Special Report No 4/2006 concerning Phare investment projects in Bulgaria and Romania, together with the replies of the Commission
Date: 2006-05-11
Institutions: European Court of Auditors
Subjects: Bulgaria, Central and Eastern Europe, EU programme, Romania, accession to the European Union, financial aid, report

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 4/2006

concerning Phare investment projects in Bulgaria and Romania, together
with the replies of the Commission

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

(2006/C 174/01)

CONTENTS

Paragraph

Page

LIST OF ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

Overall Phare objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Phare programming and implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financial significance of investment support in national programmes . . . . . . . . . . . . . . .

AUDIT SCOPE AND APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OBSERVATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Projects were in line with overall Phare objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investments took place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Over half of projects not operating as intended at the time of audit

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

Strengthening the Public Prosecutor’s Office in Bulgaria . . . . . . . . . . . . . . . . . . . . .

Strengthening the Romanian judicial and penitentiary system . . . . . . . . . . . . . . . . .

Investment in SME business incubators in areas of industrial decline in Bulgaria

Local and regional infrastructure projects in Romania . . . . . . . . . . . . . . . . . . . . . . .

Bulgarian Post-Privatisation Fund (BPPF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Energy sector liberalisation in Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Agrostatistics in Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Asylum in Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In most projects audited sustainability was not assured . . . . . . . . . . . . . . . . . . . . . . . . . .

Risks to technical viability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Risks to economic viability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

I-VII

1-11

1-4

5-10

11

12-14

15-56

15-16

17-18

19-42

20-23

24-25

26-28

29-31

32-36

37-38

39

40-42

43-56

44-50

51-56

57-61

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

2

3

4

4

4

4

4

6

6

6

6

6

7

7

7

8

8

8

9

9

9

10

10

15

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LIST OF ABBREVIATIONS

Acquis communautaire

Entire body of EU law as expressed in the treaties, in the secondary legislation
and policies of the Union, as well as in the case-law of the European Court of
Justice

AP

ASNS

BPPF

CDMS

CEEC

DIS

EBRD

ESC

NBPS

NRO

Phare

PO

SME

UIS

Accession Partnership

Agricultural statistical network system

Bulgarian Post-Privatisation Fund

Case and document management system

Central and eastern European countries

Decentralised implementation system

European Bank for Reconstruction and Development

Economic and social cohesion

National Border Police Service (Bulgaria)

National Refugee Office (Romania)

The Phare programme is currently the EU’s main instrument of financial and
technical cooperation with the candidate central and eastern European coun-
tries (CEECs). It was set up in 1989 and originally aimed only at two coun-
tries: Poland and Hungary

Prosecutor’s Office

Small and medium-sized enterprises

Unified information filing system

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SUMMARY

I.
The Phare programme provides financial assistance to countries in central and eastern Europe which are
candidates to join the European Union. The Commission and the national authorities share the management
of the Phare programme. The Commission has overall responsibility for managing the programme. Recipient
countries have primary responsibility for undertaking and operating the projects (see paragraphs 8 to 10).

II.
The purpose of the Court’s audit was to assess the performance of Phare supported investment projects
in Bulgaria and Romania. The conclusions are based on the examination of a sample of projects financed under
the Phare National Programmes 2000. The final payments for these programmes were made in 2005 (see para-
graphs 12 to 14).

III.
The audited projects were generally in line with the overall investment objectives of Phare, namely to
facilitate the alignment with EU norms and standards or to assist in the context of economic and social cohe-
sion (ESC) programmes (see paragraphs 15 and 16). The Court also got assurance that, in general, the projects
were put into place in accordance with the conditions of the supply and works contracts (see paragraphs 17
and 18).

IV.
For over half of the investment projects audited, assets were not, or only partially, being used for the
intended purpose. Output and results lagged considerably behind schedule, sometimes by up to two years.
These shortcomings were due to the continuing lack of both administrative capacity and national resources.
This illustrates the need for the national authorities to make further substantial efforts to finalise the projects
and to achieve the underlying project objectives (see paragraphs 19 to 42).

V.
Phare support for the two projects led by international financial institutions was problematic. In Bul-
garia, the Post-Privatisation Fund lacked efficiency and effectiveness (low level of equity investments opposed
to high management costs), whereas in Romania the Phare contribution did not provide clear added value for
a better regulatory infrastructure in the electricity market (see paragraphs 32 to 36 and paragraphs 37 and 38).

VI.
The technical viability of the investment goods is not assured and their longevity is at risk. With regard
to the supported business parks and incubators many management problems are still to be solved to achieve
the desired economic viability (see paragraphs 43 to 56).

VII.
The Commission is responsible in particular for the development of Phare policy, the programming
of Phare aid and for its supervision. While its checking of projects prior to financing (ex ante control) proved
to be effective, the Court criticises the Commission’s overall management of investment projects in three par-
ticular areas:

— it overestimated the management capacity of the public authorities in Bulgaria and Romania and often

agreed with their overambitious targets and deadlines,

— it neglected the principles of sustainability and co-financing,

— it did not consider enough the expected added value and catalytic effect of Phare money in activities led

by international financial institutions.

Accordingly the Commission should take steps to improve its management regarding these three aspects (see
paragraphs 57 to 61).

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INTRODUCTION

Overall Phare objective

regarding national programmes and specific subjects such as
cross-border
cooperation programmes, multicountry pro-
grammes or nuclear safety programmes. The annual national pro-
grammes finance priority needs related to accession.

1.
Since 1997 the overall objective of the Phare programme
has been to help the central and eastern European countries
(CEEC) to prepare to join the European Union. In order to sup-
port the reforms required for EU membership, the Phare pro-
gramme provides financial assistance as part of the Union’s pre-
accession strategy.

7.
Financing memoranda are accompanied by the so-called
Project Fiches which set out the details of all projects to be imple-
mented. Project Fiches are key planning documents, giving the
objectives of each project including indicators of achievement and
the timetable for implementation. As a rule, projects have to be
implemented within three years of the signature of the financing
memorandum.

In October 1999 the Commission adopted specific guide-
2.
lines for the implementation of the Phare programme for the
period 2000 to 2006 (1). According to these guidelines Phare
support had to focus on two main priorities, investment and insti-
tution building (2).

3.
After the accession of 10 countries in May 2004 a major
focus of the enlargement policy became the implementation of
the accession roadmaps for Bulgaria and Romania.

4.
After the closure of the accession negotiations in Decem-
ber 2004 the Commission adopted in February 2005 a favour-
able opinion on the accession of these two countries to the EU.
Following the green light given by the European Parliament, the
Treaty of Accession with Bulgaria and Romania was signed in
April 2005 in Luxembourg. This signature paves the way for the
ratification procedures that will formalise Bulgaria’s and Roma-
nia’s membership on 1 January 2007. However the Council may
decide to postpone the date of accession by one year to 1 Janu-
ary 2008 if either State does not fulfil the commitments under-
taken during the negotiations.

The management of the Phare programme is shared
8.
between the Commission and the national authorities. The Com-
mission (Headquarters and Delegations in Sofia and Bucharest) is
responsible for the overall management of the Phare programme
and in particular for the development of Phare policy, the pro-
gramming of Phare aid and for its supervision. Primary responsi-
bility for undertaking and operating the projects lies with Bulgaria
and Romania.

The Phare programme is currently operating in Bulgaria
9.
and Romania under the so-called ‘decentralised implementation
system’ (DIS). This means that the public authorities in Bulgaria
and Romania themselves carry out the procurement procedures
for investments. However, before it comes to contracting, the
regularity of the procedures is checked by the Commission Del-
egations in each country (ex ante control).

10.
Monitoring of programme implementation is the joint
responsibility of the acceding countries and the Commission,
through the Joint Monitoring Committee. The role of monitoring
is to steer the programme and the underlying projects towards
their agreed objectives.

Phare programming and implementation

Financial significance of investment support
programmes

in national

5.
The EU’s ongoing pre-accession strategy for Bulgaria and
Romania is based on the Accession Partnerships (AP), which pro-
vide a framework for the programming of priorities and financial
resources. On the basis of the priorities identified in the APs,
financial assistance is made available through annual financing
decisions taken by the Commission.

11.
The Phare national programmes for the years 2000
to 2004 allocated a total of 511 million euro to Bulgaria and
1 400 million euro to Romania, of which 262 million euro
(51,3 %) and 806 million euro (57,6 %) for Bulgaria and Roma-
nia respectively were devoted to investment support (see Annex I).

6.
These financing decisions are followed by financing
memoranda agreed between the Commission and the Bulgarian
and Romanian authorities. Financing memoranda are concluded

(1) SEC(1999) 1596 final: Guidelines for Phare programme implementa-
tion in candidate countries for the period 2000 to 2006 in applica-
tion of Article 8 of Council Regulation (EEC) No 3906/89, Brussels,
13.10.1999. The guidelines were revised in September 2002 and in
December 2003.

(2) Investment normally means buildings and equipment, for which the
National Authorities conclude works and supply contracts. Institution
building is defined as the process of helping the candidate countries
to develop the structures, strategies, human resources and manage-
ment skills needed to strengthen their economic, social, regulatory and
administrative capacity. The main instrument is Twinning (see the
Court’s Special Report No 6/2003 concerning Twinning as the main
instrument to support institution building in candidate countries).

AUDIT SCOPE AND APPROACH

12.
The primary objective of the Court’s audit was to con-
clude on the outputs and results of the investment components
of Phare supported projects in Bulgaria and Romania. The audit
asked four questions:

— Were the projects in line with overall Phare objectives?

— Did the projects take place?

— Were the projects operating as intended?

— Were the projects sustainable?

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Diagram shows the focus of the Court’s audit.

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The audit examined projects which were fully imple-
13.
mented or were close to completion. These projects were drawn
from the Phare National Programmes 2000 which were due to be
completed by the end of 2003 but for which some projects con-
tinued until the end of 2005.

Phare national programmes for the year 2000 allocated
14.
34,6 million euro to investment components
in Bulgaria
and 146,6 million euro to those in Romania (see Annexes II
and III). The Court audited 11 projects (1) involving 48 supply
and works contracts which represent Phare support of 14 million
euro for Bulgaria and 51 million euro for Romania. The audit
team examined the projects on the spot in the first half of 2005,
including visits to national implementing bodies and interim
evaluation units (2).

OBSERVATIONS

Projects were in line with overall Phare objectives

15.
The overall objective of the Phare programme is to help
candidate countries prepare for EU membership. This involves
investments with the aim of strengthening:

(a)

the regulatory infrastructure needed to ensure compliance
with the acquis communautaire (3);

(b) Economic and social cohesion (ESC) through measures simi-
lar to those supported in Member States through the Struc-
tural Funds, including addressing the effects of restructuring
in important sectors of the economy.

16.
The investment projects audited were in line with these
overall Phare objectives. The projects examined were accession-
driven, either by addressing the capacity to monitor and enforce
the acquis communautaire (e.g. implementation of environmental
regulations) or by addressing Economic and Social Cohesion (e.g.
creation of business parks for small and medium-sized enterprises
(SMEs)).

Investments took place

17.
In general, the investments audited were physically in
place in accordance with the conditions of the supply and works
contracts. This means that an initial condition for project success
was generally fulfilled based on the joint efforts of the authorities
in the two acceding States and of the Commission.

(1) A project in a national programme usually consists of numerous com-

ponents, which all contribute to the same objective.

(2) A consortium is contracted under Phare to carry out annual interim

evaluations of the projects.

(3) The entire body of EU law as expressed in the treaties, in the second-
ary legislation and policies of the Union, as well as in the case-law of
the European Court of Justice.

Some examples from all projects audited are given in

18.
Box 1 to illustrate the investments in place.

Box 1

— The digital mobile radio communication system delivered to the
National Border Police Service (NBPS) in Bulgaria (contract value
of 6,0 million euro). The system operates in the Lyubimetz bor-
der region (adjacent to Turkey) which is according to the Com-
mission one of the most critical areas of Bulgaria in terms of
cross-border criminality and a major transit route and conduit
for illegal immigration.

— The equipment supporting the border police of Romania in
respect of mobility (4,4 million euro) and surveillance (5,0 mil-
lion euro) at the eastern border with Moldova and Ukraine.

— Monitoring equipment in the areas of industrial pollution and

radiation protection (Bulgaria).

— Infrastructure needed for improved accommodation of asylum

seekers/refugees (Romania).

— Computer equipment for the Ministry of Agriculture and For-

estry (Bulgaria).

— A prisoner management database for the penitentiary system

(Romania).

Over half of projects not operating as intended at the time of
audit

It is not sufficient simply to have the investments in
19.
place. For over half of the investment projects audited, the assets
were not, or were only partially, being properly used for the
intended purpose. Output and results lagged considerably behind
schedule, sometimes by up to two years. The following cases
show that progress towards the achievement of specific project
objectives has been less than planned (paragraphs 20 to 42).

Strengthening the Public Prosecutor’s Office in Bulgaria

20.
The specific objective of this project was the modernisa-
tion of all Prosecutors’ Office (PO) units at central, regional and
levels. The investment support (total contract value of
local
1,8 million euro) comprised the supply of computer and net-
working equipment and the implementation of a unified infor-
mation filing system (UIS).

21.
The UIS software was delivered in 2003 but only used in
one of the eight locations visited by the Court. A final acceptance
certificate for the UIS software had not been issued at the time of
the audit in May 2005, because too many errors had been found
in its functioning.

22.
Furthermore inconsistencies in the IT strategy and imbal-
ances between software and hardware were identified (e.g. inte-
gration problems with existing software; 37 workstations not

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used but put in a store room at one PO unit; risk to the intended
wider use of the UIS due to Internet provider problems).

Therefore, 18 months after the target date for comple-
23.
tion (end of 2003) the new UIS system was still in the testing
phase and could not yet serve as an important tool in the fight
against organised crime and corruption. The complexity, techni-
cal feasibility and compatibility with existing systems had been
underestimated when the project was designed by the Commis-
sion and the Bulgarian authorities.

Six buildings were finally selected for renovation. At the
27.
time of the audit in July 2005 only one (Montana) was starting to
operate as a business incubator. Five years after the needs assess-
ment, no regional impact in terms of the creation of alternative
jobs in areas of industrial decline had materialised.

28.
The lack of progress was mainly due to the weak imple-
mentation capacity of the national authorities. Weak administra-
tive capacity was also the main reason that a further project in the
area of SMEs was cancelled (see Box 2).

Strengthening the Romanian judicial and penitentiary
system

Box 2

24.
A similar project was implemented in Romania (three
supply contracts with a total value of 8,4 million euro) with the
objective of creating a Case and Document Management System
(CDMS) which would link all the courts and prosecutorial offices
in the country. Software for a CDMS system was already devel-
oped under an earlier Phare project and delivered in September
2002. The goal of the Phare 2000 project was to be ‘the last step
in linking all the courts and prosecutorial offices in the system’.

25.
At the beginning of 2005, the overall objective of the
project (having a functioning countrywide application of CDMS)
was still not achieved, although original project completion was
foreseen by the end of November 2003. At each location visited
by the Court the hardware had been installed in accordance with
the contracts. However, the software delivered under the earlier
Phare programme was only partially used. Moreover, large parts
of the judicial network in Romania were still untouched by
CDMS, because the Romanian authorities did not respect their
substantial co-financing commitments namely to make available
12 million euro to the Ministry of Justice and 10 million euro to
the Public Ministry within the duration of the programme (1). The
absence of these financial commitments showed that this project
for the reform of the judicial system to meet EU standards was
not treated as a priority by the Romanian Government.

Investment in SME business incubators in areas of industrial
decline in Bulgaria

The intended project in Bulgaria with the title ‘SME Quality Certifica-
tion’ (allocated budget of 4,8 million euro) was not carried out at all
in the end. It had the specific objective of improving the competitive-
ness and export capability of the manufacturing sector. The ex ante
control (see paragraph 9) by the Delegation in Sofia worked efficiently
rejecting the first call for proposal documentation because of a lack
of adequate implementation structures and procedures for grant
schemes in the relevant Ministries. In the end, the Delegation did not
approve the grant award process because the assessment of adminis-
trative compliance and eligibility of applicants by the Bulgarians was
not consistent and the companies were not equally treated. The Bul-
garian authorities, for their part, blamed the Delegation for not deliv-
ering consistent information about the EU legal framework to be
applied.

Local and regional infrastructure projects in Romania

29.
At the time of the audit in March 2005, major efforts
were also still necessary for the achievement of the objectives for
two business infrastructure development parks in Romania (total
contract value of 13,7 million euro). Construction was still under-
way, whereas the original completion date according to the
project fiche was October 2004. Design flaws contributed to the
prolongation of the works contracts. Concerning the future of
these two projects, a series of management problems still had to
be solved (see paragraphs 53 to 56 under the title ‘Risks to eco-
nomic viability’).

26.
The SME Business Incubators project (allocated budget of
2,7 million euro for investment) had the objective of strengthen-
ing the SME sector in the north-west and south-central regions of
Bulgaria. Business incubators were supposed to be created by
renovating old buildings in areas of industrial decline in the two
regions. Individuals should be encouraged to start up new enter-
prises to create new employment opportunities to replace those
lost in traditional industries that had been forced to restructure.

(1) The purpose of the loans was to provide hardware in the majority of

judicial locations throughout the country.

30.
A further project in Romania was entitled ‘Modernisation
and development of tourist infrastructure in Piatra Neamt’ (con-
tract value of 2,3 million euro). The infrastructure was in place,
in accordance with the works contract. The project title was,
however, misleading, because there was little in the renovated
area to attract tourists. Major items financed were a bridge and a
3 km street, both outside the leisure area and regularly used by
local traffic. The ‘tourist’ area itself is an entertainment facility
mainly used (in spring and summer) by the local community. Fur-
thermore the site contains an eyesore, an empty, degraded
Olympic-size swimming pool. Thus the area, known as the
Strand, looks only half rehabilitated and could not create new
employment, as intended, by attracting tourists.

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Two other infrastructure projects in Romania were

31.
blocked from achieving their objectives:

The Bulgarian authorities were not satisfied with the fund
35.
and the Commission intervened to stop any more EU money
being spent. The EBRD wound up the BPPF ahead of schedule at
the end of 2002.

(a)

the bridge linking Romania and Moldova over the River Prut
was completed in December 2004 (total contract price of
3,1 million euro). Unfortunately it cannot be used since the
access road on the Moldovan side has yet to be built. More-
over, border checkpoints are missing on either side;

(b) construction work on a hall for international fairs in Con-
stanta (6,4 million euro project) stopped in September 2004
when Constanta County Council withdrew its construction
permit, claiming technical discrepancies. Since then, contin-
ued and reasoned efforts by the different stakeholders failed
to persuade the Council to issue a new permit. Although real
costs of about 3 million euro have been incurred, the project
is in serious jeopardy.

Bulgarian Post-Privatisation Fund (BPPF)

32.
A special case of investment support was the Phare
spending on the Bulgarian Post-Privatisation Fund (BPPF). The
European Bank for Reconstruction and Development (EBRD) cre-
ated the BPPF in 1998 as a fund of 10 years’ duration. The objec-
tive was to contribute to the development of the private sector in
Bulgaria and to improve the performance of selected Bulgarian
private enterprises by providing them with long-term equity
finance and know-how.

36.
The main reason for the BPPF’s failure, apparently, was
the performance of the Fund Management Company, which was
making incorrect appraisals (investment decisions) in the gener-
ally difficult post-privatisation situation. The incentive to work
cost-effectively was reduced because all operating expenses were
taken over by Phare. Because it was being used to support the
normal business of the EBRD, the catalytical (1) effect of the
investment was not achieved.

Energy sector liberalisation in Romania

37.
In Romania, the project to modernise the electricity
industries has suffered considerable delays, slowing down Roma-
nia’s preparation for entry into the EU internal energy market.
Phare covers 11 % of the 203 million euro investment part of the
programme,
the remainder being supported by national
co-financing (24 %) and loans from the EBRD (25 %) and the
European Investment Bank (40 %). The original target for com-
pleting improvements to the transmission grid (including all
Phare elements) was August 2002. This was put back twice, first
to November 2004 and then to June 2005. Contracting was
stalled by the hesitancy of the Government in meeting one of the
project conditions: satisfactory progress in the privatisation of
two electricity distribution companies.

33.
The EBRD had the overall responsibility for the BPPF and
used an asset management company as fund manager. The EBRD
capitalised the BPPF with 30 million euro of equity funds and
received 6,5 million euro of Phare payments from Bulgaria’s
1997 to 2000 Phare national programmes. The Phare money,
since it was not a form of a direct investment, was used for the
operating expenses of the Fund Manager, consultancy advice to
enterprises and the EBRD’s own management fee.

The project contributed to the restructuring of the sector
38.
in line with EU directives. However, with this project being mainly
implemented via loans by the EBRD and the European Investment
Bank, the additionality (2) of the Phare component is not evident.
Furthermore the Phare-funded components assisted the transmis-
sion provider and the commercial market operator rather than
the electricity regulatory authority directly.

Several factors indicate that Phare spending was neither

34.
efficient nor effective:

Agrostatistics in Bulgaria

(a)

instead of investing in 12 to 15 companies, the BPPF had
acquired stakes in only six;

(b) one of these six companies — one in which the Fund had
made by far the largest investment (4 million euro) — went
bankrupt;

(c)

the Fund Manager’s management costs were disproportion-
ately high: 4,5 million euro were used for the Fund’s admin-
istrative costs during the period 1998 to 2002, whereas the
total amount for direct equity investments in the six compa-
nies after their privatisation was only 11,6 million euro.

In Bulgaria, completion of the ‘Restructuring the agricul-
39.
tural statistics system’ project (total contracted value of 0,4 mil-
lion euro) was planned for January 2002. IT equipment was
installed at the beginning of 2003, but has not yet been used for
the intended purpose. This is because the software that was deliv-
ered was faulty, due to the poor performance of the software sup-
plier. As a result, the agricultural statistical network system

(1) The Phare implementing guidelines state that the support for invest-
ment ‘must act as a catalyst for a priority, accession-driven actions
which would otherwise not take place or which would only take place
at a later date’.

(2) Phare implementing guidelines state that the support for investment
‘should not displace other financiers, especially from the private sec-
tor or from the internal financial institutions’.

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(ASNS) was not yet operational in January 2005, although the
Commission indicated that significant progress has since been
made. The Ministry of Agriculture and Forestry suffers from not
having the ASNS in place which would facilitate the implemen-
tation of the common agricultural policy of the EU in future.

became evident in many cases. The Prosecutor’s Office (PO) in
Bulgaria had an insufficient budget to cover basic requirements
such as adequately qualified IT experts, scanners or adequately
cooled rooms for servers. In the judicial sector of Romania (CDMS
system), there were similar problems.

Asylum in Romania

40.
The asylum project in Romania (total contract value of
1,6 million euro) aims to further develop the asylum system,
towards harmonisation with European procedures and practice.
The funding was mainly used for the creation of two new accom-
modation centres in Galati (eastern border) and Timisoara (west-
ern border).

41.
The facilities of the Galati centre were to a large extent
not used. The number of asylum-seekers accommodated in the
centre at the time of the audit was only 19, which means an occu-
pancy rate of 7,6 % (1). The persons accommodated in June 2005
were not local applicants, but a group of Bangladeshis transported
to the centre from other parts of Romania. According to the
National Refugee Office (NRO), there have never been any appli-
cations for asylum at border crossing points along the eastern
border (or at scarcely any of Romania’s external borders, apart
from Bucharest airport). The overall picture in Galati — no appli-
cants entering from the eastern border, two floors of the building
unused, household goods untouched, medical supplies unopened,
cars barely used — suggests that it was not really necessary to cre-
ate this new accommodation centre in Galati.

42.
The overall picture for Romania was that there were
more facilities for asylum seekers and refugees than actually
needed. On the other hand, it is hard to predict the number of
future asylum seekers, because of the uncertainty regarding the
future economic environment and the stability of the region. If
low occupancy continues in the coming years, there will be a
pressing need to consider alternative uses for these buildings and
their equipment, especially the perishable part.

In most projects audited sustainability was not assured

43.
According to the Phare guidelines the investment
projects must be sustainable beyond the date of accession, includ-
ing financial means to cover future maintenance and operation
costs. The Court audited sustainability based on two aspects: tech-
nical viability for investment goods (see paragraphs 44 to 50) and
economic viability for business incubators and industrial parks (see
paragraphs 51 to 56).

Risks to technical viability

45.
A lack of available national resources, together with the
intricacy of some equipment, had already caused difficulty in
some projects. The following examples in the area of border
police equipment show the consequences of maintenance
problems.

46.
The NBPS in Bulgaria indicated that the national financ-
ing for the maintenance of the radio communication system after
the guarantee period had not been earmarked. In addition, elec-
tronic parts of the thermal imaging surveillance systems would
need to be renewed after a life of five to seven years. In 2007 the
thermovision cameras will have been in service for five years.

47.
The proper use of new and modern equipment enhances
its longevity. Officers must be trained to operate the equipment
in order to get the best from it. In this case the training compo-
nent of the project (0,5 million euro), which was also intended to
strengthen inter-agency cooperation, had not taken place.

48.
The Bulgarian border police foresees problems in main-
taining the four-wheel drive vehicles. The brand introduced by the
winning tender has no local maintenance facilities. The usual fleet
car of the NBPS is a Russian-built car, costing one third of the
price of the type of car delivered under Phare and with cheaper
spare parts. However, the Phare rules on European origin prevent
the purchase of vehicles from outside the EU or candidate
countries.

Having resources available for maintenance is all the
49.
more important as some of the equipment was unreliable or its
technical capabilities did not meet the requirements of the users:

(a)

in Bulgaria the availability of the night vision goggles was
limited because 65 pairs out of 112 originally delivered had
been sent back to the supplier for repair;

44.
Expensive investments have to be properly maintained in
order to produce long-lasting results. Generally, there were
no clear plans for covering future maintenance costs once the
lack of national finance
warranty period ends. The general

(1) The Galati centre has appropriate facilities for processing and accom-

modating up to 250 asylum seekers.

(b) Romanian records show that the eight Phare-funded custom-
built surveillance vehicles (total cost 2,1 million euro) were
not operational for a third of the time since coming into ser-
vice in November 2003. Repair of the surveillance machin-
ery has to be carried out abroad, which adds to the period of
inactivity. A similar level of inactivity applied to 35 nation-
ally funded surveillance vehicles of the same make. The prior

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26.7.2006

deployment of national vehicles to the same sectors of the
border raises the further question of the additionality of the
Phare vehicles. The project fiche does not mention these
nationally funded vehicles, when it justifies the Phare pur-
chase of surveillance equipment (1);

The park in Iasi, with dynamic management and addi-
54.
tional investment, has the potential for considerable growth.
However, the Court found that the number of new jobs to be cre-
ated was unlikely to approach half the 1 100 predicted in the fea-
sibility study which supported the Phare project.

(c) according to the Romanian Border Police, two of the fluvial
patrol boats (each costing 300 000 euro) could not be used
in the Danube delta during the winter, i.e. for two to three
months each year, due to the freezing of the river. The tech-
nical specifications had stated that the boats should be able
to be operated day and night, through broken ice and in tem-
peratures from – 15 to 45 °.

Without ensuring that resources are made available to
50.
replace or overhaul equipment or components which are reach-
ing the end of their useful life, e.g. the engines of the fluvial patrol
boats in Romania, there is a risk that the border equipment
audited will no longer be fully operational when Bulgaria and
Romania accede to the EU (or even the Schengen space) and their
borders form part of the EU external border.

Risks to economic viability

In Bulgaria six buildings had undergone renovation to be
51.
used as business incubators, of which five were not yet being used
as such (see paragraph 27). In Romania the two business infra-
structure parks audited were not yet in operation. While it is hard
to assess the future economic viability of insufficiently advanced
projects, a number of significant risks were identified.

The long-term success and economic viability of the Bul-
52.
garian business incubators will depend on numerous factors
which at the time of the audit had not yet been addressed: per-
formance of management teams, support and contributions from
the municipalities for the maintaining of premises, rental income
from tenants and income from services to SMEs, such as coun-
selling (e.g. on credit/loan applications, legal advice). Successful
operating depends on the ministries supporting fully the incuba-
tors’ management teams, which now have to perform proactively
to start up.

53.
In Romania, industrial parks are a relatively new phe-
nomenon and there is a lack of experience of park management.
The National Development Plan for 2004 to 2006 expressed
doubts about some of the newly emerging parks, stating that a
number of the current industrial development plans were not
based on a very rigorous demand analysis.

55.
While the target of 300 new jobs for the park in Bacau is
relatively prudent, it is not certain to be reached. A key source of
new employment is start-up companies, but the prospectus did
not describe how the park intended to attract and foster them.

56.
The Implementing Agency in Romania was supposed to
monitor the achievement of the objectives of these infrastructure
projects. However, they focused merely on the successful comple-
tion of construction, without checking whether the projects were
on target to meet their broader economic objectives, such as cre-
ating new employment.

CONCLUSIONS AND RECOMMENDATIONS

57.
The Commission’s checking of projects prior to financ-
ing (ex ante control) proved to be effective in preventing irregu-
larities in the procurement process.

58.
The projects audited were generally in line with the over-
all Phare objectives and were also physically in place in accor-
dance with the conditions of the supply and works contracts.
However, for over half of the projects audited assets were not, or
were only partially, being used for the intended purpose. These
shortcomings resulted from weak administrative capacity and a
lack of national resources in Bulgaria and Romania.

Recommendation 1

The national authorities should make further substantial
efforts to finalise the projects and to achieve the underlying
project objectives.

The Commission should closely follow that the audited
projects will finally operate as intended. The Commission
should also contribute to improved functioning of the Moni-
toring Committees as a key system for corrective policy
actions in the event of underperformance.

(1) The risk of potential overlaps between large nationally funded invest-
ments now under way and previous Phare supported investments in
the border management area was highlighted in Romania’s compre-
hensive monitoring report for 2005.

59.
The Commission overestimated the management capac-
ity of the public authorities in Bulgaria and Romania and often
agreed with their overambitious targets and deadlines. This over-
ambitious target setting is reflected in the project fiches, which
contain a mixture of ambitious ‘wider’ and ‘immediate’ objectives,

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outputs, purposes, results, activities and a set of often invalid
‘indicators of achievement’ (1) frequently characterised by a lack
of systematic clarification. As a result, the project fiches could
hardly be used as a meaningful management tool.

Recommendation 2

The Commission should adopt a more realistic programming
approach for Bulgaria and Romania and the new candidate
countries. This includes an improved needs assessment ensur-
ing complementarity with other sources of investment sup-
port. A key element is to improve the project fiche, which can
better fulfil its functions of directing and monitoring. Exter-
nal experts have already proposed that the bodies involved in
the planning process should systematically set up a quality
control function for the production of project documents (2).

Recommendation 3

The Commission should specify the resources for mainte-
nance and the requirements for co-financing as early as the
programming stage and introduce a formalised procedure for
the verification of these principles. The monitoring of sustain-
ability should include the monitoring of economic targets, e.g.
in terms of job creation.

61.
The Commission did not give enough consideration to
the added value and catalytic effect of Phare money in activities
led by the international financial institutions. Enormous invest-
ments in the regulatory infrastructure are needed for the imple-
mentation and enforcement of the acquis communautaire. Phare
can only cover a part of these overall needs. That is why the Phare
guidelines require that the investment support has to be focused
on actions which would otherwise not take place and which
promise a high catalytic effect.

60.
The technical viability of some of the assets is in doubt
due to a lack of national funding. With regard to the supported
business parks and incubators many questions of economic
viability remain to be solved. The Commission did not sufficiently
supervise the principles of sustainability and co-financing as it is
laid down in the guidelines for implementation of the Phare
programme.

Recommendation 4

The Commission should improve its analysis of the aspect of
additionality and catalytic effects, especially in projects which
are led by international financial institutions or other third
parties.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 11 May 2006.

For the Court of Auditors
Hubert WEBER
The President

(1) See indicators which are formulated like broad objectives (e.g. ‘cre-
ation and operation of an electricity wholesale market in conformity
with the electricity single market directive’ or ‘meeting the require-
ments of the EU in combating organised crime and corruption’).
(2) From Pre-Accession to Accession, Interim Evaluation of Phare support
allocated in 1999-2002 and implemented until November 2003,
Consolidated Summary Report, March 2004 (published by European
Commission).

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ANNEX I

ALLOCATION OF PHARE MONEY TO NATIONAL PROGRAMMES

(million euro)

National
programmes (1)

Bulgaria

Romania

Investment

Institution building

2000

2001

2002

2003

2004

34,625

44,588

54,112

47,476

81,511

Total

262,312

Percentage

51,3 %

31,095

38,235

40,788

47,424

91,014

248,556

48,7 %

Total

65,720

82,823

94,900

94,900

172,525

510,868

100 %

Investment

Institution building

Total

146,595

120,920

147,436

168,365

223,010

806,326

57,6 %

68,425

127,970

118,064

97,135

182,290

593,884

42,4 %

215,020

248,890

265,500

265,500

405,300

1 400,210

100,0 %

(1) National programmes are executed over a period of years.

For instance, the Bulgaria 2004 National Programme was agreed in September 2004, with a general deadline for the execution of projects of 30 November 2007.

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ANNEX II

National Programme 2000 — Bulgaria

BUDGET BREAKDOWN BY PROJECT

Project code

Objective and projects (short title)

Total Phare support

Institution building

Investment

(million euro)

0002.01

0002.02

0002.03

0003.01

0003.02

0003.03

0003.04

0003.05

0003.06

0004.01

0004.02

0004.03

0004.04

0005.01

0005.02

0005.03

0005.04

0006.01

0006.02

0006.03

0006.04

0006.05

0006.06

0006.07

0006.08

Economic reform

Strengthening the Ministry of Economy

Further support for Bulgarian Post-Privatisation Fund

Railway organisation restructuring

Adoption of the acquis and strengthening
the regulatory framework

Strengthening regulatory framework for telecoms

Establishing a conformity assessment system

Implementing a public procurement system

Institution building at the energy regulator

Institution building at energy efficiency agency

Environment acquis and institution building

Economic and social cohesion

SME quality certification

SME business incubators

Vocational training

Renovating vocational training institutes

Strengthening the rule of law and protection of
vulnerable groups

Strengthening the Public Prosecutor’s Office

Border police equipment at Turkish border

Developing a national anti-drugs strategy

Child welfare reform

5,500

2,000

1,500

2,000

4,000

2,000

0,000

2,000

15,400

11,025

2,450

3,000

1,300

1,100

2,200

5,350

15,000

5,000

3,000

5,000

2,000

16,500

3,000

9,000

1,000

3,500

1,750

2,325

1,000

1,000

1,600

3,350

1,080

0,200

0,320

0,240

0,320

4,555

1,200

0,500

0,705

2,450

Public finance and management of EU funds

13,320

10,435

Strengthening public internal financial control

Strengthening the public external audit institution

Reform and modernisation of tax administration

Institution building and development of national
statistics

Restructuring agro-statistics

SAPARD implementation capacity

CFCU capacity building

Phare project preparation facility

2,000

2,000

2,000

2,000

2,000

1,000

0,320

2,000

1,500

1,400

1,800

1,315

1,200

0,900

0,320

2,000

1,500

0,000

1,500

0,000

4,375

0,700

0,675

0,300

0,100

0,600

2,000

13,920

4,800

2,680

4,760

1,680

11,945

1,800

8,500

0,295

1,050

2,885

0,500

0,600

0,200

0,685

0,800

0,100

0,000

0,000

Total

65,720

31,095

34,625

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ANNEX III

National Programme 2000 — Romania

BUDGET BREAKDOWN BY PROJECT

Project code

Objective and project (short title)

Total Phare support

Institution building

Investment

(million euro)

Political criteria

RO–0004.01

Strengthening the judicial and penitentiary systems

RO–0004.02

Civil society

Economic criteria

RO–0005.01

Energy sector liberalisation

RO–0005.02

Inter-bank payments system

RO–0005.03

Securities market regulation

Meeting the obligations of the acquis

RO–0006.01

Industrial policy

RO–0006.02

Quality infrastructure

RO–0006.03

Mutual recognition of qualifications for professional
purposes

RO–0006.04

Improving the revenue collection system

RO–0006.05

Public procurement

RO–0006.06

Strengthening internal audit and financial control

RO–0006.07

Strengthening the Romanian Court of Audit

RO–0006.08

Agricultural policy and coordination

RO–0006.09

Agri-food quality control

RO–0006.10

Phytosanitary acquis

RO–0006.11

RO–0006.12

Strengthening the capacity to manage the veterinary
acquis

Strengthening the capacity to manage the acquis on
wine

RO–0006.13

Agricultural and regional statistics

RO–0006.14

Implementation of the environmental acquis

RO–0006.15

Road worthiness enforcement

RO–0006.16

Strengthening border management

RO–0006.17

Fight against drugs

RO–0006.18

Support activities to strengthen the European
integration process

Economic and social cohesion

RO–0007.01

NDP implementation IB

RO–0007.02

Regional development

13,00

8,00

5,00

40,90

28,90

10,00

2,00

73,12

0,60

4,40

1,65

2,00

2,00

2,40

1,60

4,00

2,55

2,00

4,00

2,00

6,00

8,00

3,00

18,92

1,00

7,00

88,00

13,00

75,00

5,75

0,75

5,00

12,975

8,50

3,00

1,475

36,70

0,60

1,40

1,35

1,50

1,55

1,95

0,90

3,50

1,55

0,35

1,00

1,00

5,20

5,50

1,60

0,75

7,00

13,00

13,00

Total

215,02

68,425

7,25

7,25

27,925

20,40

7,00

0,525

36,42

3,00

0,30

0,50

0,45

0,45

0,70

0,50

1,00

1,65

3,00

1,00

0,80

2,50

3,00

17,32

0,25

75,00

75,00

146,595

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THE COMMISSION’S REPLIES

SUMMARY

IV.
Some of the investment projects audited were indeed not
in place or operational at the date of the auditors’ missions. The
principal causes of the delays and shortcomings in the implemen-
tation and completion of the respective projects were indeed the
lack of the necessary administrative capacity of the national
authorities on the one hand and on the other hand the delay in
making available the required co-financing and other national
resources.

Second indent: Rules and practices regarding co-financing for Phare
have been enhanced in the last years. Parallel co-financing has
been discouraged in favour of joint co-financing and the report-
ing requirements for co-financing have been significantly
improved as well.

Third indent: The catalytic effect of Phare money in activities led
by international financial institutions has been assessed as far as
possible. This also helps to avoid overlap with existing projects
financed from sources other than Phare.

However, efforts have been made in order to develop the level of
the administrative capacity to ensure effective implementation
and completion of the investment projects, within the time limits
set in the programming documents.

OBSERVATIONS

Equally, continued efforts are being made in order to raise the
awareness of all actors involved (national authorities,
local
authorities) that at the time of programming, further funds and
human resources must be earmarked and made available to
ensure the proper management and sustainability of the invest-
ment projects, after they are completed and put into operation.

V.
The Post-Privatisation Fund indeed left a lot to be desired
in terms of efficiency and effectiveness. For this reason the EC
Delegation took measures to terminate the spending of Phare
funds ahead of schedule. There were nevertheless positive effects
with five companies surviving the turmoil of transition. With
regard to the electricity market investment, the Phare investments
have contributed to the implementation of the single electricity
market Directive.

Measures in terms of warranties and maintenance have
VI.
been taken to ensure both technical viability and longevity. More
generally, the beneficiaries have become aware of the need to
ensure by themselves the longevity of assets. Moreover, recent
developments highlight a potentially favourable evolution for the
business parks and incubators despite the initial difficulties faced.

VII.

First indent: The implementation of Phare programmes has been
affected by the weakness in the administrative capacity of Roma-
nia and Bulgaria in many areas, generating delays in the imple-
mentation of some projects. Nonetheless, the Commission would
like to stress that since the programming year 2000, the admin-
istrative capacity of the Bulgarian and Romanian authorities has
improved, although not to the extent desired, and in the frame-
work of the multiannual programme 2004 to 2006, specific
attention has been given to this issue. In addition, a comprehen-
sive overview of the Phare staff dedicated to the projects by imple-
menting agencies has been required and presented to the Joint
Monitoring Committees in 2005 and taken into account in the
programme 2005. In 2006, a specific statement on administra-
tive capacity has been required with each project fiche.

19.
The situations highlighted in the sampled projects give a
fair view of the range of the difficulties encountered in the man-
agement of the projects. However, in most of the cases the situ-
ation has evolved positively since the period of the audit with sig-
nificant progress towards meeting project objectives in a large
number of cases.

21.
As a result of the continued efforts made to eradicate
errors in the software, the Final Acceptance Certificate between
the Public Prosecutor’s Office (PPO) and the contractor was signed
on 23 February 2006. The long-lasting refusal to deliver the final
acceptance highlights that the beneficiary was aware of his rights
and applied them vis-à-vis the contractor, thus ensuring that the
principles of sound financial management were respected and the
obligations of the contractor fulfilled.

22.
No IT strategy for the computerisation of the Public Pros-
ecutor’s Office (PPO) existed prior to the design of this project.
This project started with a detailed analysis of all existing IT sys-
tems and equipment available for the PPO and with the prepara-
tion of a comprehensive feasibility study.

After two consecutive Phare-funded projects for the introduction
of IT in the PPO, all of them are now connected to the unified
information filing system (UIS) system; it is however not yet fully
used since the contractor has not completed part of the assign-
ment related to the delivery of the supplies (reporting tools).

The stored work-stations have meanwhile been re-allocated to the
training centre in Batak and to other PPOs. All designated PPOs
have hence received their hardware and are now connected to the
Internet.

Both the contracting authority and the beneficiary have
23.
demonstrated due diligence in carefully testing the performance
of the system delivered by the contractor. The beneficiary and the
contracting authority have been actively working with the con-
tractor to identify and to remedy the deficiencies of the IT system
which provoked the delays in implementing the supply contract.

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This investment project aiming at establishing a func-
25.
tioning countrywide application of the case document manage-
ment system (CDMS) had indeed not been fully completed at the
time of the Court’s visit: the IT equipment was in place, installed
in all the delivery locations, but not functional everywhere.

In the case of the Bacau project, the delays were mainly due to the
poor quality of the technical design, namely the geotechnical
studies, leading to the need for substantial re-design and modifi-
cations of the contract documents.

The Commission has been aware of the situation for over two
years and has been working with the Romanian authorities to
resolve the issue of co-financing.

30.
Indeed, the project refers to the modernisation of leisure
facilities, not tourist facilities and the two dilapidated swimming
pools, which have not been included in the Phare project, are still
not renovated, despite the frequent recommendations made both
to the relevant ministry and to the local beneficiary.

Under the new political leadership, the Ministry of Justice, in June
2005, managed to obtain Government approval for two finan-
cial leases totalling 22 million euro to cover the co-financing obli-
gation (one of 12 million euro for the Ministry of Justice and the
other of 10 million euro for the Ministry of Public Finance). At
the same time, the Government adopted the Ministry of Justice’s
IT development strategy, which presents for the first time an
accurate situation of the IT endowment in the entire sector, the
precise needs in terms of hardware and software and the funds
that are earmarked for covering those needs.

Completion of the project is scheduled for the end of March 2006
and the delegation will monitor the developments and assess the
full compliance with the objectives as expressed in the project
fiche.

27.
Due to anomalies in the tendering procedures the Com-
mission refused to endorse the contracts for five of the six busi-
ness incubators. As a result, only one incubator was funded by the
EU, as well as the construction supervision for the others funded
through the national budget. The project has developed since the
audit. The Montana business incubator is operational, buildings in
two more cities have been completed and progress continues in
the others. Some regional impact in terms of the creation of alter-
native jobs in areas of industrial decline is thus expected.

28.
The implementing agency (IA) in Bulgaria did not man-
age properly this project, and was in breach of procurement rules
particularly on the steps adopted for the award of the works con-
tracts (negotiations) which obliged the Commission to refuse
endorsement. The Commission’s ex ante control hence led to non-
endorsement of the tender and safeguarded Community funds.

31.

(a) After intensive high-level interventions by the Commission
in both Moldova and Romania, the works for the access road
are underway and scheduled for completion by end 2006.
Preparations for the establishment of the border control
points are underway.

(b) The project is closed and, following the completion of the
investigation carried out by DLAF (the Romanian counter-
part of OLAF), the Commission considers that the expendi-
tures made under this project are ineligible. The Commission
contribution will be adapted accordingly and the next pay-
ments to the programme will be reduced.

The under-performance coupled with the absence of
34.
transition impact and catalytic effect led the Commission proac-
tively to propose cancellation of the fund before the project was
due to an end (in 2008), preventing any further ineffective use of
EC funds.

(a) Clearly, the Fund manager (and the EBRD) had underesti-
mated the difficulties caused by the business environment at
that time in Bulgaria. Eligible investment opportunities were
hard to find, as the manager claimed shortly after the com-
mencement of the project. Most companies with potential
had been taken up already by foreign investors, or local
shareholders were not willing to sell/share control.

(b) The five other investee companies of BPPF are still opera-
tional, some of them even enjoying brand recognition locally.
The project thus helped at least a few companies to survive a
difficult period.

29.
Both of the audited projects indeed faced significant
delays, but have been completed in the period that has elapsed
since the Court’s mission.

(c)

The Iasi project has been in operation since June 2005, while the
project in Bacau has been completed in November 2005.

For the Iasi project, the delays were mainly due to the poor per-
formance by the Contractor (Romanian Joint-venture).

It was not easy in 1997/98 for EBRD to find a suitable con-
tractor to manage its Post-Privatisation Fund, there was even
a second tender. Clearly, in those troubled years an incentive
had to be provided for a professional international manager
respecting at least minimum business ethics standard to
manage and invest in such a fund in Bulgaria. The project
designers counted on a significant demonstration effect, first
by turning around prospective but cash-strapped former
state-owned industrial plants, second by creating a ‘critical
mass’ of professionally and transparently managed Bulgarian
companies.

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The Court has noted positively that the Commission,
35.
fearing a distortion of competition in local markets and facing
growing resistance from the Bulgarian authorities, was proactive
in terminating the BPPF ahead of schedule (in 2002 instead of
2008) and stopped the ineffective spending of EU money.

After the delays highlighted by the Court, the final accep-
39.
tance certificates have eventually been issued by the Central
Finance and Contracting Unit (CFCU) in October 2005 and
handed over to the contractor. According to the CFCU the soft-
ware is now functional, and the IT equipment, installed at the
beginning of 2003 is now being used for the intended purpose.

36.
It is common, when co-financing projects that support
privatisation in transition economies via equity funds, that public
funds support the technical assistance element (in this case, the
management fee of the venture capitalist).

Final success depends on the bank and ultimately upon the per-
formance of the venture capitalist recruited by the bank; such
type of scheme might involve a level of risk which the Commis-
sion intended to reduce by allocating the funds to the EBRD as a
financial institution specialised in this field and area.

Following the Supervisory Board decision of November 2001, the
Commission took contact with EBRD so that the remaining funds
under the signed Financial Memoranda under Phare 2000
and 2001 were not spent.

As for the lack of catalytical effect, without the Commission’s
funding the EBRD would most probably not have even launched
such a scheme and not a single company would have benefited
from the venture funds.

The common efforts of the Commission services, the
37.
international financial institutions (IFI), as well as those made
within the 2000 Phare projects (not only the investment compo-
nents, but also the important institutional building component
not mentioned in the report) acted as a catalyst for a stable and
lasting development of the market rules and implementation pro-
moting also the alignment on EU norms and standards. The origi-
nal Project Fiche effectively included rather optimistic time tar-
gets, which needed to be amended.

38.
The objective ‘to equip key institutions whose infrastruc-
tures or capacity to monitor and enforce the acquis need to be
strengthened’ was fully met by the EC financed component.

From the political perspective, the Phare contribution acted as a
catalyst and this demonstrates effective cooperation with the IFI
called for earlier in this report.

From the legal and technical point of view, the beneficiaries of
these investments are the bodies implementing the requirements
of the acquis for a functional power market in Romania. The regu-
lator is issuing the secondary legislation, while its market moni-
toring function is in fact based on the reliability of the data com-
ing from the market operator and transmission grid company.

The final payment made in December 2003 was made against
both a performance and final payment guarantee. This guaran-
teed an amount considered to be at least equal to the cost of the
software malfunction while at the same time the commercial war-
ranty was still valid allowing for technical repair.

41.
According to the international treaties to which Roma-
nia is part, the Romanian State has the obligation to host
migrants, asylum seekers and asylum beneficiaries and in doing
so to offer decent living conditions. As such, Romania was under
an obligation to build sufficient capacity for covering the needs
in connection with the expected migration flows at the moment
of the project fiche design. Migration flows are difficult to pre-
dict, be it in size or in direction, as they tend to vary as soon as
the means and degrees of control change in a determined place
but the analysis of the specialists indicated a potential increase of
flows. In addition, the Romanian authorities considered that the
reduced economic development of the areas at the Eastern bor-
der of Romania plus instability in the area would continue
to cause in-flows of migrants. To cope with it they requested and
were granted EC-Phare support for the investment.

The fact that the centre is now under-used is considered by both
Romanian and EU experts as a temporary situation, which is very
likely to change in the period following EU accession. However,
alternative use of the premises would be a good idea pending
expecting arrival of higher numbers of migrants.

It was considered preferable to bring the Bangladesh refugees
from other centres to Galati, because grouping the asylum seek-
ers according to their cultural specific is advisable, and this also
makes the procedures more manageable for the authorities
involved (judges, interpreters etc).

42.
Such an alternative use has already been granted for
another centre — in Timisoara — where the Romanian State
accepted, upon UNHCR request, to host a number of 450 people
in need of asylum, pending their final acceptance by other states.
A similar solution could be envisaged for this centre and this pos-
sibility will be raised by the Delegation with the Romanian
authorities.

During a peer review carried out in March 2006, the EU experts,
stated that they would continue to expect an influx of migrants
shortly after Romania’s accession.

The lack of national financing to ensure maintenance has

44.
been addressed meanwhile.

The Phare investments have contributed to the implementation of
the Single Electricity Market Directive, calling for the non-
discrimination, security and efficient operation in the benefit of
all system users.

In Bulgaria, the Public Prosecutor’s Office (PPO) has attributed
additional resources for the maintenance of the system, and the
period of the warranties has been extended.

C 174/18

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Official Journal of the European Union

26.7.2006

In Romania, the issue of ensuring the IT experts, maintenance and
support needs for the sustainability of the investments in the Judi-
ciary sector was included in the Action Plan for the Reform of the
Judiciary, approved by the Romanian Government in June 2005.

The EU has requested Romania to make progress in
50.
aligning to the requirements needed for a high-level control of its
borders, with special focus on the North and Eastern borders.
Such an objective needs time to be reached and Romania has to
make sustained progress towards this goal.

The Commission will continue to monitor closely these aspects.

46.
Financially Phare support ceases with the end of the given
contract. Implementation arrangements and co-financing should
secure the commitment of the beneficiary during the life-span of
the equipment and longer-term sustainability is the responsibility
of the beneficiary.

Romania has committed to further purchase and maintain the
equipment, as well as to train staff to use the equipment properly
and has until now complied with these commitments. However,
monitoring of the implementation is being further enhanced (two
peer review missions organised in 2005 alone, with another one
foreseen for spring 2006).

47.
The tender for the training component as foreseen in the
project was not successful, and a second one was launched, with-
out success either. This illustrates the efforts made to achieve the
goals of the project while respecting the procedures. The training
on the equipment was eventually ensured by NBPS in-house
instructors.

51.
In Bulgaria, once the buildings are completed and lim-
ited local funds are mobilised for the equipment and salaries of
management, all six buildings have a good chance to become
viable business incubators. According to the final report submit-
ted by the works supervisor, to date, buildings in two further cit-
ies have been completed and received the official certificate to be
put in use, so that three are now operational or ready for use.

The EC-funded cars allowed for

larger and more
48.
advanced technical manoeuvring (mobility spectrum) and storage
(mounting of surveillance equipment). Again, successful procure-
ment is contingent upon adequate market response and respect
of the rules. The Commission is also bound to ensure respect of
the legal regulations in force governing eligibility of goods pur-
chased under the Phare regulation.

49.

(a) The warranty was extended for one further year due to these
difficulties and all defects repaired at zero cost for the
beneficiary.

(b) The thermo-vision cameras were the only equipment out of
use for several months, i.e. for the time needed for the cam-
eras to be sent to the United Kingdom, repaired, sent back
and re-installed.

The fact that the market is rather limited for this specific type
of equipment justified the attribution of the contract to the
best offer in the absence of local maintenance capacity in any
of the offers technically compliant.

The equipment delivered was deployed on the field based on
the beneficiary needs assessment and on the risk analysis per-
formed prior to the contract and to the delivery.

No overlap was identified by any expert mission in terms of
surveillance and mobility equipment.

(c) The compliance of the goods with the technical specifica-
tions was firstly checked against paper in the offer and double
checked by the experts of the border police on the site of the
producer, prior to delivery. There was no indication of non-
compliance at the date. As such due diligence can be consid-
ered to have been performed.

In Romania, the Iasi project has been in operation since June
2005, whereas the project in Bacau has been completed in
November 2005.

52.
Apart from management deficiencies on the side of
implementing agency/Ministry of Regional Development and
Public Works, there was also a clear lack of commitment of local
stakeholders. However, some municipalities seem to have become
more active recently, searching for further funds. The recently
decided merger
the United Nations Development
Programme/JOBS network of existing incubators with the Bulgar-
ian Association of Regional Development Agencies and Business
Centres, the association who committed to run the five incuba-
tors except Montana, could provide a fresh impetus and the nec-
essary know-how/resources to manage the remaining incubators
in an effective and sustainable manner.

of

53.
Business parks of this type are effectively a new instru-
ment in Romania for attracting investors and small businesses. As
such there is a steep learning curve for inexperienced park man-
agers, as for business incubator and business centre managers.

The Delegation has encouraged these managers to exchange expe-
rience, including visits, with counterparts in different regions of
the country and abroad. Business parks in other areas of Roma-
nia (e.g. Arad and Baia Mare) have demonstrated a dynamic and
successful approach so their development is much more advanced
and they are fully occupied after a relatively short period of opera-
tion. It is hoped that this experience can be succesfully transfered
to the other business parks.

54.
The latest information made available by the beneficia-
ries of the projects suggests that the predicted number of new
jobs created may indeed have been somewhat overestimated. In
terms of jobs created, 50 have been created by now and another
100 are expected by the end of 2006. As the local beneficiary has
recently obtained for this investment the legal accreditation as a
these figures are likely
scientific and technological park,
to improve in the future.

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Official Journal of the European Union

C 174/19

The need for monitoring both the management of the
56.
facilities and the achievement of the indicators of these projects
has been repeatedly raised with the relevant Romanian authority
(the Ministry of European Integration) by the Commission’s rep-
resentatives at various levels. Some progress has been noted in
this respect.

CONCLUSIONS AND RECOMMENDATIONS

58.
Since the Court’s visits, significant developments in a
number of the projects have been noted with assets being used for
the intended purposes. Measures have also been taken to address
the weak administrative capacity and strengthen the fulfilment of
co-financing obligations.

Recommendation 1

The management capacity of the national authorities has been
enhanced and this had a positive influence on their awareness of
the need to finalise the projects.

The Joint Monitoring Committees (JMCs) are now held twice a
year. This allows for an acceleration of the corrective actions to
be agreed.

The implementation of Phare programmes has been
59.
affected by the weakness of the administrative capacity in many
areas, generating delays in the implementation of some projects.
This is an inherent risk of the Decentralised Implementation Sys-
tem (DIS). Nonetheless, the Commission would like to stress that
since the programming year 2000, several earlier mentioned mea-
sures have been taken to tackle the problem. Moreover, among
the measures taken to improve its meaningfulness as a manage-
ment tool, from this year on, a specific statement on administra-
tive capacity has been required with each project fiche.

For the IT-related projects, the national authorities have
60.
now taken action to provide the necessary financing to ensure the
maintenance of the systems so that their technical viability is
ensured.

The chances of economic viability of the supported business
parks and incubators have improved as well. In Romania, the
need for monitoring both of the management of the facilities and
the achievement of the indicators of these projects has been
repeatedly brought up with the relevant authority by the Com-
mission’s representatives and some limited progress has been
recorded. In Bulgaria, recent evolutions give rise to hopes that the
incubators can now operate in a sustainable manner.

Recommendation 3

The reporting requirements for national co-financing have been
improved in the last years, where national authorities have to cer-
tify amounts contracted and disbursed via national funds, com-
pare them with the forecast amounts agreed in financing Memo-
randa and, where necessary, explain the differences between the
amounts. As far as monitoring is concerned, a benchmarking sys-
tem for the monitoring of implementation is recommended for
introduction.

61.
The Commission considers added value and catalytic
effect of Phare funds to be very important when participating in
projects led by international financial institutions. In Bulgaria, the
Commission considers that the EBRD would not have launched
the investment scheme without its participation.

Recommendation 4

Recommendation 2

The programming approach has been significantly changed as
from 2004 with the introduction of a multi-annual programme
including projects divided in two- or three-yearly phases. In par-
allel, the quality of the project fiches has been improved and sub-
mitted to a preliminary assessement based on the logframe matrix,
with a detailed assessment made on the full project fiches (PFs),
among others in terms of project readiness and a fine-tuning
phase of the PFs, before an internal consistency check in the
Commission.

In order to address the Court’s recommendation, regular meet-
ings are held at a country level between the Commission services
(delegations and country desks) and the international financial
institutions (IFI), aiming at coordination of the programming
activities, and at horizontal level to best structure the coopera-
tion. Meanwhile, horizontal SME and municipal finance facilities
have proven to be successful.

For the future, under the new Instrument for Pre-Accession, a
reflexion is ongoing on how to make cooperation more efficient,
taking into account the lessons of the past.