Report concerning the financial accounts of the European Agency for Reconstruction and the implementation of aid for Kosovo for the year 2000, accompanied by the replies of the Commission and of the European Agency for Reconstruction
Date: 2001-10-10
Institutions: European Court of Auditors
Subjects: EU aid, European Agency for Reconstruction, Kosovo, cooperation policy, economic reconstruction, report

13.12.2001

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Official Journal of the European Communities

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I

(Information)

COURT OF AUDITORS

REPORT

concerning the financial accounts of the European Agency for Reconstruction and the
implementation of aid for Kosovo for the year 2000, accompanied by the replies of the
Commission and of the European Agency for Reconstruction

(2001/C 355/01)

CONTENTS

Paragraph

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Background to the Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Court’s audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-10

2-5

6-10

PART I — FINANCIAL AUDIT FOR THE YEAR 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11-20

Financial statements and accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

Financial provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17-19

TAFKO contract management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II — EFFICIENCY OF THE AGENCY: SOUND FINANCIAL MANAGEMENT AUDIT . . . .

Administrative efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Functioning of the Governing Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Organisation of the Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Human resources management

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management of the operational budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20

21-66

21-30

21-24

25-28

29-30

31-35

33-34

35

Programme implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36-59

General objectives set for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economy of the Agency’s operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

37-39

40-46

47-48

49-55

56-59

3

4

4

5

5

6

8

8

8

8

8

8

9

9

11

12

12

12

12

12

13

13

14

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Paragraph

Page

Effectiveness of the Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60-66

Short-term impact of the investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sustainability of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Court’s opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60

61-64

65-66

67-77

67-77

ANNEXES

ANNEX 1 — United Nations Interim Administration Mission in Kosovo (UNMIK) . . . . . . . . . . . . . . . . . . . . .

ANNEX 2 — Mandate of the European Agency for Reconstruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX 3 — Stages in the programming of the reconstruction programmes . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Agency’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

14

14

15

15

15

17

18

19

20

23

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SUMMARY

I.
In June 1999, after the war in Kosovo, the Council confirmed the European Union’s desire to play a leading
role in the rapid implementation of reconstruction efforts in Kosovo. As early as July 1999 a task force was
established by the Commission in Pristina to launch the first phases of the reconstruction programme. In
November 1999, the Council set up a European Agency for Reconstruction to operate with effective and flex-
ible rules allowing, however, full managerial accountability and transparency. The operational centre of the
Agency has a considerable degree of management autonomy and was to be initially located in Pristina in order
to embark on the reconstruction work in Kosovo. The Agency’s general services are located in Thessaloniki (1).
In February 2000 the Agency took over the responsibilities of the task force. In 2000 the Agency was respon-
sible for 266 million euro of the budget of nearly 306 million for Kosovo reconstruction.

II. The audit assessed the financial statements of the European Agency for Reconstruction for the financial
year ended 31 December 2000, the efficiency of the European Agency for Reconstruction in Kosovo in 2000
at the level of its organisational structure (see paragraphs 21 to 28), its operational budget management (see
paragraphs 31 to 35) as well as its programme implementation (see paragraphs 36 to 55). In this context it
also examined whether matters affecting economy (see paragraphs 56 to 59) or the effectiveness of the inter-
ventions (see paragraphs 60 to 66) had been neglected.

III. The results of its financial audit enabled the Court to obtain a reasonable assurance that the annual
accounts for the financial year ended 31 December 2000 are reliable and that the underlying transactions are,
taken as a whole, legal and regular. However, the Court recommends that the Agency should adopt a reliable
computerised system of budgetary accounts as soon as possible (see paragraphs 67 and 68).

IV. The Court concludes that in 2000 the efficiency of the Agency’s administration and its budget manage-
ment was high. It managed to achieve most of the ambitious objectives set for its first year of activity in the
fields of energy, housing, transport and agriculture (see paragraph 69). At the end of 2000 more than 90 % of
the funds committed before December 2000 were contracted and more than half of the committed funds for
operations were paid. It tried to pay attention to the principles of both efficiency and economy (see para-
graph 70). By applying the rules in force in a very flexible way the Agency managed to obtain lower prices
and stimulated the regional economy (see paragraph 71). The Court recommends the Agency not to disperse
its efforts, but to continue to focus its human and financial resources on the latest reconstruction priorities
(see paragraph 73).

V. The Court considers that the functioning of the Governing Board of the Agency should be improved (see
paragraph 75). It also urges the Commission, which is funding the United Nations Interim Administration in
Kosovo (UNMIK) EU pillar in charge of Kosovo reconstruction, to take much more action to set up a policy
framework and a strategy to ensure the sustainability of EU-financed investments in Kosovo, which is not
ensured in the prevailing circumstances (see paragraphs 76 and 77).

(1) Having been allowed by Council Regulation (EC) No 2667/2000 of 5 December 2000 to establish operational centres
with a considerable degree of management autonomy in the Federal Republic of Yugoslavia, the Agency has now opened
offices in Belgrade and Podgorica.

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INTRODUCTION

1. This report is in two parts. Part 1 consists of the report on the
accounts of the Agency for the financial year ended 31 December
2000, addressed to the European Parliament and to the Council
in accordance with Article 8 of Council Regulation (EC) No 2667/
2000 of 5 December 2000. Part 2 sets out the results of an
examination of the efficiency of the Agency in implementing the
1999 and 2000 reconstruction programmes for Kosovo.

Background to the Agency

2. After the war in Kosovo, the United Nations Interim Admin-
istration in Kosovo (UNMIK) was set up in June 1999 under UN
Security Council Resolution 1244 (see Annex 1). The European
Union, through both its Member States and the Commission, is
playing a prominent role in the reconstruction of Kosovo. It pro-
vides about 80 % of the Kosovo Peacekeeping Force (KFOR) (in
total 40 000 soldiers) and heads the UNMIK department in charge
of reconstruction.

3. Within days of the conflict ending, the Commission had

ECHO back in place to continue humanitarian aid (1). In July 1999
the Commission established a task force (TAFKO) to launch the
first phases of the reconstruction programme for Kosovo. The
task force was given the responsibility for all phases of the opera-
tion after the programming process, from programme and project
design, through contracting to payment.

4. Given the pace of return of refugees, the pressure to deliver
on economic development and reconstruction was immense, in
particular through measures designed to alleviate the housing
problem and assure basic public services. The European Council
considered that it was necessary to take account of the specific
requirements of the reconstruction of Kosovo, which would
demand the rapid implementation of numerous projects, meas-
ures to support returning refugees and the provision of expertise
covering a wide range of fields. It therefore decided to set up a
European Agency for Reconstruction, which was expected to be
organised and managed in a way that would allow ‘rapid imple-
mentation’ of the reconstruction programmes ‘while at the same
time ensuring full managerial accountability and transparency in
management’ (2). The mandate of the Agency is summarised in
Annex 2.

5. On 20 February 2000 the Agency took over the responsibil-
ities of the task force on a more autonomous basis. It was respons-
ible for the implementation of 266 million euro of the nearly
306 million euro programmed for Kosovo reconstruction in 2000
(see Table 1).

Kosovo reconstruction assistance programmed for 2000 (Article B7-5 4 6)

Table 1

Allocation

Amount
committed

Commission
Decision on

Implemented by

(Mio EUR)

Budget support (transfer to B7-5 3 2)
Assistance (electricity and public services)
Reconstruction (housing, water, electricity,
transport)
Running costs of the Agency (1)
Economic development
Health
Customs
Running costs of UNMIK pillar IV
Further reconstruction (energy, housing, waste
management)
Electricity imports + district heating

35,0
30,0

140,0
3,5
25,0
10,0
4,9
6,0

40,0
11,5

Total

305,9

14.2.2000
22.2.2000

16.5.2000
25.5.2000
26.6.2000
28.6.2000
25.7.2000
18.7.2000

20.11.2000
22.11.2000

DG ECFIN
Agency

Agency
Agency
Agency
Agency
DG TAXUD
SCR

Agency
Agency

(1) 15 Mio EUR committed and eventually 11,5 Mio EUR decommitted for electricity imports and district heating.

Source: DG RELEX.

(1) See Special Report No 2/2001 on the management of emergency
humanitarian aid for the victims of the Kosovo crisis (ECHO).
(2) Council Regulation (EC) No 2454/1999 of 15 November 1999
(OJ L 299, 20.11.1999, p. 1) amended by Regulation (EC) No 2667/
2000 of 5 December 2000 on the European Agency for Reconstruc-
tion (OJ L 306, 7.12.2000, p. 7).

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The Court’s audit

6. The Court examined the financial statements of the European
Agency for Reconstruction for the financial year ended 31 Decem-
ber 2000. In accordance with Article 8 of Council Regulation (EC)
No 2667/2000 the budget was implemented on the responsibil-
ity of the director of the Agency. He is also responsible for the
drawing up and presentation of the financial statements, in accord-
ance with the financial provisions provided for in the same Article.
The Court of Auditors is required to audit those accounts pursu-
ant to Article 248 of the Treaty establishing the European Com-
munity.

7. The audit was carried out between November 2000 and May
2001. Besides giving an opinion on the Agency’s financial accounts
for the year 2000 an important objective was to assess the effi-
ciency of the European Agency for Reconstruction in implement-
ing the 1999 and 2000 reconstruction programmes financed
under budget Article B7-5 4 6 ‘Aid for the reconstruction of
Kosovo’. In this respect the Court assessed the Agency’s efficiency
at the level of its organisational structure, its management of the
operational budget and its programme implementation. It also
examined whether matters affecting the economy or the effective-
ness of the interventions had been neglected. In its audit of the
Agency’s efficiency the Court used as reference the findings of its
previous special report on reconstruction in Bosnia and Herze-
govina (1) and its 1999 Annual Report (2).

8. The audit involved file review at the Agency’s headquarters in
Thessaloniki and its operational centre in Pristina, as well as
on-the-spot checks of the programme implementation in Kosovo.
It focused on the programmes in the fields of energy, housing,
transport and agriculture (with a global value of 145 million euro)

because their objectives were concrete and had to be reached
before the end of the year 2000. The audit included a visit to the
Delegation in Sarajevo to compare the deconcentrated system (3)
of implementing the Obnova Regulation (4) with the operations
of the Agency. Corroborative data was obtained from monitor-
ing bodies and other donors in Bosnia and Kosovo.

9. Although the main auditee in this report is the Agency, the
responsible services of the Commission have been involved in the
audit and contradictory procedure regarding this report, particu-
larly in relation to Part II, which concerns the efficiency of the
Agency.

10. The Court undertook its audit in accordance with its audit-
ing policies and standards. These have been adapted from gener-
ally accepted international auditing standards to reflect the spe-
cific characteristics of the Community context. Accordingly, it
examined the accounting records and applied the audit proced-
ures it deemed necessary in the circumstances. By means of this
audit, the Court obtained a reasonable basis for the opinion
expressed in paragraph 67.

PART I — FINANCIAL AUDIT FOR THE YEAR 2000

11. The Agency became operational at the beginning of 2000.
Table 2 shows the implementation of the appropriations for the
financial year 2000 (5).

(1) See Special Report No 5/98 on reconstruction in former Yugoslavia

(period 1996 to 1997) (OJ C 241, 31.7.1998, p. 1).

(2) Annual Report concerning the financial year 1999 (paragraphs 5.28

(3)

‘Deconcentration is defined as the transfer of responsibilities within
the Commission from headquarters to Delegations’ (in ‘Phare decon-
centration — Instructions for Delegations’).

(4) Council Regulation (EC) No 1628/96 related to aid for Bosnia and
Herzegovina, Croatia, the Federal Republic of Yugoslavia and the
former Yugoslav Republic of Macedonia (OJ L 204, 14.8.1996, p. 1),
last amended by Regulation (EC) No 2454/1999 of 15 November 1999
(OJ L 299, 20.11.1999, p. 1) and repealed by Regulation (EC) No 2666/
2000 (see footnote 6).

(5) Note: the appropriations allocated include 65,9 million euro of appro-

to 5.31 and 5.75 to 5.78) (OJ C 342, 1.12.2000).

priations not used by TAFKO.

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Table 2

Implementation of the budget — financial year 2000
Agency: European Agency for Reconstruction

Title

I — Staff

II — Administration

III — Operations 2000

Appropri-
ations
(a)

5,8

5,4

671,1

Total

682,3

Commitments

Payments

%

Carryovers

Cancellations

%

(b)

4,8

3,7

259,5

268,0

(c)

4,6

2,1

139,8

146,5

(d=c/b)

97

55

54

55

(f)

0,1

1,7

531,3 (1)

533,1

(g=a-c-f)

(h=g/a)

1,1

1,6

0

2,7

18

30

0

0

(1) Including 119,7 million euro corresponding to the amount outstanding on contracts concluded in 2000 (259,5 million euro), the remainder corresponding to appropri-

ations granted in December 2000.

(Mio EUR)

12. The Agency’s initial budget for 2000 for Kosovo amounted
to 266 million euro. At the end of 2000, after successive increases
and the extension of the Agency’s activities to Serbia, the budget
amounted to 682 million euro, including 399,5 million euro made
available at the end of 2000 but to be disbursed in 2001.

give rise to any significant remarks. Commitments amounting to
259,5 million euro, or 93 % of the appropriations provided for in
2000 under Title III (279,4 million euro), were entered into in
2000.

13. The Agency’s budgetary appropriations for administrative
and staff expenditure (Titles I and II) are managed as non-
differentiated appropriations, whereas, for operating expenditure
(Title III), they are managed as differentiated appropriations. In
future, it would be preferable if the budget were to show the estim-
ated annual payment appropriations needed for the subsequent
financial years. Although the Agency’s Financial Regulation does
not require such a presentation, it is a sensible practice for dif-
ferentiated appropriations and is in line with the general Financial
Regulation.

15. The Agency has not yet introduced the computerised SI2
budgetary accounts system and uses spreadsheets instead. Given
the risk that the use of spreadsheets poses for the integrity of the
data, the SI2 system should be introduced as soon as possible. In
several cases, errors or shortcomings were observed in the
Agency’s use of spreadsheets. Moreover, reconciliation with the
budget is difficult and is not done regularly.

Financial statements and accounts

14. The Court’s audit of the expenditure under Title III, repre-
senting 97 % of the commitments entered into in 2000, did not

16. Tables 3 and 4 show, respectively, the revenue and expend-
iture account for the financial year 2000 and the balance sheet at
31 December 2000.

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Revenue and expenditure account for the financial year 2000 — European Agency for Reconstruction

Table 3

Revenue
Revenue received from the Commission
Own revenue
Sundry revenue

Expenditure
Staff expenditure — Title I of the budget
Payments
Appropriations carried over

Total revenue

Buildings, equipment and miscellaneous administrative expenditure — Title II of the budget
Payments
Appropriations carried over

Operating expenditure — Title III of the budget
Payments
Appropriations carried over

Outturn for the financial year

TAFKO payments (non-budget)
Exchange differences

Total expenditure

(1 000 EUR)

2000

257 933
680
175
258 788

4 632
131

2 078
1 670

139 786
119 733
268 030

– 9 242

– 26 860
334

Source: Table prepared by the Court of Auditors on the basis of data provided by the Agency.

Balance for the financial year

– 35 768

Balance sheet at 31 December 2000 — European Agency for Reconstruction

Table 4

Assets

Fixed assets
Fittings and furniture
Intangible assets
Movable equipment
IT equipment

Realisable assets
VAT and recoverable taxes
Sundry accounts receivable

Cash accounts
Banks and cash

2000

258
110
508
841
1 717

61
133
194

Subtotal

Subtotal

Subtotal

87 652
87 652

Liabilities

Fixed capital
Own capital
Balance for the financial year

(1 000 EUR)

2000

1 717
– 35 768
– 34 051

Subtotal

Current liabilities
Automatic carryovers of appropriations I,
II and III
Sundry accounts due
VAT and established entitlements
Receipts for fertilisers

Subtotal

121 534
86
61
1 933
123 614

Source: Table prepared by the Court of Auditors on the basis of data provided by the Agency.

Total assets

89 563

Total liabilities

89 563

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Financial provisions

22. Experience during 2000 confirmed the Court’s concerns:

17. Article 21 of the Agency’s Financial Regulation provides that
financial control will be carried out by the Commission’s Finan-
cial Controller. However, an agreement concluded in Febru-
ary 2000 between the Commission’s Financial Controller and the
Agency provides that, in the interest ‘...of the decentralisation of
the financial control of the Agency, prior authorisation by the
Financial Controller is not necessary ...’.

18. This agreement, which aims at reducing administrative delays,
limits control over the implementation of the budget. In actual
fact, given that prior approval by the Financial Controller at com-
mitment level is very general, there is, de facto, no ex ante check
over the implementation of the Agency’s budget. Moreover, the
Agency has not taken adequate steps to compensate for the
absence of ex ante controls, for example, by creating the post of
internal auditor, as suggested in the Court’s Opinion No 6/99.
However, during the second quarter of 2001 steps were taken to
allocate an official of DG Audit exclusively to the Agency.

19. The Agency proposed implementing provisions in Septem-
ber 2000 to comply with Article 74 of the Agency’s Financial
Regulation, but these had not yet been approved by the Commis-
sion in September 2001.

TAFKO contract management

20.
In addition to implementing its own budget, the Agency has
taken over the management of the contracts entered into by the
Task Force for Kosovo (TAFKO) that were still being implemented
when the latter ceased operations. These contracts, which
amounted to 60,9 million euro, are managed outside the budget.
In February 2000, 31 million euro were left to be paid by the
Agency, which has since settled 26,9 million euro, leaving 4,1 mil-
lion euro outstanding as of 31 December 2000. In the interests of
budgetary regularity and transparency, it would have been prefer-
able for the funds set aside for the management of these contracts
to have been incorporated in the Agency’s budget.

PART II — EFFICIENCY OF THE AGENCY: SOUND FINANCIAL

MANAGEMENT AUDIT

Administrative efficiency

Functioning of the Governing Board

21. The Agency’s Governing Board, by the very nature of its
composition, was designed more as an administrative board than
as a management body. Bringing together each month more than
20 persons, including one Commissioner, appears, in the light of
the Mostar experience, to be a very serious constraint.

(a) the structure of the Agency’s Governing Board is rather heavy:
up to 23 representatives of the Member States attend the
monthly meetings in Thessaloniki. The members of the Gov-
erning Board spent a large part of the first six meetings dis-
cussing the language arrangements, which have to be decided
unanimously;

(b) the Commission insisted on a Member of the Commission
being chairman of the Governing Board, but the Member
appointed did not attend any of the meetings in 2000;

(c) organising the monthly meetings represents an extra work-

load and distraction for the Agency.

23. The new Agency Regulation (1), adopted in the wake of the
adoption of the CARDS Regulation (2) replacing the former
Obnova Regulation, partly meets this concern by stating that the
Governing Board should be convened by the Chairman whenever
necessary, and at least once every three months, but not neces-
sarily every month.

24. Some members of the Governing Board wanted to decide on
financing proposals for the reconstruction of Kosovo made by the
Commission, whereas this is the responsibility of the Manage-
ment Committee (see Annex 3). Moreover, the approach adopted
by the Member States’ representatives on the Management Com-
mittee and the Governing Board is not necessarily coordinated.
For example, for one financing proposal the representative of one
Member State gave a positive opinion at the Governing Board but
the representative of the same Member State in the Management
Committee voted against.

Organisation of the Agency

25. The Agency’s general services are located in Thessaloniki but
the Agency may establish operational centres with a considerable
degree of management autonomy (Article 3 of Council Regula-
tion (EC) No 2667/2000). In 2000 the Governing Board author-
ised the Agency to recruit 51 temporary expatriate staff and 54
local staff. The Agency recruited 48 temporary staff (39 in Pris-
tina and 9 in Thessaloniki) and 50 local staff (40 in Pristina, 8 in
Thessaloniki and 2 in Skopje).

(1) Council Regulation (EC) No 2667/2000 of 5 December 2000 on the
European Agency for Reconstruction (OJ L 306, 7.12.2000, p. 7).
(2) CARDS: Community Assistance for Reconstruction, Development
and Stabilisation — Council Regulation (EC) No 2666/2000 of
5 December 2000 on assistance for Albania, Bosnia and Herzegovina,
Croatia, the Federal Republic of Yugoslavia and the Former Yugoslav
Republic of Macedonia, repealing Regulation (EC) No 1628/96 and
amending Regulations (EEC) No 3906/89 and (EEC) No 1360/90 and
Decisions 97/256/EC and 1999/311/EC (OJ L 306, 7.12.2000, p. 1).

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In accordance with the Staff Regulations, all Agency staff
26.
based outside the Community receive an allowance for excep-
tional living conditions, a risk premium amounting to 40 % of
their salaries, the payment of their accommodation costs up to a
maximum of 1 278 euro a month, and some extra leave (around
20 days per year).

27. The budgetary authority decided that the Agency’s operat-
ing expenditure would be funded under budget Article B7-5 4 6
‘Aid for the reconstruction of Kosovo’ for an amount equivalent
to not more than 8 % of its total budget. In 2000 the Agency’s
running costs (staff, premises and equipment) amounted to 8,6 mil-
lion euro. This represents 3,1 % of the Agency’s budget, exclud-
ing the funds made available at the end of 2000 for 2001 (1).

28.
In 2000 the Agency had 2,5 employees for every 10 million
euro managed (not including back-up staff at Commission head-
quarters), compared with an average of 2,9 officials at the Com-
mission for the management of all external assistance and between
four and nine officials in Member States’ bilateral aid agencies (2).
However, the corresponding units in AIDCO manage more com-
plex programmes covering many sectors, whereas the Agency’s
work in 2000 consisted mainly of large contracts focused on a
limited number of sectors.

recruited on the basis of the qualifications needed for rapid and
professional implementation of the reconstruction programme.
They have been working intensively in sometimes rather difficult
circumstances.

30. The challenge for the Agency now is to sustain a level of
dedication among its staff appropriate to a future situation that is
likely to be less urgent and less demanding. In view of the rapid
growth of the Agency and the recent creation of new operational
centres, a new distribution of the staff between its headquarters
in Thessaloniki and its operational centres is likely to be required.

Management of the operational budget

31. At the end of 2000 the Agency had committed 96,4 % of the
funds allocated to it for Kosovo reconstruction. In February 2000,
when the Agency took over from the task force, 49 % of the
Obnova funds committed in 1998 and 1999 were contracted, of
which 23 % were paid. By the end of 2000, 88 % of the funds
committed in 1998 were paid, and 88 % of the funds committed
in 1999 were contracted, of which 75 % were paid. At the same
date 79 % of the funds committed in 2000 were contracted, of
which 55 % were paid (see Table 5).

Human resources management

29. The good performance of the Agency in 2000 in imple-
menting the reconstruction programme is largely due to the indi-
vidual commitment of dedicated staff. The team members were

32. According to Article 4(14) of Council Regulation (EC)
No 2667/2000 the Governing Board presented a draft annual
report to the Commission by 31 March 2001 on the Agency’s
activities in 2000 and how they were financed. This report was
adopted by the Commission in June 2001 and submitted to the
European Parliament and the Council on 31 July 2001 (3).

(1)

In 2000 the Agency has the use of free offices in Thessaloniki and
Pristina.

(2) Commission internal document on the reform of the management of

external assistance — Problems and proposals, May 2000.

(3) COM(2001) 446 final.

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Table 5

Programme overview up to 31 December 2000

Programme /project

Committed

Contracted

Contracted/
committed

University, animal feed, timber supply

7,5

7,5

100 %

Year

1998 (1)

1999 (2)

Funds committed July 1999-February 2000
Damage assessment
Public services
Small scale operations
Public utilities
Customs (managed by Commission)
Registration: identity cards
Housing
Re-establishment of local authority
Village employment and rehabilitation
Agency running costs
Water (major towns)
Transport
Mine-clearing
Municipal administration
Civil society
Kosovo Protection Corps
Rehabilitation of Mitrovica Hospital
Energy
Agriculture
Enterprise
Central administration
Administrative and technical assistance
Feasibility studies
Postal and telecommunications

2000 (3)

Total

Funds committed February 2000-November 2000
Public services
Energy imports
Housing
Energy
Agriculture
Transport
Agency running costs
Enterprise
Water
Health
Fertiliser counterpart funds

Funds committed in December 2000
Energy Imports II
Housing II
Waste
Energy II
Rehabilitation of district heating systems

Total I

Total II
Total

(Mio EUR)

Paid/
committed

Paid/
contracted

89 %

89 %

100 %
100 %
97 %
91 %
90 %
90 %
88 %
87 %
78 %
72 %
70 %
71 %
67 %
63 %
60 %
54 %
51 %
51 %
23 %
37 %
35 %
27 %
18 %
13 %
66 %

100 %
81 %
59 %
59 %
51 %
48 %
38 %
23 %

13 %
3 %
53 %

100 %
100 %
99 %
95 %
90 %
90 %
89 %
87 %
80 %
72 %
72 %
84 %
100 %
64 %
65 %
54 %
51 %
66 %
23 %
68 %
46 %
53 %
26 %
18 %
75 %

100 %
81 %
60 %
62 %
53 %
61 %
73 %
29 %

23 %
54 %
58 %

Paid

7

3,5
5,0
1,0
8,2
2,7
4,5
12,3
1,9
5,9
3,6
2,1
4,5
4,0
8,2
0,3
2,7
0,5
6,6
0,2
1,8
0,7
1,6
0,4
1,0
83,2

10,0
16,2
32,3
35,5
5,1
7,3
1,3
3,5

1,3
0,1
112,5

112,5

202,3

43 %

51 %

55 %

62 %

3,5
5,0
1,0
9,0
3,0
5,0
14,0
2,2
7,5
5,0
3,0
6,3
6,0
13,0
0,5
5,0
1,0
13,0
1,0
5,0
2,0
6,0
2,0
8,0
127,0

10,0
20,0
55,0
60,0
10,0
15,0
3,5
15,0
10,0
10,0
1,8
210,3

8,0
5,0
5,0
30,0
3,5
51,5
261,8

3,5
5,0
1,0
8,6
3,0
5,0
13,9
2,2
7,4
5,0
2,9
5,4
4,0
12,8
0,5
5,0
1,0
9,9
1,0
2,7
1,5
3,0
1,4
5,9
111,5

10,0
20,0
54,1
57,5
9,7
11,9
1,8
12,0
10,0
5,6
0,1
192,7

8,0
5,0
0,2

13,1
205,9

324,9

100 %
100 %
98 %
96 %
100 %
100 %
99 %
100 %
98 %
100 %
98 %
85 %
67 %
99 %
92 %
100 %
100 %
76 %
100 %
54 %
75 %
51 %
69 %
73 %
88 %

100 %
100 %
98 %
96 %
97 %
79 %
52 %
80 %
100 %
56 %
6 %
92 %

100 %
100 %
3 %

26 %
79 %

82 %

Grand total

396,3

(1) Obnova funds committed in 1998.
(2) Funds committed during period July 1999 to February 2000 and managed by the task force for the reconstruction of Kosovo.

Projects initiated by the task force and balance of committed funds transferred to Agency on 23 February 2000.

(3) Funds committed during 2000 to Agency.

Source: European Agency for Reconstruction.

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Contracting

Table 6

33. At the end of the year 92 % of the 2000 funds committed
between February and November 2000 were contracted. The
recourse to the suspensive clause (1) allowed the Agency to sign
contracts for a global value of 50 million euro within a week of
the Commission decision to approve financing proposals for a
total of 130 million euro in May 2000. The average period needed
for contracting operational funds after a Commission decision
was 153 days for both 1999 and 2000 programmes and 71 days
for the 2000 programme. This performance compares favourably
with the time needed by the Delegation in Sarajevo to contract the
Obnova programmes (see Table 6). However, the Delegation in
Bosnia, unlike the Agency in Kosovo, often needs time to reach
an agreement with the three local communities involved before
launching a tender or signing a contract.

Average time needed for contracting after a Commission decision

Obnova programmes

European Agency for
Reconstruction

Delegation in Bosnia and
Herzegovina (1)

1999 and 2000
2000 only

153 days
71 days

301 days
136 days

(1) Without taking into account the Commission decisions before deconcentration

in 1999.

Source: European Agency for Reconstruction and Commission Delegation in Bosnia

and Herzegovina.

34. Because of the emergency situation, the Agency did not
always strictly respect the Obnova rules applicable to tendering,
which are often inappropriate in these circumstances.

Energy sector

It was essential to restart one of the units of a power plant by the end of November 2000. Normally such a major overhaul requires about a year.
In February 2000 UNMIK requested the Agency to award a contract by direct agreement to the company that had already carried out some
emergency repairs under a previous contract. The Agency preferred to launch a restricted accelerated tender procedure. Although better than a direct
agreement, this tender procedure for a works contract of 40 million euro did not comply with the basic Obnova Regulation (2) which allows, under
certain conditions only (fulfilled in this case), a restricted invitation to tender for works contracts not exceeding 10 million euro. The short period
between the sending of the tender dossier and the deadline for submission (five weeks) provided a competitive advantage to the company which had
already worked in the plant. Only two companies (with a price offer of 34,5 and 37,6 million euro) could respond with bids in time. However,
neither of the two offers was considered technically acceptable and the tender was cancelled at the end of May 2000. In agreement with DG Relex,
the Agency subsequently negotiated a direct contract with a consortium consisting of the two companies concerned. It contracted the consortium for
40 million euro on the condition that the unit would be recommissioned at the end of November 2000 at the latest, in order to be fully operational
during the peak load of winter 2000/2001. This ambitious objective was finally achieved.

Housing sector

For the procurement of construction materials, 46 offers were accepted for opening. The outcome of the formal evaluation of the tenders showed that
local tenderers with the better priced bids had immense difficulties in submitting some tender documents correctly, namely the certificate of national-
ity, certification concerning bankruptcy, the certificate of origin or a bank guarantee. The strict application of the agreed formal selection criteria
would have resulted in only seven tenders passing the formal evaluation. In this case, however, the total contract amount for the 14 lots would have
amounted to about DEM 110 million whereas DEM 85 million had been budgeted for supplies. Under normal circumstances the open tendering
procedure should have been cancelled, because all formally acceptable bids exceeded the available budget. In order to secure the execution of the project,
the Agency decided, instead of requiring a bank guarantee, to insert a contract provision allowing it to deduct a 10 % cumulative retention of all
payments as security. As of the end of 2000 the Agency had not experienced serious problems with the performance of the contracted suppliers.

(1) The contract is only awarded if the financing decision is made by the

Commission.

(2) Council Regulation (EC) No 1628/96 as last amended by Regulation
(EC) No 2454/1999 of 15 November 1999 (OJ L 299, 20.11.1999,
p. 1).

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Payments

35. Between February and October 2000 payments for opera-
tional expenditure were processed within 13 days on average
(between the receipt of the invoice and the date on which pay-
ment was sent to the bank). By comparison, the Delegation in
Sarajevo managed to process the payments in the framework of
the Obnova Regulation within an average period of 43 days dur-
ing the second half of 2000 (1). With regard to current purchases
of goods (Title II), the time taken by the Agency to make pay-
ments was found, on the basis of a sample, to be around 25 days.

Programme implementation

General objectives set for 2000

transport,

environment

36. The 2000 work programme for the reconstruction of Kosovo
approved by the Commission and the Governing Board concen-
trated the bulk of the resources available in 2000 on five areas:
energy, housing,
and economic
development/agriculture. The Commission and UNMIK consid-
ered these sectors to be essential building blocks for the wider
reconstruction effort. Considering that progress in energy, hous-
ing, transport and agriculture was season-sensitive, the Agency
wanted to launch the projects in these areas quickly and accord-
ingly set very ambitious objectives, to be reached before the win-
ter 2000-2001. The Court examined whether these objectives
were being achieved at the end of 2000.

Energy

Objectives

37. The 2000 energy programme amounted to 60 million euro.
Its general objective was to allow the energy sector to move away
from the quasi-emergency holding and stabilisation phases towards
making energy generation more stable and productive as a first
step to assuring the self-sustainability of the sector. In parallel
with this programme, the Agency allocated 28 million euro to
UNMIK for energy imports under the 2000 reconstruction pro-
gramme.

that feed the two power stations. The expected increased produc-
tion from the mines aimed to match the increased demand for
fuel for the newly overhauled units at the power stations.

Results at the end of 2000

39. At the end of 2000, 96 % of the funds committed for this
sector during the year up to December were contracted, and 59 %
of that was paid. The overhaul of unit 2 at Kosovo B power sta-
tion was completed at the beginning of December 2000 before
the onset of winter. Unit B1 was running, with some unplanned
power cuts, and the repairs continued during the winter. Although
the level of production in the lignite mines had increased, it had
not yet reached two thirds of the objective (9 000 tonnes a day
compared to an objective of 15 000 tonnes) at the end of 2000,
but production was still increasing (2). Although power cuts were
still occurring, the output of the two power stations ensured that
there was usually sufficient electricity, thanks also to EU-funded
energy imports, mainly from Bulgaria, the Former Yugoslav Repub-
lic of Macedonia (FYROM) and Montenegro.

Housing

Objectives

40. The overall objective of the programme amounting to 55 mil-
lion euro was to support the Kosovars in reconstructing some
8 000 war damaged houses in the year 2000. This had to be done
with grant assistance targeted at the most vulnerable households,
especially poorer families and those in temporary accommoda-
tion. Reconstruction work on the houses was normally to be
undertaken by the beneficiaries on a ‘self-help’ basis, with quality
control and any necessary technical support coming from the
NGO implementing partners. Where it was deemed necessary to
supplement the self-help approach, a beneficiary could also be
allocated labour support, or a works contractor for the most vul-
nerable, especially in the case of completely destroyed homes.

41.
In December 2000 an additional amount of 5 million euro
was allocated to this programme because the project was focus-
ing increasingly on the most severely damaged houses (56 % of
the total number assisted), thus requiring additional materials.
The supplementary funding also allowed the target to be increased
to 8 400 houses.

38. To increase the power generation capacity and, crucially, the
reliability of the electricity supply, urgent and extensive overhauls
to the two power stations were needed. As a result of consulta-
tions with UNMIK and other donors, the intervention of the
Agency focused on the newer of the two power stations (Kosovo
B). As an integral part of the overall effort in the sector, the Agency
had also to support the rehabilitation of the lignite coal mines

42. At the same time the Agency also continued with the imple-
mentation of the 1999 housing programme amounting to 14 mil-
lion euro. This programme for the rehabilitation of 3 600 houses
(usually without a roof) was initiated by the task force in 1999,
but most of the work was carried out during the first half of
2000.

(1) The contractual obligation is to pay within 60 days.

(2) 12 000 tonnes in April 2001.

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Results at the end of 2000

43. Out of the 60 million euro committed in 2000, nearly 100 %
was contracted and 54 % paid at the end of the year. The pro-
gramme was initially delayed because municipalities were slow to
identify the most vulnerable families who were to benefit from
the programme. Often this problem could have been reduced
both through a stronger presence by UNMIK and more profes-
sionalism on the part of some NGOs. At a later stage the pro-
gramme also suffered from border-related bottlenecks in the sup-
ply of building materials coming from or through FYROM.

44. At the end of December 2000, activity had commenced on
some 7 700 construction sites in 23 of the 30 municipalities.
More than 50 % of the 8 000 houses initially foreseen were fully
completed, more than 65 % were weatherproof and habitable. In
early April 2001, according to monitoring reports, all the houses
already had roofs on. Of the combined target of 12 000 houses
to be reconstructed (3 600 under the 1999 programme and 8 400
under the 2000 programme) with 74 million euro of funding, a
total of 8 170 homes had already been completed by the Agency
during the year 2000. According to NGOs’ progress reports, a
further 2 000 houses already had roofs on and 1 530 were at ear-
lier stages of reconstruction, leaving just 300 more to be started.

condition and the railway network was under-utilised, mainly due
to a lack of appropriate rolling stock. The Agency had to face the
constraints presented by limited time for the work, the logistical
issues related to supplies and the limited resources. The 2000
programme (15 million euro)
therefore focused on the re-
surfacing of three of the main roads in Kosovo (the Pristina–
Skopje road to the Blace border being the top priority), as well as
the repair of two important road bridges destroyed by NATO
bombing in 1999.

Results at the end of 2000

48. At the end of 2000, 79 % of the funds committed in this sec-
tor in 2000 were contracted, of which 61 % were paid. Most of
the work foreseen was completed or on schedule, except the Blace
border crossing.

Agriculture

Objectives

45. The pace at which the Agency managed to rebuild houses
contrasts with the slow implementation of similar programmes in
Bosnia before their management was devolved to the Delegation
in Sarajevo. In a letter dated 31 October 2000 the head of UNMIK
pillar IV (dealing with reconstruction) said he had been ‘most
impressed by the speed with which the European Agency for
Reconstruction has disbursed funds, both in comparison with
other EU programmes and with other multilateral agencies in
Kosovo, and also the low administrative costs and value for money
[that the Agency has]’.

49.
In 2000 the Commission approved a financing proposal for
fostering the economic development of Kosovo amounting to
25 million euro. Among other measures, an amount of 10 mil-
lion euro was earmarked to boost the rural economy. Agriculture
is the most important sector in the Kosovo economy, represent-
ing about 50 % of GDP in 1999/2000. Yields fell, together with
GDP, throughout the 1990s mainly because of reduced access to
fertilisers and a decline in agricultural services.

46. The Agency drew the lessons from past experience in Bosnia
and Herzegovina (see the Court’s Special Report No 5/98 on
reconstruction in former Yugoslavia (period 1996 to 1997) (1). It
gave priority to the most disadvantaged people, exercised stronger
control over the NGOs appointed and ceased to entrust the pur-
chase of building materials to the NGOs, using instead private
sector suppliers managed by a procurement specialist appointed
by the Agency.

50. The main task for the Agency in this sector was to ensure the
availability of 37 500 tonnes of fertiliser, or 40 % of overall require-
ments, for the winter wheat and spring cropping season, benefit-
ing at least 30 000 farmers, or 40 % of all farm households. The
objectives were to ensure increases in the production and yields
of major crops for the domestic market by restoring soil fertility.
To strengthen the involvement of private sector wholesalers, dis-
tributors and retailers in the distribution and sale of farm inputs,
in particular fertiliser, it was proposed to provide dealer credit.

Transport

Objectives

Results at the end of 2000

47. An effective transport infrastructure is essential for Kosovo’s
reconstruction. The road network is overloaded and in a poor

(1) OJ C 241, 31.7.1998.

51. As at 31 December 2000, 97 % of the funds committed to
this programme in 2000 were contracted, of which 53 % was
paid. The planting fertilisers (NPK) were delivered in September
2000 in time for winter planting. Part of them (2 000 tonnes) was
delivered free of charge to vulnerable farmers, including minori-
ties, under the supervision of the FAO. The rest was auctioned
and contracts were signed with more than 100 dealers.

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52. The Agency managed to offer farmers planting fertiliser at
an affordable price. The planting fertiliser delivered was widely
used and an improved winter crop was expected. According to
research carried out at farm level by the University of Pristina,
farmers all over Kosovo had access to the product at an average
price that was 30 % lower than the market price in 1999, and
86,6 % of them purchased planting fertiliser imported by the
Agency. The provision of fertiliser was crucial for the resumption
of commercial agricultural production and for reversing the
decline in overall agricultural output.

57. On the other hand, by adapting the standard tendering pro-
cedures to allow local suppliers to tender, the Agency managed to
keep prices low (see second box, paragraph 34). The average cost
of reconstruction per house was estimated at 6 167 euro for the
1999 and 2000 programmes and 7 143 euro for the 2000 pro-
gramme which focused on the most heavily damaged houses.
This compares favourably with the average cost of about 10 000
euro in Bosnia and Herzegovina (1).

53. The auctioning of the fertilisers also contributed to the
development of market economic practices. It initiated competi-
tion, while at the same time contributing to sustained growth by
enabling the private sector to resume the primary role in the sup-
ply of fertilisers as well as other agri-inputs. The credit facility
allowed suppliers to restore and refurbish warehouses, to replen-
ish stocks and to increase warehouse capacity.

54. At the end of 2000, 83 out of 103 dealers had paid the first
instalment into the revolving fund and others who had partially
paid the instalment had to pay the remaining amount plus a pen-
alty before mid-April 2001. Six dealers who did not pay used false
documents and gave false information about their business in
order to gain access to the credit. They resold the fertilisers imme-
diately at a lower price than cost. Investigation was still going on
in September 2001.

55. As for the selling of urea fertiliser, the Agency had to cancel
the auction because the prices were so high that the fertiliser
would have been unaffordable for the beneficiary farmers. The
Agency subsequently fixed a lower sales price and distributed it
on a pro-rata basis to those dealers selected for the earlier plant-
ing fertiliser distribution who had performed satisfactorily. Accord-
ing to the Agency the farmers received most of the fertilisers in
time for the spring planting. However, part of the delivery was
delayed until April 2001 because transport had to be re-routed
through Serbia after the closure of the FYROM/Kosovo border.

Economy of the Agency’s operations

56.
In general, the Agency followed the principles of competi-
tive tendering aimed at securing the economically most favour-
able terms and conditions in its procurement. For reasons of
urgency, the Agency sometimes preferred to launch a restricted
tender instead of an open international tender. It was often com-
pelled by the special circumstances to reduce the standard period
between the date of publication of the tender notice and the dead-
line for the receipt of bids. This may have reduced competition,
but it contributed to the Agency’s achieving most of its objectives.

58.
In Bosnia and Herzegovina, however, the reconstruction of
houses was intended to encourage the return of refugees or dis-
placed persons. In Kosovo the refugees had already returned and,
therefore, the Agency could more often ask the beneficiaries to
contribute to the reconstruction. Moreover, in Bosnia and Herze-
govina about 80 % of the 450 000 houses to be repaired ranged
from badly damaged to totally destroyed compared to 70 % of the
120 000 houses to be repaired in Kosovo. Furthermore, in Kosovo,
the traditional housing construction standards are lower than in
Bosnia and Herzegovina, even if the houses rebuilt by the Agency
are often of better standard than the original ones, and labour
costs are 30 % lower than in Bosnia and Herzegovina.

59. According to data collected by the Court the average house
reconstruction costs of the Agency appear to be lower than those
of other donors in Kosovo. The cost per house of another major
international organisation is reported to be 40 % to 45 % higher
than Agency unit costs.

Effectiveness of the Agency

Short-term impact of the investments

60. According to the Commission (2), the reconstruction pro-
grammes had a positive impact on the economy of neighbouring
countries that suffered from the embargo imposed on the Federal
Republic of Yugoslavia during the previous years.

Sustainability of investments

61. Although the ambitious objectives had largely been achieved
at the end of 2000, there are some major risks as regards the
sustainability of the investments made in the various sectors,
mainly because of a lack of medium and long-term strategy for
the province. UNMIK still had a crisis management approach until
mid-2000 and it took nearly a year to develop a medium-term
policy.

(1) See Annual Report concerning the financial year 1999, para-

graph 5.76 (OJ C 342, 1.12.2000).

(2) See Report from the Commission to the European Parliament and the
Council on the implementation of macrofinancial assistance to third
countries in 1999, COM(2000) 682 final, 27 October 2000.

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62. The main question in the energy sector is whether the
Kosovo power station will one day be able to work without the
help of external donors. The power stations have to become eco-
nomically viable enterprises. No real strategy was developed for
the Kosovo Electricity Company. The majority of consumers do
not pay for electricity. A valid revenue structure with a sound
electricity tariff system and a proper management accounting sys-
tem are needed. In the medium term the Agency intends to reori-
ent its efforts from emergency aid towards normal development
aid but, in the meantime, a stronger commitment by UNMIK to
restructuring the energy sector is required.

63. The sustainability of investments in the transport sector
raises some concern. Roads were overloaded, mainly because of
the heavy military traffic. The maintenance of the roads is not
assured. There is no funding mechanism and there are no plans
for the establishment of a road maintenance system. At the end
of 2000 UNMIK had not yet defined a transport policy. For the
railway sector a master plan was also still missing.

64.
In October 1999, UNMIK imposed a set of customs duties
and sales taxes collected at the border at a combined rate of
26,5 %. The application of these high rates to agricultural inputs
tends to discourage agricultural output, development of food pro-
cessing, technological change in agriculture and the development
of an articulated network of agricultural input suppliers. How-
ever, as of the end of 2000, UNMIK had not modified those taxes.

Coordination

65. The Council insisted on coordination with UNMIK, and the
international financial institutions, the EIB, the UNHCR and the
NGOs. The Agency organises meetings with UNMIK, the Member
States represented in Pristina and other main donors on a weekly
basis and more often if necessary. At the end of 2000 the EIB,
which is also represented on the Governing Board, and the EBRD
had not yet started to implement projects in Kosovo, mainly
because of the lack of a legal framework.

31 December 2000 are reliable and that the underlying transac-
tions are, taken as a whole, legal and regular.

68. However, without wishing to weaken its audit opinion, the
Court must draw attention to the risks that derive from the points
made in paragraphs 15 and 18. Given the inherent risks of keep-
ing the accounts by spreadsheet and with a view to strengthening
its internal control, the Agency should be sure to introduce a reli-
able computerised budgetary accounts system as soon as possible
(see paragraph 15).

Part II — Efficiency of the Agency

69. The efficiency of the Agency’s administration is high (see
paragraph 27), although the low ratio of the number of employ-
ees to the total value of aid managed (see paragraph 28) could
also be considered to be a risk factor affecting sustainability (see
paragraph 30). In both contracting and payments for operational
activities the Agency has been very fast (see paragraphs 33 to 35).
Moreover, as regards programme implementation the Agency
managed to achieve most of its ambitious objectives set for the
year 2000 in the fields of energy (see paragraph 39), housing (see
paragraphs 43 to 45), transport (see paragraph 48) and agricul-
ture (see paragraphs 51 and 52). The Agency’s efficiency was
largely due to the high level of commitment of its staff (see para-
graph 29).

70. Although the usual period for tendering was often reduced
and might have affected competition (see paragraph 56), the Court
did not find any evidence that a longer period would have allowed
lower prices to be obtained without jeopardising the implementa-
tion deadlines. The favourable average cost of reconstruction of
houses funded through the Agency compared with other donors
is a good indicator that not only efficiency considerations but also
those of economy were taken into account (see paragraph 59).

66. When contracting with NGOs in the framework of the hous-
ing programme the Agency applied the same fee rates as ECHO
in order to avoid competition between the two sources of EU
funding. The phasing out of ECHO activities in Kosovo in the
fields of housing/shelter, health, agriculture, water and sanitation
was well coordinated with the activities carried out by the Agency
in those sectors.

71. The very flexible application of the rules in force, which
involved the Agency taking risks, also allowed many local and
regional companies to take part in the reconstruction process.
This contributed to reducing the reconstruction costs (see para-
graph 57) and to stimulating the recovery of the economy in the
Balkan countries which have been severely affected by the con-
flicts in the region during the last decade (see paragraph 60).

CONCLUSIONS AND RECOMMENDATIONS

The Court’s opinion

Part I — Financial audit for the year 2000

72. The outstanding performance of the Agency is also due to
the fact that in 2000 it focused its human and financial resources
on a limited number of priority areas.

Recommendation 1

67. The Court’s examination has enabled it to obtain reasonable
assurance that the annual accounts for the financial year ended

73. The Agency should make sure that it does not disperse its
efforts but develops a practical sectoral programme in accordance
with the latest priorities.

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74. The monthly meetings of the Governing Board represented
an extra workload for the Agency. The idea of having the Govern-
ing Board chaired by a Member of the Commission proved to be
unrealistic (see paragraphs 21 to 24).

76. The sustainability of the investments financed in the energy
and transport sectors was not assured because, instead of devel-
oping long-term perspectives, UNMIK still had a crisis manage-
ment approach, which was no longer appropriate in 2000 (see
paragraphs 61 to 64).

Recommendation 2

75. A meeting of the Governing Board every three months
should be more than sufficient. The new Council Regulations (EC)
No 2666/2000 (1) and (EC) No 2667/2000 (2) help to clarify the
respective roles of the Management Committee and the Govern-
ing Board. The Commission should, however, specify the respons-
ibilities of both bodies more clearly, in order to allow the Agency
to address rapidly the new reconstruction priorities in the region.

Recommendation 3

77. To ensure the sustainability of the investments financed, a
policy framework and a mid- and long-term strategy are required.
This is outside the Agency’s competence, but the Commission
bears a large responsibility for this unsatisfactory situation, as the
EU heads the UNMIK pillar in charge of reconstruction in Kosovo.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 10 October 2001.

For the Court of Auditors

Jan O. KARLSSON

President

(1) Council Regulation (EC) No 1628/96 related to aid for Bosnia and
Herzegovina, Croatia, the Federal Republic of Yugoslavia and the
former Yugoslav Republic of Macedonia (OJ L 204, 14.8.1996, p. 1),
last amended by Regulation (EC) No 2454/1999 of 15 November 1999
(OJ L 299, 20.11.1999, p. 1) and repealed by Regulation (EC) No 2666/
2000 (see footnote 6).

(2) Council Regulation (EC) No 2454/1999 of 15 November 1999
(OJ L 299, 20.11.1999, p. 1) amended by Regulation (EC) No 2667/
2000 of 5 December 2000 on the European Agency for Reconstruc-
tion (OJ L 306, 7.12.2000, p. 7).

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UNITED NATIONS INTERIM ADMINISTRATION MISSION IN KOSOVO (UNMIK)

ANNEX 1

On 10 June 1999 the United Nations Interim Administration in Kosovo, known as UNMIK, was set up under UN Security
Council Resolution 1244. All legislative and executive authority with respect to Kosovo, including the administration of the
judiciary, is vested in UNMIK and is exercised by the Special Representative of the Secretary-General. The Special Representat-
ive is assisted in his tasks by four deputy special representatives. Each is responsible for one major component of the
Mission and each component is assigned to an organisation which takes the lead role in a particular area, as follows:

(a)

interim civil administration: the United Nations;

(b) humanitarian affairs: the Office of the United Nations High Commissioner for Refugees (UNHCR);

(c)

institution-building: the Organisation for Security and Cooperation in Europe (OSCE);

(d) reconstruction: the European Union.

After restructuring in 2000 the new structure is the following:

Hans Haekkerup
(Denmark)
Special Representative
of the UN Secretary-General

Gary L. Matthews
(United States)
Principal Deputy
Special Representative
of the Secretary-General

UN

OSCE

EU

Tom Koenigs
(Germany)
Deputy Special
Representative
Interim civil administration

Daan Everts
(The Netherlands)
Deputy Special
Representative
Institution-building

Andy Bearpark
(United Kingdom)
Deputy Special
Representative
Reconstruction

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ANNEX 2

MANDATE OF THE EUROPEAN AGENCY FOR RECONSTRUCTION

Council Regulation (EC) No 2454/1999 emphasises that:

(a)

(b)

(c)

(d)

the reconstruction programmes should be managed in accordance with effective and flexible rules and procedures ensur-
ing rapid implementation;

the operational centre of the Agency with a considerable degree of management autonomy shall be established initially
in Pristina in order to embark upon the reconstruction work in Kosovo using the Agency’s general services located at its
seat in Thessaloniki;

the Agency will pursue its activities initially in Kosovo; it is for the Council, acting on a proposal from the Commission,
to take any decision on extending the Agency’s activities to other regions of the Federal Republic of Yugoslavia;

the Agency’s mandate should allow it to manage the programmes of other donors contributing to the reconstruction of
the region, in particular in the context of the cooperation established with the appropriate financial institutions.

The Agency’s duties include:

(a)

identification and analysis of requirements;

(b) preparing the reconstruction programmes for Kosovo;

(c) all aspects of the project implementation cycle;

(d) conclusion of financing agreements, signature of contracts and coordination with other donors and international finan-

cial institutions.

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STAGES IN THE PROGRAMMING OF THE RECONSTRUCTION PROGRAMMES

ANNEX 3

Strategic framework and multiannual programme

Agency

Useful
information

Commission

Draft

If negative

CARDS (1)
Management
Committee gives
an opinion

If positive

Multiannual programme
adopted by the
Commission

Annual programme

Agency

Draft programme

Governing Board

Commission

If negative

Recommendations
on the draft
programme

CARDS Management
Committee gives an
opinion

If positive

Financing decision made
by the Commission

(1) CARDS: Community Assistance for Reconstruction, Development and Stabilisation.

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THE COMMISSION’S REPLIES

SUMMARY

V. Measures to improve the functioning of the Governing Board
have been incorporated in the new Council Regulation No 2667/
2000 on the European Agency for Reconstruction.

In terms of establishing policy frameworks and sustainable invest-
ment strategies, UNMIK has improved its capacity for doing both,
mainly through its public reconstruction and investment pro-
gramme, which provides clear budgetary and investment guid-
ance for its own central budget and for the donor community.

Sector-specific policy discussions have now started between the
Commission and UNMIK, focusing in particular on private sector
development, energy, taxation and trade policy. Macroeconomic
policy is regularly discussed in the framework of the working
level steering group for south-east Europe. The Commission is
also monitoring closely the work of the EU-led pillar of UNMIK,
notably through the mechanism established under the exceptional
financial assistance instrument whose disbursement depends on
satisfactory compliance with economic policy conditions.

In order to protect the significant EC investments to date in
Kosovo, the Commission is working closely with UNMIK, the
European Agency for Reconstruction and EU Member States on a
benchmarking exercise to ensure that appropriate institutional
actions are being undertaken by UNMIK.

PART I — FINANCIAL AUDIT FOR THE YEAR 2000

17.
In order to comply fully with obligations in regard to control
under various financial regulations, the Commission, in a com-
munication adopted by the College on 25 April 2001, defined the
role of financial control during the transitional period of the
reform in the context of devolution of the management of exter-
nal aid to delegations and agencies.

18 and 19.
In the second quarter of 2001, a DG Financial Con-
trol official was exclusively dedicated to the Agency, is regularly
on-site and will, inter alia, perform regular transaction controls
including those which are ex ante.

This new approach aims at combining the advantages of ensur-
ing operational efficiency and regulatory compliance. The ensu-
ing amendment to the Financial Regulation as well as several key
issues concerning the implementing provisions have been the
subject of discussions between the Commission and the Agency
over the past months. The final draft is about to be submitted to
the Court of Auditors. The draft amendment to the Financial
Regulation also provides for the appointment of an internal audi-
tor.

PART II — EFFICIENCY OF THE AGENCY: SOUND FINANCIAL

MANAGEMENT AUDIT

22.

(a) The Commission, as chair of the Governing Board, has advo-
cated a pragmatic linguistic arrangement which is based on the
constructive cooperation of the members of the Governing Board.

(b) and (c) The requirement for a Commissioner to be chairman
of the Governing Board, and for the Agency to organise the
Board’s monthly meetings has already been lifted in the new
Agency regulation (Council Regulation No 2667/2000) which
provides for a more flexible arrangement whereby the Board
meets as and when necessary, but at least once every three months.

24. The incidents cited by the Court did occur during the early
days but were very much exceptional and never presented a seri-
ous hindrance or delay to the commitment of funds. The new
CARDS Regulation adopted in December 2000 clarifies the role
of the Board and the role of the Management Committee and no
such problems have recurred.

26. Annex X to the Staff Regulations, laying down special and
exceptional provisions applicable to officials serving in a third
country, applies here. Kosovo specifically is a hardship posting
and potentially dangerous.

33 and 34.
In addition to the particular constraints experienced
in Bosnia and Herzegovina as mentioned by the Court, it should
be noted that the Commission Delegation in Sarajevo has made
only limited use of the suspensive clause due to the fact that the
assistance to Bosnia and Herzegovina is no longer immediate
post-war emergency support and anticipatory tendering was only
exceptionally justified.

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35. The average period for payments applied by the Delegation
in Sarajevo (43 days), is well within the contractually prescribed
payment period of 60 days.

financial institutions. UNMIK’s public reconstruction and invest-
ment programmes for 2000 and 2001 to 2003 have served as a
basis for a policy framework.

45. The comparison relates to the period before devolution of
the management of this project to the Delegation in Sarajevo.
Direct comparisons between Kosovo and Bosnia and Herzegovina
in relation to return programmes are difficult to make. In the lat-
ter, the implementation of return programmes frequently takes
place in a hostile environment. Return programmes in Bosnia and
Herzegovina are broader than in Kosovo and cover, in addition to
infra-
housing, utilities,
structures.

job creation components and social

62.
In 1999 and 2000 by far the greatest share of UNMIK’s work
in the power sector consisted of day-to-day management, for
which the staff of the Kosovo Electricity Company were poorly
prepared. In the second half of 2000, and with considerable assis-
tance from the donor community (and notably from the Euro-
pean Agency for Reconstruction) progress began to be made on
management and structural issues. The Company is now taking
over greater responsibility for operations, leaving an increasingly
supervisory and regulatory rule for UNMIK which is addressing
the long-term strategic policy for the sector.

48. Delays over the Blace border crossing were mainly due to the
negotiations with the authorities of the Former Yugoslav Republic
of Macedonia on the scope of the project and UNMIK’s provision
of the expropriation permits.

56. The Commission considers the Agency’s flexible application
of the tendering rules to be justified in the light of the special cir-
cumstances.

57. EUR 10 000 was the average cost of reconstruction per house
in Bosnia and Herzegovina in the call for proposals launched by
the EC delegation in 2000. However, a September 2001 study car-
ried out by the EC return monitoring and evaluation facility shows
that over a sample of 9 951 housing units rehabilitated since 1996
the average cost has been EUR 7 430.

61. The Commission shares the Court’s view on the need for a
policy framework and long term strategy. UNMIK has improved
its capacity for establishing policy frameworks and sustainable
investment strategies, and in those sectors where the EC is the
leading donor the Commission is providing direct support in
defining key policy frameworks and their compliance with EU
policy, and is reviewing, with UNMIK, the Agency and with EU
Member States, the measures and institutional actions which still
need to be adopted by UNMIK to ensure sustainability.

63. At the end of 2000 there was no comprehensive and medium-
term transport strategy, but separate sector strategies have been
produced, including a business plan for the railways, and these are
providing the building blocks for a properly integrated strategy.
UNMIK is now considering plans to put road maintenance on a
sustainable basis, by funding it from a special levy on fuel prod-
ucts.

64. Kosovo’s revenue base had to be created virtually from
scratch, which explains why the fiscal regime put in place by
UNMIK at the beginning of its mandate, with the primary objec-
tive of securing sustainable revenues for the Kosovo budget, may
have had some undesirable effects on local production. The Com-
mission has recommended that UNMIK review this policy as soon
as the conditions permit a widening of the taxation base. To that
effect, sales tax was replaced with VAT on 1 July 2001. Its opera-
tion over the 12 months to July 2002 is being carefully mon-
itored, and UNMIK is considering further modifications to its fis-
cal policy.

65. The international financing institutions, including the EIB
and EBRD, have difficulty in operating in Kosovo because their
statutes confine their operations to partnership with sovereign
States, and so they have no legal basis for operating in Kosovo.
Although the EIB and the EBRD are not yet able to play a role as
donors, they have provided valuable advice to UNMIK.

CONCLUSIONS AND RECOMMENDATIONS

The Court’s criticism of UNMIK’s crisis management approach
should take into account the fact that UNMIK operations began
only in June 1999, following 78 days of armed conflict between
NATO and Yugoslav forces. UNMIK inherited a province ravaged
by war as well as a host of economic and social difficulties arising
from 40 years of chronic underinvestment. Despite the emer-
gency, UNMIK managed to formulate a coherent budget strategy
and to procure funding from international donors when Kosovo
had no legal status to be eligible for loans from the international

73. The Commission shares the Court’s opinion that the Agency
should continue to focus its efforts on key sectors according to
the needs on the ground and the CARDS Regulation. The Com-
mission is currently drafting the Federal Republic of Yugoslavia
(FRY) 2002 to 2006 country strategy paper, as well as the three-
year multiannual indicative programme, which will be the basis
for the Agency’s annual programmes in the future.

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74 and 75. The requirement for the Governing Board to have
monthly meetings and to be chaired by a Commissioner has been
lifted. In the course of 2001 the Governing Board will meet five
times which, considering the extension of the operations of the
Agency to the whole territory of the FRY, is deemed very efficient.
The Commission considers that the new Council Regulations pro-
vide sufficient clarity in respect of the roles of the Governing
Board of the Agency and of the CARDS Management Commit-
tee.

76. The Commission considers that there was still a need for
crisis management in 2000 given the scale of the problems at

stake. However, the Commission agrees that UNMIK should have
devoted more effort to shifting more quickly from an emergency
to a long-term developmental policy-making approach.

77. The Commission shares the Court’s view on the need for a
policy framework and long-term strategy. The Commission will
pursue the issue of the development of a sustainable policy and
regulatory framework with UNMIK and also with the provisional
institutions for self-government which are to be elected in Kosovo.

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THE AGENCY’S REPLIES

SUMMARY

TAFKO contract management

III. A more reliable system (SI2) will be fully operational by the
end of 2001.

PART I — FINANCIAL AUDIT FOR THE YEAR 2000

15. The Agency recognises that the financial accounting system
used before the introduction of Sincom2 was inadequate, although
this was the only feasible solution to becoming operational at the
start-up of the Agency. The intention is that Sincom2 will be fully
operational by the end of 2001.

20. The contracts worth 60,9 million euro were already signed
by the Commission at the date of the handover. The budget of the
Agency is the mechanism through which the Governing Board
authorises the director to sign commitments (contracts) with third
parties. Therefore, the amounts already contracted at the moment
of the handover should not be included in the budget.

The 31 million euro left to be paid by the Agency were not integ-
rated in the budget of the Agency since for 2000 the budget of
the Agency did not mention any payment appropriations.

Financial provisions

PART II — EFFICIENCY OF THE AGENCY: SOUND FINANCIAL

MANAGEMENT AUDIT

17. The agreement of 22 February 2000 reflects the principles
of the Commission’s reform of financial management and control
in April 2000.

Programme implementation

Transport

18. The absence of an internal auditor does not mean that the
Agency’s authorising officer(s) and accountant exercised no ex
ante controls at all. This is supported by the fact that the Court
identified no material errors.

48. The reason for the delays over the Blace border crossing
were mainly caused by the need to reach an agreement with the
FYROM authorities on the scope of the project and by delays by
UNMIK in providing the necessary expropriation permits.