ACRONYMS AND ABBREVIATIONS

BRI : business-related infrastructure

CAP : common agricultural policy

CARDS : community assistance for reconstruction, development and stabilisation

Agriculture and Rural Development DG : Directorate-General for Agriculture and Rural Development

Enlargement DG : Directorate-General for Enlargement

Employment, Social Affairs and Inclusion DG : Directorate-General for Employment, Social Affairs and Inclusion

Regional Policy DG : Directorate-General for Regional Policy

EAFRD : European Agricultural Fund for Rural Development

ESF : European Social Fund

IPA : Instrument for pre-accession assistance

IPARD : Instrument for pre-accession assistance in rural development

ISPA : Instrument for structural policies for pre-accession

LPE : local partnership for employment

Obnova : Croatian word for "rebuilding"

OP : operational programme

Phare : the main EU pre-accession instrument 1989–2006

SAP : stabilisation and association process

Sapard : special accession programme for agriculture and rural development

USKOK : Office for Prevention of Corruption and Organised Crime

EXECUTIVE SUMMARY

I. A key aim of the EU pre-accession assistance to Croatia (150 million euro per annum from 2007) is to help build up the country’s administrative capacity in order for it to be able to manage the very significant funding Croatia will receive from the EU after accession, notably from the European Agricultural Funds and the Structural and Cohesion Funds.

II. The objective of the audit was to assess how effective the EU assistance had been, both in terms of its relevance and the results achieved.

III. The Commission has developed new approaches since the 2004 and 2007 enlargements to improve the framework for assistance. Programming procedures are well designed to ensure capacity-building priorities are addressed, and projects examined by the Court in Croatia were found to be very relevant. However, more attention needs to be paid to building up procurement capacity and the capacity of regional and local authorities.

IV. In terms of results, EU assistance has made an important contribution to building up Croatia’s capacity for managing post-accession funding, including through learning by doing. However, implementation of assistance has been delayed and some of the intended results of projects have yet to be secured. In the area of the Structural and Cohesion Funds, learning by doing has been particularly useful though a focus on developing major infrastructure projects has been at the expense of developing other projects, particularly at the regional and local level. Rural development measures have suffered from low absorption and progress in capacity building has been modest. Some important steps have been taken to strengthen the anti-corruption body but significant challenges remain.

V. The report concludes that EU pre-accession assistance is making a significant contribution to supporting Croatia in preparing for managing EU funds after accession but has so far been only partially successful. It sets out recommendations which identify where additional assistance is particularly required for further progress in building capacity for managing pre- and post-accession funds, and which are likely to be relevant to EU pre-accession assistance in other countries.

INTRODUCTION

BACKGROUND

1. In June 2000, the Feira European Council decided, in the framework of the European Union’s stabilisation and association process (SAP), that all the western Balkan countries should have the prospect of joining the EU. Croatia presented its application for EU membership in 2003 and received the status of candidate country from the Council in June 2004. Accession partnerships were established in 2006 and 2008 setting out what the European Commission considered to be priority areas for Croatia to make progress in before accession.

2. As for other candidate countries, in order to join the EU Croatia has to meet the Copenhagen criteria [1], accept the entire EU legal framework, known as the acquis communautaire [2], and make EU law part of its own national legislation. To facilitate the accession negotiations, the acquis is divided into EU policy chapters (see Annex I). Negotiations on the various chapters are not limited to regulatory and legislative aspects, but also cover the setting up of the necessary administrative structures and the progress achieved in building up their management capacity.

3. Accession negotiations were formally opened on 3 October 2005. The chapter-by-chapter negotiations with the EU Council started in June 2006 and were closed by a ministerial accession conference on 30 June 2011. As provided for by the June 2011 European Council, the Accession Treaty should be signed by the end of 2011 [3]. The target date for Croatia’s accession to the EU, as agreed by the Member States, is 1 July 2013.

EU PRE-ACCESSION ASSISTANCE TO PREPARE FOR MEMBERSHIP

4. The purpose of EU pre-accession assistance is to support the adoption and implementation of the acquis communautaire, and to help the candidate countries strengthen their administrative capacity in preparation for managing the larger amounts of EU funding available to them once they become Member States. The Commission follows two complementary approaches to strengthening administrative capacity. Firstly, it directly funds activities such as institution building, the setting up of management systems and training. Secondly, it also supports capacity building through funding programmes similar to those under the European Agricultural Fund for Rural Development (EAFRD) and the Structural and Cohesion Funds in order to enable candidate countries to "learn by doing" as they implement such programmes before their accession.

5. Since 2001 the Commission has provided pre-accession assistance to Croatia through several instruments (see Figure 1) [4]. Initially, this was provided through the Community assistance for reconstruction, development and stabilisation (CARDS) programme. The Phare programme, the Commission’s main pre-accession instrument, was introduced in Croatia in 2005. It was complemented by the Instrument for Structural Policies for Pre-Accession (ISPA), financing infrastructure projects in the transport and environment sectors and the precursor of the EU Cohesion Fund, and the special accession programme for rural development (Sapard) which was similarly intended as a precursor for the European Agricultural Fund for Rural Development (EAFRD). From 2007 these three instruments were replaced by the Instrument for Pre-Accession (IPA), which provides funding of approximately 150 million euro per annum through five components (see Table 1). Following accession EU funding to Croatia will greatly increase.

TABLE 1

IPA ASSISTANCE TO CROATIA 2007–13 (MILLION EURO)

Source: COM(2009) 543 final of 14 October 2009 — Instrument for Pre-Accession Assistance (IPA) — Multiannual indicative financial framework for 2011–13.

Component | I. Transition assistance and institution building | II. Cross-border cooperation | III. Regional development | IV. Human resources development | V. Rural development | Total |

Totals (2007–13) | 299 | 105 | 379 | 104 | 184 | 1071 |

FIGURE 1

EU EXPENDITURE IN CROATIA BEFORE AND AFTER ACCESSION

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Source: European Court of Auditors.

6. EU assistance to Croatia is planned by the Commission in conjunction with the Croatian authorities. The accession partnerships and the national programme for integration of Croatia into the EU are the main elements of the political framework for assistance. EU funding is allocated to the assistance priorities set out in the multiannual indicative planning documents (MIPDs) established by the Commission in close consultation with the national authorities. The Croatian authorities draw up relevant project proposals and, together with the Commission, short-list and refine the proposals into mature projects ready for implementation. Projects are generally required to be completed within a 3- or 4-year time-frame. They are implemented through grant schemes, contracts (for services, supplies or public works) or twinning contracts [5]. As regards the assistance under the Instrument for pre-accession assistance in rural development (IPARD), the projects are selected solely by the Croatian competent agency.

7. EU assistance to Croatia has been managed in three ways. Under the CARDS programme, it was predominantly managed centrally by the Commission. However, for the more recent instruments the Commission has conferred management powers on accredited Croatian authorities for managing EU funding [6], subject to ex ante checks by the EU Delegation in Croatia over tendering and contracting (decentralised management with ex ante controls). The third, most advanced, management mode is when the national authorities are assessed by the Commission to have sufficient management capacity to manage EU assistance without any ex ante checks by the EU Delegation (decentralised management without ex ante controls). This is the management mode which most closely corresponds to the way in which EU funding is managed after accession, but in most areas the Commission has not yet approved its introduction [7]. Annex II sets out the different management modes for each instrument and component.

AUDIT SCOPE AND METHODOLOGY

8. The audit was carried out between June 2010 and June 2011. It aimed at answering the overall question:

"Has EU pre-accession assistance been effective in supporting Croatia prepare for managing EU funds after accession?"

The audit focused on the following two key areas:

(a) Has the Commission planned EU assistance in a way which satisfactorily helps Croatia to prepare for managing EU funds after accession?

(b) Have the EU-financed projects achieved the intended results in terms of strengthening Croatia’s capacity for managing EU funds?

9. The audit did not seek to address the effectiveness of the EU assistance in supporting Croatia’s adoption and implementation of the acquis communautaire. It was also not the aim of the audit to make an overall assessment of Croatia’s readiness for EU membership.

10. The audit findings are based on:

(a) an analysis of the documents relating to the programming and implementation of the pre-accession assistance;

(b) the audit of a sample of 16 projects financed by IPA Components I, III and IV and by the previous financial instruments CARDS, Phare, ISPA and Sapard (see Annex III). The total value of EU assistance to these projects amounted to 96,6 million euro, which represents approximately 11 % of overall funding over the audit period [8]. The projects were assessed on the basis of documentary and interview evidence and on-the-spot visits which took place in October 2010 to eight of them;

(c) interviews with Commission staff in Brussels and Zagreb;

(d) interviews with the Croatian ministries, agencies and regional and local authorities involved in the management of EU funds in Slavonski Brod, Split, Tovarnik, Vinkovci, Zadar and Zagreb.

MAP

LOCATION OF THE PROJECTS AUDITED

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Source: Eurostat.

OBSERVATIONS

COHERENT AND WELL-TARGETED PLANNING

DRAWING ON THE LESSONS OF PREVIOUS ENLARGEMENTS, A NEW FRAMEWORK FOR PRE-ACCESSION ASSISTANCE HAS BEEN INTRODUCED

11. In designing its framework for managing pre-accession funds the Commission took account of lessons drawn from previous enlargements. Thus the introduction of IPA in 2007 brought together all pre-accession financial assistance under one instrument rather than it being dispersed across three different instruments (Phare, ISPA and Sapard) as was previously the case. This has considerably facilitated the planning of EU assistance.

12. Prior to IPA separate mechanisms covered the coordination of the different instruments, but under IPA a more coherent system is in place for coordinating the planning of EU-funded capacity-building activities. Within the Commission, the Directorate-General for Enlargement (Enlargement DG) has been assigned the lead role in coordinating IPA assistance with three other directorates-general: the Directorate-General for Regional Policy (Regional Policy DG) for Component III (Regional development); the Directorate-General for Employment, Social Affairs and Inclusion (Employment, Social Affairs and Inclusion DG) for Component IV (Human resources development); and the Directorate-General for Agriculture and Rural Development (Agriculture and Rural Development DG) for Component V (Rural development). The four directorates-general coordinate their activities related to the programming and implementation of the assistance, as well as to the negotiation of chapters, both informally and then through formal inter-service consultations.

13. The Commission has also strengthened the link between the planning and implementation of EU pre-accession assistance and the pre-accession negotiation process. This has been done by introducing into this process benchmarks to be met before the closure of chapters. This new approach has been applied to the chapters where there is EU pre-accession funding, notably Chapter 11 (Agriculture and rural development) and Chapter 22 (Regional policy and coordination of structural instruments), and has led to a greater focus on Croatia’s progress in building up its capacity in these areas with the help of EU pre-accession assistance. Thus, for example, Chapter 11 benchmarks include the capacity of the paying agency and this has also been a key focus of EU assistance (see also paragraph 37). Nevertheless, this benchmark approach could have been more widely applied in Croatia than has actually been the case. For example, the establishment of sufficient capacity in Croatian authorities for them to be authorised to manage pre-accession assistance without ex ante control by the EU Delegation has not been used as a benchmark for Chapter 22.

THE IPA PROGRAMMING PROCEDURES ARE WELL DESIGNED AND HAVE PRIORITISED THE STRENGTHENING OF CROATIA’S ADMINISTRATIVE CAPACITY ALTHOUGH PROCUREMENT STILL NEEDS ATTENTION

14. A significant shortcoming of the EU assistance to prepare candidate countries for the 2004 and 2007 enlargements was that the economic and social cohesion programmes financed by Phare were only annual programmes [9]. Croatia has benefited from the approach introduced under IPA which provides for multiannual operational programmes akin to those used under the Structural Funds. This has both improved the possibilities for "learning by doing" by establishing planning procedures closer to those applicable post accession and also enabled better planning of specific capacity-building interventions. Under IPA, the Regional Policy DG and the Employment, Social Affairs and Inclusion DG have also been able to provide their expertise to assist the Croatian authorities in this multiannual planning process more easily than was the case for the previous two accessions.

15. A key step towards better post-accession management of funding by Croatia has been the Commission’s introduction of a more rigorous approach to ensuring Croatia has the capacity for managing its pre-accession funding than was the case for previous candidate countries [10]. A central part of this approach is the planning system it has developed for assessing Croatia’s capacity-building needs and identifying the necessary assistance to meet these needs, in order to be able to introduce decentralised management, first with ex ante checks by the Delegation and subsequently without these ex ante checks (see paragraph 7).

16. However, there remains a particular need to focus assistance on helping to build up Croatia’s procurement capacity. The Court’s financial audits in the framework of its annual Statement of Assurance on the EU budget consistently find that procurement is a major source of irregularities in EU Member States in the area of cohesion [11]. As Table 2 shows, the EU Delegation in Croatia in the framework of its decentralised management ex ante checks has regularly had to reject the documents submitted because they are not fully compliant with EU procedures. While there has been a clear reduction in rejection rates from 2007 to 2010, the Enlargement DG in its 2010 Annual Activity Report stated that they have "remained relatively high" for more complex contracts, mainly relating to public works, due to the "inadequate quality of the technical control expertise" [12] (see also paragraph 23).

TABLE 2

RATE OF TENDER EVALUATION REPORTS AND CONTRACTS SUBMITTED BY CROATIAN AUTHORITIES WHICH WERE REJECTED BY EU DELEGATION IN CROATIA (%)

Source: Enlargement DG, 2010 Annual Activity Report.

| | 2007 | 2008 | 2009 | 2010 |

Evaluation reports | First submission | 60 | 22 | 20 | 14 |

Further submissions | 34 | 35 | 67 | 20 |

Contracts | First submission | 60 | 20 | 21 | 20 |

Further submissions | 34 | 37,5 | 33 | 10 |

THE AUDITED PROJECTS HAVE ADDRESSED CAPACITY-BUILDING PRIORITIES ALTHOUGH ASSISTANCE SO FAR HAS BEEN LARGELY DIRECTED TO THE CENTRAL AUTHORITIES RATHER THAN THE REGIONAL LEVEL

17. The Commission has generally ensured, in consultation with the Croatian authorities, that the key capacity needs have been identified. There is a systematic approach to assessing and updating Croatia’s needs for Commission funding: top-down from the accession partnership and bottom-up with project proposals from the potential beneficiaries, mainly Croatian ministries.

18. The EU assistance in the form of specific projects complemented the Croatian authorities’ own efforts to strengthen ministries’ capacity and set up bodies specifically to manage future EU funding. In general, the specific objectives of the 16 audited projects were very much in line with the capacity-building priorities set out in the accession partnership. Even where projects did not include direct capacity building through technical assistance and twinning contracts, projects had an important "learning by doing" dimension which provided the opportunity to gain valuable practical experience of managing EU funding before the accession.

19. In nearly all cases the Commission funding was targeted at Croatian bodies which would be responsible for implementing EU assistance post accession. However, the assistance was largely directed to central bodies who would be responsible for managing post-accession funding and much less to the regional level, although regional bodies have an important role to play in the implementation of post-accession funding. As a result there is a risk that bodies at regional level will not have had adequate experience in implementing EU assistance by the time of the accession [13].

AN IMPORTANT CONTRIBUTION TO BUILDING UP CROATIA’S CAPACITY FOR MANAGING POST-ACCESSION FUNDING, BUT SIGNIFICANT DELAYS AND AREAS WHERE FURTHER PROGRESS IS NEEDED

PRE-ACCESSION ASSISTANCE HAS OFTEN NOT BEEN IMPLEMENTED ACCORDING TO THE ORIGINAL TIMETABLE

20. Table 3 shows the extent to which planned spending has been committed and spent. The Phare, ISPA and Sapard programmes all experienced difficulties in implementing funds according to the original timetables. Under IPA slow implementation remains an issue, particularly for the transport and environment operational programmes (IPA III) and the IPARD programme (IPA V), with the risk that funds will have to be decommitted due to these delays [14].

21. The implementation of EU assistance in Croatia has suffered several start-up delays following the introduction of new instruments. Croatia became eligible for pre-accession assistance under the Phare, ISPA and Sapard instruments from 1 January 2005. However, due to the need to determine sectoral objectives which corresponded to the strategic priorities, it then took approximately 12 months for the ISPA and Sapard programmes and 18 months for the Phare programme before the financing agreements could be finalised. In the case of the 2007 programmes under the different IPA components, financing agreements were not concluded until approximately 16 months after the entry into force of the IPA implementing regulation. This was mainly due to the time required for the conferral of management powers before implementation could begin, a new condition required by the IPA regulation (see paragraph 7).

22. Several pre-IPA projects audited by the Court were not yet ready to be implemented after the financing agreement had been signed. This was because the necessary terms of reference or technical specifications needed to enable the launch of tenders had not been finalised by the Croatian authorities. Thus the average time from the financing agreement to the tender launch was 12 months for the contracts audited. There was some improvement under IPA, the corresponding time being reduced to 8 months, but there remains scope for better performance in this area.

TABLE 3

IMPLEMENTATION OF EU ASSISTANCE TO CROATIA (MILLION EURO, MARCH 2011)

Source: EU delegation to Croatia.

Programmes in Croatia | Budget | % of budget contracted | % of budget paid [9999] |

CARDS | 260 | 97 % | 92 % |

Phare | 147 | 86 % | 78 % |

ISPA | 59 | 96 % | 63 % |

Sapard | 25 | 62 % | 48 % |

IPA I 2007 | 45 | 90 % | 57 % |

IPA I 2008 | 42 | 27 % | 20 % |

IPA I 2009 | 42 | 11 % | 11 % |

IPA II 2007–09 | 8 | 64 % | 36 % |

IPA III 2007–09 (of which) | 143 | 29 % | 7 % |

– Operational programme (OP) transport | 54 | 20 % | 4 % |

– OP environment | 54 | 25 % | 2 % |

– OP regional competitiveness | 35 | 48 % | 20 % |

IPA IV 2007–09 — OP human resources development | 38 | 71 % | 9 % |

IPA V 2007–09 (IPARD) — Measures 101 and 103 | 51 | 12 % | 0 % |

Total | 860 | 68 % | 55 % |

23. Once tenders were launched delays frequently also occurred due to the Croatian authorities’ still limited capacity for managing EU procurement procedures (see paragraph 16). This has meant that the EU Delegation has frequently had to reject tender and contract documentation and send it back to the Croatian authorities for the necessary improvements to be made (see Table 2). This led to delays which would not occur if the documentation were prepared to the set standards. The Court examined a sample of 18 contracts and found that contracts were concluded on average 10 months later than the original timetable, which is quite considerable when the normal project time-frame is limited to 3 to 4 years.

24. In view of the difficulties encountered by Croatia in implementing the EU assistance according to the original timetable, the Commission extended the implementation deadlines by 1 year for projects assisted under Phare 2005, Phare 2006 and Sapard, and by either 1 or 2 years for the ISPA projects. Based on that experience, longer deadlines were introduced by the Commission for IPA Component I. However, for IPA Components III, IV and V the disbursement deadlines based on the "N+3" rule represent a significant challenge (see footnote 14).

25. As the following sections demonstrate in relation to specific projects (see paragraphs 26 to 47), delays, mainly resulting from capacity issues within the Croatian administration, have reduced the progress made through pre-accession assistance in building up Croatia’s administrative capacity before accession. This points to a risk that Croatia will not have the capacity to fully absorb the increased post-accession allocations within the regulatory time-frames.

STRUCTURAL FUNDS-TYPE PROJECTS: VARIED RESULTS BUT "LEARNING BY DOING" BENEFITS

26. The audit examined eight Structural Funds-type projects relating to four key areas (see Figure 2). The achievement of the projects’ intended results varied, partly due to delays, as did their potential sustainability. It was clear that the Croatian authorities are benefiting from "learning by doing" but there are still capacity issues which need attention.

FIGURE 2

PREPARATION FOR STRUCTURAL AND COHESION FUNDS IN CROATIA

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Source: European Court of Auditors.

SEVERAL ASPECTS OF THE MONITORING AND EVALUATION OF ASSISTANCE WERE STILL IN NEED OF IMPROVEMENT

27. Insufficient use of "SMART" [15] objectives and related indicators often made it difficult to assess project results, particularly in relation to grant schemes. While the follow-up IPA projects which the Court examined were better in this respect than the pre-IPA projects there was still scope for improving the way in which project effectiveness was assessed. The Commission has a well-designed monitoring system which is being implemented by the Croatian authorities although the audit found that on occasion the monitoring reports tended to underestimate the problems faced by projects. The projects have sometimes not been subject to external assessment, particularly in relation to the grant schemes financed. This is partly because the Commission intends to combine an interim evaluation of IPA programmes with an ex ante evaluation of operational programmes for the Structural Funds, but this approach is delaying feedback on possible improvements to IPA project assistance.

THE SUSTAINABILITY OF RESULTS FOR THE HUMAN RESOURCES DEVELOPMENT PROJECTS AUDITED IS UNCERTAIN

28. The CARDS 2004 project included the first decentralised ESF-type scheme in Croatia and provided valuable capacity-building experience in the four counties covered by the project [16]. In each county a local partnership for employment (LPE) was created which undertook a range of human resources development activities. However, when EU funding ended in 2008 the LPEs became largely inactive, calling into question their sustainability.

29. The lack of financial and other support to existing LPEs did not augur well for the development of LPEs in Croatia’s 13 other counties, which was one of the aims of the follow-up IPA LPE project. Moreover, the late start of the service contract funded as part of the IPA project meant that there was insufficient time for the consultants employed under the contract to help in the setting up of LPEs in these counties before grant schemes were launched. However, the Commission has recognised that sustainability is a key issue and is assessing what would be the best model to be adopted for the LPEs to improve the prospects for their sustainability.

SIGNIFICANT CAPACITY ISSUES REMAIN IN RELATION TO THE REGIONAL COMPETITIVENESS PROJECTS FUNDED

30. The results of the Phare 2005 business-related infrastructure (BRI) project varied. The implementing bodies were able to use the full budget, albeit with delays, and ensure that for each selected grant project infrastructure was put in place. However, the audit of the Benkovac grant project (one of seven grants under the Phare BRI scheme) indicated that the local authorities were not sufficiently addressing the sustainability of the EU-funded infrastructure. There were shortcomings in the maintenance of the infrastructure and no strategy to attract companies; the infrastructure was little used.

31. The design of the follow-up IPA 2007 BRI project took into account and built upon the experience of the 2005 project. However, as for the 2005 project, there were delays in the grant scheme evaluation procedure and grant beneficiaries frequently did not have the capacity to prepare complete technical documentation. The potential benefits in terms of learning by doing were reduced because the project did not directly target the designated bodies responsible for the future regional competitiveness operational programme. Furthermore, focusing on the 10 least developed counties in Croatia meant that local authorities in other counties did not benefit from the opportunity to learn from implementing BRI grant schemes before accession although they would also be eligible for funding [17].

THE EXPECTED PROJECT OUTPUTS IN THE TRANSPORT SECTOR WERE BEING ACHIEVED BUT WITH LENGTHY DELAYS IN PROJECT PREPARATION AND PROCUREMENT

32. The ISPA 2005 railway rehabilitation project to upgrade 33 km of track on the main Trans-European Corridor X [18] railway line was the first transport infrastructure project prepared and implemented according to EU rules in Croatia. It therefore brought important "learning by doing" benefits. It started 2 years behind the original schedule because the project was not mature enough when implementation was scheduled to begin. Lack of procurement capacity then caused delays in the tendering process. The IPA 2007 rail project for works at Zagreb main railway station also suffered delays in the procurement process, mainly due to incomplete tender documentation, although these delays were less than under the previous ISPA project.

33. At the time of the Court’s on-the-spot audit in October 2010, the ISPA project was still under implementation due to the delays incurred. The projects’ planned outputs were likely to be achieved by the end of 2011, although their ultimate impact depends on the implementation of other rail projects on Corridor X in Croatia and neighbouring countries.

ASSISTANCE TO PREPARE A "PROJECT PIPELINE" FOR STRUCTURAL AND COHESION FUNDS AND INCREASE CAPACITY HAS BEEN ONLY PARTIALLY SUCCESSFUL

34. Although one of the main original objectives of the Phare 2006 project was to establish a system for developing a "pipeline" of mature projects for the Structural and Cohesion Funds, the Commission subsequently decided to focus on developing a limited number of major infrastructure projects [19]. As a result fewer Croatian authorities received capacity-building assistance than had previously been planned and the number of personnel to be trained fell from 1000 to 90. While concentrating in this way on the preparation of major projects is likely to lead to a higher rate of absorption at the beginning of the Structural and Cohesion Funds, there is also a need for mature "non-major" projects to be prepared due to their importance for regional development. More generally the Commission did not sufficiently address the need to stimulate and assist regional and local promoters to prepare projects for future operational programmes by providing support at this level. Only nine major infrastructure projects were prepared and for some of these the technical documentation was incomplete. Guidelines for applications for nearly 50 grant schemes were produced although there was insufficient time to pass on knowledge relating to these schemes from central to regional level. EU-funded expertise has made a significant contribution to programming the national strategic reference framework and operational programmes for assistance under the Structural and Cohesion Funds. On the other hand, little progress was made in developing a management information system for these Funds.

35. Significant delays in the preparation and procurement procedures for work in this context carried out under the IPA 2008 programme are likely to lead to a loss of momentum. The Croatian authorities also face significant challenges in terms of the number and turnover of staff in the area of the Structural and Cohesion Funds.

PREPARING FOR EU AGRICULTURAL POLICY: MIXED RESULTS

36. The effectiveness of the EU pre-accession assistance to the agricultural sector was assessed by examining two institutional capacity-building projects funded under Phare 2005 and IPA 2007 Component I and the Sapard and IPARD programmes, including four investment projects co-financed in the framework of Sapard (see Figure 3).

FIGURE 3

PREPARATION FOR EU AGRICULTURAL FUNDS IN CROATIA

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Source: European Court of Auditors.

SOME PROGRESS HAS BEEN MADE IN RESPECT OF THE CONFERRAL OF MANAGEMENT POWERS FOR RURAL DEVELOPMENT MEASURES

37. Results in terms of building up the capacity of the Croatian paying agency to make proper use of pre-accession and post-accession funding have been mixed. Croatia had to build up sufficient management capacity for the Commission to grant it the necessary conferral of management powers for decentralised management without ex ante checks before it could start to implement pre-accession rural development measures. In the event of Sapard, conferral of management powers was granted for only two rural development measures in September 2006 [20] instead of the four initially planned.

38. Progress was modest in relation to building capacity for obtaining IPARD funding, in particular because the Phare 2005 project’s objectives in terms of accreditation by the Croatian authorities [21] and conferral of management powers were not very ambitious. On the one hand, the programme sought only the accreditation for IPARD of the two measures which had already been accredited under Sapard. On the other hand, for the new IPARD measures, the objective was not to obtain accreditation but only to prepare documentation for possible future accreditation. Although the assistance under IPARD was available from the 2007 EU budget, the Phare 2005 project contained no precise targets for the conferral of management powers by the Commission with a view to giving Croatia access to IPARD funding as soon as possible.

PRE-ACCESSION ASSISTANCE TO RURAL DEVELOPMENT DID NOT FULLY REPLICATE THE POST-ACCESSION WORKING CONDITIONS

39. Sapard was the first "learning by doing" programme for the EAFRD, all the implemented projects being part of a process to help the Croatian authorities set up the administrative framework for the implementation of co-financed projects post accession. These included management of the applications (completeness checks, analysis of the business plan), on-the-spot checks prior to the project approval, decision on granting Sapard funds, contracting, verification of the eligibility of expenditure, payment, and reporting to the Monitoring Committee and to the Commission.

40. For the measures where the Croatian authorities have received the conferral of management powers, allowing them to use decentralised management without ex ante controls, pre-accession programmes can in principle be implemented under similar conditions to those which will apply post accession. However, in practice, the implementation of the Sapard and IPARD programmes has not fully replicated the post accession environment for managing EU funding.

(a) The Sapard programme has been entirely managed at the central level of the Paying Agency and, at the time of the audit, IPARD was also being managed centrally. As a result the Paying Agency regional offices have not yet had the opportunity to gain practical experience in the management of EU pre-accession rural development programmes although they will have to play a key role in this post accession [22].

(b) For Sapard and IPARD projects, the paying agency has been operating entirely manual procedures.

(c) Under Sapard, no ranking system for project applications was developed and applied by the agency. Instead project applications were dealt with on a first-come, first-served basis.

LOW ABSORPTION OF SAPARD AND IPARD FUNDING RAISES CONCERNS FOR THE FUTURE ABSORPTION OF EAFRD FUNDS

41. Absorption of Sapard funding by Croatia has been low, declared expenditure at the end of the programme amounting to only 48 % of the funds allocated. According to the output indicators of the Sapard programme, 161 eligible projects were expected to be funded within the framework of the two measures, whereas in reality contracts were signed for only 49 projects and just 37 were completed (see Table 4). In five of the 21 counties there was not a single successful Sapard application. Some sectors were particularly under-represented in the implementation of Measure 1 (Investment in agricultural holdings), notably the milk sector, greenhouses sector and fruits and vegetable sector. This points to serious weaknesses in the capacity and preparedness of these sectors to absorb EU funds [23].

42. The amounts contracted under IPARD confirm the continuing difficulties in absorbing EU funding for rural development programmes. Financial commitments were made in the 2008 budget for both IPARD 2007 (25,5 million euro) and IPARD 2008 (25,6 million euro) which, in accordance with the EU budget procedures (see paragraph 20), Croatia had to spend by the end of 2011. However, in May 2011 investments had only been approved for approximately 16,9 million euro (EU part of the funding) after four calls for applications (33 % of the 2007 and 2008 IPARD budget) [24]. Given the time needed to launch and process additional calls and to implement approved projects, there is a clear risk that a large part of the 2007–08 budget will have to be decommitted.

43. As a result of the low level of absorption, Croatian farmers and agro-processors have not yet become as familiar with EU funding procedures through "learning by doing" in the framework of the Sapard and IPARD programmes as had been intended. This will make it in turn more difficult to absorb the expected large increases in EU funding when the rural development measures in Croatia are fully phased in after accession.

TABLE 4

SAPARD PROJECTS IN CROATIA

Source: Annual and final report on the implementation of the Sapard programme in the Republic of Croatia (2006–09), May 2010.

Measure | Number of | Completed/ expected |

Expected projects | Applications | Contracted projects | Completed projects |

1. Investments in agricultural holdings | 110 | 84 | 26 | 19 | 17 % |

2. Improving the processing and marketing of agricultural and fishery products | 51 | 53 | 23 | 18 | 35 % |

Total | 161 | 137 | 49 | 37 | 23 % |

44. The Commission only finally established in 2009 that a key reason for the low absorption of the Sapard programme was a national scheme which offered more favourable conditions, together with fewer procedures and controls, for the same measures as funded by Sapard. Following the Commission’s intervention, Croatia decided to abolish this competing national scheme in November 2009, after the end of the Sapard contracting period. However, the slow start of the IPARD programme indicates that the reasons for low demand from farmers for the rural development scheme in Croatia have still to be fully addressed.

PRE-ACCESSION ASSISTANCE HAS CONTRIBUTED TO STRENGTHENING CROATIA’S ADMINISTRATIVE CAPACITY IN THE FIGHT AGAINST CORRUPTION AND ORGANISED CRIME BUT SIGNIFICANT CHALLENGES REMAIN

45. The fight against corruption and organised crime is a very sensitive issue and is a key part of building up Croatian capacity to ensure EU post-accession funding, as well as national funding, is well used. EU pre-accession assistance has been used to fund two institutional capacity-building projects funded by the CARDS 2002 and IPA 2007 programmes (see Figure 4).

FIGURE 4

STRENGTHENING CAPACITIES TO FIGHT AGAINST CORRUPTION AND ORGANISED CRIME

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Source: European Court of Auditors.

46. The CARDS project was launched to improve the functioning of the Office for Prevention of Corruption and Organised Crime (USKOK), which had been set up in 2001. Despite significant delays in its preparatory phase which meant the project only started in 2005, the project activities were completed by the end of 2006. For one indicator of the project’s effectiveness, an increasing number of cases of serious organised crime and corruption discovered and prosecuted, the first results of the investigation activities supported by the project started to become visible in 2009 in terms of reported high-level corruption cases. For the other indicator, a better ranking in the Transparency International Corruption Perception Index, Croatia rose from 70th place in 2005 to 62nd by 2010 and its score in the index improved from 3,4 in 2005 to 4,1 for most years since the end of the project.

47. The activities of the IPA 2007 project, which is scheduled to be completed in 2012, have been well designed to build on the previous project. In the meantime the overall number of cases being handled by USKOK has continued to increase and the indictments and convictions of high-ranking politicians indicate that USKOK is on the right track to tackle corruption at the highest level. Nevertheless, as the Commission’s 2010 progress report on Croatia emphasises, the recently upgraded legal and administrative structures remain to be fully tested in practice while USKOK’s capacity for dealing with sophisticated financial crimes is a particular challenge.

CONCLUSIONS AND RECOMMENDATIONS

CONCLUSIONS

48. Overall EU pre-accession assistance to Croatia is making a significant contribution to Croatia’s progress in building up its administrative capacity for managing increased EU funding post accession. Nevertheless, the assistance has only been partially successful so far in achieving its objectives and further progress in capacity building has to be supported in a number of key areas both before and after accession. In most areas of pre-accession assistance the Commission has not yet assessed Croatia’s capacity to be sufficient for it to authorise Croatia to implement the assistance without the Commission’s ex ante checks. Despite recent progress made, procurement capacity and anti-corruption are two areas where there is a particular need to reinforce support to the Croatian authorities.

49. In general, assistance to address Croatia’s capacity-building needs has been soundly planned by the Commission and the Croatian authorities. Lessons were learned from previous enlargements and new approaches adopted to planning assistance and linking it to the negotiation process. Programming systems have been well designed and prioritised capacity building, although procurement capacity still requires particular attention. Audited projects were found to be very relevant to capacity-building priorities but had focused on the central authorities with only limited support to regional bodies so far, despite the latter also having an important role to play in implementing post-accession support.

50. In terms of results, EU assistance has made an important contribution to building up Croatia’s capacity for managing post-accession funding, including through learning by doing. Nevertheless the intended results of some projects have still to be secured and the audit identified a number of key issues in this respect. Implementation of project assistance in Croatia has frequently fallen behind the original timetable, particularly due to delays caused by projects not being sufficiently mature and a lack of procurement capacity. Scope remains for improving the monitoring and evaluation of Structural Fund projects. Although there has been a strong emphasis on preparing large infrastructure projects at central level, non-major projects have received only limited attention and a system for developing project proposals from regional and local level has still to be fully established. Implementation in the rural development sector has suffered from low absorption rates and learning by doing at the regional and grant beneficiary levels has been limited. Although some progress has been made through EU projects to fight corruption and organised crime, significant challenges remain in this area.

51. Despite there still being scope for further improvement, the Commission has clearly learned important lessons from previous enlargements which has made its assistance to Croatia more effective.

RECOMMENDATIONS

52. The Commission and the Croatian authorities should work closely together to address the following recommendations:

RECOMMENDATIONS REGARDING EU ASSISTANCE TO CROATIA

1. Increase the priority given to building up procurement capacity by implementing plans for on- and off-the-job training focused in particular on:

(a) the development of tender documentation fully complying with EU standards;

(b) the management of the tendering and contracting of complex public works projects.

2. Take greater steps to meet capacity-building needs at regional and local level, notably by:

(a) ensuring that all relevant bodies at this level have the opportunity to learn by doing before the accession;

(b) improving the mechanisms for stimulating and assisting in the development of project ideas.

3. Develop further the assessment of project effectiveness by:

(a) reinforcing the use of SMART objectives;

(b) helping to raise the quality of monitoring reports by the Croatian authorities;

(c) ensuring interim and ex post evaluations are carried out.

4. Build up a portfolio of mature projects to be able to fully absorb the increased post-accession funding available, in particular by ensuring that:

(a) for major projects, which have been the focus of efforts so far, the necessary technical documentation is completed;

(b) more attention is given to establishing a complementary portfolio of non-major projects for the post-accession period.

5. Take action in relation to rural development programmes to:

(a) ensure that the national authorities build up their capacity in order to obtain conferral of management for all the measures planned;

(b) identify ways to generate more projects in the milk, greenhouses and fruits and vegetables sectors.

6. Strengthen anti-corruption measures through:

(a) providing ongoing support to the upgraded legal and administrative structures through twinning and other advisory inputs, including a particular focus on assistance in tackling sophisticated financial crimes;

(b) continuing rigorous monitoring of corruption levels and issues, during the pre-accession period and in relation to EU post-accession funding.

53. With reference to its pre-accession assistance to other candidate countries and potential candidates the Commission should:

RECOMMENDATIONS REGARDING EU PRE-ACCESSION ASSISTANCE TO OTHER COUNTRIES

7. Take into account the lessons learnt from its pre-accession assistance to Croatia in its pre-accession assistance to other countries wherever applicable, and, in particular:

(a) ensure a sufficient track record in decentralised management of pre-accession funds without ex-ante controls before the date of accession.

(b) pay greater attention to ensuring that project proposals for pre-accession assistance are sufficiently mature for implementation within the set timeframe.

This Report was adopted by Chamber III, headed by Mr Karel PINXTEN, Member of the Court of Auditors, in Luxembourg at its meeting of 25 October 2011.

For the Court of Auditors

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Vítor Manuel da Silva Caldeira

President

[1] The Copenhagen criteria set by the European Council in June 1993 consist of:(a)political criteria: stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;(b)economic criteria: the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces in the Union;(c)the ability to assume the obligations of membership, including adherence to the aims of political, economic and monetary union.

[2] The acquis communautaire denotes the whole range of principles, policies, laws, practices, obligations and objectives that have been agreed or developed within the European Union.

[3] European Council Brussels, 24 June 2011, EUCO 23/11.

[4] EU assistance to Croatia started in 1991, immediately after the outbreak of armed conflict in former Yugoslavia. Over the period 1991–2000, 382 million euro was provided through the European Commission Humanitarian Office (1991–98), and through the Obnova (Croatian word for "rebuilding") programme 1998–2000, which focused on the return and reintegration of refugees and displaced persons, reconstruction of infrastructure, economic revitalisation of war-affected areas and demining.

[5] Twinning is an instrument designed by the Commission to facilitate the transfer of know-how from EU Member States administrations to the administrations of recipient countries. They complement the transfer of know-how through service contracts with consultancy companies for technical assistance.

[6] Before the Commission grants conferral of management powers, the authorities have to undergo an accreditation process by the government of Croatia.

[7] The area of rural development is an exception in this regard. Decentralised management with ex ante checks is not applicable to the special accession programme for agriculture and rural development (Sapard) and the Instrument for pre-accession assistance in rural development (IPARD). The candidate country is required to obtain conferral of management powers for decentralised management without ex ante checks before starting implementation of measures under these two programmes.

[8] Overall EU assistance to Croatia from 2001 to 2009 amounted to 860 million euro (see Table 3).

[9] See European Court of Auditors Special Report No 5/2004 concerning Phare support to prepare candidate countries for managing the Structural Funds (OJ C 15, 20.1.2005, p. 1).

[10] Prior to the previous enlargements, the management mode of decentralised management with ex ante checks was used in candidate countries without the Commission first making an assessment of the country’s capacity to effectively manage funding through this system.

[11] See, for example, paragraphs 4.18–4.20 of the Court’s Annual Report concerning the financial year 2009 (OJ C 303, 9.11.2010, p. 1). One of the two main sources of error was "serious failures to respect public procurement rules".

[12] Enlargement DG, 2010 Annual Activity Report, p. 20.

[13] A 2009 review of Phare assistance to prepare for the Structural Funds in Croatia carried out by consultants financed by the Commission found that capacity building for local and regional bodies was not receiving sufficient priority. The review recommended that the experience of new Member States be heeded and that "the process of developing the required capacity not be left until it was too late for such bodies to participate effectively".

[14] Article 166(3) of the financial regulation states that under the "N+3" rule the Commission shall automatically decommit any portion of the budgetary commitment for the programme that has not been paid out by 31 December of the third year following the year in which the budgetary commitment was made (Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the financial regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002, p. 1)).

[9999] Excluding advance payments of 30 % for Components III, IV, V.

[15] Specific, measurable, achievable, relevant and timely.

[16] Another four counties were covered by an earlier 2002 CARDS project.

[17] The 2009 ad hoc interim evaluation of Phare assistance to preparation for Structural Funds in Croatia also concluded that too much emphasis is put on less developed regions and that all other regions in Croatia also face significant challenges in terms of the European Union competitiveness.

[18] This Corridor follows the route Salzburg - Ljubljana - Zagreb - Beograd - Niš - Skopje - Veles – Thessaloniki.

[19] According to the Structural Funds regulation, a "major" project is defined by the Commission as being greater than 50 million euro. Projects below this threshold are classified as being "non-major". Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999 (OJ L 210, 31.7.2006, p. 25 ). Regulation as amended by Regulation (EU) No 539/2010 of the European Parliament and of the Council of 16 June 2010 (OJ L 158, 24.6.2010, p. 1).

[20] Commission Decision 2006/658/EC of 29 September 2006 conferring management of aid on implementing agencies for pre-accession measures in agriculture and rural development in Croatia in the pre-accession period (OJ L 271, 30.9.2006, p. 83).

[21] See paragraph 7, footnote 7 on accreditation.

[22] The Croatian authorities have decided that the paying agency regional offices will check the admissibility of the applications and perform the administrative and on-the-spot controls.

[23] In the milk sector two projects were completed compared with the 16 projects (12,5 %) expected, in the greenhouses sector two projects were completed compared with the 14 projects (14,3 %) expected and in the fruit and vegetable sector seven projects were completed compared with 42 projects expected (16,7 %).

[24] Report on the implementation of the IPARD programme by the Croatian Paying Agency for Agriculture, Fisheries and Rural Development Sector for Structural Support, 24.5.2011.

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ANNEX I

THE 35 CHAPTERS OF THE ACQUIS ( 30 JUNE 2011)

Nº | Chapters | Negotiations opened | Negotiations provisionally closed |

1 | Free movement of goods | 25.7.2008 | 19.4.2010 |

2 | Freedom of movement for workers | 17.6.2008 | 2.10.2009 |

3 | Right of establishment and freedom to provide services | 26.6.2007 | 21.12.2009 |

4 | Free movement of capital | 2.10.2009 | 5.11.2010 |

5 | Public procurement | 19.12.2008 | 30.6.2010 |

6 | Company law | 26.6.2007 | 2.10.2009 |

7 | Intellectual property law | 29.3.2007 | 19.12.2008 |

8 | Competition policy | 30.6.2010 | 30.6.2011 |

9 | Financial services | 26.6.2007 | 27.11.2009 |

10 | Information society and media | 26.6.2007 | 19.12.2008 |

11 | Agriculture and rural development | 2.10.2009 | 19.4.2011 |

12 | Food safety, veterinary and phytosanitary policy | 2.10.2009 | 27.7.2010 |

13 | Fisheries | 19.2.2010 | 6.6.2011 |

14 | Transport policy | 21.4.2008 | 5.11.2010 |

15 | Energy | 21.4.2008 | 27.11.2009 |

16 | Taxation | 2.10.2009 | 30.6.2010 |

17 | Economic and monetary policy | 21.12.2006 | 19.12.2008 |

18 | Statistics | 26.6.2007 | 2.10.2009 |

19 | Social policy and employment | 17.6.2008 | 21.12.2009 |

20 | Enterprise and industrial policy | 21.12.2006 | 25.7.2008 |

21 | Trans-European networks | 19.12.2007 | 2.10.2009 |

22 | Regional policy and coordination of structural instruments | 2.10.2009 | 19.4.2011 |

23 | Judiciary and fundamental rights | 30.06.2010 | 30.6.2011 |

24 | Justice, freedom and security | 2.10.2009 | 22.12.2010 |

25 | Science and research | 12.6.2006 | 12.6.2006 |

26 | Education and culture | 11.12.2006 | 11.12.2006 |

27 | Environment | 19.2.2010 | 22.12.2010 |

28 | Consumer and health protection | 12.10.2007 | 27.11.2009 |

29 | Customs union | 21.12.2006 | 2.10.2009 |

30 | External relations | 12.10.2007 | 30.10.2008 |

31 | Foreign, security and defence policy | 30.6.2010 | 22.12.2010 |

32 | Financial control | 26.6.2007 | 27.7.2010 |

33 | Financial and budgetary provisions | 19.12.2007 | 30.6.2011 |

34 | Institutions | 5.11.2010 | 5.11.2010 |

35 | Other issues | N/A | 30.6.2011 |

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ANNEX II

COMMISSION’S GRANTING OF CONFERRAL OF MANAGEMENT TO CROATIAN AUTHORITIES RESPONSIBLE FOR EU FUNDS ( 15 JUNE 2011)

Programme | Conferral of decentralised management |

with ex ante controls | without ex ante controls |

Phare | 7.2.2006 | Not introduced |

ISPA | 13.2.2006 | Not introduced |

IPA I | 28.10.2008 | Not yet introduced |

IPA II | 14.11.2008 | Not yet introduced |

IPA III | | |

– Transport | 3.11.2008 | Not yet introduced |

– Environment | 29.10.2008 | Not yet introduced |

– Regional competitiveness | 29.10.2008 | Not yet introduced |

IPA IV | 1.12.2008 | Not yet introduced |

Sapard | | |

– Measure 1 Investments in agricultural holdings | N/A [1] | 29.9.2006 |

– Measure 2 Improving the processing and marketing of agricultural and fishery products | N/A | 29.9.2006 |

IPA V (IPARD) | | |

– Measure 101 Investments in agricultural holdings | N/A | 30.11.2009 |

– Measure 103 Investments in the processing and marketing of agricultural and fishery products | N/A | 30.11.2009 |

– Measure 201 Preparatory actions for implementation of the agri-environmental measures | N/A | Not yet introduced |

– Measure 202 Preparation and implementation of local rural development strategies | N/A | Not yet introduced |

– Measure 301 Improvement and development of rural infrastructure | N/A | 17.3.2011 |

– Measure 302 Diversification and development of rural economic activities | N/A | 17.3.2011 |

– Measure 501 Technical assistance | N/A | Not yet introduced |

[1] N/A — Not applicable. Sapard and IPARD can only be implemented under decentralised management without ex ante controls.

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ANNEX III

LIST OF PROJECTS AUDITED

Pre-IPA projects | Contracted amounts in millions of euro |

EU contribution | National contribution | EU + national contribution |

1 | Sapard Measure 2 - GLAZIR | 1,019 | 0,339 | 1,358 |

2 | Sapard Measure 2 - CONEX trade | 1,033 | 0,344 | 1,377 |

3 | Sapard Measure 1 - AGROMEÐIMURJE | 0,251 | 0,083 | 0,334 |

4 | Sapard Measure 1 MURKOVIĆ | 0,256 | 0,086 | 0,342 |

5 | Phare 2005 Business-related infrastructure grant scheme | 5,280 | 4,264 | 9,544 |

6 | ISPA 2005 Vinkovci to Tovarnik to state border railway rehabilitation | 28,789 | 31,394 | 60,183 |

7 | CARDS 2004 Local partnership for employment phase II | 1,488 | - | 1,488 |

8 | CARDS 2002 Capacity building for USKOK | 0,650 | - | 0,650 |

9 | Phare 2005 Institutional capacity building and support for implementation of Sapard/IPARD | 3,822 | - | 3,822 |

10 | Phare 2006 Development of institutional capacity and project pipeline for Structural Funds | 6,200 | - | 6,200 |

Total Pre-IPA projects | 48,788 | 36,510 | 85,298 |

IPA projects | Budgeted amounts in millions of euro |

EU contribution | National contribution | EU + national contribution |

11 | IPA Component IIIc Regional competitiveness operational programme 2007–09 | 19,823 | 6,608 | 26,431 |

12 | IPA 2007 Component III Zagreb main station signalling & interlocking system | 14,025 | 4,675 | 18,700 |

13.a | IPA 2007–09 Component IV Local partnership for employment phase III | 2,210 | 0,390 | 2,600 |

13.b | IPA 2007–09 Component IV Local partnership for employment phase III | 1,615 | 0,285 | 1,900 |

14 | IPA 2007 Component I Strengthening capacities of USKOK | 1,000 | - | 1,000 |

15 | IPA 2007 Component I Establishment of effective and financially sound management system and control of use of agricultural funds | 5,114 | 0,375 | 5,489 |

16 | IPA 2008 Component I Support to management, monitoring and evaluation of Structural Instruments | 4,000 | 0,288 | 4,288 |

Total IPA projects | 47,787 | 12,621 | 60,408 |

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