Special report No 5/2004 concerning Phare support to prepare Candidate Countries for managing the Structural Funds, together with the Commission’s replies
Date: 2005-01-20
Institutions: European Court of Auditors
Subjects: Cohesion Fund, European Court of Auditors, accession to the European Union, audit, interinstitutional relations (EU), management

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 5/2004

concerning Phare support to prepare Candidate Countries for managing
the Structural Funds, together with the Commission’s replies

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

(2005/C 15/01)

CONTENTS

Paragraph

Page

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

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

Phare assistance to prepare Candidate Countries for managing the Structural Funds

I-VII

1-14

1-10

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

11-14

THE OVERALL APPROACH OF USING THE PHARE PROGRAMME TO PREPARE CANDI-
DATE COUNTRIES FOR MANAGING THE STRUCTURAL FUNDS . . . . . . . . . . . . . . . . . . . . .

The choice of Phare made preparation of Candidate Countries for the ERDF and ESF more
difficult . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The design of Phare ESC programmes differed from Structural Fund Objective 1
approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Constraints affecting strategy of using Phare to prepare for the ERDF and ESF . . . . . . . .

PHARE PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Delays in establishing Extended Decentralised Implementation System . . . . . . . . . . . . . .

Multiannual programming not introduced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FUNDING AND IMPLEMENTATION OF PHARE PROGRAMMES TO PREPARE CANDIDATE
COUNTRIES FOR MANAGING THE STRUCTURAL FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . .

Allocation of funding to most countries was less than foreseen . . . . . . . . . . . . . . . . . . . .

Difficulties experienced in preparing programmes similar to Structural Fund Objective 1
programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Delays in programme implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RESULTS OF INSTITUTION-BUILDING PROJECTS TO PREPARE CANDIDATE COUNTRIES
FOR MANAGING THE STRUCTURAL FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Difficulties in the overall approach of using the Phare programme to prepare Candidate
Countries for managing the Structural Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15-28

15-17

18-26

27-28

29-36

30-33

34-36

37-55

37-41

42-45

46-55

56-62

63-67

63

4

5

5

7

8

8

9

11

11

11

12

12

12

13

14

17

18

18

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Paragraph

Page

Limited progress in moving Phare closer to Structural Funds . . . . . . . . . . . . . . . . . . . . . .

Variable allocations for and delayed implementation of ESC programmes . . . . . . . . . . . .

Only partial achievement of results of institution-building projects to prepare Candidate
Countries for managing the Structural Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Overall conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64

65

66

67

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

68-71

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

18

18

18

18

18

20

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CBC

CSF

EAGGF

EDIS

ERDF

ESC

ESF

ISPA

NDP

Phare

PNDP

PPF

Sapard

SPD

SPP

LIST OF ABBREVIATIONS

Cross Border Cooperation

Community Support Framework

European Agricultural Guidance and Guarantee Fund

Extended Decentralised Implementation System

European Regional Development Fund

Economic and Social Cohesion

European Social Fund

Instrument for Structural Policies for Pre-Accession

National Development Plan

The main pre-accession instrument

Preliminary National Development Plan

Project Preparation Facility

The pre-accession instrument for measures for agriculture and rural development

Single Programming Document

Special Preparatory Programme

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SUMMARY

The audit examined the effectiveness of the Phare programme, the first of the three pre-accession instru-
I.
ments to be established by the Commission, in helping to prepare Candidate Countries for managing the two
main Structural Funds, the European Regional Development Fund (ERDF) and the European Social Fund (ESF).
The audit covered the period from 1998, the year from which Phare was reoriented to focus on accession, to
2002 and focused on the 1998 Special Preparatory Programme (SPP) and the Economic and Social Cohesion
(ESC) programmes, which were first launched in 2000. The objective of helping to prepare Candidate Coun-
tries for the Structural Funds was given an increasingly high priority by the Commission because it wished to
ensure that the countries concerned would be able to benefit fully from the very large allocations available to
them following accession.

The overall approach of using the Phare programme to prepare Candidate Countries for managing the
Structural Funds

The fact that a new instrument was not established to help prepare Candidate Countries for the ERDF
II.
and ESF made it more difficult to familiarise the Candidate Countries with Structural Funds procedures (see
paragraphs 16 and 17). Moreover, the initial approach which the Commission required Candidate Countries
to follow in setting up ESC programmes differed from the approach of the Structural Funds (see paragraphs 18
to 24). Not all of the regions eligible for the Structural Funds gained experience in managing ESC programmes
prior to accession while the Phare implementation structures did not reflect those of the Structural Funds. The
effectiveness of the ESC programmes further suffered from the fact that they also aimed to achieve a cohesion
impact and this was not always compatible with the objective of preparing for the Structural Funds (see
paragraph 27).

Phare procedures

While the Commission had intended that Candidate Countries should learn to manage these pro-
III.
grammes on the basis of the Commission only exercising ex-post controls, as would be the case for the man-
agement of the Structural Funds, in the end the Extended Decentralised Implementation System (EDIS), which
was to make this possible, was not introduced before the accession (see paragraphs 30 to 32). The delays
encountered in introducing a system of ex post control also made it more difficult to use grant schemes, the
main mechanism for implementing the Structural Funds (see paragraph 33). Very little progress was made in
introducing a further procedure employed under the Structural Funds, multiannual programming (see para-
graphs 34 and 35).

Allocations for and implementation of programmes to prepare for the Structural Funds

IV.
Although overall approximately 35 % of the Phare programme was allocated to ESC programmes,
most countries allocated somewhat less than this target figure, mainly due to insufficient absorption capacity
and competing priorities (see paragraphs 39 to 41). Thus countries struggled to design programmes and did
not devote sufficient funding to preparing future ESC and Structural Fund projects (see paragraphs 43 to 45).
They also experienced considerable difficulties in contracting funds before the deadlines (see paragraphs 46
to 52). These problems in absorption capacity largely reflected the inexperience and insufficient institutional
development of the ministries responsible for managing the ESC programmes (see paragraphs 54 and 55).

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Results of institution-building projects to prepare Candidate Countries for managing the Structural Funds

V.
This insufficient institutional development, as well as uncertainty over which bodies would be desig-
nated to be future managing and paying authorities, reduced the impact of institution-building projects (see
paragraphs 58 and 59). Institution-building at regional level was hindered by the delays in some countries in
setting up the regional bodies concerned and changes in the role foreseen for regional bodies in managing the
Structural Funds (see paragraphs 60 to 62).

Overall conclusion

VI.
While the Commission should be commended for starting as early as 1998 to use the Phare pro-
gramme to help prepare Candidate Countries for managing the Structural Funds, at the time of the accession
the Phare programme had had a more limited impact on preparing the Candidate Countries for the ERDF and
ESF than planned in the Commission’s policy documents, notably its Phare Review 2000 (see paragraph 67).
This was in part due to the inexperience and the insufficient institutional development of the relevant authori-
ties in the Candidate Countries. It was not possible to remedy these shortcomings in the time available.

Recommendations

VII.
There is a significant need for more institution-building support in the areas of managing the Struc-
tural Funds after the accession (see paragraph 68). Considerable resources should be devoted to the ex-post
control of Structural Fund operations in the new Member States (see paragraph 69). A clear strategy should be
put in place identifying the different steps that still need to be taken for preparing the current and future Can-
didate Countries for managing the Structural Funds (see paragraph 70). The Commission should increase its
efforts to bring Phare closer to the Structural Funds by giving future managing authorities the status of Phare
implementing agencies, providing the assistance necessary to implementing agencies to enable them to imple-
ment Phare in the framework of an ex-post control system and introducing multiannual planning based on
National Development Plans (see paragraph 71).

INTRODUCTION

Regional Development Fund (ERDF), the European Social Fund
(ESF) and the European Agricultural Guidance and Guarantee
Fund (EAGGF — Guidance Section) (3). In addition, all the coun-
tries concerned will be eligible for the Cohesion Fund (4).

Phare assistance to prepare Candidate Countries for managing
the Structural Funds

A key issue facing the European Union in the context of
1.
the 2004 enlargement is the great disparity in average income
between the current Member States and the new Member States
from central and eastern Europe (1). Whereas 22 % of the popu-
lation of the present Union live in regions with less than 75 % of
the current average gross domestic product per capita, following
the enlargement 93 % of the population of these new Member
States will be living in regions where the gross domestic product
per capita is less than 75 % of the enlarged EU average. In order
to help overcome these disparities nearly all the regions of these
new Member States will be eligible for support as ‘Objective 1’ (2)
regions from the three main Structural Funds: the European

(1) The Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slo-

venia and Slovakia.

(2) Objective 1 funding is allocated to EU regions defined as lagging
behind in their development by the fact that their gross domestic
product per capita is below 75 % of the EU average. Approximately
two thirds of Structural Funds are allocated to this objective.

2.
For the period 2004 to 2006 approximately 13 178 mil-
lion euro has been allocated to Objective 1 support under the
Structural Funds to these countries as well as a further 7 523 mil-
lion euro for the Cohesion Fund. However, in order to properly

(3) The principal objective of the ERDF is to promote economic and
social cohesion within the European Union through the reduction of
imbalances between regions or social groups. The ESF is the main
financial instrument allowing the Union to realise the strategic objec-
tives of its employment policy. The EAGGF is designed to contribute
to the structural reform of the agriculture sector and to the develop-
ment of rural areas. For the Structural Fund programming period
1994 to 1999, 52 % of funds were implemented through the ERDF,
30 % through the ESF and 16 % through the EAGGF. The remaining
2 % were implemented through the fourth Structural Fund, the Finan-
cial Instrument for Fisheries Guidance (FIFG).

(4) The Cohesion Fund finances environment and transport infrastruc-
ture projects in countries whose GNP per capita is below 90 % of the
EU average (current recipients are Greece, Spain, Ireland and Portu-
gal).

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benefit from this funding, new Member States must be able to
identify, prepare and implement priority programmes and
projects within the timeframes laid down.

In March 1997 the Commission proposed a reorientation
3.
of the Phare programme in order to fully focus it on preparing
Candidate Countries for joining the European Union (5) (6).
Henceforth the Phare budget (approximately 1 500 million per
annum) was to be allocated in principle to institution-building
(30 %) and investment support (70 %). As far as institution-
building was concerned, among the specific areas which the
Commission called for funding to be focused on was regional
development. Thus it stated that ‘there is a need for the introduc-
tion, as soon as possible, to the objectives and procedures of the
Structural Funds. This is the best way to ensure these countries
will be capable, in due course, of applying the rules of the Struc-
tural Funds and handling the first payments from them’ (7).

4.
Accordingly a ‘Special Preparatory Programme for the
preparation of the Candidate Countries for EU Structural Policy’
(SPP) covering each Candidate Country was financed from the
1998 Phare programme for a total of 60 million. The programme
funded institution-building and small pilot investment projects of
the type financed from the Structural Funds to begin to give Can-
didate Countries operational
in Objective 1
procedures.

experience

In 2000 two new pre-accession instruments were created.
6.
ISPA (9) (annual budget: 1 000 million) had similar objectives and
procedures to the Cohesion Fund’. Sapard (10) (annual budget:
500 million) aimed at contributing to the implementation of the
acquis communautaire in the common agricultural policy and at
solving priority and specific problems for the sustainable adapta-
tion of the agricultural sector and rural areas, and, in line with the
Sapard Regulation, was implemented with some similarities to
the Structural Funds and the EAGGF (see paragraph 17). Although
the ERDF and ESF were respectively around three times and two
times bigger than the EAGGF Structural Fund (11), no new instru-
ments were established in relation to these two Structural Funds.

7.
Instead, the new Phare Guidelines for 2000 to 2006 pro-
vided for the setting up in each country of Economic and Social
Cohesion (ESC)
investment programmes to be funded from
Phare (12). The ESC programmes would be implemented through
measures similar to those financed by these two Structural Funds,
in the areas of productive sector investment, human resource
development and business related infrastructure. These pro-
grammes would be one of the two areas to be funded from the
70 % of Phare funds allocated to investment (13). The guidelines
also stated that Phare institution-building activities (the remain-
ing 30 % of Phare funds) would particularly reflect the impor-
tance of these ESC programmes by addressing weaknesses of the
administrations at central, regional and local level which had
responsibilities in this area (14).

5.
The urgency of preparing Candidate Countries for manag-
ing the Structural Funds was highlighted by the Berlin Financial
Framework of March 1999 which provided for the possibility of
six new countries (Czech Republic, Estonia, Hungary, Poland, Slo-
venia together with Cyprus) joining the European Union as early
as 2002 (8).

(5) The new orientation agreed was set out in a Communication to the
Commission from Commissioner van den Broek: New Orientations
for the Phare Programme in the Context of Pre-Accession Assistance
(COM(97) 112/8, Brussels, 18 March 1997).

(6) As well as the countries referred to in footnote 1, which will join the
European Union in May 2004, the Phare programme also provides
assistance to Bulgaria and Romania which are foreseen to join the
European Union at a later date.

(7) COM(97) 112/8, Brussels, 18 March 1997.
(8) The Helsinki Summit of the European Council in December 1999
opened the possibility of accession to a further six countries (Bul-
garia, Latvia, Lithuania, Malta, Romania and Slovakia). Subsequently
the Nice European Council in December 2000 established 2004 as
the target date for accession. The Laeken European Council of Decem-
ber 2001 declared that accession was irreversible and that these
10 countries should be ready in 2004.

8.
Further to these guidelines, a Commission review of the
Phare programme was issued in October 2000 entitled ‘Phare
2000 Review: Strengthening preparations for membership’ (15).
The Review concluded that what it termed ‘Moving to Structural

(9) Council Regulation (EC) No 1267/1999 of 21 June 1999 establish-
ing an Instrument for Structural Policies for Pre-Accession (OJ L 161,
26.6.1999, p. 73).

(10) Council Regulation (EC) No 1268/1999 of 21 June 1999 on Com-
munity support for pre-accession measures for agriculture and rural
development in the applicant countries of central and eastern Europe
in the pre-accession period (OJ L 161, 26.6.1999, p. 87).

(11) Based on Structural Fund assistance 1994 to 1999: ERDF 75,0 bil-

lion; ESF 43,4 billion; EAGGF 23,5 billion.

(12) ‘Guidelines for Phare Programme Implementation in Candidate
Countries for the Period 2000 to 2006 in Application of Article 8 of
Regulation
Commission Decision:
3906/89’.
SEC(1999) 1596 final, Brussels, 13 October 1999.

(EEC) No

(13) The second area to be funded under investment was ‘Alignment with
EU norms and standards’ which primarily involved the provision of
equipment to key institutions for the monitoring and enforcing of the
acquis.

(14) See Section 3 ‘Institution-building’ of the 2000 to 2006 guidelines.
(15) Directorate-General Enlargement, C(2000) 3103/2, 27 Octo-

ber 2000.

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Funds’ was one of two challenges for Phare that the Commission
must tackle over the period 2000 to 2006. The Review set out
two objectives for Phare in this area:

The Court’s audit

(a)

‘to prepare for the implementation of the Structural Funds in
Candidate Countries by putting in place the necessary admin-
istrative and budgetary structures’ and to

The objective of the Court’s audit was to assess how
11.
effective the Phare programme was in preparing Candidate Coun-
tries for managing the Structural Funds. To do this the Court:

(b)

‘allow these countries to benefit from a first generation of
integrated regional development programmes of a (Structural
Fund) Objective 1 type contributing to their economic and
social cohesion’.

(a)

examined the extent to which the overall approach followed
by the Commission provided an effective basis for preparing
the Candidate Countries for managing the Structural Funds
(see paragraphs 15 to 28);

9.
The Review stressed the importance of preparing for the
Structural Funds: ‘Phare can not only help applicant countries
address the wide development disparities that exist between them
and existing Member States, but must also familiarise them with
the structures and procedures they will need if they are to use
Structural Funds efficiently and effectively upon accession’.
Indeed, in view of the very limited cohesion impact that Phare
ESC programmes could hope to achieve compared with the Struc-
tural Funds because of the much smaller budgets available, the
internal programming guidelines established in 2000 by
Directorate-General Enlargement for drawing up the ESC 2001
programmes stated that: ‘the desired impact in economic and
social cohesion must be clarified as helping the preparation of the
structures and strategies needed to implement the Structural
Funds after accession. We can only expect a small impact on
reducing general development disparities’.

The principal developments envisaged in the Review rel-

10.
evant to the objective of ‘moving to Structural Funds’ were:

(a)

reinforce progressively Structural Fund approaches and pro-
cedures in Phare’s ESC support;

(b) move national Phare programmes to multiannual program-
including

ming on a differentiated basis for all support,
institution-building;

(c)

extend decentralisation, so familiarising the applicant coun-
tries with the joint responsibility principles that underpin the
implementation of the Structural Funds;

(d)

reinforce support, alongside Candidate Countries’ own
efforts, to implementing authorities (i.e. managing authori-
ties in the sense of Article 34 of the Structural Funds Regu-
lation) accepted by the Candidate Country and the Commis-
sion in full compliance with the Financial Regulation.

The aim was to devote approximately 35 % of countries’ national
programmes to investment support for the ESC.

(b) examined how far Phare provided adequate preparation for
Structural Fund structures and procedures (see paragraphs 29
to 36);

(c)

examined whether Phare funding was allocated as foreseen to
this purpose and to what extent this funding was being effi-
ciently implemented (see paragraphs 37 to 55);

(d) examined the effectiveness of institution-building projects in
meeting their objective of preparing beneficiary countries for
managing the Structural Funds (see paragraphs 56 to 62).

12.
The Court selected this audit in view of the increasing
importance attached by the Commission since 1997 to prepar-
ing Candidate Countries for managing the Structural Funds, and
the significant resources expected to be allocated from the Phare
programme to meeting this objective from 2000 onwards in rela-
tion to the ERDF and ESF (16). The audit did not assess the legal-
ity and regularity of the expenditure concerned. It also did not
undertake an assessment of the capacity of the Candidate Coun-
tries to manage the Structural Funds because this is the responsi-
bility of the Commission itself which it carries out through its
annual reports on the overall preparedness of Candidate Coun-
tries for the accession (17). The Court’s audit rather examines the
Phare programme to assess how well the funding available under
it was used to assist Candidate Countries to prepare for manag-
ing the Structural Funds.

(16) The Court is carrying out a separate audit on the management of the
Sapard pre-accession instrument which is linked to the third main
Structural Fund, the EAGGF. In addition, the Court examined aspects
of the management of ISPA in its Special Report No 5/2003 ‘Phare
and ISPA funding of environmental projects in Candidate Countries’,
OJ C 167, 17.7.2003

(17) From 1998 to 2003 the Commission issued annually ‘Regular
Reports’ on Candidate Countries’ level of preparedness for EU mem-
bership. Following completion of the accession negotiations at the
end of 2002 with eight of the ten Candidate Countries from central
and eastern Europe, the Commission published in November 2003 a
‘Comprehensive Monitoring Report’ on the extent to which they had
taken further steps in preparation for membership.

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The audit covered the programming and implementation
13.
of commitments made over the period 1998 to 2002. It did not
cover commitments made in 2003 which could only have had a
limited impact before 1 May 2004 given the lead times required to
implement commitments. It concentrated on the two main instru-
ments used, the 1998 SPP and the ESC programmes which were
launched in 2000. The commitments for each country related to
these

programmes are set out in Table 1 (18). On-the-spot missions to
seven Candidate Countries (Bulgaria, the Czech Republic, Hungary,
Latvia, Poland, Romania and Slovakia) were carried out in 2002. In
addition, the Supreme Audit Institutions of Lithuania and Slovenia
audited this subject in their countries in cooperation with the Court
and using its methodology. The findings of these two audits were
taken into account when preparing the Court’s Special Report.

Special Preparatory Programme and Economic and Social Cohesion programme commitments

Table 1

Country

SPP 1998

ESC 2000

ESC 2001

ESC 2002

Total

(million euro)

Czech Republic

Estonia

Latvia

Lithuania

Hungary

Poland

Slovenia

Slovakia

Bulgaria

Romania

7,0

3,0

3,0

3,0

7,0

9,0

3,0

7,0

7,0

7,0

Total

56,0

Source: European Court of Auditors.

17,5

10,1

10,5

14,0

27,0

137,0

5,0

6,3

15,0

88,0

330,4

13,6

6,0

9,0

15,6

31,0

170,0

3,0

18,4

37,1

109,0

412,7

6,3

3,7

4,5

1,6

41,5

197,6

5,8

16,5

14,0

106,6

398,1

44,4

22,8

27,0

34,2

106,5

513,6

16,8

48,2

73,1

310,6

1 197,2

14.
As the ESC programmes funded from the 2000 budget
were only contracted towards the end of 2002, the investment
projects to be funded from the ESC programme had had virtually
no impact yet on the ground by that time. The Court’s audit
therefore did not cover the second objective of the ESC pro-
grammes, that of achieving a cohesion impact (see paragraph 9).

(a)

financing Twinning projects, where experts in the area of the
Structural Funds from the administrations of the Member
States work in the relevant ministries of the Candidate Coun-
tries. To a lesser degree technical assistance from consultancy
firms has also been funded;

THE OVERALL APPROACH OF USING THE
PHARE
PROGRAMME TO PREPARE CANDIDATE COUNTRIES FOR
MANAGING THE STRUCTURAL FUNDS

The choice of Phare made preparation of Candidate Countries
for the ERDF and ESF more difficult

(b) enabling Candidate Countries to ‘learn by doing’ through
familiarising them with procedures, which the Commission
intended should increasingly resemble those of the Structural
Funds. Funds were directed to investments that pilot-test and
demonstrate the instruments and structures to be used after
accession.

The Phare programme has contributed in two ways to
15.
preparing Candidate Countries for managing the Structural Funds:

(18) Most commitments for the ESC included a Twinning component. In
a limited number of cases, a separate commitment was made for a
Twinning project in relation to ESC. These projects were also exam-
ined by the Court and are included in Table 1.

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The support of institution-building for managing the
16.
Structural Funds through Twinning and technical assistance
reflected what had been the primary role of the Phare programme
from its beginnings: the provision of human resource expertise to
assist countries in making the transition to functioning market
economies and eventual membership of the European Union.
However, the use of Phare for the ‘learning by doing’ approach to
institution-building for the Structural Funds was more problem-
atic. The Commission chose not to propose a new instrument and
regulation for preparing Candidate Countries for managing the
ERDF and ESF. As a result, since Phare differed significantly from
the Structural Funds in terms of implementing structures, pro-
gramming, procedures, implementation mechanisms and control
systems, the Phare programme could not be used so effectively to
familiarise Candidate Countries with Structural Fund procedures.

17.
The approach taken for preparing Candidate Countries
for managing the ERDF and ESF was very different from that
taken in relation to the Cohesion Fund and the EAGGF. As noted
in paragraph 6, the Commission established completely new pre-
accession instruments in relation to these Funds, ISPA, managed
by Directorate-General Regional Policy, and Sapard, managed by
Directorate-General Agriculture. Sapard aims primarily at con-
tributing to the implementation of the acquis communautaire in the
common agricultural policy and at adaptation of the agricultural
sector and rural areas. The Sapard Regulation provides for Struc-
tural Fund multiannual programming and EAGGF financial con-
trol procedures. The management of Sapard was based, firstly, on
multiannual programming and, secondly, on implementation
through the decentralisation of functions to the beneficiary coun-
tries with only ex post controls from the Commission. Phare
complemented these new instruments by fulfilling its traditional
role of institution-building through funding Twinning expertise
from the Member States conversant with the Cohesion Fund and
the EAGGF.

Funds, it was necessary for the Commission to establish a high
degree of coordination between Directorate-General Enlargement
and these two Directorates-General. However, while there was
initially good cooperation between them in setting up the SPP, the
approach taken in 1999 to preparing ESC programmes for fund-
ing in 2000 differed significantly from the approach favoured by
Directorate-General Regional Policy.

19.
Thus Directorate-General Enlargement emphasised a
‘regional approach’ to the Structural Funds, insisting that all Can-
didate Countries target funds on a small number of regions using
regional development plans drawn up for these regions. By con-
centrating funding in this way, the Directorate-General aimed to
increase the impact of the limited Phare funding available. This
approach, however, did not take into account two key aspects of
Structural Fund implementation mechanisms.

In the first place, it did not take into account the specific

20.
regional planning framework of the Structural Funds (19):

(a)

in countries made up of more than one NUTS II region, the
Structural Funds are to be implemented through a Commu-
nity Support Framework (20) involving a number of sectoral
and regional programmes, the latter being managed by
regional bodies; and

The design of Phare ESC programmes differed from Structural
Fund Objective 1 approaches

(b)

in countries where the whole country corresponds to one
NUTS II region, the Structural Funds are to be implemented
through a Single Programming Document (SPD) managed by
national ministries. Four of the eight acceding countries from
central and eastern Europe fall into this category (Estonia,
Latvia, Lithuania and Slovenia).

18.
Since Phare was the instrument selected for financing
Objective 1 type programmes in the Candidate Countries,
Directorate-General Enlargement, which manages the Phare pro-
gramme as a whole, was responsible for these programmes as
well as the related institution-building projects. This was despite
the fact that expertise for the ERDF and ESF lay primarily with
Directorate-General Regional Policy and Directorate-General
Employment. In order, therefore, for Phare to be effective in pre-
for managing the Structural
paring Candidate Countries

(19) The ‘Nomenclature of Territorial Units for Statistics’ (NUTS) divides
countries into NUTS I (national), NUTS II (regional) and NUTS III
(county) levels. In larger countries with more than one NUTS II
region, the NUTS II level is normally the level for which Structural
Fund regional operation programmes are established. However, in
small countries the whole country may only correspond according to
this classification to a NUTS II level.

(20) Community Support Frameworks are the strategic documents
required by the Structural Fund Regulation and are designed to pro-
vide coordination of all Community structural assistance in the
regions concerned.

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20.1.2005

By insisting on regionally focused programmes even in
21.
smaller countries, lower levels of government were brought into
managing Phare funds although they lacked the capacity to do so
and would not in any case be required to perform such a func-
tion under the Structural Funds after accession. Thus, Directorate-
General Regional Policy stated in 2001: ‘There has been quite a
lot of confusion concerning the role of the regions with regard to
the programming and implementation of the Structural Funds.
The “target region” approach has contributed to this basic mis-
understanding by initiating a process of programming and set-
ting up Regional Development Agencies at sub-regional level’ (21).

Latvia for the ESC 2000 programme was required by the Commis-
sion to concentrate the funds on one or two target regions. The
Latvian authorities accordingly decided to focus them on two of
Latvia’s five county level regions, Latgale and Zemgale. This was
despite the weak programming and implementation capacity in both
regions. In 2001, the Commission, recognising these weaknesses,
and mindful of the urgent need to improve capacity in the central
administration, switched to nationally managed sectoral pro-
grammes.

22.
Secondly, three of the four Member States (Greece, Ire-
land, and Portugal) which worked through CSFs and were benefi-
ciaries of the Cohesion Fund had largely implemented their Struc-
tural Funds allocations over the programming period 1994 to
1999 through sectoral operational programmes rather than
regional operational programmes (22). This led Directorate-
General Regional Policy to conclude that a similar sectoral
approach should have been adopted for at least Candidate Coun-
tries of a similar size to these Member States (Bulgaria, the Czech
Republic, Hungary, and Slovakia) which would have CSFs and be
beneficiaries of the Cohesion Fund when designing ESC pro-
grammes. A sectoral approach was also the most realistic
approach to follow given the centralised administrative structure
of these countries.

negotiate with Candidate Countries on the number and type of
operational programmes which would be drawn up to implement
Objective 1 was that each new Member State should have only
one regional operational programme covering the entire coun-
try. This was in contrast to the individual regional operational
programmes for each eligible area, the assumption on which
Directorate-General Enlargement had based its programming of
Phare ESC for 2000.

24.
It was only in the second half of 2000 in the context of
drawing up the 2001 ESC programmes that Directorate-General
Enlargement adjusted its annual programming guidelines for ESC
investments to better reflect Directorate-General Regional Policy
approaches (23). Nevertheless a significant portion of the funding
under 2001 ESC programmes continued to be devoted to pro-
grammes which were primarily regional rather than sectoral in
character.

25.
Since these regional programmes continued to concen-
trate on a limited number of target regions, although nearly all
regions in the Candidate Countries will be eligible for Objective 1
support under the Structural Funds, those regions which did not
benefit from such programmes were less well prepared for Struc-
tural Funds. Even if the managing authorities in the Candidate
Countries for the period 2004 to 2006 will be central ministries,
regional bodies will nevertheless still have at least a limited role
to play in their implementation as intermediary bodies.

In addition, it was clear that any enlargement taking place
23.
between 2002 and 2006 would result in a shorter period for the
Candidate Countries to programme and implement Structural
Funds. This meant that there was a need, particularly given the
limited capacity in Candidate Countries, to simplify programming
as much as possible. As a result the approach followed by
Directorate-General Regional Policy when in 2001 it came to

(21) Synthesis Paper arising from Twinners Seminar, ‘Preparations for the
Structural Funds in the Candidate Countries’ held on 15 and
16 March 2001 in Brussels.

(22) In Ireland for the 1994 to 1999 programming period 100 % of the
funds were implemented through sectoral programmes in industry,
economic infrastructure, human resources, environmental services, tourism,
transport, agriculture and rural development, local development, fisheries,
and technical assistance. In Portugal 78 % and in Greece 68 % of funds
were implemented through sectoral operational programmes. (Source:
Report from the Commission: 11 Annual Report on the Structural
Funds (1999), Volume II, Annex 7, COM(2000) 698 final, Brussels,
13 November 2000).

At the level of the central ministries, as part of its policy
26.
of keeping the number of implementing authorities to a mini-
mum, the Commission encouraged Candidate Countries to have
only one implementing agency responsible for managing the ESC
programmes. Thus the Phare Review stated that ‘the target will be
to have (…) one implementing agency for ESC’. One result of this
approach was to reduce the possibilities for some central minis-
tries, particularly those that will be responsible for the European
Social Fund, to gain experience in managing the ESC programmes
and hence preparing for the Structural Funds.

(23) In June 2000, the Director-General for Regional Policy wrote to the
Directors-General for Enlargement, Employment, Fisheries and Agri-
culture that: ‘Dans la mesure où ces pays sont potentiellement éli-
gibles à l’objectif no 1 des Fonds structurels, il me parait nécessaire de
mettre l’accent sur la préparation à cette objectif, qui mobilisera des
ressources financières importantes dès leur adhésion et nécessitera
des adaptations par rapport à l’approche actuelle de Phare.’ (Letter of
6 June 2000, ref. D(2000) JFD.A. 1 001 01111).

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Official Journal of the European Union

C 15/11

Constraints affecting strategy of using Phare to prepare for the
ERDF and ESF

The strategy of using the Phare programme to prepare
27.
for the ERDF and ESF suffered from the constraint that the Com-
mission also sought to achieve a cohesion impact from the pro-
grammes which it believed could best be achieved by concentrat-
ing funds on a limited number of regions (see paragraph 19). This
cohesion objective made it difficult to give all the organisations
which would be involved in managing the ERDF and ESF experi-
ence of the Phare ESC programmes in order to familiarise them
with Structural Funds.

28.
More generally, the Commission’s use of the Phare pro-
gramme to prepare Candidate Countries for managing the Struc-
tural Funds suffered from the lack of a wider strategy identifying
both the requirements to be met by Candidate Countries in the
field of regional policy prior to accession and the approach to be
followed by these countries to Structural Fund management after
accession. Such a strategy should have been developed once the
decision had been taken to open negotiations with Candidate
Countries. On the other hand, the setting of a clear timeframe for
such a strategy was rendered difficult because a clear timeframe
for accession did not emerge until
the end of 2000 (see
paragraph 5).

PHARE PROCEDURES

While the Commission chose not to set up a new pre-
29.
accession instrument in relation to the ERDF and ESF (see para-
graph 17), it aimed to move Phare procedures closer to those of
the Structural Funds, in particular through making more use of ex
post controls, introducing more Objective 1 type measures and
launching multiannual programming (see paragraph 10).

Delays in establishing Extended Decentralised Implementation
System

30.
In terms of moving Phare implementation procedures
closer to those of the Structural Funds, the largest single step
which the Commission could have taken was to further decen-
tralise the financial management of the Phare programme to Can-
didate Countries as foreseen in the Phare 2000 Review. Stressing
that whereas the Structural Funds in the Member States were
based on ex post control by the Commission, under Phare the
Commission controls were ex ante, the Phare Review stated: ‘As
such, Candidate Countries would have great difficulty in moving
directly from the current Phare approach to full financial delega-
tion under Structural Funds as new Member States’. Therefore the
Review took the view that ‘Prior to accession the applicant coun-
tries need to have several years experience of full responsibility for
planned
implementation’.

Commission

therefore

The

to give Candidate Countries operational experience in managing
Objective 1 type measures in an ex post control environment by
introducing what it termed the ‘Extended Decentralised Imple-
mentation System’ (EDIS). Under EDIS the ex ante controls car-
ried out by the Commission’s Delegations on contracting proce-
dures would be replaced with ex post controls. The legal basis for
this very significant shift in responsibilities was laid down in the
June 1999 Coordinating Regulation (24) for Phare, ISPA and
Sapard, which also defined the conditions to be met by Candidate
Countries before the new procedures could be introduced. The
Phare Review thus planned ‘to decentralise implementation
responsibility to the Candidate Countries from 2002 where strict
conditions are met’. Yet despite the fundamental importance of
EDIS in preparing Candidate Countries for managing the Struc-
tural Funds, the Commission initially left it to the Candidate
Countries to decide whether they wished to take the necessary
steps to introduce EDIS or not (25).

31.
In practice, the Candidate Countries did not initiate
preparations for EDIS, often owing to competing priorities in pre-
paring for accession and because they were content to have the
safeguard of the ex ante system of checks provided by the Com-
mission Delegations. It was only towards the end of 2001 that the
Commission began to apply the necessary pressure on Candidate
Countries to set up EDIS before the accession, in particular by
establishing in 2002 what were termed ‘High-level Working
Groups’ made up of Commission and national representatives in
each beneficiary country to oversee its introduction. The Com-
mission’s efforts to introduce EDIS in the framework of Phare
were initiated later than for ISPA, while Sapard from the outset
was set up on an ex post control basis which gave the beneficiary
institutions more experience for meeting their responsibilities
after the accession.

While

32.
the 2003 Annual Management Plan for
Directorate-General Enlargement still foresaw Commission deci-
sions on the accreditation of countries for the introduction of
EDIS in the second half of 2003, EDIS was not introduced for the
management of Phare funds into any of the Candidate Countries
before the accession on 1 May 2004 (26). It meant that Candidate
Countries would become Member States less well prepared for the
financial management of the ERDF and the ESF than the Com-
mission had intended in the Phare Review 2000.

(24) Council Regulation (EC) No 1266/1999 of 21 June 1999 on coordi-
nating aid to the Applicant Countries in the framework of the pre-
accession strategy (OJ L 161, 26.6.1999, p. 68).

(25) A circular letter sent by the Directors-General for Enlargement and
Regional Policy to National Aid Coordinators in December 2000
stated that ’national preparatory efforts should start as soon as pos-
sible in those countries interested in moving to EDIS’.

(26) The only exception was Hungary where EDIS was symbolically intro-

duced on 30 April 2004.

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Official Journal of the European Union

20.1.2005

The delays in the introduction of EDIS also made it more
33.
difficult for the Commission to use grant schemes to implement
Phare ESC programmes. While the setting up of grant schemes
under Phare ESC programmes was an important step towards
moving to a more Structural Funds approach to implementation,
in an ex ante control context there was a limit to the Commis-
sion’s capacity to supervise them. This was because grant schemes
were considered to be a high-risk area involving a large number
of small projects. The Commission Delegations therefore had to
carry out very time-consuming checks, both on the mechanisms
proposed by the beneficiary authorities for implementing each
grant scheme and on the evaluation of the project applications
submitted for funding. This implied significantly more work for
Commission Delegations compared with more traditional Phare
implementation mechanisms (essentially works, service and sup-
ply contracts).

progress in multiannual programming. For example, even in the
absence of an overall development plan, under the Phare Cross
Border Cooperation (CBC) programme, which is modelled on the
Structural Fund Community Initiative ‘Interreg’, the Commission
introduced a multiannual approach as early as 1994, covering the
period up to 1998. Indeed, from 2000 such programmes took an
increasingly sophisticated form as Phare CBC aligned itself more
closely with Interreg practices. Under the Sapard instrument, pro-
grammes were established for the Structural Fund programming
period 2000 to 2006 in the same way as for Member States.

The Phare Review foresaw that the multi-annual pro-
36.
grammes
to be established would also specify national
co-financing and other sources of financing. In the absence of
these programmes this key issue of co-financing to accompany
European Union funding, which would become all the more
important
properly
addressed (27).

Funds, was

Structural

under

not

Multiannual programming not introduced

34.
To serve as a basis for introducing multiannual program-
ming along the lines of that used for the Structural Funds, the
Commission announced in early 1999 that a preliminary National
Development Plan (PNDP) was to be drawn up in draft form by
each country for September 1999. Most countries were unfamil-
iar with this form of planning and were often sceptical of the ben-
efits of planning in view of their experience of planned econo-
mies prior to 1989. In any case, countries generally directed their
limited human resources in ministries to identifying ESC projects
for the annual funding round rather than to longer-term plan-
ning. In cases where single ministries were given the overall
responsibility for drawing up the plan, they often did not coor-
dinate effectively with other ministries that needed to be con-
sulted. The short time period granted by the Commission for sub-
mitting the PNDP also made it very difficult to draw up adequate
documentation and made it impossible to establish a proper part-
nership approach to planning,
involving consultation with
regional and local authorities and NGOs.

35.
The weakness of the PNDPs and subsequent drafts of the
NDP was one reason why the Commission did not move to the
multiannual programming which was foreseen by the Phare
Review to be introduced by 2002. Thus Hungary was the only
country which established a programme covering more than one
year (2002 to 2003). Nevertheless problems with these planning
documents do not provide a full explanation for the lack of

FUNDING AND IMPLEMENTATION OF PHARE PROGRAMMES
TO PREPARE CANDIDATE COUNTRIES FOR MANAGING THE
STRUCTURAL FUNDS

Allocation of funding to most countries was less than foreseen

37.
The 1998 Special Preparatory Programme (SPP) was the
first programme financed throughout the Phare Candidate Coun-
tries to specifically prepare for the management of the Structural
Funds. However, no similar programmes were financed by the
Commission in 1999 to build on these initial programmes.

38.
In 2000 the Commission launched ESC programmes in
each Candidate Country. The Phare 2000 Review stated that
about 35 % of the funds for Phare national programmes should
be devoted to ESC programmes. In global terms the Commission
succeeded in meeting this objective, as Table 2 shows. Thus for
the period 2000 to 2002, the average percentage of national pro-
grammes committed to these activities was 36,8 %.

(27) On the subject of co-financing see also the Court’s observations in its
Annual Report 2002, paragraphs 8.10 and 8.11 (OJ C 286,
28.11.2003).

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ESC commitments as a percentage of Phare National Programmes 2000 to 2002

Table 2

2000

2001

2002

Total (2000 to 2002)

Country

ESC
commitments

ESC as % of
national
programme

ESC
commitments

ESC as % of
national
programme

ESC
commitments

ESC as % of
national
programmes

ESC
commitments

ESC as % of
national
programme

(million euro)

Czech
Republic

Estonia

Latvia

Lithuania

Hungary

Poland

Slovenia

Slovakia

Bulgaria

Romania

17,5

10,1

10,5

14,0

27,0

137,0

5,0

6,3

15,0

88,0

Total

330,4

Source: European Court of Auditors.

29,7

42,6

42,4

36,6

41,5

43,8

31,8

22,5

22,8

40,9

39,0

13,6

6,0

9,0

15,6

31,0

170,0

3,0

18,4

37,1

109,0

412,7

20,8

22,8

28,7

34,3

34,5

41,4

14,1

42,3

44,8

39,8

37,8

6,3

3,7

4,5

1,6

41,5

197,6

5,8

16,5

14,0

106,6

398,1

7,4

12,2

14,0

2,6

37,2

50,2

18,5

28,9

14,8

40,2

34,2

37,4

19,8

24,0

31,2

99,5

504,6

13,8

41,2

66,1

303,6

1 141,2

17,9

24,6

27,2

21,4

37,3

45,1

20,2

32,0

27,2

40,3

36,8

39.
However, this overall average figure was largely attained
because of the significantly higher than average percentage of
their national programmes committed to ESC by the two largest
Phare beneficiary countries, Poland (45,1 %) and Romania
(40,3 %) over the period 2000 to 2002 (28). All the other coun-
tries, with the exception of Hungary, experienced difficulties in
committing the required 35 % of their national programme to
this objective.

40.
While it would be expected that the percentage of funds
committed to ESC would increase from year to year as absorp-
tion capacity increased as accession drew nearer, this has not been
the case. In four countries (the Czech Republic, Estonia, Latvia
and Lithuania) the percentage of the programme allocated to ESC
programmes was progressively reduced from 2000 to 2002. The
main reason for this was difficulties in absorbing funds commit-
ted in 2000. In Bulgaria, a large commitment was made in 2001
despite the significant implementation difficulties with the rela-
tively low commitment made in 2000 programme, but the com-
mitment in 2002 was then reduced to less than that of 2000.

41.
The reduced commitments in relation to investment
projects in 2002 in part reflected the major emphasis placed by
the Commission that year on trying to raise administrative capac-
ity before accession. Prior to this the systematic approach to
institution-building for Structural Fund management in all coun-
tries, which the Commission initiated in 1998 under the SPP, had
not been sustained. Despite the increased importance attached to
supporting ESC investment programmes and preparing for the
Structural Funds, the Commission did not ensure that Candidate
Countries systematically funded Twinning projects in this area in
2000 to support the national structures. Thus the main Twinning
projects funded were in Hungary, Poland and Romania but these
were largely focused on the regional level, with very few initia-
tives at national level. Even in 2001 only five of the ten countries
had Twinning projects in the area of Structural Fund preparation.

Difficulties experienced in preparing programmes similar to
Structural Fund Objective 1 programmes

(28) The average annual allocation for the Phare national programme over
the period 2000 to 2002 for Poland was 373 million euro and
Romania 251 million euro. For the eight other countries average
annual allocation over the same period was 51 million euro.

42.
In most countries ESC funding was not programmed in
a consistent way from year to year. This largely reflected the shift
in the Commission’s approach from programmes where alloca-
tions were made to different regions in 2000 to programmes

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Official Journal of the European Union

20.1.2005

which were made on a more sectoral basis starting from 2001.
This was followed by a strong emphasis on institution-building
projects rather than investment projects in 2002.

While the Commission financed a Project Preparation
45.
Facility (PPF) in 1999 of between 2 million and 3 million euro for
each Candidate Country to provide technical assistance to
improve the pipeline of projects for ESC funding in 2000 and
2001, most countries struggled to make effective use of this
instrument. Beneficiaries at both national and local level often did
not coordinate sufficiently with the consultants preparing the
projects, which in some cases reduced the quality of the projects
prepared. Apart from this 1999 PPF, no other horizontal pro-
gramme covering all countries was established by the Commis-
sion for preparing later ESC programmes and, more importantly,
developing a pipeline of projects for the Structural Fund financ-
ing. Moreover, most Candidate Countries allocated few or no
resources to developing project pipelines for the Structural Funds
from their national Phare programmes.

43.
Countries in most cases experienced difficulties in draw-
ing up project fiches of an acceptable quality for the ESC pro-
grammes and had recourse for assistance to the Commission Del-
egations and consultancy firms. Indeed, a significant portion of
the projects which were approved were in fact often not fully pre-
pared and/or suffered from shortcomings in their design, which
delayed implementation and hence reduced their impact upon
preparation before accession. Although Bulgaria was not due to
join the European Union until after other Candidate Countries,
the design of its ESC programmes was amongst the most com-
plex of all the Phare ESC programmes, which increased imple-
mentation difficulties in that country. More straightforward
implementation mechanisms should have been pursued in this
country in the first years of ESC.

Delays in programme implementation

46.
All countries have experienced significant delays in
implementing ESC programmes compared to the timetables origi-
nally foreseen. Although Phare rules allow three years after the
commitment of funds for programmes to be fully implemented
and disbursed (‘n+3’ project cycle timeframe), the disbursement
rate for the ESC commitments made in 2000 was only 71,7 %,
including advance payments, at the end of 2003 (see Table 3).
This slowed down efforts to improve administrative capacity in
preparation for the ERDF and the ESF. It also highlighted the
weaknesses in administrative capacity and the need for more
assistance.

44.
Although infrastructure projects financed under ESC
were supposed to be business-related, in Poland in 2000 and
2001, in order to absorb funds, approximately 35 % of funding
was allocated to road infrastructure projects with often only tenu-
ous links to business development. In the Czech Republic and
Romania, a number of industrial parks were financed without the
countries having an overall strategy to prioritise locations and
avoid an excess supply of such parks.

Under the ESC 2000 programme, 12,7 % of Poland’s allocation
was foreseen for a 17,5 million euro access road to Katowice air-
port, even though all transport and environment infrastructure
projects costing more than 5 million euro were to be financed by
ISPA. In addition, a further 10 road projects in the beneficiary
regions were financed for 28,4 million euro which were not specifi-
cally focused on business promotion but most commonly formed part
of wider city bypass/ring road projects. This was also the case for the
13 road projects financed under ESC 2001 for a total of 59,3 mil-
lion euro (34,9 % of budget).

The Twinning component of the 1998 Special Prepara-
47.
tory Programme only got underway towards the end of 1999 and
therefore did not generally have an impact until the first half of
2001. Although twinners had been needed to assist in drawing up
the preliminary National Development Plans, in all cases they
took up their positions after the September 1999 deadline for the
submission of the first draft. These delays were in part due to
Twinning being a new instrument as well as weaknesses on the
part of the Candidate Countries’ administrations. However, the
SPP technical assistance contracts in most cases were only signed
in the second half of 1999.

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Implementation of ESC programmes 2000 to 2002 (31.12.2003)

Table 3

2000

2001

2002

Total (2000 to 2002)

Country

ESC
commitments

ESC payments

ESC
commitments

ESC payments

ESC
commitments

ESC payments

ESC
commitments

ESC payments

(million euro)

Czech
Republic

Estonia

Latvia

Lithuania

Hungary

Poland

Slovenia

Slovakia

Bulgaria

Romania

17,5

10,1

10,5

14,0

27,0

13,3

9,7

8,8

13,0

18,5

13,6

6,0

9,0

15,6

31,0

137,0

103,7

170,0

5,0

6,3

15,0

88,0

4,5

6,1

5,3

53,9

236,8

3,0

18,4

37,1

109,0

412,7

Total

330,4

Source: European Commission.

48.
In the case of the SPP pilot investment projects, imple-
mentation was particularly slow because it was only after the SPP
had begun that the Commission sought to clarify how far exist-
ing Phare procedures for the implementation of these projects
could be modified in order to make them more akin to Structural
Fund procedures.

49.
Most countries only contracted the 1999 Project Prepa-
ration Facility shortly before the December 2001 deadline, even
though most of the contracts to be funded under the PPF con-
cerned relatively small service and study inputs. Because of delays,
in only a few cases was the Facility used for preparing projects
under the ESC 2000 programme, it being mainly used for the
2001 and 2002 ESC programmes. Several countries were unable
to fully use their allocation before the contracting deadline. In
Latvia, the Commission made a significant derogation from ten-
dering procedures to enable funds to be contracted before the
deadline. Thus the time for tendering a contract of 2 million euro
to provide a number of studies was reduced from the minimum
of 50 days to just 28 days. This had a negative effect on the num-
ber and quality of the bids received, which also affected subse-
quent implementation.

10,8

2,0

0,6

4,4

7,5

32,4

0,6

3,8

10,0

26,2

98,3

6,3

3,7

4,5

1,6

41,5

197,6

5,8

16,5

14,0

106,6

398,1

1,7

0,6

—

—

0,4

—

1,0

1,3

—

0,6

5,6

37,4

19,8

24,0

31,2

99,5

25,8

12,3

9,4

17,4

26,4

504,6

136,1

13,8

41,2

66,1

303,6

1 141,2

6,1

11,2

15,3

80,7

340,7

51.
The ESC 2000 investment programmes were similarly
delayed due to difficulties Candidate Countries had encountered
in establishing the operational guidelines governing the imple-
mentation of grant schemes. These had to be approved by the
Commission before calls for project proposals could be launched
and frequently required several drafts before they were of a satis-
factory standard. In most countries the great majority of funds
were only contracted in the last two months before the contract-
ing deadline, approximately 6 to 12 months later than the imple-
mentation timetables set out in the project fiches. In fact the dead-
line for the beneficiary countries to complete the contracting of
the programme had to be extended in Bulgaria and Estonia, as did
the disbursement period in Hungary and Poland.

52.
The 2001 ESC programmes were also significantly
delayed. Although the Commission sought to ensure that only
projects should be financed which were sufficiently advanced in
their preparation for them to be contracted within six months of
the Commission Financing Decision (29), in practice virtually no
ESC project fulfilled this criterion.

50.
Notwithstanding the fact that Twinning procedures were
not being used for the first time, Twinning projects in the frame-
work of the 2000 and 2001 ESC were subject to considerable
delays in both selecting the Member State which would provide
the twinners and then drafting the Twinning covenant.

(29) Phare Programming Guide 2001, paragraph 5 (e).

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The problems encountered by Candidate Countries
53.
in programming ESC allocations
about
their capacity to absorb the much greater allocations
planned under
(see Table 4),
particularly in view of the new tighter timeframe for the

raise doubts

Structural

Funds

the

disbursement of Structural Funds introduced for the period
2000 to 2006 (the so-called ‘n+2’ rule) (30). In fact ESC fund-
ing for 2000 to 2002 represented only approximately 6 %
of Structural Fund allocations
for 2004 to 2006 for
Objective 1 (31).

ESC commitments 2000 to 2002 compared with Structural Fund allocations 2004 to 2006

Table 4

Country

ESC 2000 to 2002

SF 2004-2006: Objective 1

ESC as % of SF

(million euro)

Czech Republic

Estonia

Latvia

Lithuania

Hungary

Poland

Slovenia

Slovakia

Total

Source: European Court of Auditors.

37,4

19,8

24,0

31,2

99,5

504,6

13,8

41,2

771,5

1 286

329

554

792

1 765

7 321

210

921

13 178

2,9 %

6,0 %

4,3 %

3,9 %

5,6 %

6,9 %

6,6 %

4,5 %

5,9 %

A fundamental cause of the delays for all programmes
54.
has been administrative weaknesses in the Candidate Countries.
In each country regional policy represents a new field of action
and most countries struggled to establish stable structures which
were capable of managing even the relatively small amount of
funding allocated to the ESC. Moreover, the newness and weak-
ness of the ministries concerned reduced their ability to establish
the necessary coordination with other ministries to ensure effec-
tive programming and implementation. In addition, the channel-
ling of all funding through a single implementing authority also
created bottlenecks which slowed down the overall implementa-
tion and, therefore, impact of the programmes (see paragraph 26).

down in January 2001 and its functions transferred to the Min-
istry of the Interior. Inadequate performance by the Latvian
authorities originally managing the ESC programme also led to
these responsibilities being moved to the Ministry of Finance in
2002. In Slovakia and Romania, the ministries responsible for
in 2000 and
regional development only became operational
lacked experienced staff. In Bulgaria, the Ministry for Regional
Development and Public Works underwent reorganisations and a
particularly high level of staff turnover followed changes in politi-
cal responsibilities. The Ministries of Regional Development in
the Czech Republic and Hungary also suffered a loss of key per-
sonnel in 2000 for similar reasons.

55.
Thus in Poland a Ministry for Regional Development and
Construction was established in June 2000 only to be abolished
in January 2002 following a change of government. In mid-2002
responsibility for managing ESC infrastructure projects had to be
transferred from the Polish ESC implementing authority to
another implementing authority because of its inability to carry
out this task. Similarly, in Lithuania, the Ministry of Public Admin-
closed
istration

Local Authorities was

Reform and

(30) The Structural Fund Regulation (EC) No 1260/1999 Article 31.2
foresees that ‘the Commission shall automatically decommit any part
of a commitment which has not been settled by the payment on
account or for which it has not received an acceptable payment appli-
cation… by the end of the second year following the year of com-
mitment’.

(31) Notwithstanding the closeness of accession,

the Commission’s
November 2003 ‘Comprehensive Monitoring Report’ pointed to con-
tinuing weaknesses in Candidate Countries’ capacity for managing
the Structural Funds. The countries needed to make what the Com-
mission termed ‘enhanced efforts’ in their preparations for accession.

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RESULTS OF INSTITUTION-BUILDING PROJECTS TO PREPARE
CANDIDATE COUNTRIES FOR MANAGING THE STRUCTURAL
FUNDS

The 1998 SPP Twinning projects generally allowed some
56.
initial progress to be made by mid-2001 in preparing for the
Structural Funds. However, the project achievements were very
largely not as far-reaching as had been intended at the start of the
projects. In the most problematic case, in Bulgaria, the project
was abandoned with only approximately 30 % of the funds spent
because of the difficult relations between the twinners and their
counterparts. Generally SPP Projects achieved least progress in
contributing to drawing up National Development Plans and the
setting up of monitoring systems for Structural Funds, mainly
because of the complexity of these tasks and the relatively short
timeframe of Twinning covenants.

The task of Phare concerning institution-building at
60.
regional
level was particularly difficult. Most countries only
started to establish administrative structures at regional level (32)
for the purpose of managing the Structural Funds. Often the
boundaries of the newly created regions did not reflect natural
historical or geographical boundaries and did not have political
bodies as these tended to reside at county level (33). In several
countries, for example Bulgaria, the Czech Republic and Slova-
kia, regional structures for managing the Structural Funds were
only put in place at the end of 2001. This meant Twinning
projects could not be set up at regional level in these countries
before this time.

In the Czech Republic Twinning assistance to the regions carried out
under the SPP was significantly less than had been foreseen. This
was in part due to the setting up of new regional structures in the
first half of 2001. Under the Twinning covenant financed from the
ESC 2000 programme, it was intended during the course of 2001
and 2002 to make up for the limited inputs at regional level made
during the 1998 project. However, continuing uncertainty, in par-
ticular, over the role of Regional Executive Units and Regional Sec-
retariats (32) in the implementation of the Structural Funds meant
that in this case too the twinners reduced the amount of time they
spent working at regional level.

57.
The SPP for each country also included a technical assis-
tance institution-building component. However, the respective
roles of twinners and consultants were not always clearly defined
which led to a degree of overlap, for example, in contributing to
the National Development Plans.

58.
Of particular concern is the way the changes in respon-
sibilities between ministries and the internal restructuring of min-
istries (see paragraph 55), as well as the high turnover of indi-
vidual staff, reduced the lasting impact of the SPP. Even for ESC
programmes in 2000 and 2001 there still existed a similar risk of
funds being allocated to ministries which in the end would not be
designated to manage the Structural Funds. This problem was
only finally resolved in 2002 when Candidate Countries, in the
context of their negotiation of Chapter 21 of the Accession
Treaty, were obliged to decide on their managing and paying
authorities. For the purposes of ensuring more effective prepara-
tion, it would have been desirable for the Commission at an ear-
lier stage to have required Candidate Countries to designate these
authorities.

In certain other countries, where regional structures had
61.
been established earlier, large Twinning projects were carried out
in most or all regions of the country under the ESC 2000 pro-
gramme. However, in half of the regions in Hungary and Roma-
nia, and all the regions supported in Poland, no ESC funding was
allocated to ESC investment projects. This reduced the scope for
the practical training that could be provided by twinners on the
management of EU funds. Moreover, in Romania, none of the
eight Regional Development Agencies (32) where the twinners
were located had a budget from central government to cover their
running costs, which also made the work of the twinners more
difficult. Indeed, uncertainty over future budgets and the agencies’
legal status threatened to undermine the long-term impact of
Phare institution-building support at regional level in Romania.

62.
Under the 2000 Twinning covenants, one of the main
tasks both at regional and national level was to assist in drawing
up regional operational programmes for each region (32). The
decision in 2001 by Directorate-General Regional Policy to only
allow one Regional Operational Programme per country meant
that covenants had to be subsequently modified.

59.
Even after the managing and paying authorities were des-
ignated, the identification of effective institution-building projects
was hindered by uncertainty over which departments within min-
istries would play what role and the fact that the identity and role
of intermediate bodies was also not yet clear.

(32) NUTS II level.
(33) NUTS III level.

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CONCLUSIONS

Variable allocations for and delayed implementation of ESC
programmes

Difficulties in the overall approach of using the Phare
programme to prepare Candidate Countries for managing the
Structural Funds

63.
There were several difficulties concerning the Commis-
sion’s overall approach to using the Phare programme for man-
aging the Structural Funds. It was the instrument used in the con-
text of preparing for the ERDF and ESF although it was clear in
advance that there were limitations on how far Structural Fund
procedures could be replicated under Phare. In the absence of
arrangements similar to those under Sapard and ISPA, it was more
difficult to gain practical experience in managing and controlling
ESF and ERDF type expenditure (see paragraphs 16 and 17). The
approach to programming initially followed by Phare did not
reflect actual practice in the Structural Funds (see paragraphs 18
to 24). This situation arose in part because of the tension between
the two objectives of the Phare ESC programmes: on the one
hand to use them to prepare for Structural Funds, and on the
other hand to already achieve a cohesion impact through these
programmes (see paragraph 27). More generally, the use of the
Phare programme was not linked to an overall strategy defining
the pre-accession and post-accession needs of the Candidate
Countries in terms of preparing for and then utilising the Struc-
tural Funds (see paragraph 28).

Limited progress in moving Phare closer to Structural Funds

64.
Although an important part of the Commission’s strat-
egy for using Phare to prepare Candidate Countries for managing
ERDF and ESF was to modify Phare procedures to make them
more akin to those of the Structural Funds, only limited progress
was made in this respect. In particular, although the introduction
of EDIS under Phare was to be a major step in moving towards
the Structural Funds, EDIS was not actually introduced before the
accession. As a result Candidate Countries will not have gained
the experience of managing programmes similar to ERDF and ESF
in an ex post control environment prior to accession, which is
what the Commission originally planned (see paragraphs 30 to
32). Furthermore, delays in introducing EDIS have made it more
difficult to channel funding through grant schemes, although
these are the main instruments for implementing the Structural
Funds (see paragraph 33). In addition, the Commission did not
introduce multi-annual programming as foreseen (see para-
graphs 34 to 35).

65.
Although for Phare national programmes taken as a
whole, the Commission achieved its target of allocating approxi-
mately 35 % of funds to the ESC, in most countries the amount
of the national programme allocated to this purpose was some-
what less, thus reducing the impact of the Phare programme on
contributing to their preparation for the Structural Funds (see
paragraphs 38 to 44). Moreover, within the total allocations avail-
able insufficient funding has been allocated to preparing future
Structural Fund measures (see paragraph 45). Actual programme
implementation has been subject to serious delays (see para-
graphs 46 to 52). The difficulties encountered largely reflect the
administrative weaknesses in the ministries responsible for
regional development in the Candidate Countries (see para-
graphs 54 and 55).

Only partial achievement of results of institution-building
projects to prepare Candidate Countries for managing the
Structural Funds

66.
The impact of institution-building projects has particu-
larly suffered from the changes in responsibilities for regional
development among ministries in beneficiary countries. Delays in
designating managing authorities and paying authorities and
defining specific roles and responsibilities within them has fur-
ther hindered institution-building efforts (see paragraphs 58
and 59). Slowness in setting up regional structures has restricted
the scope for support to institution-building at this level in some
countries (see paragraph 60).

Overall conclusion

The Commission should be commended for starting as
67.
early as 1998 to use the Phare programme to help prepare Can-
didate Countries for managing the Structural Funds. However,
while Phare continued to provide important support in this area
over the period 1998 to 2002, at the time of accession the Phare
programme had a more limited impact than expected in prepar-
ing the Candidate Countries for the ERDF and ESF to the extent
the Commission had planned in its policy documents, notably the
Phare Review 2000. This was in part due to the inexperience and
the insufficient institutional development of the relevant authori-
ties in the Candidate Countries. It was not possible to remedy
these shortcomings in the time available. Making effective use of
the Structural Funds will represent a major challenge for new
Member States, particularly given the shortened programming
and implementation period of 2004 to 2006.

RECOMMENDATIONS

68.
There is a significant need for more institution-building
support in the area of managing the Structural Funds after the
accession.

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Considerable resources should be devoted to the ex post
69.
control of Structural Fund operations in the new Member States.

The Commission should increase its efforts to bring

71.
Phare closer to the Structural Funds by:

70.
A clear strategy should be put in place identifying the dif-
ferent steps that still need to be taken for preparing the current
and future Candidate Countries for managing the Structural
Funds.

— giving future managing authorities the status of Phare imple-

menting agencies,

— providing the assistance necessary to implementing agencies
to enable them to implement Phare in the framework of an
ex-post control system,

— introducing multiannual planning based on National Devel-

opment Plans.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 7 and 8 July 2004.

For the Court of Auditors
Juan Manuel FABRA VALLÉS
President

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THE COMMISSION’S REPLY

SUMMARY

I.
Phare was established in 1989 and assisting Candidate
Countries to prepare for Structural Funds was not part of its remit
at that time. In 1997 Phare became accession-driven with the
objective of preparing Candidate Countries for membership
across all 31 chapters of the acquis communautaire. The first pre-
paratory projects for Structural Funds and related negotiation
chapters were institution building in nature and began in 1998.
Only in 2000 did Phare begin with investment projects under the
title of Economic and Social Cohesion (ESC) that had a twofold
provision: assistance for preparing for Structural Funds and an
initial impact on development disparities. The indicative target for
Economic and Social Cohesion was 35 % of annual national pro-
grammes as of 2001. The timeframe for enlargement and hence
the related timeframe for preparation was estimated to be around
five to six years.

No previous enlargement had such extensive preparations
II.
for Structural Funds using three pre-accession instruments.
Through Phare, prerequisite planning processes were stimulated
and overall planning capacity established and these countries
were able to submit draft Structural Funds Development Plans
already at the beginning of 2003, thereby ensuring early approval
and launch in 2004 of Structural Funds Programming Documents
for the 2004 to 2006 period. This has never been achieved before.
While not all early ambitions were realised in a timeframe com-
pressed by rapid acceleration in the negotiations, the ESC initia-
tive, among others, had a very significant impact on the negotia-
tions themselves and on institutional developments. As a result
the Council was able to close negotiations on the main Structural
Funds related chapter (21) in 2002 on the basis of legislative
alignment and designation of structures. The second objective of
ESC was ‘to begin to make an impact on development disparities’
through focus and concentration. Any intentionally diffused
approach would have been a very poor learning model and this
was clearly stated at the outset: ‘It is neither feasible nor wise to
pilot test all structures and instruments that will be developed…’
(Phare 2000 Review).

III.
It was foreseen from the outset that extending decentra-
lised management (EDIS) and multiannual programming ‘could
not start until 2002 at the earliest’ (Phare 2000 Review). It tran-
spired that 2002 was the year that negotiation closed and conse-
quently there has been a compression of the timeframe. EDIS is a
complex and lengthy process, not a punctual event, and the coun-
tries have been working on this process for several years. The

determining factor for moving to ex post controls is overwhelm-
ingly the acceding countries ‘ownership’ of the process to estab-
lish their own safe management and control systems. Difficulties
encountered in grant schemes were mainly due to the learning
curve the countries had to undergo. Hence, they were not related
to the type of Commission control (ex ante or ex post).

Although the objective of allocating approximately 35 %
IV.
of Phare national programmes to ESC was indicative only ‘to be
applied with flexibility on a country by country basis’, (Phare
Guidelines Decision 1999), the 2001 to 2003 figures indicate
that the average of around 35 % has been maintained. The insig-
nificant dip in percentage terms in 2002 due to the Action Plans
on Administrative and Judicial Capacity was fully compensated in
2003 allocations. In addition there were both investment and
institution-building allocations in other horizontal chapters that
had an indirect bearing on preparing for managing Structural
Funds. In 2003, which was beyond the audit period, there was a
deliberate focus on ESC. Several countries devoted well over 35 %
of their 2003 funds to investment in ESC. The average was 39 %.

V.
The Commission endeavoured to stimulate institutional
progress and Phare Twinning and ESC actions were launched
considerably ahead of final decisions on requirements for closure
of negotiations on Regional Policy e.g. designation of the Paying
and Managing Authorities. This process involved prolonged
political discussion in the countries and Phare helped accelerate
agreements on solutions essential for the eventual success of the
negotiations and not least on preparing for Structural Funds.

Even if not all initial ambitions were realised within a
VI.
timeframe reduced by rapid accelerations in the negotiations, this
was primarily due to the inherent difficulties and delays in desig-
nation of the future institutions responsible for managing struc-
tural funds. In certain instances, insufficient stability of some
institutions indeed significantly impeded the impact of prepara-
tory pre-accession assistance. Nevertheless, the evidence to date is
that the main objectives were indeed realised as reflected in the
negotiations themselves and follow-up monitoring reports and in
all subsequent programming developments to an extent never
achieved before.

VII.
After accession the new Member States will continue to
receive a great deal of direct support from the Structural Funds
Directorates-General to help them manage programmes effec-
tively, just as they have in framing the programmes and design-
ing their delivery and management systems. The lessons learned
are already being taken into account and the Bulgaria and Roma-
nia Roadmaps together with the revised 2003 Phare Guidelines
already outline the strategy underway. On implementing agen-
cies, in moving to ex-post controls, the process is the other way
round. Phare agencies, in order not to lose the expertise they

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acquired, should become (or be integrated into) the Structural
Funds managing and implementing bodies. In most new Member
States this is the reality when the structure, or at least the staff,
have been transferred to the management and payment agencies.
Building on positive pilot experience in 2003 the Phare Guide-
lines have been revised and the Programming Guide for 2004 has
been revised to introduce multiannual planning for the ESC and,
where appropriate and feasible, also for institution building.

PHARE
THE OVERALL APPROACH OF USING THE
PROGRAMME TO PREPARE CANDIDATE COUNTRIES FOR
MANAGING THE STRUCTURAL FUNDS

Concerning the twofold objective of Phare ESC, see reply

15.
to paragraph 9.

INTRODUCTION

4.
In 1997 and 1998 a Special Preparatory Programme was
originally conceived as a horizontal EUR 60 million programme.
Subsequently substantial additional funds were made available
and implemented under National Programmes, in line with the
general policy of moving from multi-country/horizontal pro-
gramming to national programming.

7.
The Phare Guidelines Decision of 1999 stipulated that ‘the
split of around 30 % for institution building and around 70 % for
investment is indicative only. These proportions had to be applied
with flexibility on a country-by-country basis, giving priority to
the needs arising in the field of institution building’. Consequently
this flexibility was established under law.

8.
‘Moving to Structural Funds’ was also indicated in the
2000 Review as a broad challenge to which all components of
Phare would have to contribute. Consequently, the ESC was a
significant but only one of the several avenues of approach.

The Phare Review (point 5.1.1) set ESC objectives as fol-
9.
lows: ‘(1) to strengthen the countries’ programming and admin-
istrative capacities through institution-building support across
their entire national territories so that they may absorb the Struc-
tural Funds upon accession; (2) to use investment in support of
institution building and, closely coordinated with it, to begin to
make an impact on development disparities and to allow pilot
testing of integrated development programmes similar to Objec-
tive 1 and Community Initiatives at national and/or regional level
(…)’ Concerning investment support, the Review and program-
ming documents prescribed focus and concentration in order to
ensure impact. While acknowledging the limits on reducing wide
development disparities, these documents did not establish a hier-
archy of objectives.

10.
The Phare Review stated: ‘Phare is pushing for maximum
impact from its investment support budget in this area…’ conse-
quently the aim was to devote approximately 35 % of countries’
Phare national programmes to economic and social cohesion
support. Thus this aim was directly related to the other ‘impact’
objective in the Phare Review and not to the objective of ‘moving
to Structural Funds’ as such.

As Structural Funds (SF) operate under shared management and
Phare under decentralised implementation, legal and financial
procedures are different and ‘learning by doing’ would be thereby
constrained. This is why the Phare Review referred specifically to
‘pilot testing’ of SF-type measures. Thus even if design modalities
could be aligned, implementation would still have to comply with
external aid Financial Regulation requirements.

Outside the limits mentioned in paragraph 15, the use of
16.
Phare institution building for Structural Funds preparation was
not problematic. Phare is a flexible, general external assistance
instrument, within which it is possible to combine investment
and institution-building actions as well as partial alignment with
other instruments. In the interests of sound financial management
it was prudent to remain within the established evolutionary
approach of Phare involving gradual and controlled progress
from centralised to decentralised with ex ante control, to fully
decentralised management systems.

In the late 1990s the decision to establish only two new
17.
pre-accession instruments reflected a complete consensus and
was fully endorsed by the European Parliament and the Council.
It was evident in 1999 that the scale of the preparations required
was enormous and the demands on the administrations of the
candidate countries were considerable. They were unable to take
on the challenge of a sophisticated multiannual planning exercise
coupled with complex implementation arrangements as well as
support a second movement to the ex post control arrangements
as apply in the Structural Funds regulation. Therefore it was pru-
dent to opt for a more phased approach under Phare in order to
avoid overloading the limited resources of the candidate countries
as well as avoiding a potential interruption of pre-accession assis-
tance delivery.

18.
Only the ESC (approximately 35 %) component of Phare
National Programmes was deemed to support Objective 1 ERDF
and ESF-type projects. Implementation of Phare and coordination
of all pre-accession assistance has been the competence of DG
Enlargement. However, as provided in the Communication
COM(97) 112, since 1998 closer cooperation with Commission
services responsible for regional structural policies was estab-
lished. The involvement of Structural Funds Directorates-General
in ESC programming has been substantial. Since inauguration of
preliminary National Development Plans (PNDPs), prepared by
candidate countries in late 1999, all concerned services contrib-
uted to their assessment and implementation. In particular,

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the Regional Policy DG was systematically involved in annual ESC
programming and in programming missions. A high degree of
coordination between all services was ensured in the negotiations
on Regional Policy (Chapter 21) and in the context of Council
Coordination Regulation of 1999.

Funds were implemented centrally. For the 2000 to 2006 period
two regions were newly created and 31 % of Structural Funds will
be implemented through Regional Programmes. Concerning
acceding countries, the Commission’s approach to recommend-
ing sectoral programmes was mainly dictated by the aim of sim-
plifying a very short (less than three-year) Structural Funds pro-
gramming period (see paragraph 23).

19.
Concerning the twofold objective of the ESC, see para-
graph 9. The method followed aimed at introducing, in a phased
manner, effective ESC programming to move progressively
towards the full approach used in Objective 1. In this context, the
dynamic impact of the negotiations has to be underlined. In 1999,
the perspective was to use most of the 2000 to 2006 period to
progressively move towards the SF approach. This perspective
was changed by the Nice and Laeken European Councils.

20.
The Structural Funds Regulation (EC) No 1260/1999
prescribe that Member States, irrespective of their regional struc-
ture, shall submit a draft Single Programming Document (SPD)
when the Community allocation is less than EUR 1 000 million.
For Community allocations above this threshold, the choice
between Community Support Framework/Operational Pro-
grammes or Single Programming Document is to a large extent
left to the Member State. In addition, in 1999 in most applicant
countries the NUTS classification was not yet established. And in
1999 no one knew what geographical set-up was going to be
implemented for Structural Funds upon accession and when this
was going to happen.

21.
To facilitate the introduction of ESC and in accordance
with the principles of focus, concentration and impact (see reply
to paragraph 9), ESC investment support was limited to target
regions while institution-building support covered the whole
country. This regionally focused approach was implemented only
in 2000 (the first year of ESC programming). In the context of the
progressive move towards the Objective 1, this approach was
widened in 2001 ESC programming (see the Phare Review) where
the possibility to have sectoral schemes at national level was
introduced. In particular, smaller countries had the option to
implement only sectoral schemes at the national level. While the
county level regions were likely not to perform Structural Fund
managing authority’s functions, they would almost certainly per-
form Structural Fund intermediate body’s functions (see para-
graph 25). Thus, experience acquired in implementing ESC mea-
sures would not be lost.

23.
Only in 2001, when it became clear that the Structural
Funds programming period was going to be very short (three
years), did DG Regional Policy propose to the countries not to
have individual Regional Operational Programmes (contrary to
current practice in Member States) but one integrated Regional
OP (IROP) covering all regions. Thus, for example, the IROP in
Poland covers all 16 regions. There was eventual agreement with
the countries that IROPs be managed centrally, but focusing on
measures to be implemented in individual regions by relevant
regional authorities.

24.
After a first year (2000) where ESC investment was lim-
ited to target regions (to facilitate its introduction), as indicated in
paragraph 21, DG Enlargement introduced ESC sector schemes at
national level for small (NUTS II) countries. For larger ‘regiona-
lised’ countries, sector schemes could co-exist with the regional
approach (see Phare 2000 Review). As indicated in paragraph 21,
it was a phased move towards the introduction of an Objective 1
approach.

25.
Experience shows that even in the case of centrally man-
aged Operational Programmes, regional bodies still have an
implementation role to play. Thus Phare institution building to
strengthen programming and administrative capacity was done at
both central and regional level. On the other hand (as explained
in paragraph 9), the principles of sound financial management
(economy, efficiency, effectiveness) required ESC investment sup-
port to be focused and concentrated to ensure impact. And as
highlighted in the Phare Review, it was neither feasible nor wise
to pilot test all regional structures by spreading limited resources
across too many programmes.

22.
Building on the lessons learned in 1994 to 1999, in the
2000 to 2006 period Member States substantially expanded the
share of regional programme versus sectoral (national) pro-
grammes. This trend was massive in larger countries with a
regionalised structure. Despite their essentially centralised admin-
istrative structure, 47 % of the 2000 to 2006 Structural Funds in
Portugal are implemented through Regional Programmes and
34 % in Greece. Ireland is a special case. In 1994 to 1999 Ireland
had still a fully centralised administrative structure, thus 100 % of
Structural

The 1999 Guidelines Decision stipulated that: ‘project
26.
the
selection and monitoring remain the responsibility of
ministries/administrations directly benefiting from assistance’ and
‘as far as possible, of sustainable institutions which will be respon-
sible for management and implementation of Community funds
upon accession, particularly the structural funds’. Thus, where
capacity existed there was an IA each for Regional Development,
ESF, SMEs and CBC (e.g. in Poland). It is also worth mentioning
that the Guidelines stipulated ‘institution building (IB) activities
will be focused on the weaknesses identified at the central,
regional, and local level particularly in view of the increased
emphasis to be given to economic and social cohesion’.

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ESC objectives (see paragraph 9) were not conflicting
27.
and, as quoted in paragraph 24, the ‘target region’ approach for
investments was followed only in the first year of ESC program-
ming (2000). While institution-building support for preparing for
Structural Funds covered the whole country (both at central and
level), ESC investment support, given its limited
regional
resources, had to be concentrated on a few priorities to have an
impact as well as to ensure compliance with sound financial man-
agement principles. This was an essential lesson for the nascent
programming structures and was a vital complement to the pre-
paring for Structural Funds objectives.

The preparatory process was not static but dynamic and
28.
determined by the wider regional policy negotiations strategy
(including common position papers). This strategy included the
responsive and evolving policy framework of the progress reports
and resulting accession partnership priorities which underpinned
the Commission decision to make Phare ESC investment available
under conditions of slow designation of managing structures and
insufficient institutional stability. However, this approach was jus-
tified by the outcome of the negotiations in terms of both actual
results and timing.

PHARE PROCEDURES

29.

See reply to paragraph 17.

30.
The 1999 Coordination Regulation stipulated that the
management of pre-accession assistance aims to be gradually
decentralised, taking account of management and control capaci-
ties. This approach involved first the Decentralised Implementa-
tion System (DIS) and then the Extended Decentralised Imple-
mentation System (EDIS) which both facilitates the phasing out of
Phare as indicated in the 2002 Communication and allows the
countries to operate with ex-post controls.

Even though the Coordination Regulation of 1999 did not make
the process mandatory for the countries, already in 2000 the
Commission elaborated guidelines on preparing for EDIS (see
Commission working document Preparing for Extended Decen-
tralisation of the Phare and Ispa Programmes). This Working
document, which included checklists on the control standards
expected to be attained for EDIS, was distributed to all countries
already also in 2000. In 2001, the Roadmap to EDIS for Ispa and
Phare was prepared and sent to the countries, giving a step-by-
step methodology for realisation of the conditions set out in the
Coordination Regulation. Both the Working documents and
Roadmap were sent by joint letters from the Regional Policy and
Enlargement DGs underpinning the strong coordinated approach
maintained for Phare and Ispa programmes. The Phare Review
affirmed that ‘decentralisation cannot start before 2002 at the ear-
liest’ and it will not be implemented ‘unless clear preconditions
have been met and the necessary financial and human resources
are in place’. Thus while earlier EDIS would have indeed been
desirable, in the reduced timeframe it proved not to be feasible.

In 2001 considerable pressure was brought to bear on
31.
the countries on the need to move towards EDIS, culminating in
a seminar at ministerial level in February 2002 with both the
Commissioner and the Director-General responsible for Enlarge-
ment as well as senior management from the Regional Policy and
Agriculture DGs. During 2002, after the accession target dates
were set at the Laeken European Council, a formal requirement
governing EDIS was stipulated in the Act of Accession and actions
already initiated were accelerated. High-level Working Groups
were only one additional tool for the Commission and the coun-
tries. In parallel, continuous guidance was provided in writing as
well as during joint seminars organised by the Regional Policy
and Enlargement DGs. Consequently, there was was no material
time difference in initiating extended decentralisation for Phare in
comparison to ISPA.

33.
The Commission acknowledges that introduction of the
new ESC instrument in 2000 resulted in slow but progressive
implementation but there is no link between introducing EDIS,
due to start ‘at the earliest in 2002’, and initial difficulties in
implementing ESC grant schemes introduced two years earlier.
Initial difficulties were mainly due to the inexperienced agencies
learning curve with the new ‘measure’ mechanism. Although
grant schemes meant increased work for Delegations (ex ante
approval of Call for Proposal and Guidelines for Applicants),
according to external aid rules (decentralised), evaluation of
project applications submitted for funding is not done by Delega-
tions
Delegations
give a global endorsement to the evaluation report and the final
list of award proposals prepared by national authorities, not an
approval to each individual grant contract.

authorities.

national

but

by

Initial difficulties were mainly due to the learning curve those
countries had to undergo with this new ‘measure’ mechanism.

Administrative weaknesses and lack of inter-ministerial
34.
coordination were a reality in 1999. Therefore, the requirements
for the Preliminary National Development Plan (whose drafts had
to be submitted by October 1999), while mirroring the Objective
1 requirements, including the partnership approach, were rela-
tively straightforward. The Preliminary National Development
Plan (PNDPs) were conceived as a first step of an on-going pro-
cess which would develop over time into the type of NDP required
for Structural Funds inside the EU. The PNDPs fulfilled a double
role of being the key steering documents for programming ESC
while at the same time being the forerunners of Structural Funds
Development Plans. In late 2000, countries were requested to
review and to develop their PNDPs by the end of 2001, to take
into account the observations from the Commission on the first
generation of PNDPs and to incorporate the lesson learned with
the 2000 ESC programming exercise. Revised PNDPs, which were
jointly passed by DG Enlargement and Structural Funds DGs,
paved the way for the Structural Funds Development Plans and
programming documents which were subsequently prepared by
acceding countries in the course of 2002 to 2003.

C 15/24

EN

Official Journal of the European Union

20.1.2005

The Phare Review identified multi-annual programming
35.
(on the basis on strengthened National Programmes for the Adop-
tion of the Acquis and PNDPs) as a medium-term task that, under
certain conditions, could have been operational from 2002
onwards. A multiannual approach in the context of Phare CBC
was easier to implement given the limited scope of the pro-
gramme and its complementary nature of a programme con-
ceived to work, since its outset, with Interreg (a programme with
multiannual programming) at the EU-CC borders. As of 1999, the
further alignment with Interreg meant that Joint Programming
Documents in a multiannual perspective (although only indica-
tive: for Phare those allocations have to be decided on an annual
basis) were adopted to cover the 2000 to 2002 period and revised
in 2003.

36.
Co-financing requirements are in all Phare investment
project fiches since 2000. As preparations for accession imposed
a considerable financial burden on candidate countries, both joint
and parallel co-financing was permitted under Phare. Even though
Phare is bound by annual financing decisions, both co-financing
forms clearly require multi-annual budgetary planning of
co-financing by the countries.

FUNDING AND IMPLEMENTATION OF PHARE PROGRAMMES
TO PREPARE CANDIDATE COUNTRIES FOR MANAGING THE
STRUCTURAL FUNDS

37.
The Special Preparatory Programme (SPP) was originally
conceived as a horizontal multi-country programme but in 1998,
in line with general policy on reducing horizontal actions, it was
phased out. As of 1999 SPP-comparable activities were incorpo-
rated into the National Programmes, mainly through institution
building support.

39.
The indicative objective of allocating approximately 35 %
of Phare national programmes to ESC was ‘to be applied with
flexibility on a country-by-country basis’ (Phare Guidelines Deci-
sion 1999). In 2003 there was a deliberate focus on ESC to com-
pensate for the need to concentrate on building administrative
and judicial capacity in 2002. Several countries devoted well over
35 % of their 2003 funds to investment in ESC. The average was
39 %.

limited. 2000 was the first year of ESC and the total for ESC
accounted for 23 % of the National Programme. In 2000 the ESC
share of the total rose to 45 %. In 2002 and 2003, given limited
capacity, the allocation was reduced to allow earlier commitments
to be contracted. The totals were 15 % and 12 % respectively. It
is in any case much more meaningful to look on a multi-annual
basis, rather than focus on the annual variances. Overall, since
introduction of ESC, 23 % of the National Programme has gone
to ESC, under the 30 % indicative target, but this is reasonable for
a country much further from accession than most other recipi-
ents and still developing its capacity.

41.
Until 2002, most Structural Funds’ national structures
were not yet designated. Consequently it was difficult to support
them. In 2000 and 2001, the Commission was already pushing
for progress by making Phare ESC investment decisions under
conditions of acute institutional uncertainty. However, this enter-
prising approach was in the end vindicated by the outcome of the
negotiations in terms of both actual results and timing. As it
turned out, the timeframe was approximately halved but never-
theless there was still some time available for actual ESC imple-
mentation. However, for institution building such an approach is
more difficult and actions were focused on areas where the least
uncertainty existed.

42.
An evolutionary approach is not an inconsistent one.
The programming approach followed in 2000 was evolutionary
for the pre-accession period, moving towards the full Structural
Funds approach (i.e. thematic and regional programmes covering
the whole national territory) as quickly as was feasible. Concern-
ing the regional versus sector approach, see replies to paragraphs
9, 21 and 24. The change in ministries responsible for drafting
PNDPs and subsequently NDPs followed the designation of
authorities responsible for SFs which took place late in the pro-
cess (2002).

reply

As higlighted in the

to paragraph 33,
43.
the countries were not familiar with ESC projects, and namely
with their implementing tool: ESC grant schemes. This required a
learning process which, although causing delay in the implemen-
tation, was a valuable building block essential for future Structural
Funds implementation. In regard to Bulgaria, the Commission
agreed with the Court’s observations in September 2002 and cor-
rective measures were taken.

40.
In Bulgaria the 2000 programme was committed in late
2000 with a contracting deadline of end-2002. Similarly, the
2001 programme was committed in late 2001. By late 2001,
little of the 2000 ESC had been contracted as the authorities
coped with the new instrument including grant schemes. At this
stage the implementation difficulties referred to had not emerged
and there was therefore no reason to reduce ESC allocations.
When difficulties did emerge in 2002, the Commission acted
responsibly by reducing allocations for that year. Despite the dif-
ficulties indicated, contracting losses for 2000 and 2001 were

44.
In keeping with its objective to prepare for Structural
Funds, Phare ESC investments closely mirrored ESF and ERDF-
type investments. Under the latter, investments in basic economic
infrastructure are fully eligible if they help to increase the eco-
nomic potential of the regions, thus supporting the productive
environment. In other words, improving the standard of the infra-
structure is a basic pre-condition for any economic and social
development.

20.1.2005

EN

Official Journal of the European Union

C 15/25

The 1999 Project Preparation Facility (PPF) was the only
45.
horizontal multi-country programme of its type. In line with the
general policy of moving from horizontal/multi-country pro-
gramming to national programming, candidate countries were
urged to establish PPFs within their national programmes (includ-
ing for developing a pipeline of projects for the Structural Funds).
However, if candidate countries decide that sufficient investment
in building up a project pipeline has been done, that is their
prerogative.

Twinning delays in a particular selection of Member State
50.
partners were invariably due to the slow designation of ministry
and implementation agency responsibilities which only took
place under the pressure of the negotiations. The Commission
could not interfere in the internal political processes of the can-
didate countries while these issues were being resolved. Both in
terms of its ESC investment decisions and institution-building
actions, the Commission was pushing the limits of what was fea-
sible and possible.

46.
See also replies to paragraphs 33 and 43. The Commis-
sion is of the view that initial data indicating a disbursement rate
of almost 72 % for 2000, the first year of the new ESC instru-
ment, at the end of 2003 is under the circumstances a good per-
formance. Not surprisingly, start-up difficulties indeed revealed
administrative capacity constraints. However, this did not slow
down efforts to improve capacity but in fact contributed to speed-
ing them up. This was evident in the 2002 Accession Partnerships
priorities and Action Plans for Administrative Capacity, includ-
ing for ESC institution building, which averaged about 6 % of
national programmes. Consequently, during the audit period
most countries allocated more of their programmes to institution
building.

47.
The drafts of the first generation of PNDPs were due to
be submitted to the Commission by the end of October 1999
with or without Twinning assistance in order to facilitate ESC
programming in 2000. However, Twinning had a significant
impact on the revised (second generation) PNDP submitted in
2001 (see paragraph 34).

51.
See replies to paragraphs 33 and 43. Commission Del-
egations played a great role in contributing to improving the
quality and soundness of the grant schemes-related documents
and procedures, thus contributing to the learning process that
candidate countries had inevitably to go through.

52.
Given that only the first year of ESC (2000 projects) are
finishing implementation, the evidence available makes it difficult
to base reasonable doubts on such limited data as well as taking
into account the fact that countries had competing priorities in
their preparations for accession.

RESULTS OF INSTITUTION-BUILDING PROJECTS TO PREPARE
CANDIDATE COUNTRIES FOR MANAGING THE STRUCTURAL
FUNDS

56.
As was established in the Court’s Special Report on Twin-
ning, this instrument improved significantly after its start-up
phase and general conclusions cannot be drawn from difficulties
in the start-up phase prior to the Commission’s own evaluation
of the instrument and remedial measures taken.

48.
Any impact on implementation of pilot projects of the
clarification or modification of procedures was quite marginal in
comparison to other fundamental factors identified in the report
i.e. institutional uncertainty and weaknesses on the part of the
administrations as outlined in observations 51 to 60.

To the limited extent that the respective roles of Twin-
57.
ning pre-accession advisers and consultants were not defined, this
was a project management operational problem shared by the
country administrations (mainly) and Member State project lead-
ers responsible for these projects (and is addressed in the various
replies in the Court’s Twinning Reports).

49.
Start-up problems are almost inevitable with any new ini-
tiative, and this was also the case with the PPF facility. Indeed due
to weak administrative capacity in one country, the Head of Del-
egation decided on derogation from the standard tendering
period. However no tendering rules were ‘broken’ in the sense of
an irregularity. The reasons for derogation were justifiable and
documented.

58.
Candidate countries were requested repeatedly to desig-
nate authorities at earlier dates but internal political constraints
prevented them from so doing, which was only resolved in the
final stages of the negotiations as the Court indicates in several
observations above. However, thanks also to the Phare ESC
approach (PNDPs), overall planning capacity was established and
allowed candidate countries to submit their draft SF Development
plans in early 2003 (in order to assure timely approval and launch
in 2004 of CSFs+OPs and SPDs). These plans were also approved
in 2003 and this was an unprecedented achievement.

C 15/26

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Official Journal of the European Union

20.1.2005

As highlighted in replies to paragraphs 9, 25 and 27, IB
61.
was used on the whole territory, at central and regional level, for
preparing the structures due to manage the ESC, whereas, as the
Phare Review stipulated: ‘Phare investment support in the ESC
must be focused on a few priorities if it is to have an impact. It is
neither feasible nor wise to pilot test all structures and instru-
ments that will be developed through IB. This concentration
requires a discipline on programming to ensure that resources are
not spread too thinly across too many programmes’. This was in
accordance with the SFM principles of economy, efficiency and
effectiveness.

CONCLUSIONS

63.
Given that assisting preparations for Structural Funds
was always only one of the ESC objectives and that the Commis-
sion has met the aim of delivering around 35 % of total financing
for national programmes in the form of investment in the ESC,
complemented by considerable related institutional building,
results are consistent with the the original timeframe. It is ques-
tionable as to whether arrangements similar to Sapard and ISPA
(effectively a fourth instrument) would have served better. It is
also highly doubtful as to whether countries stretched to their
limits by accession preparations could have sustained a second
full decentralisation process without major disruptions in assis-
tance delivery. Great progress was achieved in the context of a
compressed timeframe determined by the pace of the negotia-
tions and not defined at the outset. Overall planning capacity was
established and allowed these countries to submit their draft SF
Development Plans in early 2003 (and gain approval in 2003).
This was never achieved before. The focus, concentration and
impact standards of ESC were never at odds with the Structural
Funds objective. A more diffused deployment of the limited
resources would have provided a bad example of management of
Community funds. The Commission considers that an overall
evolutionary strategy did exist (Progress Reports and resulting
Accession Partnerships) on which the Phare programme includ-
ing ESC was based. Most of the ESC contribution to this overall
strategy continues as most ESC investment is being delivered
beyond the audit period.

Modified Phare procedures mirrored ERDF and ESF mea-
64.
sures to the maximum extent allowed by the external assistance
provisions of the Financial Regulations. Progress beyond the legal
limits thereby imposed was impossible. On EDIS, the Phare
Review stipulated that decentralisation could not start before
2002 at the earliest due to the preparation needed to ensure
adequate management and financial control systems were in place
and operational. The legal obligation to move to EDIS only arose
in the Act of Accession after the timeframe was compressed by
the acceleration in the negotiations. In addition there was no legal
link between the introduction of EDIS
or other procedural

starting at the earliest in 2002 and the initial difficulties encoun-
tered in the implementation of grant schemes introduced in
2000. These initial difficulties were mainly due to the learning
curve countries had to undergo with this new mechanism similar
to ERDF/ESF measures (see also reply to paragraphs 28 to 36).

65.
Given the legal flexibility of the Phare Guidelines, alloca-
tions were relatively high. In 2001 to 2002, on average, ESC
investment accounted for almost 37 % of national programme
financing (see 38), in line with the aim in the 2000 Phare Review.
The indicative (i.e. suggestive, it was not a minimum requirement)
35 % ESC allocation was ‘to be applied with flexibility on a
country-by-country basis’ (Phare Guidelines Decision 1999). Con-
sequently, seven out of ten countries chose to allocate less than
35 % to the ESC and, as a result, more to other Accession Part-
nership priorities. Three large countries allocated substantially
more to the ESC, thereby raising the average to 37 %. In addition,
the ESC institution building has accounted for about 6 % of the
entire national programme financing, on average, over the same
period, bringing total average allocations to well over 40 % annu-
ally. Consequently, it is not clear how ESC allocations have been
insufficient in either individual countries or in overall terms.

67.
Even if not all initial ambitions were realised within a
timeframe reduced by rapid accelerations in the negotiations, this
was primarily due to the inherent difficulties and delays in desig-
nation of the future institutions responsible for managing struc-
tural funds. In certain instances, insufficient stability of some
institutions indeed significantly impeded the impact of prepara-
tory pre-accession assistance. Nevertheless, the evidence to date is
that the main objectives were indeed realised, as reflected in the
negotiations themselves and follow-up monitoring reports and in
all subsequent programming developments to an extent never
achieved before. Meanwhile, the majority of ESC and related insti-
tution building programmes continue to deliver assistance
beyond the audit period and the prognosis for the SFs is positive.

RECOMMENDATIONS

68.
After accession the new Member States will continue to
receive a great deal of direct support from the Structural Funds
Directorates-General to help them to manage programmes effec-
tively, just as they have in framing the programmes and design-
ing their delivery and management systems.

The new Member States have all set up audit services to
69.
fulfil the financial control requirements laid down by Regulation
(EC) No 438/2001 and the Commission will ensure that these
begin work immediately and will itself monitor and test these
systems.

70.
The lessons learned are already being taken into account
and the Bulgaria and Romania Roadmaps together with the
revised Phare Guidelines already outline the strategy underway.

20.1.2005

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Official Journal of the European Union

C 15/27

Designation of implementation agencies is a sovereign
71.
decision for the candidate countries themselves and the Commis-
sion has no mandate to dictate such a decision. Actually, in the
progression of EDIS accreditation, the process is the other way
round. Phare implementing agencies, in order not to lose the
experience they acquired, should become (or be integrated into)
the SF managing and implementing bodies. In the context of the
Roadmaps for Bulgaria and Romania, and in the light of the con-
siderably enhanced amounts that will be available, both countries

were invited (and have agreed) to implement EDIS two years
before accession. This will be monitored through the High-level
Working Group process and all projects in the 2004 national
programmes are being designed for implementation under EDIS.
The Phare Guidelines have been revised and the Programming
Guide for 2004 has already been revised to introduce multi-
annual planning for ESC and, where appropriate and feasible, also
for institution building.