Adapting to EU Transfers: the Case of Lithuania

The message of the Lithuanian experience from adapting the domestic economy and the public administration to EU requirements for the usage of transfers is very illustrative. It deals with the general efficiency of public procurement, selection of competing projects, their co-financing, evaluation of individual stages of implementation, adjustment of domestic institutions, changes in the hierarchies of organization, conflict resolution and many other problems of modern public administration. In 2001 Lithuania competes for EU funding for its projects in the programs of PHARE (institutional convergence), SEC (social and economic cohesion), SAPARD (agriculture and rural development) and ISPA (environment and transport).

Expected EU funding (including CAP, structural and cohesion funds) at the time of EU

15 This section summarizes the presentation by Vitalis Nakrosis based on a paper by Vitalis Nakrosis and Ramunas Vilpisauskas.

enlargement is estimated to reach up to 4% of the Lithuanian GDP (or approximately 1000 million EUR in absolute terms). The problem is that the effective commitments of the EU depend on the accession country’s ability to compete for funds by developing the capacities for their successful absorption. This requires a long way of learning, adjustments and changes in the management of public investments and policies.

At the beginning Lithuania was particularly unsuccessful in attracting financial support from the EU. For example, it contracted only 19% of the PHARE commitments for 1998 while on average the accession countries succeeded to receive over 40%. The problems appeared on all sides of the management of support schemes: bureaucracy, clash of interest between the domestic side and the EU side, negative distributional effects related to domestic decision making (e.g. rent seeking, politicized project selection, corruption), market distortions, displacement of domestic private investments by public investments, lack of monitoring and periodic evaluation, limits of competition, rigidity of factor movements and false expectations. The reforms of institutions and policy procedures were superficial and the old communist administrative reality was hiding behind the “modernized” institutional façade.

Thus the Lithuanian government stood in the late 1990s before a crucial decision: either resign from a revamping of its support policies and get in the first year of EU membership only 30% of the expected structural and cohesion funding, or initiate the deep changes that are targeted at gaining the full potential funding. What also mattered for the acceptance of the latter strategy was large expected positive externalities that the compliance with the EU requirements had on the functioning of the public expenditure and investment policies. On the other hand, large inflows of the EU support funds would require greater demands on domestic co-financing (both public and private) that may divert domestic expenditures from being channeled to their traditional beneficiaries and cause conflicts of interest. In the meantime, after 1997 the European Commission also changed its policies to accession countries: from the soft “demand-driven” provision to a more austere “accession-“demand-driven” support, where efficiency and public returns, judged to a large extent from the EU’s viewpoint, became the decisive criteria.

The process of adaptation to the EU’s pre-accession financial policies should commence with a systems analysis and an audit of the mismatch between characteristics of national public investment procedures and the EU’s objectives and requirements. The analysis should unveil areas of major tensions (“mismatches”). In Lithuania the list was divided into major areas of potential conflicts:

• Vaguely defined and non-transparent domestic development policies whose implementation could not be supported from the EU funds. Here one could find e.g. intervention schemes that were in conflict with the market operation, subsidies that had their history in the communist planning, and vested interests of private businesses embedded in the public spending. Many of these policies were targeted on welfare objectives while EU funds are aimed at investments that should reduce development disparities.

• Existing public finance programs that could be (partially) supported from the EU funds, but whose existing implementation was not compatible with the EU’s procedures. Such programs were found e.g. in the development of SMEs,

exports, quality management, business innovation, information technologies, tourism, R&D, etc.

• Methodological differences in the management of funds, such as representing the techniques of multi-annual programming, budgetary control, private and public co-financing, personal accountability, etc.

The intensities of the level of mismatch and the pressures for adaptation were assessed against six criteria. At the same time each item was assigned to a particular EU support scheme. The criteria were as follows:

(1) Programming requirements of development plans.

(2) Implementation structures (such as paying and managing authorities) and their procedures.

(3) Co-financing requirements and their sources.

(4) Institutional requirements and co-ordination (including both central and the regional co-ordination).

(5) The division of responsibility for public interventions and monitoring of projects funded by the EU.

(6) Experience in public investment management and the requirements for their upgrading.

Though the implementation of the above rather technical agenda is important, it is not a sufficient condition for the efficient management of EU funds measured by both benefits for the domestic development and fulfilling the EU policy aims. One must also comply with the “art” of the EU fund raising, the guiding principles of which can be best explained on the Irish experience:

• The applicant country must address its real needs and build on the real potential for improvement.

• The development strategy should be open to co-ordination at the communitarian, national and regional levels that also implies periodical monitoring and effective control. There should be effective partnership between governments (central and regional), trade unions and businesses.

• The management of national and EU funds and the policies that they require is centralized.

• The largest part (36% in the Irish case) of EU investments should be channeled into human capital development, followed by productive environment improvements (27%) and infrastructure (25%). Investments into the so called

“sunrise industries” (e.g. the information technologies) should expand significantly at the expense of subsidies into agriculture. (A comment should be added that this policy did not weaken the rural sector.)

• Negative distributional effects of EU and government funding and their market distortions must be strictly controlled. Public financing and interventions are legitimate only if they provide public goods whose benefits are widely distributed and transparent. The positive externalities should be accountable and assessed in the long run. Public finance should not interfere with the functioning

of the markets. The policies of the government should be aimed at reducing entry barriers, imperfect information flows and uncertainty. Compliance with EU public investments must go along with creating entrepreneurial environment that motivates economic agents to productive activities that are competitive on international markets. The public administration therefore must not abuse its role as a co-coordinator and an institution guaranteeing the rules, and should refrain from expanding its power into areas that belong to private initiatives.

Discussion of Previous Two Presentations

A discussant pointed out that the problems experienced by Lithuania were in many aspects similar in other countries. It seems very difficult to estimate the future inflows of EU funds after accession, such as the estimated 1 billion euros of gross EU transfers to Lithuania (e.g. for 2006). First, we do not know what rules will be applied;

second, we cannot assess the relative competitiveness of bargaining of individual countries for the funds.

Another discussant emphasized the uncertainties concerning agriculture related transfers. For Hungary and Poland (the most agriculture intensive countries of the first group of candidates) the Berlin Summit estimates for future funding do not include compensation payments, and a discussion about the future role of compensation was postponed. In the present EU member countries these transfers are huge. Until this particular issue is solved we cannot have any serious expectations about the future total transfers from the EU. The estimation of EU subsidies to Lithuania looks justified, even if the funds received could go above the 4% of the GDP.

A workshop participant commented on the support of the “sunrise industries”.

Such a selection of supported areas by the government implies judgments, or a “long-term vision” of the government. However, let us ask: are such approaches compatible with successful economic policies, once comparative advantages depend on much more complicated determining factors?

A Swedish participant expressed his view that in the Scandinavian countries 15 years ago hardly anyone could be certain about telecommunications becoming their leading industry. The risks were, however, taken and the combined vision of the private and the public agents really changed the economic structure of countries like Sweden and Finland. No country can lose on supporting the human capital development, though its particular local implementation cannot be commanded exclusively by the government.

A discussant agreed that the problem of EU institutions dominating the process of funding provisions was extremely important. The atrophy of a partnership to a one-way communication can be detrimental to both sides as the experience from the PHARE programme shows. Therefore it may not be just the lack of internal commitment in accession countries that makes the institutions and programs inefficient. The arbitrary and fluctuating priorities of the EU, whose representatives act in a role of principals, also point out that there may be present other systemic problems to be solved than just the domestic problems.

Vitalis Nakrosis replied that he did not associate himself with the pessimistic view presented by some of the commentators. His experience shows that the dominant bargaining position of EU directorates (DG) has been generally a result of the inability of association countries to become qualified opponents. The EU procedures are open for local maneuvering and they offer the candidate countries a potential for local initiative, provided these countries are ready for it. The Lithuanian government first decentralized the EU support schemes to the level of target regions. Only later it was discovered that this move deteriorated the quality of projects and a central surveillance authority is needed in order to keep the process of negotiation with centralized EU authorities in balance.

3. The Sequence of EU Programs: Planning, Monitoring and