The Phare Programme - Annual Report 1998
Date: 2000-03-31
Institutions: European Commission
Subjects: Central and Eastern European countries, EU financing, EU programme, EU relations, accession to the European Union

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 31.03.2000
COM(2000) 183 final

The Phare Programme

Annual Report 1998

(presented by the Commission)

Contents

The Phare Programme

Phare in 1998

EU-CEC relations
Implementing the new Phare orientations
Implementing operational changes
Financial overview and performance

Phare in the individual partner countries

Candidate countries

Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia

Non-candidate countries

Albania
Bosnia and Herzegovina
The former Yugoslav Republic of Macedonia

Statistical overview

Phare funding by country, 1990-1998
Phare funding by sector, 1990-1998

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The Phare Programme

The year in review

In 1998,
the European Community’s Phare Programme provided financial and
technical support to 13 partner countries in central Europe. Phare’s aim is twofold: for
the ten countries that have applied to join the EU, it is to prepare them for accession.
For the other three countries, Phare’s aim is to support their transition to democracy
and a market economy. This report is intended to review the main achievements of
Phare during 1998 and to place Phare within the EU’s overall policy framework.

1998 saw the adoption of the Accession Partnerships and the formal launch of the
accession process with the ten candidate countries. The Accession Partnerships set out
the priorities to be tackled in preparation for membership and the framework for all
pre-accession assistance.

Phare guidelines for 1998-1999 were formally adopted and apply to all 1998
programmes. The guidelines provide that Phare will focus on two main priorities:
institution building and investment support. A range of measures and mechanisms
was foreseen in both these areas. Preparations for twinning, a key instrument of
institution building, got under way during 1998, while the Large-Scale Infrastructure
Facility, a new investment support mechanism, was also launched during the year.

A crucial aspect of the Guidelines is the focus on improved implementation. The
Commission and the partner countries have made considerable efforts to accelerate
the implementation of Phare programmes and to ensure that they achieve results. As a
result, 1998 saw a record level of contracting (Euro 1.26 billion). Consequently the
level of uncontracted funds available under Phare (the so-called backlog)
fell
significantly for the first time since the Programme’s launch in 1990.

This improvement
in contracting was combined with an enhanced focus in the
programming phase on ensuring that programmes are designed to achieve impact and
results. Commitments were made only to mature, well-defined programmes, resulting
in the case of Poland in a reduction in the indicative annual allocation.

Phare has made significant progress in 1998. It has shown flexibility in its response to
the new demands being placed upon it. New initiatives have been launched. Reforms
are working. Decisions are being made more quickly, and are being increasingly taken
in the candidate countries themselves. As a result, today’s Phare is more efficient and
focused than ever, providing a firm support for the accession process.

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Phare in 1998

4

EU-CEC relations

The enlargement of the European Union is one of the most important challenges
facing the EU as it prepares for the 21st century. It
is also a unique, historic
opportunity to further the integration of the continent by peaceful means, extending a
zone of stability and prosperity to new members.

1998 was a historic year for the European Union and for the enlargement process.

The fifteen Member States of the European Union are currently involved in an
enlargement process with a further thirteen countries, namely Hungary, Poland,
Romania, Slovakia, Latvia, Estonia, Lithuania, Bulgaria,
the Czech Republic,
Slovenia, Cyprus, Turkey and Malta.

At Luxembourg in December 1997, the European Council took historic decisions on
the enlargement of the Union and defined the ‘overall’ enlargement process in a way
which encompasses all candidate countries that wish to join the Union.

This enlargement is a comprehensive, inclusive and ongoing process. Each of the
applicant states will proceed at its own pace, depending on its degree of preparedness.

The enlargement process has three components:

1) The European Conference

This Conference provides a multilateral framework which brings together all the
countries that wish to accede to the Union and share its values and aims. The fifteen
Member States of the EU and twelve candidate countries were invited to the
Conference, which met first in London on 12 March 1998 and subsequently in
Luxembourg on 6 October 1998.

2) The accession process

On 30 March 1998, the accession process, comprising the ten central and eastern
European countries plus Cyprus, was launched. It involves the reinforcement of the
Pre-Accession Strategy, which will enable the applicant countries to align themselves
as far as possible on the ‘acquis’ (the body of EC legislation) of the Union before
accession.

A key element of the reinforced Pre-Accession Strategy is the Accession Partnerships
which have been drawn up for the ten central and eastern European countries setting
out a series of short- and medium-term priorities for further work in preparing for
accession. They are designed to mobilise all forms of assistance to the countries of
central Europe in a single framework. In response to the Accession Partnership, each
candidate country has prepared a National Programme for the Adoption of the Acquis,
which sets out the ways in which the priorities of the Accession Partnership will be
implemented, including timetables and human and financial resource allocations.
They are updated regularly.

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A second element is the proposed doubling of financial aid targeted on accession
priorities. The financial assistance will come from a reoriented Phare Programme,
new programmes for environment and transport as well as agricultural and rural
development. For those countries not yet ready for the opening of negotiations, an
‘catch-up facility’ has been set up. A wide range of Community
additional
programmes will be progressively opened to candidates, covering such fields as
education and training, environment, research and culture, which will help accustom
many different groups in the candidate countries to the working methods of the EU.

Finally a review procedure has been set up under which reports are to be drawn up on
each candidate’s progress in preparations for accession. The first such Reports were
published on 4 November 1998 (see below).

3) Accession Negotiations

Negotiations were launched on 31 March 1998 with the six countries recommended
by the Commission (Hungary, Poland, Estonia,
the Czech Republic, Slovenia,
Cyprus). Negotiations with these countries are being conducted in bilateral accession
conferences between the Member States and each of the applicants.

Analytical examination of the acquis communautaire

In order to prepare the negotiations and give an added impetus to pre-accession
preparations, the screening exercise was launched in April 1998. The aim of screening
is to explain the Community acquis to the candidate countries and to measure the
they may have in adopting it. In addition to actually adopting
difficulties that
Community legislation, all
the candidates need to create and/or strengthen the
structures needed to ensure that it is effectively implemented.

By the end of 1998, the multilateral and bilateral screening of 20 chapters of the
acquis were completed with Hungary, Poland, Estonia, the Czech Republic, Slovenia
and Cyprus. Screening reports on all of these chapters, bar one, had been submitted to
the Council by the end of the year. The remaining nine chapters will be screened by
autumn 1999.

The Commission has also completed the multilateral screening of 29 chapters of the
acquis with the countries with which negotiations have not yet started:Bulgaria,
Latvia, Lithuania, Romania and Slovakia. A more precise identification of these
problems will be made during bilateral screening meetings which will take place
between March and July 1999 for all the chapters with the exception for agriculture
which will be screened in the autumn of 1999.

The Regular Reports

The Luxembourg European Council also invited the Commission to draw up Regular
Reports, from the end of 1998, on the progress made in meeting the Copenhagen
criteria by each of the candidate countries. The first Regular Reports were published

6

in November 1998 and submitted to the European Council of Vienna in December
1998.

In compiling the Regular Reports, the Commission analysed whether, in the light of
the Copenhagen criteria, reforms that were announced by the candidate countries had
in fact been carried out since July 1997. To ensure that the Reports measured real
progress, the Commission only highlighted those reforms that had actually been
adopted, rather than those under preparation or in the course of adoption. The
Commission also analysed progress in the capacity of each candidate to implement
the acquis, and highlighted the steps taken to adapt administrative structures to the
requirements of the acquis.

The Reports highlighted the progress made by certain candidate countries in all three
areas of the Copenhagen criteria, but also stressed that the rhythm of preparation for
accession must accelerate if deadlines are to be met. On the basis of the Reports, the
Commission did not feel it necessary to make recommendations “on the conduct or
extension of
the negotiations” as envisaged by the European Council. The
Commission’s conclusions on each candidate country are given in the individual
country chapters in this report.

The Vienna European Council

The Vienna European Council (11-12 December 1998) welcomed the Commission’s
Regular Reports and the fact that the enlargement process was now well under way. It
noted that six of the candidates had entered into substantive negotiations and had
reached the first concrete results, while progress had been made in preparation for
negotiations with the other five candidates. The European Council also reiterated the
“European Union’s willingness to continue to provide pre-accession aid throughout
the process.” The European Council stressed that “each country will continue to be
judged on its own merits”, and invited the Commission to present further Regular
Reports in time for the Helsinki European Council in December 1999.

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Implementing the new Phare orientations

General overview

The reorientation of Phare from a ‘demand-driven’ programme (in which the partner
countries requested funding for priorities which they established) to an ‘accession-
driven’ programme based on the Accession Partnerships was unquestionably the
major focus in 1998. The Phare Programme in the ten candidate countries is now fully
oriented towards preparing these countries for membership of the EU. Phare’s new
role is to help the candidate countries address the priorities set out in the Accession
Partnerships.

Two clear priorities have been fixed: institution building and investment support.
in the ‘Guidelines for Phare programme
These two priorities were set out
implementation in candidate countries, 1998-1999’, which were adopted in June 1998
and cover the Phare budgets for 1998 and 1999.

Institution building

Institution building covers a number of areas such as twinning, participation in
Community programmes and technical assistance.

Concerning Community programmes, a number of programmes were already open in
1998 (e.g. Leonardo da Vinci, Youth for Europe, Raphael, Media, Save, Life,
Combating cancer, Equal opportunities, SMEs). The candidate countries were also
given the possibility to become fully associated with the Fifth Research and
Development Framework Programme (1998-2002).

Twinning

The aim of twinning is to make available the expertise of Member State practitioners
to help the candidate countries implement the acquis. The core of twinning is the
secondment of EU practitioners, known as Pre-Accession Advisors, to the institutions
in the candidate countries responsible for implementing the acquis.

In some cases, twinning will consist only of the long-term secondment (for a period of
over 12 months) of one or more Pre-Accession Advisors from a Ministry or other
approved body in a Member State to work on a project in the corresponding Ministry
in a candidate country. In many cases, in order to achieve the objective of the
including short-term
twinning,
expertise, training, services (such as translation and interpreting) and specialised help
(such as specialised computer software), in addition to the Pre-Accession Advisor.

it will be necessary to combine different means,

At the very end of 1997 the Commission took the first steps to launch twinning. A
network of National Contact Points was established to work with the Commission in
the twinning process. Each Member State and each candidate country appointed a
person to represent them, to liaise with their own administration and to ensure the
flow of information through the network. The National Contact Point network met
three times in 1998. Following an initial meeting in December 1997, the network met

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in March 1998 for the presentation and discussion of the twinning concept, again in
May for the launch of the first round of project selection, and finally in October for an
analysis of initial results and further development of the process.

The most distinctive feature of twinning is that it sets out to deliver definite and
guaranteed results. It is not designed to foster general cooperation, but to deliver
specific results, which have been agreed between the parties in advance, for the
in the Accession
implementation of priority areas of
Partnerships. In 1998 the twinning projects under development focused on the same
four key areas of the acquis in each candidate country: agriculture, environment,
finance, and justice and home affairs. The candidates had the option of including an
additional area to meet individual needs. Preparatory measures for the implementation
of the Structural Funds was added as a topic later in the year.

the acquis, as set out

Some 120 projects out of the Phare programming exercise for 1998 were circulated to
the Member States in May and October. The Member States were then invited to
make proposals for ways of meeting the needs identified in the various projects. After
discussion between all the parties, the candidate country chose the offer which best
corresponded to its individual needs. In some cases, two or more Member States
joined forces to provide support, or the candidate country invited Member States
offering different elements to combine them in a single project. The ‘twins’ were then
asked to submit a detailed project to the Commission for approval.

Fourteen twinning projects have been approved by the Commission Steering
Committee. The first Pre-Accession Advisors will start work in May 1999.

Investment support

Adoption of the ‘acquis communautaire’ not only means approximating legislation
and strengthening institutional and administrative structures. It also means adapting
infrastructures and enterprises in the candidate countries to meet EC standards, which
requires considerable investment. Accounting for around 70 per cent of the Phare
budget in the candidate countries, investment support thus entails mobilising the
investments needed to help the candidate countries bring their industries and major
infrastructure up to EC standards.

Alongside continued support under the Phare national programmes in the areas of
transport, energy and environment, Phare’s investment support activities focused on
three new areas in 1998:

increased coordination with the international financial institutions
the launch of the Large-Scale Infrastructure Facility

•
•
• Preparation for the Instrument for Structural Pre-Accession Assistance (ISPA).

Working with the international financial institutions

With a view to increasing infrastructure investments in the CECs, the European
Commission took steps in 1998 to deepen its cooperation with the international
financial
a Memorandum of
Understanding on Accession was signed on 2 March 1998 with the European Bank

the Commission’s

institutions. At

initiative,

9

for Reconstruction and Development (EBRD), and the World Bank. The European
Investment Bank (EIB) also committed itself to cooperate in the spirit of the
Memorandum of Understanding.

Many of the Accession Partnership priorities are consistent with the objectives set out
in the country assistance strategies of the EBRD and the World Bank. The shared
desire to promote transition and support
the accession process has led these
institutions to intensify their cooperation efforts. As the main financing arm of the
EU, the EIB works closely with the Commission to ensure that the EU’s policy
objectives are met.

The Memorandum of Understanding sets out common goals and objectives, including
the identification of specific projects for co-financing and the development of new
financing mechanisms. Four new partners -
the Nordic Environment Finance
the International Financial
Corporation (NEFCO),
Corporation (IFC), and the Council of Europe’s Social Development Fund -
joined
the agreement in October.

the Nordic Investment Bank,

Co-financing with the international financial institutions helps to make Phare’s grant
assistance go further -
in co-financed projects
every euro of Phare investment
leverages around EUR 8 from the international financial institutions, national and
other sources.

The Large-Scale Infrastructure Facility

The Large-Scale Infrastructure Facility (LSIF) is a central facility which provides co-
financing to projects that have a cross-border impact in the environment and transport
sectors. Investments are co-financed with the international financial
institutions.
Projects were selected on the basis of both their impact on accession preparations and
their readiness for implementation. Examples of eligible LSIF projects include road
and rail rehabilitation projects, upgrading water and waste systems, and anti-air
pollution projects.

In 1998 Phare provided around EUR 180 million for large-scale infrastructure
projects through both the Large-Scale Infrastructure Facility and the national Phare
programmes. LSIF support shall continue in 1999 with a budget of EUR 95 million,
focusing on environment investment support. The LSIF will be replaced by ISPA in
2000 (see below).

Planning for 2000: Phare, ISPA and SAPARD

Preparations for the continuation of pre-accession support beyond 2000 have already
begun. Phare will continue, and will be complemented by two new pre-accession
transport and
instruments, called ISPA and SAPARD.
environmental infrastructure will be financed from ISPA, and those in agriculture and
rural development from SAPARD. In November 1998 the Council approved in
principle the Regulations on these two instruments and a coordination Regulation.
The latter ensures coherence between the three instruments; it stipulates that Phare,
ISPA and SAPARD should be coordinated within the framework of the Phare
Management Committee.

Investments in major

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Pre-accession aid will more than double after 2000, to over EUR 3 billion per year
(EUR 1.5 billion for Phare, EUR 1 billion for ISPA and EUR 520 million for
SAPARD).

for

Preparations
the Large-Scale
ISPA were supported during 1998, under
Infrastructure Facility, while the Special Preparatory Programme, a component of the
the candidates in setting up the
national programmes, was continued to assist
structures and policies for eventual participation in the Structural Funds.

Special Preparatory Programme

After accession, the candidate countries will be eligible for support from the EU
Structural Funds. To help ensure a smooth transition to the new system, the Special
Preparatory Programme was set up. This programme aims to help the candidate
countries put in place the institutions and strategies necessary for the successful
implementation of activities financed from the Structural Funds after accession. The
Special Preparatory Programme should prepare the candidate countries to design and
implement programmes similar to those in EU Objective 1 regions.

Justice and home affairs

The reorientation of the Phare Programme towards accession priorities has also meant
an increased focus on the area of justice and home affairs (JHA) in 1998. The
Accession Partnerships accord particular importance to the area of justice and home
affairs. Along with finance, agriculture and environment, justice and home affairs was
one of the four sectors identified as priorities for support under the new twinning
programme. Out of 110 twinning projects (costing EUR 75 million) foreseen under
the 1998 programme, 25 (worth EUR 14 million) are dedicated to justice and home
affairs. These twinning projects focus on customs and border controls (8 projects),
judicial institutions (7), asylum and immigration (3), police training (2), and the fight
against organised crime (1). A further four projects will tackle horizontal JHA issues.

Justice and home affairs is also one of the three sectors eligible for support from the
Catch-Up Facility. In 1998, five projects in the area of justice and home affairs were
presented for funding of EUR 6 million. These projects focus on areas such as the
fight against corruption, including customs reform and fighting economic crime.

Ongoing multi-beneficiary programmes include the horizontal programme on justice
and home affairs. During 1998, this programme financed a mission to evaluate needs
and identify JHA projects in Bulgaria, Estonia, Latvia, Lithuania, Poland, Romania,
and Slovenia (missions in Hungary, the Czech Republic and Slovakia had taken place
in 1997). Reports drawn up by EU experts focused on five priority areas: asylum,
immigration, border management and control, policing, and the judiciary. The reports
analysed the current state of affairs in these areas and proposed potential projects to
be financed by Phare.

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1998 also saw the launch of three major new projects under this horizontal Phare
programme, which will support the transposition of the acquis in priority JHA areas.
These projects deal with training for police (EUR 4.5 million) in the candidate
countries, transfer of the acquis in asylum issues (EUR 3 million), and the fight
against corruption and organised crime (EUR 1.5).

The Phare Baltic eastern border management programme is designed to strengthen the
capacity of Estonia, Latvia and Lithuania to manage their eastern borders effectively,
and to combat illegal trafficking. This 1997-1999 programme, which is receiving
EUR 6 million from Phare, financed four projects in 1998: equipment for police and
border guards in Estonia and Lithuania (EUR 1.5 million each), tender preparation
and call for proposals for refurbishing a centre for immigrants in Lithuania, tender
preparation for the construction of four border posts, and training for the police forces
in all three Baltic states.

In 1998, the customs component of the multi beneficiary transit facilitation and
customs modernisation programme focused mainly on improving ‘operational
capacity’ in the customs services of the partner countries. During meetings and
workshops held during 1998, ‘Customs Blueprints’ (establishing standards to be
achieved by the customs services in the partner countries) were developed and ‘gap
analyses’ (comparing the existing situation with the standards in the Blueprints) were
conducted. Finally, each country’s individual gap analysis results were used to
identify detailed requirements for assistance. In parallel, in 1998 the programme
provided the partner countries’ customs administrations with direct assistance in
developing their customs business strategies and customs training functions, and in
elaborating their national Phare project documentation.

Additionally, a number of major projects were in different stages of implementation:

•

•

•

•

•

‘General customs technical assistance and training’, involving 12 Phare partner
countries
‘Measures to improve efficiency at border posts’, very successfully implemented
in 11 partner countries, aimed to introduce risk-assessment, selectivity and
profiling tools and techniques in the customs operational environment
‘Customs information and intelligence’, involving 12 customs administrations,
aimed at improving national customs ‘Intelligence’ teams and programmes and
in the customs working
implementing Intelligence tools and techniques
environment
‘Transit and application of Single Administrative Document’, implemented in
Bulgaria, Estonia, Latvia, Lithuania, Romania and Slovenia
‘Automation Support Unit’, providing practical support to all partner countries in
implementing their extensive Phare customs computerisation programmes.

Further progress was made during 1998 in implementing the Phare multi-beneficiary
drugs programme, which aims to help the candidate countries develop coordinated
drugs policies, particularly in the light of enlargement. The programme has been
particularly active in the areas of anti-money laundering and precursors monitoring, in
compliance with the acquis. It also focused on the development of information and
communication structures and on preparing for the integration of the candidate
countries into the activities of the European Monitoring Centre for Drugs and Drug

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Addiction. Phare also provided know-how to help strengthen drug demand reduction
strategies and capacities in the partner countries. Finally, the programme identified
new priorities, such as combating synthetic drugs, and gave special attention to the
escalating drug problems along the Balkan Route in the framework of the Joint
UNDCP-Phare Drug Law Enforcement Programme in South-eastern Europe.

The Catch-Up Facility

Romania, Slovakia, Latvia, Lithuania and Bulgaria received additional support in
1998 to accelerate their preparations for membership. A Catch-Up Facility was set up
during the year to help these five countries to complete the process of economic and
social reform, to attract investment and to fight corruption. The aim of the Catch-Up
facility is to maintain the all-inclusive nature of the enlargement process by financing
projects in areas where specific problems were identified by the Commission’s
Opinions on these five countries. EUR 100 million has been allocated to the Catch-Up
Facility for the 1998-1999 period.

The new Phare cross-border cooperation programme

On 18 December 1998, the European Commission adopted a Regulation on the Phare
revising
cross-border
cooperation
cooperation programme,
indicative allocation for the cross-border
programme set up in 1994. The total
cooperation programme for the 1995-1999 period is EUR 885 million.

cross-border

the

The cross-border cooperation programme aims to promote cross-border cooperation
to prepare central European regions for taking advantage of the opportunities and
challenges of European integration, notably as future beneficiaries of the EC’s
Structural Funds. In particular, it aims to stimulate economic development in border
regions and encourage socio-economic integration.

The new Regulation provides financing for actions of a structural nature in border
regions of Phare partner countries. Actions will be implemented taking into account
the Community structural policies and Interreg in particular. The eligible borders for
financing under the new Regulation are

•
•

borders between the countries of central Europe and the EU
borders between the ten candidate countries themselves.

Eligible projects for border regions between the EU and central European countries
will normally be linked with measures supported by Interreg. Eligible projects for
border regions between the central European countries will demonstrate a cross-
border impact, contribute to the development of structures in border regions or
facilitate cooperation between the countries as a whole.

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EC grants will finance joint projects between the eligible border regions. The aim of
these projects will be to

•

•

promote cooperation between border regions in countries and adjacent regions in a
neighbouring country, to help the border regions in central Europe overcome
specific development problems, in the interests of the local population
promote the development of cooperation networks on either side of the border and
the creation of links between these networks and wider EU networks.

Types of activities which may be financed under the new programme include

•

actions to alleviate obstacles to the free movement of persons, goods or services
across the border, taking into account the security aspects
actions to improve infrastructures across border areas
environmental protection measures
agricultural and rural development measures

•
•
•
• measures in the fields of energy and transport, to complement the development of

the trans-European networks
•
actions related to Community policy on justice and home affairs
• measures to promote cross-border business and financial cooperation
•

aid to investment and the provision of supporting services and facilities,
particular for technology transfer and for marketing for SMEs
training and employment measures.

•

in

The new programme also seeks to encourage joint small-scale actions involving local
actors from the border regions and to enhance local capabilities to develop and
implement such actions. For this purpose, each border region may set up a joint small
project fund; activities that could be funded under a small project fund include

actions to foster local economic development, including tourism

•
• measures to promote cooperation on health, particularly through the sharing of

resources and facilities

• measures to develop facilities and resources to improve communications between
border regions, such as cross-border radio, TV, newspapers and other media.

The new programme incorporates the recommendations of an evaluation which was
concluded in November 1998. The purpose was to analyse the problems leading to
delays in implementing the sub-programmes and to make recommendations on
strengthening management, programming and expenditure mechanisms.

The evaluation found that the cross-border cooperation programme had produced a
number of positive results. In particular, dialogue and cooperation between EU border
regions and adjacent regions in central Europe have been established. Economic
development in the border regions of those countries has been helped, promoting
greater convergence with the level of development on the EU side. The countries also
had an opportunity to familiarise themselves with Interreg procedures, including the
design of regional development strategies for border regions.

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However, a number of problems were identified by the evaluation team. There were
differences in the way Phare and Interreg operated, and the evaluation recommends
that further steps were needed to harmonise the two. The cross-border cooperation
programmes still placed greater emphasis on hard measures than did the Interreg
programmes, very few projects had a real cross-border nature, and implementation
had been rather slow. Local and regional capacities in the candidate countries need
strengthening and the involvement of local and regional actors must be encouraged.
More emphasis needs to be placed on the setting up of small project funds, which help
strengthen planning capacities.

The multi-annual approach to programming, intended to correspond with Interreg
programming, had not been entirely successful: common development concepts,
strategies and objectives were missing and the external coherency of programmes was
lacking. The programmes also tended to lack a regionally specific approach, and few
were drafted in partnership with regional and local authorities or with social partners.

These problems cannot be fully resolved as long as Phare continues to have an annual
budget and Interreg a multi-annual one and as long as two separate Regulations
continue to apply, limiting spending to the territory of the candidate countries and
Member States respectively. However, some improvements can be made. The new
Regulation provides for common cross-border programmes to enable definition of
common development strategies and priorities for the border region. Common
programming and monitoring structures will be used, involving an integrated joint
cross-border cooperation committee. The new programme also extends
the
geographical scope of the programme. In addition to the EU-candidate country
the new programme covers borders between the candidate countries
borders,
themselves.

15

Implementing operational changes

One of the aims of the new Phare Guidelines is improved implementation. The
Commission and the partner countries have made considerable efforts to accelerate
the implementation of Phare programmes and to ensure that they achieve results. This
has involved both deconcentration (increased responsibility for the Commission’s
Delegations in the partner countries) and decentralisation (transfer of responsibility to
the partner countries themselves). As a result, 1998 saw a record total of contracting
(EUR 1,260 million), and the level of uncontracted funds available under Phare since
the Programme began in 1990 fell for the first time. This improvement in contracting
was combined with an enhanced focus in the programming phase on ensuring that
programmes are designed to achieve impact and results.

Deconcentration

Deconcentration means the transfer of
for Phare programme
implementation within the Commission from its headquarters in Brussels to its
Delegations in the partner countries, enabling decisions to be taken where they belong
– on the ground.

responsibilities

The new Phare Guidelines envisaged greater responsibility for the Delegations in the
partner countries in the supervision of programme implementation. Deconcentration is
supported by the Court of Auditors and the European Parliament to reduce the
duplication of controls and decision-making processes between headquarters and the
step towards the further
It has also represented an important
Delegations.
decentralisation of the Programme to the partner countries themselves.

A certain level of deconcentration already existed under the Phare Decentralised
Implementation System (DIS), whereby the Head of Delegation in the partner country
had the authority to approve contracts up to EUR 500,000. Now the Head of
Delegation has the authority to approve all tender documents and to approve tender
evaluations and endorse contracts up to EUR 5 million.

Deconcentration is being implemented in all the partner countries’ Delegations. In
order to ensure that the Delegations are able to manage the increased workload that it
entails, extra staff are being sent to them and internal procedures are being improved.
Under deconcentration each Delegation will have a dedicated Financial Officer who is
responsible for checking that Phare procurement rules are correctly followed.

Following the recruitment and training of local agents and Financial Officers,
deconcentration was introduced in seven Delegations - Hungary, Poland, Czech
Republic, Estonia, Latvia, Lithuania and Slovenia -
by the end of 1998, and
preparations were well advanced for its early introduction in early 1999 in Bulgaria,
Romania and Slovakia.

16

Decentralisation

Decentralisation means the transfer of greater management responsibility from the
Commission to the partner countries themselves. This means that, to the extent
permitted by the European Communities’ Financial Regulation, the implementation of
national programmes will become the responsibility of the candidate countries, under
the supervision of the European Commission, which remains ultimately responsible
for the use of the funds.

Decentralised implementation has actually been a feature of Phare since 1990. One of
the aims of decentralisation is to progressively prepare the candidate countries to
administer Community funds after accession. The intention is to establish, within
limits and in a gradual manner, a relationship between the Commission and the
candidate countries in which responsibility is shared, similar to that which exists with
Member States for implementing the Structural Funds.

Decentralisation is authorised by the Commission on a case-by-case basis in those
sectors where predefined criteria can be respected by the candidate country and/or
Implementing Agency in question, which will ensure sound and efficient management
and transparency of the use of the funds in line with the objectives of the agreed
programmes. Under this system, candidate countries would be bound by the rules
governing Phare as well as the Community’s Financial Regulation. The partner
country would be financially accountable and, if the rules are not complied with,
funds would be recovered by the Commission for the total value of the Phare contract
in question.

This further decentralisation calls for amendments in the current Financial Regulation
of the European Communities, which requires that the Commission exercises ex ante
control on tenders and contracts. The Commission has proposed in its discussion
paper on the modification of the Financial Regulation (SEC (1998) 1228)to allow ex
post control with regard to Community assistance projects in the candidate countries.

New implementation structures

The new Phare Guidelines contain new implementation structures to improve the
delivery of support in the candidate countries, with two objectives:

•

•

to increase the transparency of financial operations and avoid the dispersion of
funds over many agencies
to use, as far as possible, sustainable institutions and implementing agencies
and
which would be
implementation of programmes financed from Community funds.

the management

accession for

responsible

after

Thus, during 1998, a National Fund was set up in each candidate country, usually in
the Ministry of Finance, to receive and administer Phare funds. Headed by a National
Authorising Officer, the National Fund enables the coordination of the use of Phare
funds with other funds available in the country concerned, whether from the national
budget or from international financial institutions.

17

In each of the ten candidate countries, a single Central Financing and Contracting
Unit was created to handle tendering, contracting and payments on behalf of
Ministries. Project selection and monitoring remains the responsibility of
the
Ministries benefiting from the support. This has greatly improved transparency and
has permitted a dramatic reduction in the number of Programme Management Units,
which fell from over 150 to under 50.

Improving the delivery of assistance

Changes in programming were also introduced in 1998, to ensure that Phare support is
linked closely to accession priorities and is delivered quickly and efficiently.

The new system for programming Phare is to draw up a ‘Programming by Objectives’
outline for each country based on the short- and medium-term priorities identified in
the relevant Accession Partnership and National Programme for the Adoption of the
Acquis. The outline, drawn up by the Commission in close consultation with the
partner country, lists a limited number of key objectives to be achieved with Phare
support for the year in question, and the approximate budget for each activity.
Detailed project fiches are then drawn up for each activity before final approval of the
National Programme. The project fiches must show precisely what the funds will be
used for and provide evidence that
is ready to be implemented
immediately. This ensures swift implementation.

the project

Other improvements in programme implementation have also focused on improving
efficiency and speed. As far as possible, contracting should take place within 6-12
months after the signature of the Financing Memorandum (although in some cases,
such as for large-scale infrastructure projects, a longer period may be needed).
Extensions of time for slow-performing projects, once common, are now almost
always refused. Projects must be completed on time.

Fewer but larger projects are now being financed, and a minimum size of EUR 2-3
million has been stipulated. This ensures greater impact and visibility in the priority
areas, and reduces the management burden.

As described above, greater responsibility has been transferred from Brussels to the
Commission’s Delegations in the candidate countries for the management of national
and cross-border programmes. Twenty posts have been transferred from Brussels to
the Delegations and each Delegation now has its own financial officer. This speeds up
decision-making and reduces management costs.

The Joint Service for the management of Community Aid to Non-Member
Countries

The Joint Service for the management of Community Aid to Non-Member Countries
(SCR) in Brussels was set up in mid-1998, and became fully operational in September
1998. The SCR provides an in-house service for the Directorate Generals responsible
for implementing EC aid to non-EU countries. The SCR is responsible for the
financial, accounting, contractual, and legal side of project management. It is also
responsible for implementing multi-beneficiary programmes and other programmes

18

that are not affected by decentralisation and deconcentration. The SCR is also
responsible for monitoring the progress of all Phare programmes.

The SCR is divided into a number of Directorates:

• Directorate A is responsible for implementing and monitoring projects (A1 is

responsible for infrastructure and A2 for institution-building)
• Directorate D is responsible for financial management,

including budgetary

issues, contracts, accounting and payments

• Directorate E publishes calls for tenders for both services and supplies, and is also

responsible for legal matters and disputes

• Directorate F is responsible for various tasks including personnel, administration,
management of the SCR computer network, relations with the European Council
and Parliament, etc., evaluation, and information and communication.

The creation of the SCR should lead to improved implementation (particularly of
multi-beneficiary programmes), more effective monitoring of operations, and the
rationalisation of management procedures.

Monitoring and assessment of Phare in 1998

The Phare Monitoring and Assessment System monitors the implementation of
ongoing Phare programmes in all partner countries and assesses to what extent they
are achieving their objectives as set out in the programming documents. M&A reports
provide information on the progress of programmes in a sector, assess them, and put
forward concrete recommendations on their management and on the design of future
programmes in the same sector. As such, they are a management tool for all relevant
parties in the implementation of Phare and an integral part of the Decentralised
Implementation System.

Three important changes were made to the system in 1998.

• For the first time since the system was introduced in 1996, reports were produced
in accordance with an Annual Workplan. The Annual Workplan was drawn up
following consultation between all the parties involved in the management of
programmes, and took account of the timing requirements of each. The 1998
Workplan foresaw the launch of 103 reports on programmes in 11 Phare countries
- Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Slovenia,
Hungary, Romania, Bulgaria and Albania -
as well as on multi-beneficiary
programmes.

• A follow-up system was introduced. Shortly after a report

the
Delegation organises a debriefing session during which the steps to be taken to
effect recommendations, and the timing for them, are agreed between all parties.
The outcome of this discussion is then followed up by the Commission.

is issued,

•

In May 1998, the Monitoring and Assessment system was extended to the former
Yugoslav Republic of Macedonia.

19

During 1998, a total of 115 reports were completed and issued (including 54 which
had been initiated at the end of 1997). A total of 107 reports were initiated in 1998, of
which 61 were completed by year end. The reports covered some 350 programmes in
25 sectors.

Evaluations of the Phare Programme

In response to the Commission’s Sound and Efficient Management initiative (SEM
2000), DG IA set up an Evaluation Unit for the Phare, Tacis and Obnova Programmes
in January 1997. This Unit is now part of the SCR Evaluation Unit. With a view to
increasing transparency and accountability, evaluation reports are being published on
a regular basis and are accessible to a wide public.

Within the framework of the Phare Programme, the Evaluation Unit has undertaken
the following types of evaluations: sectoral evaluations, to provide input for policy
and strategy development; country evaluations, to provide inputs for the annual
planning exercise; and evaluations of Phare cooperation instruments, to provide input
for the future revision of the Phare Regulation as well as for the Accession process.

Following the Phare Interim Evaluation, published in July 1997 and intended to set a
benchmark upon which the Evaluation Unit would conduct further sectoral and
instrument evaluations, seven evaluation studies were completed in 1998. They cover
four sectors (banking, enterprise restructuring and privatisation, customs reform, and
public administration reform), two instruments (the Cross-Border Cooperation and
Partnership Programmes) and one emergency initiative (Essential Aid Programme for
Bosnia and Herzegovina). They are publicly available on the Internet.

20

Financial overview

1998 showed improvement in financial data which, combined with the enhanced
focus on quality programming, should lead to improved impact and results.

In 1998, the Phare Programme committed a total of EUR 1,153.9 million to its partner
countries. This represents a commitment rate of 99.4 per cent, as compared with the
budget of EUR 1,161.4 million.

The following chart shows the break down year by year of the Phare funds committed
in the period 1990-1998 (EUR million):

1990
493

1991
758.9

1992
996.2

1993
998.4

1994
966.9

1995
1,153.3

1996
1,222.5

1997
1,147.7

1998
1,153.9

In terms of financial performance, 1998 showed a continuing improvement in the area
of contracting. Over the year, the Commission headquarters and partner countries
signed contracts totalling EUR 1,260 million, a rise of EUR 124.5 million on the 1997
figure of EUR 1,135.5 million, and an increase of 10.9 per cent. In total, 75.3 per cent
of all committed Phare funds have been contracted.

the overall contracting backlog (i.e.

As a result,
the difference between total
commitments and total contracting since Phare began) also fell for the first time, by
EUR 125 million. The total backlog has now fallen to below EUR 2.2 billion.

A record level of payments was also achieved in 1998. Phare paid EUR 1,042.7
million on signed contracts in 1998 (payments on Commission headquarters contracts
and advance payments to partner countries). This represents an increase of just over
27.2 per cent on the 1997 figure (EUR 819.3 million).

The situation with regard to implementation may therefore be summarised as follows:

Total commitments 1990-1998

EUR 8,890.9 million

Total value of contracts signed 1990-1998

Total payments under signed contracts 1990-1998

EUR 6,697.3 million (thus 75.3
per cent of all commitments
have been contracted)

EUR 5,589.1 million (thus 62.9
per cent of all committed funds
have been paid, and 83.4 per
cent of all contracted funds have
been paid).

21

Phare in the individual partner countries

22

Candidate countries

23

Bulgaria

The year in review

Following the introduction of a wide-ranging and comprehensive reform programme
in May 1997, the macroeconomic situation in Bulgaria improved considerably during
1998. The reform programme included the introduction of a currency board
arrangement, a tightening of fiscal policy and the revitalisation of structural reform
efforts. Thus, despite the less favourable external environment, the continuation of
prudent policies ensured that economic developments within the country remained
generally positive. Economic growth reached an estimated 4 per cent, and annualised
inflation fell to just 1 per cent, compared with the 1997 rate of 580 per cent. The
budget is expected to post an overall surplus of 1.3 per cent of GDP.

However, other economic indicators were less positive in 1998. The rate of registered
unemployment remained relatively high at 12 per cent. Developments on external
accounts were less favourable than in 1997, resulting in a current account deficit
estimated at around 1 per cent of GDP. There was also less foreign direct investment
inflow, due to the relatively slow progress in privatisation and the declining interest of
foreign investors in emerging markets. As a result, foreign direct investment inflows
fell by over 50 per cent to around EUR 150 million, compared with the substantial
inflow in 1997.

Bulgaria has made considerable progress in implementing an ambitious structural
reform programme. Measures have been taken to liberalise the economy, including
the removal of most price controls and the lifting of export bans on agricultural
products. Major budgetary reforms have also been carried out. Following early
success in 1997, privatisation slowed in 1998, and was largely limited to employee
buyouts. Ongoing privatisation also meant that public sector employment continued to
shrink The amount of privatised assets rose to almost 30 per cent at the end of 1998,
compared with around 20 per cent at the end of 1997. However, this still remained
well below the Government’s target of 50 per cent. Privatisation in the banking sector
continued, but at a slower pace. Finally, efforts to stem the losses of ailing state-
owned enterprises and certain large utilities had only mixed results.

Overall macroeconomic stability was matched by stability in the political arena: the
Government that came into office in May 1997 continues to enjoy a majority in the
National Assembly. Democratic institutions and mechanisms have functioned well,
and progress has been made in the fight against corruption. Maintaining close links
with the Euro-Atlantic integration process was one of the cornerstones of Bulgaria’s
foreign policy in 1998. Free trade agreements with neighbouring countries were
concluded and Bulgaria acceded to CEFTA during the year. A solution to the
Macedonian language dispute meant that relations with the former Yugoslav Republic
of Macedonia improved, as did those with Turkey.

Relations with the European Union moved forward significantly in 1998, with the
launch of the accession process in March, the adoption of the Accession Partnership
and the publication of the first Regular Report in November. Negotiations on fish
products and wine were conducted, and discussions on new concessions for
agricultural products began. A number of Association Council decisions were taken,

24

notably regarding Bulgaria’s participation in Community programmes and the
prolongation of regional state aids. Finally, an antidumping complaint regarding steel
products was launched by the Commission in 1998.

Conclusion of the European Commission’s Regular Report,
November 1998

Bulgaria meets the Copenhagen political criteria although continuing efforts are
needed in the fight against corruption and to reform the judiciary.

Although Bulgaria has made progress recently in the creation of a market economy it
would face serious difficulties in coping with competitive pressure and market forces
within the Union in the medium term. The momentum reached in transposition of
legislation, if matched with the strengthening of corresponding institutions, should
eventually allow Bulgaria to take on the obligations of membership. However, further
efforts are needed particularly in the internal market and in the areas of standards and
certification, control of state aids, the future of Kozloduy and in justice and home
affairs.

Phare in 1998

A total of EUR 149.5 million was allocated to Bulgaria under the 1998 Phare budget
to support Bulgaria’s accession to the European Union, in line with the priorities
highlighted in the Accession Partnership.

Phare support for Bulgaria’s accession preparations was channelled through four main
programmes: the National Phare Programme (with a budget of EUR 68 million), the
Cross-Border Cooperation Programme with Greece (EUR 51 million), the Large-
Scale Infrastructure Facility (EUR 20 million) and the Catch-Up Facility (EUR 10.5
million). Bulgaria also participated in Phare multi-beneficiary and horizontal
programmes in 1998, including customs, democracy, standardisation, nuclear safety,
environment, SMEs, statistics, public administration reform and TAIEX.

In line with accession priorities, the 1998 National Programme focused on a range
of key areas and a number of new programmes were launched. Assistance for the
ongoing but fragile economic reform process includes support for private sector
development and the Bulgarian Post-Privatisation Fund (EUR 11.7 million).
Institution building is clearly a priority, and Phare support will focus on strengthening
Bulgaria’s institutional and administrative capacity, through institution building for
the Ministry of Agriculture, Forestry and Agrarian Reform, and the transformation of
customs (EUR 18 million). The Ministry of Environment and Water is also receiving
support for institution-building and investment projects (EUR 7.3 million).

Transport sector projects with IFI co-financing include work at Sofia Airport (EUR
7.6 million). Nuclear safety remains a priority, with Phare financing nuclear safety
measures at the Kozloduy Nuclear Power Plant (EUR 6 million). Bulgaria is also

25

receiving support from the Special Preparatory Programme for Structural Funds and
from the Project Preparation Facility (EUR 10 million) to support the development of
regional policies and regional cohesion. In the area of education and training, an
allocation of EUR 5.4 million will
support Bulgaria’s participation in EU
programmes, of which EUR 4 million was for Tempus, allowing for the funding of 20
Joint European Projects, among which 8 were in the field of
Institution Building.
Finally, reflecting the importance of a healthy civil society in Bulgaria, the civil
society development programme received an allocation of EUR 2 million from the
1998 national programme.

The 1998 Cross-Border Cooperation Programme with Greece consisted of three
main components. The first concerned the rehabilitation of major roads in the cross-
border cooperation region,
the E85
(Haskovo to Alexandroupolis) and the reopening of an access road to the new border
crossing at Illinden (total EUR 44 million). Phare also supported the construction of
the cross-border checkpoint at Illinden (EUR 3 million). Finally, EUR 4 million was
earmarked for the preparation of future CBC projects and programme management.

including the E79 (Sofia to Thessaloniki),

Under the Large-Scale Infrastructure Facility, EUR 20 million was provided as
Phare co-financing towards the completion of the Government’s Rail Rehabilitation
Project, which has a total budget of EUR 285 million. Total Phare funding for this
project thus amounts to EUR 35 million. Sections of track to be renewed under this
project lie on two important pan-European transport corridors.

Bulgaria also received pre-accession support through the Catch-Up Facility in 1998.
A total of EUR 10.5 million was channelled into projects in banking and enterprise
reform, land restitution, and the fight against corruption with the Bulgarian customs
administration.

Including the 1998 allocation, Phare grant funding to Bulgaria since 1990 now stands
at almost EUR 755 million.

Achievements

A number of ongoing Phare programmes made good progress during 1998. Launched
in 1997,
the second Emergency Social Assistance Programme was successfully
implemented from December 1997 onwards. With a budget of EUR 20 million, this
programme continued to provide support
to those parts of the population most
severely affected by the 1997 economic crisis, through household income support and
job-creation measures (co-financed with and managed by the United Nations
Development Programme).

The Structural Adjustment and Reform Assistance (SARA) programme was launched
the implementation of the Government’s economic reform
in 1997 to support
programme. During 1998, the programme (EUR 20 million) provided essential and
targeted know-how transfer in the areas of enterprise and banking privatisation,
banking supervision, and institution building for the Foreign Investment Agency.

The employment generation project, Beautiful Bulgaria, was also completed during
1998 (see box below). Under the civil society development programme, some 120

26

grants were allocated. These grants have been awarded to Bulgarian NGOs providing
social care, humanitarian aid, and support for marginalised and ethnic groups in
Bulgaria.

The overall performance of the Phare programme in Bulgaria improved in 1998, due
both to the stabilisation of
the political environment and to the improved
administrative environment. Indeed, the need to strengthen implementation structures
was given particular political emphasis. However, with the public administration
reform process still
inevitably
continues to face various constraints and uncertainties.

in its infancy in Bulgaria,

the operational

level

Bulgaria also started to put in place new implementation structures, as foreseen in the
new Phare Guidelines. Thus a National Fund, a Central Financing and Contracting
Unit and a limited number of Implementing Agencies were set up during the year.
These new structures should improve implementation procedures, allow for increased
deconcentration and decentralisation, increase the scope for co-financing, and help
prepare for the two new pre-accession instruments, ISPA and SAPARD. However,
further efforts will be needed to establish effective internal and external financial
control mechanisms, and to adopt and implement public procurement legislation in
line with EC norms.

By the end of 1998, nearly all programmes committed under the 1994-1997 Phare
budgets had been contracted, bringing the overall contracting rate for 1990-1997 close
to 94 per cent. Including the 1998 commitments, the overall contracting rate has
stabilised at around 72 per cent.

27

Case study: Beautiful Bulgaria

The aim of this project was to alleviate poverty in a number of regions of Bulgaria by
generating new employment,
training unemployed people and improving urban
infrastructures in the cities of Sofia, Plovdiv, Varna, Veliko Turnovo and Russe.
Programme management and implementation was carried out by the UNDP, in close
cooperation with the municipal authorities and the Regional Employment Services.
The project’s total cost came to EUR 3.4 million, of which EUR 3 million was
contributed by the Phare Programme. The project was successfully completed by end
December 1998.

The project achieved remarkable results.
•

•

3,500 people became involved on a temporary basis in the job-creation schemes,
in a total of 14,371 man-months. An estimated 4-20 per cent of these people have
kept their jobs, depending on the city.
2,058 people received vocational training and developed skills in areas such as
painting, gardening and landscaping.
•
216 buildings, architectural sites and parks were renovated and rehabilitated.
• New cooperation structures were set up between municipalities, employment

•

offices, etc.
54 companies were contracted to carry out renovation work in the five cities,
which promoted the development of the private sector and SMEs.

• The project encouraged the municipalities involved, and others by example, to set

up funds for improving urban infrastructure.

• The project gave high visibility to the work of the Phare Programme in Bulgaria.

28

Czech Republic

The year in review

The economic situation in the Czech Republic remained difficult in 1998. Real GDP
fell, unemployment rose sharply, and real incomes started to contract. The downturn
than anticipated, and
in the economy has proved to be deeper and lengthier
macroeconomic prospects continue to look bleak. However, there were also some
positive trends in 1998. Export performance was strong and, combined with lower
domestic demand,
this has resulted in a reduction in the external trade deficit.
Inflation also fell during 1998.

The ongoing economic problems in the Czech Republic have highlighted the need to
press ahead with structural reforms. Prior to the elections in June 1998, economic
decision-making had been complicated by political difficulties, which have not
entirely disappeared with the appointment of the new minority government. However,
there was good progress in the implementation of the two economic reform packages
that had been announced by the previous government in April and May 1997.

Trade relations remain good. Disputes that did arise – such as the Import Deposit
Scheme, the import quota for apples, and import restrictions on EU potatoes – were
resolved through the consultation mechanisms provided for in the Europe Agreement.

Elections in June 1998 led to the nomination of a Social Democrat minority
government in July. The new government under Prime Minister Zeman has begun to
address problem areas that had been neglected during the previous period of political
uncertainty.

With regard to relations with the European Union, the most significant events in 1998
were the launch of the accession process, the adoption of the Accession Partnership,
and the publication of the first Regular Report in November.

Conclusion of the European Commission’s Regular Report,
November 1998

The Czech Republic continues to fulfil the Copenhagen political criteria although
continued attention needs to be focused on the situation of the Roma in Czech society.

The Czech Republic can be regarded as a functioning market economy and it should
be able to cope with the competitive pressure and market forces within the Union in
the medium term, provided that it improves corporate governance and accelerates
enterprise restructuring.

The Czech Republic should be able to take on the obligations of membership
provided that the momentum in the adoption of the acquis and the strengthening of the
related administrative structures is resumed rapidly so as to make up for the slow
progress in the last year, particularly in the areas of internal market, agriculture and
justice and home affairs.

29

Phare in 1998

On 12 October 1998, the Czech government and the European Commission signed the
Memorandum of Understanding for the establishment of the National Fund, the
Financing Memoranda for the Phare National Programme for the Czech Republic and
the two Cross-Border Cooperation Programmes, and the exchange of letters relating
to the project fiches of these memoranda. The Financing Memorandum for the third
Cross-Border Cooperation Programme had already been signed earlier in the year.

In line with the new Phare Guidelines of March 1997, the 1998 National Programme
focused on the short-term priorities of the Accession Partnership and the National
Programme for the Preparation of the Czech Republic for Membership of the EU.
However, a limited number of activities in support of medium-term priorities were
also included.

The 1998 National Programme allocation to the Czech Republic amounted to EUR
22.45 million, not including the Tempus programme (EUR 1 million) and support for
participation in Community programmes (EUR 3.55 million). The EUR 1 million for
Tempus allowed for 11 Joint European Projects among which 7 were in the field of
Institution Building. Reflecting comments made in the European Commission’s
Regular Report, EUR 2 million was allocated to measures to help integrate the Roma
community into Czech society and to strengthen civil society organisations. EUR 7
million was allocated to developing policies aimed at strengthening economic and
the Czech
social cohesion, with particular emphasis on activities to support
Republic’s preparation for the Structural and Cohesion Funds.

Strengthening institutions remains a key objective, and institution building support
was provided over a range of priority areas. EUR 3 million was allocated to projects
designed to strengthen the capacity of institutions and administrative structures to
implement the ‘acquis communautaire’. In the same vein, the Czech Ministry of
Agriculture will receive institutional and policy support (EUR 3 million), including
support to improve regulatory capacities in veterinary and food control. Justice and
home affairs is also a priority area, and EUR 4.8 million was allocated to projects for
strengthening border controls, law enforcement and asylum, and the independence
and proper functioning of the judiciary. In the environment sector, new projects
focused mainly on strengthening institutional and regulatory capacity and the
implementation of policies relating to EC air and waste Directives (EUR 2.15
million). Finally, EUR 500,000 was allocated to support project management.

Twinning arrangements,
including long-term secondments of Member State
officials, were foreseen in the sub-programmes concerning economic and social
the
cohesion, strengthening the institutional/administrative capacity to implement
acquis, agriculture, justice and home affairs, and environment.

The Czech Republic also received support under
the Phare Cross-Border
Cooperation Programme in 1998. A total of EUR 19 million was allocated to cross-
border activities related to Interreg II programmes in regions that share a common
border with Germany and Austria. Three cross-border cooperation programmes were

30

developed in 1998, concentrating on infrastructure, environment and economic
development. The first programme consists of activities to help improve transport
links and technical infrastructure, such as energy supply networks and sewerage and
waste water systems. The second focuses on the renewal of rural areas and
reforestation activities. And the third is designed to boost economic development,
particularly through support for the tourism industry in the Czech Republic. The
Small Projects Fund also continued to deliver support to projects designed to foster
cooperation between local and regional authorities on both sides of the border.

Achievements

Phare achieved positive results in a number of key areas during the year.

Within the framework of preparing for the Structural Funds and regional
development, a series of regional seminars were held to raise awareness among local
authorities, culminating in a well-attended conference in December. The Ministry also
organised the first meetings of the National Programming Committee, which is
responsible for preparing the National Development Plan by September 1999.

Under cross-border cooperation, major investment projects worth EUR 16 million
were completed during 1998, covering two sewage pipelines, four waste water
treatment plants, two gas pipelines, and a road bridge. With a Phare contribution of
EUR 7 million, these projects had a positive impact on the environment on both sides
of the border and gave local authorities experience in working with EU funds. A
further EUR 55 million of contracts were signed during the year and EUR 1.16
million was spent by the Small Projects Funds.

the government

Phare is playing an important role in encouraging government support to private
sector development. During 1998,
took over financing of the
majority of the costs of CzechInvest, the foreign direct investment agency established
by Phare. The government also took over financing of the advice and training
delivered by the previously Phare-funded Regional Business Advisory Centres, and,
encouraged by the success of the Phare-financed venture capital fund in Ostrava,
launched an incentive scheme for venture capital. Finally, advice delivered to the
Ministry of Finance is playing an important part
in the development of the
government’s economic policy.

With regard to infrastructure and environment, the largest Phare project in the
Czech Republic got under way in 1998, namely the improvement of the Brno-
Vranovice railway line (part of the Prague-Vienna line), worth EUR 34 million (out of
a total of approximately EUR 37 million for the whole project). The Phare Energy-
Saving Fund provided almost EUR 8 million of low-interest loans for investments that
reduce energy consumption. And the Business Environment Fund was set up to
provide similar loans to SMEs for environmental investments. Both these Funds were
co-financed with a commercial bank.

The Czech Republic has made progress in the legal approximation effort, as
demonstrated during the screening exercise. Czech preparations for accession in this
area were supported by the Phare-financed Consortium for Legal Approximation, a
group of legal firms and expert institutions providing legal advice to the Czech

31

government. A new contract (worth EUR 1 million) was signed in 1998, providing for
an improved service including a Czech standing expert and an EU standing expert to
cover each legislative sector. In addition, a pool of highly specialised lawyers is
available to provide more specific help.

In September 1998, the government set up a Coordination and Revision Centre to
speed up work on Czech translations of EC legislation, a precondition for the
approximation of legislation. During the next few years the Centre should revise
70,000-80,000 pages of EC documents, partly translated by an agency selected
through a Phare tender. The revised texts will stand as the authorised Czech
translation of the acquis.

The civil society development programme provided support to 378 NGO projects
(EUR 1.8 million ) in 1998, covering environmental protection, health and social care,
human rights, consumer protection, community development, information on citizens’
activities in the EU, and NGO information and training. A further 27 grants (EUR
150,000) were awarded to NGOs for projects in the areas affected by the floods in
1997. Under the Phare Democracy, LIEN and Partnership programmes, Czech NGOs
also received 82 grants for micro-projects totalling EUR 440,000.

Finally, Phare supported the provision of social services through the Social Welfare
Initiative Fund. A total of 46 projects (EUR 475,000) brought
local
authorities and NGOs in 10 model districts in order to broaden the range of social
services available. Such services were previously managed in a centralised way or
were not available at all.

together

32

Case study: Public administration reform

Public administration reform in the Czech Republic gained momentum in 1998. In the
spring, the interim government of Prime Minister Tošovský took account of the need
to strengthen the capacity of the Czech civil service to implement and enforce
harmonised EU legislation. A law on the creation of 14 autonomous regions was
passed and these new regional structures, which will come into being in 2000, are
expected to function effectively after 2001.

Under the new government of Prime Minister Miloš Zeman, public administration
reform was included as a priority in the government manifesto, and a new post of
Deputy Minister of Interior was created with overall responsibility for public
Interior subsequently assumed
administration reform issues. The Ministry of
the improvement of public
responsibility for an ongoing Phare project
administration (EUR 500,000) which had started in November 1997. Managed by the
National Training Fund (also established by Phare), this project aimed at producing an
in-depth analysis and a draft Reform Strategy. These two documents will form the
basis for public administration reform in the Czech Republic for years to come. The
draft Reform Strategy was submitted to the government in January 1999.

for

In 1999, a number of key issues will be decided on the basis of these two documents:
the introduction of a Civil Service Law, the development of a career and promotion
system for civil servants, and new training schemes in cooperation with the academic
sector, coupled with the development of new courses for civil servants supported by
the Phare Tempus programme. In cooperation with the Ministry of Foreign Affairs
(responsible for training Czech officials in EU affairs) and the Diplomatic Academy
(co-funded by Phare in 1997-1998), a new institutional basis has thus been created for
EU-related training and research for the civil service in the Czech Republic.

33

Estonia

The year in review

Following a very good performance in 1997,
the Estonian economy suffered a
slowdown in 1998. The economic growth rate reached 5.4 per cent in 1998, compared
with a high of 11.4 per cent of GDP growth in 1997. However, the average rate of
inflation also declined to a rate of 8.2 per cent year-on-year (it had topped 11 per cent
in August 1997). The level of foreign direct
investment remained high (as a
percentage of GDP), but so did the current account deficit, which continues to be a
cause for concern. However, the current account deficit did show some signs of
recovery toward the end of the year from 12.1 per cent of GDP in 1997 to 9.2 per cent
in 1998. This was partly attributed to the fall in external demand and to a lesser
extent, at least in 1998, in domestic demand. The financial crisis in Russia also had
negative effects, hitting exporting industries (such as fisheries and dairies) and
decreasing consumer confidence. The number of registered unemployed grew to 4 per
cent of the workforce.

Having posted record-breaking profits in 1997, the banking sector had a turbulent
year. Restructuring of the sector continued in 1998, with the merger of the four largest
banks and the liquidation of three under-capitalised banks. In response to dangers
linked to overheating that had appeared in 1997, the Government and the Central
Bank tightened fiscal policy and strengthened control over the sector. In addition, the
fiscal stance became looser as 1998 passed and the country finished with a deficit of
0.3 per cent of GDP (vs a surplus of 2.2 per cent of GDP in June). Real GDP Growth
in 1998 was 4 per cent after 10.6 per cent in 1997. Estonia has pursued a rapid
privatisation programme in recent years and privatisation was largely complete by the
end of 1995, apart from large utilities. During 1998, steps were taken for the
privatisation of the railways, energy and telecommunications, all of which should be
sold off during 1999. Land reform, however, does not move fast enough to create a
good framework for developing agriculture.

Estonia continued to enjoy political stability and a smooth functioning of its
democratic institutions. Further measures to integrate minorities were taken, such as
the adoption of amendments to the Citizenship Law to allow the naturalisation of
stateless children. In foreign policy, membership of the European Union continues to
be a major policy objective.

Regarding EU relations, the most significant events in 1998 were the entry into force
of the Europe Agreement, the launch of the accession process in March, the start of
negotiations, the conclusion of the Accession Partnership, and the publication of the
first Regular Report in November.

34

Conclusion of the European Commission’s Regular Report,
November 1998

Estonia continues to fulfil the Copenhagen criteria, although decisions need to be
taken on the naturalisation of stateless children. In addition, there is an important need
for training and career development in the judiciary.

Estonia can be regarded as a functioning market economy, and should be able to cope
with the competitive pressures and market forces within the Union in the medium
term, provided that prudent macroeconomic management continues to limit the risks
associated with its large external imbalances.

Provided that the problem of administrative capacity is resolved, Estonia will be able
to take on the obligations of membership in the medium term although a particular
effort should be make in the internal market and justice and home affairs.

Phare in 1998

A total of EUR 28.5 million was allocated to Estonia under the 1998 Phare budget to
support Estonia’s socio-economic transformation and thus facilitate Estonia’s future
integration into the European Union. Phare support for Estonia was channelled
through three main programmes: the National Phare Programme (EUR 21 million),
the Large-Scale Infrastructure Facility (EUR 5 million) and the Cross-Border
Cooperation Programme (EUR 2.5 million).

The 1998 Phare National Programme committed funds in accordance with the
priorities of the Accession Partnership, in particular related to

•

•
•

•

the reinforcement of institutional and administrative capacity, in particular in the
agriculture sector, in strengthening the Ministry of Finance, in setting up the
necessary administrative structures in preparation for the Structural Funds (EUR
9.11 million)
strengthening of the judicial system (EUR 1.49 million)
the approximation of legislation in the environment sector including investments
in environmental infrastructure (EUR 5.81 million)
upgrading of transport infrastructure (EUR 2.5 million).

The 1998 Cross-Border Cooperation Programme consists of
components.

three main

• Phare will help develop administrative capacity within the local authorities of
Estonia, Latvia and Lithuania in the management of cross-border cooperation
projects and publicly financed activities more generally (Estonia: EUR 138,000).
• Phare will finance the purchase of equipment for the construction of a wastewater
treatment plant and sewerage system in the town of Jogeva (EUR 612,000), in

35

order to reduce the pollution of ground water and the level of untreated waste
discharged into local waterways and ultimately into the Baltic Sea.

• Phare will provide financing for the supply of equipment for the development of a
vessel traffic system for the port of Tallinn (EUR 1.75 million), with a view to
improving maritime safety in accordance with international maritime safety
requirements.

In addition to these new commitments, a range of programmes and projects were
launched in 1998, and projects from previous years were continued or completed.

In the area of public administration, Phare support has included advice on the
establishment of a public administration bureau, on composing a code of ethics, and
on developing the principles for a law on transparency; Phare has also provided
assistance for the decentralisation of local governments, and has helped to develop a
public service training programme. The Association of Estonian Cities also received
help to develop appropriate institutional and administrative structures for local
governments. Finally, Phare provided support for the development of Estonia’s public
procurement system.

The Phare/UNDP language training programme (EUR 1.4 million) was launched in
1998. This programme responds to a point made by the Commission’s Opinion stating
that measures are needed to naturalise Russian-speaking non-citizens and to integrate
them into Estonian society. The programme will help facilitate naturalisation to foster
mutual acceptance between ethnic groups. The initial focus will be on language
education for non-Estonian-speaking children and adults (including preparation for
the Citizenship Exam) through the preparation of teachers and teaching materials.

Estonia also received a budget of EUR 1.5 million for Tempus, allowing for the
funding of five Joint European Projects, among which two were in the field of
Institution Building.

Phare continued to provide support to the environment sector in 1998. The second
phase of a project on pollution reduction in oil shale mining areas and water resource
management in the Ida Virumaa region began in 1998, as did the rehabilitation of
water services in Keila. EUR 4 million was allocated to water treatment in three other
cities, Kuresaare, Pärnu and Valga. Finally, the Ministry of Environment received
support from previous years' Phare programmes for institution building and for the
approximation of legislation, and this support will continue with 1998 funding with
two major twinning projects in the air and water sector.

In the transport sector, EUR 5 million from the 1997 budget was contracted in 1998
for the repair and renewal of the Tallinn-Narva railway line, the most important line
in Estonia. The reconstruction of the Tallinn-Paldiski road (EUR 1 million), financed
out of the Cross-Border Cooperation budget, was completed during 1998.

In the public finance sector, an IT Masterplan for the Budget and Treasury
Department in the Ministry of Finance was developed, and will be implemented with
funds allocated under the 1998 Phare programme. The National Tax Board also
received Phare support during the year. In the area of customs administration,

36

implementation of the new computerised customs and transit system, known as
ASYCUDA, began in 1998.

Support for the Estonian regional development programme continued in 1998, most
notably through the development of regional statistics and the drafting of a regional
development plan. Preparations for the launch of the Special Preparatory Programme
for Structural Funds, financed with EUR 3 million from the 1998 programme, also
began during the year. Support in this area will be provided through a variety of
measures and will focus particularly on sound financial management and control, the
legal framework, the formulation of a National Development Plan, and preparatory
activities regarding the new ISPA and SAPARD programmes.

Achievements

Achievements have been recorded in a number of key sectors in Estonia.

The agriculture sector has been the scene of ongoing and new Phare collaboration.
For example, institutional and capacity building support was provided to the Ministry
of Agriculture, to help with the development of rural tourism and an alternative land-
use policy. In addition, essential equipment for an agricultural register and an
integrated food quality/safety information network was procured (and will be supplied
in the first quarter of 1999). A new project designed to develop a micro-credit scheme
was also launched during 1998.

As land reform is still in its infancy in Estonia, Phare continued to provide much-
needed support for the acceleration of land reform. Assistance was provided for the
design of a land information system (including the procurement of equipment), and
for capacity building within the National Land Board.

Finally, preparations for three institutional twinning projects, to be financed from the
1998 programme, have begun. Through these twinning projects, support will be
provided for the development of an agricultural information system, for phytosanitary
controls and for fisheries.

European integration and legal approximation remain high priorities and Phare
projects continued to supply valuable support in this area. Phare provided strategic
advice on EU integration, assistance for the European Integration Office in training
civil servants in EU affairs, and support for the EU Integration Subdivision of the
Ministry of Economic Affairs. The Estonian Translation and Legislative Support
Centre also received Phare support during 1998.

Institution building also reached into the social affairs domain. A number of Phare
projects helped strengthen the administrative and institutional capacity of the Ministry
of Social Affairs, the National Labour Inspectorate and the National Labour Market
Board. Support was also provided for the improvement of occupational health and
safety.

Justice and home affairs is a high priority right across the region, and includes the
effective management and control of borders. Relatively large allocations had been set
aside in 1997 to strengthen Estonia’s eastern border, and in 1998 a contract worth

37

EUR 2 million was prepared for the procurement of thermal imaging equipment for
the Estonian border guard. This new equipment will bring surveillance capability up
to EU standards and enable Estonia to reach the Schengen standard in a short period
of time.

A number of projects begun under the Cross-Border Cooperation Programme
during recent years were successfully completed in 1998. These include the Tallinn
Transfer Station for Hazardous Waste, which was inaugurated in mid-1998, an Old
People’s Home in Kuressaare, the first phase of a Rural Economic Development
Project, and the Development of Nature Tourism for Western Estonia project. The
allocations made in 1998 continue to focus on infrastructure investments in the
environment and transport sectors and on institution building for local and regional
authorities.

Phare has also provided valuable support in the area of export and investment
promotion, including help with staff training and development at the Estonian Export
Agency. A draft export policy has been elaborated with Phare assistance; final
government approval is expected in 1999. Phare support to the Estonian Privatisation
Agency (see box below) will help complete the privatisation process in Estonia.

Case study: the Estonian Privatisation Agency

A rapid privatisation programme in Estonia has meant that the privatisation process
was largely complete by the end of 1995, with the exception of the railway, energy
and telecommunications sectors, which were still undergoing reforms. However,
thanks to Phare support, the Estonian Privatisation Agency has now been able to help
prepare these large utilities and companies for privatisation in 1999.

Phare support to the Estonian Privatisation Agency included the provision of data that
will enable the future privatisation of

• Estonian Railways
• Estonian Energy
• Estonian Telecom
•
•

the Oil Shale Company
the Port of Tallinn.

38

Hungary

The year in review

As in 1997, Hungary’s macroeconomic performance remained positive in 1998.
Economic growth reached an estimated rate of 4.5 per cent (compared to 4.4 per cent
in 1997), and external and internal accounts both showed signs of continued
improvement. The current account deficit stood at 3 per cent of GDP (down from 6
per cent in 1997) while the budget deficit decreased slightly at 4.5 per cent of GDP
(4.6 per cent in 1997). Foreign direct investment remained relatively strong at around
to continue its
USD 1,500-1,700 million, allowing Hungary’s net external debt
downward trend, to around EUR 6,900 million. The average rate of inflation slowed
to an estimated 14.9 per cent year-on-year, and the unemployment rate also declined
to 8.1 per cent.

Structural reforms continued. Pension reform was implemented during the year and
marked the first important step towards an overhaul of the entire social security
system. Good progress had already been made in the privatisation process, and mass
privatisation was completed and sales for cash continued. Revenues from privatisation
amounted to around EUR 1.3 billion, more than half in foreign currency. Following
amendments to the Privatisation Act in 1997, the State Property Agency will retain a
stake in 116 companies.

The current economic performance should continue if Hungary maintains the right
conditions for trade integration and enterprise restructuring. However, additional
efforts are needed in reform of the health sector and in the implementation and
enforcement of the legal framework, particularly with regard to regulated enterprises
and the financial sector.

Both parliamentary and local elections were held in Hungary in 1998. The
parliamentary elections resulted in a change of government, which demonstrated the
smooth functioning of the country’s democratic institutions. In foreign policy, the
major development was clearly the opening of accession negotiations with the
European Union.

With regard to EU relations, the most significant events in 1998 were the launch of
the accession process in March, the start of accession negotiations, the adoption of the
Accession Partnership, and the publication of the first Regular Report in November.

39

Conclusion of the European Commission’s Regular Report,
November 1998

Hungary continues to fulfil the Copenhagen criteria. Continuing attention needs to be
paid to combating corruption more effectively and to improving the situation of the
Roma.

Hungary can be regarded as a functioning market economy. It should be well able to
cope with the competitive pressures and market forces within the Union in the
medium term, provided that it maintains the conditions for trade integration and
ongoing enterprise restructuring.

Hungary’s rhythm of transposition has remained steady and has generally been
accompanied by adequate
facilitating
implementation. The Commission considers that Hungary’s steady progress will, if
sustained, enable it to take on the obligations of membership in the medium term
provided that the pace of transposition in environment picks up.

and financial provisions

institutional

Phare in 1998

On 17 December 1998, the Hungarian Government and the European Commission
signed the 1998 Phare National Programme (EUR 67 million).

Under the 1998 Phare National Programme, Phare will give priority to both
institution building measures and the investments needed to meet the obligations of
EU membership. Support will focus on the sectors identified as short- and medium-
term priorities in the Accession Partnership.

EUR 7.8 million has been allocated to the reinforcement of institutional and
administrative capacity in Hungary. Projects through twinning arrangements with
the Member States will focus on the development of a state aids monitoring system,
taxation, anti-trust authorities, supervisory bodies, and audit and accounting standards
committees. Phare will also support the improvement of financial and statistical data,
the strengthening of the State Audit and Government Control Offices, the facilitation
of foreign trade and the improvement of border management.

Phare support will also be used to enable further integration into the internal market
(EUR 3 million) through continuing work on the adoption and implementation of the
White Paper legislation, including the development of testing and certification bodies.
the development of market surveillance
in this area will also cover
Support
institutions and the provision of expertise in EU law.

The justice and home affairs programme (EUR 15 million) aims at the improvement
of cooperation in the fight against organised crime, through the provision of training,
and equipment for the police, border guards, the State Prosecutor’s Office, and the

40

Migration Office. Border management
modernise two major border posts on Hungary’s southern border.

is a priority and funds will be used to

Phare support in the agriculture sector (EUR 16 million) will help to establish border
inspection posts, develop veterinary and phytosanitary information systems, upgrade
diagnostic laboratories and raise standards in phytosanitary control. The agriculture
programme will support the development of institutions that will be responsible for
the future implementation of the Common Agricultural Policy. Compliance with EU
quality control and quality assurance regulations will be targeted, as will
the
development of management structures for the implementation of structural and rural
development measures.

The need to transpose and implement the environmental acquis was highlighted in the
Commission’s Regular Report, and the 1998 environment programme (EUR 14.2
million) will focus on the implementation of key environmental Directives (such as
air pollution, habitats, Seveso), on strengthening the Central Environmental Protection
Fund to achieve full conformity with EU standards, and on modernising
environmental inspectorates.

With regard to regional development, a Special Preparatory Programme (EUR 7
million) will aim to introduce project identification, planning, implementation and
supervision capacities to help Hungary prepare to participate in the Structural Funds
after accession.

Hungarian end-users will receive support for their participation in Community
programmes (EUR 3 million). Subsidies provided through Community programmes
only cover part of the total project cost, meaning that final beneficiaries have to co-
finance their own participation. External support is essential if Hungarian institutions
and individuals are to benefit fully from the possibilities arising from participation in
Community programmes. Phare will provide financial support to final beneficiaries of
a number of programmes,
including Kaleidoscope, Ariane, Raphael, Equal
Opportunities, Life and Save.

Finally, EUR 1 million will contribute to improve the Phare Programme
Management through the establishment of a Central Finance and Contracting Unit
(CFCU).

An additional allocation of EUR 10 million has been committed in 1998 for the
continuation of the Tempus Programme and for
the Opening of Community
Programmes (for the costs of the ‘entry tickets’). EUR 5 million alone went to
Tempus, allowing for the funding of 22 Joint European Projects, among which 14
were in the field of Institution Building.

Achievements

While programming proceeded smoothly in 1998, some difficulties developed in
programme management. The implementation capacity of the Hungarian authorities
has been steadily declining over the last four years. In 1995, total contracted funds for
the year reached around EUR 110 million; the figure dropped to EUR 93 million in
to EUR 72 million in 1997 and to just EUR 60 million in 1998. The
1996,

41

Commission is working with the Hungarian authorities to try to address these
difficulties.

The achievements of the Phare programme can be seen across a range of sectors.

In the field of European integration, Phare has helped set up European Study
Centres in Hungary. Following a call for tenders, 12 higher education institutes were
appointed as European Study Centres in February 1998. The European Study Centres
programme (EUR 3 million) allows Hungarian higher education institutions to create
comprehensive training programmes in European affairs. The main target groups are
students and postgraduates, but courses are also offered to civil servants, lawyers,
journalists, teachers and the business community.

A Phare-supported export promotion programme has also achieved great success.
in the Knitwear Industry Development
Ten knitwear companies are taking part
Programme, launched with Phare support. The aim of the programme is to help
companies develop their collections and market them effectively. The companies vary
in size, organisation and location, but are united by the common ambition of wishing
to reach European markets with high-quality products. The first phase of the project
(May 1997-March 1998) concentrated on the selection of potential Hungarian
participants, and the development of their autumn-winter collections. The collections
were presented at international fairs (financed from Phare funds) with great success:
the companies took orders of EUR 60,000 at the fairs alone. They also made contact
with many different EU wholesales and retailers. The second phase of the project
(May 1998) aimed to involve more companies in the project, while a new component
focused on the development of corporate identities for the companies. The new
collections will be presented at trade fairs in Europe in 1999.

The Phare Democracy Programme and the LIEN programme have also been very
successful in Hungary, with numerous micro-projects providing support to a whole
range of organisations and individuals.

The Democracy Programme has provided support to 140 NGOs in Hungary over the
last three years. For example, one micro-project has fostered the development and
coordination of NGOs in the Szabolcs-Szatmár-Bereg County. By publishing and
distributing a bimonthly newsletter to NGOs in the region, the project helped to
inform NGOs about events, training sessions and relevant calls for proposals. Another
project helped to educate the region’s Roma youth about democracy, through lectures,
study tours to Hungarian Roma organisations and training sessions for the most
talented young people.

Successful LIEN micro-projects include the operation of a day care centre for people
with Alzheimer’s disease and senile dementia and their relatives, providing therapy
and advice two days a week. Another LIEN micro-project supported the operation of
a non-stop mobile health service, staffed by psychologists, psychiatric assistants and
social workers, to treat mentally ill patients and drug addicts, and to provide support
to their families. The service carries out home visits in response to emergency calls.

Implementation of the Phare programme in Hungary will be improved by the creation
of a National Fund and a Central Financing and Contracting Unit in December 1998.

42

The newly elected government also appointed a minister in charge of Phare in July
1998, in recognition of the need to ensure efficient implementation.

Case study: Support for SMEs

In the SME sector, Phare has helped SMEs in a number of different Counties,
including Bacs-Kiskun, Borsod and Nograd. Through a micro-credit fund providing
grants of EUR 3,900, Phare has helped local entrepreneurs to expand their business,
improve the quality of their products and create new jobs.

In Borsod County, for example, an unemployed man started up a bakery as a family
business. He attended Phare-funding training and obtained micro-credit to start the
business. He bought a garage with the help of the micro-credit, converted it into
suitable premises for his business, and was subsequently able to employ two more
people. He has continuously expanded his business and is now the owner of one of the
largest bakeries in the region, which provides a living for 20 families.

Another example of success in the SME sector is the creation of an firm of auditors,
with expertise in accountancy, taxation and social security, services that are sorely
needed by the growing number of SMEs in the regions. The founders of the company
attended Phare-financed advisory sessions and obtained micro-credit, with which they
bought specialised software and IT equipment. The enterprise now employs seven
people and provides services to around 100 SMEs.

43

Latvia

The year in review

Latvia’s economy developed favourably in 1998, in terms of both macroeconomic
performance and structural reforms. Overall economic growth for the year was 3.6 per
cent: in the first half of 1998, GDP growth rose to 6.4 per cent, but it subsequently fell
following the Russian financial crisis. The trade and current account deficits
continued to grow in 1998. The current account deficit increased from 6.3 per cent of
GDP in 1997 to 11 per cent in 1998. The general budget fiscal balance was in
equilibrium, but tax revenues dropped sharply at the end of the year. Inflation also
in January 1999. Registered
continued to fall, and reached just 2.8 per cent
unemployment rose from 7 per cent at end 1997 to 9.2 per cent at end 1998.

By the beginning of October 1998, 1,039 of the 1,097 enterprises selected for
privatisation since 1994 had been transferred to majority private ownership. However,
completion of the sale of some of the remaining large state-owned enterprises (mainly
in the infrastructure sector) could pose problems and cause delays to completion of
the privatisation process. Foreign direct investment inflows continued to increase, and
Latvia is one of the best-performing countries in the region as regards FDI per capita.
The banking sector had also been performing well, but was hit by the Russian
financial crisis in mid-year, which led to losses for most Latvian banks.

Democratic institutions continued to develop positively in 1998, with the executive
and legislative powers operating satisfactorily. Elections in October led to a reduction
in the number of parties represented in the Parliament. A minority government was
formed by Prime Minister Kristopans consisting of three centre-right parties. The
formation of this government was possible due to support from the Social Democrats,
with whom a cooperation agreement was later signed and who were accorded one
ministerial post (Agriculture).

Following a referendum on 3 October, Latvia decided to liberalise the citizenship law.
The ‘window system’, which restricted applications for naturalisation to certain age
groups, was abolished, and, in addition, stateless children born in Latvia can now
obtain citizenship. This resulted in a significant rise in the number of applications for
citizenship at the end of 1998.

With regard to relations with the European Union, the most significant events in 1998
were the entry into force of the Europe Agreement on 1 February, the launch of the
accession process in March, the adoption of the Accession Partnership and Latvia’s
National Programme for Integration into the EU, and the publication of the first
Regular Report in November. The analytical examination of the acquis (or screening
exercise) began on 3 April.

44

Conclusion of the European Commission’s Regular Report,
November 1998

Latvia continues to fulfil the Copenhagen political criteria. Major progress has been
made in dealing with weaknesses identified in the Opinions and the Accession
in particular as concerns the integration of non-citizens.
Partnership priorities,
Continuing attention needs to be paid to the promotion of Latvian language learning
among non-citizens, public administration reform, strengthening the judiciary and the
fight against corruption.

Latvia has continued to make progress in establishing a market economy and is well
on the way to being able to cope with the competitive pressures and market forces
within the Union in the medium term.

It has made a lot of progress in transposing the acquis but needs to consolidate its
implementation and enforcement capacity. Provided it does so, Latvia will be able to
apply the acquis effectively in the medium term.

Phare in 1998

A total of EUR 32.5 million was allocated to Latvia under the 1998 Phare budget to
support Latvia’s accession to the European Union,
in line with the priorities
highlighted in the Accession Partnership and the Latvian National Programme for
Integration into the EU. Phare support for Latvia’s accession preparations was
channelled through four main programmes: the National Phare Programme (EUR 21
million), the Cross-Border Cooperation Programme (EUR 2.5 million), the Large-
Scale Infrastructure Facility (EUR 5 million) and the Catch-Up Facility (EUR 4
million).

In line with accession priorities, the 1998 National Programme focused on a range
of key areas and programmes, including

•
•
•
•
•
•
•

transport (EUR 2.5 million)
environment (EUR 4 million)
justice and home affairs (EUR 2.2 million)
alignment with the internal market (EUR 1.3 million)
reinforcing institutional and administrative capacity (EUR 6.037 million)
agriculture (EUR 1.6 million)
acceleration of the integration of non-citizens (EUR 1 million).

Under the Large-Scale Infrastructure Facility, EUR 5 million was allocated to the
rehabilitation of railways on the east-west rail corridor. This track renewal project is
part of a larger project to renew some 340 km of track on the trans-European east-
west transit corridor over the period 1998-2002.

45

Under the 1998 Baltic Cross-Border Cooperation Programme (Estonia, Latvia,
Lithuania and Poland), Latvia was allocated a total of EUR 2.5 million. This
programme consists of four main components:

• Phare will help develop administrative capacity within the local authorities in the
management of cross-border cooperation projects and publicly financed activities
more generally (Latvia: EUR 100,000).

• With a view to reducing pollution of the Baltic Sea and associated health risks,
Phare will finance sewerage works in the towns of Ainazi and Saulkrasti (EUR
1.025 million).

• Phare will finance construction works to improve road traffic safety and reduce
transport bottlenecks on the section of the Via Baltica running though the city of
Bauska (EUR 400,000).

• Phare will co-finance the construction of a depot for contaminated soil sediments
in the port of Liepaja, in order to reducing damage to the environment caused by
the dredging of the port (EUR 975,000).

Latvia also received support from the Catch-Up Facility in 1998. Assistance will be
provided to improve the economic performance of twelve to fifteen medium-sized
enterprises in three or four different sectors, along with retraining and re-employment
schemes for employees affected by the restructuring process (EUR 2 million). In
addition, support will be provided for a comprehensive programme of anti-corruption
measures (EUR 2 million),
including a legislative component, training for civil
servants, police and customs officers, and a public awareness campaign.

In addition to these new commitments, a range of programmes and projects were
launched in 1998, and projects from previous years were continued or completed.
Namely:

•

•

In the area of public administration, the Public Administration Reform project
(EUR 3.7 million) was launched in November 1998. Sizeable in input and
coverage, this project should play a key role in Latvia’s preparation for accession.

In education, a Financing Agreement was signed with the Ministry of Education
(EUR 100,000) in 1998 to support Latvia’s preparations for participation in
Community education programmes. In November 1998, the Association Council
adopted the decision on Latvia’s participation in the Leonardo, Socrates and
Youth for Europe programmes. Phare also continued to provide support for
language training for non-Latvian speakers during 1998. The programme is being
financed from the 1996, 1997 and 1998 programmes, and is supported by a
number of bilateral donors and managed by UNDP. Phare is now the largest single
financial contributor to the UNDP language programme in Latvia. Latvia also
received a budget of EUR 1 million for Tempus, allowing for the funding of six
Joint European Projects among which two were in the field of Institution
Building.

• A number of environment projects financed from previous programmes were
launched or completed during 1998. The Daugavpils water supply project (1995
programme, EUR 1.76 million) began in September 1998, while the Jurmala
sewage pipeline project (EUR 1.9 million) was completed in June 1998. Technical

46

assistance (EUR 1 million, 1997 programme) to the Latvian Environmental
Investment Fund was agreed and a Financing Agreement (EUR 2 million) was
signed.

•

In infrastructure, two major Phare transport projects, the Traffic Service Control
Tower in Riga Port (EUR 1.5 million) and the ‘Supply of rails for Rezekne-Zilupe
railway connection’ (EUR 2.6 million), were completed in 1998. In the energy
sector, the Phare ‘Energy Efficiency Fund’, financed from the 1995 programme,
was contracted and an executive bank was selected to provide co-financing.

• Private sector development remains a priority in Latvia. A Framework project
providing support to enterprises for the development of exports (EUR 300,000)
was launched, and involves the Ministry of Economy, the Latvian Development
Agency (LDA), the Chamber of Commerce and the Union of Employers. Phare
support to the LDA (EUR 1.65 million) to develop exports and promote FDI
continued in 1998. The Latvian Privatisation Agency also received support (EUR
2.2 million), with emphasis on the privatisation of the remaining state-owned
enterprises. A major Phare project in support of SMEs (EUR 5.2 million) was
completed in January 1999. Business Advisory Centres have been established,
which will provide advisory services to enterprises,
in particular small and
medium-sized enterprises, as a part of the strategy to promote the development of
entrepreneurship and growth of the private sector.

•

In the social sector, a Phare project (worth EUR 0.9 million) that aims to provide
accession-related support to reform of the social protection system in Latvia began
in September 1998. Support for the approximation of legislation in the area of
occupational health and safety also continued in 1998. The Latvian health care
system is currently undergoing reform, with particular emphasis on improving
health care availability, quality and cost-effectiveness. Phare support is focusing
restructuring health care finances, human resources
on three main areas:
development and restructuring of the pharmaceutical sector.

• The legal approximation process remains a priority and the ALL (Approximation
of Latvian Legislation) project worth EUR 4 million began in February 1998. This
project is helping the Latvian ministries and the European Integration Bureau
(EIB) to draft and implement 992 Directives which are part of the White Paper or
are relevant to the first Copenhagen criteria. Phare is also providing support to
strengthen the Latvian Parliament (Saeima). Two new projects were launched in
1998, one helping the Legal Bureau to analyse legal compliance and the other
providing training for MPs and staff and raising public awareness of European
integration.

• The agriculture sector is also benefiting from major Phare support, and three
large projects are currently under way. Under ‘Support to diversification of the
rural economy’ (EUR 1.2 million), activities in selected pilot
regions are
providing essential input into the formulation of a rural development policy in
for the Ministry of
Latvia. Institution building support (EUR 1.8 million)
approximation and
legal
Agriculture
reorganisation of the Ministry itself. A third project
to
the Phare 1998
improving food quality controls (EUR 1.8 million). Finally,

training, policy analysis,

is providing support

includes

47

programme provided for a twinning project aimed at assisting the Latvian
Ministry of Agriculture in the implementation of the EU acquis. Germany and
France have been chosen as twinning partners for the project.

Phare projects in a number of other areas got under way in 1998:

•

•
•

•
•

‘Technical Assistance to Public Investment Programme in Latvia’ (EUR 0.6
million)
a twinning project with Krajbanka (EUR 0.47 million)
‘Policy and European Integration Advisory Unit in the Ministry of Economy’
(EUR 0.76 million)
‘Pilot Regional Development Plan Project’ (EUR 0.475 million)
phase II of support to the European Integration Bureau (EUR 1 million).

Achievements

Concrete results have been achieved in the transport sector in Latvia, particularly
regarding the development of Latvia’s ports and railways . Phare support in these two
vital and interrelated areas is helping to upgrade and modernise transport and thus
trade links with Latvia’s economic partners.

Latvia has major ports in Riga, Ventspils and Liepaja, and Phare support has focused
on ensuring that these ports remain the hubs of Latvia’s transport and distribution
network, providing competitive services all year round. Riga port, for example, has a
capacity of about 15 million tons and handles container, general and bulk cargo
shipments. With Phare support of EUR 1.5 million, Riga port can now boast a modern
vessel traffic control tower equipped with a high-performance navigation control
system. In addition, Phare has helped finance several safety installations, such as an
echo sounder system, a radio communication system for search and rescue, and the
renovation of navigational aids (total Phare support EUR 1.75 million).

In the railway sector, the most significant Phare projects have focused on the
development of the key east-west transport corridor linking the three Latvian ports
with the economic hinterland of Russia and Belarus. The reconstruction of the railway
link between Ventspils, Krustpils and Rezkene on the Russian border includes the
modernisation of
level crossings, and the
modernisation of the signalling system. Phare provided EUR 2.6 million to help
finance the supply of rails and, through the 1998 programme, will finance the second
tranche (EUR 5 million) of rail supply along with installation of a modern welding
system. Additional loan financing from the European Investment Bank and the EBRD
(EUR 55 million) is being used for the rehabilitation of the line and railway
infrastructure in the port of Ventspils.

the removal of

railway trucks,

48

Case study: Support to the Ministry of Finance and State Treasury

As part of Latvia’s preparations for EU accession, Phare has been providing know-
how to the Ministry of Finance and the State Treasury since June 1996 (budget of
EUR 2.5 million). The project has focused on establishing an effective system of
management of Latvia’s finances.

The primary task of the project was to reorganise key departments within the Ministry
of Finance and the State Treasury. New structures were agreed with senior
management and revised job descriptions prepared for key staff. Cross-departmental
working groups were established, facilitated by the project team, which helped to
promote internal communications within the Ministry as a whole.

National budgeting and macroeconomic experts worked together to redesign the
budget process. Medium-term macroeconomic and fiscal models were designed to
help the Ministry in the planning process, by allowing reliable forecasting. Modern
treasury techniques were introduced to guide the State Treasury and its management
of the national debt. The project also helped to develop government accounting
functions and reporting standards reflecting best international practice within the State
Treasury. The development of an information technology strategy was also covered
by the project.

The project is due to run until October 1999.

49

Lithuania

The year in review

The Lithuanian economy continued to make healthy progress in 1998, in terms of
both macroeconomic performance and structural reforms. GDP growth was estimated
at 5.2 per cent (5.7 per cent in 1997). While external accounts remained problematic –
the current account deficit reached 13 per cent of GDP – internal accounts continued
to improve, demonstrated by the budget deficit which decreased to just 0.3 per cent of
GDP as of 1 October. Foreign direct investment inflows were strong and in 1998
reached an estimated cumulative amount of EUR 1.7 billion. Lithuania’s external debt
continued to grow, reaching EUR 1.32 billion. However, the average rate of inflation
remained low, at 2.4 per cent year-on-year. The unemployment
rate dropped
fractionally to 6.4 per cent (6.7 per cent in 1997).

Privatisation continued in 1998: 344 companies were privatised during the first 11
months of the year, yielding a revenue of EUR 495 million. Private sector activity is
responsible for almost 70 per cent of GDP in Lithuania, and 68.4 per cent of the
workforce are employed in private enterprises. In order to sustain the current
economic performance there is a need for further structural reforms and continued
privatisation. Additional efforts are also needed in terms of enterprise restructuring
and the adoption of new technologies.

Lithuania continued to enjoy political stability and a smooth functioning of its
democratic institutions in 1998. Following free and fair presidential elections in
December 1997 and January 1998, a new president, Mr Adamkus, took office on 26
February 1998. The transfer of power took place smoothly and in accordance with the
law.

With regard to relations with the European Union, the most significant events in 1998
were the entry into force of the Europe Agreement, the launch of the accession
process in March, the signing of the Accession Partnership, and the publication of the
first Regular Report in November. The Regular Report underlined that Lithuania had
made considerable progress, although additional measures are needed before it can be
considered to meet the Copenhagen economic criteria (see box below).

50

Conclusion of the European Commission’s Regular Report,
November 1998

Lithuania continues to fulfil the Copenhagen political criteria. It should intensify the
fight against corruption and pursue reform in the judiciary.

Sustained implementation of the remaining reform agenda would complete the
establishment of a functioning market economy and enable Lithuania to make the
progress necessary to cope with competitive pressure and market forces within the
Union in the medium term.

Further efforts are needed in the internal market and to establish a comprehensive
long-term energy plan including the closure of Ignalina. Lithuania has made progress
in transposing the acquis, although this is uneven. Efforts are needed to consolidate
implementation and enforcement capacity.

Phare in 1998

In line with the new Phare orientations, the 1998 Phare Programme for Lithuania
focused assistance on sectors with high relevance for the country’s accession to the
European Union. Phare support to Lithuania in 1998 was based on the short-term
priorities of the Accession Partnership. In addition to the two main components of the
programme, institution building and investment support, Phare also contributed to
Lithuania’s participation in EU programmes for the first time in 1998.

Phare support for Lithuania’s accession preparations was channelled through four
main programmes: in addition to the National Phare Programme (with a budget of
EUR 32 million), Lithuania received support under the Cross-Border Cooperation
Programme, the Large-Scale Infrastructure Facility and the Catch-Up Facility, which
between them added a further EUR 12 million, bringing total support to EUR 44
million in 1998. The creation of the National Fund and the beginning of the
decentralised and deconcentrated system in Lithuania have brought major changes to
programme implementation.

Major sectoral allocations under the 1998 programme go to the transport sector (EUR
4 million), energy (EUR 5 million), environment (EUR 4.8 million) and justice and
home affairs (EUR 3.5 million). Transport and environment projects also receive
funding through the Cross-Border Cooperation Programme and the Large-Scale
Infrastructure Facility.

In addition to new funding, a number of Phare projects were launched or completed in
these three sectors. In the transport sector, the supply of rails (EUR 5.1 million) for
upgrading the east-west railway Corridor IX was completed. This is part of the overall
rehabilitation of the Vilnius-Kaunas-Klaipeda railway link. Phare also contributed to
the renovation of some sections of the Via Baltica road Corridor I.

51

The energy sector has received continuous Phare support since 1991. In 1998, a
number of projects were successfully completed: elaboration of a draft law on energy
conservation, the preparation of energy regulation legislation and an evaluation of the
potential for renewable energy resources. Particular emphasis has also been placed on
infrastructure
supporting the revision of the National Energy Strategy. Several
projects were completed, including the Panevezys-Siauliai gas pipeline (see box
below) and the gas distribution network in Utena. Several projects also commenced
during the year, such as the provision of equipment for the State HFO storage facility
in Vilnius and the underground gas storage facility in Vaskai.

In 1997, Lithuania received multi-donor support to improve security at the Ignalina
nuclear power station. The 1998 programme will build on this by providing support
for capacity building in the Nuclear Power Safety Inspectorate, a decommissioning
plan for Ignalina, and the preparation of the National Energy Strategy. In addition,
EUR 19 million was allocated under the multi-country nuclear programme for the
second shutdown system at Ignalina.

Phare projects in the environment sector are focusing on approximation activities and
on infrastructure development. A major project has been providing support to the
Ministry of Environmental Protection for pre-accession preparations since 1997, and
has helped develop a national strategy for approximation in the sector. 1998 support
will continue the work of previous projects,
including work on transposing the
environmental acquis. The sector has also received funding for investments in
infrastructure. In 1998, waste and waste water treatment projects in Kaunas and
Klaipeda continued, and the renewal of the air monitoring system should be
completed with 1998 funding.

The first steps to prepare Lithuania for the EU Structural Funds were taken in 1998,
through the creation of a Special Preparatory Programme. Support will be provided
through various measures focusing on sound financial management and control, the
legal framework, the formulation of a National Development Plan and actions related
to ISPA and SAPARD.

Phare support in the social sector has focused on the State Social Insurance Fund
Board, and from 1996-1998 Phare helped draw up the requirements for a new
Integrated Information Technology System for social insurance in Lithuania. Work on
the collection and billing system continued in 1998. Phare also continued to support
institutional capacity building in the Ministry of Social Security Labour and in
occupational health and safety institutions during the year.

In education, reform of the higher education sector has been a priority for Phare. A
White Paper on Higher Education was produced, along with a law on higher
education which was accepted by all higher education institutions and is expected to
be adopted by Parliament during 1999. Phare also provided support in the vocational
education sector. Lithuania also received a budget of EUR 1 million for Tempus,
allowing for the funding of five Joint European Projects, of which 1 was in the field
of Institution building.

52

Phare continued to assist in the approximation of Lithuanian law to that of the EU,
through support to the interministerial working groups. Support was also given to the
modernisation of commercial laws, to the Lithuanian Parliament and to the creation of
translation and interpretation facilities. In public administration, a major new project
was finalised during 1998. This aims to provide a concept for civil service training
needs and methodologies,
to provide advice on civil service legislation and to
strengthen local government.

Phare has provided a range of support to the customs administration. A major
reorganisation at central and regional
level had helped improve administrative
capacity, and a new intelligence system for customs control was introduced. In
addition, a new ASYCUDA-based processing system has been tested and is now
being put in place. Funding from the 1998 programme will ensure introduction of the
entire system.

In statistics, funding from Phare has helped strengthen the administrative capacity of
the Lithuanian Department of Statistics; the 1998 programme will build on this by
focusing on preparations for the forthcoming census. In the public finance sector,
Phare has focused on supporting the tax administration and on developing modern
accounting and auditing systems, including the provision of IT equipment for the
Ministry of Finance.

Programme

Justice and home affairs was included for the first time in 1997, with an allocation
of EUR 0.5 million. Following an assessment carried out by Member State officials, a
further allocation of EUR 1.4 million was made under the horizontal Border
for
complementary
Management
strengthening Lithuania’s eastern border. In addition, EUR 3.5 million from the 1998
programme has been allocated for the construction of border police stations. This
range of measures complements substantial efforts by the national authorities to
strengthen the eastern border and bring standards up to those adopted at Schengen.
Finally, a rigorous anti-corruption policy has been adopted, providing the basis for a
substantial allocation of funds from the 1998 Catch-Up Facility.

surveillance

equipment

for

Achievements

The agriculture sector provides an excellent example of Phare cooperation in
Lithuania. Phare has been providing support to the sector since 1992, and projects
have been successfully completed in a range of different areas. For example, Phare
has provided valuable support to the development of the food control system since
1995. A major project to upgrade the national veterinary laboratory and to formulate a
revised food law began in 1997 and is still ongoing. A Phare project has also helped
to assess needs in the areas of veterinary and phytosanitary controls; follow-up
support will be provided with funding from the 1998 programme. Building on support
provided since 1992, Phare has helped with the development of a land registration
system and a land market, through strategic management support and supply of
technical equipment.

53

Concrete results have been achieved in the dairy sector. In 1998, 11 Lithuanian
dairies received licences for the export of dairy products to the EU. The quality of
their dairy products was clearly a vital factor in this achievement, and Phare projects
in the field of quality management played a key role in raising awareness of the
the sector. While several management
importance of quality issues throughout
training programmes for the agribusiness sector have stressed the importance of
quality management more generally, a further dedicated project is providing direct
consultancy and advice to ten of the largest dairy companies in Lithuania. This project
covers HACCP analysis, control of raw milk quality, and the pursuit of ISO 9000
accreditation in processing facilities. Through training, study tours and consultancy,
the project is successfully raising awareness among management and staff of the
international
importance of quality management – thereby increasing the
competitiveness of the dairy industry as a whole.

In the health sector, Phare has helped make the reform of the primary health care
system a reality. With Phare support, primary health care systems were set up and
piloted in three areas. The concept of general practitioners was introduced and a corps
of doctors was trained which will, in 1999, train a larger group of general practitioners
the University of Vilnius. Phare also supported the
with the cooperation of
development of community nursing programmes and the improvement of the public
health service. The 1998 Phare programme will continue to support the development
of the primary health care system and will also help set up a statutory health insurance
system.

Case study: gas pipeline from Panevezys to Siauliai

The aim of this project was to provide affordable, clean gas fuel to the people in this
region of Lithuania, to encourage them to move away from other less environmentally
friendly fuels like coal, wood or oil. The project entailed the construction of around
80 km of pipeline to be connected to the main pipeline and two gas distribution
stations. Phare contributed EUR 2.5 million within a EUR 52 million project to
supply and apply a corrosion system for 27 km of the pipeline. More significantly, the
Phare funds helped the project to attract further loans from the IFIs, including the
Kuwait Fund, the EIB and Danish Unibank. While the Phare part of the project was
completed in June 1997, the entire project was completed at the end of 1998. The
pipeline was opened on 4 December.

54

Poland

The year in review

The Polish economy continued to make noticeable progress in 1998, although some
economic indicators deteriorated in comparison with 1997. Economic growth in 1998
amounted to 4.8 per cent, compared with 6.9 per cent in 1997. More pronounced was
the slowdown in industrial output, with an annual growth of 4.7 per cent in 1998,
compared with nearly 11 per cent in 1997. These downward trends were caused by
the Russian and Asian financial crises and by diminishing domestic demand as a
result of a strict monetary policy and slower wage growth.

Foreign direct investment increased in 1998, allowing Poland to become the prime
target for foreign investment in central Europe. The total FDI inflow for 1998 should
reach an estimated USD 7.5-8.5 billion – nearly double the 1997 total. This will help
compensate for the current account deficit, which increased again in 1998. The trade
deficit in 1998 was slightly larger than in 1997, with exports growing faster than
imports in the first half of the year. The government’s budget deficit was 2.5 per cent
of GDP and Poland’s external debt amounted to EUR 28.8 billion. The average rate of
inflation continued its downward trend and fell below the 10 per cent mark for the
first time since the beginning of the transition process. The rate of unemployment
amounted to 10.6 per cent at the end of 1998.

As in previous years, the size of the public sector continued to shrink in 1998. In July,
the government adopted a plan to sell most of the remaining state assets by the end of
2001. This includes the sale of 10 per cent of TPSA, the telecommunications operator.
On 30 June 1998, a plan to restructure the Polish steel industry was presented to the
Commission. Privatisation revenue amounted to EUR 1.75 billion in 1998. Almost 65
per cent of GDP now comes from the private sector in Poland. Other major reforms
were initiated in 1998, notably pension and health reform, and education reform; these
reforms should all be implemented in 1999.

The need to sustain current economic performance calls for continued efforts to
maintain the pace of economic restructuring and to avoid reversals in trade policy.
Priority must still be given to the implementation of reforms, restructuring of the coal
and steel industries, and the modernisation of agriculture.

In 1998, Poland continued to enjoy political stability and an improvement in the
functioning of its democratic institutions. A major reform was prepared in 1998 for
the decentralisation of the public administration. This reform includes a reduction in
the number of regions from 49 to 16, and the introduction of a new county-level
administration (powiats). Elections at the three administrative levels (voivodships,
powiats, gminas) took place in October 1998, with a view to the reform coming into
force as from 1 January 1999.

With regard to relations with the European Union, the most significant events in 1998
were the adoption of the Accession Partnership for Poland in March 1998 and the
opening of accession negotiations. In November 1998, the Commission published its

55

first Regular Report on Poland’s progress towards preparing for membership of the
EU.

Conclusion of the European Commission’s Regular Report,
November 1998

Poland continues to fulfil the Copenhagen political criteria.

Poland can be regarded as a functioning market economy, and it should be well able
to cope with competitive pressures and market forces within the Union in the medium
term, provided that it strengthens the pace of economic restructuring and continues to
avoid reversals in trade policy.

Its rhythm of transposition is uneven and there are gaps in administrative and
institutional capacity in certain key areas, in particular environment, standardisation
and state aid control. Progress to date in industrial restructuring and justice and home
affairs should be maintained. Nonetheless the Commission considers that Poland’s
progress will, if sustained, enable it to take on the obligations of membership in the
medium term.

Phare in 1998

In 1998 the Commission took a number of important steps to reinforce the pre-
accession strategy, including reforming the Phare programme to make it accession
driven. The Phare programme now concentrates on helping the candidate countries
implement the priorities of the Accession Partnerships and their National Programmes
for the Adoption of the Acquis, in order to prepare them for membership.

In this context, the Phare budget for Poland in 1998 had to be reduced by EUR 34
million. The Commission had applied the same criteria to all candidate countries and
had examined all projects proposed by Poland to see whether they were relevant to the
priorities of the Accession Partnership, whether they would have an impact on
Poland’s alignment or implementation of the acquis, and whether they were cost-
effective and technically and institutionally ready. As a result, the Commission could
only accept a more limited programme than that originally envisaged, and, in line
with the new Phare orientations, the remaining EUR 34 million was transferred to the
Large-Scale Infrastructure Facility from which all countries could benefit, including
Poland. The experience in 1998 programming prompted enhanced efforts in Poland to
ensure that programmes developed for commitment in 1999 were well designed.

In 1998, the European Union committed a total of EUR 198 million for Poland. This
included EUR 95 million for national programmes, EUR 53 million under the Cross-
Border Cooperation Programme, EUR 10 million for Tempus, EUR 20 million for
Poland’s participation in Community programmes, and EUR 20 million from the
Large-Scale Infrastructure Facility. Poland's EUR 10 million for Tempus allowed for
the funding of forty Joint European Projects, of which 13 were in the field of
Institution Building.

56

Twinning has become the core of institution building in Poland. Under the 1998
National Programme, around EUR 20 million will be devoted to institution building
in four key areas, namely agriculture, environment, justice and home affairs, and
preparing for structural funds. A total of seven twinning projects were approved, and
relate to strengthening the
system, border management, veterinary
administration, environmental strategies, administration of the Common Agricultural
Policy, an animal identification system, and preparation for structural funds. In 1999,
twinning will be gradually extended to cover the whole acquis.

judicial

EUR 45 million has been allocated to infrastructure investment from the 1998
National Programme. This support will cover key environmental investment projects,
such as waste water treatment facilities for major Polish cities, and the construction of
the Krakow city bypass (part of the ongoing renovation of the A4 motorway on Trans-
the Large Scale
European road Corridor
Infrastructure Facility, Poland also received EUR 20 million to help fund the
construction of the Gdansk bypass on the A1 motorway.

III, Berlin-Katowice-Kiev). Under

Under the 1998 National Programme, a total of EUR 30 million was committed for a
project to alleviate the social effects of coal and steel restructuring in Poland. This
project should be seen in the context of the Polish government’s plans to restructure
the coal and steel sectors and to lay off more than 150,000 workers over a period of
five years. The project is conditional on the government’s commitment to continued
restructuring and privatisation of the steel sector in Poland, which is one of the main
priorities of the Accession Partnership.

A total of EUR 9 million was allocated for institution-building activities to help
Poland prepare for structural funds upon accession. This will also include
preparation for the new ISPA and SAPARD instruments.

As in previous years, Poland received support from the Cross-Border Cooperation
Programme (EUR 53 million) in 1998. Under this programme, the main focus is on
transport and environment infrastructure projects in regions on Poland’s border with
Germany and the Baltic Sea. Further efforts were also made to strengthen the capacity
of the Polish authorities to manage the Cross-Border Cooperation Programme.

Achievements

In the transport sector, Phare made a major contribution in 1998 with the launch of
construction of the Katowice bypass (EUR 35 million) and the Poznan bypass (EUR
45 million). These are located on the A4 motorway (Trans-European Corridor III) and
the A2 motorway (Corridor II) respectively, and aim to link Berlin with Kiev and
Moscow.

In agriculture, support was provided to the government to help identify priorities in
the modernisation of the agriculture and food processing sectors. This should enable
to elaborate a rural development and agricultural restructuring
the government
investment programmes were started, focusing on
strategy in 1999. In addition,
equipment for packaging, grading and weighing fruit and vegetables in nine wholesale
markets. In the dairy sector, a cooperative investment programme was set up to

57

provide farmers with equipment for cooling and transporting raw milk products from
the farms to the dairies. Following the milk exports ban of December 1997, this pilot
project provided a powerful demonstration to dairies and milk farmers in Poland on
how to upgrade their production to EU standards.

Building on the STRUDER regional development programme of previous years,
Phare continued to fund small-scale municipal infrastructure development in the ten
least developed regions of Poland in 1998. In addition, a regional development
strategy was completed for every selected region: the analysis and identification of
objectives and development needs at local level should help build a comprehensive
approach to rural development. In addition, 89 small infrastructure projects were
completed in these regions, targeted mainly at upgrading municipal water supply
networks, waste water treatment plants, roads, and SME development through local
business incubators.

In the banking sector, a management
training scheme together with an audit
programme was completed in 1998, covering the more than 1,000 local and regional
cooperative banks in Poland.

In environment, a major project in the Zakopane region focused on the reduction of
air pollution through the modernisation of the existing heat supply system, as well as
the replacement of polluting fuels with clean geothermal and natural gas. Other
projects focused on forest protection and development (see box below).

Following the floods of July 1997 and an official request by the Polish Prime
Minister, EUR 65 million of Phare funds were reallocated for a flood damage
reconstruction programme, which was
successfully completed in 1998. The
programme focused on the reconstruction of small-scale infrastructure in the south
and south-west regions of Poland, notably roads, bridges, water supply and waste
water treatment systems, schools and other public facilities. Fast implementation and
decentralisation helped ensure the success of the programme. More than 2,000 small-
scale projects received funding, contracting was completed by the end of 1998 and
most of the projects were implemented within 15 months of the start of the
programme. The programme has achieved high visibility in Poland, with a high
degree of commitment from the people and institutions involved. It has been greatly
appreciated by the people living in the rural areas concerned.

Implementation of Phare programmes was generally satisfactory in 1998. Although
lower than in 1997, contracting amounted to EUR 206 million in 1998, and the rate of
contracting at the end of 1998 stood at 79 per cent of all funds allocated to Poland
over the 1990-1998 period.

58

Case study: Forestry development in Poland

Forestry represents a major natural resource in Poland, and forests cover 28 per cent
of the country’s territory – giving it one of the largest forest holdings in Europe. Over
the 1995-1998 period, the Phare Programme has provided EUR 12 million for the
restoration and protection of Polish forests.

Phare support for forestry development has helped achieve the following results.

• A comprehensive programme of financial and technical support was carried out to
eradicate pests in the Polish forests, which had been spreading to forests in the
EU, using environmentally safe biological control agents. A total of 250,000 ha of
forests in Poland were treated.

• Phare helped develop an early-warning system – including airstrips, watchtowers
and storage facilities – to prevent and detect fires in the large forested areas of
northern and southern Poland.

• An afforestation programme was launched and financed by Phare, with the
procurement of 44 million seedlings for the afforestation of 6,000 ha of private
agricultural land. This is part of Poland’s National Afforestation Programme,
which plans to create 700,000 ha of new forests by 2020. Transportation
equipment was purchased to help develop an environmentally friendly harvesting
system.

• The programme undertook the restoration of eroded forests in south and west
Poland. The Phare contribution included the supply of specialised fertilisers to
restore the balance of damaged soils, tree protection materials, construction of 14
water reservoirs, where watershed irregularities and erosion made replanting and
growth almost impossible, and the supply of fencing for 3,000 ha of forest.

• A former Soviet military camp was refurbished and converted into a forest nursery
and study facility for forest scientists, along with the development of a forest gene
bank and storage facilities for certified seeds for the future restoration of damaged
forests in Poland.

59

Romania

The year in review

Romania again experienced negative economic growth in 1998, with the economy
shrinking by 7.3 per cent and industrial output falling by 17 per cent. However, the
budget deficit was reduced to 3.3 per cent and inflation came down massively to 40.6
per cent (compared to a high of 150 per cent in 1997). The current account deficit
(about EUR 2.75 billion) deteriorated in line with the trade deficit, and stood at
around 7.9 per cent of GDP. Foreign direct investment inflows also remained low
(EUR 1822 million on a net basis) ) and could not reduce the size of the overall
external debt, which stood at EUR 8.6 billion. The rate of unemployment increased
significantly, to 9.7 per cent of the workforce.

Although important structural reforms had been introduced in the first half of 1997,
reform momentum stalled in the second half of that year and there was little progress
in the rest of the year with few substantial results achieved in 1998, with the
noticeable exception of the privatisation of Romtelecom. Overall, privatisation figures
show some acceleration of privatisation compared to 1997 but about two thirds of
large companies remained to be sold at the end of 1998. Progress in creating a
legislative framework for a market economy was mixed, and there have been repeated
changes to the legislation on privatisation and foreign investment.

Restructuring of large public enterprises did not progress much in 1998, and although
the authorities have developed restructuring plans for some of the large public
companies and utilities, there are doubts concerning the effective implementation of
these plans. The financial sector also remained weak, with many large public banks
burdened with non-performing assets and overdue loans. As a result, lending to the
private sector dropped sharply in 1997 and did not recover in 1998. Finally, the
number of privatisation transactions slowed considerably in the first half of 1998, and
receipts from privatisation fell short of the authorities’ expectations.

There was some political uncertainty during the year,
including a change of
government and several reshuffles within the same governing coalition. Following a
government crisis triggered by alleged delays in the reform process, the coalition
government of the National Peasant-Christian and Democratic Party was replaced by
a new government on 15 April 1998. The majority of ministers remained in their posts
and there were no major shifts in government policy following the reshuffle.

With regards to relations with the European Union, the most significant events in
1998 were the launch of the accession process,
the adoption of the Accession
the publication of the Regular Report and the conclusion of the
Partnership,
Adaptation Protocol for the commercial aspects of the Europe Agreement.

60

Conclusion of the European Commission’s Regular Report,
November 1998

Romania meets the Copenhagen political criteria. Much remains to be done in rooting
out corruption, improving the working of the courts and protecting individual liberties
and the rights of the Roma. Priority should also be given to reform of the public
administration.

Romania has made very little progress in the creation of a market economy and its
capacity to cope with competitive pressure and market forces has worsened.

Despite progress made in transposition of key parts of the acquis, Romania has a long
implementation and
way to go in terms of additional
enforcement before the country will be able to assume the obligations of membership.

legislative transposition,

Phare in 1998

For 1998, the total Phare support in Romania is related to five key objectives in line
with the Accession Partnership:

•

•

•

•

•

through projects

the Customs Administration,

the rule of law and human rights,

strengthening democracy,
focusing on child protection and improvement of the situation of the Roma
strengthening the institutional and administrative capacity to manage the acquis,
through institution-building projects with the Ministries of Finance, Agriculture
and Environment,
to public
administration reform
integration of Romania into the internal market,
further
concerned with the restructuring of public utilities and the financial sector
helping Romania meet its obligations in the area of justice and home affairs,
including projects with the Ministries of Interior and Justice
economic and social cohesion, including regional development and support for
the rehabilitation of roads.

through projects

and support

Phare support to help Romania meet these objectives is being provided through three
programmes: the National Phare Programme, the Large-Scale Infrastructure Facility
and the Catch-Up Facility.

the Commission and the Government of Romania signed a
In October 1998,
Financing Memorandum providing EUR 106.6 million under the National Phare
Programme. Within this budget, EUR 34.6 million has been allocated to public
administration and institutional strengthening, EUR 12 million to democratisation
and civil society, and EUR 60 million to regional development measures. It also
includes
an allocation to support Romania’s participation in Community
programmes. Phare is also providing an additional EUR 6 million for the Tempus

61

programme for higher education, allowing for the funding of 23 Joint European
Projects, of which 7 are in the field of Institution Building.

Romania will also receive funds from the Large-Scale Infrastructure Facility
(EUR 25 million) for the rehabilitation of roads, and from the Catch-Up Facility
(EUR 16 million) for financial sector restructuring and for a project on rehabilitation
of mining regions. As a result, the total allocation for Romania in 1998 is EUR 155.2
million.

Phare projects receiving support under previous programmes continued in 1998. For
example, Phare support under the 1997 programme amounted to a total of EUR 100
million, and covered a range of projects, from investment in municipal water supply
systems to projects dealing with statistics, food standards, strengthening the judiciary,
local public administration reform, SME development, income tax and health care
financing.

A significant level of funds from the 1996 programme remained uncontracted at the
end of 1998. This is due to the long lead times involved in the preparation of the
contracts for the Romanian railways and waste water treatment in the Jiu Valley. The
1995 programme, with its strong focus on policy reform in the key infrastructure
sectors of telecoms, energy and transport, was more than 80 per cent contracted by the
end of 1998. However, a significant proportion of the funds under these programmes
was allocated to emergency projects (Floods 1997 and 1998). The rather slow
implementation of the policy support projects within the 1995 programme reflects the
relatively slow development of reform policies in the sectors concerned.

Achievements

Implementation of the Phare programme in Romania was affected significantly by the
creation of a single Central Financing and Contracting Unit (CFCU) in the Ministry of
Finance. The CFCU will contribute to increased efficiency in the management of
Phare contracting procedures, and represents the first step in the development of the
sorts of financial management structures that will be needed to handle Community
funds in the pre-accession period. The advantages of having a strong, specialised
contracting unit in the Ministry of Finance are now beginning to be felt.

The Municipal Utilities Development Programme (MUDP II) is co-financed by Phare,
the EBRD and the Romanian government. The total Phare allocation is EUR 35
million of which, by the end of 1998, EUR 27 million has been contracted. The Phare
contribution (investment in water supply and waste water infrastructure and technical
is resulting in improved water supply services and environmental
assistance)
standards in ten Romanian cities, and is also contributing to the development of the
institutional and financial framework. This will permit
the necessary increased
investment to flow into municipal infrastructure in future years.

Progress was made during 1998 in implementing the health care financing reform
programme, worth EUR 4 million. The objective of this programme is to assist the
Romanian government in formulating new policies in support of the health system. It
is
system organisation and is
increasing the decentralisation of
strengthening its efficiency and effectiveness.

the actual

62

Under the 1996 Phare programme, major
transport
infrastructure has been undertaken. The implementation of investments in the
Romanian railways on the European corridors has been continuing in 1998. The total
value of this programme is EUR 58 million, and works for the rehabilitation of the
Constanta port were initiated in 1998 (EUR 17.5 million).

in the national

investment

Case study: regional development in Romania

Through a series of projects beginning in 1994, Phare is contributing to the creation of
the institutional and legal framework for the development of regional policy in
Romania, and to preparations for programmes to be implemented along the lines of
the EU structural funds.

•

• Under a 1994 Phare budget, EU and Romanian experts prepared an analysis of
regional disparities in Romania, and drew up proposals for a legal and institutional
framework for the development of regional policy.
In 1997, the conclusions of a Phare-financed study were published as a Green
Paper on Regional Development, which proposed the establishment of a number
of macro regions as planning units, based on associations of elected county
councils. The Green Paper also defined a national framework for the development
of regional policy and the financing of programmes.

• The government adopted the main points of the Green Paper as its policy on
regional development; consequently, a 1997 Phare budget was approved,
providing support for institution building at national and regional level.
In 1998 a Law on Regional Development was passed, creating an appropriate
institutional
framework and establishing a National Agency for Regional
Development and a National Fund for Regional Development.

•

• A 1998 Phare budget was approved, providing preliminary financial support for
projects which would be proposed by the regions and financed out of the National
Fund for Regional Development. Linked to this is technical assistance under the
Special Preparatory Programme for Structural Funds, which provides further
support and training to relevant institutions at regional and national level.

63

Slovakia

The year in review

As a result of a lack of structural reforms and unbalanced macroeconomic policies,
the macroeconomic situation in Slovakia worsened in 1998. Although GDP continued
to grow by 4.4 per cent, external and fiscal accounts showed signs of continued
deterioration. For the third year in a row, the current account deficit was higher than
10 per cent of GDP, while the general government deficit increased to more than 5 per
cent of GDP. Substantial efforts are needed to reduce the current account and
government deficits to more sustainable levels.

Although foreign direct investment in 1998 was substantially higher than in the
previous years, at about 2% of GDP, the amounts are far from sufficient to cover the
current account deficit. The cumulative total for the 1990-1998 period amounted to
only EUR 1.230 billion. The average rate of inflation remained relatively low at 6.7
per cent. However, the rate of registered unemployment continued its upward trend
and reached 15.6 per cent in December 1998, compared to 12.5 per cent in December
1997.

With regard to structural reforms, privatisation has been continuing, and more than 80
per cent of GDP now originates in the private sector. However, the privatisation
methods that were used have not been conducive to enterprise restructuring.
Moreover, the largest banks, which are still state owned, are burdened by bad debts
and are undercapitalised. Considerable efforts are needed to promote market-based
enterprise restructuring, to restructure and privatise the state-owned banks, and to
attract foreign direct investment to accelerate the modernisation of enterprises.

Slovakia continued to suffer from political difficulties in 1998. Parliament was unable
to elect a new President, and as a result presidential powers shifted to the government,
which proceeded to use them in controversial ways. The EU made several statements
highlighting its concerns regarding the stability of democratic institutions and good
governance in Slovakia.

National elections in the autumn resulted in victory for the opposition, which formed
a new government in November 1998. This resulted in a significant change in the
political climate in the country. The new government set out to stabilise democratic
institutions and to reform the economy. The last
two months of the year saw
substantial improvements in Slovakia’s relations with the EU, its neighbours and
international organisations like the Council of Europe, the OSCE and the OECD.

With regard to relations with the EU, the most significant events in 1998 were the
launch of the accession process with the adoption of the Accession Partnership and
the National Programme for the Adoption of the Acquis, and the publication of the
first Regular Report in November. The Regular Report underlined the Commission’s
concerns about political developments in the period before the elections and the
macroeconomic situation in Slovakia.

64

Conclusion of the European Commission’s Regular Report,
November 1998

The recent elections offer an important opportunity for Slovakia to address the
political weaknesses outlined in the Opinions and to take steps to ensure that it will in
future meet the Copenhagen political criteria.

Slovakia has implemented most of the reforms necessary to establish a functioning
market economy, but there has been a lack of transparency due to government
interference. Nevertheless, Slovakia should be able to cope with competitive pressure
and market forces within the Union in the medium term, provided that the market
economy is allowed to function.

Slovakia needs to accelerate the pace of approximation particularly in the area of
internal market, environment and justice and home affairs. A concerted effort is
needed to set up and strengthen the corresponding institutional and administrative
capacity.

Phare in 1998

In line with the short-term priorities of the Accession Partnership and the National
Programme for the Adoption of the Acquis, the aim of the Phare Programme in 1998
is to support Slovakia in its efforts to meet the Copenhagen criteria and to prepare for
membership of the European Union.

Slovakia received support from four Phare programmes in 1998: the Phare National
Programme (EUR 45.9 million), the Catch-Up Facility (EUR 7.5 million), the Large-
Scale Infrastructure Facility (EUR 15 million) and the Cross-Border Cooperation
Programme (EUR 5 million).

Phare support under the 1998 National Programme is focusing on six key areas:
helping Slovakia meet the Copenhagen political criteria, continuing the economic
reform process, institutional strengthening and integration into the internal market,
strengthening justice and home affairs, approximation in the environment sector, and
participation in Community programmes.

In order to help Slovakia meet the political criteria, Phare will provide support to
strengthen the capacity of local government and the judiciary (EUR 1.5 million). In
the area of economic reform (EUR 3.5 million), Phare support will include the
establishment of medium-term economic policy priorities and a joint assessment of
within the framework of the Europe Agreement. Assistance will be provided to
improve rights of ownership and property, and Phare will support the implementation
of the National Cadastral Policy and the creation of a land registration system.

65

Slovakia needs to strengthen its institutional and administrative capacity and
support in this area will focus particularly on accession-related issues. Phare will
provide support for harmonising legislation and strengthening institutions in the fields
of standards and certification, state aids, capital markets, intellectual property, public
procurement and agriculture (veterinary and phytosanitary fields). Assistance will also
be provided to prepare Slovakia for the EU Structural Funds, by helping develop
regional and structural policies and the capacity to implement them. Phare support in
this area comes to EUR 17 million in 1998.

Justice and home affairs (EUR 5.2 million) remains a priority area and support in
this field will include strengthening the police and judiciary, developing effective
border management and migration control, and helping the fight against organised
crime, trafficking in drugs and persons, corruption, and money laundering. Support
will also focus on the alignment of JHA policy to that of EU and international
conventions.

In the environment sector (EUR 17.5 million), support will be provided for the
continued transposition of framework legislation, and the creation and implementation
of detailed approximation programmes including financing and investment strategies
related to the adoption of the environmental acquis.

Finally, an allocation of EUR 1.2 million will support Slovakia’s participation in
Community education programmes in 1998.

In addition to the above, EUR 4 million has been allocated to the Tempus higher
education programme for 1998, allowing for the funding of 24 Joint European
Projects and of which 12 are in the field of Institution Building.

Slovakia also received an allocation from the Catch-Up Facility in 1998, and four
projects have been identified for support:

support to the Supreme Audit Office (EUR 1.05 million)
strengthening the capacity of the National Council (Parliament) (EUR 2 million)

•
•
• Slovak Post-Privatisation Fund (EUR 4 million)
• Spisska Nova Ves – a regional development project improving the position of

Roma (EUR 0.45 million)

Slovakia has received an allocation of EUR 15 million from the 1998 Large-Scale
Infrastructure Facility, which will help finance the construction of a bypass around
Bratislava. The project, co-financed by the European Investment Bank and the Slovak
Government, involves the construction of 6.5 km of motorway (the D-61) around the
city. Construction of the bypass will reduce congestion and pollution in Bratislava and
contribute to the development of the country’s transport network.

Slovakia is also receiving support from the Cross-Border Cooperation Programme
(EUR 5 million). Focusing on border regions with Austria, the programme will
support actions in four priority areas: technical infrastructure, economic development
and tourism, environment, and institutional support and human resources.

66

Achievements

The performance of the Phare programme in terms of contracting and payments has
substantially improved. By the end of 1998, all 1990-1996 programmes were fully
contracted. The contracting rate for the 1997 programme reached approximately 35
per cent at the end of 1998.

Phare has provided support across a range of sectors in Slovakia and has implemented
and completed a number of successful projects.

In the agriculture sector, a project developing agricultural extension services is being
successfully implemented, in collaboration with the Ministry of Agriculture. Phare
has also provided support to private sector organisations such as the Agriculture and
Food Chamber and the Association of Private Farmers. Additional support has been
including phytosanitary and
provided in the area of plant and animal health,
veterinary diagnosis. Modernisation of the Geodesy, Cartography and Cadastre
Authority was also undertaken with Phare support.

In the area of legal approximation, a central translation unit has been set up at the
Institute of Approximation of Law to provide translations of the acquis in the Slovak
language. A legal team, funded by Phare, is continuing to provide the government
with advice on a range of issues in the legal approximation field.

A major project in the public administration sector is focusing on civil service
reform, the development of a legal framework for a professional, non-political civil
service and civil service training. Public administration institutes in Germany, Finland
and the United Kingdom are all involved. Under the same project, the Parliament
received Phare-funded printing equipment
the legislative process. A
number of commercial courts received IT equipment to computerise the commercial
registers.

to support

Phare has provided valuable support in the area of civil society development. In
1998, the Phare-funded Civil Society Development Foundation in Slovakia supported
non-partisan NGO activities to raise awareness among young voters and to monitor
the parliamentary elections. This campaign – called OK 98 –had a significant impact
on the record voter turnout (84.6 per cent) in the elections. Particularly remarkable is
to the polls. The election
the fact
monitoring activities of the NGOs concerned also helped to ensure that the elections
were free and fair. The campaign has strengthened the role and prestige of NGOs in
Slovakia.

that eight out of ten first-time voters went

Phare has contributed to the strengthening of the market economy in Slovakia through
its support to small and medium-sized enterprises (see box below) and through the
Slovak Post Privatisation Fund (SPPF). Established at the end of 1996, the SPPF is
a EUR 40 million venture capital fund which involves a joint partnership between the
EBRD (EUR 30 million) and Phare (EUR 12 million). In addition to equity, Phare
also provides EUR 8 million of funds which are available for technical assistance for
pre- and post-investment support. This combination of venture capital and technical
assistance means that the fund can provide support to second-tier companies that
would not otherwise receive support from the financial markets and banks. It is

67

expected that the SPPF will play a catalytic role in attracting foreign investors into
Slovakia.

Case study: the SME sector in Slovakia

The SME sector is playing a key role in stimulating economic growth and providing
employment in Slovakia. The number of SMEs in the country has grown constantly
since 1991 and they now account for around 60 per cent of total employment and over
50 per cent of economic output.

Phare has played an important part in this development, by providing technical and
financial support directly to SMEs and by creating institutions that provides services
to SMEs. With government support, Phare helped to establish the National Agency
for SME Development and a network of twelve Regional Advisory and Information
Centres and five Business Innovation Centres. Spread widely over the country, these
regional organisations provide training, information and advice to SMEs. Through
these centres, Phare has helped generate around 5,000 new jobs and create 1,300 new
SMEs.

The Phare SME Loan Scheme (EUR 16.7 million) has also proved very successful.
Through a unique blend of Phare, government and commercial funding, the Loan
Scheme makes capital available to SMEs at favourable rates. To date, the Loan
Scheme has provided 480 loans to enterprises employing on average 45 workers, for
an average loan size of EUR 60,000. The present default rate is under 1 per cent.

An assessment of the SME programme was carried out in 1998 by OMAS. Phare
support was rated as highly satisfactory, in terms of programme implementation and
achievement of Phare objectives, and the programme is considered to be one of the
most successful of its kind in central Europe. Phare support to the SME sector in
Slovakia amounts to EUR 31.9 million to date.

68

Slovenia

The year in review

Slovenia’s economy made good progress in 1998. Real GDP grew by 4 per cent
during the first six months of the year, and the rate for the whole year is estimated at
3.9 per cent, an improvement on the 1997 rate of 2.9 per cent. The current account,
which recorded a surplus of 0.2 per cent of GDP in 1997, was expected to be in
balance in 1998, while the budget deficit, which stood at 1.1% of GDP in 1997 was
expected to fall fractionally to 1 per cent in 1998.

Foreign direct investment inflows for the first half of 1998 reached EUR 136 million,
while Slovenia’s net external debt stood at EUR 4.08 billion at the end of August.
Inflation continued to fall, and dipped to 6.4 per cent in November 1998, compared to
9.4 per cent in 1997. Unemployment (according to the ILO definition) stood at 7.5 per
cent at the end of September 1998.

Following the law on the conclusion of the privatisation process, privatisation of all
socially owned enterprises was formally completed on 1 November 1998. However,
these enterprises still require restructuring. Additional efforts are also needed in the
privatisation of public utilities, state-owned banks and insurance companies, and the
liberalisation of the capital market.

Slovenia continued to enjoy political stability and a smooth functioning of its
democratic institutions in 1998. In foreign policy, Slovenia presented a strategy for its
integration into NATO to the North Atlantic Council in March.

With regard to EU relations, the most significant events in 1998 were the formal
launch of the accession process and the opening of negotiations, the adoption of the
Accession Partnership in March and the publication of the Commission’s Regular
Report in November.

Conclusion of the European Commission’s Regular Report,
November 1998

Slovenia continues to fulfil the political Copenhagen criteria. Continuing attention
needs to be paid to streamlining the judicial and parliamentary process and to
ensuring that Europe Agreement obligations as concerns property ownership are met.

Slovenia can be regarded as a functioning market economy, and should be able to
cope with competitive pressure and market forces within the Union in the medium
term, provided that planned reforms are fully implemented on time.

Provided that the process of approximation and institution building accelerates so as
to make up for the lack of progress this year, Slovenia will be able to assume the
obligations of membership in the medium term. Efforts are needed in the area of
internal market, especially VAT, state aids control, and justice and home affairs.

69

Phare in 1998

Phare committed a total of EUR 16 million to Slovenia in 1998. Support was provided
through two Phare programmes: the Phare National Programme (EUR 10 million),
including EUR 1.25 million for the Tempus programme, and the Cross-Border
Cooperation Programme (EUR 6 million).

It was decided to carry over a substantial part of the 1998 allocation to 1999, in order
to prepare detailed investment projects. The 1998 National Programme therefore
focuses mainly on institution building, which will be implemented through the new
twinning arrangements (finance, environment, agriculture) and where appropriate
through classical technical assistance (statistics).

Further integration into the internal market and the strengthening of administrative
and institutional capacity are priority areas. Support will include raising standards in
the field of statistics (EUR 2 million), and institution building for the Ministry of
Finance (EUR 0.85 million)

EUR 3 million has been allocated to the Special Preparatory Programme for Structural
Funds, providing support in the development of regional policy and cohesion.

Phare will also provide support for feasibility studies for future investment projects
(1999) in the fields of environment and agriculture (EUR 1.9 million) and for
monitoring and implementation control structures in these two sectors (EUR 1
million).

Tempus II received an allocation of EUR 1.25 million for work in the higher
education sector, allowing for the funding of 5 Joint European Projects, of which 1 is
in the field of Institution Building.

The Cross-Border Cooperation Programme (EUR 6 million) supports actions in
border regions with Austria and Italy.

Achievements

Implementation of the Phare programme in Slovenia faced a number of challenges in
1998. It was the first year of programme implementation under the Decentralised
Implementation System (DIS), and the National Fund was also established during the
year (the Memorandum of Understanding was signed in December). With the support
of the Central Financing and Contracting Unit, the National Fund will supervise
financial management and ease the transfer of funds to the final beneficiaries in
Slovenia.

The amount of work involved in the approximation and enforcement of laws and
technical regulations does not differ significantly according to the size of the country.
As a small country, Slovenia is having to cope with this workload with a small
administration. The pre-accession strategy programme, introduced under the 1996

70

programme, helped the Office for European Affairs and other ministries to handle the
tasks of planning, coordinating, and supporting the pre-accession process.

In the financial sector, Phare continued to play a major role in the introduction of
VAT in Slovenia (planned for 1 July 1999). Phare provided technical assistance for
the formulation of the legal framework, policy development and organisational issues.
This resulted in the adoption of the law on VAT by Parliament on 25 November 1998.
In addition, Phare assisted the Ministry of Finance with the development of a capital
movement liberalisation strategy and with setting up a monitoring and reporting
system of capital flows. Additional support to the Ministry included training for the
insurance sector, and training and privatisation support for the banking sector.

The cross-border cooperation programmes in Slovenia have continued to have a
positive impact on stimulating economic and social development in the border regions
with Italy and Austria. Projects with a clear cross-border effect were identified and
implemented in a range of sectors, in close collaboration with counterpart Austrian
and Italian authorities. Activities included the improvement of cross-border links,
protecting and improving water catchment areas, local development initiatives, SME
development, and improvement to infrastructure (e.g. water supplies).

Case study: Environmental Credit Scheme

The objective of the Environmental Credit Scheme (ECS), co-financed by Phare, is to
help the EcoFund to service the investment financing needs of the corporate and
municipal sectors in Slovenia, for the reduction of pollution, promotion of waste
management systems and the introduction of environmentally friendly technologies.
The EcoFund is an independent non-profit-making investment fund set up by the
Ministry of Environment.

The ECS is based on a Phare-funded feasibility study (market demand analysis and
institutional analysis) conducted in 1996. This study indicated substantial demand for
environmental investment financing in the corporate and municipal sectors, but a
reluctance to borrow at market rates from the commercial banks. A major source of
demand comes from privatised companies that have a legal obligation to make
environmental investments as part of the privatisation process.

The ECS provides loans to municipal and private sector borrowers at attractive rates
for the financing of projects in three main areas: improving air quality and reducing
resource management, and
air pollution,
minimising the production of solid or hazardous waste. The ECS has provided over
EUR 2 million worth of EcoFund loans at competitive rates for environmental
investments in these three sectors.

improving water quality and water

71

Non-candidate countries

72

Albania

The year in review

With per capita GDP in 1998 of around EUR 675, Albania remains the poorest
country in Europe. Following the dramatic fall in economic output that accompanied
the collapse of the centrally planned economy, when real GDP fell by almost 40 per
cent between 1989 and 1992, Albania entered a period of rapid recovery, recording
among the highest economic growth rates in Europe. Real GDP increased by over 45
per cent between 1992 and 1996, and had reached 90 per cent of 1989 levels by the
end of 1996. The 1997 crisis resulted in a drop of real GDP of 7 per cent as compared
to 1996. Growth resumed in 1998: it is estimated at 10 per cent in real terms and at a
reduced rate of 7 per cent for 1999. Albania’s success in reducing inflation, from a
in 1998, has been an outstanding
high of 237 per cent
achievement. Foreign direct investment, mainly from Italy and Greece, remained at
around EUR 42 million in 1998.

in 1992 to 8 per cent

Progress, in terms of macroeconomic stabilisation, was confirmed throughout 1998,
but economic development is vulnerable to continuing political instability and lack of
public order and security. First steps towards structural reforms with respect
to
institutions and public administration are encouraging, but should be confirmed and
completed by sustained efforts in the fight against fraud and corruption.

The process of stabilisation, recovery and democratisation in the country continued to
develop rather unevenly and is still confronted with severe problems. Political life
remained highly confrontational and public order rather volatile, as highlighted by
renewed turmoil in September 1998 followed by a new government in October 1998.
The continued high levels of corruption in public administration and the judiciary
together with organised crime have considerably undermined the efforts of the
government. The worsening of the situation in Kosovo and the arrival of forcefully
displaced persons have placed additional demands on the government and have
adversely affected the security situation in north-eastern Albania.

With regard to Albania-EU relations, Albania benefits from the Generalised
Preference Scheme (GSP) treatment and from a Trade and Cooperation Agreement
since 1992. Albania has requested an association agreement since 1995, but further
strengthening of relations are subject
to the EU’s Regional Approach and real
progress in terms of stabilisation and development.

Phare in 1998

In 1998, as in 1997, Phare resources were concentrated in four main areas of interest:

•
•
•
•

public administration and institutional reform
local community development
large-scale infrastructure development
agriculture.

73

For 1998, Phare has committed EUR 30.5 million in national and EUR 12.0 million in
cross-border cooperation programmes.

In the area of public administration reform, technical assistance has been deployed in
1998 in different fields (Supreme Audit Institution, DOPA/Department of Public
Administration, etc.).

In the area of judiciary reform, considerable efforts have been made, to a substantial
extent with the support of the Council of Europe, whose involvement is funded by
Phare. Two Joint Programmes have already been implemented.

Since late 1997, the Commission has been providing support, in cooperation with
WEU/MAPE, for advice and equipment for the Albanian police. Up to 1998, almost
EUR 8 million has been committed and implementation of the programme is ongoing.
This support is targeted to equipment (special police equipment, uniforms, vehicles
and spare parts) and to rehabilitation of the Police Training Centres.

In the area of customs, a Customs Assistance Mission (CAM) was established in June
1997 for a nine-month period and was still ongoing in 1998. Its main task is to assist
the Albanian customs authorities with restoring their ability to efficiently collect
customs and excise revenue. During 1998, activities that concentrated on the reform
of the customs service and computerisation (ASYCUDA) have been delayed due to
civil unrest.

In the sector of local community development,
the 1998 programme included
development of pilot projects for urban regeneration in Tirana which consist of labour
intensive works for the maintenance of public space or buildings.

The water sector is recognised as a key area for infrastructure development by both
the Albanian Government and the donor community. Water supply and distribution
networks continue to deteriorate. Phare’s PMU continued to play a key role in 1998 in
stimulating and coordinating donors’ intervention in this crucial sector.

In the sector of agriculture, efforts were concentrated on extension services, land
mapping, veterinary services and fisheries. In late December 1998, the Government of
Albania approved a strategy for the development of Albanian agriculture – the Green
Strategy – which will be very useful in the future development of agriculture.

Albania also received a budget of EUR 0.7 million for Tempus, allowing for the
funding of 6 Joint European Projects.

Achievements

Over the period 1991-1998, Phare assistance to Albania has exceeded EUR 500
million. Despite delays in programming and implementation due to the situation in
Albania, overall implementation of Phare assistance remains satisfactory, with a level
of contracting of 66 per cent of total funds allocated in 1991-1998. 1998 saw an
in particular with regard to large infrastructure
acceleration of implementation,
projects. A good example of this is the construction of the Durres-Roghizina road. In
1998, the target to contract EUR 120 million was very nearly reached.

74

Phare conditioned its budgetary support to the Government’s public administration
reform programme on a certain number of measures. Thanks to this leverage, the
following measures have been taken: adoption of
law,
transformation of the State control service into an independent Supreme Audit
Institution, adoption of the Decree on transitional measures of recruitment and
dismissals, creation of the State publication office, etc.

the Organic budget

In the field of support to the Albanian police, several targets were met in 1998: 13
police stations have been rehabilitated, more than 100 hand-held radios with
transmitters have been distributed, rehabilitation of the training centre at the Tirana
police academy has been completed, spare parts for police vehicles have been
delivered, etc.

Water and waste strategies funded by Phare were finalised in line with the
recommendations of the Albanian National Environment Action Plan. This will serve
as a basis for further infrastructure investments in sectors which are critical for both
health and the environment.

Case study: Customs

The Customs Assistance Mission to Albania (CAM-A) has been one of the most
successful technical assistance programmes in Albania as demonstrated by the strong
increase in the revenue collected by customs. CAM-A was originally conceived as
part of the international response to the pyramid investments crisis in Albania in 1997.
The customs services in particular had suffered badly from the civil unrest. This had
particularly serious consequences for the public finances, as the majority of the
budgetary revenues are collected by the customs service. The CAM-A deployed a
team of specialists in order to help the government restore its ability to combat fraud
and to collect revenue, as well as to modernise and grow into a self-sustaining viable
service. This mission has been very successful. Revenues from duty fees have
increased substantially and have reached about 150 per cent of the pre-crisis level. In
1998, CAM-A turned into a modernisation and development programme, but was
hindered by civil unrest in September 1998. The International Conference held in
Tirana in October 1998 highlighted the importance of this mission.

75

Bosnia and Herzegovina

The year in review

Despite a difficult post-war situation in Bosnia and Herzegovina there has been
considerable progress with regard to economic revival in 1998. External assistance
fuelled a strong economic recovery in 1995-1998, during which GDP growth
averaged around 35 per cent per year. Inflation has fallen to moderate levels in both
entities (post-war Bosnia is made up of two entities: the Muslim-Croat Federation and
the Serb Republic (RS)), mainly thanks to the tight fiscal discipline maintained by the
entity authorities. Although progress has been made, GDP stands at about half of its
pre-war level, and the GDP per capita at less than half of its pre-war level. Overall
unemployment stands at 30-40 per cent, and in the RS it is reported to be as high as
50-60 per cent.

In the context of the current
IMF-supported countrywide macroeconomic and
structural reform programme, which was adopted by the Bosnian authorities in May
important progress has been achieved with regard to promulgating an
1998,
appropriate legislative framework which encompasses common institutions suited to a
market economy. Key achievements so far include: the introduction of a new common
currency, the Convertible Marka, the adoption of a common State Budget in the
spring of 1998 and the promulgation from 1 January 1999 of a new uniform Customs
Code, drafted with the assistance of the EC-funded CAFAO programme.

In 1998 Bosnia and Herzegovina continued to experience political difficulties in the
sense of resistance to integration, especially in the eastern part of the Serb Republic
and in some parts of the Federation. Furthermore,
the work of Bosnia and
Herzegovina’s common institutions seemed still hampered by the lack of political will
to take decisions. The judicial system reform is still awaited. And serious obstacles
remain on refugee return.

With regard to EU-Bosnia and Herzegovina relations, the EU Declaration on BiH of
June 1998 represents an important step in bilateral relations. It emphasises that the
future of BiH is in Europe and provides the framework for closer cooperation. The
Member States have also created the ‘EU/BiH Consultative Task Force’ (CTF). The
CTF provides a joint EU/BiH vehicle for technical and expert advice in the fields of
administration, regulatory framework and policies.

Conditionality

The Commission applies the conditionality principles to the programmes it manages
in Bosnia and Herzegovina. This is notably based on the Regional Approach adopted
in April 1997 which outlines the political and economic conditions to be fulfilled in
order to permit the development of bilateral relations.

76

Phare and Obnova in 1998

The two main EC instruments for reconstruction in Bosnia and Herzegovina are the
Phare and Obnova programmes which are complementary, as Bosnia is not eligible
for full Phare assistance. In line with the conditions and steps laid down in the
Regional Approach, “Phare assistance will be limited to projects in direct support to
the peace agreements, in particular the building of cross-entity links and refugee
return”. Obnova funding will be used to further “underpin the reconstruction process,
to encourage return of refugees, reconciliation and regional economic cooperation,
and to create the economic and social conditions that will lay the foundations for the
development” of Bosnia and Herzegovina by supporting CAFAO, economic
development activities, integrated assistance activities, social development and media
projects.

As Bosnia entered its third year of reconstruction, the return and reintegration of
refugees and displaced persons became the focus of a major new international effort.
Creating sustainable reconstruction by moving away from emergency interventions
and toward targeted programmes in support of economic development and institution
building was the other guiding theme for the Commission’s strategy. The Commission
directed approximately half of the 1998 programme to refugee return initiatives. In
addition,
large institution-building projects,
promoting the development of customs and taxation systems, a modern central bank,
and democratic media. Bosnia-Herzegovina also received a budget of EUR 1.5
million for Tempus, allowing for the funding of 7 Joint European Projects.

the Commission undertook several

The total allocation in 1998 was more than EUR 186 million (Phare and Obnova).

Other EC-funded programmes in BiH

ECHO (European Community Humanitarian Office), the humanitarian arm of the
European Commission. Since the beginning of the conflict, ECHO has granted EUR
1,623 billion to the victims of the conflict in the former Yugoslavia.

The Customs and Fiscal Assistance Office (CAFAO) programme funded under B7-
544 (managed by European Commission Directorate General XXI)

Specific aid to the reception and voluntary repatriation of refugees in the European
Union, managed by the Task Force on Justice and Home Affairs of the Secretariat
General of the European Commission.

Democracy, LIEN, Tempus, LIFE programmes.

77

Achievements

In 1998, integrated refugee assistance was the number one priority. The Commission
designed an ambitious refugee return programme mainly implemented through
European NGOs (see box below).

In 1998, the Commission funded institution-building projects in a wide range of
economic and social sectors, including banking, the constitutional court, the central
bank, the police, economic reforms, education, health care, civil aviation, customs and
taxation, statistics and environmental legislation.

A wide range of economic regeneration projects were funded in 1998. Through an
industrial development programme started in 1998, the Commission is working with
immediately viable economic sectors and attempting to engage European firms in
them. With a contribution to the EBRD’s micro-entreprise bank, the Commission is
attempting to stimulate investment in small and large Bosnian enterprises. Through
support to Village employment projects, the aim is to help create jobs. Finally, though
direct intervention in the agriculture and forestry sectors, the EC is securing a firm
base for two important economic sectors.

In 1998 the Commission continued to fund large and small infrastructure projects like
roads, bridges, telecommunications and energy supply projects.

In the field of democracy and human rights, the EC funded independent media in BiH,
and offered support to the Commission for Human Rights.

In 1998, significant steps have been taken to improve the level of implementation:
amendments brought to the Obnova Regulation have simplified the decision-making
process for project approval and implementation; the management of the programmes
has been deconcentrated to the Commission Representation in Sarajevo.

78

Case study

Making return possible:The 1998 Refugee Return Programme

Getting Bosnia and Herzegovina’s many refugees and displaced persons to go back to
their places of origin is an absolute priority for the European Commission. It hopes
that at least 30,000 people will return home thanks to its 1998 integrated return
programme. Most of the projects are still under way and it is difficult to give a precise
assessment of the results, as the return programme will have a sizeable impact during
the second half of 1999. Even at this early stage, however, it is clear from reports
from NGOs and field visits that
the European Commission’s integrated return
programme has led to a breakthrough at local level in minority returns: by the time the
projects are finished, 7,500 houses will have been rebuilt and 30,000 refugees or
displaced persons should have gone home.

Rebuilding houses, however, is not enough, if that goal is to be met. The 1998 return
programme is also helping to rehabilitate essential infrastructure, like electricity and
water networks, schools and health centres. It also helps create jobs. The Commission
may be counting on helping 30,000 people return home. But the figure will probably
be double that, because many families that returns to a house rebuilt by the EC vacate
other homes, meaning that yet other families can return. And the domino effect does
not end there. Developments over the past year demonstrate that when a small group
of people returns to a municipality thanks to an assisted programme, other people
follow. Thus European Commission-sponsored projects act as a catalyst, sparking off
the process and encouraging people to go back to their places of origin.

Refugees and displaced persons: the figures

In 1998 140,000 refugees and displaced persons returned home. 100,000 of them were
refugees from abroad, mainly Germany. Of those, 35,000 were people returning home
to places where they are in a minority – a slightly higher number than in 1997. That
leaves 375,000 refugees still abroad along with 860,000 internally displaced people
who would be in a minority if they returned to their pre-war homes. Of those
internally displaced people, 120,000 would be prepared to return if the conditions
were such that they could feel safe and build a future for themselves and their
families. However, three years after the Dayton accord was signed, real barriers to
return persist. The biggest barrier is an appalling lack of political will on the part of
the authorities (source: RRTRF, OHR).

79

The former Yugoslav Republic of Macedonia

The year in review

The authorities in the former Yugoslav Republic of Macedonia continued to pursue a
policy of economic stabilisation in 1998, in line with the IMF programme. As a result
of tight monetary policy and the effects of external factors, prices were kept low. The
rate of inflation came down slightly, from 1.3 per cent in 1997 to just 1 per cent in
1998. The budget was also brought under control, with an estimated overall fiscal
deficit of 0.7 per cent of GDP in 1998. GDP growth was estimated at 3.5 per cent in
1998. Although this is an improvement on the 1997 rate of 1.5 per cent, it still below
the target of 5 per cent. However, aggregate demand grew even more: the trade deficit
stood at 15 per cent of GDP in 1998, while the current account deficit remained at 8
per cent of GDP. Unemployment remains high, at around 30 per cent.

With regard to structural reforms,
the liberalisation of trade has almost been
completed. Trade relations with the EU have improved considerably: exports to the
EU rose by almost 30 per cent in 1998, while the import of goods from the EU
increased by 3.4 per cent. Trade Agreements with Slovenia and Croatia were signed,
and, following the recent agreement on the language issue, the establishment of a Free
Trade Agreement with Bulgaria is expected to begin in 1999. Over 80 per cent of
prices of goods and services have been liberalised.

By the end of 1998, 1,435 enterprises had been privatised, which means that over 88
per cent of all enterprises are now privately owned. The legislative framework still
does not reflect this new environment, however, and as a result there are insufficient
incentives for restructuring and foreign direct investment remains low compared with
other central European countries. The government is taking measures to tackle these
problems, including a proposal to amend the privatisation laws and a commitment to
privatise the remaining agricultural and metal enterprises. Private sector development
is also hindered by the fact that nine out of twelve state-owned enterprises are
incurring heavy losses, placing a heavy burden on the banking sector and on public
finances.

A plan for the rehabilitation of the banking sector has been gradually developed over
the last four years. Despite this, the sector remains vulnerable and is burdened with
bad loans. The privatisation of the largest credit institute, Stopanska Banka, therefore
remains a priority.

There was a slowdown in the pace of reforms during the period leading up to the
elections in 1998. However, following successful elections and major changes within
the Parliament, the new government, which took office in December, outlined an
impressive plan of reforms of the legal framework and the economy.

With regards to relations with the European Union, the most significant events in
1998 were the entry into force of the Cooperation Agreement on 1 January 1998 and
the first EU-former Yugoslav Republic of Macedonia Cooperation Council held in
March. The Cooperation Agreement includes a financial protocol, including particular

80

provisions on transport for loans worth EUR 150 million from the European
Investment Bank as well as a corresponding EC budget allocation of EUR 20 million
as interest subsidy. These resources are intended to support the upgrading of transport
infrastructures. The appointment of the EC Resident Envoy in Skopje in mid-1998 is
considered a first step toward the upgrading of the Commission Representation in the
former Yugoslav Republic of Macedonia.

Phare in 1998

In December1998 the Commission and the government of the former Yugoslav
Republic of Macedonia agreed a Financing Memorandum providing EUR 13 million
for the Phare National Programme, to continue to support reforms initiated under the
1996 and 1997 programmes.

The 1998 Phare National Programme concentrates on the following key objectives:

•

•

•

infrastructure development: construction of a bypass for the town of Tetovo, on
the E65 Skopje-Tetovo road (European Corridor VIII); this is part of the Skopje-
Tetovo motorway project co-financed by the EIB and the World Bank
continuing the reform of the statistical system through provision of know-how,
training and equipment to the State Statistical Office
strengthening the institutional capacity of the Aid Coordination Unit within the
office of the Deputy Prime Minister to manage foreign resources, and supporting
preparations within the Ministry of Finance for the decentralisation of Phare.

Phare also provided EUR 2 million for the continuation of the Tempus higher
education programme in 1998.

Finally, the 1998 Phare programme provided EUR 10 million for cross-border
cooperation in border regions between Greece and the former Yugoslav Republic of
Macedonia. Support will focus on

•

•

transport

upgrading cross-border
upgrading the Negotino-Demir Kapjia section of the E75 (European Corridor X)
socio-economic development: implementation of second round of Small Project
Fund projects and grant support for local economic infrastructure projects.

first phase of

infrastructure:

the project

Phare allocations to the former Yugoslav Republic of Macedonia under the 1996 and
1997 programmes amounted to EUR 58 million. These allocations are supporting
programmes and reforms in a wide range of sectors, including the development of
SMEs (see box below), reform of the banking and payment system, approximation of
economic legislation, the public investment programme, agriculture and land reform,
environment, public administration reform, education reform, statistics, and cultural
development. The Cross-Border Cooperation Programme is supporting the upgrading
of border crossing facilities, upgrading the E75, environmental activities and a first
round of small projects to be implemented in border regions. FYROM also received a
budget of EUR 2 million for Tempus, allowing for the funding of 12 Joint European
Projects.

81

Achievements

The 1997 programme provided valuable support to reforms in both the banking
sector and the public administration sector, which received Phare support for the first
time. Support was also provided in other new areas, including environment, cultural
development and the preparation of a public investment programme and related
feasibility studies.

Activities under the 1996 programme also continued during 1998, and achievements
include the approximation of economic legislation project, which produced 63
recommendations for modifications to the entire legal framework related to SMEs.
The agriculture and land reform programmes developed a property registration system
and started a training programme on agricultural policy. The statistics programme
prepared a Master Plan for all statistical activities and conducted a labour force
started work on
survey. Finally,
improvements to two border-crossing points with Greece and on the first 5 km section
of the E75 road from Gevgelija to the Greek border.

cooperation programme

cross-border

the

By the end of 1998, contracting under the 1996 and 1997 programmes amounted to 74
per cent of total funds committed, and payments amounted to 17 per cent.
Uncontracted funds from the 1997 programme were mainly due to the fact that the
public investment,
land reform and payment reform programmes have specific
allocations for studies, equipment and activities to be identified following completion
of a first technical assistance phase. However, the slow rate of contracting under these
programmes also reflects the relatively slow development of reform policies in the
sectors concerned.

At present, all Phare programmes are centrally managed in Brussels; decentralisation
of programme implementation will be introduced during 1999, and is conditional
upon the upgrading of staff in the Office of the Resident Envoy.

Case study: Development of the SME sector

Phare has been supporting the development of the SME sector in the former Yugoslav
Republic of Macedonia. With an allocation of EUR 4 million from the 1996 Phare
programme, Phare has supported the creation of the National Enterprise Promotion
Agency, the first Regional Enterprise Centre in Skopje, and a dedicated SME credit
line within a number of commercial banks.

Although the creation of the SME support institutions has been hindered by the
unfavourable legal framework and bureaucracy, the credit line set up within six
commercial banks has been very successful. Advice was provided to the banks and
business guidelines were provided to individual entrepreneurs. A specific training
programme addressed the implementation of International Accounting Standards. By
the end of 1998, almost 200 individual business plans had been reviewed and
recommended to the banks and 80 were approved, for an average of EUR 20,000 per
line from the 1997
loan. A further EUR 4 million was allocated to the credit
programme.

82

Statistical overview

83

Phare funding by country, 1990-1998

Total Phare commitments, contracts and payments, 1990-1998, in million EUR

Partner country

Commitments Contracts

Payments

Albania
Bosnia & Herzegovina
Bulgaria
Czech Republic
Estonia
FYROM
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia
Ex-Czechoslovakia
Multi-country
Horizontal programmes
Total

493.13
282.33
746.94
389.73
162.83
167.33
864.04
206.57
272.03
1,731.51
971.85
253.23
131.29
232.71
880.69
1,104.68
8,890.88

347.82
206.98
518.13
246.12
116.76
127.68
586.59
149.56
197.33
1,386.04
675.75
149.45
95.65
228.85
701.07
963.51
6,697.3

315.88
152.11
479.44
196.46
95.48
93.57
566.92
115.07
146.46
1,251.30
598.13
132.95
77.67
229.17
544.67
593.81
5,589.10

84

Phare funding by sector, 1990-1998

Total Phare commitments, contracts and payments, 1990-1998, in million EUR

Sector

Commitments Contracts

Payments

Administration & public
institutions
Agricultural restructuring
Civil society and
democratisation
Education, training and
research
Environment and nuclear
safety
Financial sector
Humanitarian, food and
critical aid
Infrastructure (energy,
transport and telecoms
Approximation of
legislation
Consumer protection
Private sector, privat. &
restructuring, SMEs
Integrated regional
measures
Social development and
employment
Public health
Other (multidisciplinary,
general TA, etc.
Total

761.23

562.60
104.84

395.35

459.01
79.79

1,012.09

959.93

753.12

268.68
533.02

544.62

257.82
521.07

291.58

438.57
64.95

867.51

447.19

248.76
501.52

2,145.59

1,298.24

958.04

84.07

12.91
1,156.02

340.15

272.84

105.57
778.15

73.81

12.63
924.98

124.91

233.64

98.92
712.59

19.66

8.97
815.81

83.34

202.37

88.46
552.39

8,890.88

6,697.3

5,589.10

85