Special report No 6/2012: European Union assistance to the Turkish Cypriot Community - Montesquieu Instituut

 

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COUNCIL OFBrussels, 4 June 2012

THE EUROPEAN UNION

10707/12

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FIN 382 ESE 1

COVER NOTE

from:

Mr Vítor CALDEIRA, President of the European Court of Auditors

date of receipt: 25 May 2012

to: Mr Nicolai WAMMEN, President of the Council of the European Union

Subject: Special report No 6/2012: European Union assistance to the Turkish Cypriot Community

Sir,

I enclose a copy of Special report No 6/2012 "European Union assistance to the Turkish Cypriot Community" together with the Commission's replies.

The Special report, which is shortly to be published, was adopted by the Court at its meeting on 6 March 2012 and is accompanied by the replies from the Commission, which was notified of the preliminary findings on 19 December 2011.

(Complimentary close).

 

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Special Report No 6/2012

(pursuant to Article 287(4), second subparagraph, TFEU)

European Union Assistance to the Turkish Cypriot Community

2

TABLE OF CONTENTS

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Paragraph

Executive summary I-V

Introduction 1-10

Background 1-7

EU financial assistance 8-10

Audit scope and approach 11-12

Observations 13-57

The Commission faced significant constraints in the setting up and implementation of the programme

13-33

Interventions reflected the programme's objectives despite the wide range of sectors to be covered, the regulation's delayed adoption, and the absence of a multi-annual perspective

14-21

The effectiveness of the Commission's local support office has been undermined by several factors

22-27

Programme implementation procedures not always effective

28-33

3

Annex I Breakdown of all individual projects/sector programmes as at

30 September 2011

Annex II - Overview of audited contracts

The Commission's replies

4

EXECUTIVE SUMMARY

I. The Court of Auditors assessed whether the Commission is managing the

instrument for financial support to the Turkish Cypriot community (hereafter

referred to as TCc) in the northern part of Cyprus2 effectively. Specifically, the

Court examined whether the Commission drew up an assistance programme

which reflected the instrument's objectives and put in place appropriate

implementing arrangements and whether the individual projects are achieving

their intended results.

II. The audit covered the period from the adoption of Council Regulation

(EC) No 389/2006 in February 2006 to the third quarter of 2011. It included the

examination of a sample of 34 contracts totalling approximately one third

(97,5 million euro) of all budget allocations to the instrument from 2006-11.

III. Despite the difficult political context and a compressed timetable, the

Commission managed to establish a programme which reflected the

regulation's objectives. It was also able to quickly set up a programme

management office and introduce suitable implementation mechanisms. The

main weaknesses resulted from the programme support office not operating

under more devolved procedures like EU delegations and from contracts for

5

V. On the basis of the above observations the Court makes a set of

recommendations to the Commission covering different possible scenarios

based both on developments in the reunification process and the level of future

EU assistance:

• - 

  If there is no settlement in the short term and it is decided that further

significant funding should be provided to the TCc, the Commission should

take a number of steps to strengthen its management of the assistance

programme (see paragraph 64).

• - 

  If it is decided not to support a further large scale assistance programme, an

action plan should be prepared to scale down or phase out the Commission

Task Force's operations (see paragraph 65).

• - 

  If clear progress is made in the reunification process, the Commission

should make early preparations for a programme to enable the whole

country to benefit from EU funding following reunification (see paragraph

66).

6

INTRODUCTION

Background

• 1. 

  Cyprus became independent in 1960. The Treaty of Guarantee signed the

same year by Greece, Turkey, the United Kingdom and the representatives of

the Greek Cypriot and Turkish Cypriot communities intended to guarantee the

basic provisions of the constitution and the territorial integrity and sovereignty

of Cyprus. However, disagreements over the revision of the constitution soon

surfaced and led to a political breakdown in 1963 and an upsurge in inter-

communal violence. After United Nations (UN) Security Council Resolution 186

in March 1964, the UN Peacekeeping Force in Cyprus (UNFICYP) was

established and is still in place with a current strength of approximately 1 000

troops.

• 2. 

  The existing de facto division of Cyprus dates back to Turkey's military

intervention in the northern part of the island in July 1974. This followed years

of inter-communal struggles and a short-lived military coup by sections of the

Cypriot National Guard led by Greek officers.

• 3. 

  In the aftermath of the Turkish military interventionthe UN Security Council

7

sovereignty of the Republic of Cyprus according to the terms of its

independence in 1960.

• 5. 

  At its meeting in Helsinki in December 1999, the European Council decided

that a political settlement would not be a precondition for the accession of

Cyprus to the European Union (EU), although it underlined that a settlement

would facilitate the accession process. In December 2002, the European

Council decided in Copenhagen that Cyprus would be admitted as a new EU

Member State, while reiterating its preference for the accession of a unified

Cyprus.

• 6. 

  However, in an April 2004 referendum the Annan Settlement Plan was

rejected by 76 % of the Greek Cypriots voting, while 65 % of Turkish Cypriots

voting approved it. The Republic of Cyprus therefore joined the EU on

1 May 2004 with the island still de facto divided. While the whole island legally

is part of the EU, the acquis communautaire is suspended in the northern part,

an area over which the Republic of Cyprus does not exercise effective control.

This constitutes a unique political, legal and diplomatic context.

• 7. 

  A new round of UN-sponsored talks was launched in September 2008 and

is still ongoing. The United Nations Secretary General and the leaders of the

8

Cyprus by encouraging the economic development of the Turkish Cypriot

community. The Council invited the Commission to bring forward

comprehensive proposals to this end, with particular emphasis on the economic

integration of the island and on improving contact between the two

communities and with the EU.3"

• 9. 

  On 7 July 2004, the Commission proposed a package of two regulations:

one for a financial support instrument to encourage the economic development

of the Turkish Cypriot community and a 'direct trade` regulation. It proved,

however, difficult for the Council to agree on the adoption of this package and

the two regulations had to be decoupled4.

• 10. 

  The Council Regulation for the instrument of financial support was

eventually adopted on 27 February 20065 with an initial allocation of

258,8 million euro. This was in fact the amount which had been earmarked for

the Turkish Cypriot community for the implementation of EU policies in Cyprus

if a political settlement was reached before accession. Smaller additional

amounts totalling 33,5 million euro were allocated over the period 2009 to

2011. The funding allocation to the instrument's objectives is set out in the

Table . A detailed list of the projects funded under each objective is given in

9

Table Financial allocations by objective (as at 30 September 2011)

% paid of total contracted

(Million euro) Planned % of total planned

Contracted Paid

Objective 1

Developing and restructuring of infrastructure

129,25 44,2 % 135,02 76,49 56,6 %

Objective 2

Promoting social and economic development

84,65 29,0 % 64,87 49,41 76,2 %

Objective 3

Fostering reconciliation, confidence building measures and support to civil society

23,50 8,0 % 19,90 17,61 88,5 %

Objective 4

Bringing the Turkish Cypriot community closer to the EU

12,50 4,3 % 8,62 7,49 87,0 %

Objective 51

Preparing the Turkish Cypriot community to introduce and

implement the acquis communautaire and unallocated TA and Programme Reserve Facility

21,35 7,3 % 15,69 14,15 90,2 %

Sub total Operational part 271,25 92,8 % 244,10 165,15 67,7 %

Management (Staff and Missions), Logistics

21,05 7,2 % 15,30 13,64 89,1 %

Total 292,30 100,0 % 259,40 178,79 68,9 %

10

(a) the Commission had been able to draw up an assistance programme

which reflected the instrument's objectives and had put appropriate

arrangements in place for implementing it;

(b) the individual projects financed in the framework of the programme are

achieving their intended results and whether they are likely to be

sustainable.

The audit did not seek to assess whether the programme is contributing to the

instrument's political objective of reunification.

• 12. 

  The audit gathered evidence for its assessment through documentary

review, interviews and three on-the-spot audit visits to Cyprus in 2011. In

particular, the audit examined a sample of 34 contracts selected from nine of

the main projects out of 24 projects funded through the programme and

covering all five of the instrument's policy objectives. The contracts audited

totalled 97,5 million euro or one third of the total budget allocations to the

instrument (292,3 million euro). The complete list of contracts covered by the

audit is given in Annex II .

OBSERVATIONS

11

Interventions reflected the programme's objectives despite the wide

range of sectors to be covered, the regulation's delayed adoption, and the

absence of a multi-annual perspective

• 14. 

  The overall objective of the assistance financed by the instrument

according to Article 1 of the Council Regulation is to facilitate the reunification

of Cyprus. This is to be done "by encouraging the economic development of the

Turkish Cypriot community with particular emphasis on the economic

integration of the island, on improving contacts between the two communities

and with the EU, and on preparation for the acquis communautaire ". Article 2 of

the regulation lists a wide range of more specific objectives which the

assistance is required to cover (see Box 1 ). This broad formulation of the

objectives meant that assistance had to be funded across a wide range of

sectors which represented a considerable implementation challenge for the

Commission, including in relation to allocating the necessary human resources.

An approach focused on a more limited number of objectives would have

allowed the Commission to better target the assistance.

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Box 1 Objectives of Council Regulation (EC) No 389/2006

Article 1

Overall Objectives and Beneficiaries

The Community shall provide assistance to facilitate the reunification of Cyprus by

encouraging the economic development of the Turkish Cypriot community with

particular emphasis on the economic integration of the island, on improving the

contacts between the two communities and with the EU, and on preparation for the

acquis communautaire .

Article 2

Objectives

Assistance shall be used to support inter alia:

(a) the promotion of social and economic development including restructuring, in

particular concerning rural development, human resources development and regional

development,

(b) the development and restructuring of infrastructure, in particular in the areas of

energy and transport, the environment, telecommunications and water supply,

(c) reconciliation, confidence building measures, and support to civil society,

(d) bringing the Turkish Cypriot community closer to the Union, through inter alia

13

• 15. 

  All the audited interventions contributed to varying degrees to the

regulation's objectives in Article 2. The focus on infrastructure and economic

development of the TCc was intended to ensure that the level of development

of the TCc economy compared to that of the Greek Cypriot community would

not be an obstacle to a political settlement. The largest financial allocations

were made to the water and sanitation and rural development sectors. This

reflected the priority needs, the absorption capacity in the different sectors, and

the results of the specific feasibility studies carried out (see Table and

Annex I ).

• 16. 

  The 'reconciliation and confidence-building` objective also represented an

important complementary means of supporting the overarching reunification

objective. However, the actual amount of the financing decision of December

2006 was 35 % lower than the initial proposal of July 2004. This shift reflected

the outcome of consultations with TCc leaders who considered the TCc's

infrastructure and economic development to be the instrument's primary

objectives.

• 17. 

  The Commission in its assistance programmes generally makes

widespread use of capacity building support to accompany its projects in order

14

could work together with the TCc authorities was also limited by the political

circumstances (see also paragraph 45).

• 18. 

  The long time required for the adoption of the Council Regulation (see

paragraph 9) meant that the financing decisions for the initial allocation of

259 million euro had to be developed and approved in the course of just one

year. A series of preparatory activities which had been planned for 2004-05

could not take place and the Commission had to finance important feasibility

studies through a budget of only 2 million euro made available under a

2003 Special Aid Package for the northern part of Cyprus7. The time pressure

during the project preparation phase was one reason for the major problems

encountered in the water desalination plant project (see paragraphs 38 to 40).

• 19. 

  The delayed approval also had a negative impact on the preparation of

contracts to implement the projects, in particular the technical specifications for

tenders, which instead of being spread over the four and half years between

July 2004 and December 2009, had to be completed in three years before the

contracting deadline expired. This posed a particular challenge for

infrastructure projects in the water sector (see Box 2 (c)). As a result, of the

total allocations to the contracts covered by the audit, some 62 % were only

15

interventions for maximum impact and to move funding between different

sectors of intervention according to how well they are performing and lessons

learnt. The assistance to the telecommunications sector (see paragraph 35)

and to the scholarships programmes (see paragraph 53) are two areas which

have experienced particular difficulties in this regard. The lack of a multi-annual

perspective also makes human resource management more difficult (see

paragraph 27).

The effectiveness of the Commission's local support office has been

undermined by several factors

• 22. 

  The Commission faced a major challenge in finding a suitable structure for

implementing the programme. While EU funding in Member States is normally

implemented through national bodies, this was not possible for this programme

given that the Republic of Cyprus does not exercise effective control over the

northern part of Cyprus. At the same time, however, it was also not possible to

set up an EU delegation to implement the assistance because delegations can

only be established outside the EU and the whole island is legally part of the

EU (see paragraph 6). It was originally foreseen in the regulation that the

assistance would be implemented using the European Agency for

16

northern part of Cyprus. This was inspired by the technical assistance offices

used by the Commission in the West Bank and took into account the costs and

benefits of different approaches as well as the political context9.The location of

EUPSO in the northern part of Cyprus enabled the assistance programme to

monitor implementation more closely and better respond to the needs of the

project beneficiaries.

• 24. 

  The Commission was able to quickly establish the EUPSO through a

service contract signed in December 2006 with GTZ10. This contractor was

already to provide logistical support for technical assistance in the northern part

of Cyprus under an existing agreement11.

• 25. 

  Nevertheless EUPSO's management of the programme has been

constrained by the fact that it has not been able to operate in the same way as

EU delegations which typically manage EU assistance programmes. In the

absence of a head of delegation, all key decisions have to be referred back to

Commission headquarters. This also applies to tendering, contracting and

payment procedures as they have not been devolved to EUPSO in the way that

they are in EU delegations and which slows down operations. Moreover, within

DG Enlargement four different units are involved in authorising contracts and

17

payments. A 2009 evaluation of the programme also highlighted the lengthy

verification procedures resulting from the centralised nature of the approval

process.

• 26. 

  EUPSO, unlike EU delegations, does not have its own press and

communication section and therefore cannot issue its own press releases.

Instead, EUPSO consults with the EC Representation in the Republic of

Cyprus, which is located in the part of Nicosia over which the Republic of

Cyprus exercise effective control, on all material produced for publication by the

EU projects. While there are potential benefits in this arrangement given the

politically sensitive context, there is no detailed operational agreement on the

procedures for such consultations and delays of up to two months have been

encountered in obtaining the EC Representation's clearance of documents (see

also paragraph 55).

• 27. 

  A further constraint faced by EUPSO is that, according to the Staff

Regulations12 of the European Union, headquarters-based contract agents can

only be employed for a maximum of three years. This contrasts with the five

year contract duration, sometimes with the possibility of renewal, for contract

agents in delegations. As a result of this shorter contract duration, the Task

18

Programme implementation procedures not always effective

• 28. 

  The Commission has taken appropriate steps to evaluate the most suitable

implementation methods for individual projects. As it cannot enter into financing

agreements with the TCc authorities because they are not officially recognised

by the international community, the Commission has primarily implemented the

assistance by entering into contracts directly and acting as the sole contracting

authority. In addition, the Commission jointly managed some interventions with

the United Nations Development Programme (UNDP) and this approach has

proved appropriate for launching the EU assistance because it allowed it to

build on previous UN activities. There is nevertheless a need to review whether

these initial start-up advantages are still relevant given the experience the

Commission has now built up before funding new EU interventions through the

UN.

• 29. 

  The monitoring arrangements put in place by the Commission have

generally been adequate. EUPSO task managers and heads of section

followed up and took corrective action with partners and contractors for the

projects covered by the audit. EUPSO was supported where necessary by

programme management units and technical assistance experts. Its

19

• 31. 

  This evaluation has provided a sound basis for the Task Force's risk

management and the implementation of an assurance strategy. The

Commission has taken several measures to mitigate the need for corrective

controls and to reduce exposure to additional demands or penalties from

contracting parties. There remains a post-project risk related to the way in

which liabilities connected with the ownership and operations of infrastructure

investments are transferred to beneficiaries that are not officially recognised13.

• 32. 

  A particular risk relates to the fact that an estimated 78 % of privately

owned land in the northern part of Cyprus legally belongs to Greek Cypriots14,

whose consent was required for EU-funded infrastructure investments on their

land. The Commission has established procedures to verify property ownership

in cooperation with the Department of Lands and Surveys of the Republic of

Cyprus. While there were initially legal challenges to this process and

significant delays, processing times have since been reduced.

• 33. 

  The Commission, despite considerable efforts, did not effectively manage

the implementation risks for the 27,5 million euro contract for the construction

of a seawater desalination plant in Sirianokhori/Kumköy (see Box 2 ).

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(b) In the procurement notice for the works contract for the seawater desalination

plant it is stated that the tenderer must provide a performance guarantee for the

completion of the contract of 10 % of the contract value no later than 30 days after

receiving the signed contract or else the contract becomes void. Yet, the contractor

never provided it. In accordance with the procurement notice, the Commission should

therefore have terminated the contract already on 17 January 2010, in which case the

27,5 million euro would have been de-committed.

(c) By contracting the works at the latest possible moment (the contracting deadline

expired on 18 December 2009) the Commission also missed an opportunity to offer

the contract to another tenderer. The procurement notice states that "if the selected

tenderer fails to provide such a guarantee within this period, the contract will be void

and a new contract may be drawn up and sent to the tenderer which has submitted the

next cheapest compliant tender". As the contracting deadline had expired, this was no

longer an option.

(d) The Commission only started the high-level dialogue with the TCc political leaders

in June 2010, seven months after the contract was signed in December 2009. While

the TCc leader responded on 17 June 2010, expressing his political commitment to the

project, access restrictions were only partially removed in August 2010. If the

Commission had started the dialogue already in December 2009, this would have

allowed more time to tackle the access issue.

21

Objective 1: Development and restructuring of infrastructure

Telecommunications sector

• 35. 

  The objective of EU support to the development and restructuring of the

telecommunications infrastructure is to eventually bring the telecommunications

sector in the northern part of Cyprus into line with EU standards in accordance

with the acquis communautaire. The support is intended to provide a network

where everyone can have access to modern telecommunication services, and

which can easily be interconnected with the telecommunications network in the

areas under the effective control of the Government of the Republic of Cyprus.

Although behind schedule most of the equipment had been delivered by

30 June 2011. The accompanying technical assistance contract was facing

significant delays, mainly because TCc `laws and regulations' had not been

adopted according to the planned schedule.

• 36. 

  As for other sectors (see below), in the absence of financing agreements,

the Commission has implemented the programme without an obligation for the

beneficiary to implement the necessary reform actions before the signing of

contracts for the supply of equipment. There is therefore a risk of sector

reforms not being implemented, despite the programme's considerable

22

Water sector

• 38. 

  The construction of the seawater desalination plant at Sirianokhori/

Kumköy is not only the main project in the water sector but also the largest

intervention funded under the instrument, amounting to approximately 10 % of

total contracted funding. The plant was intended to provide 23 000 m3 of clean

drinking water per day covering the needs of an estimated 100 000 people. The

design of the plant changed considerably during the project formulation

process. The original proposal had been to build a plant to treat brackish

groundwater but this approach was dropped because of concerns over

compliance with the Water Framework Directive.

• 39. 

  Despite its importance, very limited progress was made on the

implementation of the contract, mainly due to the Greek Cypriot workers of one

of the consortium's contractors being denied access to the site by the Turkish

armed forces and the unresolved issue of the performance guarantee (see

Box 2 ). According to the contract conditions, the Commission, as contracting

authority, is responsible for providing access to the construction site but in

practice this is outside its control.

• 40. 

  The failure to implement this project represents a significant setback for the

23

any indicator to assess the effectiveness of the project in terms, for

example, of the reduction in leakages or annual repair costs.

(b) The construction of the new Mia Milia/Haspolat Waste Water Treatment

Plant (WWTP) aims to modernise wastewater treatment in the whole of

Nicosia and the surrounding area. Due to the existing plant's bi-communal

organisation, the project also supports reconciliation and confidence

building. The builder of the WWTP is contracted to maintain and operate

the plant for ten years after handover to ensure that capacity needs will

continue to be met. However, the 'joint entity` to be formed by the two

communities to manage and supervise this contract has still not been set

up, which poses a risk to the project's sustainability.

• 42. 

  Equipment for water sampling, analysis and laboratory information

management has also been funded to provide additional capacity to carry out

water quality analysis for all drinking water and waste water services in the

northern part of Cyprus in accordance with the relevant EU directives. Although

all the equipment was supplied as envisaged, it is not clear whether the project

objectives will be achieved as the laboratory is not currently performing

according to EU standards. While additional training of beneficiary staff was

24

• 44. 

  Both a rural development plan and local development strategies of the kind

used in the EU-Leader programme have been established. More than 200

individual farmers or entrepreneurs have benefited from a grant to enable them

to upgrade their operating facilities and move closer to EU standards. In

addition, nearly 40 community development grants have been made to local

bodies and nongovernmental organisations (NGOs). Grant beneficiaries have

received Commission-funded technical assistance support during the

preparation and implementation of their projects and through the grant

schemes have learnt modern bookkeeping, procurement and monitoring

practices.

• 45. 

  Nevertheless, the capacities of the local administrations and the final

beneficiaries continue to need strengthening. The transfer of know-how from

the technical assistance provided to the TCc authorities responsible for rural

development has been hindered by the fact that the technical assistance does

not work in the offices of the TCc authorities because of the political situation.

At the same time ownership of the new Rural Development Plan, and, in

particular, of the local development strategies which are intended for use by

Member States in the framework of the EU Leader programme, is still weak.

Sustainability is therefore unlikely to be achieved without additional support in

25

restoration of the Bedestan, a major cultural heritage and tourist site in the

north of Nicosia (see Box 3 ). Most of the individual actions have experienced

delays although, in many cases, these delays have been linked to political

difficulties and problems with property checks, which are largely out of the

hands of the Commission and the UNDP.

• 47. 

  Sustainability of the interventions is potentially undermined by the limited

participation of the Turkish Cypriot community. There is no formal mechanism

at project level where the TCc is represented, including in the project steering

committee. At the level of the interventions, while the UNDP has cooperated

closely with the local bodies at municipal level to involve them in project

management, the UNDP remains the only contractor which means that these

local administrations have not gained experience as contracting authorities.

The issue of sustainability is not explicitly addressed in the UNDP reports with

the exception of the Bedestan project (see Box 3 ).

Box 3 Results: Upgrading of Local and Urban Infrastructure

Opening of crossing points

According to Article 2 of the Green Line Regulation, the line shall be crossed only at

26

from the northern part of Cyprus to the government-controlled areas, and 28 % by EU

citizens other than Cypriots and nationals of non-EU countries15.

Restoration of the Bedestan

The Bedestan was initially built as a Byzantine Church but was transformed into a

closed market in the 16th century. By the 1930s, the building had fallen into disuse.

When the EU-funded project started, it was in very poor condition, with a collapsed

roof and various other structural damage. The works were completed in two phases:

structural work between 2004 and 2006, and conservation and restoration work

between 2005 and 2009.

In November 2009, the Bedestan was reopened to the public as a cultural centre and

the inauguration ceremony was attended by representatives from both communities.

The project was awarded the European Union Prize for Cultural Heritage/Europa

Nostra Award in the research category.

Objective 3: Fostering of reconciliation, confidence building measures

and support to civil society

• 48. 

  Support has been provided to the Joint Committee on Missing Persons to

try to bring closure in relation to this painful aspect of the history of Cyprus and

thereby contribute to the process of reconciliation between the Greek Cypriot

27

• 49. 

  The Commission also used the instrument to finance seminars organised

by the Council of Europe Academy of Political Studies to give both Turkish

Cypriot and Greek Cypriot participants a better insight into some of the

common challenges which the island will be facing in the future. These

seminars have contributed to better integrating Turkish Cypriot leaders

although they have not always been well attended. The Commission has not

taken any specific action to ensure the sustainability of the 'European Forum

Cyprus`, an alumni network for participants in these seminars.

• 50. 

  `Civil Society in Action' and `Civil Society Support Team' programmes were

launched with the aim of strengthening civil society organisations and the

development of a civil society culture in the TCc. Both programmes have been

able to build capacity but further support is required to strengthen operational

and financial management capacity in Turkish Cypriot civil society

organisations.

• 51. 

  EU assistance has made a major contribution to demining in Cyprus.

Almost all minefields in the buffer zone have now been cleared and since 2007

the EU has financed 6,5 million out of a total of 9 million euro invested in this

effort. Among the benefits of the demining have been the facilitation of trade

28

isolation of the TCc by enabling 400 students and teachers to live and study in

another Member State for one year16.

• 53. 

  However, the programme's effectiveness and sustainability are hindered by

the lack of a multi-annual perspective. The timing of the call for proposals is

determined not by operational needs but by when Commission financing

decisions are taken. The fact that there is no guarantee that the programme will

continue from one year to another means that potential applicants cannot plan

ahead (in particular those who cannot consider spending one year abroad

without a grant).

• 54. 

  It is not possible to assess the extent to which the overall objective of the

project has been met because an ex-post survey among the individual

beneficiaries has not yet been carried out. The contracting for the latest call

concerning academic year 2011/12 has encountered serious delays, due

mainly to a temporary shortage of staff in EUPSO (see paragraph 27). The

Commission has not been able to sign any contract before the end of

August 2011, just before the start of the academic year.

• 55. 

  The European Union political and legal order information project

(`InfoPoint') aims to bring the TCc closer to the EU through information

29

launch of the project's website was delayed by 16 months because of such

problems.

Objective 5: Preparation for the acquis communautaire

• 56. 

  The Commission has also funded projects to prepare for the acquis

communautaire . The Court examined one of the largest of these projects for air

quality monitoring. Despite problems encountered (see Box 4 ), which are also

illustrative of challenges faced by other projects, both the technical assistance

and all the equipment were delivered.

Box 4 Implementation problems in the Air Quality Monitoring project

The final report by the technical assistance for the air quality monitoring project

addressed the following implementation problems, which pose a risk to the project's

results and their sustainability:

(a) the start of the project was delayed four months after contract signature while

waiting for the installation of four new air quality monitoring stations under the first of

two supply contracts;

(b) two other EU-funded technical assistance projects were working with the TCc

`Environmental Protection Department' (EPD) at the same time, which meant close

coordination was necessary to avoid having four experts simultaneously trying to work

30

`law'. Nevertheless the overall sustainability is at risk due to the severe budget

constraints faced by the TCc `Environmental Protection Department'.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

• 58. 

  The Commission succeeded in developing a programme where the

objectives of the instrument were reflected in the interventions funded and

largely appropriate implementing arrangements were put in place. The

programme has already achieved some positive results but their sustainability

is often in doubt, particularly given the uncertainty over future EU funding.

• 59. 

  The Commission had to manage the difficult political context and the

challenges posed by the broad formulation of the regulation's objectives, its late

adoption and uncertain timeframe. Despite this, it has been able to develop a

programme which addresses and appropriately prioritises all sectors referred to

in the regulation's objectives. It also found a way in the face of significant

constraints to quickly set up a programme management office in the northern

part of Cyprus and use largely suitable implementation methods and risk

mitigation measures. The main weaknesses in the management of the

31

administrative capacity, the delayed adoption of relevant `laws and regulations'

and the uncertainties over future funding on the part of the TCc authorities.

• 61. 

  At the time of the audit it was still unclear whether or not significant further

funding for the EU assistance programme would be made available. This

uncertainty makes the programme management more difficult and has a

negative impact on its effectiveness and sustainability.

• 62. 

  Despite the efforts of the EU in setting up and implementing the assistance

to the TCc, the ultimate objective of the instrument, the reunification of Cyprus,

only can be achieved if the two communities involved have the political will to

do so.

Recommendations

• 63. 

  The specific recommendations on the Commission's management of EU

assistance to the Turkish Cypriot community necessarily depend on

developments in the reunification negotiations and EU policy in this regard. The

recommendations seek to take into account different possible scenarios.

• 64. 

  In the current situation, where a settlement for the reunification of Cyprus

32

(d) develop formal procedures to ensure better coordination between the EC

Representation in Nicosia and the Task Force in order to make information

from EUPSO and the projects more readily available to the public;

(e) better define future contribution agreements with partner organisations,

notably the UNDP, in order to ensure proper financial and operational

reporting, including more relevant and up-to-date performance indicators;

(f) take into account not only new projects but also the need to help secure

the sustainability of existing projects when deciding on the allocation of any

future funding;

(g) give a particular priority to thoroughly preparing a new project to address

the major issue of the limited water supply;

(h) require the TCc beneficiaries to put in place the necessary legal

framework, human and financial resources, and reforms of public

administration and financial management to support the effective and

sustainable implementation of assistance.

• 65. 

  If it is decided not to support a further large scale EU assistance

programme, an action plan should be prepared to scale down or phase out the

33

Vítor Manuel da SILVA CALDEIRA

President

34

ANNEX I

BREAKDOWN OF ALL INDIVIDUAL PROJECTS/SECTOR PROGRAMMES AS AT 30 SEPTEMBER 2011

Objectives and projects Planned Contracted Paid Paid / contr.

(euro)1 - (euro) (euro) (%)

Objective 1: Developing and restructuring of infrastructure

Sub-objective 1 - Protecting the environment

Project 1.1 - Sector programme for updating the quality and management of water supply and sanitation services

71 400 000 83 852 225 40 619 611 48 %

Project 1.2 - Support to the Turkish Cypriot community as regards management and protection of potential Natura 2000 sites in northern part of Cyprus

5 000 000 5 176 480 3 855 268 74 %

Project 1.3 - Solid waste sector programme for the Turkish Cypriot community

21 200 000 19 367 570 10 750 517 56 %

Project 1.4 - Feasibility study for the rehabilitation of the Lefke mining area

900 000 906 500 906 500 100 %

Sub-objective 2 - Improving management of the energy sector

Project 1.5 - Upgrading the management of the energy sector 5 000 000 6 035 972 5 841 195 97 %

Project 1.6 - Development and restructuring of the energy infrastructure - Part II

8 750 000 5 341 486 5 135 356 96 %

Sub-objective 3 - Improving traffic safety

Project 1.7 - Improving traffic safety 3 000 000 2 724 511 2 266 958 83 %

35

Objectives and projects Planned Contracted Paid Paid / contr.

(euro)1 - (euro) (euro) (%)

Project 1.8 - Development and restructuring of telecommunications infrastructure

14 000 000 11 617 413 7 113 606 61 %

Sub-Total 129 250 000 135 022 157 76 489 010 57 %

Objective 2: Promoting social and economic development

Project 2.1 - Rural Development Sector Programmes I & II 37 350 000 29 837 192 19 941 407 67 %

Project 2.2 - Upgrading of local and urban infrastructure 7 000 000 7 000 000 7 000 000 100 %

Project 2.3 - Upgrading of local and urban infrastructure - Part II 8 000 000 9 784 225 8 850 803 90 %

Project 2.4 - Human Resources Development Sector Programme 9 200 000 8 080 948 6 542 745 81 %

Project 2.5 - Micro and Small Enterprises Loan programme -

cancelled in 2009 (Funds from this project were reallocated to the TAIEX project, ICT/SME, Water/Waste water projects)

9 000 000

2

Project 2.6 - Sustainable economic development sector programme

6 000 000 6 971 860 3 913 291 56 %

Project 2.7 - Supporting private sector development within the Turkish Cypriot community

8 100 000 3 198 200 3 160 000 99 %

Sub-Total 84 650 000 64 872 425 49 408 246 76 %

Objective 3: Fostering reconciliation, confidence building measures and support to civil society

Project 3.1 - Reconciliation, confidence building measures and support to civil society

14 000 000 13 404 835 11 115 091 83 %

Project 3.2 - De-mining assistance programme 6 500 000 6 495 894 6 495 894 100 %

36

Objectives and projects Planned Contracted Paid Paid / contr.

(euro)1 - (euro) (euro) (%)

Project 3.3 - Support to the development of new trends in history teaching for reconciliation and stability in Cyprus - cancelled in 2008 (Funds from this project were reallocated to the civil society projects)

1 000 000

Support for the cultural heritage monuments of great importance for the communities of Cyprus

2 000 000

Sub-Total 23 500 000 19 900 729 17 610 985 88 %

Objective 4: Bringing the Turkish Cypriot community closer to the European Union

Project 4.1 - Community scholarship programme 8 000 000 6 256 875 5 536 216 88 %

Project 4.2 - Promotion of youth exchanges and other people-to- people contacts

3 000 000 1 047 892 904 893 86 %

Project 4.3 - Information on the European Union political and legal order

1 500 000 1 313 100 1 053 100 80 %

Sub-Total 12 500 000 8 617 867 7 494 209 87 %

37

Objective 5: Preparing the Turkish Cypriot community to introduce and implement the acquis communautaire

Project 5.1 - Technical Assistance to support legal transportation as well as implementation of the acquis through the TAIEX instrument - Part II (Component A - Assistance through TAIEX);

(Component B - small scale equipment facility) + Part I

17 150 000 13 699 997 12 911 242 94 %

Project 5.2 - Capacity building in the environment sector 2 460 000 1 140 690 1 117 554 98 %

Unallocated Technical Assistance and Programme Reserve Facility (and wrongly encoded on Decision 2006/018-150)

3 - 1 740 000 850 203 621 579 73 %

Sub-Total 21 350 000 15 690 890 14 650 375 93 %

Total 1 271 250 000 244 104 068 165 152 825 68 %

Overall technical assistance for the implementation of the programme

Sub total a (Studies, expertise, office management logistics) 11 400 000 8 436 605 6 776 955 80 %

Sub total b (Staff and mission costs)

Decision 2006/018-621, Decision 2006/018-316, Decision

2006/018-317

9 650 000 6 865 323 6 858 993 100 %

Total 2 21 050 000 15 301 928 13 635 948 89 %

Overall total 292 300 000 259 405 996 178 788 773 69 %

1 Planned amounts are as indicated in the financing proposals attached to Commission decisions.

2 The project could not go ahead due to difficulties to reaching agreement with Kreditanstalt für Wiederaufbau (KfW) in the special conditions

prevailing in the northern part of Cyprus.

3 This is referred to as `Objective 6' in the financial reports from the Task Force. Funds from the Programme Reserve Facility were transferred

38

ANNEX II

OVERVIEW OF AUDITED CONTRACTS

Contract Contracted

1

type Contract period Contract title amount1 Paid amount

(euro) (euro)

Project 1.1. Sector programme for upgrading the quality and management of water supply and sanitation services -

PMU/SUP Nov. 2009 May 2010 Supply of water sampling, analysis and laboratory information management equipment

580 500 580 500

PMU/WKS Feb. 2009 Nov. 2010 Renewal of water distribution network in the northern part of Nicosia

2 640 000 2 375 624

PMU/WKS Dec. 2009 Feb. 2012 Construction of seawater desalination plant 27 517 814

UNDP/C.A Jan. 2010 July 2013 Construction of new Mila Milia/Haspolat waste water treatment plant

8 192 242 4 657 046

Project 1.8. Development and restructuring of telecommunications infrastructure -

-/SUP Oct. 2009 Oct. 2012 Upgrading of the telecommunications infrastructure network 9 828 453 5 897 072

-/SER Dec. 2008 Dec. 2011 Development and restructuring of telecommunications infrastructure

1 598 750 1 098 750

Project 2.1. Rural development sector programme -

PMU/SER May 2008 July 2011 TA to support rural development policy 2 868 200 2 265 878

-/SER Sept. 2008-Sept. 2012 TA to support implementation of the rural development sector programme

1 994 080 1 595 264

PMU/SUP Dec. 2009 June 2011 Supply of equipment for veterinary laboratories 422 154 422 154

Adata (Rural development grant scheme call 1,

PMU/GRS Nov. 2009 Jan. 2011 No 127937)

39

Contract Contracted

type Contract period Contract title amount1 Paid amount1

(euro) (euro)

Oct. 2009 Oct. 2010 Andaç (Rural development grant scheme call 1, No 127937)

52 435 452 435

Çö

PMU/GRS Dec. 2009 Aug. 2011 atalky Fight Against Insects

144 098 72 049

Dec. 2009 Dec. 2011 Bü yükkonuk Culture House 158 400 126 720

Dec. 2009 Dec. 2011 Serdarl Culture and Art House 85 998 68 798

Projects 2.2-2.3. Upgrading of local and urban infrastructure -

UNDP/C.A Nov. 2006 Sep. 2010 Upgrading of local and urban infrastructure 8 249 869 7 424 869

Dec. 2007 Oct. 2011 Upgrading of local and urban infrastructure Part II 9 784 225 8 850 803

Project 3.1 Reconciliation, confidence building measures and support to civil society -

UNDP/C.A March 2007 May 2009 Support to the CMP 1 469 566 1 469 566

CoE/C.A Aug. 2007 May 2011 Council of Europe Academy Pol. Studies 600 000 351 000

-/SER Feb. 2008 Feb. 2011 TA to support the development of reconciliation measures and to support civil society in the TCC: the CSST

1 499 000 1 349 631

Aug. 2009 Dec. 2010 Post Research Institute: Education for Peace III (CSA call No 126199)

89 310 82 437

-/GRS May 2009 May 2011 KYTD: Celebrating Diversity and Volunteerism across Cyprus (CSA call No 126199)

166 909 133 528

May 2009 May 2011 MRG-KISA: Minority rights: a contribution to the Cyprus problem (CSA call No 126199)

197 313 157 851

Project 3.2 Demining -

UNDP/C.A Jan. 2007 Feb. 2009 Landmine and Ordnance Clearance in Cyprus IV 3 995 894 3 995 894

Jan. 2010 Dec. 2011 Landmine and Ordnance Clearance in Cyprus V 2 500 000 2 500 000

Project 4.1 Community scholarship programme -

Call for Interests - Community scholarships programme 2007/08 (Call 1)

40

Contract Contracted

1

type Contract period Contract title amount1 Paid amount

(euro) (euro)

Oct. 2007 April 2008 Call for interests - European Community scholarships programme 2008/09 (Call 2)

1 564 919 1 537 988

Nov. 2008 Feb. 2009 European Union Scholarships III Programme For the Academic Year 2009/10 Local Grant Scheme (Call 3)

2 346 580 2 271 597

Dec. 2009-Feb. 2010 Scholarships for the Turkish Cypriot community Programme for the Academic Year 2010/11 (Call 4)

1 313 440 1 051 796

Feb. 2011-April 2011 Scholarships for the Turkish Cypriot community Programme for the Academic Year 2011/12 (Call 5)

- -

Project 4.3 Information on the European Union political and legal order -

-/SER Feb. 2009 Feb. 2012 Setting up of an open access information point on the European Union

1 300 000 1 040 000

Project 5.2 Capacity building in the environment sector -

-/SUP June 2009 Feb. 2011 Supply of Air Quality Monitoring (AQM) Equipment 645 450 645 450

-/SER June 2009 Sept. 2010 TA for AQM activities in the northern part of Cyprus 197 983 183 121

GTZ contracts for support to EUPSO -

-/SER July 2006-June 2008 TA in running a PSO in the northern part of Cyprus (GTZ.A) 3 476 000 2 836 524

-/SER June 2008 June 2012 Setting up of a PSO in the northern part of Cyprus (GTZ.B) 1 496 795 1 496 795

Total - - 97 387 729 57 474 492

1 As of 30 September 2011, excepted

for grant contracts: 31 March 2011. WKS= Works contract PMU= Project Management Unit -

SUP= Supplies contract UNDP=United Nations' Development Programme -

SER= Service contract CoE=Council of Europe -

C.A.= Contribution agreement GRS= Grant scheme

REPLIES OF THE COMMISSION TO THE SPECIAL REPORT OF THE EUROPEAN

COURT OF AUDITORS

EUROPEAN UNION ASSISTANCE TO THE TURKISH CYPRIOT COMMUNITY

EXECUTIVE SUMMARY

III. The Commission admits that not operating under more devolved procedures is a constraint, but has made considerable efforts to work with the options available to provide the most appropriate alternative institutional set-up.

IV. The loss of the sea water desalination plant project was an unfortunate setback. After extensive efforts to rescue and proceed with the project, the Commission had to act to protect its financial interests and terminated the construction contract. No payments have been made under this contract. The Commission agrees with the Court's conclusion on the risks to sustainability and the reasons for it and will continue to help the Turkish Cypriot community to develop administrative and technical capacity.

V. First indent - The Commission largely agrees with the Court's recommendations. The Commission attempted to find the best practical solution considering that the establishment of a Delegation within EU territory is not possible. Since the audit, further efficiency improvements have been achieved. When considering further devolution of management, however, the Commission must balance the possible efficiency gains against the risks of reducing the supervision from headquarters, given the particular circumstances of the assistance to the TCc.

V. Second indent - The Commission is committed to providing continued assistance to the Turkish Cypriot community and to working towards reunification of the island of Cyprus. A phasing-out of the operations is not currently planned and these will continue on an appropriate scale.

V. Third indent - Reunification is the central aim of the assistance programme. The Commission recognises that reunification would require a -review of the assistance to Cyprus. The Commission would make timely preparations for this scenario.

Besides this, another substantial amount was committed for the (bi-communal) Nicosia waste water treatment plant, which was included with reconciliation as a prime motivation.

In addition to the above, the entire allocation for 2010, which was 3 million, was devoted, through the Committee on Missing Persons, to the 'reconciliation and confidence-building' objective.

• 17. 

  The Court's comments on the difficulties of providing effective technical assistance highlight one aspect of the challenging environment for the assistance programme.
• 21. 

  The Commission agrees that a multi-annual perspective would facilitate the planning and implementation of assistance to the TCc, but this must be seen in the broader political context. The Commission strongly supports efforts towards a settlement of the Cyprus issue and reunification. Meanwhile, the Commission proposes to continue supporting the Turkish Cypriot community on the basis of the current Aid Regulation.
• 22. 

  The Commission had to consider very carefully how to establish the most efficient management structure from the options available at the same time as it was developing the technical elements of the programme to be delivered.

23-25. Joint reply:

The Commission admits that not operating under more devolved procedures is a constraint, as the establishment of a Delegation in an EU Member State is not possible. The Commission has worked with the options available to provide the most appropriate alternative institutional set-up.

The Commission has taken measures to facilitate operations and financial circuits including derogations of normal procedures and regular missions from the Authorising Officer by sub- Delegation (AOSD) to Nicosia. A new IT structure was put in place at the end of 2011 to allow common file access between Nicosia and Brussels and the 2012 reorganisation of DG ELARG has streamlined the internal processes; the number of units involved in contracts and payments has been reduced from four to two.

The Commission has also to take into account the risks arising from operations in such a sensitive political environment.

• 28. 

  The Commission will start an overall programme evaluation in 2012. The advantages of implementing some parts of the programme through the UNDP will be considered in this review.
• 29. 

  Weaknesses in the first Committee on Missing Persons Contribution Agreement (joint management with UNDP) found by the Court have been addressed in later Agreements e.g. better definition of indicators related to EU funding, better definitions of numbers exhumed and identified, better general output-input relation and improved reporting.
• 30. 

  Decisions on the management arrangements, including setting up the EUPSO office and the degree of "devolution", formed part of the risk analysis undertaken by the Commission.
• 33. 

  No funds have been disbursed yet under the construction contract and the contract was terminated in December 2011, after considerable efforts to rescue the project, when there was no prospect of progress. The Commission's financial interests have been protected.

The risk management included designing a two-phase project starting with a pilot plant, but the developments that led to termination could not reasonably have been anticipated at the start of the project.

Box 2 Management of Implementation Risks:

(a) The Commission evaluated the risk in the context of the selection of the company for the construction of the seawater desalination project. The outcome of this international open tender was fully based on established rules.

(b) The guarantee was not provided by the contractor. In the early stages this was primarily due to issues arising from the complex local context, which the Commission tried to solve. Even if the contract had been terminated in January 2010, it would not have been possible to recommit the money, since the contracting deadline had passed.

(c) The assistance to the Turkish Cypriot community was a new programme for the Commission. During the 3-year contracting window between 2006 and 2009 allowed by the regulations, the programme management and logistics, as well as the projects themselves, had to be developed. Given the need for thorough project preparation, the Commission considers that it would not have been possible to contract the works for the desalination plant at an earlier date.

make a real impact. In some areas it was necessary to try to deliver real benefits and encourage sector reforms in parallel.

• 37. 

  This is the first experience by the TCc of major EU assistance. The complexity of the alignment

to the acquis and the size of the reforms necessary in this context were underestimated by the beneficiary. The aid programme for the TCc is still relatively new and the major contracting took place only in 2009. The Commission services had no previous experience of working with the TC beneficiary.

• 38. 

  The seawater desalination plant design change arose from stakeholder and expert consultations, and was related to concerns that the requirements of the Water Framework Directive would not otherwise be met.
• 39. 

  The problems affecting the implementation of the construction contract for the desalination plant illustrate the difficult operational environment.
• 40. 

  The failure of the desalination plant project is a disappointment. The environmental effects of the salination of the Morphou aquifer will be taken into account, however. The water sector situation is changing with significant new elements arising. Water and waste water investments remain in the draft assistance programme which is being drawn up for the coming years.

41.(a) Reliable baselines and indicators were not available for water distribution, which is one of the reasons why investments in the water laboratory were made, but the evidence is that there are considerable improvements in service and leak rates for Nicosia water, the latter being previously up

to 50% in some areas.

41.(b) UNDP is implementing the Mia Milia/Haspolat project under joint management. The UNDP Deputy Director for Europe is aware of the need for the "joint entity" for the WWTP and, along with the Commission, is engaged in resolving this.

• 42. 

  In addition to the training that was provided by the suppliers of the laboratory equipment, the Capacity Building project provided training in sampling and analysis to meet the requirement of the Water Framework Directive, Drinking Water Directive and Bathing Water Directive.

addressed by the access to the Community Development grants, outside the UNDP Contribution Agreement.

• 48. 

  The missing persons issue is sensitive and the work of the Committee on Missing Persons (CMP) work is much appreciated by both communities and strongly supported by the European Parliament.

A significant proportion of the total number of "missing" has not been found or identified yet. The Commission has not yet planned an exit strategy, but is aware that, eventually, programme activities will decrease. It is important that the two communities take the initiative in this process.

• 49. 

  Continuation of the European Forum Cyprus by building upon the alumni network is foreseen.

Members of the European Forum Cyprus (EFC) alumni network participated in the European Forum for Democracy in Limassol in October 2011.

• 50. 

  The Commission will consider the need for further capacity building in future programmes to the extent that funds are available.
• 53. 

  The Commission agrees that a multi-annual perspective would facilitate the planning and implementation of assistance to the TCc, but this must be seen in the broader political context.
• 54. 

  The ex-post survey on the scholarships referred to by the Court will be launched in 2012.
• 55. 

  The Commission agrees that collaboration between DGs ELARG and COMM could be strengthened and is making supplementary efforts in this respect.

Box 4 Implementation problems in the Air Quality Monitoring project

(b) Environment is very important from the point of view of the acquis communautaire. The programme therefore calls for significant support in this area.

CONCLUSIONS AND RECOMMENDATIONS

• 59. 

  The Commission admits that there are constraints associated with running the EUPSO programme office without fully devolved management, but, since a Delegation could not be

established, the most appropriate alternative institutional set-up was provided for. Measures have been taken to facilitate operations (see the response to point 23), including some streamlining since the audit was carried out.

64.(a) The Commission agrees that a multi-annual perspective would facilitate the planning and implementation of assistance to the TCc, but this must be seen in the broader political context. The Commission strongly supports efforts towards a settlement of the Cyprus issue. Until this is achieved, the Commission intends to continue supporting the Turkish Cypriot community on the basis of the current Aid Regulation.

64.(b) The Commission agrees with this recommendation. The overall length of future contracts will depend on the outcome of the Commission's proposed change to the Staff Regulations.

64.(c) Since the audit, efficiency improvements have been made in Commission headquarters, (see for example point 23 above), which help to streamline finance and contract procedures. The Commission will consider the issue of devolution, taking into account both its potential advantages and risks in the particular circumstances of assistance to the TCc.

64.(d) The Commission accepts the recommendation on coordination with the Commission Representation (ECR) in Nicosia. There are already formal procedures for inter-DG cooperation at headquarters and the Commission is making further efforts to improve cooperation between the ECR in Nicosia and the Task Force on the ground.

The current staff reinforcement of the ECR also due to the incoming Cyprus Council Presidency will help to strengthen cooperation with the other services and this will also bring the benefit of achieving better coherence and consistency.

64.(e) The recommendation on improvements to Contribution Agreements is accepted by the Commission and these improvements have already been made including better definition of indicators related to EU funding, better definitions of numbers exhumed and identified, better general output-input relation and improved reporting.

64.(f) The recommendation on ensuring sustainability will be taken into account in completing existing projects and the programming of new interventions will reflect the steps taken by the TC beneficiary in creating an appropriate environment in terms of organisation, operation, maintenance etc.