Source: EURLEX
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# 52012DC0243

**REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Sixth Annual Report 2011 on the implementation of Community assistance under Council regulation (EC) No 389/2006 of 27 February 2006 establishing an instrument of financial support for encouraging the economic development of the Turkish Cypriot community /\* COM/2012/0243 final \*/**

  

REPORT FROM THE COMMISSION TO THE
COUNCIL AND THE EUROPEAN PARLIAMENT

Sixth Annual Report 2011 on the
implementation of Community assistance under Council regulation (EC) No
389/2006 of 27 February 2006 establishing an instrument of financial support for
encouraging the economic development of the Turkish Cypriot community

1.           Introduction

Council Regulation (EC) No 389/2006
establishing an instrument of financial support for encouraging the economic
development of the Turkish Cypriot community (TCc)[1] (hereafter the "Aid
Regulation") is the basis for the implementation of the assistance to the
TCc and requires annual reporting to the Council and the European Parliament.
This sixth report covers the year 2011.

2.           Programming of the
assistance

Between 2006 and 2010, €264 million was
programmed under the Aid Regulation and many of the projects arising from this
earlier funding were still underway in 2011. Development of the 2011 programme
used input from stakeholder consultations and from 2009 and 2010 evaluations. It
followed the objectives of the Aid Regulation: reunification of Cyprus through
the promotion of social and economic development; reconciliation, confidence
building and support to civil society; bringing the TCc closer to the EU and
preparation of acquis-aligned legal texts for the purpose of these being
immediately applicable upon the entry into force of a comprehensive settlement
of the Cyprus problem. Finance for infrastructure or large equipment was not
included in the 2011 allocation, since substantial infrastructure projects were
already underway. The 2011 allocation of €28 million was made available under
two Commission Decisions[2].

3.           Implementation mechanisms

The programme is implemented in an EU Member
State in an area that is not under the effective control of the Member State authorities
and where the application of the EU acquis is suspended. The assistance
is implemented primarily through centralised management by the European
Commission. Some projects are jointly managed with the United Nations
Development Programme (UNDP).

The Commission operates in a unique political,
legal and diplomatic context. Ad hoc arrangements are needed to
implement the programme while respecting the principles of sound financial
management. In EU-funded aid programmes, in normal circumstances, a Financing
Agreement with the beneficiary Government establishes the legal framework of
the assistance. No such agreement exists for the assistance to the TCc. The
Commission has to rely on what it understands to be the rules and conditions
applicable locally and this introduces a certain level of risk. Management and
mitigation of these risks is part of the Commission's responsibility and
adopted measures include intensive monitoring and support to beneficiaries,
revised payment conditions, linking advance payments with proof of signed
procurement contracts and a more widespread use of bank guarantees.

The Commission relies on the support of the TCc
to make this programme a success and in particular to ensure its long-term sustainability.
TC stakeholders are consulted about their needs for future funding and TC
experts take part in tender evaluation committees and play a key role in
project steering committees. Cooperation between the Turkish Cypriot and Greek
Cypriot communities remains necessary for full effectiveness of the programme
and for achieving the ultimate goal of reunification.

The Programme Team, set up in 2006 within the
Commission's Directorate-General for Enlargement, uses the EU Programme Support
Office (EUPSO) in the northern part of Nicosia, with office logistics provided
through a service contract. This office provides a local base for project
implementation and for interaction with TC stakeholders. The Representation of
the Commission in Cyprus also hosts meetings and seminars and communicates to
the Cypriot public on the programme as part of its standard role.

In the absence of a Financing Agreement to
establish the legal framework under which the assistance is implemented, sector
development programmes cannot easily be conceived. The assistance programme,
therefore, includes a significant amount of grant support, particularly to
non-public actors including NGOs, SMEs, farmers and students. Management of
this grant assistance (over 1000 grants since 2009) is demanding in terms of
EUPSO human resources, and the staffing situation was particularly challenging
in 2011, with reduced numbers and a high turnover, requiring strict priority
setting.

One challenge of the EU assistance to the TCc
is the difficulty of medium and long-term planning. The programme is currently
financed from the margins of the EU budget as it is not included in the
multi-annual financial framework for 2007-2013 and annual allocations are not
guaranteed. There are, however, a number of sectors, including those important
for future acquis compliance, where multi-annual support is required for
intervention to succeed fully.

4.           Implementation during the
reporting period

4.1.        General overview

The year 2011 saw the major supply and large
construction contracts from the 2006 programme moving towards completion in
water, solid waste, nature protection, energy and telecommunications. Many
grant contracts under the various schemes for civil society NGOs, SMEs, rural
development, schools, scholarships, and training organisations were completed.
Considerable technical assistance (TA) has also been delivered in support of
these programmes. Operations through joint management with UNDP were conducted
in support of the Committee on Missing Persons, waste water treatment and
upgrading of local and urban infrastructure. The Commission mandate under the
Aid Regulation also includes preparation for the full application and
implementation of the acquis communautaire following a solution
to the Cyprus problem and the dissemination of information on the European
Union's political and legal order to the TCc. The two years since 2009 have,
therefore, been a period of intensive project implementation in which the
Commission has developed considerable experience in dealing with local
constraints. Despite the fact that some major infrastructure is close to the
point of hand-over to the beneficiary, there continue to be problems of project
sustainability. Works contracts for the seawater desalination plant near
Sirianokhori/Kumköy and the construction of nature protection facilities in
four Special Environmental Protection Areas, defined as
potential Natura 2000 sites, had to be cancelled by the Commission.

One further problem that arose in 2011 was the
status of bank guarantees issued in the northern part of Cyprus. One local
contractor filed a suit with the local "court" to prevent the
Commission from calling advance and performance guarantees after a contract
termination. This matter is of relevance to the programme in general
and, until the matter is resolved, concerns about the effectiveness of local
bank guarantees will remain.

4.2.        Progress by objectives

The overall objective of the Aid Programme is
to facilitate the reunification of Cyprus by encouraging the development of the
TCc, with particular emphasis on the economic integration of the island, on
improving contacts between the two communities and with the EU, and on
preparation of the implementation of EU law in case of a comprehensive
settlement of the Cyprus problem. A considerable contribution has been made
towards improvements in some areas, notably water, waste water and environment,
and there is some evidence that the GDP/capita gap between the government
controlled areas and the northern part of Cyprus has been reduced, although the
picture is not entirely clear due to incomplete data.

4.2.1.     Objective 1: Developing and
restructuring of infrastructure

In the water sector, the replacement of old,
concrete asbestos water distribution pipes in the northern part of Nicosia,
Kyrenia, Kioneli/Gonyeli and Lefka /Lefke was completed during 2011. In
Nicosia, the beneficiary has reported a substantial reduction in leakages,
resulting in overall water supply to the northern part of Nicosia falling from
0.67 to 0.40 m3/day/consumer meter.

In the Morphou/Güzelyurt area, the commissioning of the
wastewater treatment plant was started during the second half of 2011. In
addition, 53 km of sewerage network and 43 km of water main were installed.
After all house connections have been made, this will provide, for the first
time, wastewater collection and treatment in this region for about 10,700
people thereby reducing pollution of groundwater sources. In the Famagusta
area, the new wastewater treatment infrastructure for about 30,000 people is
nearing completion and will be commissioned during the first half of 2012. The
project includes 50 km sewerage network and 45 km water network. Both projects
in Famagusta and Morphou have suffered from construction delays, putting a strain
on the limited supervision resources. The construction of the new Nicosia
bi-communal wastewater treatment plant at Mia Milia/Haspolat, co-funded by the
EU and the Sewerage Board of Nicosia and implemented through the UNDP,
continued in 2011 and commissioning is expected in the second half of 2012.

The largest project in the water sector was the
€27 million seawater desalination plant at Sirianokhori/Kumköy, to supply water
to 100,000 people and reduce the overexploitation of the Morphou aquifer, which
is the current main water source in the area. The programme experienced
problems including site access restrictions imposed by the Turkish army, which
emerged at the end of 2010. Once those restrictions were lifted in March 2011,
the contractor was unwilling to continue. The Commission terminated the
contract in December 2011.

On nature protection, draft management plans were
prepared for all Special Environmental Protection Areas (SEPAs) and
consultation meetings were held with local stakeholders. A walking trail
network of over 600 km was completed. Construction of information and
management centres located in four SEPAs suffered from poor contractor
performance and the Commission terminated the contract in November 2011. The
place of arbitration of the contract is Belgium, but the local TC contractor
filed a suit with the local “court” to prevent the Commission from calling the
advance and performance guarantees from the local bank. Until the matter is
resolved, concerns about the effectiveness of local bank guarantees will
remain. The completion of the buildings remains a challenge to be addressed in
2012. In the meantime, the delivery and use of supplies intended for the nature
protection teams has been delayed.

With regard to solid waste, the
rehabilitation and closure of the Kato Dhikomo/Aşağı Dikmen dump
progressed well and will be completed in the first half of 2012. The transfer
station in Famagusta and the new landfill in Koutsoventis/Güngör were completed in 2011. The handover and opening of the new
facilities was, however, delayed because the beneficiary has not been able to
put in place the necessary operating entity. Delays have also arisen from a
local "court" case pursued by a nearby university on environmental grounds.
The case has been dismissed by the "court", but this has led, in the
meantime, to temporary dumping on a new area close to the Kato Dhikomo/Aşağı
Dikmen site. The medical waste facility for the main hospital in the northern
part of Nicosia was handed over at the end of 2011.

In the energy sector, the remaining
supply and TA contracts have been completed. The challenging construction of
the 1.27 MW Solar Power Plant was finished and the installation has been
running at full power since November 2011. The allocation of dedicated staff by
the beneficiary is necessary, however, for the effective and sustainable use of
the generating installation and the control system. The TA for the
restructuring of the electricity utility and the sector policy reform was not
delivered effectively due to a lack of cooperation from the counterparts.

In the telecommunications sector, all
equipment for network upgrading has been delivered to the sites and most of it
has been installed, but there have been delays in site preparation and
technical input by the beneficiary. The project should be completed by
mid-2012. The TA component has been extended accordingly. The “law” detailing
the modalities of liberalisation of the electronic communications sector was
adopted in December 2011. The conditions necessary to separate the provision of
services from the network operation are still to be met in order to ensure a
smooth transfer and a sustainable use of the EU-financed assets.

Under the traffic safety project, all TA
and supply projects are finished. Traffic management plans have been prepared,
the accident information database and the data collection system are effective
and the vehicle inspection equipment has been installed and is in use. The
education campaign to promote traffic safety took place at the beginning of
2011 and has demonstrated some immediate, positive results with a significant
reduction in the number of severe accidents. Finally, after several delays, the
project to eliminate traffic accident “black spots” should be completed within
the first half of 2012.

4.2.2.     Objective 2: Promoting
social and economic development

Four TA teams continued to deliver training and assistance to
farmers, veterinarians and rural development counterparts including support for
grant implementation. The two grant schemes Improving Agricultural Production
and Supporting Rural Enterprise were completed in 2011, but many of the
37 projects under Community Development through Village Initiatives
suffered delays, arising in particular from procurement of infrastructure
works. Two additional Calls for Proposals, to be funded under 2011 budget, were
prepared.

Under the project Upgrading of
Urban and Local Infrastructure implemented under joint management with
UNDP, rehabilitation works in several villages in the northern part of Cyprus (Louroukina/Akıncilar,
Tremetousia/Erdemli, Galinoporni/ Kaleburnu and Kormakitis/Kormacit) were
finalised. Renovation of the market in the northern part of the walled city of
Nicosia has continued and will be completed in 2012.

The TA activities for the Ongoing Reform of Primary
and Secondary Education continued to focus on building the capacity of the
main stakeholders including intensive training of a core team of inspectors,
study visits, training and support for child-centred education, development of
quality standards and input for the development of the European Information
Management System. The project ended in December 2011. The main output was a
draft vision and mission document for the education sector in the northern part
of Cyprus. Most of the 72 grant contracts signed with local schools finished in
2011. Only seven will continue into 2012.

TA was provided for the development of Vocational
Education and Training Systems, Life-Long Learning and Active Labour Market
Measures, including the opening of a job centre in Nicosia, study visits
and conferences abroad. Efforts were concentrated on training the stakeholders
in areas such as entrepreneurship and career counseling and collaboration with
local counterparts has been very productive. The project ended in February
2012. Under the project for Life-Long Learning, Social Inclusion and Active
Labour Market Measures, 31 grants have been awarded to SMEs, Chambers of
Commerce and other training organizations since 2008. Most were completed in
2011 and only two will continue into 2012.

In support of SME Competitiveness,
23 grant contracts were ongoing during 2011. There have been delays due to lack
of experience of EU grants by SME beneficiaries, but all the contracts will end
in 2012. The private sector has also received TA support promoting good
business practices. A significant result was the adoption of a Private
Sector Development Strategy by the TCc. Sector-specific marketing
initiatives were also undertaken to promote local products in Nicosia and
Famagusta. Training in entrepreneurship and project cycle management started in
2011 and will continue in 2012. In the ICT sector, help
was given to develop an e-governance strategy.

4.2.3.     Objective 3: Fostering
reconciliation, confidence building measures, and support to civil society

Support to
the Committee on Missing Persons for exhumation, identification and return
of remains, managed jointly with UNDP, is ongoing. Work now focuses more on
individual exhumations rather than mass exhumations and this has influenced the
speed of the process. A new Contribution Agreement with UNDP, continuing the
work, is likely to be signed in 2012.

The demining of the buffer-zone has been
almost completed. There is lack of agreement on access to remaining minefields
in the buffer zone or extension of demining to areas outside the buffer zone
hampering the continuation of EU funded demining activities. A final evaluation
of the project was positive, highlighting the appreciation of the project by
all stakeholders.

Out of the 44 projects under three grant
schemes so far for Civil Society in Action, 27 have been concluded or
are near completion. Ten projects will end their activities in 2012. A TA team
provided guidance to applicants on grant management. More training will be
necessary to accompany the next grant call in 2012, since grant beneficiaries'
capacity for producing good quality applications for EU grants and for grant
administration and activity reporting is proving insufficient in many cases.

4.2.4.     Objective 4: Bringing the
Turkish Cypriot community closer to the European Union

For the fifth year of the Scholarships
Programme, 89 scholarships (9 teachers, 1 undergraduate, 79 graduates) were
granted, with free choice of study or training programme, although with
priority given to technical and administrative topics where there is a skill
shortage in the TCc. An evaluation of the scholarship scheme will be carried
out in 2012.

Visibility was mainly ensured by the Infopoint
project and 2011 was a fruitful year with 37 events. The biggest EU-funded
event was organised in collaboration with the TC Children’s Welfare Association
and attracted around 1000 participants. In addition, video clips and photo
archives were prepared and there were two academic conferences organised with the
participation of internationally renowned scholars and local Turkish Cypriot
and Greek Cypriot academics. There were also eight issues of the Infopoint
Newsbulletin published in Turkish and one in English covering the Aid Programme
and current EU topics.

4.2.5.     Objective 5: Preparing the
Turkish Cypriot community to introduce and implement the acquis communautaire

The Commission's TA Information Exchange
(TAIEX) instrument helps prepare the TCc for implementation of the EU acquis
following the settlement of the Cyprus problem. TAIEX supports the preparation
of acquis-compliant legal drafts, which are then subject to review and
approval through the local processes. Through TAIEX, over 80 EU experts carried
out 528 actions in 2011, including training courses, workshops, and study
visits. Activities followed the Programme for the Future Application of the
Acquis (PFAA), which provides the medium-term framework for the
intervention. In addition to the 13 sectors of the PFAA, assistance was
provided in 2011 in Free Movement of Goods, Intellectual Property Rights and
Mutual Recognition of Professional Qualifications. Linked to the future
management of EU funds after a settlement, training was also given on Public
Expenditure Management. Finally, trade across the Green Line (Regulation 866/
2004) was also supported by TAIEX EU Member State experts who were mobilised to
carry out regular phytosanitary/veterinary inspections of potatoes and fish.
Preparations for a new cycle of TAIEX assistance were launched at the end of
2011 in cooperation with the beneficiaries.

The equipment supplied in previous years under
contracts for air quality monitoring is in use. The two TA contracts for this
sector have ended. The equipment supports compliance to the new draft environment
"law". Sustainability requires a commitment to staffing and to
equipment servicing in the long run.

The progress of draft "legislation"
aimed at acquis-alignment through the approval process was, however,
slower than hoped. The telecommunications reform "law" was finally
adopted at the end of 2011, but the environment "law" has been
delayed.

4.2.6.     Other projects

A €1 million Trust Fund with the World Bank to
carry an Economic Analysis Programme for Growth and Sustainable Development
was restarted in 2011 and a Stock-Taking Report was delivered in December.

4.3.        Financial execution
(contracts and payments)

4.3.1.     Contracting

Commitments in 2011 were €7.45 million (66% of
the January forecast of €11.2 million). Commitments for school grants and a
Contribution Agreement with UNDP in the field of Cultural Heritage were delayed
until 2012.

4.3.2.     Payments

Payments in 2011
totalled €49.98 million (67% of the January forecast). During the year,
however, the target was reassessed and reduced by €24.5 million. This was due
to the termination of two works projects, delays in large scale projects in the
field of water and telecommunications and to late completion of grant projects,
particularly those dealing with village upgrading. From the revised projection,
100% was disbursed.

In total, €179
million (69% of the overall amount contracted since the start of the programme
in 2006) was disbursed by the end of 2011. The number of contracts open at the
end of 2011 was 533.

4.4.        Monitoring

The bi-annual Interim Review Mechanism (IRM) serves
as a forum for detailed discussion of the programme with the beneficiaries. EC
staff also carries out continuous monitoring through field visits, site
meetings and Project Steering Committee meetings. TAIEX activities are
monitored through more than 20 Project Steering Groups, that each met twice in
2011, plus bi-annual Monitoring Mechanism meetings. TAIEX logistics are
monitored through the on-line TAIEX Management System. In most of the
intervention areas, a lack of beneficiary experience or capacity causes
implementation difficulties or delays. Grant beneficiaries, for example,
experienced problems with EU procedures, particularly for procurements using
grant funds. This has been addressed through Project Management Units,
established to assist grant holders with grant administration. In the case of
infrastructure or supply projects, the central or local TC administration,
which will be responsible for operation and maintenance, is struggling to
provide adequate resources and set up suitable structures in a number of cases.
Appropriate TA is provided to support the beneficiary through the hand-over
period.

4.5.        Audit and controls

The European Court of Auditors carried out a
performance audit in 2011. The report will be published in 2012.

The ELARG Internal Audit Capability Audit
Report of 2008 was supplemented by a 2011 follow-up that concluded that all
recommendations have now been implemented, although some residual risk has been
identified in handing over of works and supplies.

An ex-post control was carried out at the end
of 2010 by the Operational Audit & Evaluation Unit of DG ELARG to verify
legality and regularity of a set of 23 transactions. The final report in May
2011 made some observations on procedures, which are being considered.

An external audit was carried out on 12
selected grant contracts and the final report will be delivered in the first
half of 2012.

4.6.        Evaluation

A review of the water sector was initiated in
2011 and will contribute to future programming. A World Bank study of economic
aspects of the TC economy was also underway in 2011. A major evaluation effort
has been foreseen for 2012, when the main part of the 2006 programme will
finish.

4.7.        Information, Publicity and
Visibility

Visibility was ensured through the Infopoint
(see Objective 4). In addition, TA teams from the separate projects have been
tasked with enhancing visibility. A number of project-completion events were
also held by grant beneficiaries. Six press releases relating to the Aid
Programme for the TCc were disseminated by the Commission Representation in
Cyprus.

4.8.        Consultations with the
Government of the Republic of Cyprus

Regular meetings were held with representatives
of the Government of the Republic of Cyprus, in particular when senior
Commission officials visited the island. The Commission also meets regularly
with the Permanent Representation in Brussels. The Commission continues to rely
on the cooperation of the Government of the Republic of Cyprus for verification
of property ownership.

5.           Conclusions

The programme continues to meet challenges in
its implementation, in the absence of a recognised beneficiary or a programme
for direct institutional restructuring. Progress towards meeting the objective
of the Regulation to facilitate the reunification of Cyprus by encouraging
the economic development of the Turkish Cypriot community remains difficult
to achieve, given the operating environment and the sui generis political and
economic situation prevailing in the northern part of Cyprus. The process of
preparing for the future adoption and implementation of the acquis is
slow and the TCc is likely to require considerable support to meet acquis
requirements in many areas following a settlement and reunification.

During the reporting period, activities focused
on the completion of the 2006 programme. A number of substantial infrastructure
and equipment supply projects were nearing completion. The Morphou waste water
treatment plant started to receive wastewater and the pilot
solar power plant, completed and handed over in July, is operating at full capacity.
Efforts have been made to prepare the beneficiary for handover and future
operation, but lack of resources and experience mean that substantial further
commitment and input is required from the TC administration to ensure
sustainability of the investments. Inefficient structures and unclear
responsibilities are the underlying causes in many cases. This must be
addressed in 2012.

The many grant schemes launched since 2009 have
been well received, but have been demanding in terms of human resources, partly
because of lack of experience of the beneficiaries for project and financial
management.

As the major part of the 2006 programme is
completed, an overall review evaluation of the Aid Programme, as well as
sector-specific impact studies are necessary and will be carried out in 2012.

Human resources for the Programme Team remain a
challenge, partly because of the grant-intensive programme composition, but
also because of the overall reduction in human resources foreseen in all
services of the Commission.

The programme would benefit from more medium and
long term planning for which more stable arrangements for financing the
operational and staffing costs are necessary.

[1]               OJ L65, 7.3.2006, p.5.

[2]               Commission decisions C(2011)337 and C(2011)4443.

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