Select Committee on European Scrutiny Thirty-Sixth Report

16 Phare programme in Bulgaria and Romania



Special Report No. 4/2006 concerning Phare investment projects in Bulgaria and Romania, prepared by the European Court of Auditors

Legal baseArt 248 EC
Document originated27 June 2006
Deposited in Parliament14 July 2006
DepartmentInternational Development
Basis of considerationEM of 17 July 2006
Previous Committee ReportNone
To be discussed in CouncilTo be determined
Committee's assessmentPolitically important
Committee's decisionCleared, but further information requested


16.1 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: the Commission has overall responsibility for managing the programme, while the recipient countries have primary responsibility for undertaking and operating the projects.

The Court of Auditors' Report

16.2 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. The Court examined 11 complete or almost complete Phare supported investment projects involving 48 contracts for Phare support under the "Phare National Programmes 2000". The value of the audited projects was €14 million for Bulgaria and €51 million for Romania. The total allocations in 2000 under the investment programmes were €34.6 million in Bulgaria and €146.6 million in Romania.

16.3 The Court says that 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 Cohesion programmes. 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. But for over half of the investment projects audited, assets were not, or only partially, being used for the intended purpose:

    "Outputs 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 finalize the projects and to achieve the underlying project objectives."

16.4 Phare support for the two projects led by international financial institutions is described as "problematic". In Bulgaria, the Post-Privatisation Fund was found to have 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 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."

16.5 While the Commission's 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 particular areas:

—  "it overestimated the management capacity of the public authorities in Bulgaria and Romania and often agreed with them 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."

16.6 To improve the effectiveness of assistance the Court made the following recommendations:

—  National Authorities should make further substantial efforts to finalize the projects and to achieve the underlying objectives of the audited projects. The Commission should follow up to ensure that this happens and also improve monitoring so that corrective action is taken on all underperforming projects.

—  The Commission should adopt a more realistic programming approach for Bulgaria, Romania and the new candidate countries. This should include improved needs assessment ensuring complementarity with other sources of investment support, and improvements in the project fiche so that it better fulfils its function of directing and monitoring.[51] Quality assurance of project documentation should also be improved to assist implementation and monitoring.

—  The Commission should specify the resources for maintenance of assets and the requirements for co-financing at the programming stage. The monitoring of sustainability should include achievement of economic targets, e.g. in terms of job creation.

—  The Commission should improve its analysis of the "additionality" and "catalytic effect" of Phare resources especially in projects led by International Financial Institutions (IFIs). The Phare implementing guidelines state that the support for investment "should not displace other financiers, especially from the private sector or from the internal financial institutions" ("additionality"). They also state that the support for investment "must act as a catalyst for priority, accession-driven actions which would otherwise not take place or which would only take place at a later date" ("catalytic effect").

16.7 The Commission's response states that, since the Court's examinations, significant developments have taken place in a number of the projects. On the individual recommendations the Commission refers to: increased management capacity in the National Authorities and twice-yearly joint monitoring committees to ensure prompt corrective actions; the introduction of multi-annual planning to better match assistance to needs, combined with better quality control of project plans; more rigorous co-financing reporting requirements; and regular meetings between the Commission and IFIs to help address the issues of additionality and catalytic effect.

The Government's view

16.8 In his 13 July Explanatory Memorandum, the Parliamentary Under-Secretary of State at the Department for International Development (Mr Gareth Thomas) says:

    "Enlargement is a major issue for the EU. The UK is supportive of enlargement. Pre-accession assistance played a significant part in the 2004 accession process and also in bringing Bulgaria and Romania, the remaining members of this group, close to joining the EU. The May 2006 Monitoring Reports on Bulgaria and Romania confirmed that both countries are on track to join in January 2007. There will be further reports in October.

    "Substantial pre-accession funds are being provided to both Bulgaria and Romania. Over €500m has been allocated to Bulgaria and €1.4bn to Romania for the period 2000-04. Similar levels of assistance will be provided between 2004 and accession.

    "We welcome the Court of Auditors' report, and other monitoring and evaluation processes that seek to improve the effectiveness and risk management of this substantial and important support. In particular we agree that effective programming requires a thorough assessment of needs and clarity on what the national authorities and other donors, in particular the IFIs, are best able to provide. We also agree that ongoing monitoring linked to the ability to make changes to underperforming projects is an essential part of meeting needs.

    "But the Commission rightly points to the changes that took place since programming year 2000. Firstly, the administrative capacity of the Bulgarian and Romanian authorities has improved, with substantial additional attention given by the Commission to administrative capacity. Secondly, we agree with the Commission that multi-annual planning has brought benefits. Multi-annual planning and programming is an effective and predictable way to provide assistance in sectors which have been identified as priority fields for accession. The quality of the project documentation within the programmes has also been improved to better assess the state of readiness for each project.

    "Lessons from Phare will be taken up under the new Instrument for Pre-Accession (IPA) which from 2007 will replace the current mechanisms to deliver assistance to EU Candidate and Pre-candidate Countries. The UK has been successful in strengthening the Instrument's emphasis on social and economic development and the importance of evaluation in ensuring efficiency."

16.9 Finally, the Minister says that although there are no direct financial implications from this report, "the UK is promoting increased emphasis on evaluation and lesson-learning in new EC external relations instruments to ensure that continued improvements are made to increase value for money from this financial assistance". There have been preliminary discussions of the report, and "the aim is likely to be for Council approval before the summer break".


16.10 Even though no doubt unintended, there is an aura of Pollyanna in some of what the Minister says. There is no reason to suggest that the sample of the audited projects was in any way unrepresentative, and they are drawn from a total of almost €2 billion in 2000-04, with similar levels between 2004 and accession. We are not sure that other observers would agree with the upbeat tone of his view that "the May 2006 Monitoring Reports on Bulgaria and Romania confirmed that both countries are on track to join in January 2007". It would also have been more reassuring if the Minister had been able to say not just that, but a little more about how, the lessons learned will be integrated in the successor IPA, which we cleared at our last meeting along with two of the other new Instruments for External Action (the European Neighbourhood Partnership Instrument and the Stability Instrument).[52]

16.11 All in all, we should like to have had a greater degree of reassurance than at present that future such Reports will not be making the same observations in a few years' time with regard to current and future candidates' pre-accession assistance. We should therefore be grateful if, when he submits the IPA implementing regulation (which will set out the ways in which it will be managed), the Minister would illustrate, with reference to the findings of this Court of Audit Report, how the lessons learned have been incorporated.

We now clear the document.

51   Financing Memoranda are accompanied by the so-called Project Fiches which set out the details of all projects to be implemented. 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. Back

52   (27654): HC 34-xxxv, para 11 (12 July 2006). Back

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Prepared 27 July 2006