BULGARIA: LOSS OF EU FUNDS -- A SELF-INFLICTED

C O N F I D E N T I A L SOFIA 000750

SIPDIS

E.O. 12958: DECL: 11/25/2018
TAGS: ECON PREL PGOV
SUBJECT: BULGARIA: LOSS OF EU FUNDS -- A SELF-INFLICTED
WOUND

Classified By: Ambassador Nancy McEldowney for reasons 1.4 (b) and (d).


1. (C) Summary: Although the European Commission decision
to suspend permanently 220 million Euros in PHARE program
preaccession funding should have come as no surprise, the
November 25 announcement appeared to catch the government off
guard. PM Stanishev expressed disappointment over the news,
while Deputy Prime Minister in charge of EU Funds Meglena
Plugchieva called the decision "unfair." There is a growing
realization that the Commission is linking access to funds
with Bulgaria's notorious rule of law problems, a linkage
that was not originally attached to the pre-accession funds.
End Summary.


2. (C) Although the Bulgarians had received some cautious
encouragement from the European Anti-Fraud Office and DG
Enlargement in the past several weeks, those in the know were
nearly certain the Commission would decide to with-hold
permanently the 220 million Euros in PHARE funds. Bulgaria's
National Authorizing Officer, Dimitar Ivanovski, himself
continues to refuse to send Bulgarian Government funds
through one of the two authorizing agencies which lost
accreditation in July after a stinging EU report on
Bulgaria's misuse and abuse of EU Funds. Therefore it should
have come as no surprise that Brussels itself would refuse to
use this implementing agency. Brussels' claim that not only
did Bulgaria not take needed measures to manage the PHARE
funds, but in some areas actually exhibited "new weaknesses"
left Bulgarian officialdom crestfallen. Bulgaria has two
more opportunities to gain access to the other 340 million
Euros in preaccession funding that Brussels froze in July.
In January the Commission will decide if Bulgaria has taken
sufficient safeguard measures to tap into frozen ISPA
(infrastructure) funds and by February it will decide whether
Bulgaria can start drawing SAPARD (agriculture) payments.


3. (C) While important, preaccession funds are just a
fraction of what Bulgaria stands to receive in structural
payments. These funds, 13 billion USD by 2013, have already
started to flow in the form of advance payments. They are
also at risk, according to National Authorizing Officer
Ivanovski. In its July 2008 evaluation of Bulgaria's
handling of EU funds, the Commission put Sofia on notice that
drastic changes were needed in the Bulgarian institution
overseeing the majority of EU structural funds, the National
Auditing Authority. According to Ivanovski, the government
is holding discussions on how to reform that institution, and
perhaps move it from the Ministry of Finance. But no real
action is taking place and the clock is ticking. Ivanovski
believes the Commission will make an announcement about
Bulgaria's structural funds just after, or concurrent with,
the interim monitoring report to be released in February 2009.


4. (C) Comment: Instead of managing public expectations
about the government's ability to regain EU funding, over the
past several weeks Bulgarian officials had been expressing
optimism about the government action plan and its chances to
regain the frozen funding. As a consequence, the government
now has to deal not only with the loss of EU funds but also a
public relations nightmare to boot. Bulgaria greeted the
July monitoring report with a stiff upper lip and vowed to
take necessary measures to bring the country to EU standards.
The mood today is one of defensiveness. There is a growing
feeling within the government -- and the public -- that the
EU is holding Bulgaria to a higher standard, and is linking
EU funds with progress on rule of law, a linkage that was not
originally attached to the pre-accession funds.
McEldowney