SEC (2005) 1352

Bulgaria 2005 Comprehensive Monitoring Report {COM (2005) 534 final}

EXECUTIVE SUMMARY 3

A. INTRODUCTION 5

B. POLITICAL CRITERIA 6

1. POLITICAL DEVELOPMENTS 6

2. IMPLEMENTATION OF RECOMMENDATIONS FOR IMPROVEMENTS 7

3. GENERAL EVALUATION 16

C. ECONOMIC CRITERIA 18

1. ECONOMIC DEVELOPMENTS 18

2. IMPLEMENTATION OF RECOMMENDATIONS FOR IMPROVEMENTS 20

3. GENERAL EVALUATION 25

D. COMMITMENTS AND REQUIREMENTS ARISING FROM THE ACCESSION NEGOTIATIONS 26

1. CHAPTERS OF THE ACQUIS 26

Chapter 1: Free movement of goods 26

Chapter 2: Free movement of persons 28

Chapter 3: Freedom to provide services 30

Chapter 4: Free movement of capital 31

Chapter 5: Company law 33

Chapter 6: Competition policy 34

Chapter 7: Agriculture 36

Chapter 8: Fisheries 41

Chapter 9: Transport policy 43

Chapter 10: Taxation 45

Chapter 11: Economic and Monetary Union 46

Chapter 12: Statistics 47

Chapter 13: Social policy and employment 48

Chapter 14: Energy 51

Chapter 15: Industrial policy 53

Chapter 16: Small and medium-sized enterprises 53

Chapter 17: Science and research 54

Chapter 18: Education and training 54

Chapter 19: Telecommunications and information technologies 55

Chapter 20: Culture and audiovisual policy 56

Chapter 21: Regional policy and coordination of structural instruments 57

Chapter 22: Environment 59

Chapter 23: Consumer and health protection 62

Chapter 24: Cooperation in the field of justice and home affairs 63

Chapter 25: Customs union 69

Chapter 26: External relations 71

Chapter 27: Common foreign and security policy 72

Chapter 28: Financial control 72

Chapter 29: Financial and budgetary provisions 74

2. TRANSLATION OF THE ACQUIS INTO BULGARIAN 75

3. GENERAL EVALUATION 75

STATISTICAL ANNEX 77

EXECUTIVE SUMMARY

Bulgaria, by its geopolitical situation in South-East Europe, constitutes an interface between the European Union (EU) and Balkan as well as Black Sea regions. After the fall of the Berlin wall and the emergence of a democratic regime, Bulgaria very soon established diplomatic relations with the EU in 1989. In 1990, it signed a Trade and Co-operation Agreement with the EU. In 1993, a far-reaching Association Agreement called “Europe Agreement” which already indicated Bulgaria's goal of becoming a member of the EU. This agreement, which created a free trade zone between Bulgaria and the Member States, was already part of the strategy of the EU to prepare Bulgaria for accession, which also included substantial financial and technical assistance.

In 1993 in Copenhagen, the Member States decided that associated countries in Central and Eastern Europe that so desired could become members of the European Union once they met the necessary economic and political conditions. This led Bulgaria to submit, in 1995, its application for membership. Accession negotiations were opened in February 2000 together with Romania and with several other countries which joined the Union in 2004. This is why Bulgaria is part of the fifth enlargement process that successfully brought ten countries into the EU in May 2004. Bulgaria’s accession process contributes to secure democracy, stability and economic development in Europe. This is in line with the fundamental aims of the European project to make Europe a place of peace and prosperity and to overcome the divisions of the past.

Accession negotiations were closed in December 2004 with the objective of welcoming Bulgaria as a Member State in January 2007. The Treaty of Accession was signed by the 25 Member States and Bulgaria and Romania in April 2005. The ratification process by the Member States is on-going. Bulgaria has already ratified it.

The Commission, as guardian of the Treaties, is now monitoring Bulgaria’s preparations for accession in order to ensure that this country can meet all the duties and requirements of a fully-fledged Member State by accession, in the interest of both current Member States and Bulgaria. This Comprehensive Monitoring Report presents the results of the Commission’s assessment of Bulgaria’s preparations for accession. It covers the political and economic reforms undertaken by Bulgaria to meet EU requirements as well as its implementation of the EU legal order which is to be respected by each and every Member State, the so-called acquis communautaire . The Report assesses the situation up to the end of September 2005.

The findings of this Report can be summarized as follows:

As regards the political requirements for membership, Bulgaria continues to meet them. Overall, it has reached a satisfactory level of compliance with EU requirements. However, despite progress, a number of shortcomings still exist. Enhanced efforts are needed to improve the functioning of the justice system, particularly as regards the pre-trial phase and the penal procedures, to address the problem of backlogs at courts and to combat efficiently organised crime and corruption. As regards human rights and the protection of minorities, further efforts are needed, in particular for the integration of the Roma minority.

Concerning the economic requirements for membership, Bulgaria continues to be a functioning market economy. The continuation of the current pace of its reform path should enable Bulgaria to cope with competitive pressure and market forces within the Union. Bulgaria has maintained a high degree of macro-economic stability with strong economic growth, relatively low inflation and falling unemployment. However, in particular the business environment still needs further improvement.

Bulgaria has made very significant progress in aligning its legislation. Bulgaria should be able to assume the obligations of membership at the envisaged date of accession, provided that it accelerates its efforts to that end in a number of areas and that it focuses on strengthening its overall administrative capacity. The Report identifies three stages of preparations for accession:

- First, areas where Bulgaria is ready or where preparations are ongoing and which should be resolved by accession if the current pace of preparations is maintained. These include for example competition policy, the free movement of capital and payments, and culture and audio-visual policy.

- Secondly, areas where increased efforts are needed. Here the Bulgarian authorities are encouraged to better target their reform efforts to harmonize with EU requirements in the remaining period before accession. This covers for example the need to promote social inclusion or to ensure the full respect of EU standards in air and maritime transport and in relation to industrial pollution.

- Finally, a number of areas of serious concern requiring immediate action from Bulgaria so that it may reap the benefit from EU accession but also in order to preserve the balance of the Union. These areas include the ability to absorb European funds allocated to Bulgarian beneficiaries, the need to ensure a high level of food safety and to fight efficiently and in a pro-active manner corruption and organised crime. The Bulgarian authorities are strongly encouraged to spare no efforts to remedy the existing gaps without further delay.

The exact conclusions of the Report can be found in sections B.3, C.3 and D.3.

The Commission is supporting Bulgarian financially in its preparations for accession and will focus on measures to tackle the shortcomings identified in the Report. The total volume of pre-accession assistance available to Bulgaria is substantial, around EUR 545 million in 2006. It will be used for pre-accession programs.

The Accession Treaty envisages the accession of Bulgaria on 1 January 2007. It includes a number of provisions under which the Union may take action to prevent serious breaches of the functioning of the internal market or to deal with shortcomings in the field of cooperation in civil and criminal matters caused by Bulgaria. Other safeguards exist in the EU legal order. If there is clear evidence that the state of preparations for adoption and implementation of the legal order in Bulgaria is such that there is a serious risk of Bulgaria being manifestly unprepared to meet the requirements of membership in a number of important areas, then accession of Bulgaria may be postponed by one year.

The Commission will continue to monitor Bulgaria’s preparations and to encourage the country in its reform path in period leading up to accession in order to ensure a smooth integration into the EU.

INTRODUCTION

The accession negotiations with Bulgaria were successfully concluded on 14 December 2004. After the Commission’s favourable opinion, the European Parliament’s assent and the Council decision on the admission of Bulgaria, the Accession Treaty was signed on 25 April 2005. The ratification process by all 25 Member States is underway. Bulgaria ratified the Treaty in May 2005. The Treaty envisages accession on 1 January 2007.

In the 2004 Strategy Paper on progress in the enlargement process, the Commission stated it would continue to closely monitor Bulgaria’s preparations for membership. This monitoring, which has intensified after the closure of negotiations, will continue until accession.

In December 2004, the European Council concluded on Bulgaria that the European Union will continue to monitor closely Bulgaria's preparations and achievements, including the effective implementation of the commitments undertaken in all areas of the acquis, and in particular in the area of Justice and Home Affairs. To this end the Commission will continue to submit annual reports on Bulgaria's progress towards accession, together with recommendations if appropriate.

This report assesses Bulgaria’s preparations for membership. It identifies the remaining gaps in policies, legislation and its implementation and identifies the steps to be taken. The report contains three main parts.

- The first part briefly describes political developments and assesses the state of affairs as regards the political issues which were identified as in need of further improvement in the 2004 report.

- The second part briefly describes economic developments and assesses the economic issues which were identified as in need of further improvement in the 2004 report.

- The third part gives an overview of where Bulgaria stands in implementing all commitments and requirements arising from the accession negotiations for each acquis chapter, both in terms of legislation and implementation.

This report reflects the situation as of 30 September 2005.

Numerous sources of information have been used to compile this report. Bulgaria was invited to provide information on its state of preparedness. The Report also draws on information provided by Bulgaria within the framework of the Association Agreement and the accession negotiations, as well as on peer reviews that have taken place to assess its administrative capacity in specific areas. Council deliberations and European Parliament reports[1] and resolutions have been taken into account in drafting it. Where relevant, the Commission has also drawn on assessments made by various international organisations, the international financial institutions, and by non-governmental organisations.

POLITICAL CRITERIA

The 2004 Report confirmed the conclusions of previous reports that Bulgaria fulfilled the political criteria. However, the following areas were identified in the conclusions of the 2004 Report as requiring further improvements: public administration reform (all aspects, but especially local and regional administration); justice reform (all aspects, including police and measures to combat organised crime); anti-corruption measures; trafficking in human beings; freedom of expression/media independence; ill-treatment in custody and prison conditions; childcare and mental healthcare system; protection of minorities and integration of the Roma minority.

The principal purpose of this chapter is to asses the state of play on the issues identified last year as requiring further improvements.

Political developments

General elections were held in Bulgaria in June 2005. Official turnout was 55.76% of the electorate. The BSP-led Coalition for Bulgaria (socialists) emerged as the biggest political force in the new parliament, gaining 30.95% of the votes. The National Movement Simeon II (NMS) ranked second with 19.88%, ahead of the Movement for Rights and Freedoms (MRF) with 12.81%. These were followed by the “Ataka” Coalition with 8.14%, the United Democratic Forces (UDF) with 7.68%, the Democrats for a Strong Bulgaria (DSB) with 6.44% and the Bulgarian Popular Union (BPU) with 5.19%.

In July 2005, the National Assembly adopted a declaration on the priorities for the parliament’s work. These priorities include the adoption of European integration-related legislation, speedy implementation of judicial reform, the establishment of a framework to stimulate economic development and investment, access to quality healthcare and education, and the full-fledged integration of various social and ethnic groups.

Almost two months after the general elections of June, the Coalition for Bulgaria, as strongest grouping in the Bulgarian Parliament, the National Movement Simeon II and the Movement for Rights and Freedom signed a coalition agreement on the formation of a government in August 2005. The new government is headed by Sergey Stanishev, as Prime Minister, and the distribution of the 17 ministerial seats between the three parties BSP/MSN/MRF is 8/5/3, with one minister being non-partisan. The government held its first session in August 2005.

Bulgaria has achieved an acceptable degree of alignment as regards the transposition of directives, but although efforts were made to minimise the interruption of the legislative process due to the election, the adoption of certain key pieces of legislation was disrupted by the election process, and the momentum of the implementation of reforms was somewhat delayed.

Implementation of recommendations for improvements

Public administration

Although public administration reform remained a government priority during the reporting period, Bulgaria has made only very limited progress with regard to relevant legislative developments.

The structures in charge of preparing and implementing public administration reform are difficult to assess, as important changes are still planned, including the establishment of a fully-fledged Ministry of State Administration.

The envisaged amendment to the Law on Administration has still not been adopted. Consequently, the division of responsibilities between the political and administrative levels of the administration still has to be clarified, the position of chief secretaries in the administration regulated, an effective internal control on its work established and all agencies unified under the control of the relevant parent ministries.

The draft Code of Administrative Procedure has also not been adopted yet. It is intended to establish a legal procedure for the implementation of administrative acts and dispute settlement, to better regulate citizens’ rights and to increase administrative and judicial control over all administrative acts. In the meantime, most basic procedural principles for control over the public administration are defined in a dispersed way by three other pieces of legislation, as well as the Law on Administration. Principles and procedures such as administrative and judicial review of administrative acts through appeal, and the imposition of administrative penalties as a result of the violation of administrative law are included in these pieces of legislation. Their interpretation and implementation is, however, often governed by the rules of procedure of each administrative body, thus creating conditions which provide room for inefficiency.

Bulgaria needs to give priority to closing gaps in existing legislation and to ensure the establishment of a legislative framework guaranteeing the principles of legality, accountability, reliability and predictability in the workings of the public administration. Further efforts are required in terms of making the public service more resistant towards corruption, including preventive measures.

Openness and transparency of public service, notably as regards access to public information, are covered by the Law on Access to Public Information, as amended in 2003. Although there has been an increase in the number of decisions issued by the Bulgarian administration on the basis of this law, and its acceptance has increased, the impact of the law remains limited.

The first national Ombudsman and a deputy Ombudsman were finally elected in April 2005 on the basis of legislation which had existed since January 2004 and which provided for the election of an Ombudsman by March 2004. The internal rules on the organisation and activities of the Ombudsman entered into force in June 2005. The Ombudsman’s office has not yet been definitively set up. A number of local ombudsmen have existed since the beginning of 2004. They are located in municipalities and are elected by municipal councils.

With regard to decentralisation , the Council for Modernisation approved a Strategy for Decentralisation in May 2005, covering the decentralisation of authorities and fiscal decentralisation. On the basis of the strategy, action plans will have to be prepared. However, decentralisation as such has not progressed very far in reality. Attempts at administrative and fiscal decentralisation to the municipal level have stalled and are gradually giving way to a deconcentration of responsibilities and tasks to the NUTS (nomenclature of statistical territorial units) II level, where administrative structures are currently being strengthened.

Under the responsibility of the Ministry of Finance, programme budgeting is being introduced in Bulgarian ministries. There are currently 11 ministries participating in the pilot scheme. The Ministry of the Environment is expected in 2005 to be the first ministry to present a fully programmed budget to the parliament.

The legal basis for the status of civil servants and other public employees was introduced through amendments to the Civil Service Law in 2003. However, in the absence of a central body in charge of implementing the different aspects of civil service legislation, the envisaged full assessment of implementation and of performance after its first year in force cannot be made.

Training is developing well and represents an incentive for civil servants. According to the Civil Service Law, 0.8% of the budget for civil servants’ salaries should be available for training purposes. The main training body is the Institute for Public Administration and European Integration, which is attached to the Council of Ministers and is organising courses for newly recruited employees, for senior managers, and also on more specific subjects such as public procurement. Other training bodies include the School of Public Finance (Ministry of Finance), the School for Magistrates (Ministry of Justice) and the Diplomatic School (Ministry of Foreign Affairs). In 2004, 20 683 employees from the central administration and 1 961 employees of local government administrations underwent compulsory training.

In April 2005, the Council for the Modernisation of Public Administration, an inter-ministerial committee, approved a White Paper on the Modernisation of the Administration, which sets out further proposals for improving service delivery, better policy-making, public service, budgetary control and accountability, following the best European practices. If fully implemented, the White Paper could be a positive tool in the modernisation of public administration.

Justice system

For the fourth year now, a reform strategy is being implemented. The legal framework has undergone important changes, including in relation to the establishment of a probation system, witness protection, extradition, international private law, enforcement of civil judgments, legal aid, the execution of penalties and alternative dispute resolution (mediation). These new provisions require swift and correct implementation. Hence it is important that implementing regulations be adopted quickly, that staff be trained to implement them without further delays and that sufficient budgetary provisions be made available. Expected legislation has not been adopted in relation to civil procedures. Overall, there remains considerable scope for improving the technical quality of draft laws in the justice area in view of ensuring a smoother implementation. It is also recommended that monitoring mechanisms be established in order to follow up on the impact a new law generates.

In contrast to legislative developments, the structure of the judicial system has not changed. So far, the impact of the reform on the efficiency of the justice system remains limited, in particular as far as the problem of case backlogs is concerned. Despite some ongoing progress, very considerable efforts are still needed, in particular to improve the pre-trial phase.

Regarding the reform of the pre-trial phase legislative progress was made. However, in practice progress in the combating of organised crime remained very limited. In December 2004, the Council of Ministers adopted a “National Concept for the Reform of Penal Justice”, on the basis of which the new Penal Procedure Code was prepared. In April 2005, some amendments to the previous Penal Procedure Code entered into force, which further limited the possibilities for transforming police investigations into preliminary proceedings carried out by an investigating magistrate. The amendments also provided for a clearer distinction between the competences of the actors involved in the pre-trial phase, so that the role of investigating magistrates has been reduced and transferred to police investigators. So far, however, the impact of the April 2005 amendments remained limited, despite closer cooperation between police, investigation and prosecution bodies via the introduction of the “team work” principle at local and regional levels, which can be observed in a number of places following the Joint Declaration of December 2004 on Cooperation in Reforming Criminal Justice, signed by the Minister for Justice, the Prosecutor-General and the Head of the Investigation Service.

In October 2005, a new Penal Procedure Code was adopted with the aim of doing away with the complicated multi-layer investigation structure and of simplifying the lengthy and formalistic procedures. It remains, however, to be seen to which extent the new code addresses these shortcomings. This reform has to be accompanied by an increase in the efficiency and accountability of the court system. Furthermore, there is a need for revision of other legal acts, including the Judicial System Act, the Attorney Act or the Ministry of the Interior Act, with a view to considerably enhancing the efficiency of the Bulgarian penal justice system and establishing the required capacity to deal with organised crime and corruption. Last but not least, no steps were taken in the reporting period to modernise the prosecution service, although there remains a need to make it more transparent and accountable.

On the administrative capacity side, the Supreme Judicial Council (SJC) now benefits from increased administrative support and numbers 61 employees. Two new departments were created in 2005 and the SJC obtained more offices. The SJC also continued to appoint, promote, transfer and dismiss magistrates. In 2004, the SJC organised a competition for the appointment of junior magistrates, resulting in the effective appointment of 43 junior judges, 43 junior prosecutors and 57 junior investigators. However, since April 2004, the Council has appointed about 30 judges and prosecutors without a competition, on the basis of an extraordinary procedure in the Law on the Judiciary which allowed for the possibility of appointments without competitions, there being a risk that objective criteria were not applied. In order to remedy this, a decision was taken in April 2005 restricting this practice to cases where no candidate has been found after publication of the vacant post and where a detailed motivated statement for the candidate’s qualities is issued by the chairman of the relevant judiciary body. Nevertheless, the number of appointments made without a full competition under this extraordinary procedure did not drop. According to official figures, there is no major problem with understaffing in the Bulgarian justice system. 1755 posts out of 1800 for judges are filled and 1068 out of 1109 posts for investigators are occupied. Only in the case of prosecutors there are about 10% vacancies (1224 posts of which 1103 are occupied), which in view of the more important role of prosecutors in the penal procedure should be filled as soon as possible. The adoption of a Regulation on appraisal of magistrates in view of promotion or demotion is being delayed. The SJC also continued to exercise its role in the establishment of the budget. It presented the draft budget of the judicial system to the Council of Ministers and controls its implementation. The budget of the judiciary in 2005 is EUR 115 million, which is an increase of 12 % compared with 2004 and amounts to 2.19% of the State budget.

All legal professions now have ethical codes . However, there is little evidence of enforcement of these ethical codes, including by the SJC as far as the ethical codes for the three categories of magistrate are concerned. Bulgaria should enhance the fight against corruption in the judiciary by revising the procedure for lifting immunity, as it is now far too protective towards magistrates accused of unlawful behaviour. This would considerably enhance the accountability of the judiciary and increase the trust of the citizens.

As regards the functioning of the court system , Bulgaria intends to foster specialisation in the judiciary, in particular as far as administrative and commercial law is concerned. However, so far no final decision is taken on the establishment of either commercial departments or on administrative courts . Further specialisation is much needed but will only be successful if the required training is also provided by the National Institute for Justice. With a view to better managing the workload in courts and reducing the sometimes considerable delays in deciding cases, temporary rules are in place on the appraisal of the work performance of judges, public prosecutors and investigators, which include qualitative and quantitative criteria for the evaluation of their activities and workload in accordance with the new provisions of the Law on the Judiciary.

As far as equipment and infrastructure is concerned, the Bulgarian IT Judiciary Strategy was further implemented, resulting among other things in the development of software for monitoring insolvency cases, which was installed in the Ministry of Justice and in all courts in June 2005. However, there have been systematic delays in terms of putting into operation various other types of IT equipment such as the national land register, the Uniform System for Data Collection and Statistics and the Unified Information System for Combating Crime. These delays have negative consequences for the quality of the management of the judiciary, as Bulgaria needs a reliable statistical capacity allowing it to use statistics as management and policy development tools. Also, the Unified System for Court Case Management, which should have allowed for the random distribution of cases as of the end of 2004, is not operational. Even if the software is not yet available, there is an urgent need to adopt objective and clear rules for the manual distribution of cases, as this remains an area which allows for the undue influencing of the work of magistrates.

As regards training , the National Institute for Justice continued to implement training programmes for magistrates in close cooperation with foreign donors and partners and started the initial training courses for junior magistrates in spring 2005. For the first time also training courses for court clerks were organised. While the administrative capacity and infrastructure of the Institute is gradually improving, its budget remains very limited. Financially, the Institute continues to rely heavily on foreign support. Its budget for 2005 is approximately Euro 0.65 million. A modern curriculum for continuous training of magistrates still needs to be established as, so far, continuous training is being organised on an ad hoc basis. There remains a need for various types of training for legal professions outside the magistracy and in particular for lawyers.

Anti-corruption measures

Surveys and assessments conducted by both national and international organisations confirm that widespread corruption remains a cause for concern and affects many aspects of society. There is a positive downward trend as far as administrative corruption is concerned, but the overall enforcement record in the field of corruption remains very weak. The main problem is weak results in the investigation and prosecution of corruption cases. There were no reported cases of completed prosecutions of high-level or political corruption cases, and very few concerned members of the magistracy.

There were few significant legal developments in this area in the reporting period. However, the legal instruments required by the acquis are almost all in place. A new Law on Political Parties was adopted in March 2005, setting out a number of anti-corruption measures to guarantee the transparency and accountability of political party funding, including a complete ban on anonymous donations and better mechanisms for monitoring the activities of political parties. In September 2005, the Law amending the Law on Administrative Violations and Sanctions was adopted dealing with liability of legal persons.

Bulgaria also continued to implement the “Updated Action Plan for the National Anti-Corruption Strategy 2004-2005” through the Commission for the Coordination of the Fight against the Corruption. The administrative capacity of this Commission remains weak. The Commission focuses above all on prevention and education measures, such as the development of special programmes for education in anti-corruption practices at the Public Administration and European Integration Institute and in various high schools, and the implementation of specific programmes for prevention in the different ministries and agencies, taking into consideration their specific activities.

In February 2005, the Council of Ministers adopted an amendment supplementing the National Strategy for Combating Corruption of October 2001, which provides for measures to combat high-level corruption. The amendment is aimed exclusively at undertaking measures to prevent corruption in the administration of the executive power at the level of political cabinets and at curbing corruption in other sensitive spheres, such as public procurement. However, deadlines fixed in the National Strategy for Combating Corruption have been largely missed and consequently its impact remained very limited. The Law on making public the property of persons occupying high State positions, which contains provisions for establishing a public register for declaring property, income and expenses of persons occupying high State positions in the Republic of Bulgaria, continued to be implemented. Bulgaria will need to continue vigorously the fight against high-level corruption. Bulgaria’s current anti-corruption policy would greatly benefit from an independent audit. The results of such an audit could feed into the new strategy and focus on better targeting remaining problems.

Bulgaria continued to take a number of administrative measures to strengthen the fight against corruption. The necessary structures within law enforcement agencies and the judiciary have been created, but their results so far vary considerably. The overall organisation and intra-departmental control of the prevention and detection of acts of corruption at the Ministry of the Interior has been further improved by refining the mechanism for receiving, checking and taking action on information concerning corruption amongst Ministry of the Interior officials. Integrity tests are carried out on a regular basis. The training curricula of the Police Academy for the academic year 2004-2005 include issues related to the prevention of internal corruption. In the period October 2004 – March 2005, 38 Ministry of the Interior officials were dismissed on disciplinary grounds. Boxes labelled “Anti-corruption” were placed on the premises of the Ministry of Justice to encourage reporting by staff on suspected cases. A “Customs Intelligence and Investigation” unit was established within the customs administration. In the first nine months of 2005 32 customs officers have been subject to disciplinary sanctions. However, despite these measures, and by comparison with the measures taken in other parts of the public administration, there appears to be little effect in practice. The existing specialised anti-corruption structures in all parts of the administration and the judiciary should be assessed and adapted where necessary to improve efficiency . During 2004, the Public Prosecutor’s Office investigated 6 535 cases, compared with 6 785 in 2003, related to corruption (of which 2 275 were opened during 2004).

Some areas of public administration remain particularly vulnerable to corruption. This is the case for those engaged in public works contracting, including the health sector. There have been several exemptions already from the new law on public procurement which entered into force in October 2004. Claims of non-transparent procedures for procurement and the granting of concessions are continuing.

Bulgaria continues to participate in the monitoring of anti-corruption measures adopted by the OECD Working Group on Bribery in International Business Transactions and in GRECO (the Council of Europe Group of States against Corruption).

Trafficking in human beings

Bulgaria remains primarily a country of origin and transit for trafficking in human beings for the purposes of sexual exploitation and is to a lesser extent a country of destination. Mostly women and girls are trafficked for the purposes of sexual exploitation. Trafficking of men exists on a smaller scale, the men usually ending up as slave workers. In 2005 cases of trafficking of newborns to EU Member States have been reported. The overall situation has not improved, as Bulgarian women are also becoming victims of internal trafficking. They are trafficked to be prostitutes in larger towns, tourist centres and in border post areas where international traffic is high. Furthermore, Roma children are still disproportionately represented among victims of trafficking.

Clear information on trafficked persons and the related number of missing people in Bulgaria is still not available. Bulgaria lacks a system of registering missing persons and victims of trafficking. The Bulgarian police registers as “victims” only those willing to testify, and they are very few. Bulgaria has a witness protection programme. Witness protection measures are not being fully implemented in Bulgaria, and victims of trafficking who cooperate with the police are often only partly protected. An enhanced witness protection programme is essential in the fight against trafficking in human beings. To that effect, implementing rules to the Law on the Protection of Individuals Endangered in relation to Criminal Proceedings have been adopted in September 2005.

The institutional framework to combat human trafficking has been reinforced with the creation of the National Anti-Trafficking Commission, a coordination and policy-making body.

In February 2005, the Government approved a National Programme on preventing and combating trafficking in human beings and protecting its victims, which envisages measures to implement existing legislation better, to raise awareness, to provide assistance and rehabilitation to victims, and to enhance international cooperation and other complementary measures. A manual on best practices for law enforcement agents having to interact with children victim of sexual exploitation was adopted in January 2005. Furthermore, a Code of Conduct for the prevention of trafficking in children and sexual abuse in tourism was endorsed in May 2005, in close coordination with the tourism industry. However, due to the insufficiency of governmental activities, it is mainly non-governmental organisations which continue to play an important role in prevention programmes and assisting victims of trafficking.

Ill-treatment in custody and prison conditions

There continue to be reports of cases of ill-treatment by law enforcement officials, including excessive use of firearms and force by the police. Reports indicate that ill-treatment of persons in custody disproportionately affects Roma. In a number of cases, investigations of complaints of police ill-treatment were not prompt, thorough and impartial.

Concerning prisons, the Bulgarian authorities achieved some positive results in improving penitentiary legislation, mainly related to the implementation of probation as a specific form of sentencing. The establishment of central and local probation services is underway. The population in places of detention has increased slightly. It is encouraging, though, that more inmates are being placed in open and semi-open prison hostels. This would generally provide them with more possibilities for work and for resocialisation. However, the conditions in some Bulgarian prisons and detention centres are still inadequate, mainly because of overpopulation and poor living conditions in the older facilities.

Freedom of expression

The situation in relation to freedom of expression has improved. Freedom of expression is enshrined in the Constitution, and legal provisions are further developed in legislation. Libel is punishable by fines (up to EUR 5 000) under the Criminal Code, and the number of cases brought to court has generally increased. In most cases, however, the courts defined libel and interpreted the law in a manner that favoured journalistic expression.

Regarding audiovisual media, there are no formal restrictions on programming and both television and radio provide a variety of news and public-interest programmes. Bulgarian legislation requires the Council for Electronic Media to issue radio and television programming licences only in accordance with its long-awaited Strategy for Developing Radio and Television Activities. In the absence of such a strategy, the Council could not start new licensing procedures. The Supreme Administrative Court has revoked some of the decisions made by the Council, and this institution needs to ensure its capacity to make transparent, justified and impartial decisions. It needs to reinforce its administrative capacity (see also Chapter 20 – Culture and audiovisual policy) .

Child protection

As regards children’s rights, the government has shown its commitment through various strategies, action plans (including a new programme for child protection, adopted in December 2004) and legislation. However, real progress in implementing these remains limited and action should be taken urgently. There have been some improvements related to the method of placing children in institutions, since a large number of children are now placed on the basis of court orders. However, the conditions for children in some State institutions remain poor. Although the legal framework for alternative services to institutional care improved, its promotion is still at an early stage. There is a poor take-up of foster care. Progress in de-institutionalisation remains very limited and falls behind the Bulgarian plan to reduce by 10% the total number of children in specialised institutions in the period 2003-2005.

In the autumn of 2004, the State Agency for Child Protection finalised an assessment of specialised institutions for children. However, despite the critical assessment the conclusions are rather weak and have not been followed up by firm closure plans with systematic parallel development of professionally staffed alternative services. A comprehensive monitoring system should ensure that efforts to support children living in community care are successful in the long term. Resources currently blocked in the institutional system should be available to provide community-based services in the best interests of the child. Many of the children in institutions are not orphans, and little has been done to support re-integration with parents. In spite of existing legislation aiming at enhanced access for all children to mainstream education, access for children in institutional care to mainstream schools remains unsatisfactory, and the share of these children in special schools is a matter of concern. Unlocking the financial and human resources currently supporting the special schools system would help speed up reforms in this area. In view of the still complex institutional set-up for child protection, the competences of the State Agency for Child Protection remain limited and its coordinating function needs to be enhanced. There is a further need to increase the capacity of relevant local structures, particularly child protection departments. Inconsistent policies on integration of minority groups create further obstacles to sound implementation of children’s rights.

It appears that changes in adoption legislation and practices have had an impact on the number of children being adopted internationally. However, it is too early to judge if the decrease in international adoptions is a long-term trend. It has proved difficult to obtain reliable statistics on this question. Further efforts are necessary to increase transparency regarding adoptions and to ensure that the best interests of the child are the primary consideration when making decisions relating to inter-country adoption, and to eliminate all possibilities for improper financial gain. Bearing in mind the risk of abuse, it should be ensured that foreign entities are not involved in the identification of children for inter-country adoption.

The disabled and mental healthcare system

A new law on integration of people with disabilities aims at social inclusion of people with disabilities and provides for the shift from a narrow medical model to a social care model. In that context, the establishment of an Agency for People with Disabilities is an encouraging step.

The mental healthcare system is still poorly coordinated between three ministries (Ministry of Health, Ministry of Labour and Social Policy and Ministry of Education), and enhanced efforts are necessary to devise and implement a consistent policy for people with mental disabilities. State financial support for social care homes increased slightly and some measures were taken to improve the material conditions of such institutions. However, living conditions in a number of social care homes continue to be extremely poor, with little improvement in the provision of medical (including psychiatric) care and other therapies and scant regard for the need for privacy and respect for the individual. There is still a lack of an independent review of placement decisions and effective legal safeguards (e.g. against abuse) for the people concerned. In a number of cases, people with different needs are placed in the same institution. Efforts to develop community-based services and to reintegrate are still at a very early stage ( see also Chapter 13 Social Policy and Employment ). Despite an existing government decree that gave all children the right to attend mainstream schools, segregation of children with disabilities into special schools continues to lower the quality of their education. In 2005, following an evaluation of social care homes undertaken by the Agency for Social Assistance together with the Ministry of Health, recommendations for reforming institutions and individual care plans for people with mental and physical disabilities were drawn up.

The new Law on Public Health which entered into force in January 2005 requires that placement and treatment in psychiatric dispensaries in principle be carried out on the basis of a court order and be in line with the requirements of the European Court of Human Rights ruling in the Varbanov v. Bulgaria case.

Protection and integration of minorities

The effective and sustainable integration of Roma remains an issue of major concern. The efforts made by Bulgaria to implement the “Framework Programme for Equal Integration of Roma into Bulgarian Society” lack sufficient strategic approach, coordination and finance. This Framework Programme is still in its early stages, and related documents and action plans adopted by the government remain largely on paper.

Key reforms in combating discrimination in education, healthcare and housing are still outstanding. A long-term action plan in line with the “Decade of Roma Inclusion 2005-2015” (launched in Sofia in February 2005) has been drawn up and contains objectives in the areas of education, healthcare, housing, culture and discrimination. Bulgaria needs to to ensure that this action plan is properly resourced and implemented.

A number of cases were filed under the Protection against Discrimination Act, and in three cases the Sofia Electricity Supply Company was found guilty of treating Roma customers unfavourably in relation to non-Roma customers. An independent Commission for Protection against Discrimination, as envisaged by the law, was established in 2005 ( see also Chapter 13 Social Policy and Employment ).

The strategic documents and programmes on the educational integration of children from the Roma minority have not significantly changed the situation on the ground. Initiatives aimed at attracting and keeping Roma children in school (e.g. free lunches, subsidised textbooks, teacher assistants in schools with Roma students, bussing programmes) were largely unsuccessful. Although an Agency for Educational Integration of Children and Pupils from Ethnic Minorities has been established, this body has not succeeded so far in fulfilling its main function, namely the coordination of efforts made by different ministries to enhance the educational integration of children from minorities. As already outlined in the 2004 Report, a number of Roma children of mainstream mental ability still continue to be placed in special schools following poorly controlled assessments.

Many Roma continue to be excluded from access to healthcare services. A Health Strategy for Disadvantaged Members of Ethnic Minorities and an associated action plan were adopted in September 2005. The elaboration of this strategy and action plan forms an important part of the Framework Programme for Equal Integration of Roma into Bulgarian Society. Although several initiatives are ongoing with international donor support, a long-awaited National Housing Strategy for Roma has not yet been adopted.

A number of national employment programmes aimed inter alia at addressing long-term unemployment amongst Roma have continued. However, in order to increase their effectiveness, these initiatives need to be further combined with complementary measures such as family counselling and professional assistance in searching for a job.

In spite of the establishment of a new National Council for Cooperation on Ethnic and Demographic Issues, the administrative capacity of the State structure dealing with minority issues continues to be weak. The body is not yet fully operational, and it remains to be seen whether the chosen structure will provide for the powers necessary for effective minority rights protection, including enhanced political influence and staffing. In particular, attention should be paid to ensuring sufficient consultation with Roma representatives with a view to developing and implementing the State policy on the integration of Roma.

The Bulgarian authorities should demonstrate, at all levels, that the country applies a zero-tolerance policy on racism against Roma or against any other minority or group and that this policy is effectively implemented.

General evaluation

Bulgaria, as in previous years, continues to fulfil the political criteria for membership. Overall, it has reached a satisfactory level of compliance with EU requirements. Nevertheless, further action is needed in a number of important areas which were highlighted in the 2004 Report as requiring further efforts.

As regards public administration reform, Bulgaria still needs to complete the legislative framework guaranteeing the principles of legality, accountability, reliability and predictability in the workings of the public administration. Also, further efforts are needed to strengthen local and regional administration in the context of decentralisation. The White Paper on the Modernisation of the Administration adopted by the Government in April 2004 now needs to be put into practice.

Important legislative steps have been taken in relation to the judiciary. However, progress in the reform of the pre-trial phase remains limited and the justice system continues to suffer from a lack of accountability. The procedures for administering justice remain cumbersome and slow.

The main problem in combating corruption effectively remains the weak results in the investigation and prosecution of high-level corruption cases. While efforts to combat corruption have had a certain impact, notably in relation to petty corruption, generally the perception remains that corruption continues to be a cause for concern.

In the area of human rights and the protection of minorities, more effort needs to be made to combat efficiently the trafficking of human beings and to improve conditions in a number of state institutions for children and people with disabilities. Further progress is needed in the process of de-institutionalisation and in improving the management of the mental health care system. Sustained efforts are required to realise the effective integration of the Roma minority. The Framework Programme for Equal Integration of Roma into the Bulgarian Society should be implemented as planned.

ECONOMIC CRITERIA

In its 2004 Report the Commission concluded that Bulgaria is a functioning market economy. The continuation of its current reform path should enable Bulgaria to cope with competitive pressure and market forces within the Union.

The principal purpose of this part of the Comprehensive Monitoring Report is to assess the implementation of recommendations for improvements in the areas identified in last year’s Report.

Economic developments

Bulgaria maintained a high degree of macroeconomic stability with strong economic growth, relatively low inflation and falling unemployment, but the external deficit remains high . Boosted by strong domestic demand and high investment, real GDP grew at 5.6% in 2004 which was the highest rate since the start of transition. GDP per capita in purchasing power standards increased to 30.8% of the EU-25 average. At 12%, gross fixed capital formation grew most strongly, whereas the highest contribution to growth came again from domestic consumption which increased by 5%. In the first half of 2005, economic performance continued to be strong with a GDP growth rate of 6.2%. Both investment and consumption growth accelerated further to 13.4% and 6.6%. Average inflation was 6.1% in 2004 and declined to 4.4% until August 2005.

In line with the strong economic expansion, the employment situation continued to improve. Employment grew by 3.1% in 2004, but the employment rate was still very low at 54.2%. In the first half of 2005, employment creation slowed down to 1.3% compared to the first half of the previous year. The unemployment rate declined further from 13.7% in 2003 to 12.0% in 2004. Wage increases remained relatively moderate in 2004 with a real wage growth rate of 0.9%, but accelerated in the first half of 2005 to 5.0%. After reaching a record high of 9.2% of GDP in 2003, the current account deficit decreased to 7.4% of GDP in 2004. However, driven by strong imports of both consumer and investment goods, the trade deficit increased from 12.5% of GDP in 2003 to 14% of GDP in 2004. In the twelve months to June 2005, the trade deficit widened further to 15.7% of GDP, contributing to a worsening of the current account deficit to 9.6% of GDP on an annualised basis. As in 2003, strong FDI inflows of 8.4% of GDP more than financed the current account deficit in 2004, while in the twelve months to June 2005 FDI inflows slowed down to an annualised 6.4% of GDP.

The currency board arrangement pegging the Bulgarian lev (BGN) to the euro continued to contribute to macroeconomic stability. Bank credits to households and non-financial enterprises expanded again at almost 50% in 2004 fuelling domestic demand and import growth. The Bulgarian National Bank (BNB) took additional measures in April 2005 to curb bank credit growth by imposing de facto ceilings on the extension of new credits. Partly in anticipation of these measures, credit growth increased again at record levels in the first quarter of 2005, but cooled down significantly to under 40% until the end of July. Fiscal policy remained stability-oriented. Due to better than expected revenues, the general government balance ended with a surplus of 1.3% of GDP in 2004 (based on EU accounting standards, ESA 95) contributing to the reduction of general government debt to below 40% of GDP in 2004.

Structural reforms have been further deepened in all areas. Reforms of product and capital markets have continued and are broadly in line with key objectives of the Lisbon agenda. Privatisation has been completed in many sectors. Good progress was made since the last Report in the sale of remaining enterprises for example in the energy sector, although not without setbacks and delays as regards for example the failed privatisation of the tobacco company or the cancellation of the privatisation process for a thermal power plant. Company restructuring in the network industries has been triggered by the privatisation of companies and the increasing liberalisation of markets. Preparations for the unbundling of the national electricity company have started with the separation of accounting systems for different units. The implementation of the national programme for the restructuring of the steel industry, adopted in March 2004, is to be completed by 2007. Progress in its implementation in the last year included the closure of some steel mills, staff reductions and further investments. In coal mining, three more coal pits were privatised during the reporting period and preparations for the privatisation of one of the two remaining state-owned mines are under way. State aid for operating mines is to be phased out completely in 2005, while the technical liquidation of closed mines continues. Prices for energy, gas and telecommunication have been fully aligned with costs. Some cross-subsidisation still exists with regard to electricity and heating energy for households, but should be phased out in 2006. Following tariff increases for rail passenger services, the gap to full cost recovery levels has been reduced.

Market entry of new firms has been dynamic, but both market entry and exit continues to be hampered by relatively costly, complex and time consuming procedures. Financial intermediation has been further deepened both in the banking and non-banking sector. Due to the high credit growth rates, bank credits to non-financial private corporations and households have increased by almost 10 percentage points to 35% of GDP until the end of 2004. In line with credit expansion, the ratio of deposits to GDP increased by more than 10 percentage points to over 50%. Despite the high credit growth, bank performance indicators do not show any obvious deterioration in the financial situation of banks. The share of substandard and non-performing loans stood at 3.5% at the end of 2004 down from 4.2% at the end of 2003. The capital adequacy ratio declined from 22.0% at the end of 2003 to 16.1% at the end of 2004 but is still well above the legal minimum of 12%. A new regulation on the capital adequacy of banks entered into force in July 2005. The role of the non-banking sector in financial intermediation remains limited but continues to increase. Stock market capitalisation has increased as a share of GDP from 7.9% at the end of 2003 to 21.5% at the end of June 2005. The assets of pension funds have also further increased from 1.5% of GDP to 2.4% over the same period.

Implementation of recommendations for improvements

In its 2004 Report, the Commission noted that the current account deficit had widened substantially in 2003 and that this could, if continuing, warrant a further policy response.

After a temporary improvement in 2004, the current account deficit increased again considerably in the first half of 2005 and needs to be closely monitored. In case of a continued deterioration, additional corrective measures may become necessary. Without the possibility for active monetary and exchange rate policies within the currency board arrangement, tight fiscal and wage policies are critical for maintaining internal and external stability. Despite a better than expected export performance mainly due to favourable developments in commodity prices, the trade balance deteriorated further in 2004, because imports surged even more strongly. However, higher incomes from tourism and higher transfers together with a slightly improved income balance contributed to a decline in the current account deficit relative to GDP. In the first half of 2005, trade in goods continued to expand strongly at a rate of more than 20%, with import growth again outpacing the increase in exports. Consequently, the trade deficit and the current account deficit widened considerably in the twelve months to June 2005 to 15.7% and 9.6% of GDP, also fuelled by the recent increase in the oil price.

The continuation of prudent fiscal policies played a key role in containing the external deficit in 2004 . The general government ran a budget surplus of 1.3% of GDP (ESA 95 basis) in 2004, which contributed to containing the current account deficit. A relatively tight fiscal stance was maintained in the first half of 2005, where mainly thanks to a large increase in revenues, the general government accumulated a surplus of 2.7% of the forecasted GDP on a cash basis. For the whole year 2005, the fiscal target foresees a surplus of at least 1% of GDP on a cash basis.

Real wage increases were relatively moderate in 2004, but accelerated in the first half of 2005 . Real wages increased by less than 1% in 2004 and have been mostly in line with improvements in productivity over the last years. However, in the wake of a substantial 25% increase in the minimum wage in January 2005, average real wages increased by 5.0% in the first half of 2005. Maintaining overall wage restraint will, therefore, be crucial to secure competitiveness and contain further potential demand-side risks for the external balance.

Credit growth continues to be high, but the central bank has taken further steps to bring it under control. Despite some measures taken by the BNB in the second half of 2004, bank credits continued to increase at a rate of close to 50% for the second consecutive year. Additional measures to curb the credit boom entered into force in April 2005, effectively imposing ceilings on the further extension of credits by raising the minimum reserve requirement to prohibitive levels if the average growth rate of credits exceeds 5% for a three-month period, 12.5% for a six-month period, 17.5% for a nine-month period and 23% for a twelve-month period. Partly in anticipation of these measures, growth of credits to non-financial private corporations and households increased again massively by more than 70% year-on-year by the end of March 2005, but has since come down to below 40% by the end of July.

In its 2004 Report, the Commission noted that the business environment, in particular the efficiency of the administrative and judicial system as well as regulatory procedures, should be further improved to increase Bulgaria’s attractiveness for investment.

Efforts to improve the business environment have continued, but many obstacles remain and some reforms have been delayed or still need to be fully implemented. Despite some improvements, business surveys indicate that procedures for market entry and exit as well as contract enforcement still tend to be very time-consuming, costly and complex. Some first steps have been taken to streamline business registration with the adoption of the long-awaited Law on the Bulstat registry on 27 April 2005 and the ensuing adoption of a government strategy for the actual establishment of a central register of legal entities and of an electronic register of Bulgaria. The aim is to unify the registration of businesses with the Registry Agency under the Ministry of Justice, to turn business registration from a court procedure into a purely administrative procedure, and to introduce a single Bulstat number for tax and social security purposes. These measures will be important for making business registration simpler and more transparent, but still need to be fully implemented.

The Tax and Social Security Procedural Code which will provide for the integration of the collection of taxes and social security contributions and thereby lay the basis for the functioning of the National Revenue Agency also still needs to be adopted in this context. The project for the modernisation of the land registration system has encountered delays, although some progress in the functioning of the Cadastre Agency has been made especially at regional level. Hardly any progress has been made to improve the efficiency of bankruptcy procedures. Moreover, further planned amendments to the insolvency legislation are still only in the process of preparation.

Further efforts have been made to improve the functioning of the administration and to streamline existing regulation in line with the Law on the Restriction of Administrative Regulation and Control on Business Activity of December 2003. The review of existing licensing, registration and authorisation regimes with a view to alleviate or lift these regulations has continued, as well as the introduction of one-stop shops. A majority of administrative units have tried to strengthen their service-orientation by adopting clients’ charters and by increasing the availability of e-government services. The Law on Investment Promotion was also amended in April 2005 lowering the thresholds for potential investors to receive preferential treatment. However, the extent to which these measures lead to tangible improvements in the conditions for doing business is not always clear. A more systematic and comprehensive assessment of the business impact of existing as well as new legislation beyond the review of regulatory regimes mentioned above, including regulations at local level, would be important to further improve the business environment especially for SMEs. While the Law on the Restriction of Administrative Regulation envisages the introduction of regulatory impact assessments, this needs to be implemented more systematically. The same holds for the introduction of ‘silent consent’ as a general principle in administrative procedures.

Some steps were taken to improve the functioning of the judicial system, but major challenges remain. Judicial reform made some progress (see also the section on political issues) but improving the functioning of the judicial system remains crucial for providing a transparent, stable and reliable legal framework for doing business and enforcing property rights. Delays have occurred in the adoption of the Administrative Procedure Code and the revision of the Civil Procedure Code which will be important for speeding up legal procedures, facilitating the review of administrative acts and providing greater clarity and legal certainty. A Law on Mediation as an alternative out-of-court procedure for conflict resolution entered into force in December 2004. The enforcement of judgements by private bailiffs has in principle been facilitated by a law adopted in May 2005. Both measures still need to be fully implemented, but should help improving the functioning of the judicial system and in particular the conditions for contract enforcement.

In its 2004 Report, the Commission noted that in spite of significant achievements, privatisation still needed to be completed .

Further good progress was made in this area, although some delays occurred . The privatisation process is well advanced with the privatisation of almost 90% of all assets due to be privatised in the medium-term having been achieved by March 2005. In many sectors privatisation has already been completed. For 2005, the privatisation of another 46 majority-owned enterprises, 20 separate parts and 167 minority stakes is foreseen according to the Action Plan of the Privatisation Agency. Until June 2005, 37 deals have been completed involving 29 majority packages and 8 parts of companies. In addition, 156 minority packages have been sold, mostly over the stock exchange.

Good progress was made on the privatisation of companies in the energy sector. Majority stakes in the seven regional electricity distribution companies were successfully privatised at the end of 2004. The winners in the bids for the thermal power plants in Varna, Rousse and Bobov Dol were announced in May 2005. However, the final decision on the sale of the power plants in Rousse and Varna has been postponed several times because of negotiations on certain details of the regulatory framework and a negative verdict by the competition agency on the sale of the two plants to the same bidder; the sale of the power plant in Bobov Dol was cancelled because the offer of the winning bidder was considered too low. Three hydro-power plants were sold in May and preparations for the sale of a further seven plants are under way. The privatisation of the former telecommunication monopoly was completed when the remaining 35% stake in the Bulgarian Telecommunication Company was sold on the Bulgarian stock exchange in January 2005. The winning bidders for the remaining 70% stake in the Bulgarian River Shipping Company and the Boyana film studios were chosen in June 2005. However, both deals are currently blocked because of judicial reviews following appeals by the losing bidders. The privatisation of Bulgartabac failed for a third time when the sole remaining bidder for the holding’s cigarette manufacturing companies withdrew its offer in February 2005. The privatisation plans for Bulgaria Air and the Maritime Fleet have not been endorsed by Parliament and a revision of the privatisation strategies for the two companies was announced in September 2005. 25 Bulgarian commercial banks jointly acquired a majority stake in the card operator BORICA in May 2005. Preparations for the sale of a number of arms producers (Teraton, Kintez and VMZ Sopot) have started. The privatisation plan for VMZ Sobot military plant was approved by the Council of Ministers in June 2005.

In its 2004 Report, the Commission noted that the actual restructuring and liberalisation of the network industries needed to progress further in order to enhance competition and efficiency.

Good progress has been made in the liberalisation and restructuring of the energy sector. Privatisation in the energy sector has advanced substantially with the sale of the regional electricity distribution companies at the end of 2004, several district heating companies in 2004 and 2005 and several hydro-power plants and coal mines. The liberalisation of the electricity sector continued with the lowering of the threshold for direct contracting between power generators and large industrial consumers. By August 2005, the liberalised market segment included eleven licensed buyers and five licensed producers and covered approximately 12.5% of the overall consumption. This process is set to continue gradually until full liberalisation will be achieved in mid-2007. Alignment of electricity prices with cost-recovery levels had already been achieved in several steps until mid-2004 although a certain cross-subsidisation of household consumption of electricity and heating energy continues to exist. In line with the successful restructuring of the energy sector, state aid has almost entirely been phased out. Restructuring of the national electricity company still needs to be completed with the unbundling of activities due to take place before accession. In line with the electricity sector, liberalisation of the gas market has also started in 2004 and covers in principle 80% of the whole market. However, while growing, the gas market remains relatively small and the actual degree of opening is only about 6.6% of total consumption. Several investment projects to upgrade existing facilities in the energy sector were being implemented in the reporting period but further investments will be needed in the coming years.

Good progress has been made in the liberalisation and restructuring of the transport sector, but the process needs to continue . Steady progress in the restructuring of the railway sector through the closure of loss-making lines and services as well as staff reductions has improved the productivity and financial position of the national rail operator. Following a decision by the Council of Ministers in November 2004, further lines are due to be closed in 2005 and 2006. Tariff increases have raised cost-recovery ratios and government transfers have been put on a more transparent and stable basis through the conclusion of a public service contract which will be reviewed regularly. The basis for more competition has been laid with the licensing of a second private, national freight operator in April 2005. While the modernisation of the network and the rolling stock has started, further efforts are needed to reduce costs and to bring tariffs in line with costs. Concessions for private operators were granted for the airports in Varna and Bourgas where the deals have, however, been halted following a legal appeal by some of the losing bidders. Concessions were also granted for one sea port and one river port. Overall, more than 20 river and sea ports are due to be offered for concession. A concession agreement was signed for the construction and operation of Trakia motorway in March 2005. This deal is currently subject to a judicial review, after the Deputy Prosecutor General challenged the award of the concession in June 2005 before the Supreme Administrative Court because it did not involve an open tender procedure. While the involvement of private investors through concession agreements should aid the much-needed modernisation of the national transport infrastructure, ensuring the transparency of the process will be crucial for maintaining the confidence of potential future investors and for avoiding lengthy legal conflicts.

The liberalisation of the telecommunication sector continued, but attention needs to be given to effectively increase competition. Regarding telecommunications, the privatisation of the former monopoly was completed with the sale of the remaining state-owned shares on the Bulgarian stock exchange in January 2005. Six additional licenses for fixed-line services were granted in the first half of 2005, bringing the total number of licenses to 16. Eight inter-connection agreements have so far been signed between new operators and the network provider. Actual competition in the market for fixed-line telephony is, however, still limited due to the small market share of new entrants. While competition for mobile phone services should increase with the launch of a third GSM operator, which was delayed until the end of the year, prices for mobile phone calls are still relatively high. Three UMTS licenses were granted in April 2005, but services are not expected to start before mid-2006. The liberalisation and restructuring of the telecommunication sector is well advanced, but ensuring non-discriminatory network access for cable, internet and fixed-line service providers and preventing the abuse of market power by incumbents will be crucial for improving competition. This implies an increasingly important role for the regulators, who have already adopted a number of important decisions in this respect in the first half of 2005.

In its 2004 Report, the Commission noted that the ongoing reduction in unemployment should be further supported by reducing rigidities in labour market regulation .

While the situation in the labour market has continued to improve, only limited progress was made in making labour markets more flexible. In March 2005, an amendment to the Labour Code facilitated the extension of normal weekly working hours to some extent. However, rules on working time still remain relatively rigid and provide little room for introducing more flexible working time arrangements, including for example through collective agreements. Measures to promote the employment of disadvantaged groups in the labour market were accompanied by a certain tightening of eligibility criteria for unemployment benefits in April 2005, which together with appropriate control and activation should increase the incentives to take up work. A reform in the unemployment insurance system, shifting responsibilities for the administration and control of contributions and benefits to the National Social Security Institute should help to reduce the size of the informal sector. The transposition of EU legislation on fixed-term work which puts fixed-term workers on an equal footing with regular employees as regards employment and working conditions has not been used as an opportunity to alleviate existing restrictions on the use of fixed-term contracts. Job mobility continues to be hampered by the portability of seniority-based bonuses. Talks between the social partners on integrating these bonuses into the normal pay scale as well as dialogue on more comprehensive measures to improve labour market flexibility have not led to any results so far. Active labour market programmes aim at the integration of disadvantaged groups in the labour market and at improving the employability of the workforce by providing education and training. A regular evaluation of these programmes is important to ensure their effectiveness. The functioning of the labour market also continues to be hampered by low regional mobility of the workforce and skills mismatches, due to persistent labour market rigidities and an education and training system, which is ill-adapted to labour market needs and does not adequately provide for continuous updating of skills through life-long learning.

General evaluation

As regards the economic criteria for accession, Bulgaria continues to be a functioning market economy. The continuation of the current pace of its reform path should enable Bulgaria to cope with competitive pressure and market forces within the Union. Bulgaria has broadly maintained macroeconomic stability, even if external deficits have further risen. It continued implementing its structural reform programme, albeit not equally vigorously in all fields.

Progress has been made in most areas where improvements were suggested in last year’s report, but a number of challenges remain. After narrowing in 2004, the trade and current account deficit widened considerably again in the first half of 2005. Further measures have been taken to curb bank credit growth, but the continuation of prudent fiscal policy and moderate wage increases remains critical to containing potential risks for the external balance and the situation needs to be closely monitored. Further reforms are needed to improve the business environment, and in particular the functioning of the administrative and judicial system. The streamlining of business registration has started but remains to be completed. While already well advanced, the momentum in completing the privatisation programme should be maintained. Little progress has been made in improving labour market flexibility, which, together with a comprehensive reform of the education system, would be crucial for dealing with skills mismatches and improving the adaptability of the Bulgarian economy.

Commitments and requirements arising FROM THE ACCESSION NEGOTIATIONS

This chapter gives an overview of where Bulgaria stands in implementing all commitments and requirements arising from the accession negotiations for each of the 29 chapters of the acquis . Each chapter contains one or several areas. Each area is assessed, both in terms of legislation and from the perspective of implementing structures, including administrative capacity and enforcement. In cases where transitional arrangements have been agreed, their effect on Bulgaria’s obligations is duly reflected in the assessment.

For each chapter, a conclusion is provided, structured in the following way.

Firstly, it identifies those areas where Bulgaria is generally meeting the commitments and requirements arising from the accession negotiations and is expected to be, or is already, in a position to implement the acquis from accession. This does not exclude the possibility that certain actions are still to be taken, but these are not likely to pose serious difficulties.

In a second paragraph, the assessment identifies any areas where increased efforts are needed in order to ensure that Bulgaria completes preparations for membership in time. These are issues which can still be remedied taking into account the envisaged accession date of 1 January 2007 but which require the special attention of the authorities.

Thirdly, where relevant, the assessment also identifies issues that are of serious concern. These are areas where serious shortcomings exist which are likely to persist after accession unless immediate remedial action is taken. These issues require the urgent attention and action by the authorities.

Chapters of the acquis

Chapter 1: Free movement of goods

The principle of the free movement of goods implies that products must be traded freely from one part of the Union to another. In a number of sectors this general principle is complemented by a harmonised regulatory framework, following the “old approach” (imposing precise product specifications) or the “new approach” (imposing general product requirements). The transposition of harmonised European product legislation represents the largest part of the acquis under this chapter. In addition, sufficient administrative capacity to apply horizontal and procedural measures in areas such as standardisation, certification and market surveillance is essential. This chapter also covers detailed EU rules on public procurement, requiring specialised implementing bodies.

Framework legislation for the horizontal and procedural measures necessary for the administration of the acquis in the new approach sector is almost in place. The principles of the new and global approach have been introduced into the Law on technical requirements for products, last amended in May 2005. Implementing structures are in place in the fields of standardisation, metrology, accreditation, conformity assessment and market surveillance. However, the measures taken to segregate standardisation, certification, market surveillance and accreditation could sometimes be a formality, as the state organisations concerned are all under the budget of the Ministry of Economy. This could give rise to a conflict of interests.

Bulgaria has transposed most of the sectoral legislation under the new approach . However, further efforts are needed with regard to equipment and protective systems for use in potentially explosive atmospheres, radio equipment and telecommunications terminal equipment personal protective equipment, pressure equipment, cableway installations, recreational crafts and non-automatic weighing instruments. The transposition of the acquis on medical devices has not yet begun. The latest transpositions on machinery, simple pressure vessels and construction products remain to be assessed. Market surveillance inspections on products regarding compliance with legislation have found significant percentages of non-conforming products (for example 19% of machinery in 2004).

With regard to old approach directives, a considerable amount of legislation has been adopted, in particular as regards motor vehicles. Further efforts are necessary regarding legal metrology, good laboratory practice for tests on chemical substances, aerosol dispensers, cosmetics, pharmaceuticals for human and veterinary use, wood in the rough, as well as agricultural and forestry tractors. Amendments are needed in the legislation transposing the acquis on glass, footwear and textiles. The latest transpositions on chemicals remain to be assessed. In the field of metrology, inspections carried out by the State Agency for Metrology and Technical Surveillance have found significant rates of non-conformity (for example 24% of fuel pumps). Regarding motor vehicles, a considerable amount of legislation has been adopted. Regarding foodstuffs, most of the legislation has been transposed, with the exception of legislation on novel foods and the 2004 acquis . The new Law on health which has been adopted dismantles the system of authorisations (sanitary certificates) prior to marketing. A National Council for Food Safety has been set up; an important development with respect to inter-service coordination. The tasks of responsible authorities have been defined in the amendments adopted to the Law on foodstuffs. The HACCP (Hazard Analysis Critical Control Points) requirements have been made obligatory under the Law on foodstuffs. Manufacturers in this field must comply with HACCP requirements by end-2006 (end-2005 for certain groups of food operators). A national training programme in this field is still in the early stages of development and needs further work.

In the field of public procurement , a new law entered into force in October 2004. However, there is still need to address a number of important shortcomings such as the lack of a fully efficient remedies mechanism. Moreover, the new provisions of the 2004 procurement directives must still be implemented. Particular attention should be paid to align the concessions Act with the EU acquis . Related legislative efforts need to be continued and the implementation of the new legal framework will have to demonstrate Bulgaria’s genuine commitment to competitive and transparent public procurement procedures. Special efforts are needed to strengthen administrative capacities and to ensure an effective implementation of the procurement rules. Since its establishment, the Public Procurement Agency has continuously developed and improved its administrative capacity, but further efforts are required, notably as regards a clear separation of advisory and review functions and the improvement of staff professional skills. Furthermore, the adoption of an overall strategy and action plan for the establishment of a fully compliant and efficient procurement system, which would benefit the whole procurement community (contracting entities and private sector) in addition to the Public Procurement Agency, should be accelerated.

In the non-harmonised area , a screening of the legislation has been partly carried out to identify provisions that could be in breach of Articles 28-30 of the EU Treaty. Such provisions are being amended. Some import/export authorisation or license regimes still exist under the current legislation. Administrative arrangements for the future monitoring in this area still have to be completed. The principle of mutual recognition remains to be adopted and implemented throughout the legislation.

Conclusion

Bulgaria is generally meeting the commitments and requirements arising from the accession negotiations in the fields of horizontal and procedural measures , sectoral legislation under the new approach , as well as old approach directives and is expected to be in a position to implement this acquis from accession. As regards the horizontal measures, conflict of interest should be avoided through further segregation of standardisation, certification, market surveillance and accreditation functions. Some parts of legislation remain to be adopted or adjusted, both in the new and old approaches.

Increased efforts are needed in the field of public procurement and in the non-harmonised area . In order to complete preparations for membership, attention must be given to completing legislative alignment on time and improving the capacity to implement the acquis in the field of public procurement. The principle of mutual recognition remains to be adopted and implemented throughout the legislation.

Chapter 2: Free movement of persons

The acquis under this chapter provides for non-discriminatory treatment of workers who are legally employed in a country other than their country of origin. This includes the possibility of cumulating or transferring social security rights, which requires administrative cooperation between Member States. In order to facilitate the practice of certain professions, the acquis also includes specific rules concerning mutual recognition of qualifications and diplomas; for certain professions a harmonised training curriculum must be followed in order to be able to have the qualification automatically recognised in an EU Member State. Furthermore, this area also covers the residence and voting rights of EU citizens in any Member State.

Progress can be recorded on mutual recognition of professional qualifications , where framework legislation on mutual recognition has been adopted, but remains to be assessed. Several pieces of legislation, aiming at improving Bulgaria’s alignment with the general system directives and with sectoral directives were adopted in September 2005. Amendments to the Law on vocational education and training and to the Law on higher education, aiming at transposing two out of the three general system Directives, were also adopted in September. The Law on health, adopted in 2004 and amended in 2005 and establishing the legal basis for transposing the main directives in this sector (doctors, dentists, nurses, midwives, pharmacists and vets), is not in line with the acquis and with the Act of Accession. Much work remains to be done regarding the adoption of the necessary implementing legislation. The Law on the Bar is partly in line with the acquis . Further measures are necessary to fully ensure freedom of establishment and the free provision of services in Bulgaria by lawyers as well as architects from the other Member States.

The Ministry of Education and Science and the respective authorities (according to the list of regulated professions) will be competent to recognise legal capacity in the professions concerned. Further strengthening of administrative capacity both in terms of training and of the further development of appropriate administrative structures is needed with a view to enforcing the legislation (general systems directives and sectoral directives) in the field of mutual recognition of qualifications upon Bulgaria’s accession.

As regards citizens’ rights , alignment on right of residence is still to be achieved. Also, new acquis on the right of EU citizens and their family members to move and reside freely within the territory of the Member States still needs to be transposed. Concerning electoral rights, amendments to Bulgaria’s Constitution were adopted in February 2005, providing in particular for the adoption of special legislation to regulate elections of Members of the European Parliament and the participation of EU citizens in local government bodies. Such special legislation remains to be adopted. Measures must also be taken to ensure, by accession, that all Bulgarian and non-Bulgarian EU nationals receive equal treatment on access to education and education fees. In July 2005, Bulgaria adopted a new Law on Foreign Nationals. Provisions in this law prohibit the right to legal remedy in case a foreign national is revoked the right to stay in Bulgaria for reasons of national security. Bulgaria will need to bring these provisions in line with the acquis and more specifically with the directive on the co-ordination of special measures concerning the movement and residence of foreign nationals which are justified on grounds of public policy, public security and public health. Furthermore, a new directive, which will enter into force in April 2006, takes over the provisions of the above directive as well as all relevant jurisprudence of the Court.

As for the free movement of workers , transitional arrangements have been agreed. For the first two years following accession, current Member States will apply national measures, or bilateral agreements, to regulate the access of Bulgarian workers to their labour markets. These arrangements may continue for a maximum of seven years. Although Bulgaria may apply equivalent measures to any current Member State applying restrictions, it must have legislation in place to comply with the acquis on free movement of workers by accession. During the transitional period, Bulgaria may continue to apply bilateral agreements with any current Member State applying restrictions.

Concerning future participation in the EURES network, preparations should continue for connection to the European Job Mobility Portal to ensure that all job vacancies displayed on the Public Employment Services website will be available upon accession.

Bulgaria has strengthened bilateral relations through agreements with a series of Member States, with a view to the future coordination of social security systems . Administrative capacity, particularly staff numbers, needs to be increased. Preparations should continue for the introduction of the European Health Insurance Card from the date of accession.

Conclusion

Bulgaria is generally meeting the commitments and requirements arising from the accession negotiations in respect of citizens’ rights , the free movement of workers and the coordination of social security systems . It is expected to be in a position to implement this acquis from accession. Some legislation remains to be adopted or aligned in the field of citizens' rights, and preparations should continue for the introduction of the European Health Insurance Card from the date of accession.

Increased efforts are needed with regard to the mutual recognition of professional qualifications , where more attention needs to be paid to transposing the remaining legislation and ensuring its enforcement, especially as regards health professions.

Chapter 3: Freedom to provide services

Under this chapter, Member States must ensure that the right of establishment and the freedom to provide services anywhere in the EU is not hampered by national legislation. In some sectors, the acquis prescribes harmonised rules which must be respected if the internal market is to function; this concerns mainly the financial sector (banking, insurance, investment services and securities markets) but also some specific professions (craftsmen, traders, farmers, commercial agents). Harmonised rules concerning the personal data protection and certain information society services must also be respected.

As regards the right of establishment and freedom to provide non-financial services , the screening for possible legislative and administrative restrictions is completed, but the process of removing restrictions is ongoing and requires increased efforts. ( See also Chapter 2 – Free movement of workers). The Law on foreigners, the Law on gambling, the Law on higher education and the Law on healthcare have been amended, but the Law on child protection, the Law on the protection and development of culture and the Law on tourism are still problematic from the point of view of the freedom to provide services and need to be amended. Tariff discrimination in the tourism sector (e.g. museums, car rental, ski passes, rental apartments, hotels) still exists and needs to be removed.

In the field of financial services, the transposition of legislation in the banking sector has made good progress but needs to be completed as regards the single passport principle, the differentiation between foreign and EU credit institutions and the definition of branches. The Law on deposit guaranty has been amended in order to increase the level of coverage, which currently exceeds the level agreed during the negotiation for a gradual increase with a view to reaching the minimum level of coverage required by the acquis . The acquis on e-money and on financial conglomerates remains to be transposed, as well as part of the acquis on the winding up of credit institutions. By the time of accession, the new capital requirements framework (known as “Basel II”) needs to be incorporated in the respective legislation. The banking supervision structure is well equipped and competently supervises the banks with a view to ensuring compliance with prudential regulations. The capacity and expertise of the supervision has been constantly upgraded.

In the insurance sector, important parts of the acquis remain to be transposed, in particular through the adoption of a new Insurance Code and a new Law on supervision of institutions for occupational pensions. To respect the target date foreseen for the Insurance Code (end 2005), Bulgaria will need to increase its efforts in this sector. Enforcement of the motor insurance against third party liability is weak; sources indicate that up to 45% of the cars circulating in Bulgaria are not insured. This is therefore an issue of serious concern. Bulgaria should continue its efforts to significantly decrease this percentage and ensure better enforcement of the legislation on third party liability. In that context, Bulgaria should also ensure accessibility to insurance products on third party liability in order to increase the number of insured vehicles. The procedure for signing the “green card” Multilateral Guarantee Agreement needs to be finalised and preparations should be made without delay to meet the obligations incumbent on signatories to this agreement, in order to avoid the risk that Bulgaria is not ready in this area by the time of accession.

In the investment services sector, important parts of the acquis remain to be transposed. Further alignment is needed as regards the acquis on market abuse and prospectuses, as well as the newly adopted acquis on securities markets (markets in financial instruments). The acquis on capital adequacy remains to be transposed.

Bulgaria has been granted a transitional period until the end of 2009 as regards the investor compensation scheme, at the end of which it should reach the minimum level of coverage set out in the acquis .

Since March 2003, the supervision of large parts of the financial sector (securities, insurance and pension funds) has been brought together under the Financial Supervision Commission (FSC). The FSC is functioning well overall in the area of securities and investment services but an upgrading of the skills, motivation and expertise of the staff is needed as well as elaboration of a supervision strategy, including for human resources development within the Securities Department of FSC. Independence from the Ministry of Finance should be increased. It is important that the FSC establishes even closer cooperation with the BNB Supervision to have a unified approach and avoid gaps in supervision concerning investment intermediaries.

Bulgaria still needs to fully align its legislation on the protection of personal data and the free movement of such data. (See Chapter 24 – Justice and home affairs). The current legislation needs revision. Serious efforts are required for the Commission on personal data protection to be effectively staffed and to take the appropriate measures to allocate the resources at its disposal in such a way as to become fully operational. The Commission should proceed to duly concentrating on the core tasks most needed at the present, such as guidelines to controllers, inspections and awareness-raising activities. Excessive expenditure outside its core tasks as well as the establishment of regional offices should be avoided.

In the area of information society regulations , some progress has been made as regards e-document and e-signature. Bulgaria has recently transposed the directive on electronic commerce, the compliance of which remains to be assessed.

Conclusion

Increased efforts are needed in the areas of banking , investment services and securities markets as well as in the fields of information society regulations and the right of establishment and the freedom to provide non-financial services . Restrictions towards EU citizens and companies need to be eliminated urgently. In order to complete preparations for membership, attention must be given to completing legislative alignment. Increased efforts are also needed with regard to the protection of personal data, where legislation should be aligned with the EU standards. The Commission on personal data protection should urgently establish a sensible administrative practice and effectively perform its core tasks.

As regards the insurance sector, weak enforcement of rules on motor vehicle insurance remains an issue of serious concern. Unless efforts to enforce motor insurance legislation are accelerated, Bulgaria risks not to be ready by the envisaged time of accession.

Chapter 4: Free movement of capital

Member States must remove all restrictions in national law on the movement of capital between themselves, but also with third countries (with some exceptions), and adopt EU rules to guarantee the proper functioning of cross-border payments and transfers of all forms of capital. The acquis also includes harmonised rules on payment systems. The money laundering directives establish money laundering as a criminal offence. They require financial institutions to identify and know their customers, keep appropriate records and report any suspicions of money laundering. The directives also address the activities of auditors, external accountants, notaries and lawyers, casinos, real estate agents and certain dealers in high-value items involving large cash transactions. Adequate enforcement capacity is required.

In the area of capital movements and payments , Bulgarian legislation is to a large extent in line with the acquis . Legislation regarding the full harmonisation of prudential rules relating to the placement of assets of pension funds, insurance companies and savings and credit unions remains to be adopted (i.e. through amendments of the Social Insurance Code). In accordance with the transitional arrangement it has been granted, Bulgaria has committed to remove restrictions on the acquisition of secondary residences by EU nationals not resident in Bulgaria within five years after accession. Similarly, in accordance with the transitional arrangement, Bulgaria has committed to remove restrictions on the acquisition of