52000PC0281(02)

Proposal for a COUNCIL REGULATION concerning the European Agency for Reconstruction

(presented by the Commission)

EXPLANATORY MEMORANDUM

INTRODUCTION

This Explanatory Memorandum covers two proposals for Regulations forwarded to the Council for adoption, namely:

- a proposal for a Regulation on assistance for Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia and the Federal Republic of Yugoslavia;

- a proposal for a Regulation on the European Agency for Reconstruction.

Proposal for a Regulation on assistance for Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia and the Federal Republic of Yugoslavia

1. A SINGLE LEGAL FRAMEWORK

In December 1999 the Commission adopted a Communication [1] on future assistance to the Western Balkans announcing the Commission's intention of proposing that the Council should adopt a new legal basis for assistance to the region [2].

[1] COM(1999) 661 final.

[2] Albania, Bosnia and Herzegovina, Croatia, former Yugoslav Republic of Macedonia, Federal Republic of Yugoslavia.

One of the aims of the proposal is to consolidate the regulatory framework for assistance to the region. At present, assistance to some of its countries is provided under the Obnova Regulation, others receive assistance under the Phare Regulation, and some under both.

The fact that there are two separate legal bases for Phare and Obnova, each with their own, different administrative and management procedures, has caused endless operational problems, a fact to which Parliament and the Court of Auditors rightly draw attention. Also, the Phare programme has been redirected to serve the new priorities of enlargement and is therefore no longer suited to providing assistance to the Western Balkans.

This proposal represents a single legal framework for providing assistance to the five countries in question and repeals Regulation (EC) No 1628/96 (Obnova) and the provisions in the Annex to Regulation (EEC) No 3906/89 (Phare) applicable to these countries.

The assistance given by the Community in other fields and under other Regulations will complement and must dovetail with the assistance provided under this Regulation. This applies in particular to the following types of aid, which will not be covered by the new Regulation: humanitarian assistance, some actions in favor of democracy under Regulation (EC) No 976/99 of 29 April 1999 and exceptional macro financial assitance.

2. MAIN POINTS OF THE PROPOSAL

- Main objectives

"The Stabilisation and Association Process, which offers each country in the region a "road to Europe" is the centrepiece of EU policy in the Balkans. The process, which leads to formal contractual relations with the EU through a Stabilisation and Association Agreement, includes economic and financial assistance and cooperation, political dialogue, improved trade including the establishment of a free trade area, approximation of EU legislation and practices, and cooperation in areas such as justice and home affairs" [3].

[3] Report on the Western Balkans presented to the European Council by the Secretary-General/High Representative together with the Commission.

The European Council which met in Lisbon on 23 and 24 March 2000 confirmed that its overall objective remained the fullest possible integration of the countries of the region into the political and economic mainstream of Europe and that the Stabilisation and Association Process was the centrepiece of its policy in the Balkans.

Under the new Regulation, the main objective of any assistance will be to support participation by the receiving countries in the Stabilisation and Association Process and close regional cooperation.

In the course of the Process the countries will have to redirect their political, economic and institutional development to align themselves on European Union values and models of democracy, respect for human and minority rights, the rule of law and the market economy.

This means concentrating the assistance (in the form of investment and institution building) on building up and modernising institutions and administrations so as to strengthen democracy, the rule of law and respect for human and minority rights.

Another objective will be to provide the institutions and administrations concerned with the skills they need to embark on, and develop, economic and social policies based on market-economy oriented reforms.

The assistance may also be used to encourage alignment of the laws of the countries concerned on those of the European Community - an important factor in any rapprochement between these countries and the European Union.

Where there is still a need, reconstruction and assistance to returning refugees will remain priorities but such assistance cannot be dissociated from the economic and institutional development of the recipient countries.

- Programming

As a rule, the aid will be implemented under either national or multi-beneficiary programmes.

National programmes

Wherever possible, the beneficiaries will be involved in programming within a framework of dialogue and partnership.

The partnership will provide an opportunity to discuss reform programmes with the beneficiaries in priority sectors. The assistance is indissolubly linked to the reforms and will be programmed to accompany and support them.

- Multi-beneficiary programmes

In a number of fields, including customs cooperation, trade, justice and home affairs, with particular reference to cross-border criminal activity and crime prevention, programmes could be devised to involve countries of the region together in initiatives on a regional scale.

- Comitology

In accordance with Council Decision 1999/468/EC, the Commission will be assisted by a management committee. This is the same as the current arrangement for the Phare and Obnova programmes.

Under the Obnova programme, the management committee delivers an opinion on financing decisions worth more than EUR 5 million, the threshold set in 1998 when Regulation (EC) No 1628/96 was revised in order to speed up the response time. To speed up implementation still further, the new cut-off will be EUR 10 million.

This figure might be revised at a later date, for instance if the different external aid programmes were to be harmonised.

General operational guidelines for implementation of the regulation will be adopted in accordance with the committee procedure as well.

- Conditionality

As stated in Article 3 of the proposed Regulation, "respect for the principles of democracy and the rule of law and for humane, minority rights and other fundamental freedoms is a ... precondition of eligibility for assistance". In the event of failure to abide by these principles the Council, acting on a proposal from the Commission, may take appropriate steps.

Other - political - conditions, such as those set out in the Council conclusions of 29 April 1997 on certain types of assistance (e.g. commitments to introduce democratic and economic reforms), will also apply.

The level of compliance will be discussed with the authorities concerned and this dialogue will allow the EU to state its expectations, assess the authorities' commitment and encourage them to develop the measures intended to comply with the conditions. The fulfilment of the conditions will be evaluated and this evaluation will influence the assistance provided under the Regulation.

The element of conditionality is intended to act as an incentive in the context of a dialogue with the authorities in support of the objectives of the Stabilisation and Association Process, the aim being to foster integration.

Where a State does not fulfil the conditions referred to in Article 3 of the proposal, or where compliance with the political conditions for assistance (April 1999) falls short of a threshold regarded as the minimum for a State to be eligible, assistance may be granted direct to local or regional authorities or federal or other entities.

Proposal for a Regulation on the European Agency for Reconstruction

This Agency was established by Regulation (EC) No 2454/1999 of 15 November 1999 amending Regulation (EC) No 1628/96, which is the legal basis for implementing the assistance provided under the Obnova Regulation.

The proposal for a Regulation on assistance to Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia and the Federal Republic of Yugoslavia repeals Regulation (EC) No 1628/96.

The provisions on the creation and operation of the European Agency for Reconstruction should therefore be incorporated in a new Regulation, with a few minor amendments to adapt them to the new aid Regulation.

2000/0112 (CNS)

Proposal for a COUNCIL REGULATION concerning the European Agency for Reconstruction

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 308 thereof,

Having regard to the proposal from the Commission [14],

[14] OJ C

Having regard to the opinion of the European Parliament [15],

[15] OJ C

Whereas:

(1) Assistance for Albania, Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia and the former Yugoslav Republic of Macedonia has been implemented essentially under Council Regulation (Euratom, EC) No 2185/96 [16], as last amended by Regulation (EC) No 2454/1999 [17], and under Council Regulation (EEC) No 3906/89 [18], as last amended by Regulation (EC) No 1266/1999 [19].

[16] OJ L 204, 14.8.1996, p. 1.

[17] OJ L 299, 20.11.1999, p. 13.

[18] OJ L 375, 23.12.1989, p. 11.

[19] OJ L 161, 26.6.1999, p. 68.

(2) Regulation (EC) No 1628/96 as amended by Regulation (EC) No 2454/99 set up the European Agency for Reconstruction, for which it was the legal basis.

(3) On [date of adoption of CARDS] the Council adopted Regulation [CARDS] which lays down a single legal framework for assistance to those countries and repeals Regulation (EC) No 1628/96.

(4) The provisions governing the creation and operation of the European Agency for Reconstruction should therefore be adapted to Regulation [CARDS] and incorporated in a new Regulation.

(5) The Treaty does not provide, for the adoption of this Regulation, powers other than those under Article 308,

HAS ADOPTED THIS REGULATION:

Article 1

1. The Commission may delegate to an agency implementation of the assistance provided for in Article 1 of Regulation [CARDS], initially in Kosovo and also in other parts of the Federal Republic of Yugoslavia (FRY) when conditions permit.

The European Agency for Reconstruction, hereinafter referred to as the 'Agency', shall be set up to that end with the aim of implementing the assistance referred to in the first subparagraph.

2. Any decision to extend the Agency's activities to parts of the FRY other than Kosovo, including decisions on the arrangements for determining the bodies referred to in Article 1(2) of Regulation [CARDS], shall be taken by the Council acting by a qualified majority on a proposal from the Commission. In the light of that decision, the Agency may establish other operational centres.

Article 2

1. To achieve the objective laid down in Article 1, the Agency shall carry out the following duties, within the bounds of its powers and in accordance with the decisions taken by the Commission:

(a) gathering, analysing and communicating information to the Commission on:

(i) damage, the requirements for reconstruction and the return of refugees, and related initiatives taken by governments, local or regional authorities and the international community;

(ii) the urgent requirements of the communities concerned, taking account of the various population displacements and the possibilities for the return of those displaced;

(iii) the priority sectors and geographical areas requiring urgent assistance from the international community;

(b) preparing draft programmes for the reconstruction of Kosovo and the return of its refugees and submitting them to the Commission with a view to their adoption in accordance with Article 8(2) of Regulation [CARDS];

(c) implementing the assistance referred to in Article 1, wherever possible in cooperation with the local population and where necessary by drawing on the services of operators selected by tender. The Commission may accordingly make the Agency responsible for all operations required to implement the programmes, including:

(i) drawing up terms of reference;

(ii) preparing and evaluating invitations to tender;

(iii) signing contracts;

(iv) concluding financing agreements;

(v) awarding contracts, in accordance with the provisions of this Regulation;

(vi) evaluating projects;

(vii) checking project implementation;

(viii) effecting payments.

2. Without prejudice to any operations cofinanced in the framework of the responsibilities entrusted to the Agency under Article 1, the Agency may implement reconstruction programmes and programmes for the return of refugees which the Member States and other donors entrust to it, inter alia under the arrangements for cooperation established by the Commission with the World Bank, international financial institutions and the European Investment Bank (EIB).

Such implementation shall be subject to the following conditions:

(a) the financing must be provided in full by the other donors;

(b) the financing must cover any associated administrative costs;

(c) the duration of these tasks must be compatible with the deadline for winding up the Agency set in Article 13.

Article 3

The Aency shall have legal personality. It shall enjoy in each of the Member States the most extensive legal capacity accorded to legal persons under their laws; it may, in particular, acquire or dispose of movable and immovable property and be a party to legal proceedings. The Agency shall be non-profit-making.

The operational centre of the Agency, which shall have a considerable degree of management autonomy, shall be established initially in Pristina in order to embark on the reconstruction work in Kosovo, drawing on the Agency's general services located at its seat in Thessaloniki.

Article 4

1. The Agency shall have a Governing Board composed of one representative from each Member State and two representatives of the Commission.

2. The Member State representative shall be appointed by the Member State concerned, paying due regard to experience and qualifications relevant to the Agency's activities.

One of the two Commission representatives shall be a Member of the Commission.

3. The term of office of representatives shall be thirty months.

4. The Governing Board shall be chaired by a Commission representative. It shall usually be chaired by the Member of the Commission. The Chairman shall not vote.

5. The EIB shall appoint a non-voting observer.

6. The Governing Board shall adopt its rules of procedure.

7. The Commission and Member State representatives on the Governing Board shall each have one vote.

Governing Board decisions shall be adopted by a two-thirds majority.

8. The Governing Board shall determine by unanimous decision the rules governing the languages used by the Agency.

9. The Governing Board shall be convened by the Chairman every month. It shall also be convened at the request of the Agency's Director or at least a simple majority of its members.

10. On the basis of a draft submitted by the Agency's Director and in consultation with the Commission, the Governing Board shall examine by 30 November of each year at the latest the preliminary draft annual work programme for the following year. The work programme shall be adopted at the beginning of each operating year. It may be adjusted as necessary during the year by the same procedure to take account, inter alia, of programmes adopted by the Commission.

Measures included in the annual work programme shall be accompanied by an estimate of the necessary expenditure.

11. The Governing Board shall lay down the principles necessary for implementing the reconstruction programmes. On a proposal from the Director, the Board shall decide on the main issues relating to the Agency's activities, including:

(a) the draft programmes to be submitted to the Commission;

(b) methods of evaluating and properly implementing the projects;

(c) proposals for programmes by other donors for possible implementation by the Agency;

(d) setting the multiannual contractual framework with the provisional authority responsible for the administration of Kosovo, for implementation of the assistance referred to in Article 1(3) of Regulation [CARDS] and adopted in accordance with Article 8(2) of the same Regulation;

(e) finalisation, any adjustments to, and implementation of projects;

(f) whether representatives of the countries and organisations delegating implementation of their programmes to the Agency should be present as observers on the Governing Board.

12. The Governing Board shall lay down the principles governing the award of contracts by calls for tender.

13. The Governing Board shall present a draft annual report to the Commission by 31 March each year at the latest on the Agency's activities in the previous year and how they were financed.

The Commission shall adopt the annual report and submit it to the European Parliament and the Council.

Article 5

1. The director of the Agency shall be appointed by the Governing Board on a proposal from the Commission for a term of office of thirty months. The term of office may be terminated by the same procedure.

The Director shall be responsible for:

(a) preparation and organisation of the work of the Governing Board and, in particular, preparation of the Agency's draft work programme;

(b) day-to-day administration of the Agency;

(c) preparation of the statement of revenue and expenditure and execution of the Agency's budget;

(d) preparation and publication of the reports specified in this Regulation;

(e) all staff matters;

(f) implementation of the annual work programme referred to in Article 4(10);

(g) implementation of the Governing Board's decisions and guidelines laid down for the Agency's activities.

2. The Director shall be accountable to the Governing Board for his activities and shall attend its meetings.

3. The Director shall be the legal representative of the Agency.

4. The Director shall hold the power of Appointing Authority.

5. The Director shall present a quarterly activity report to the European Parliament.

Article 6

1. Estimates of all the Agency's revenue and expenditure shall be prepared for each financial year, which shall correspond to the calendar year, and shall be shown in the Agency's budget, which shall include an establishment plan.

2. The revenue and expenditure shown in the Agency budget shall be in balance.

3. The Agency's revenue shall comprise, without prejudice to other types of income, a subsidy from the general budget of the European Union, payments made as remuneration for services performed and funding from other sources.

4. The budget shall also include details of any funds made available by the recipient countries themselves for projects receiving financial assistance from the Agency.

Article 7

1. The Director shall establish each year a draft budget for the Agency covering administrative expenditure and the proposed operational programme for the following financial year, and shall submit it to the Governing Board.

2. On this basis, the Governing Board shall adopt a draft budget for the Agency by 15 February of each year at the latest, and shall submit it to the Commission.

3. The Commission shall assess the draft budget of the Agency having regard to the priorities it has established and the overall financial guidelines for reconstruction assistance for Kosovo.

It shall establish on this basis and within the proposed limits of the overall amount to be made available for aid to Kosovo, the annual contribution to the Agency budget to be included in the preliminary draft of the general budget of the European Union.

4. The Governing Board, after receiving the opinion of the Commission, shall adopt the budget of the Agency together with the work programme at the beginning of each financial year, adjusting it to the various contributions granted to the Agency and to funds from other sources. The budget shall also specify the number, grade and category of staff employed by the Agency during the financial year in question.

Article 8

1. The Director shall implement the budget of the Agency.

2. The Commission's Financial Controller shall be responsible for financial checks.

3. By 31 March each year at the latest, the Director shall submit to the Commission, the Governing Board and the Court of Auditors the detailed accounts of all revenue and expenditure from the previous financial year.

The Court of Auditors shall examine the accounts in accordance with Article 248 of the Treaty. It shall publish a report on the Agency's activities every year.

4. On a recommendation from the Council, the European Parliament shall give a discharge to the Director in respect of the implementation of the Agency's budget.

Article 9

The Governing Board, having received the agreement of the Commission and the opinion of the Court of Auditors, shall adopt the Agency's Financial Regulation, specifying in particular the procedure to be used for drawing up and implementing the Agency's budget, in accordance with Article 142 of the Financial Regulation applicable to the general budget of the European Communities.

Article 10

The Agency's staff shall be subject to the rules and regulations applicable to officials and other servants of the European Communities. The Governing Board, in agreement with the Commission, shall adopt the necessary implementing rules.

The Agency's staff shall consist of a strictly limited number of officials assigned or seconded by the Commission or Member States to carry out management duties. The remaining staff shall consist of other employees recruited by the Agency for a period strictly limited to its requirements.

Article 11

The Governing Board shall decide on the Agency's accession to the Interinstitutional Agreement on internal investigations by the European Anti-Fraud Office (OLAF). It shall adopt the provisions necessary for the conduct of internal investigations by OLAF.

Financing decisions and any implementing instrument or contract arising therefrom shall expressly provide that the Court of Auditors and OLAF may, if necessary, carry out on-the-spot checks on recipients of Agency funds and on the intermediaries distributing them.

Article 12

1. The contractual liability of the Agency shall be governed by the law applicable to the contract in question.

2. In the case of non-contractual liability, the Agency shall, in accordance with the general principles common to laws of the Member States, make good any damage caused by the Agency or its servants in the performance of their duties.

The Court of Justice shall have jurisdiction in disputes relating to compensation for any such damage.

3. The personal liability of servants towards the Agency shall be governed by the relevant provisions applying to the staff of the Agency.

Article 13

Once the Commission considers that the Agency has fulfilled the mandate described in Article 1, it shall submit to the Council a proposal for the winding up of the Agency. In any event, at least six months before this Regulation expires, the Commission shall submit a proposal to the Council on the status of the Agency.

Article 14

The translation services necessary for the operation of the Agency shall, as a rule, be provided by the Translation Centre of the bodies of the European Union.

Article 15

This Regulation shall enter into force on the third day following that of its publication in the Official Journal of the European Communities.

It shall apply until 31 December 2004.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels,

For the Council

The President

FINANCIAL STATEMENT

1. TITLE OF OPERATION

Community programme of assistance for Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia and the Federal Republic of Yugoslavia

2. BUDGET HEADING(S) INVOLVED

Chapter B-754, Articles B-7541, B-7541 A and B-7546

3. LEGAL BASIS

Article 308 of the Treaty establishing the European Community

- Proposal for a Regulation on assistance for Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia and the Federal Republic of Yugoslavia

- Proposal for a Regulation on the European Agency for Reconstruction

4. DESCRIPTION OF OPERATION

4.1 General objective

The main purpose of the assistance is to support participation by the receiving countries in the Stabilisation and Association Process.

The assistance is for:

- rebuilding and stabilising the region;

- establishing an institutional and legislative framework to underpin democracy, the rule of law and human and minority rights;

- market-economy oriented economic development and reforms;

- building closer relations between the receiving countries and between them and the European Union.

4.2 Period covered and arrangements for renewal

Indefinite once it enters into force. The Regulation concerning the Agency expires in 2004.

5. CLASSIFICATION OF EXPENDITURE OR REVENUE

5.1 Compulsory/non-compulsory expenditure: non-compulsory expenditure

5.2 Differentiated/Non-differentiated appropriations: differentiated appropriations

5.3 Type of revenue involved: none

6. TYPE OF EXPENDITURE OR REVENUE

- 100% subsidy;

- Subsidy for joint financing with other sources in the public and/or private sector;

- Possibility of cofinancing;

- Interest-rate subsidies;

Measures will be financed by means of subsidies. These may be granted in the form of interest-rate subsidies from European Investment Bank resources or investment-project loans from other international financial institutions.

Should the operation prove an economic success, is there provision for all or part of the Community contribution to be reimbursed-: No

Will the proposed operation cause any change in the level of revenue-: No

7. FINANCIAL IMPACT

7.1 Method of calculating total cost of operation (relation between individual and total costs)

The Western Balkans region is one of the EU's top policy priorities. In 1999 the EU decided on a new strategy for the region based essentially on the Stabilisation and Association Process and the Stability Pact.

On 8 December that year, the Commission adopted guidelines on assistance to the region for the period 2000 to 2006. The purpose of the guidelines is to adjust future assistance to the EU's political objectives which are to develop closer relations between the receiving countries and between them and the European Union. Future assistance will also have to meet the requirements of reconstruction and the return of refugees.

The Commission has announced that the intention is to allocate a package of up to EUR 5 500 million for assistance to the region for the period 2000 to 2006. This sum will be used to cover such items as budget aid and macro-financial aid in the form of grants.

The total cost of the measure has been calculated as follows:

ALBANIA

Between 1997 and 1999, an average of EUR 36 million was provided through the programme of assistance for Albania itself and EUR 12 million through the Crossborder programme. Albania also received some EUR 14.9 million in budget support for developing its national administration and expanding some multi-country programmes.

The country has a population of just over three million but suffers from an institutional deficit which to this day hampers its capacity to absorb any aid that may be provided. With Community support this situation should improve in the next few years.

The Community should therefore not just maintain the activities it has initiated but step up its efforts to match the requirements of the stabilisation and association process.

The increased financial contribution is therefore calculated with a view to balancing the country's ability to absorb aid, the additional requirements caused by institution building to Community standards and government training needs.

BOSNIA AND HERZEGOVINA

Bosnia and Herzegovina has received aid under both the Phare and Obnova programmes. Assistance to Bosnia between 2000 and 2006 should therefore concentrate less on rebuilding and more on the reforms that will enable the country to move towards negotiating Stabilisation and Association Agreements.

A major effort is still needed to encourage refugees to return of their own free will. This effort, which should be continued in 2000 and 2001, has to be balanced against the withdrawal of aid from ECHO (EUR 56.4 million in 1999).

Support for institutions and economic reform will also be maintained.

Projects involving reconstruction alone should be gradually run down and replaced by support for the process of economic restructuring (i.e. for privatisation).

As the requirements of reconstruction gradually diminish, the annual package of assistance for Bosnia should also begin to decrease as from 2001.

CROATIA

The changed political situation in Croatia has led the Community to enter into closer relations with the country and step up its assistance under the Stabilisation and Association Process.

The conflict caused major damage in Croatia while its economy, despite significant potential, suffered greatly under the previous political regime. So far the Community has contributed to repairs only insofar as it has been involved in efforts to get refugees to return. This effort has received some EUR 13 million per year.

The amount set aside for assistance to Croatia should be increased significantly to finance pursuit of the new objectives. Croatia must be provided with the resources it needs to prepare for negotiating a Stability and Association Agreement, a process which could not be entered into in the earlier political context. Support for refugees must be maintained, as must the reconstruction begun by Croatia itself. Above all, the economy must be restructured, development of Croatia's institutional and legislative framework must be encouraged and its administration must be modernised.

FRY

In the case of the FRY, a distinction should be drawn between assistance to Serbia, to Montenegro and to Kosovo:

- The Republic of Serbia, excluding Kosovo

Two scenarios have been envisaged to take account of probable political developments in Serbia. The first is based on the possibility of no improvement in the political situation before 2002. The second scenario envisages the possibility of starting on the programme of reconstruction and cooperation with Serbia as early as 2001. (see Table p. 1)

The most reliable damage estimate provided by a group of Serbian experts (G17) is around EUR 4 billion which breaks down as follows: EUR 800 million on infrastructure; EUR 2 900 million on non-economic infrastructure and EUR 370 million on economic infrastructure.

It is estimated that most of the damage reconstruction can be funded by means of loan-based financing. The Community budget could fund some of the "reconstruction" not covered by loans and institutional and economic reconstruction by means of grants up to an approximate limit of half the estimate of the damage.

The Community contribution would therefore be in two parts. The first will consist of an EUR 80 to EUR 100 million cooperation programme linked to the stabilisation and association process and aimed at institutional and economic development and support for industrial restructuring. Part two will consist of a programme of reconstruction.

The total required for the period 2000-2006 is estimated at EUR 2.3 billion. It goes without saying that this sum would need to be reviewed when the time comes if it conflicts with evaluations made in the field and in the light of any decisions taken on the EU's contribution to reconstruction in Serbia at the forthcoming donors' conference.

Until such time as the political circumstances are right, it is proposed that the EU should cooperate with those towns open to outside contacts. Towns that meet the necessary conditions (to be determined) could receive financial aid for small infrastructure works amounting to an estimated EUR 40 million per year. The aim of this assistance is to continue existing operations under the 'Energy for Democracy' (EFD) project and to provide them with a structure. The EFD project involved supplies of fuel to towns which agreed to sign a charter of observance of democratic principles. This project had a strong impact on the people of Serbia and demonstrated the European Union's commitment to supporting them in their striving for democracy.

In view of the above, it was thought advisable to allow for the reconstruction to start in 2002 with the amounts allocated gradually increasing from that date in line with the region's absorption capacity to arrive at a total for the period in question of EUR 2.3 billion.

- Kosovo The Community has earmarked a sum of EUR 1 billion for the reconstruction of Kosovo over the next three years (2000-2003). EUR 90 million has been earmarked for the subsequent three years. Together with the total of EUR 127 million committed under the 1999 budget, this gives an amount corresponding to the EC's pledge to finance half of Kosovo's reconstruction needs.

These needs were estimated on the basis of the joint Commission/World Bank report.

Under the Rambouillet process in February 1999, the Commission proposed that the European Union should cover half the cost of Kosovo's reconstruction. The Member States agreed to this proposal, except they interpreted the Commission proposal as referring solely to the Community budget. Covering 50% from the Community budget can be considered as justified both in view of the efforts made by the Member States bilaterally and of their contributions to Nato's operations during the war and peace-keeping activities after it.

- Montenegro

The Council has called for Community support to Montenegro to be stepped up urgently.

Montenegro has a population of 600 000 but is currently hosting 30 000 refugees, many of them from Kosovo. Aid under the OBNOVA programme in 1999 amounted to EUR 7 million. Montenegro also received special aid to cover the outlay necessitated by the arrival and settlement of the Kosovo refugees. It is proposed to step up aid to Montenegro. The political and social stability of this Republic is essential for the stability of the entire region. Significant amounts of aid should be provided to help it modernise its administration and institutions and restructure its economy.

FYROM

In 1999 the country received EUR 16 million under the country programme and EUR 10 million under the Crossborder programme.

By virtue of a major political effort, FYROM currently fulfils the conditionality requirements best of any of the countries in the region and has progressed furthest in the Stabilisation and Association Process. Negotiations on the Association Agreement have already begun. The Community should therefore not just maintain the activities it has initiated but, as with Albania, step up its efforts to match the requirements of the stabilisation and association process.

Nevertheless, FYROM's level of economic development constitutes a cause for alarm and a destabilising factor which merits special attention. The legislative framework which would allow development of the private and financial sectors needs to be urgently modernised to improve SME access to financing.

The country should also be helped to step up reforms, notably in its public administration.

REGIONAL COOPERATION

Like the Stability Pact, the process of stabilisation and association places special emphasis on strengthening regional cooperation, which is a key element in providing a sustainable solution to the region's problems. Whether it involves facilitating trade between the countries of the region, solving border problems, building infrastructure links or encouraging independent media, cooperation between national and local authorities is essential in every case. By learning how to work together, these countries will be able to slot more easily into European structures which are likewise based on principles of regional cooperation. Regional cooperation will incorporate the earlier "cross-border"-type programmes with the Member States, backed by Interreg II and Phare CBC aid. They will extend to all the countries of the region and will provide suitable back-up to the various sections covered by the new Interreg III initiative on trans-national, cross-border and inter-regional cooperation.

A total of EUR 558 million has been set aside for the purpose for the period 2000-2006.

EUROPEAN AGENCY FOR RECONSTRUCTION

The Agency was established by Regulation (EC) No 2454/99. Its main mandate is to implement reconstruction programmes in Kosovo. This mandate may be extended to other parts of the FRY by means of a Council Decision following a proposal from the Commission. The Agency is financed by appropriations entered against the programme headings in Part B of the Community budget. These appropriations cover financing of the Kosovo reconstruction programmes and the Agency's operating expenditure. The operating expenditure may not exceed an annual average of 8% of the total of the appropriations entered in the programme budget.

7.2 Itemised breakdown of cost

>TABLE POSITION>

(1) 240+30 (carry-over) +40 (redeployments).

(2) If Serbia becomes democratic in 2001, additional requirements would have to be covered by the flexibility instrument up to a ceiling of EUR 200 million.

(3) In the event of use of the flexibility instrument.

(4) Except humanitarian assitance and some actions in favour of democracy under Regulation (EC) No 976/99.

7.3. Administrative and technical operating expenditure of the type included in part B of the budget (indicative amounts, subject to budget procedure).

Commitment appropriations in EUR million (at current prices). (excl. the Agency's operating expenditure and any technical and administrative assistance required in 2001 if the flexibility instrument is used for aid to Serbia)

>TABLE POSITION>

7.4. European Agency for Reconstruction

7.4.1 Effect on the number of posts (part B of the budget)

>TABLE POSITION>

7.4.2 Total financial incidence of the Agency's human resources and operating expenditure

EUR million

>TABLE POSITION>

(1) This corresponds to the 1999/2000 forecasts. Administrative expenditure must not exceed a yearly average of 8% of the total appropriations entered in the budget for the programme.

7.5 Indicative schedule of appropriations

Commitment and payment appropriations in EUR million

The table below shows the payments to be made from the budgets for the period 2000-2006, excluding those which will be made during that period but relate to earlier budget years.

>TABLE POSITION>

N.B.: The schedule does not take account of the possible use of the flexibility instrument for Serbia in 2001 (ceiling of EUR 200 million).

8. FRAUD PREVENTION MEASURES

Any financing decisions taken or agreements or contracts negotiated under this Regulation will specifically provide that the Commission or any bodies charged by the Commission, the Court of Auditors or OLAF may carry out on-the-spot checks as necessary.

The Commission may also carry out on-the-spot checks and inspections under Council Regulation (Euratom, EC) No 2185/96. Measures adopted by the Commission under Article 8 of this Regulation will ensure the sufficient protection of the Community's financial interests as required by Council Regulation (EC, Euratom) No 2988/95.

- European Agency for Reconstruction

Financial control at the Agency will be the responsibility of the Commission's Financial Control department.

Each year the Director will submit a financial report on the execution of the previous year's budget to the Governing Board, Parliament, the Council, the Commission and the Court of Auditors. The Court of Auditors will examine the report on the basis of Article 248 of the Treaty. Responsibility for giving discharge to the Director for execution of the budget lies with Parliament.

- Bosnia and Herzegovina

Implementation of operations was devolved to the Commission representation in Sarajevo in June 1998. A special unit is responsible for monitoring projects and carrying out audits.

9. ELEMENTS OF COST-EFFECTIVENESS ANALYSIS

9.1 Specific and quantified objectives; target population

The programme's specific objectives are described in this Regulation.

The main purpose of the assistance is to support participation by the receiving countries in the Stabilisation and Association Process.

The assistance is for:

- rebuilding and stabilising the region;

- establishing an institutional and legislative framework to underpin democracy, the rule of law and human and minority rights;

- market-economy oriented economic development and reforms;

- building closer relations between the recipient countries and between them and the European Union.

The entire population of the five recipient countries, i.e. 27 million people, is likely to benefit under this Regulation.

The assistance may go directly to the State or to federal, regional and local bodies, public and semi-public bodies, organisations providing support to businesses, cooperatives, mutual societies, associations, foundations and non-governmental organisations.

A large proportion of the population has suffered the consequences of the recent armed conflicts which have laid waste the region. A lot of rebuilding remains to be done. The process of getting refugees to return and getting them resettled must be kept up. Economic development and the building-up of institutions and administrations must be supported.

To some extent it will be possible to measure success in achieving the objectives by the number of houses or the amount of infrastructure rebuilt and the number of refugees the programme helps to resettle. But the programme has other objectives too. Assistance will be provided to support economic development, reforms intended to change the economy into a market economy and work on building up institutions and public administrations with a view to underpinning democracy and the rule of law.

9.2 Grounds for the operation

In the last ten years the countries of South-East Europe, and in particular those that will benefit under this Regulation, have received large amounts of aid from the international community in general and the European Union in particular. Yet inter-ethnic tensions and conflicts persist and there has been no substantial political or economic progress.

In the coming critical period the European Union has a responsibility to make a substantial contribution towards stabilising and developing the region. The Union has an important leadership role to play here. Last year saw the launch of an ambitious political strategy based on the Stabilisation and Association Process. It is also built on the foundations of the Stability Pact.

This Regulation will be the legal framework within which the countries in question will be provided with the assistance essential to achieving the objectives of the new political strategy.

9.3 Choice of ways and means

Two approaches will be used to achieve the objectives:

- Institution building:

The recipients will be provided with assistance in developing structures, strategies, and skills to build capacity in the economic, social, legislative and administrative spheres.

Assistance will be focussed mainly on developing sectoral policies, modernising the administration and the judicial system, training and developing human resources and on economic reform.

- Investment:

This includes, inter alia, aid for reconstruction and economic rehabilitation, for developing the infrastructure needed for expanding the activities of the manufacturing sector and for building up an environmental infrastructure.

9.4 Monitoring and evaluation of the operation

Initially, the assistance will be implemented as follows:

- In Kosovo, it will be implemented by the European Agency for Reconstruction. The mandate of the Agency, established by Regulation (EC) No 2454/99, is to prepare projects and programmes in accordance with the Commission's instructions and implement the projects and programmes once the Commission has adopted them. The Agency has special departments responsible for monitoring, evaluation and auditing.

- In Bosnia, the programmes will be implemented on a decentralised basis by the Delegation (ECRO) which has sufficient technical assistance at its disposal.

- Aid to Albania will also be managed on a decentralised basis.

The Commission will monitor implementation of the programmes. Wherever possible financing agreements will include objective and verifiable indicators which can be used to compare outcomes with objectives.

Operations financed under this programme will undergo ex-post evaluation to assess what effect the operation has had.

An evaluation of the programme is planned in the third year of implementation.

10. ADMINISTRATIVE EXPENDITURE (SECTION III, PART A OF THE BUDGET)

The actual availability of supplemantary administrative and human resources will depend on the decisions taking by the Commission in the framework of the annual allocation of resources, taking particular account of the possibilities of redeployment and additional resources authorised by the Budgetary authority.

10.1 Effect on the number of posts

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10.2 Overall financial impact of additional human resources

(EUR)

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10.3 Increase in other operating expenditure as a result of the operation

(EUR)

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(1) Committee exists; no extra expenditure

These amounts represent total expenditure if the duration of the operation is fixed or expenditure per 12 months if the duration is open-ended.