PHARE 2005 PROJECT FICHE. 1.2 Title: Institutional Capacity Building and Support for Implementation of SAPARD/IPA-RD Programme

1 BASIC INFORMATION 1.1 CRIS Number: HR2005/5/1 PHARE 2005 PROJECT FICHE 1.2 Title: Institutional Capacity Building and Support for Implementation of SAPARD/IPA-RD Programme 1.3 Sector: 43010 1.4 Location: Croatia, Ministry of Agriculture, Forestry and Water Management (MAFWM), Programme Managing Authority for SAPARD/IPA-Rural Development Component (referred to as IPA-RD), Directorate for Market and Structural Support in Agriculture (DMSSA at MAFWM) 1.5 Duration: 24 months 2 OBJECTIVES 2.1 Overall Objective(s): To strengthen preparation of Croatian public administrations and institutions with a view to ensure effective functioning inside the EU 2.2 Project purpose: To build up capacities of the Program Management Authority for SAPARD/IPA- RD enabling the carrying out tasks and responsibilities linked to coordination and management of EU co-financed rural development programmes To build up capacities of the Directorate for Market and Structural Support in Agriculture to carry out tasks and responsibilities assigned to SAPARD/IPA-RD Paying Agency; To build up institutional capacities (stakeholders; national authorities and bodies; potential beneficiaries) to enhance absorption and an efficient use of EU Rural Development/Agricultural support funds, SAPARD/IPA-RD. 2.3 European Partnership (AP) and NPIEU priority Following national accomplishments related to the implementation of the Copenhagen criteria and the political conditions set by the Stabilization and Association Agreement (SAA), the European Commission (EC) gave a positive Avis on the Croatian candidacy for EU membership in June 2004. The Avis provided a detailed overview and assessment of Croatia s ability to meet the political and the economic membership criteria, as well as Croatia s ability to adopt and implement the acquis communautaire. The European Council confirmed that Croatia had met the political criteria and moved from the status of applicant to candidate country for EU membership. 1

The European Partnership for Croatia (based on the provisions of Council Regulation (EC) No 533/2004) identified priorities for action in order to support efforts to move closer to the European Union within a coherent framework. Priorities set for Croatia reflect its current capacity to meet the criteria set by the Copenhagen European Council of 1993, the conditions defined for the Stabilization and Association Process, the content of the final declaration of the Zagreb Summit (November 2000) and the Thessaloniki agenda (June 2003). Among the main short- and medium term priority areas for Croatia's preparations for further integration with the European Union in the area of agriculture and rural development (identified in the Commission s Opinion on Croatian application for EU membership and included in the Council Decision on the establishment of European Partnership with Croatia) those directly linked to this project are as follows: Short-term priorities (expected to be accomplished within one to two years): Develop a strategy to establish effective and financially sound paying bodies for the management and control of agricultural funds, in line with EU requirements and internationally accepted auditing standards; Reinforce the administrative structures needed to establish a rural development strategy and policy instruments for the design, implementation, management, monitoring, control and evaluation of rural development programmes; Continue on alignment with the acquis in the veterinary and phytosanitary sector, upgrade inspection arrangements, modernize meat and dairy plants in order to meet EU hygiene and public health standards. Align the import regime for live animals and animal products with international sanitary and phytosanitary (SPS) obligations and EU acquis. Medium-term priorities (expected to be accomplished within three to four years): Strengthen the administrative structures needed to implement market and rural development policies; Continue preparations for the establishment of a fully-functioning administration and control system and a paying agency in line with EU requirements; Continue and substantially improve alignment with the acquis in the veterinary and phytosanitary sectors, including a system for animal identification, animal waste treatment, modernization of meat and dairy plants, animal disease control programmes and plant protection. Following European Partnership agreement, in preparation for further EU integration Croatia developed a National Plan for the Adoption of Acquis (NPAA) with a timetable and details addressing the above priorities. The latter were adopted into the NPAA (section 3.7. Agriculture) and resulted in a number of operational goals of which the major one is: To develop the institutional framework for the execution of Common Agricultural Policy measures according to the EU standards. Accession Partnership in the field of the CAP and future participation in EU negotiation rounds will create new rules and a new challenge. The proper application of these rules 2

and their effective enforcement by an efficient public administration are essential for the functioning of the Common Agricultural Policy. This includes: The setting up of management systems such as a Paying Agency The Integrated Administration and Control System (IACS) and Developing a sustainable rural programme with supporting infrastructure. Additionally, the EU Regular Reports point to a number of specific areas where further improvements need to be made in the context of the political and economic criteria and relationship to the adoption, implementation and enforcement of the acquis. Croatia has already made progress to meet the agricultural, veterinary and phytosanitary acquis and began to strengthen its administrative capacity in the area of rural development. However, overall administrative and enforcement capacities should be further enhanced. Particular attention should be paid to setting up and reinforcing the SAPARD Agency, preparation for implementation of pre-accession rural development programmes and to establishing the necessary elements of a functioning IACS. 2.4 Contribution to National Development Plan (and/or Structural Funds Development Plan) Not applicable {Note: National Development Plan for Agriculture (i.e. National Programme for Agriculture and Rural Areas ) - a comprehensive document which will link a national strategy to the agriculture and rural sectors with NPAA is currently under preparation. It is envisaged that the Croatian Parliament will approve the Plan by the end of 2005.} 2.5 Cross Border Impact Not applicable 3 DESCRIPTION 3.1 Background and justification: 3.1.1 Involvement of Stakeholders and Civil Society in the programming process All preparatory activities carried out for this project, including analysis of needs and gaps, selection of general and specific project objectives, elaboration of modalities of its implementation, to be financed under PHARE 2005 have been intensively discussed with all major stakeholders, including representatives of MAFWM, international donors (i.e. the World Bank, EU and bilateral donors), other national authorities, bodies and interest groups as well as potential beneficiaries of forthcoming rural development programmes (including NGOs and municipalities). Concluding consultations took place on occasion of a workshop organised on 10 June 2005 with participation of all mentioned stakeholders. Outcomes of the workshop fully confirmed relevance of priorities of action, the main project objectives and the list of activities proposed. To reinforce some of the planned actions, additional 3

investment proposals were recommended and considered as relevant (i.e. mostly linked to strengthening of preparatory work aimed at establishing of viable pilot environmental schemes). 3.1.2 Justification Croatia is currently facing a new challenge in its present stage of development, looking forward to future integration with an enlarged EU. The most important specific constraints to development of rural economies in Croatia are: 1. Low competitiveness of the key rural sectors (incl. agriculture, food processing, forestry, etc.); 2. Insufficiently developed rural infrastructure; 3. Insufficient access of rural population to public goods; 4. Weak performance of central and local institutions responsible for rural development; 5. Existence of war damaged and depressed rural areas; 6. Low educational level of rural population; 7. Problems relating to management of rural environment and natural resources. Croatia as an EU candidate country will benefit from all pre-accession financial instruments: PHARE, ISPA, SAPARD (Special Pre-Accession Programme for Agriculture and Rural Development). From 2007, these three pre-accession instruments will be replaced by the Instrument for Pre-Accession (IPA). The legal basis for the SAPARD instrument, successfully implemented in pre-accession period in all EU new member states, is Council Regulation (EC) No 1268/1999 for which there are two Commission implementing regulations (EC) No 2759/1999 and (EC) No 2222/2000. Because no Community legislation is directly applicable in candidate countries, the substance of these instruments is set out in a special instrument, the Multi- Annual Financing Agreement (MAFA). The latter will be negotiated and signed with Croatia before the end of 2005. The main objectives of the SAPARD programme (art. 1 of Reg. EC 1268/1999) are: 1. Contributing to the implementation of the aquis communautaire concerning the common agricultural policies and related policies; 2. Solving priority and specific problems for the sustainable adoption of the agricultural sector and rural areas in the Applicant Countries. The implementation of SAPARD is to be based on two fundamental principles: 1. Development for the applicant country of a programme for agriculture and rural development on the basis of the principles applied under the EU Structural Funds; 2. Conferral of management to the applicant countries on a fully decentralised basis with ex-post control by the Commission based on the principles of EAGGF Guarantee finance management. 4

Procedures and principles applied to the SAPARD programme reflect the basic principles on which EU structural funds are operating and require a close collaboration between the EC, national authorities (central, regional and local) and economic and social partners and other relevant competent bodies. Correct application of SAPARD needs reliable implementing and financial structures. Implementation of acquis in the area of rural development requires from Croatian authorities to undertake a number of actions. Among the most important ones there are: Setting up the Programme Managing Authority responsible for the efficiency and correctness of co-ordination, managing, monitoring and evaluation of pre- and postaccession programmes and instruments in the area of rural development, i.e. SAPARD, IPA-RD and post-accession rural development programmes, and build up its capacities to successfully achieve those objectives; Setting up an administrative structure (SAPARD/IPA-RD Agency - to be converted to Paying Agency after EU accession) enabling an efficient implementation of agriculture and rural development programmes during the pre- accession period; Furthermore, all above tasks will have to be supplemented with a wide scale activities aiming at: i) efficient transferring of necessary information and know-how about the forthcoming rural development programmes to all potential programme stakeholders/beneficiaries and, ii) building up capacities of the latter in absorption of rural development funds. The recently published governmental Decree on changes and amendments to the internal organization Ministry of Agriculture, Forestry and Water Management (February 2005) addresses some of those issues and defines the new structure of the Ministry of Agriculture, Forestry and Water Management (MAFWM) to meet those new responsibilities. According to above decree the Directorate for Market and Structural Support to Agriculture, Forestry and Water Management (DMSSA) at MAFWM will strengthen its capacity and grow to an EU-compatible Paying Agency responsible for implementation of the CAP measures and disbursement of pre and post-accession structural funds. In future, the DMSSA aims to become a central cohesive element between EU and Croatian institutions and beneficiaries through the development, preparation and implementation of agricultural support system and development of the organisation itself. In particular, DMSSA will have to develop its organization and functions in order to perform the main tasks as authorization of payments, calculation of the amount that is to be paid, execution of payments, accounting for payments and carrying out control and internal audit of EU Paying Agency. In the process of preparation for EU accession DMSSA will be accredited as a SAPARD/IPA-RD/Paying Agency. According to the new Decree on the internal organization of the Ministry of Agriculture, Forestry and Water Management, at the end of 2005 it will be 90 employees in the DMSSA (63 new employees and 27 currently employed). The activities to support accreditation of SAPARD Paying Agency are progressing; DMSSA is being strengthened (CARDS and one bilateral project) to provide a sound structure with knowledgeable staff. The decree is about to bring in the first tranche of 5

recruits for the SAPARD Agency. In addition, the World Bank project Croatia: Agricultural Acquis Cohesion Project (see: 3.5. Linked Activities) will assist Croatia in preparations for EU accession, inter alia by providing office and IT facilities for SAPARD Agency, recruiting Agency staff, establishing a monitoring and evaluation systems for SAPARD, training of programme facilitators and building up capacities of potential programme beneficiaries to absorb available funds from SAPARD. Further support will however be needed from PHARE to assist in the development of the agency, especially accreditation and implementation of new measures under IPA-RD and transition to post-accession measures. The Programme Managing Authority will have to be created. This function is at present assumed by the Department for Sustainable Development of Rural Areas (DSDRA) at MAFWM which consists of three units: Unit on Cooperatives, Unit for Implementation National Support Schemes on Rural Development, and Unit for Organic Farming. A separate unit for management and coordination of EU co-financed rural development programmes is still missing. Clearly, structure and capacities of this department and other national institutions and bodies to be involved in implementation of EU co-financed Rural Development programmes (SAPARD, IPA-RD) are yet inadequate and require a considerable strengthening to ensure an effective implementation of pre-accession assistance in the area of RD. Important element of acquis in the area of rural development is a programming principle. Preparations of the Agriculture and Rural Development Plan (ARDP) were carried out between January June 2005 (in co-operation with CARDS Twinning Programme). According to this main programming document the SAPARD programme in Croatia will encompass four measures (i.e. investment in agriculture, investment in food-processing industry, rural infrastructure and technical assistance) out of the available 15 rural development measures. The SAPARD Programme in Croatia will only be financed for one year (2006) and is scheduled to be implemented over next three years (programme implementation will commence with receiving national accreditation and conferral of management of aid to national programme authorities the latter is expected to take place at the beginning or mid-2006). In the year 2007 the SAPARD programme will be replaced with a new preaccession instrument (the Instrument for Pre-accession IPA) 1. The new EU proposal (IPA) aims at streamlining pre-accession assistance by enhancing coordination between the different components, through the creation of a single framework for assistance. This framework will incorporate the PHARE, ISPA, CARDS and SAPARD systems by applying structural funds and rural development funds components and will become operational in the year 2007. It is expected that under IPA candidate countries (e.g. Croatia) will receive the same kind of assistance as under CARDS (i.e. institution building and democratisation, economic 1 In view of on-going CAP reforms (i.e. a reform of EU rural development policy and its funding system aims at their simplification, i.e. bringing the policy under a single funding and programming instrument; improving transparency and accountability for the use of EU money; reinforcing monitoring, evaluation and reporting systems; more flexibility to be provided to the Member States and a strengthening of a bottom-up approach) drawing on the main lessons from the current accession process, EU proposed rationalization of the pre-accession aid provided to potential members of the EU. 6

and social development, regional and cross-border cooperation and partial alignment with the acquis), and will additionally receive assistance in the preparation for the implementation of structural and rural development funds after accession, as well as concerning the full implementation of the acquis communautaire. The IPA instrument should encourage candidate countries to gradually adopt the rules and principles governing the management of structural funds and rural development funds, by making available assistance through five components, three of them with particular importance to the areas mentioned above: Regional Development Component; Rural Development Component; Human Resources Development Component. All these three components are aimed at following the structural and rural development funds' rules as closely as possible, while at the same time laying the foundations for a national framework fostering economic and social cohesion and viable agricultural structures (which is also consistent with the prospect of EU membership). Although exact structure and modalities of implementation of the IPA programme are yet unknown it can be expected that a rural development part of IPA, i.e. IPA-RD, as a replacement of SAPARD, will closely follow rules and principles of its predecessor. However, to become operational, new programming activities including selection of targets and measures, setting eligibility criteria for measures to be accredited and other modalities related to informing potential programme beneficiaries about its conditions as well as programme implementation, monitoring and coordination of IPA-RD will have to be carried out in timely fashion by Croatian administration, in a close cooperation with all economic and social partners involved, parallel to activities linked to SAPARD. All these activities will have to be thoroughly designed and managed; by drawing on experience from SAPARD programmes in other EU countries in order obtain quantifiable meaningful results. Definitely, significant administrative efforts are required to keep pace with those moving targets. To reinforce those developments an intensive PHARE assistance will be provided already at the beginning of this process to build up administrative and institutional capacities enabling Croatian authorities and potential programme beneficiaries to efficiently prepare for implementation of these new pre-accession rural development instruments. In the view of above, and taken into consideration: Scope of tasks to be carried out by national authorities in preparing for implementation of pre-accession RD programmes (SAPARD and IPA-RD) and converting SAPARD/IPA-RD Agency to a fully EU compatible Paying Agency; Considerable resources (especially of an investment type) allocated by the World Bank project to building up necessary administrative capacities with the aim to successfully launch the SAPARD programme; 7

The fact that the investment programme supported by the World Bank project will provide a substantial part of the Paying Agency s infrastructure and capacity for which PHARE investment will not be required (i.e. investment in 2005); The lack of institutional capacities, knowledge and resources linked to programming, accreditation and implementation of other relevant RD measures to be available under IPA-RD programme; The lack of resources from the World Bank and other projects to secure a longterm assistance to both Programme Managing Authority for SAPARD/IPA-RD and SAPARD/IPA-RD Paying Agency which will have to assume a crucial role in co-ordination and implementation of pre-accession rural development programmes, and Tight deadlines for finalization of all preparatory work related to IPA-RD programme (all preparatory activities for IPA-RD should be finalized by the end of 2006). The focus of the PHARE programme in the year 2005 (to be implemented over two following years in two separate components) will be: 1. Long term capacity building to Programme Managing Authority for SAPARD/IPA- RD and SAPARD/IPA-RD Paying Agency for support of implementation of SAPARD and preparation for IPA-RD programmes and 2. A general institutional capacity building and support for implementation of IPA-RD programme. Yet, in view of some fundamental differences between the administration of a SAPARD/IPA-RD Agency (with currently four accredited rural development measures) and a fully accredited EU Paying Agency regarding the scope of schemes, management of IACS, export trade, market support, physical intervention, etc. - further activities will need to be financed from PHARE budget 2006-2007 and carried out to ensure that as accounting and funding will change in a scale, frequency and complexity the migration from the SAPARD schemes and accounting to the EU Paying Agency requirements can efficiently take place (a list of proposed projects to be financed from PHARE budgets 2006 and 2007 is provided in Annex 5a). 3.2 Sectoral rationale Not applicable 3.2.1 Identification of projects Analyses of structure and current capacities of national institutions and bodies to be involved in implementation of EU co-financed rural development programmes (SAPARD, IPA-RD) revealed a number of major institutional weaknesses/constraints 8

which, if not abolished, may in future negatively affect effectiveness of pre-accession measures in the area of rural development. The most important institutional deficiencies and weaknesses to be addressed are: i. Insufficient institutional capacity of the Programme MA and the SAPARD Agency (to be later transformed into IPA-RD and EU compatible Paying Agency) to co-ordinate, manage, implement, monitor and ensure correct evaluation of rural development programmes; ii. Weak institutional capacities of institutions and bodies responsible for verification, monitoring and certifying that programme applicants have met national and EU standards and norms (animal welfare, veterinary, water management, environmental, etc.); iii. Insufficient coordination of activities among all national institutions, organisations and bodies that will be involved in implementation of EU co-financed rural development programmes (other ministries, regional tax authorities, national social fund, farm registry, county courts, veterinary inspectorates, phyto-sanitary inspectorates, water management inspectorates, etc.); iv. Inadequate information system for transferring/updating of a basic information about the SAPARD/IPA-RD programme to potential programme beneficiaries; v. Lack of necessary skills among agricultural advisors and potential programme beneficiaries to prepare viable SAPARD/IPA-RD projects (elaboration of business plans, marketing plans, meeting environmental standards, etc.); vi. Low number of farms/enterprises with bookkeeping data (especially among small/medium scale firms); vii. Insufficient institutional knowledge about the role of the programme monitoring and evaluation system; viii. Weak institutional links and insufficient partnership between MAFWM and economic and social partners; ix. Lack of knowledge how to prepare and perform information campaign about EU co-financed RD programmes; x. Lack of experience in managing and implementation of similar RD instruments (including programming, monitoring and evaluation) at all stages of project/programme management. Given those deficiencies on one side, and huge institutional needs on the other side 2, in order to reinforce complementarity, synergy and ensuring necessary coordination of all actions to be carried out in the area of rural development by the MAFWM proposed PHARE 2005 programming activities will be carried out under umbrella of one overall 2 To achieve the overall project s objective other activities are necessary. For example, there is a need to assist the Croatian Government in introduction of a number of horizontal measures (incl. adopting of acquis relating to trade mechanisms, improving quality policy (including strengthening of inspectorates and inspection structures), address issues related to organic farming, state aids, public stocks; establishment of farm accountancy data network (FADN), etc., as well as in adjusting national legislation and building up institutional capacities in the area of preparations for implementation of Common Market Organisations for agricultural and food products. The complete list of proposed PHARE projects addressing those areas is included in Annex 5. 9

project: Institutional capacity building and support for implementation of SAPARD/IPA-RD programme. This project will be carried out with one service contract and one supply contract Proposals for PHARE activities in this project take fully into consideration links to existing project activities and will draw upon experience of former EU candidate countries in managing and implementation of pre-accession programmes in the area of rural development. 3.2.2 Sequencing Not applicable 3.3 Results Respective Department/Unit at MAFWM is fully prepared to carry out tasks and responsibilities of SAPARD/IPA-RD Managing Authority Directorate for Market and Structural Support in Agriculture (DMSSA) at MAFWM is fully prepared to carry out tasks of IPA-RD implementation Agency The National Agriculture & Rural Development Plan for IPA-RD prepared, negotiated (with EC services) and accepted by the STAR Committee as a basis for programming in the pre-accession period; Institutional preconditions (guidelines, procedures, and manuals) for accreditation and implementing new RD measures established; National support schemes in the area of rural development adjusted and made compatible with EU supporting schemes; Modalities of IPA-RD implementation elaborated; National legislation/regulation on IPA-RD prepared; Financing management- and implementation procedures of SAPARD/IPA-RD Paying Agency adjusted, streamlined and simplified in accordance with EU practices; Staff of involved institutions (incl. SAPARD/IPA-RD/Paying Agency staff) trained in the analysis of applications as to technical, financial and economic viability; risk assessment and management; contracting and procurement, etc; and informed about new RD measures and implementation modalities of IPA-RD; Information, publicity and awareness raising campaign on the new EU RD programme (IPA-RD) carried out; Guidance & assistance provided to potential programme final beneficiaries; Guidance and assistance provided to representatives of national authorities and bodies involved in monitoring and issuing respective certificates on standards related to IPA-RD; Partnership between MAFWM and economic/social partners strengthened ; Pilot schemes for implementation of selected post-accession RD measures set-up and carried out; Monitoring & evaluation systems for IPA-RD in place and fully operational. 10

The above results will be measured by the success of the IPA-RD programme, the proportion of the scheme taken up, the number of successful applications to the total number of applications, etc. 3.4 Activities (including Means) Supporting Programme PHARE/IPA Institutional Building Component (IBC) PHARE/ IPA-IBC Duration Tasks/Activities 2006-08 1. Assistance to the IPA-RD Managing Authority in carrying out tasks and responsibilities needed to coordinate and manage EU co-financed rural development programmes 2006-08 2. Assistance to the DMSSA in carrying out tasks and responsibilities assigned to SAPARD/IPA-RD Paying Agency and identify long-term system development activities of an EU-compatible Paying Agency PHARE 2006 3. Preparation of a new programming document for IPA-RD PHARE/ IPA-IBC 2006 4. Preparations for accreditation of the next batch of RD measures (elaboration of respective implementation procedures; revision of existing procedures with particular concern for simplifications, streamlining and increased efficiency of procedures for already accredited measures in accordance with EU practices and norms.) PHARE 2006 5. Coordination with other national authorities and bodies on issues linked to implementation of IPA-RD projects (e.g. project related documentation, certificates, etc.) PHARE 2006 6. Preparation and issuing of detailed ministerial regulations allowing implementation of IPA-RD programme. PHARE 2006 7. Support for adjustment of national legislation and structures on agri-environment, organic farming, etc. (administrative tasks, inspection systems, equivalency decisions, general enforcement measures, exchange of information, etc.) PHARE IPA-IBC PHARE 2006-2008 8. Setting up and implementation of pilot scheme/schemes for implementation of selected IPA-RD measures (e.g. environmental measures, management of water resources, forestry and afforestation). 2006-2007 9. Training for representatives of national institutions at central and local levels about principles and rules for implementation of new IPA-RD measures. 11

PHARE 2006 10. Training of staff of the Paying Agency regarding practical exercises of checking the applications for approval of projects against eligibility, selection criteria and compliance with MAFA for IPA-RD: definition and classification of conflict of interest (Croatian legislation and EU norms) its prevention, verification, investigation, solving and sanctioning. PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC 2006-2007 11. Training of staff of the Paying Agency on analysis of technical, financial and economic viability indicators; legal verifications of national and EU standards; risk management in project assessment, selection, contracting and procurement; sanctions in case of non-compliance with contractual obligations; internal audit; improvement of professional skills in using IT applications in programme implementation; keeping security norms; control and anti fraud activities related to RD programmes. 2006-2007 12. Training of staff in regional offices of the PA (to be established) on risk management; contracting and procurement; sanctions in case of non-compliance with contractual obligations; internal audit; improvement of professional skills in using IT applications in programme implementation; keeping security norms; control and anti fraud activities related to RD programmes. 2006 13. Support for the preparation and issuing new guidelines for project applications under IPA-RD programme including; description of measures, eligibility criteria (general and specific), links to National and EU legislation regarding standards and procurement rules to be adhered to, description of eligible expenditures, complete lists of eligible investments, modalities of project submissions, rules for project selection, procedures linked to signing a contract, responsibilities of beneficiaries, project monitoring and control, sanctions in case of breaching contractual arrangements. 2006 14. Support for ex-ante evaluation of IPA-RD ; feasibility studies on nationally funded RD pilot schemes not supported under IPA-RD 2006-2007 15. Training for representatives of Monitoring Committee, MA and others in preparation and organisation of information campaign about RD programmes (e.g. use of networking, local initiatives etc.) 2006-2007 16. Further training for staff of RD Paying Agency in topics: Business financial management, assessment of feasibility studies and business plans; selection, contracting, payment preauthorisation, execution, accounting, debt recovery, monitoring commitments, etc.; risk analysis and risk 12

management linked to implementation of projects under specific RD measures; preparations for accreditation of new measures; communication, promotion and PR; control and anti fraud functions, controlling, penalising, investigation of irregularities; professional skills in using IT applications in programme implementation, keeping the security norms; IPA-RD and Agriculture and Rural Development Plan (ARDP); RD programmes and policies in EU. PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC PHARE/ IPA-IBC 2006-2007 17. Training for MC, MA and Paying Agency members on monitoring and preparation for evaluation of IPA-RD programme (especially newly accredited measures). 2006-2007 18. Training of trainers (IPA-RD Coordinators, business advisors, members of agricultural extension service, incl. livestock centres, agricultural inspectorates etc.) in IPA-RD methodology/guidelines issues linked to implementation of newly accredited IPA-RD measures e.g. preparation of business plans, meeting relevant national and EU standards (environmental, health, veterinary, etc.),and new principles of EU RD policies and programmes etc. 2007 19. Follow-up training for representatives of relevant national authorities and bodies in practical monitoring and control of IPA-RD projects towards meeting and compliance with environmental, health, veterinary, animal welfare, and other national and EU standards during implementation of IPA-RD projects. 2006-2008 20. Further assistance for building up and supporting partnership between MA and regional and national organisations and institutions in the area of RD 2008 21. Preparations for a mid-term evaluation of IPA-RD. Other contractual arrangements: It is envisaged that all activities 1.1-1.21 will be implemented through one service contract (TA). Justification: Experience of other countries shows that necessary preparations for setting up and implementing of new rural development programmes (in case of Croatia: IPA- RD) require a high degree of innovative actions to be carried out in a flexible environment and non-schematic manner, including intensive contacts and coordination with EU services (e.g. DG-AGRI), other ministries, authorities as well as other international donors (incl. World Bank) and stakeholders involved. As the scale of those efforts is substantial, Resident Twinning Advisors (RTAs) or Twinning Light Advisors (TLAs) being usually representatives of existing, well-established institutions would be able to provide a required expertise only to a limited extent. 13

3.5 Linked Activities: There are a number of activities currently underway within the agricultural sector. Funding is from various CARDS budgets, bi-lateral cooperation, United Nations and the World Bank. The objective of the World Bank project Croatia: Agricultural Acquis Cohesion Project (approx. 35M, duration 2005-2008) is to assist Croatia in preparations for EU accession. Among numerous activities which will be carried out the most important are: institutional capacity building and support for preparation and implementation of SAPARD Programme, assistance in setting up SAPARD Agency (including provision and training in using IT equipment), preparation of the Codex of Good Agricultural Practices, assistance in setting up of the Integrated Administration and Control System (IACS), including improvement of farm registry database, integration of land parcel information, GIS and animal registration as well as support to the Food Safety Agency and veterinary services. Given that PHARE assistance to Croatia will not become effective before June-September 2006 the focus of activities of the WB project in the area of institutional capacity building will be on SAPARD Programme (extensive use of EU expertise is planned), whereas activities envisaged under PHARE 2005 project will mainly be targeted towards preparations, successful launching and implementation of SAPARD s successor, i.e. IPAR-Rural Development Component programme (including accreditation and implementation of several new Rural Development measures). In this respect objectives and activities of both projects fit very well and are fully complementary to each other. Furthermore, many activities to be launched by the World Bank in year 2005 in form of pilot projects, e.g. FADN are fully complementary to activities of other on-going projects (CARDS and bilateral projects) and will be later continued on a large scale with assistance of PHARE (a list of envisaged PHARE projects to be financed from PHARE budget 2006-2008 and implemented during the years 2007-2009 is included in Annex 6A). Among other activities, there is ongoing CARDS 2002 twinning project Operational Capacity Building within the MAFWM (budget: 1.0 M, duration: 24 months). The project purpose is to enhance the operational and administrative effectiveness of the MAFWM in fulfilling its obligations under the SAA and in benefiting from preaccession support for agriculture and rural development. There are three components of the project and one of them is a subcomponent for Capacity Strengthening of Department for Agricultural Policy, EU and International Relations (DAP) and Department for Sustainable Development of Rural Areas (DSDRA). Emphasis was given on assistance in preparation for pre-accession support to agriculture and rural development, and especially on preparation of Agriculture and Rural Development Plan (SAPARD-Plan). The project started in September 2004 and will last for 2 years. There is also ongoing CARDS Project 2002 Development of Public Internal Control and Internal Audit (budget: 1.5 M, duration 24 months). The projects purpose is to help Ministry of Finance in the development of policy, organisation, procedures and methods in line with internal financial control in public sector. One of the objectives is to enable state internal auditors access to methodology of internal audit in accordance with the internationally accepted audit standards (IAAS) and to establish the sustainable education program and certification system of internal auditors. There are seven employees of MAFWM who are involved in education process for acquirement of 14

certificate of internal auditors and they are engaged in pilot project of accomplishing of first internal revision in MAFWM. Also, under the bilateral aid from France there is an ongoing project ( Establishment and promotion of Market and Structural Support Agency, budget: 1 Long-term Expert, duration: 2004-2006) which provides MAFWM with technical assistance in preparing for introduction of selected CMOs and accreditation of the Market and Structural Support Agency as the Paying Agency. Under CARDS 2003 project Capacity building of the SAPARD Agency within the MAFWN (which started in April 2005 and will last for 9 months, budget: 0,2M ) assistance is provided to DMSSA with the purpose to prepare all necessary documentation and procedures necessary to establishing and accrediting a fully operational Agency for managing the EU pre-accession instrument for agriculture and rural development (SAPARD). Projects overview: For completeness, all on-going project activities are listed in Annex 7. Furthermore, the task and activity list at Annex 5A contains the overview of envisaged PHARE proposed projects and activities to be financed from PHARE budget 2006 and 2007 (pipeline projects to the full EU Paying Agency). It also identifies relevant activities to be funded by the World Bank during the years 2005-2006. 3.6 Lessons learned: SAPARD programme is largely seen as a successful pre-accession programme which provided a solid base for the creation of the administrative and legal basis necessary for implementation EU rural development policy, giving necessary experience on preparation of RD projects with a positive effect on agriculture and rural development in EU accession countries. Yet, there are also numerous lessons to be learnt from its implementation. One of major concerns linked to implementation of SAPARD programmes (occupying both the EC and a general public) in some accession countries was a long process for the preparation of programme accreditation and a rather slow rate of an initial programme up-take 3. A slow programme s uptake (measured in terms of a number of approved SAPARD projects or a ratio of committed budgetary expenses to total available funds) originated from several factors of which the most important were 4 : 3 See: (EC) SAPARD Annual Reports (Years 2001-2003); Regular reports of SAPARD Monitoring Committees; various papers and presentations on SAPARD, e.g. Wilkinson A. (2003), The SAPARD instrument overview of progress to date, and prospects, paper presented at the International conference on Europe s Agriculture and sustainable development in the run up to enlargement, Budapest, 2003; Lisztwan I. (2002), Understanding EU driven policy in applicant countries: the case of SAPARD Programme in Poland, conference paper, Aix-en-Provence, May 2002; etc. 4 See: AGROTEC (2003) Mid-term Evaluation of SAPARD in the Slovak Republic, Final Report; FAO (2003), Strengthening National Capacities for Monitoring and Evaluation of the SAPARD Programme in Slovakia, Final Project Report, September 2003; HALCROW Ltd, (2003), Mid-term Evaluation of the 15

i) A delay in opening all available measures on time (restricting the scope and number of potential programme beneficiaries). The process of accreditation of SA and respective measures was very demanding on the capacity of the national authorities; ii) The reportedly difficult economic and financial situation of enterprises in the agricultural and food processing sectors, which in many cases could not meet the economic eligibility criteria established prior to the first phase of programme implementation; iii) Lack of funds on the side of potential programme beneficiaries for prefinancing of SAPARD measures (liquidity problems on the side of potential applicants, restrictive credit policy on side of commercial banks and the inherently high risk related to agriculture); iv) Too complex procedures. Difficulties were encountered by many applicants in understanding guidelines, receiving all necessary permissions and confirmations and in preparing the large amount of necessary data about the past and future farm performance in the required form (incl. business plan). The latter applied especially to small enterprises; v) Problems linked to obtaining in reasonable time framework all needed documents; vi) More demanding administrative procedures in comparison with similar national schemes; vii) Difficulties encountered at setting up various pilot projects in the area of agrienvironment, water management, and others; viii) Not always effective information and communication campaign about SAPARD. Information about the SAPARD programme was often not delivered to potential programme beneficiaries and their advisors in an easily understandable form; ix) Reportedly not adequate preparation on side of national institutions and bodies responsible for issuing important certificates necessary for a project application. For example, offices issuing various confirmations (e.g. business register, Environment, Veterinary, Hygiene, Insurance agencies /health, social, others, etc.) were reported to be rather poorly informed about the SAPARD Programme, and in many cases the process of obtaining all necessary certificates appeared as a very time consuming exercise (e.g. the latter especially concerns carrying out of an Environmental Impact Assessment). Given above, various efforts were undertaken by relevant national authorities to enable a higher absorption of available funds 5. Although in some countries numerous amendments were introduced to RDPs (during programme implementation) with the aim to facilitate spending of available funds, i.e. by modifying and easing programme eligibility criteria, such activities were reported to weaken the economic impact of the programme 6 and probably have not contributed to a cost-effective achievement of programme objectives 7 (e.g. due to a wider dispersion of funds and priorities). SAPARD Programme for Agriculture and Rural Development for Latvia, Final Report, November 2003; Regular reports of SAPARD Monitoring Committees; etc. 5 For example see: FAO (2003). 6 This tendency was often strengthened by appraisal procedures which were found to give too much weight to a business plan compared to the past and present economic performance of a project applicant (granting almost all enterprises a possibility to receive support). In many cases, internal appraisal 16

Furthermore, many of above problems occurred due to insufficient capacities on the side of programme managing authorities to set up appropriate programme monitoring and on-going evaluation systems. Clearly, in order to enable a smooth and efficient dispersion of funds available under SAPARD/IPA-RD and post-accession RD programmes the Programme Managing Authority should undertake all necessary actions aiming at timely and carefully preparing for implementation of individual measures. Special attention should be assigned to setting up of programme s comprehensive monitoring and evaluation systems, a careful targeting and preparation of programme potential beneficiaries and extensive training to be provided to programme administration and institutions involved. 4 INSTITUTIONAL FRAMEWORK The project partner is Ministry of Agriculture, Forestry and Water Management (MAFWM) represented by Ph.D. Dragan Kovačević, Senior Programming Officer. The main beneficiaries are: 1. Programme Managing Authority for SAPARD/IPA-RD currently represented by Mr. Srecko Selanac, Assistant Minister, and 2. Directorate for Market and Structural Support in Agriculture (DMSSA) represented by Mr. Krešo Filipović, Assistant Minister. Programme Managing Authority is at present within the Department for Sustainable Development of Rural Areas (DSDRA) which consists of three units: Unit on Cooperatives, Unit for Implementation National Support Schemes on Rural Development, and Unit for Organic Farming. Yet, a separate unit for management and coordination of EU co-financed rural development programmes is still missing and will have to assume responsibility for the efficiency and correctness of co-ordination, managing, monitoring and evaluation of pre-accession programmes and instruments in the area of rural development, i.e. SAPARD and IPA-RD. DMSSA monitors and implements all legal and other acts within the scope of marketpricing and structural policy in agriculture. In future DMSSA will also: 4.1 implement agricultural and rural development measures throughout the procedure appeared not to contribute to the selection of projects with the highest return and elimination of the worst ones (in many cases the first come first serve criteria were applied). 7 The tendency of national SAPARD authorities to favour modifying and easing programme selection criteria in order to assist a larger number of enterprises (including weaker ones), while understandable from an administrative point of view could also have the effect of slowing achievement of original programme objectives. A major risk involved was the provision of support to enterprises which in future many easily become economically non viable (e.g. by disregarding the current level of indebtedness as one of support criteria). The additional risk was an ignorance of a deadweight effect in large companies not necessarily in need of SAPARD assistance but taking a significant part of the programme funds. Definitely, in order to undertake corrective actions strengthening of the effectiveness of the existing ongoing monitoring and evaluation systems and a careful monitoring of economic performance of supported companies are necessary. Yet, final assessment of those actions will be only possible at time of programme ex-post evaluation. 17

SAPARD programme, 4.2 coordinate and control implementation of field inspections related to the measures from SAPARD program; 4.3 Organize financial, accounting and reporting functions related to payments for national measures of market-pricing policy and to payment of the aid from SAPARD program. New decree on changes and amendments the internal organization Ministry of Agriculture, Forestry and Water Management (February 2005) defines the new structure of the Directorate for Market and Structural Support in Agriculture (Annex 7). Human resource capacities and constrains In order to ensure effective project management and absorption, current institutional capacities of MAFWM (i.e. Programme Managing Authority for IPA-RD and DMSSA) will have to be significantly built up both as concerns staff and IT equipment. It is envisaged that the WB project will significantly contribute to this task. Furthermore, effective co-ordination and management throughout the project s life cycle will be ensured through creation of a Project Steering Committee consisting of representatives of EC Delegation, CFCU, MAFWM (Deputy-SPO, DSDRA and DMSSA), Ministry of Environment, Ministry of Finance, Programme Monitoring Committee and Project TL. The Project Steering Committee will be established at the beginning of the Project and will be chaired by the Deputy SPO Mr. Miroslav Bozic, Assistant Minister. 5 DETAILED BUDGET Phare/Pre- Accession Instrument support M National Public Funds (*) Co-financing Other Sources (**) Total Cofinancing of Project PHARE Budget Year 2005 - Investment support jointly co-funded Contract 2 0,045 0,015 nil 0,015 0,060 Investment support sub-total 0,045 0,015 nil 0,015 0,060 % of total public funds max 75 % min 25 % Total Cost Year 2005 Institution Building support 18