Romania and European Funds

JOINT EUROPEAN MASTER IN COMPARATIVE LOCAL DEVELOPMENT

ACADEMIC YEAR 2010-2011

Absorption of EU funds in Romania Student Economic Tutor Gratian Mihailescu Johann Spitzer July 2011

Budapest

CONTENTS

I. Introduction

II. The importance of structural and cohesion funds for the

development of Romania

III. Romania and absorption of community funds a) The absorption rate in 2010b) The absorption rate in 2011IV. Critics from International Institutions, Civil Society and Banking sector

V. Causes of low absorption a) Lack of Human Resources

b) Excessive beaurocracyc) Poor legislationd) Lack of development strategy at local levele) Low level of lobbying in Brussels by Romanian institutionsf) Corruption and excessive politicization of European fundsVI. Conclusion

List of Tables

Table 1: Structural and Cohesion Funds allocation for Romania, by Objective and by

year, for the period 2007-2013

Table 2: National Strategic Reference Framework (NSRF) allocation by Operational

Programmes (OPs)

Table 3: Reported cumulative rates of selected projects by Member States 2010Table 4: Absorption of structural funds - compared with other EU Member States

I. IntroductionRomania officially declared intention to become EU member in the mid of 90s. On 22 June, 1995 was submitted an official request for accession to EU. According to the European Agreement, the parties assume some obligations and recognize that an important condition for accession to the Community is the legislative harmonization. Helsinki European Council from 1999 took the historic decision to start the accession negotiations with Romania in 2000. Romania, like other candidate states, had to work hard to ensure compatibility of national legislation with the acquis communautaire. The criteria that each candidate country must meet to join the EU was established in 1993 by the Council from Copenhagen: Stable institutions guaranteeing democracy, the rule of law, human respect and protection of minorities; Market economy, able to cope with competitive forces and pressure from the internal market;

Ability to assume obligations of membership, especially to subscribe to the aims of political, economic and monetary union.At the end of 2004 Romania concluded the formal negotiations with EU. There were 31 negotiating chapters. Each negotiation chapter (except Chapter 31) covered an area or more areas of activities, associated with a part of the acquis which was adopted and implemented by Romania to become EU member. On 1 January 2007 Romania joined the EU being eligible to access all the funds from European Regional Development Fund (ERDF), European Social Fund (ESF) and Cohesion Fund (CF)Under the new acquis on EU Cohesion Policy, each Member State shall draw up a National Strategic Reference Framework (NSRF), the reference document for programming Structural and Cohesion Funds. This document will not serve as a management tool, but as a strategic document setting out the priorities of intervention of the Structural and Cohesion Funds in the period. The NSRF creates the links between national development priorities set out in the National Development Plan (NDP) 2007-2013, and priorities at European level - the Community Strategic Guidelines (CSG) for Cohesion 2007-2013. As a major difference between the NDP and NSRF is to note that, in terms of funding, the NSRF is supported exclusively by Structural and Cohesion Funds and national co-related, while the NDP includes other funding (national and local investment programs, external loans, EU funds for rural development and fisheries, etc.). It is extremely important to underline the connection between NSRF and Operational Programmes (OPs). In the package being negotiated with the European Commission's, NSRF represent the global strategy of using the Structural and Cohesion Funds, and various OP are the instruments under which the overall objectives of the NRSF can be achieved. The vision of the NSRF is to create a competitive, dynamic and prosperous economy for Romania. The general objective of the strategy is to reduce economic and social development disparities between Romania and EU member states by generating a further increase of 15-20% of GDP by 2015.

II. The importance of structural and cohesion funds for the development of RomaniaThese funds represent new money entering the economy; their effect on economic growth is particularly - given that Romania's GDP is 120 billion euro, annual absorption of an amount of 3-4 billion euros in European funds can generate addition of at least 1.5 to 2.5 growth percentage points per year.The key aims of the NRSF are to strength the Romanians economic and social cohesion policies in order to link it with EU policies, especially to the Lisbon Strategy, which build policies for economic growth and the creation of jobs. The synthesize priorities and actions of the NRSF are:

Developing basic infrastructure to European standards Increasing long-term competitiveness of Romanian economy Development and better use of human capital in Romania Building an effective administrative capacity Promoting balanced regional developmentThe entire territory of Romania is eligible under convergence objective (GDP per capita of each NUTS II region is bellow 75% of the EU 25 average), European Territorial Cooperation Objective (cross-border, transnational and interregional cooperation), and for Cohesion Fund (the GNI of Romania is less then 90% of EU 25 average). In order to achieve the priorities of NSRF Romania will receive for the period 2007-2013 almost 20 billions euro through ERDF, ESF, CF.

Table I

As we seen earlier NSRF has been prepared based on the National Development Plan (NDP) 2007-2013. NSRF is implemented through Operational Programmes (OPs). The OP are documents approved by the EC to implement those sectoral or regional priorities from the NDP, which were approved for finance through Community Support Framework. The OPs are management tools which help to achieve the objectives of the NSRF 2007-2013, through specific interventions. Romania has seven operational programs: 1. Human Resources Development Operational Programme2. Economic Competitiveness Operational Programme3. Transport Operational Programme4. Environment Operational Programme5. Operational Programme Administrative Capacity Development6. Regional Operational Programme

7. Technical Assistance Programme

Table 2

Each operational program is funded from a single instrument, except an operational environment and transport programs that are funded through ERDF and CF.

The OPs that should bring the structural funds have received the approval from EC in the second half of 2007. In this situation were the majority of the new member states. But this time it took six months to launch calls for proposals, while the authorities have developed guidelines and detailed procedures. Basically, work on drafting the documents (or the programming phase) lasted more than two years; since started more than a year before Romania joins the European Union, when the competent authorities have started to work intensively on preparing operational programs.III. Romania and absorption of community funds Romania contributes to the EU budget annually with 1% of GDP, a low degree of absorption can put the country in position to be the net contributor, as happened in 2007-2009. According to the Finance Ministry, the balance made for 2007-2009 period, the absorption rate for the first three years is 10.26%. Theoretically, to "cover" the allocation of unspent money, not to lose money in terms of the "n +3" rule, would mean that in 2010 the EC should make payments five times more than in all the three years before; which did not happened in 2010. We are in the mid of 2011 and the situation of EU funds absorption is critical. Even EC President Jose Manuel Barroso, was concerned about the low rate of effective absorption of funds, stressing in a official letter addressed to Prime Minister Emil Boc, that the Commission is concern about the "very low level of financial absorption of the Structural Funds and cohesion in Romania, which reached only 3% "(Note: official letter referred to the absorption rate calculated from the EU allocation effectively spent, considering that reimbursements).

III. a) The absorption rate in 2010According to the "National Strategy Report for 2009 on the implementation of Structural and Cohesion Funds" issued by the Romanian authorities ACSI (Authority for Coordination of Structural Instruments) in January 2010 and submitted to the European Commission: "although Romania was among the first members of their operational programs have been approved by EC the actual start of implementation of the strategy approved by the National Strategic Reference Framework (NSRF) and operational programs was not easy," recorded multiple and complex problems in the process of starting the implementation of operational programs and projects.In a communication from the European Commission from March 2010, to the European Parliament, the Economic and Social Committee and Committee of Regions, were outlined the poor results of the absorption of European funds that Romania registered.

Table 3

Reported cumulative rates of selected projects by Member States 2010

In 2007 the public administration specialists which develop the majority of the programmes and the guidelines, argued that regional development (Regional Operational Programme-ROP), could constitute the first step for a successful implementation of all OPs. Because of the synergy and complementarity process, the implementation of national projects will become more achievable, if ROP will have a high absorption rate. In June 2010, the latest data provided by the ACSI show that the operational program with the highest degree of absorption is ROP with 15.14%, which is, in fact, the only program that has an evolution. With regard to other programs, these presents deficiencies in access and do not have a high degree of absorption. The process of synergy of operational programs, which was thought at the time of drafting the National Strategic Reference Framework (2007-2013) (NSRF), does not seem so to be successful. In addition, large project evaluation periods, currency instability, legal barriers and institutional system with low efficiency are found to be other factors raised in the process of absorption.The civil society represented by several non-profit organizations, including Transparency International Romania, Academy of Advocacy, The Foundation for Civil Society Development, Pro Democracy Association and over one hundred other associations, have signed a document that was submitted in March 2010 to Prime Minister Emil Boc, which drew a warning on major congestions in the absorption of EU funds. Through this letter the government was asked to adopt emergency measures to unlock the access and use of funds from the structural instruments. III. b) The absorption rate in 2011According to recently published report from the Romanian Fiscal Council at the end of 2010, Romania is in last place among the six countries examined, with an absorption rate for 2007-2013 of 8.6% below Bulgaria (10.2%), Czech Republic (12.4%), Poland (20.4%), Estonia (26%) and Latvia (29%). Table 4

Absorption of structural funds - compared with other EU Member States

Total allocations Payments in Absorption Total allocation Total payments

2007-2013 December 2010 rate capita euro capita euro

Billions euro

European Commission source, The annual report of Romanian Fiscal Council 2011

As for Poland, for example, by mid 2008, the country managed to attract almost all the funds made available for the period 2004-2006, while Hungary was at the end of 2007 an absorption rate of 80%.ACSI published in July 2011, official report on the progress of structural and cohesion funds absorption. Therefore, by the end of June, the calculated absorption grade, taking into account both reimbursements, and pre-financing has reached 13.17%.

IV. Critics from International Institutions, Civil Society and Banking sector

This low rate of absorption of European funds has attracted international criticism of such bodies as the European Commission and World Bank on the one hand, and on the other hand the Romanian civil society, who blame Romanian government for mismanagement of European money.

European Commission remains very much concerned with regard to the very low financial absorption of Structural and Cohesion funds in Romania highlights EC President, Jose Manuel Barroso in an official document sent to Romanian Prime-Minister, Emil Boc. The percents submitted by the European experts are much lower than the Romanian institutions claim. Bucharest has absorbed only 3.4 % of the 20 billion allocated by the EU for 2007-2013, said Ton Van Lierop, a spokesman for European Commissioner for Regional Policy, Johannes Hahn. Romania's problems are "systemic," explained for HotNews.ro officials from Brussels and are linked to corruption, legislation, incompetence, lack of management efficiency and control authorities, bureaucracy and conflicts of interest.The World Bank experts say that programs financed from European funds could be "replaced" by the support from the state budget funds, which are not so rigorous and transparent. World Bank cautions that programs financed from European funds have a relatively low fiscal impact on state budget, and this overlap is extremely inefficient and costly given the crisis on budgetary resources. WB report presents the main causes of low absorption of EU funds run by the Ministry of Regional Development and Tourism (MRDT). WB experts show that although the absorption of European funds run by the ministry is among the largest in Romania, is very small compared to other European countries. The WB experts believe that excessive bureaucracy is one of the main obstacles to a better absorption. This problem is raised by the applicants, who claim the long assessment of dossiers by management authorities personnel. Beneficiaries acknowledge that the limited capacity to co-finance projects and lack of experience in preparing these projects (especially financial and technical sections) is a serious impediment to access EU funds.A report published in early July by the Public Policy Institute emphasized the "very low" rate of absorption of European funds allocated for development, money which should help to bridge the gap between Romania and other European countries. He also criticized "chronic lack of transparency by the authorities in managing these funds."

Bankers stresses that Romania would have attracted more European money if there was better coordination between institutions involved. Representatives of the banking sector considered appropriate the development of a common voice which should manage EU funds absorption. Romania needs a common voice in European projects to increase absorption, considered experts in the banking sector. Otherwise, without a direct correlation between the involved institutions - banks, consulting firms, government and business the country risks to lose the EU money.Following these criticisms and low absorption process, the Romanian government has launched a discussion about law project that establish a ministry of European funds. Another topic discussed in informal ways by most politicians is the process of administrative decentralization; the abolition of the 43 administrative units which should be transformed in 8 big regions, the actual NUTS II regions from Romania. But, in this process, entire political class will lose the benefits that they have in this moment. The merging of administrative units will make the politicians who have some influence in a certain area, to lose that influence. And this action has an indirect impact on political parties and the future votes. The decentralization and regionalization could be the perfect tool for a better absorption of EU funds. But it will be very difficult, because the politicians will have to put the interests of citizens above their interests. And this is hard to believe that will happen. In 2008, Romania was once again rated by Transparency International among the most corrupt nations in the EU-27 with a Corruption Perception Index (CPI) score of 3,8, meaning that the country has a serious corruption problem. According to a Eurobarometer from April 2008, 75% of the Romanian respondents consider corruption a major problem in their country (European Commission, 2008).V. Causes of low absorptionV. a) Lack of Human ResourcesOne of the major causes of low rates of EU funds absorption is related to human resources. People involved in this process (central and local authorities, SMEs, NGOs) do not know or are not interested in funding opportunities offered by EU Structural Funds. For public administration is very hard to motivate the public officers to apply for projects of thousands and hundreds of thousands of euros when their monthly income does not exceed a few hundred euros. On the other hand those public officers dont have the necessary expertise to write such kind of projects. And if the they have the knowledge and the expertise, they prefer to change the sectors, from public to private, because the Romanian government is unable to motivate them enough. In the private sector, even if the experts exist and the consulting companies can write successful projects, the entrepreneurs are reluctant to European Funds. Because of bureaucracy, co-financing part and tougher controls, entrepreneurs would rather not apply for European money, preferring to develop their business more slowly.The same human resource problems are found in many ministries that are the management authorities for most operational programs. There are no qualified and motivated personnel to assess the submitted projects, which in some priority axes, exceed far the number of the projects that should be approved. In most of the OPs, the number of the potential beneficiaries (deponents) is three or for times higher then the budget approved for one specific priority axis for one specific call launch; what it means that the design quality of the projects is very poor. Even so, the public officers from the ministries must evaluate the entire project submitted, and this causes long delays. V. b) Excessive beaurocracyThe excessive bureaucratic procedures which should be completed by applicants, especially by managing authorities and intermediate bodies, on the one hand in the request of funding and evaluation of application, and on the other hand in the process of concluding the contracts and during the development of the approved contracts. The very high excess of bureaucracy leads to large delays. Much of these procedures are required by Commission regulations, but others can be and must be modified by decisions of public authorities from Romania. V. c) Poor legislationOther weaknesses are related to the Romanian legislation on public procurement and public-private partnerships (PPP). If in the first case the government has begun the negotiations for legislative changes in public procurement legislation, but for the PPPs the law remains ambiguous. A development of private-public partnership will not be able to be accomplished without a major change in the actual legislation. V. d) Lack of development strategy at local levelAnother factor that prevents the absorption of European funds is the lack of a local strategy for accessing European funds; very few counties in Romania have a strategy. These documents supposed to be developed before 2007, through pre-accession programs like PHARE. Currently, in some counties from Romania there is no such document after which local governments to follow the proper steps to access certain OPs, in accordance with the needs of the specific area. Mismanagement of pre-accession funds had a negative impact on human resources, lack of qualified staff being one of the most important reasons of low absorption level. V. e) Low level of lobbying in Brussels by Romanian institutionsBrussels is not only the headquarters of EU institutions, but is a magnet for representatives of various public and private entities from all EU Member States and not only. The number of people who are representatives of European regions, associations of employers or trade unions, various multinational companies, lobbying firms, consultants, lawyers, etc., exceed the number of employees of EU institutions. In Brussels there are over 300 regional offices and more than 2.000 lobby offices. Therefore, each region needs to close those partners with which it has affinities and with which can develop relevant joint projects; EU is encouraging the creation of European partnership between different regional entities. Romania, although is the second country as size and population from Central and Eastern Europe, practically doesnt exists in terms of lobbying in Brussels. With few exceptions, Romania does not have local and regional representatives for public and private sector or civil society, which shows their lack of interest for European affairs. Full understanding of specific mechanisms of EU is a crucial factor in increasing the efficiency of accessing structural funds.V. f) Corruption and excessive politicization of European fundsCorruption is manifested in two main aspects:

1. Prefects, deputy prefects, heads of agencies and government institutions are appointed from the center on political criteria. It is a system that feeds political clientelism of neophanariot type which punishes competence, fairness and professionalism.

2. Allocation of funds based strictly on political views, depending on the party membership card of the mayor, president of county council, as a reward and electoral argument; and as a punishment for elected opposition, or as a method of blackmail to force the migration from the opposition party to officials government.VI. ConclusionsThe reorganization of Romanian administrative units can be the factor which will drive to a better absorption of EU funds. The decentralization process brings with it a reform of public administration. Romania, compared with other countries of its size, is one of the most centralized states in Europe. Centralization means inefficiency, inequity and corruption. Economic inefficiency has many aspects: budgetary funds, instead of being spent where are generated, are sent first to the center, processed by a thick bureaucratic apparatus, and returned in territory through arbitrary principles. The center does not know or care about regional priorities therefore the allocation is inefficient. Decentralization and regionalization is therefore the only solution to remedy these serious administrative and political disruptions. Romania is an EU member, and subsidiarity principle is a basic principle of the EU: the decisions must be taken as close as possible to the citizens, therefore some decisions has to be taken locally and regionally.

The distribution of European funds is based on the principle of subsidiarity, and Romania has regional structures to access this money. At the local level, the towns and municipalities have little financial and administrative autonomy. The counties are to smalls to implement regional programs, and the current development regions (NUTS II) dont have legal personality and power to function as promoters of development. Besides that the most important aspects that can be take in considerations in Romania are the strengthening of institutional system and rule of law, factors that are the foundation elements in the making policies process. Transparency, responsibility, efficiency, multi level governance, competitiveness are key words that should be the pillars of every system.BibliographyInternet sources:National Strategic Reference Framework 2007-2013, Government of Romania, Final Version 2007, pg 152-155:http://www.fsenordest.ro/BIBLIOTECA/csnr-en.pdfNational Strategic Report for 2009 on the Implementation of Structural and Cohesion Funds, Authority for Coordination of Structural Instruments, January 2010, Page 6: http://www.eufinantare.info/Documente/Raport-fonduri-2007-2009_ro.pdfThe official letter sent by the EC President to Romanian Prime-Minister: http://www.hotnews.ro/stiri-9391178-scrisoarea-presedintelui-comisiei-europene-jose-manuel-barroso-catre-premierul-boc-comisia-ramane-foarte-preocupata-nivelul-foarte-scazut-absorbtiei-financiare-atins-doar-3.htmThe official document sent by European Commission to European Parliament, Social and Economic Council and Committee of Regions, Brussels March 2010, page 8 http://www.fonduri-structurale.ro/Document_Files//Stiri/00006788/9sj0l_Comunicarea%20CE%20martie%202010%20-%20ro.docThe letter send by Romanian Civil society to Romanian Prime Minister, Emil Boc, January 2010:http://www.afaceripublice.ro/media/diverse/scrisoare-ong-uri.pdfThe report made by Authority for Coordination of Structural Instruments (ACSI), 30 June 2011: http://www.fonduri-structurale.ro/Document_Files//Stiri/00009536/yibfp_Stadiu%20absorbtie%20iunie%202011.rar Data collected from National Strategic Reference Framework 2007-2013, page 152

HYPERLINK "http://www.fsenordest.ro/BIBLIOTECA/csnr-en.pdf" http://www.fsenordest.ro/BIBLIOTECA/csnr-en.pdf

Data collected from National Strategic Reference Framework 2007-2013, Page 155

HYPERLINK "http://www.fsenordest.ro/BIBLIOTECA/csnr-en.pdf" http://www.fsenordest.ro/BIBLIOTECA/csnr-en.pdf

The official document sent by the EC President can be found at:

HYPERLINK "http://www.hotnews.ro/stiri-9391178-scrisoarea-presedintelui-comisiei-europene-jose-manuel-barroso-catre-premierul-boc-comisia-ramane-foarte-preocupata-nivelul-foarte-scazut-absorbtiei-financiare-atins-doar-3.htm" http://www.hotnews.ro/stiri-9391178-scrisoarea-presedintelui-comisiei-europene-jose-manuel-barroso-catre-premierul-boc-comisia-ramane-foarte-preocupata-nivelul-foarte-scazut-absorbtiei-financiare-atins-doar-3.htm

National Strategic Report for 2009 on the Implementation of Structural and Cohesion Funds, Page 6

HYPERLINK "http://www.eufinantare.info/Documente/Raport-fonduri-2007-2009_ro.pdf" http://www.eufinantare.info/Documente/Raport-fonduri-2007-2009_ro.pdf

The official document sent by EC to EP, ECOSOC and Committee of Regions

HYPERLINK "http://www.fonduri-structurale.ro/Document_Files//Stiri/00006788/9sj0l_Comunicarea%20CE%20martie%202010%20-%20ro.doc" http://www.fonduri-structurale.ro/Document_Files//Stiri/00006788/9sj0l_Comunicarea%20CE%20martie%202010%20-%20ro.doc

Table taken from the official document sent by EC to EP, ECOSOC and Committee of Regions, page 7

HYPERLINK "http://www.fonduri-structurale.ro/Document_Files//Stiri/00006788/9sj0l_Comunicarea%20CE%20martie%202010%20-%20ro.doc" http://www.fonduri-structurale.ro/Document_Files//Stiri/00006788/9sj0l_Comunicarea%20CE%20martie%202010%20-%20ro.doc

The letter send by Romanian Civil society to Romanian Prime Minister, Emil Boc:

HYPERLINK "http://www.afaceripublice.ro/media/diverse/scrisoare-ong-uri.pdf" http://www.afaceripublice.ro/media/diverse/scrisoare-ong-uri.pdf

Table with the absorption rate from the annual report of Romanian Fiscal Council, pg 22

HYPERLINK "http://www.consiliulfiscal.ro/raportanual2011.pdf" http://www.consiliulfiscal.ro/raportanual2011.pdf

The report made by Authority for Coordination of Structural Instruments (ACSI), 30 June 2011:

HYPERLINK "http://www.fonduri-structurale.ro/Document_Files//Stiri/00009536/yibfp_Stadiu%20absorbtie%20iunie%202011.rar" http://www.fonduri-structurale.ro/Document_Files//Stiri/00009536/yibfp_Stadiu%20absorbtie%20iunie%202011.rar

Official letter from EC president Jose Manuel Barroso to the Romanian Prime-Minister Emil Boc, 23.06.2011:

HYPERLINK "http://htmlimg3.scribdassets.com/3r044lqb4011elf6/images/1-2ebe5947b3.jpg" http://htmlimg3.scribdassets.com/3r044lqb4011elf6/images/1-2ebe5947b3.jpg

Article in Economic News Paper, 13.07.2011:

HYPERLINK "http://economicsnewspaper.com/world-economics/romania-severely-criticized-the-management-of-eu-funds-44190.html" http://economicsnewspaper.com/world-economics/romania-severely-criticized-the-management-of-eu-funds-44190.html