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