EU FUNDING FREEZE HIGHLIGHTS NEED FOR REAL REFORM

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000168

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/18/2018
TAGS: ECON PGOV BU
SUBJECT: EU FUNDING FREEZE HIGHLIGHTS NEED FOR REAL REFORM

REF: SOFIA 0017

Classified By: Ambassador John Beyrle for reasons 1.4 (b) and (d).


1. (C) Summary: The announcement of the suspension of
three EU pre-accession funding mechanisms due to allegations
of fraud and mismanagement has the GOB pointing fingers and
engaging in damage control. After an initial defensive
reaction to the EC's decision, the GOB put in place a 16-step
program to improve the management of EU funds. But if
Bulgaria is to have the opportunity to tap into the more than
seven billion euros in EU funds it stands to receive by 2013,
it will have to do much more to relieve Brussels' growing
skepticism. The GOB will have a chance to show progress when
Commission monitoring teams arrive in April and May in
preparation for the release of a comprehensive monitoring
report to be released in July. End Summary.


2. (U) The European Commission's Directorate General on
Agriculture and Rural Development announced the suspension of
40 million euros in SAPARD funding in a March 6 letter to the
Bulgarian Finance and Agricultural Ministries. The
announcement affects 49 on-going projects funded by SAPARD,
the EU's pre-accession instrument promoting agriculture and
rural development. The SAPARD monitoring committee said the
suspension is linked to an on-going investigation by the
European Anti-Fraud Office (OLAF) for misuse of EU money in
several European countries. The SAPARD announcement followed
a February 29 Commission decision to suspend an estimated 51
million euros in Bulgarian PHARE funds (a pre-accession
funding mechanism for economic and market restructuring)
going to 14 projects. Explaining this action, the EC said it
had found 25 irregularities in the implementation of three
public procurement projects funded with EU money.


3. (U) The bad news started a month earlier, when, on
January 25, the EC announced it had frozen 144 million euros
in ISPA funds (pre-accession infrastructure moneys) intended
for three Bulgarian road construction projects. With the
freeze, the Commission said it sought to prevent further
abuse of EU public funds following allegations of conflict of
interest by the head of the Bulgarian Road Infrastructure
Fund (RIF),Vesselin Georgiev. Days earlier, two RIF
officials were arrested holding 50,000 leva (35,000 USD),
which was allegedly given by a local businessman in return
for Georgiev's signature on a project. Although an
investigation by the Finance Ministry reported no abuse of EU
funds, Georgiev was forced to step down following the
revelation that he had awarded millions of leva in public
money to his brother's road construction company.


4. (SBU) The GOB reacted defensively to the funding
suspension. The Ministries directly implicated in funding
misuse -- Finance, Regional Development and Agriculture --
downplayed the EC actions, calling them temporary and
promising to have the funds flowing again within months.
Some officials laid blame on the Commission itself for lack
of sufficient oversight during the time the EU had a
delegation present in Sofia. Other officials threatened to
reveal names of public officials and companies, including MPs
and individuals close to high-ranking officials, who were
allegedly siphoning EU funds. Opposition leaders quickly
capitalized on the scandal, noting that the government had
ignored EU warnings coming as early as November 2007 that
pre-accession funds were in danger. Sofia Mayor and head of
the popular center-right party GERB Boyko Borissov pointed
out that average Bulgarians were paying the price for the
current government's mishandling of EU funds. The
opposition, center-right Democrats for a Strong Bulgaria
party of ex-PM Ivan Kostov demanded the resignations of the
Ministers of Regional Development, Finance, Environment,
Agriculture, and Transport. While the call was unsuccessful,
the controversy has re-ignited rumors of a cabinet reshuffle.
Public reaction was muted as allegations of corruption and
embezzlement have become a mainstay in the press. A poll
done just after the news of the funding freeze broke showed
that 41 percent of Bulgarians say EU money will go to
businesses close to the government, while 34 percent believe
the money will not be used properly.


5. (SBU) Overcoming its initial defensive reaction, on
March 12 the Government approved a package of 16 corrective
measures to improve the management of pre-accession and
structural funds. The most important steps include the
creation of a public register of beneficiaries of
pre-accession and operational funds; the hiring of external
auditors; and stricter rules for reporting irregularities by
implementing agencies. The Government is also contemplating
the relocation of the unit in charge of combating fraud
related to EU funds from the Ministry of Interior to the new
national agency for security DANS. Finance Minister

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Oresharski and EU Affairs Minster Grancharova were dispatched
to Brussels March 14 to calm the row with the Commission.
Upon their return, the two hinted that Brussels has evidence
of even more incidences of wrongdoing related to EU funding
in Bulgaria. They promised Bulgaria would "improve
communication" with OLAF. The GOB will try to build
Brussels' confidence in Bulgaria's ability to handle EU funds
when EC President Barroso visits Sofia March 28.


6. (C) Comment: Bulgaria stands to receive more than
seven billion euros in EU structural, cohesion and
agricultural funds in the next five years. Due to weak
administrative and absorption capacity, as many predicted, in
Bulgaria's first year as an EU member, it received little
more than it paid in membership dues. In 2008,
post-accession money began to trickle in - funds for
enhancing administrative capacity began in January and the
first direct payments to farmers arrived in February. But if
the management of pre-accession funds is a test of Sofia's
ability to control the overwhelming influx of funds the
country is set receive as a member state, the country has
received a failing grade. Brussels-based EC representatives
have told us that Bulgaria's defensive reaction to the
suspension of funds -- and to the EC monitoring of Bulgaria
as a whole -- is winning no friends in the Commission. With
little progress on critical rule of law issues noted in the
Commission's February interim monitoring report and the
uncovering of pervasive mismanagement of EU pre-accession
funds, our contacts tell us a sense of buyer's remorse about
Bulgaria is setting in in Brussels. Bulgaria will need to do
more than just "improve communication" with the Commission
antifraud office to regain Brussels confidence and avoid more
painful funding freezes. The GOB will have a chance to
redeem itself in April and May when the Commission sends
teams to Bulgaria in preparation for a comprehensive
monitoring report to be released in July. We will meet with
these monitoring teams to ensure we are speaking with one
voice on the rule of law issues high on our agenda.

Beyrle