**Table 12: Co-financing**

|**Co-financing, in mn current €**|**2007**|**2008**|**2009**|**2007-09**|
|---|---|---|---|---|
|Ruraldevelopment|27|49|54|131|
|Structural funds|27|49|54|131|
|Cohesion fund|1|9|20|30|
|Pre-accessionaid|126|112|107|345|
|**Total **|182|219|236|637|

_Source:_ Pre-accession aid data from the Ministry of Finance.

Co-financing needs and Structural Funds additionality requirements are both taken into account in calculating the net budgetary effect of the accession. We assume that two offsetting effects take place. On the one hand, the maximum contribution of EU funds will not be allocated for all measures as there is interest to increase the number of the EU-financed projects (i.e. allocate a smaller amount for each project).<sup>18</sup> Therefore, national co-financing might be higher than 15% for the Structural Funds and, the Cohesion Fund and 20% for Rural Development. On the other hand, a part of this co-financing will come from private sources and bear no effect on the state budget. Taking into account these two considerations, it is assumed that they would mostly cancel out each other.<sup>19</sup> This reasoning is generally in line with the Bulgarian Ministry of Finance expectations too. Therefore, our calculations are based on the assumption that the national cofinancing will amount to 15% of total funding (or 18% of the allocated EU funds) for Structural Funds and the Cohesion Fund; and 20% of total funding (or 25% of the allocated EU funds) for Rural Development.

As per pre-accession aid, the co-financing requirement is one third of pre-accession payments appropriations. Due to the gradual phasing-in for all structural actions of the EU, co-financing requirements for Structural Funds, the Cohesion Fund and Rural Development increase as well during the period under consideration. Following the opposite tendency, co-financing of the preaccession aid subsides in 2007-2009.

# **_Substitution of expenditures_**

As the Cohesion Fund alone is not subject to the principle of additionality, expenditures made under this fund might substitute other budget expenditures. With respect to the Structural Funds, full compliance with the principle of additionality is required (see Box 1). This implies that Structural Funds may not substitute existing budget expenditures and therefore may not improve the budget balance of a member state.

Budget savings may be realized also in the substitution of national agricultural subsidies with the direct payments under the Common Agricultural Policy, assuming that there will be no top-ups out of national resources. The latter is achievable since in the case of Bulgaria the income effect for the agricultural producers from the EU direct payments is expected to be significant and further national subsidies might distort considerably the decisions of the Bulgarian farmers.

# **_Pre-Financing of Direct Payments under CAP_**

Direct payments to the farmers might or might not add to the fiscal balance deterioration depending on whether they are paid out in December 2007 or in early 2008. The payment scheme for these subsidies is as follows:

> 18 National authorities usually prefer having a higher number of projects so that if certain projects fail they would have headroom and would still be able to absorb the allocated EU funds. 19 Hallet (2004).

17