PHARE-TACIS: EU cooperation with its Eastern neighbours

by R.N. Clive Matthews.

PHARE and TACIS, the European Union's aid programmes for the Central and Eastern European countries and the New Independent States, are the Union's own contribution to the general efforts of the Western and other industrialised countries, the IMF and the World Bank, to support the reforms in Central and Eastern Europe and the republics of the former Soviet Union.

The crucial question posed by the collapse of the former systems in Central and Eastern Europe and the Soviet Union is how best to provide efficient and effective assistance to these countries, which need to reform nearly every aspect of their economic, social and political life from scratch. The task is momentous and all sorts of difficulties have emerged which could not have been envisaged when the old order collapsed.

The problem has also been exacerbated by the fact that, as the old structures, policies and managers disappeared, the former trading markets also disintegrated, frequently disclosing outmoded and uncompetitive industries with little entrepreneurial initiative and no incentives, let alone capital, for new investment. Moreover, the general recession affecting the rest of the world has taken root in these newly independent countries, which already have severe economic problems.

The European Union itself has recently revised its two programmes to take account of changing circumstances and to enable them to respond to quickly changing needs. However, the two programmes cannot be easily separated from the overall background of the European Union's relations with the countries in question.

As far as the Central and Eastern Europe countries are concerned, future membership of the Union is their ultimate goal, which the Edinburgh and Copenhagen summits first implicitly and then more explicitly accepted in December 1992 and June 1993. The mechanism for attaining membership is long and complex. The first step is a Trade and Cooperation Agreement which offers bilateral cooperation on a wide range of economic, commercial, scientific, technical and cultural subjects. The second step, when the economic and social development of the partner country has reached the appropriate level, is the Europe Agreement which is the precursor to accession.

So far, Europe Agreements have been signed with Poland, Hungary, the Czech Republic, the Slovak Republic, Bulgaria and Romania, and the first two countries have ratified them. The Agreements are designed to bring the two sides in each case towards closer partnership and establish special links to promote their growing interdependence, leading up to full membership of the European Union for the associated countries.

As well as securing much deeper political dialogue and cultural cooperation, the Agreements provide for the progressive introduction of a free trade area, free movement of workers, freedom of establishment of firms, freedom to provide cross-border services and free movement of capital.

As a result of these developments, PHARE has had to move rapidly from emergency assistance (food aid, humanitarian aid, and priority import programmes) in 1989-1990, through the provision of technical assistance for economic and social restructuring (still exclusively the case in seven out of the eleven countries concerned) towards the provision of specific pre-accession assistance (for harmonisation of key legislation, technical norms, etc., pre-investment financing, provision of seed capital, transfer of business and specific technical skills) for countries which sign Europe Agreements; this new type of assistance is geared to facilitating accession by ensuring that barriers to trade and investment are increasingly minimised.

The countries of the former Soviet Union are in a very different situation from those of the Central and Eastern European countries. Neither their past history nor their geographical location makes them natural candidates for European Union membership and they themselves see their future more in some new relationship with each other than with any group of 'outsiders', however welcoming. Thus, neither the level of funding nor the overall aims of TACIS are similar to those of PHARE, even if the operational methods and the interest areas tend to resemble each other. The very scale of the problems facing the NIS is such that a serious attempt to solve them, say at the level of that for Central and Eastern Europe, would result in the bankruptcy of the donors. TACIS serves as a catalyst for the NIS authorities: it cannot hope to tackle the problems but it can help marshal the NlS's own resources and willingness to do so.

PHARE

PHARE was set up by the European Community in 1989 to support the reforms in Poland and Hungary initially and was extended in 1990 to Bulgaria, former Czechoslovakia, former GDR (aid ceased on reunification), Romania and former Yugoslavia (aid to Yugoslavia was suspended in 1991 but Slovenia was admitted as a beneficiary in 1992). Albania, Estonia, Latvia and Lithuania were admitted to the Programme with effect from the beginning of 1992.

Eligibility for assistance under PHARE is conditional on the commitment of a given country to consolidate its democracy and to progress towards a market economy, a commitment which must be clearly demonstrated through appropriate action.

Figure 1: Phare programme 1990-1993

PHARE receives a specific allocation of funds under the annual Community budget. The total budget for operations was ECU 500 million for 1990, 785 million for 1991, 1015 million for 1992 and 1005 million for 1993, amounting to a total amount granted of ECU 3.295 million at the end of 1993. A further 835 million is planned for 1994.

PHARE takes the form of a technical assistance and training programme designed to support the process of economic and social reform in Central and Eastern European countries.

As its fundamental means of achieving its objectives, PHARE funds the transfer of Western know-how to Central and Eastern European countries in a wide variety of forms in certain key areas crucial to creating the conditions for a market oriented economy.

However, successful economic restructuring also depends on changing attitudes and nurturing democratic structures and philosophy. To this end, PHARE is helping to develop civil rights in the Central and Eastern European countries through Democracy Programmes which aim to ensure the survival of pluralist libertarian values in a world of rapid and often disheartening change, given rising levels of unemployment. PHARE's activities range from helping to create civil rights groups, organisations to protect women and minority interests, effective trades unions, employer/employee associations and environmental lobby groups to activities which promote the independence of lawyers, the free expression of journalists and the ability of MPs to represent their constitutents properly.

While the European Commission sets the broad objectives for funding under PHARE, taking account of the across -the-board needs of the Central and Eastern European countries, each beneficiary country itself plays a major role in choosing what the funding should be spent on in view of its own particular priorities and economic situation.

Although the Central and Eastern European countries share many common problems, they also differ widely as to their specific needs. Some are more advanced in certain areas than others and are already engaging in highly sophisticated programmes. Others still need rapid, urgent assistance of a more basic sort.

For instance, when PHARE was set up in 1989, Hungary already had an appreciable Western trained managerial class and distinct free-enterprise social tendencies. Czechoslovakia had a highly educated technical workforce and the longest tradition of a liberal democracy. Poland, while keen and politically more liberal, was seriously under-resourced and possessed a large and underdeveloped agricultural sector; exposure to the free market in Bulgaria and Romania was very limited, so that a serious effort of education and information is still needed. Also, the lack of adequate health care in Bulgaria and Romania, and of adequate food supplies in Romania, meant that, initially, PHARE had to concentrate on providing urgent humanitarian aid to these two countries, rather than more sophisticated programmes.

Equally, the move towards economic reform and privatisation has progressed at different speeds. Some countries are still at the early stages while others, notably Hungary, Poland and the Czech Republic, are well advanced.

PHARE has attempted to gear its programmes in each country to take account of these differences. However, it has been recognised that still more tailoring is needed to enable an increasingly diversified approach to be applied to each beneficiary country, so that PHARE can respond more accurately to the changing needs and existing progress of each country, according to the stage of reform reached.

PHARE has also introduced multi annual indicative programming, instead of the former annual indicative programming procedure, so as to achieve greater coherence between the various programmes and greater continuity from year to year, as well as more effective integration of PHARE assistance in the medium to long term reform strategies of the beneficiary countries.

The beneficiary government sets its priorities in close collaboration with the EC Commission, following discussions with key authorities in the country. Once funding is allocated for a particular programme, the relevant authority assumes its management, selecting individual projects, arranging tenders and supervising implementation, frequently with the help of a project management unit made up of local experts, with Western experts if needed and with some supervision from the local Commission Delegation.

Therefore, while the Commission in Brussels coordinates the overall PHARE programme, most of the groundwork and the implementation is done in the Central and Eastern European countries themselves. However, there is still room for more decentralisation and the Commission is working towards transferring increased control to the beneficiary countries themselves. Measures are also being taken to accelerate procedures generally as well as the disbursement of assistance.

PHARE not only functions at the individual national level but has developed programmes of a transnational/regional dimension involving several countries or all the countries of Central and Eastern Europe in areas where it is felt that swifter and better progress can be made by joint cooperation between the countries themselves in a particular field or where an objective has to be achieved in several countries at the same time.

TEMPUS (Trans European Mobility Programme for University Students), ACE (Community Action for Cooperation in the field of Economics) and SIGMA (Support for Improvement in Governance and Management) are some of the best known examples of these regional initiatives. Regional programmes have also been set up to deal with a broad range of other issues such as transport, telecommunications, computer communications, industrial property, environment, energy, nuclear safety, standards, customs cooperation and statistical cooperation. These programmes frequently complement programmes in the same fields of interest already running at the individual country level and, for the period 1993-1995, PHARE is intending to complement national approaches with an increasing number of such regional and cross-border programmes.

TACIS

TACIS - Technical Assistance to the Commonwealth of Independent States - is a technical assistance programme set up at the end of 1990 to transfer Western know how to the then Soviet Union and adapted from 1992 for the 12 new independent states. At the beginning of 1994, TACIS was also extended to Mongolia, given that country's close links with the former Soviet Union and its similar needs.

TACIS is designed to set the conditions for encouraging private investment with a view to building up a democratic society and a market economy. The assistance granted takes the form of policy advice, institution building, design of legal and regulatory frameworks and training. When the Programme was set up, the priorities eligible for funding were far narrower in scope than those of PHARE, although these are beginning to broaden and some of the initiatives generated under PHARE are now being adapted by TACIS to cater for similar needs in the NIS.

TACIS has taken much longer to get off the ground than PHARE and has posed considerably more problems. Although funding for 1991 was agreed et the end of 1990, given the political problems in the former Soviet Union, the Programme was severely delayed. At the beginning of 1991, the handling of the problems in the Baltic States made diplomatic relations with Moscow difficult. The attempted coup in August and the political repercussions that followed further delayed the Programme. By the time that the 1991 Programme finally got off the ground in the late autumn, it became clear that the 1992 Programme would have to be negotiated with a large number of new independent states, busy with their own political reorganisation.

Drawing up priorities in this climate has taken time, with so many changes in the political make-up and in key personnel, let alone the problem of identifying needs. Setting up appropriate organisational structures to help run the Programme has also proved difficult, given that the dissolution of the Union necessitated decentralisation of the existing Commission counterparts in Moscow. Furthermore, TACIS has simply been unable to operate in some of the new states, due to political disruptions and, in certain cases, civil unrest.

As a result of all this, unlike PHARE, far more of the day-to-day management of TACIS has been conducted from Brussels, with the Commission itself handling much of the tendering and contracting of services and monitoring of project implementation. While steps are being taken to decentralise the process in favour of more involvement by the appropriate structures in the NIS, this is likely to take some time. This heavy Brussels involvement in the detailed running of the Programme has inevitably resulted in slower and bureaucratic procedures, exacerbated by the Commission's problem of understaffing and the lack of trained personnel for this new task.

The TACIS Programme was allocated ECU 400 million in 1991, ECU 450 million in 1992 and ECU 510 million in 1993. ECU 460 million has been committed for TACIS for 1994, with an additional ECU 10 million for democracy initiatives to support NGOs in areas such as health, housing and agriculture. So far, Russia has received the largest share of aid - 60%, with Ukraine receiving 15% and Kazakhstan 5%. However, symptomatic of the problems which have been encountered by the TACIS Programme is the fact that actual commitments and payments have been slow and things only began to improve in 1993, when the Commission took steps to speed up the rate of disbursement with ECU 345 million worth of contracts signed, compared to only ECU 5.3 million in 1991 and 203 million in 1992.

A multiannual method of programming has now been introduced, concentrating on fewer sectors and more carefully targeted geographic areas so as to ensure the earlier and swifter implementation of projects and to gear assistance more closely to the mid-term economic goals of the beneficiary countries. This system of programming should also enable commitments to be spread more evenly over the year.

Building on the priority areas set for 1991 and 1992 and on experience gained, TACIS is concentrating on certain areas crucial for the reform process in the NIS for the period 1993-1995: human resource development (public administration, social protection, policy advice, management training, statistics and customs); enterprise restructuring and development (financial services, privatisation, SMEs, conversion of defence-related industries); infrastructural networks (transport, energy, telecommunications); nuclear safety; agriculture, food production, processing and distribution. TACIS is also increasing emphasis on horizontal themes, in particular as regards the integration of the social dimension into reform, the promotion of democracy and a pluralistic society, the promotion of equal opportunities and the integration of environmental concerns.

Regional/inter-state programmes-have also been set up under TACIS and these are receiving increased attention; their share of the TACIS budget will increase to some 32% during 1994. These programmes take the form of joint facilities for implementing similar actions in parallel in several states and of regional actions to address a problem common to two or more states. They aim to support governments, notably on economic restructuring, on improvements to infrastnucture and their operation and on the development of economic sectors of importance to a particular region. So far, regional actions have concentrated mainly on cooperation on nuclear safety, education under TEMPOS, regional/crossborder transport and telecommunications networks and crossborder cooperation on environmental issues.

Figure 2: Tacis programme: 1991-1993

Other EU assistance

As well as PHARE and TACIS, the European Union grants assistance to the Central and Eastern European countries in various other forms; of particular note are the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

The EIB, based in Luxembourg and owned by the Community Member States, finances large-scale capital investment projects in infrastructure, industry, agro-industry, agriculture, energy and tourism. The EIB was authorised to commence loans to the Central and Eastern European countries in 1989, and by the end of 1993 the EIB had lent over ECU 2 billion.

A further ECU 3 billion will be available for the 1994-1996 period.

The EBRD, based in London, was launched to provide finance specifically for the Central and Eastern European countries and for the former Soviet Union. The European Union institutions with the Member States constitute the major shareholder, contributing 51 % of its capital. The EBRD aims to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiatives. It grants or guarantees loans primarily to private firms but also to state run firms undergoing privatisation or managed according to the principles of free competition and may acquire or finance acquisitions of holdings in such firms.

Conclusion

The European Union and the industrialised countries cannot, on their own, meet the financing and investment needs required to bring about the economic transformation of Central and Eastern Europe and the NIS. This is also dependent on the inward flow of investment funds and know-how from private investors in the West.

However, these private investors will not risk these new markets until they think that political and economic stability is assured. The Western effort is geared to lay the foundation for such critical investment by helping to establish a sufficiently supportive framework to stimulate confidence in these new markets and make them attractive. However, there is no magic wand which will miraculously change everything overnight; the assistance programmes can only help transfer know-how to those areas where this is most needed and do their best to ensure that the know-how is of the highest quality.

This is not to say that PHARE and TACIS are by any means perfect. Both programmes had to be set up in a hurry and suffer from understaffing and underfunding as well as complicated financial control procedures, but then it is the Western European taxpayers' money and they are entitled to know that this is being spent wisely.

Moreover, this is a joint effort - the West does not, and should not be expected to have all the answers. Nor does it have limitless barrels of money, particularly given the recession in the European Community, the current level of unemployment and the existence of some regions which are poorer than certain countries in the East. Economic transformation also depends on the determination of the people of the Central and Eastern European countries and the NIS themselves. Memories are short and, now that the euphoria has died down and it is dear that a very hard road lies ahead, there is almost a nostalgia about the old order. But the good old days were equally bad and indeed far worse for many in different ways.

One of the main criticisms of instruments such as PHARE and TACIS is that these are used as a vehicle for Western consultants to grow rich at the expense of those they are meant to help. However, Western firms survive by being profit making; they are unlikely to transfer the know-how which they have spent time, effort and much money building up without some material return for themselves and so they expect to be paid market prices for their services. That is the essence of entrepreneurship and a free market economy. In the early days, there was simply not enough local expertise to provide the type of services needed, but PHARE and TACIS are now making attempts to ensure greater participation of local firms and experts in contracts, where they have the requisite skills.

It is true too that funding is sometimes inadequate or late and that some important projects are postponed or abandoned while unworkable or inappropriate projects are selected. Attempts are made to ensure that the experts used are the best but there are sometimes failures. When these problems occur. both sides need to coordinate to ensure that they can be avoided in the future.

Certainly, the EC Commission has learnt much during the short period since PHARE and TACIS were set up, often the hard way. Substantial efforts are now being made to improve the targeting of funding and tailor this to individual countries' needs. The bureaucratic and laboured procedures are also being speeded up and efforts are being made to transfer much more control to the beneficiary countries themselves, although, in the case of TACIS, the nature of the problems in some of the NIS is likely to impede this transfer for some time to come.

However, what is needed is much more partnership from both sides and, essentially, this is what PHARE and TACIS are all about: new markets for Westerners in exchange for know-how and capital for Easterners which they can use to compete on Western markets on their own or with Westerners.

As far as the Central and Eastern countries are concerned, this concept of partnership has already taken firm root, and has in fact altered the original philosophy underlying the PHARE Programme, which was to help the Central and Eastern European countries through their transition to market economies. A formal basis of partnership has now been established between the European Community and certain Central and Eastern European countries through the so-called 'Europe Agreements' which are the precursor to full membership of the European Community and, for those countries, PHARE assistance is now being increasingly geared to funding activities to prepare these countries for accession.

But while the Europe Agreements make the horizon look clearer for the Central and Eastern European countries, it is still a very distant horizon and both sides will have to negotiate many hurdles and pitfalls before it can be reached. For many of the NIS, the path to success threatens to be much more difficult than for the countries of Central and Eastern Europe. PHARE and TACIS, although necessarily limited in their impact, are intended at least to ease the burden a little and to create the basis for a firm partnership between East and West, which is so crucial to our future common security. R.N.C.M.