Report No. 54903-BG Bulgaria Public Expenditure Review for Agriculture and Rural Development June 4, 2010 Poverty Reduction and Economic Management Department & Sustainable Development Sector Unit Europe and Central Asia Region Document of the World Bank Table of Contents Acknowledgements ......................................................................................................................... 3 Executive Summary ......................................................................................................................... 4 1 Priorities in Bulgarian Agriculture and Rural Development .................................................. 14 1.1 Overview of sector development challenges ................................................................ 15 1.2 Overview on trends in budget allocation/execution ..................................................... 18 2. Expenditure Programs for Agriculture and Rural Development: Status and Reform Priorities ............................................................................................................................................... 22 2.1 Direct Income Support under CAP Pillar 1..................................................................... 22 2.2 Rural Development Support under CAP Pillar 2 ............................................................ 33 2.3 State Aid and National Programs .................................................................................. 44 3. Institutional Aspects of Public Expenditure Management in Agriculture and Rural Development ................................................................................................................................. 55 3.1 Institutional Responsibilities in the Sector .................................................................... 55 3.2 CAP Administration Costs .............................................................................................. 58 3.3 Efficiency of CAP Implementation for Beneficiaries ...................................................... 59 3.4 Budget Planning at MAF ................................................................................................ 61 3.5 MOF Oversight of the Agriculture Sector ...................................................................... 64 3.6 Proposals for Improving Performance Based Budgeting .............................................. 66 2 Acknowledgements This report was prepared based on a World Bank mission to Bulgaria during February 16- 27, 2009. The team was lead by Bernard Myers (Senior Public Sector Management Specialist) and Holger Kray (Lead Operations Officer, Agriculture and Rural Development). Other World Bank team members included Pierre Olivier Colleye, Stella Ilieva, Anna Georgieva, Nadia Badea, Adrian Baila, and Svetlana Edmeades. Peer reviewers for the report included Irina Ramniceanu (EU Rural Development Network), Benoit Blarel (World Bank), Phil Joyce (George Washington University), and Karin Hochhaus (EU Funds Advisor to Bulgaria). Comments were also provided by Sector Managers, Bernard Funck and Dina Umali-Deininger. The Bank would like to acknowledge the excellent collaboration of the Ministry of Finance, the Ministry of Agriculture and Food, and the State Fund Agriculture. Important guidance was provided to the mission by Ljubomir Datzov, Deputy Minister of Finance, Alizan Jahova, Executive Director of the State Fund Agriculture, and Svetoslav Simeonov of the Ministry of Agriculture and Food. Many other staff provided contributed by sharing their insights with the mission. 3 Executive Summary Although Bulgaria now implements the EU's "common" agricultural policy (CAP), national policymakers still maintain responsibility to tailor CAP implementation to meet the specific development needs of the country. The National Rural Development Program (NRDP) very appropriately lays out the challenges that Bulgarian agriculture and rural development face, but the early implementation of a relatively high number of support schemes falls short of adequate administrative capacities and planning. With CAP resources projected to increase substantially over the coming years under Pillar 2, Bulgarian authorities must take appropriate corrective measures now so that the opportunity to impact long-term sector growth is not missed. Important decisions need to be made regarding existing State Aid programs (which are to be terminated under EU rules) and the Complementary National Direct Payments (CNDPs) for which EU financing will phase out. Going forward, investment-type activities should be prioritized over simple income support. The Ministry of Agriculture and Food (MAF) could also play a more strategic role by articulating measurable goals for the sector and by critically evaluating the effectiveness and efficiency of the National Programs financed currently through their budget. With expectations of higher EU counter-part funding required in the future, careful prioritization of resources within the current domestic resource envelope will be ever more important. Sector Challenges The major challenge facing Bulgaria's rural sector is the significant fragmentation of land ownership and the highly polarized farming structure. As of 2003, there were 665,500 agricultural holdings operating in Bulgaria. About 75 percent of agricultural holdings account for less than 7 percent of the utilized agricultural area (UAA). They cultivate plots of no more than one hectare. In contrast, about 78 percent of UAA is farmed by 0.8% of holdings. The fragmentation of land ownership is a significant barrier to long- term investments in agriculture, land improvements, and efficient use of agricultural machinery. Other challenges facing the sector include: · An aging labor force (54.6 percent aged 55 and over) · Relatively few young farm-holders (less than half the EU average) · Low educational attainment of those employed in agriculture · Low labor productivity due to worn-out assets and outdated technologies · Poor access to credit for small and medium-sized producers Adoption of appropriate policies could help facilitate the transition toward more consolidated landholdings, and equipping of a younger, more educated generation of famers, as the older generation retires. Spending Trends Bulgaria no longer operates an autonomous agricultural and rural development policy, 4 but nationally implements and manages the European Union's Common Agricultural Policy (CAP). The CAP supports agricultural and rural development through measures grouped into two so-called "Pillars", i.e. two principal areas of intervention. Pillar 1 provides agricultural market and income support, with direct (area) payments representing the prevalent form of income support to the EU farmers. Pillar 2 addresses both the agricultural sector and the wider rural population through a comprehensive set of rural development programs. In this context, Bulgaria finances its agricultural and rural development policy out of three main funding sources: · European Agricultural Guarantee Fund (EAGF), an EU fund for direct income and market support measures that disburses outside of the national budget (though through Treasury channels). · European Agricultural Fund for Rural Development (EAFRD), an EU structural fund that is mobilized through the national budget. · Domestic resources from the budget of the Ministry of Agriculture (MAF), State Fund Agriculture (SFA) as the designated Paying and Intervention Agency, and the Forestry Agency (state agency under the Council of Ministers). Overall, expenditure on agriculture (from EU and domestic sources) has more than doubled between 2003 and 2008. In GDP terms, expenditure on agriculture increased from 1.1 percent of GDP in 2003 to 1.2 percent in 2008 (with real GDP growing rapidly), and it is planned to reach 1.8 percent in 2009 based on expectations about increased absorption of EU funds. Within the agriculture expenditure envelope, transfer payments have grown substantially, mainly as a function of CAP-related support programs financed under Pillars 1 and 2. The total resources that benefit the sector may be even higher than reported by MOF on a purely "functional classification" because some related services on education, research, and defense activities are administered by the MAF but not classified strictly under Government Financial Statistics (GFS) as "agriculture". These "non-core" activities account for an additional 0.3 percent of GDP, and tax breaks for agricultural producers are likely to exceed 0.3 percent of GDP. With public spending of over 1 percent of GDP, Bulgaria's spending on agriculture is higher than most of the other EU countries, including most of the new member states. However, because of the large numbers of persons employed in the sector it is relatively low on a per farmer basis. The economic benefits of this higher spending have not yet materialized in large part because of the early emphasis of the CAP on direct payments. Gross value added (GVA) generated in the agriculture sector and productivity per employed declined on average by 7.1 and 6.3 percent per year respectively between 2003 and 2008, while the overall economy and aggregate productivity grew at 6 and 3.5 percent. As spending from Pillar 2 ­ especially those measures targeted at competitiveness ­ is scheduled to ramp up starting from 2009, the impact on sector productivity may only start to manifest itself sometime later. 5 Increased absorption of EU Funds will require additional counter-part funding, and consequently will put some pressure on the national budget. Accommodating this responsibility in the tight global economic environment could best be achieved through intra-sectoral restructuring away from less economically viable programs, including some State Aid schemes. Implementation of EU-Funded Direct Payments (SAPS) ­ Pillar 1 In 2009 Bulgaria will receive up to EUR 289.8 million for the EU's Single Area Payment's Scheme (SAPS) under Pillar 1, and will rank among NMS with the highest Euro per hectare received (EUR 82.98) because of its high proportion of CAP-supported products and historically high yields. In contrast, Bulgaria will rank third to last among NMS in its per full-time equivalent support payments. This is due to the relatively high numbers of persons earning an income in agriculture and by how the authorities determined the eligible area. This support is highly concentrated. The EU permits national policymakers to choose the minimum farm size that farms need to qualify for income support (within a specified range), and Bulgarian authorities chose the highest threshold (1 hectare). In effect, about three-quarters of Bulgaria's agricultural population do not qualify for SAPS payments. This means by implication that a very large share of the EU's support payments go to a relatively small group of farmers. While Bulgaria "loses" something in terms of coverage of SAPS payments, it gains by creating strong incentives for the consolidation of small, uneconomical plots and it lowers overall program administrative costs. Administrative costs would be considerably higher if authorities had to provide direct payments to the numerous small-scale farmers as well. The high eligibility threshold could also contribute toward a less fragmented farm and land use structure in Bulgaria. Yet, to be effective these incentives need to be accompanied by other measures under Pillar 2 related programs that will facilitate appropriate consolidation. Until mid-2009, Bulgaria had forgone about EUR 10 million annually because it registered too large a reference area for Single Area Payment's Scheme (SAPS) payments. In many NMS the determination of the reference area has proven to be as much a political decision as an administrative one. While the determination of a larger area avoids the public perception that portions of the agricultural population will be excluded from support, in practice, some 15 percent of Bulgarian agricultural land fails to meet the EU's eligibility criteria for income support and therefore should be excluded. In 2008, out of the 3.8 million ha of registered agricultural land, support could only be granted to users of about 3.2 million ha, and payments for about 0.6 million ha remained "unabsorbed." However, first corrective action has been taken: Effective June 2009, Bulgaria's revision of the reference area to 3.492 million ha has been approved by the European Commission. 6 Implementation of Nationally-Funded Direct Payments (CNDPs) Bulgaria employs national budget resources to "top-up" EU direct income support via Complementary National Direct Payments (CNDPs). These CNDPs are granted in addition to EU-financed SAPS and are currently funded from both the national budget and through reallocation of EU funds for Pillar 2. Topping up represents a transitional option and is subject to an EU-agreed phasing out schedule. In Bulgaria CNDPs were initially oriented toward agricultural producers on a flat area basis ­ like the SAPS ­ and therefore were very easily administered. As of 2008 two additional CNDPs were implemented for producers of milk and sheep ­ groups that were excluded under the SAPS. Several emerging trends in the sector will place pressure on the Bulgarian authorities to take some immediate policy decisions to avoid risk of a large budgetary impact in the near future. The transitional EU support for CNDPs will be eliminated starting in 2010, resulting in a potential impact of EUR 40-50 million on the domestic budget if maintained as is. Another EUR 160 million in State budget would be required should MAF decide to take advantage of the possibility, only recently granted by the EC, of increasing CNDP from 30% to 50% of the EU15 average (from its own domestic resources). As existing State Aid schemes also terminate at the end of 2009, former beneficiaries may lobby for compensation via CNDPs. Given prevailing fiscal constraints MAF should resist such potential lobbying pressures. In total, the inclusion of new CNDPs for each of these areas could potentially add an additional EUR 200 million annual burden on the domestic budget. Improved targeting of CNDPs ­ rather than increased support rates ­ would be the most effective policy instrument to meet the sector's needs. In short, there is little justification to increase support beyond the existing CNDP support ceiling. The government should be able to address relative incomes disparities and support asymmetries (e.g., between crop and livestock production) by better targeting support on a sub-sectoral level. This would be based on thorough analysis of the income situation among target beneficiaries and the underlying sector objectives. In this context, converting the existing tobacco subsidies into (commodity specific) CNDPs should be resisted, as such payments have created powerful disincentives for modernization and diversification out of tobacco. While transitory arrangements may be used to cushion the shift in the regulatory framework, tobacco growers would be better served through Pillar 2 measures that facilitate producer transition/adjustment or through programs beyond the CAP (e.g. Structural Funds). As the preservation of existing CNDP support levels would require about EUR 210 million in 2010, the authorities might consider a gradual phasing out of CNDPs starting in that year. Such phasing out could still be designed in a way that ensures increasing overall support to farmers. The phasing out of CNDPs could be offset by the scheduled phasing in of EU financed payments under SAPS. It is possible to induce a 6% increase in direct income support payments per year, while also freeing up EUR 30 million annually. 7 Implementation of Rural Development Support ­ Pillar 2 In addition to the support available under CAP-Pillar 1, Bulgaria's National Rural Development Program qualifies for EUR 2.6 billion in potential financial assistance from the EU under Pillar 2 for the 2007-13 programming period. When combined with counterpart funding of EUR 632 million from Bulgarian budget resources, and another EUR 1 billion in contributions from intended beneficiaries, the CAP Pillar 2 is expected to generate rural investment projects in excess of EUR 4.3 billion. On top of the EUR 2.6 billion, Bulgaria received EUR 33.15 million through the European Economic Recovery Plan (EERP) covering years 2009 and 2010. The European Council adopted the EERP in December 2008, in response to the economic crisis that hit the EU countries. Of the plan's total envelope of EUR 200 billion, the EU earmarked EUR 1.02 billion to rural development, which were broken down between all Member States. These monies can be used to develop broadband internet in rural areas and/or to pursue a set of (mainly environmental) priorities that have resulted from the CAP Health Check (e.g. climate change adaptation and mitigation, water management, renewable energies, biodiversity). Bulgaria considers to use this additional budget to support water management (56% of the funds), renewable energy (35%) and restructuring of the dairy sector (9%). Unlike Pillar 1 direct payments, the EU relies primarily on a decentralized approach for implementation, leaving Bulgarian authorities with responsibility for tailoring the program to national needs. The menu of options that the EU offers member states are divided among four "axes" and a number of separate "measures" that can be supported under each. Bulgaria's prioritization among the axes follows patterns commonly observed among new member states ­ counties with relatively low labor productivity tend to emphasize the "competitiveness" oriented measures of Axis 1. Failure to match the relatively ambitious National Rural Development Program (NRDP) with sufficient capacities has lead to initial implementation bottlenecks. While Bulgaria is relying on a coherently designed RDP, the implementation timetable was not adequately articulated with the staff resources of the State Fund for Agriculture (SFA). Attempting to address a wide range of previously identified rural needs, the NRDP of Bulgaria has ambitiously selected 30 measures out of the about 40 available under the EU rural development menu. From April 2008 to end-2009, 23 measures were launched, while the rest up to 30 is scheduled for later start. Bulgaria's desire for an early launch of such a high number of NRDP measures has seriously strained the administrative capacity of the State Fund for Agriculture (SFA). As a result, the first 2 years of NRDP implementation saw substantial backlogs in processing applications for support, thus compromising the SFA ability to comply with the legally mandated response deadline to applicants of three months. The risks are twofold - loss of trust among potential applicants, and deterioration in the quality of application appraisals and approvals. The latter case may have a financial impact if the EC were to determine that Bulgaria does not comply with funding guidelines. MAF has 8 recently initiated corrective measures to address these bottlenecks. Applications are now accepted under a "window" approach, whereas the staff of the SFA has been supplemented. However, further improvements in the management of applications might be needed (such as better planning of windows etc), and functional review of the SFA might provide appropriate analytics to underpin future improvement initiatives. Looking ahead, it is important for the Bulgarian authorities to start the NRDP 2013-20 preparations no later than 2010 given the time consuming nature of the process. Early finalization of the new NRDP (by 2012) would also allow for adequate transparency and investment planning among potential beneficiaries and for adequate capacity adjustments in the agricultural administration. Preparation of the new NRDP should also reflect the outcomes of the 2008 "Health Check of the Common Agricultural Policy." In this context, experience from other NMS shows that well-prioritized and selective rural development programs are more effective in leveraging, mobilizing and eventually absorbing the available support funds. Slovakia serves as example for an especially well prioritized and administered NRDP, with 65 percent of the total public expenditure concentrated in four measures. Over the medium term, the prioritization of Pillar 2 interventions will be critical to the restructuring of the sector. Bulgaria needs to maintain an important focus on investment- type measures and risk mitigation programs in order to create incentives for competitiveness enhancement and economic diversification. Given that fragmentation of land ownership and operatorship still represents a major impediment to sector productivity, it is critical that MAF initiate the development of a National Land Consolidation Strategy to define its preferred future approach and related processes. Such Strategy is also critical to supporting an effective implementation of the land consolidation support provided under the NRDP, and scheduled to start being implemented in the second half of 2010. Appropriate measures are also needed to help beneficiaries with access to rural/agricultural credit ­ without which implementation of NRDP will be stalled. State Aid Programs Unlike programs under Pillars 1 and 2 of the CAP, State Aid programs are financed by Bulgarian resources but permitted by the EU only on a transitional basis within tightly prescribed limits. Bulgaria's existing state aid measures are highly fragmented and do not appear to build on a coherent objectives and results framework. The existing State aid budget is clustered into a complex set of 9 categories, which are then further subdivided into 100 measures. Moreover, the true budget extent of spending on existing State Aid is unknown because of the fragmented policy development and budgeting system in place. Data is only available for 45 measures under just two categories, therefore, any estimates of total spending are necessarily low. State Aid programs are spread throughout various government agencies, who each submit their requests and forecasts through the normal budgetary process. 9 Since existing State Aid must be phased out by end-2009, Bulgarian authorities need to make a policy decision on how to replace them. The process will be more difficult due to the lack of data available at MAF to monitor total spending on State Aid. The primary options open to the government are to: (1) eliminate existing state aid starting January 2010 and hence considerably reduce agricultural spending, or (2) transfer part/all the budget from these measures to new measures that are compliant with EC regulations. The existing State Aid monies could be best used by redirecting them toward support of public goods. Many of the current state aid measures apply to goods that could be considered private in nature, hence distorting competitiveness and silencing market incentives (e.g., use of irrigation water, credit subsidies, etc.). Those public in nature (e.g., maintaining genetic resources under the Livestock Breeding Program) could qualify for continued government support. The MAF is committed to aligning these new decisions with a set of effective and pragmatic principles, which match longer term competitiveness-enhancing objectives with fiscal rationality: - The State Aid schemes will respond to objective needs and will be granted within the resources available; - The support will be mainly directed to (1) areas of public interest, which may also facilitate compliance with EU standards and requirements (e.g. preservation of animal genetic pool, research and innovation), and (2) investment activities not covered under the NRDP but in support of EU integration and competitiveness targets. National Programs In addition to what is covered by EU policies and programs, the Ministry of Agriculture's annual budget directly finances "national programs" which must be consistent with CAP though not financed by it. For the purposes of communicating with the MOF and the Parliament about its budget requests, the MAF categorizes its activities under 17 separate programs, plus an additional one for general overheads (administration). The biggest of these programs are for crop breeding, agricultural lands, and education, although the first one is primarily composed of the tobacco fund. The efficiency and effectiveness of MAF's programs could not be assessed within the scope of this report. Eight of these programs need to be considered for functional assessments or performance evaluation because of their significance in annual budget allocations and/or their contribution to NRDP objectives. They include: agricultural land, hydro-amelioration, animal health, food and feedstock safety (including food quality), scientific research, education, and advisory services. Management and Budget Processes for the Sector So far, the administrative cost of running CAP does not seem to have been excessive. Responsibility for CAP is shared between the Ministry of Agriculture and Food and the State Fund Agriculture (SFA) as the accredited paying agency (PA). Bulgaria's decision to establish a single paying agency (rather than dual ones for the two pillars) has contributed to keeping administrative costs relatively low. CAP administrative costs 10 amount to 3 percent of the transferred amount in Bulgaria compared to 5-7% on average among EU member states. Costs could decline further as the transferred support volumes increase with the EU phasing in schedule. On the other hand, introduction of animal- based CNDPs could increase administrative costs in the future because the relevant animal registration systems need to be adapted to accommodate the monitoring of disbursements. There is also a moderate risk of non-reimbursement from the EC if quality problems emerge with the applications processed by SFA. In principle, the MAF sets the overall policy direction for the sector, and the annual budget allocations should reflect its strategic priorities. In practice, however, budgeting is largely incremental and implemented as a technical exercise. The institutional structure and management processes of the MAF do not encourage a strong integration between strategic planning and the resource allocation decisions. Without a sufficient policy development unit within the MAF to help inform the decision-making process, annual budgets will preserve the inefficient and/or ineffective programs. A strategic direction for the sector as a whole is generally missing from MAF budget documents. MAF's program budget presents only national programs, with little reference to how they complement broader activities financed under CAP. The program structure introduced in recent years includes a proliferation of very detailed output indicators, but there are few measures for gauging the results ­ either at a program level or for the sector as a whole. Indeed, the budget documents imply a lack of perceived accountability for the sector as a whole. One example is reflected by the lack of information inside MAF on the SFA's budget and the assumptions in it. Acknowledging such shortcomings, the MAF is now committed to taking actions that would enhance the effectiveness and efficiency of policy making and implementation. Policy decisions such as adopting CNDPs and State Aid measures would be increasingly based on adequate analyses. To this end, the MAF is contemplating (i) setting up a specific unit to support defining the sector's long term strategy, (ii) outsourcing some of the related scientific/analytical functions to qualified research institutions, and (iii) making better use of the data available through various information systems. The MOF's instructions on performance budgeting could be a useful tool in the future to put more attention on the quality of spending. However, currently the program structure of the MAF is used mainly for presentation purposes in budget documents, and it has little impact on the day-to-day management or accountability systems of the ministry. Program goals are often shared responsibility across different departments or institutions. There is no single person who has authority to manage resources for the program or the accountability for delivering on the expected outputs/outcomes. There is also no mechanism within the ministry to account for and assess poor institutional performance. High variations between original budgets and actual spending by the MAF also suggest weaknesses in budget planning. When viewed either by program or by economic classification, some areas greatly exceed their budgeted amounts, while others are cut back substantially. Good practice would be for the ministry to fully anticipate the cost of 11 new policy initiatives before the budget is sent to Parliament. Greater budget discipline, however, is a shared responsibility between the MAF, the MOF, and the Cabinet. MOF's role and capacity in promoting value-for-money in public expenditure needs to be enhanced over the medium to long term. The highly fragmented internal structure within the MOF is one obstacle to this. For the agriculture sector budget planning and execution responsibilities are spread among multiple directorates. The annual budget preparation process also continues to give priority to economic classification and has not yet found a way to integrate non-financial information effectively. Some challenges remain because the quality of performance of information provided by line ministries is not very useful for decision-making. More effective guidance could be given to line ministries on developing their performance measurement systems, including reducing the number of indicators for each program and developing more outcome-oriented indicators that reflect sector performance. Building capacity and commitment to integrate performance information into decision- making can take time, but some institutional changes could help facilitate the process in Bulgaria: (a) creating a unit responsible for coordination of policy analysis and budget planning close to the Minister, (b) assigning direct responsibility to individuals for managing resources at program level and for achievement of results, (c) improving the process for reporting on performance, so that it focuses only on major issues relevant for decision-makers, and (d) following-up this sector-wide review with evaluations of specific programs of the MAF to identify whether their current design and management is cost-effective. Global experience suggests that periodic, targeted program evaluations are an important complement to performance indicators because they are better suited to reveal the causes of poor performance and the management implications. Summary of Recommendations The following summarizes the Bank's primary recommendations to the Government of Bulgaria for strengthening effectiveness and efficiency of the Agriculture and Rural Development Sector. Short-term actions: · CAP Pillar 1 ­ Income Support: - Assess fiscal space to address additional resource requirements related to the end of the reverse modulation of EAFRD funds to CNDPs - Limit application of CNDP to 30% of EU15 average to respond to fiscal constraints - Based on analysis of income disparities, assess need for sub-sectoral adjustments such as, for instance, further shift of CNDP resources from crop to livestock schemes · CAP Pillar 2 ­ Rural Development: - Conduct a rapid functional review of the application/contracting process to verify sufficiency of recent corrective measures and/or identify further action needs 12 - Consider improved awareness campaigns for RDP measures experiencing limited uptake · State Aid: - In close cross-departmental coordination and under reliance on the principle of investment in public goods, finalize programming for discontinuation of Existing State Aid under the sunset clause and definition of Registered State Aid for accreditation by the EC · National Programs: - Conduct designated functional reviews for National Programs aiming at addressing critical structural, human resource, and knowledge constraints · Institutional and Administrative Capacity: - Establish high level policy unit within MAF that provides for strategic analysis and coordination, and informs budgeting and medium-term sector planning, including monitoring of performance information. Medium-term actions: · CAP Pillar 1 ­ Income Support: - Monitor adequacy of registered reference area for SAPS payments in light of medium-term sector development trends to avoid potential absorption losses or under-declaration - Based on analysis of income trends, consider gradual annual reduction of CNDPs and shift of released financial resources to National Program funding public investment priorities not funded by the EU, but central to facilitating further integration into the EU Single Market - Better inform sector about upcoming inbuilt medium-term changes to their support environment (SAPS phasing-in, CNDP phasing-out, cross compliance provisions) · CAP Pillar 2 ­ Rural Development: - Ensure strong participation of concerned administrative units and stakeholders in 2010 mid-term evaluation (MTE) of the RDP and timely, targeted program adjustment in light of MTE findings - Ensure timely initiation of the programming of RDP 2014-20 to allow for adequate analysis, stakeholder consultation, and EC accreditation process · National Programs: - Develop strategies for MAF support to voluntary land consolidation and investments in hydro-amelioration; initiate potentially required legal amendments; and implement pilot projects to `field-test' procedural provisions before mainstreaming into national policies. - Elaborate concept and provide adequate funding for provision of more quality- oriented, client-responsive advisory services · In RDP and National Programs, mainstream incentives for climate change adaptation and mitigation into sector support programs (Pillar 2 and National Programs) and evaluate related additional revenue potentials from CAP Pillar 2 and from trading carbon emission rights on international markets. 13 1 Priorities in Bulgarian Agriculture and Rural Development 1. As an EU member state, Bulgaria no longer operates an autonomous agricultural and rural development policy, but nationally implements and manages the European Union's Common Agricultural Policy (CAP)1. Though a common policy, there is no uniform application of CAP policy instruments across the NMS. Apart from a set of general mandatory rules, the CAP offers many implementation options from which member states may choose. As a result, EU countries continue to have powerful tools to "tailor" support programs to the conditions and needs of their agriculture and rural sectors. The actual implementation of the CAP takes very different shapes from one country to another2. Figure 1: Structure of the EU CAP (simplified) 2. The CAP supports agricultural Com m on Agricultural Policy and rural development through measures Pillar 1 Pillar 2 grouped into two so-called "Pillars", i.e. A G RICU LTUR AL R URAL two principal areas of intervention. Pillar M ARKET AND I NCO M E D EVELOPM ENT 1 provides agricultural market and S U PPO RT income support, with direct (area) European Agricultural European Agricultural Fund for Rural G uarantee Fund payments representing the prevalent form Development Competitiveness of income support to the EU farmers. Diversification (Direct payments) Environment Income support Market support Pillar 2 addresses both the agricultural sector and the wider rural population through a comprehensive set of rural LEADER development programs. 3. For the CAP programming period 2007-2013, and in accordance with CAP funding and financial management principles3, Bulgaria finances its agricultural and rural development policy out of three4 main funding sources: · European Agricultural Guarantee Fund (EAGF), fully financing direct income and market support measures under the first pillar of the CAP. For its core activities, EAGF provides finance in the context of shared management between 1 Giving up autonomous country-specific agricultural policies in most new EU Member States entailed significant changes to agricultural sector support: most nationally administered output, input, or credit support programs and various other intervention tools had to be discontinued or could only be carried on during a negotiated transition (see discussion on State Aid in Section 2). 2 Rural development (i.e. Pillar 2) support is provided through a menu of about 40 measures, grouped into four categories, the so-called "axes". From these, members can almost autonomously select the most suitable mix. For Bulgaria, the rural development menu is further enriched with a set of country-specific measures. Agricultural market and income support (i.e. Pillar 1) also allows for some flexibility albeit more limited. Several options accompany the way in which direct payments are calculated and made. Direct payments in Bulgaria are subject to simplified arrangements and are not immediately granted at full EU15 levels. Diversity is further increased through an option to employ national budgetary resources to complement (or "top-up") EU-funded direct payments during the transition period (see Section 2). 3 See particularly Council Regulation (EC) No. 1290/2005 of June 21, 2005, on the financing of the Common Agricultural Policy 4 A fourth principal source of budget funds is the European Fisheries Fund. Support measures under this fund, however, have not been subject of the mission's assessment. 14 Bulgaria and the European Commission (EC). For a limited number of accessory activities (e.g., specific veterinary measures for disease eradication, promotion of agricultural products, agricultural accounting systems, and agricultural surveys) EAGF expenditure is done in a centralized manner. · European Agricultural Fund for Rural Development (EAFRD), financing, in a context of shared management between Bulgaria and the EC, the EC's contribution to the rural development program implemented in Bulgaria. Public counterpart financing to EAFRD allocation is provided through allocation in the State Fund Agriculture's budget. · Budget of the Ministry of Agriculture (MAF) and the State Fund Agriculture (SFA) as the designated Paying and Intervention Agency, and the Forestry Agency (a state agency under the Council of Ministers). Financing from national budgetary sources applies to (i) the public counterpart-financing5 for expenditure incurred under the EAFRD; (ii) Complementary National Direct Payments (CNDP); (iii) pre-existing State Aid to agriculture and rural development and "de minimis" program and (iv) the national administration of the above where subject either to national management or shared management between Bulgaria and the EC. Figure 2: CAP financial envelopes, 2007-13 (EUR billion) 4. CAP budget allocations for 14.0 13.2 Bulgaria differ from those in other new EU member states in both aid volume 8.0 and aid intensity (Figure 2). Pillar 1 6.2 allocations were negotiated on the basis of 5.5 4.2 3.8 areas sown with various crops, the size of 2.8 2.6 2.5 2.0 1.8 1.7 1.8 animal herds, and "historical" yields 1.0 0.9 0.7 0.7 0.7 0.5 (output per hectare or per animal during a reference period). Pillar 2 allocations were BG CZ EE HU LV LT PL RO SK SI negotiated with country-specific structural Pillar 1 direct payments Pillar 2 rural development adjustment and rural development needs in Source: Eurostat view. 1.1 Overview of sector development challenges 5. For Bulgaria, for other new EU member states, and ultimately for the European Union it is a challenge to address the substantial diversity of agricultural and rural sectors with the CAP as a single common sector policy. Across the new EU member states, average sector performance is ultimately driven by the diversity in the distribution of agricultural land between "large" and "small" farmers (Figure 1). Three different land distribution patterns stand out: (i) large-scale-farming dominated structures (e.g., 5 Budgeting of national counterpart financing is done under a separate National fund- (used for all EU funds co-financing programs) and reflected in the budget of State Fund Agriculture (as first level spending unit) 15 Estonia, the Czech and Slovak Republics) in which large-scale farms cultivate most agricultural land; (ii) mixed farming structures (e.g. Bulgaria, Poland and Latvia), in which the distribution of land is fairly balanced across all farm clusters; and the (iii) dualistic farming structures, in Romania, with almost all agricultural land being equally divided between small and large holdings. Figure 3 below shows that in Bulgaria about 95 percent of the farm population is employed on plots of less than 5 ha in size, but plots of this size constitute less than 20 percent of all farm land. Figure 3: Farm population (upper panel) and farm land (lower panel): distribution by physical size (%, 2005) [figures in square brackets indicate average farm size] 100 80 60 40 20 0 Romania Bulgaria Hungary Poland Slovenia Lithuania Latvia Slovakia Estonia Czech Republic [3.4 ha] [4.4 ha] [6.0 ha] [6.0 ha] [6.3 ha] [11.0 ha] [13.2 ha] [27.4 ha] [29.9 ha] [84.2 ha] 0 20 40 60 80 100 0-5 ha 5-10 ha 10-20 ha 20-50 ha >50 ha Source: Eurostat 6. A major challenge facing Bulgaria's rural sector is the significant fragmentation of land ownership (which was created by the land restitution) and a highly polarized farming structure. The average size of agricultural plot is 0.6 ha. In 2003, 665,500 agricultural holdings were operating in Bulgaria6, out of which the majority (75%) cultivated up to 1ha. These 75 percent accounted, however, for less than 7 percent of the utilized agricultural area (UAA). On the other hand, only 0.8 percent managed more than 50 percent, but they farmed 78 percent of the UAA. The fragmentation of land ownership is a significant barrier to long-term investments in agriculture, land improvements, and efficient use of agricultural machinery, and there is a clear need for land consolidation actions. The adjustment of the farming structures can be achieved by improving the age structure in agriculture, facilitating the entry of young farmers into business, supporting the transformation of part of the semi-subsistence farms able to achieve long term viability as commercial businesses, and by enhancing the agricultural knowledge and the business skills of people working in the sector. 6 2003 Agricultural Census data 16 7. A second rural development challenge is the aging of the labor force. In 2003 only 11.6 percent of the persons included in the agricultural labor force were less than 35 years old (compared to 54.6 percent at the age of 55 and more). Low incomes and unfavorable working conditions in agriculture, as well as deteriorating living conditions in rural areas discourage young people to start a carrier in agriculture. 8. Moreover, the number and share of young farmers in Bulgaria is very low. Thus, in 2003 the sole farm holders under 35 years old were 7.8 percent of those above 55 years old, compared to 18 percent in the EU-25. The lack of startup capital and managerial skills are significant barriers to entry of young people into the farming business and to the development of viable farms. There is a need to support entrance of young and educated people into farming business to ensure sufficient replacement of a large number of old farmers and to speed up productivity growth in agriculture. 9. The overall low educational attainment of those employed in agriculture represents another challenge. The majority of the agricultural labor force lack formal agricultural training and managerial and business skills. Only 2.4 percent of the farm managers have secondary or higher agricultural education. According to the 2004 Labor Force Survey, 57 percent of those employed in agriculture had primary and secondary education (country average being 17 percent), while the share of those employed with tertiary level education was only 4.4 percent (country average ­ 25 percent). This clearly reveals the need for development of a system for continuous vocational training for farmers and improvement of the quality, and outreach of the extension services. 10. Another feature of the agriculture and forestry sector in Bulgaria is the lowest productivity compared to other sectors of the national economy. While overall productivity per person employed grew by 3.2 percent per year between 2003 and 2008, productivity in agriculture declined by 6.3 percent per year. In 2008, the gross value added (GVA) per employed in agriculture and forestry was EUR 2,770 or 31 percent of the country average. The labor productivity in agriculture was among the lowest in EU member states (12 percent of the EU average for the period 2003-2008). The low productivity is determined to a large extent by worn-out assets and outdated technologies. The lack of investment in equipment resulted in the significantly increased use of manual labor, and in consequence, in low labor productivity. Despite the support provided under SAPARD, the need for further investment to improve the technical and technological level in the sector is still considerable. 11. Last but not least, access to credit still significantly limits the development and modernization of agricultural holdings in Bulgaria, although the situation has been improving since 2003. The growing competition among commercial banks led to a significant credit expansion and improvements in credit terms (longer maturities, lower interest rates and more flexible collateral requirements). However, the access to credit still remains a major problem for small and medium-sized agricultural producers in Bulgaria, which limits their investment and reduces demand for support. 17 1.2 Overview on trends in budget allocation/execution 12. Agriculture has been one of the sectors that have seen an increase in budget allocations at a time when overall budget Figure 4. Budget Spending on Agriculture spending has been on a declining trend (functional classification of the budget) (Figure 4). This trend mainly occurred as a function of EU accession and, since 2007, was 900 1.4 fueled by the (non-state budget) funds inflows 800 1.2 from the two European Agricultural Funds 700 1.0 (EAGF and EAFRD) and related national 600 0.8 counterpart-financing requirements (see 500 400 Section 2). Overall budget spending on 0.6 300 agriculture has more than doubled between 0.4 200 2003 and 2008. In GDP terms, budget 100 0.2 spending on agriculture increased from 1.1 0 0.0 percent of GDP in 2003 to 1.2 percent in 2008 2003 2004 2005 2006 2007 2008 and is planned to reach 1.8 percent in 2009 BGN million % of GDP (RHS) reflecting expectations about increased Source: Ministry of Finance, Actual budget implementation absorption of EU funds. 13. Within the agricultural budget, allocations on transfer payments to the sector show an increasing trend, mainly as a function of CAP-related support programs for Pillars 1- and 2-type support programs (Figure 5). 2007, as Bulgaria's first year of EU membership Figure 5: Agriculture spending by line items however stands out as an [million BGN] exception to this trend. The relative decline in 2007 was 700.0 caused by two main factors: 600.0 First, subsidies to producers, 500.0 mainly tobacco subsidies, 400.0 were downsized in 2007. 300.0 Second, the EU direct 200.0 income support payments for 100.0 the 2007 period were ­as 0.0 foreseen in the EC funding 2003 2004 2005 2006 2007 2008 regulations- only paid to Capital expenditure Labor costs O&M Subsidies agricultural producers in early 2008 (for details see Sections 2.1 and 2.3). Since EU Funds operate on a reimbursement basis and most programs are to be pre-financed by the state budget, the increased transfers for payments under CAP programs in 2008 did not immediately translate into a higher absorption of EU funds. In 2008, EU financing of the sector (excluding financing of direct payments outside the budget) contributed only 4 percentage points to the overall increase of 50 percent. 18 14. Labor costs of the agriculture budget function were only marginally reduced in 2008 while operations and maintenance expenditures have remained level. Overall labor costs (wages, bonuses, and social contributions) declined by 4 percent in 2008 compared to 2007 as a result of downsizing of staff. Most of the optimization of staff has taken place in the budgetary units financed by Central Government (MAF and FA) while personnel expenditure of the Agricultural Paying Agency, SFA, has increased as a function of the full implementation of EU CAP support programs. Within the agricultural administration, the Ministry of Agriculture and Food achieved substantial cuts in its labor costs (almost by half) on the account of optimization of staff and transfer of staff to the FA, whereas labor costs of the SFA grew by 50 percent in 2008 compared to 2007 reflecting higher staffing (see Section 3 for details on the administration cost of CAP support programs). 15. Resources flowing to the agriculture and rural development policy domain are actually larger than suggested by a purely `functional classification' and in 2008 these additional resources Figure 6: Government spending on Agriculture [% of GDP, exceeded 1.4 percent of GDP. 2007] In addition to the (mainly 1.4 transfer-related) allocations 1.2 indicated in Figure 5, direct payments financed directly by 1 the EU budget under Pillar 1 0.8 account for 1% of GDP in 0.6 2008. There are also accessory 0.4 services and functions 0.2 supporting the agriculture sector, such as the 0 CY GR IT AT PT CZ LT DK DE SE UK ES NO EE PL LV BG MT FI HU administration of the Ministry of Agriculture and Food Source: Eurostat, data for Bulgaria refer to 2008. (MAF), or education, research, and defense activities financed Figure 7: CAP aid intensity [EUR/capita, 2007-13 aggregates] and overseen by MAF but not 25,000 technically classified as (1) (2) 20,000 "agriculture" functions. 15,000 Altogether these "non-core" activities account for 10,000 additional 0.3 percent of GDP 5,000 per year. In addition, there are - SK EE CZ SI HU LT LV PL BG RO tax expenditures in the form of per annual work unit in agriculture tax and social contribution per person employed in agriculture rebates/stimuli for agricultural Note: CAP aid intensity calculated by dividing the sum of the CAP financial producers. for Pillar 1 Pillar 2 (rural development) by: Agricultural envelopes agricultural (direct payments) and (i.e. annual work units), and (1) full-time worker equivalents (2) producers and tobacco growers persons employed in agriculture, respectively. are subject to preferential tax Source: World Bank based on Eurostat data treatment (no personal income taxation, tax credits for up to 60 percent of the corporate income tax, much lower pension 19 contributions, and a number of procedural exemptions and stimuli). These foregone revenues have not been estimated but very rough estimates based on numbers of registered agricultural producers and tobacco growers suggest that the tax expenditure may well exceed 0.1 percent of GDP. 16. With over 1 percent of GDP spending on agriculture, Bulgaria is spending higher relative amounts more than most of the other EU countries, including most of the new member states. Government spending in 2009 is even planned to increase to 1.8 percent of GDP. 17. However, as detailed in Section 2.1 of this report and due to the relatively high numbers of persons employed in agriculture, the relative CAP Aid Intensity is lower than in most new EU Member States (Figure 7). 18. Increased access to EU funds for agriculture suggests that spending on agriculture is set to further increase. While most of this increase will actually be financed by the two European Agricultural Funds, an increased absorption of EU Funds will require additional national budget allocations to comply with Bulgaria's national counterpart financing obligations (see Section 2). However, the fiscal space for further expansion of national budget spending on agriculture is limited as the medium-term fiscal framework envisages a cap on aggregate public spending at 40 percent of GDP. Large infrastructure needs and needs for investment in enhancing human capital to increase Bulgaria's convergence to EU living standards are leaving little room for expansion of any additional sectoral budget allocations. In addition, with the ongoing financial and economic crisis, public revenues are declining while social spending might increase to mitigate the cost of adjustment to the poor. Therefore, achieving the objectives of agriculture policy and increased absorption of EU funds would require substantial intra- sectoral restructuring to prepare for lower budget envelope for agriculture. As is discussed in Section 2 of this report, this will mainly require an early reduction of national support measures currently complementing EU Direct Income Support Payments and a rationalization of the currently applied State Aid schemes. Little room exists, however, to reduce national budget allocations on administrative services in the agricultural and rural development policy domain (see Section 3). 19. Within the agricultural administration, the Ministry of Agriculture, while responsible for setting the agriculture policy, represents a declining share of the overall agriculture budget function. When the Forestry Agency was set up in 2007, it became a state agency under the Council of Ministers, completely separate from the budget of the ministry. At the same time the State Fund Agriculture (SFA) was assigned the CAP-mandated function of a Paying Agency and thus for the execution of most support programs under Pillars 1 and 2. In 2008, MAF was responsible for only 22 percent of the spending allocated to the agriculture function compared to 71 percent a year ago with less than half of the staff. 20. As to be expected for programs funded by the EAGF and the EAFRD, public resources for agriculture are increasingly managed outside the state budget. The 20 MAF budget which used to be the major financing source for agriculture activities financed only half of the spending for the sector in 2008. As is detailed in Sections 2 and 3 of this report, the rest of the expenditures were managed through extra-budgetary funds--the SFA and the National Fund (for pre-accession EU funds). 21. A translation of the increased support funds inflow into sectoral growth has not yet been observed and will need some more time to materialize. Gross value added generated in the sector has declined by 7.1 percent per year between 2003 and 2008 while GDP grew by 6.1 percent per year. Only in 2008 when agricultural output grew by 25 percent annually reflecting a very low base in 2007 during which Bulgaria was hit by a severe drought. It must be understood, however, that Pillar 1 direct payments for the year 2007 were only paid to farmers in early 2008. Even more importantly, any Pillar 2 payments ­expected to contribute to competitiveness enhancement and thus to shift the income curve upwards- will only start flowing in 2009 after the start of the implementation of the National Rural Development Program (see Section 2.3). 21 2. Expenditure Programs for Agriculture and Rural Development: Status and Reform Priorities 2.1 Direct Income Support under CAP Pillar 1 2.1.1 EU-funded Direct Payments ­ Single Area Payment Scheme (SAPS) 22. Like 10 of the 12 EU New Member States (NMS), Bulgaria has opted to use the simplified implementation system for EU-funded direct payments, the Single Area Payment Scheme (SAPS). Fully financed by the European Agricultural Guarantee Fund (EAGF) it provides for flat area-based payments7 to users, not owners, of agricultural land. Payments are decoupled from production activity (no obligation to produce). Bulgaria was initially scheduled to move from this simplified to the EU mainstream Single Farm Payment Scheme (SFP) in 2011 at the latest8, the EC recently approved an extension of the applicability of SAPS to 2013. This decision has been taken in the light of several advantages such as reduced costs of implementation, administrative simplicity, and smaller distortive effects on the farm sector as to be potentially expected from commodity-specific payments. 23. By setting a relatively high minimum size threshold for farms to receive income support under SAPS, Bulgaria has reduced administrative costs, and more importantly created incentives for consolidation of small, uneconomical plots. The minimum size for an agricultural holding to be eligible for support under SAPS is 0.3 hectares, but Bulgaria has decided to set it at the maximum permissible level of 1.0 hectares (0.5 hectares for perennial crops). In practice, all new member states applying SAPS except Cyprus have chosen to set one hectare as the minimum holding size (Hungary is applying a system with two minimum sizes). Under SAPS, this criterion is complemented with a minimum parcel size eligible for the area payment (for example, Poland has opted for 0.1 ha; Slovakia has opted for 0.3 ha). The application of a minimum holding threshold of one hectare in Bulgaria effectively excludes about three- quarters of Bulgaria's agricultural population from SAPS receipts. However, it significantly reduces the budgetary and administrative costs associated with providing 7 Under this simplified support schemes, payments are granted for agricultural land only; no specific payments are being provided for livestock. 8 As an outcome of the 2003 CAP reform, a Single Farm Payment Scheme (SFP) was introduced in the EU starting 2005. SFP is based on direct payments that EU15 farmers had been receiving under certain support programs during a reference period (2000 to 2002). As Bulgaria (like most new member states) did not operate CAP-conforming direct payments during the reference period, and due to the high administrative requirements for implementing direct payments on an SFP basis, Bulgaria, like all new EU member states, has been given the option to choose the Single Area Payment Scheme (SAPS) instead . However, using the SAPS rather than the new SFP approach was initially limited to the first three years of membership, with the possibility of two one-year extensions. 22 direct payments to small-scale production units, and provides incentives for structural change towards a less fragmented farm and land use structure in Bulgaria. 24. Over the first ten years of EU membership (2007-16) farmers in Bulgaria will receive only a fraction of the direct payments received by farmers in the EU15. In accordance with EC provisions on the phasing-in of direct income support in new member states (Table 1), direct payments for Bulgaria in 2007 started at 25 percent of the EU15 level, increase yearly by five percentage points until 2009, and then increase by ten percentage points per year to reach 100 percent of the then applicable EU level in 2016. 25. The determination of income support payment levels for EU NMS is conducted based on country-specific EAGF annual support envelopes that follow the above phasing in schedule. In essence, SAPS payment level determination is based on two elements fixed at national level: · a national financial envelope which is to be established by the Commission and is the sum of all the direct Table 1: Phasing-In of EAGF Direct Payments (SAPS) payments the Member State 10 new Bulgaria Year concerned would receive member states (and Romania) 2004 25 -- under 'normal' direct 2005 30 -- payment arrangements; and 2006 35 -- 2007 40 25 · a national agricultural area 2008 Percent of EU 50 30 (reference area), to be 2009 direct 60 35 established as the part of 2010 payment level 70 40 2011 80 50 the agricultural area that 2012 90 60 was in 'good agricultural 2013 100 70 condition' in June 2003 and 2014 100 80 to be adjusted according to 2015 100 90 2016+ 100 100 objective criteria to be Source: World Bank, EU8+2 Regular Economic Report, May 2007 approved by the Commission (e.g. reduction to take into account the fact that Bulgaria decided not to grant direct payments to farms smaller than 1 ha). 26. For the year 2009, Bulgaria's support envelope ceiling amounts to EUR 289.8 million compared with EUR 248.8 million in 2008 and EUR 202.1 million in 2007. Following a division of the EAGF support envelope by the applicable reference area of currently 3.492 million hectares9, this translates into 2009 SAPS payments levels of 82.98 EUR/ha (162.3 BGL/ha) following the scheduled increase over payment levels in 2007 (53.1 EUR/ha; 103.85 BGL/ha) and 2008 (65.4 EUR/ha; 127.9 BGL/ha). It is estimated that, by the time Bulgaria has fully phased in CAP Pillar 1 income support payments by 2016, payment levels will amount to approximately 233.19 EUR/ha. 27. SAPS payments do not require any designated national budget allocation, but they do have cash flow implications for the Treasury. SAPS payments are being financed, in full, by the EAGF. The EAGF disburses directly to the State Fund 9 Effective June 2009, the reference area has been adjusted down from 3.8 million ha, in order to avoid foregoing the take-up of single area payments (see paragraph 28). 23 Agriculture (SFA) as the designated agricultural paying agency. From a cash-flow perspective, however, SAPS payments are pre-financed by the SFA while the actual transfer from the EAGF to the SFA, covering the financial resources spent in the form of direct payments in year (n), will be made in year (n+1). Moreover, it is a management responsibility of the SFA to ensure that the highest possible share of its domestic SAPS payment approvals meets the EAGF control standards. From a funds absorption perspective, it is the management responsibility of the Ministry of Agriculture, to determine, ex ante, as good as possible the area for which actual payments can be made. 28. Until now, Bulgaria has forgone about EUR 10 million in EAGF absorption annually due to continued problems with the determination of the applicable reference area for EAGF payments. This implies that 2008 SAPS payments were about 12.2 EUR/ha lower than necessary. The reason for this foregone revenue is that Bulgaria registered too large a reference area for Single Area Payment's Scheme (SAPS) payments. In many NMS the determination of the reference Box 1: Can all agricultural land be registered for SAPS area has proven to be as much a support? political decision as an The determination of a national reference area is among the administrative one. While the two support level determination elements fixed at national determination of a larger area level, but in many NMS this determination has proven to be a avoids the public perception that political as much as an administrative decision. The Bulgarian portions of the agricultural Ministry of Agriculture had decided to register all 3.8 million population will be excluded ha potentially eligible agricultural land for EAGF payments ­ it is assumed that this decision was taken based on overly from support, in practice, some optimistic assumptions on the prospective receipt of 15 percent of Bulgarian applications and to avoid leaving the impression with agricultural land fails to meet the stakeholders that a political decision would be taken not to EU's eligibility criteria for support a significant share of the agricultural population. income support and therefore However, about 15% of this area, meanwhile were found to either not be verifiably in `good agricultural condition', to should be excluded. In 2008, belong to smallholders below the 1ha minimum farm size out of the 3.8 million ha of criterion, or ­perhaps most importantly- to constitute lands registered agricultural land, for which no clear land use records are available (SAPS support could only be granted to payments are granted to users of agricultural land, not to users of about 3.2 million ha, owners). The latter factor particularly relates to public (commonly used) pastures and meadows for direct support. and payments for about 0.6 Their inclusion led to increase in the registered area and million ha remained consequently decrease in the per-hectare SAPS payment. "unabsorbed." However, first Direct support to public lands in the EU is a rare case (e.g. corrective action has been taken. Ireland, parts of Spain) and is a process very difficult to Effective June 2009, Bulgaria's implement. It requires the establishment of a complex system of contracts and procedures between the parties involved revision of the reference area to and/or benefiting from the direct support, and has proven 3.492 million ha has been complicated in the Bulgarian context where only a limited approved by the European number of uses of common lands are in possession of formal Commission. Further lease or land use contracts. adjustments may be necessary to optimize the use of EAGF money; this requires a policy level decision rather than an administration level decision (see Box 1). 24 29. Currency fluctuations have not impacted Bulgaria's SAPS implementation as it has other NMS. The SAPS payment volumes are established in EUR, while payments to farmers are then made in national currency. While local currency appreciations against the euro in neighboring NMS have led to differences between anticipated and nominal payment levels, this has not been the case for Bulgaria. With the Bulgarian Lev pegged to the Euro at an exchange rate of (EUR 1 = BGL 1.95583) and Bulgaria mainly maintaining agricultural trade relations to the EU Single Market, no immediate noteworthy difference between nominal and real phasing-in levels was observed. 30. Direct payment levels across the EU NMS are subject to great variation, with Bulgaria ranging among the NMS with the highest nominal SAPS payment levels (see Figure 8). While SAPS per-hectare payments are, in principle, uniform for all eligible land within the individual new member states (i.e., irrespective of natural yield potential) these payments differ substantially between the NMS. These variations stem from the fact that the level of per hectare payments is computed by dividing the available EU financial "envelope" for each country by the eligible agricultural area. Given the EU rules for CAP Pillar 1 financial allocations, higher land productivity results in higher hectare payments, as historical yield levels (2000-2002) were factored into the Figure 8: SAPS Payment Levels in First Year Figure 9: Relative SAPS Aid Intensity of Membership [EUR/ha] [EUR/person] 70.2 30,000 57.2 53.1 25,000 50.6 44.5 43.8 20,000 35.9 15,000 26.8 10,000 20.7 5,000 - CZ SK EE HU SI LT PL LV BG RO BG LV EE per annual work unit in agriculture CZ RO SK PL LT HU per person employed in agriculture Source: European Commission, The World Bank Source: Eurostat, The World Bank determination of the financial envelope for Pillar 1. Furthermore, candidate countries with a relatively higher production of CAP-supported agricultural products (e.g., arable crops, beef and veal, milk and dairy products) were allocated relatively larger financial envelopes. 31. Despite high nominal payments, Bulgaria ranks second to last in its per- capita support payments. This is due in large measure to the relatively high numbers of persons employed in agriculture and by how Bulgarian authorities determined the eligible area. The EU permits national policy-makers to choose the eligibility thresholds (minimum farm size) that farms need to qualify for income support. Thresholds can be set anywhere between 0.3 and 1 hectare, but all EU8+2 countries opted for the highest (i.e., 1 ha) threshold. As a result, numerous small farmers cannot benefit from direct payments, with the actual numbers differing from one country to another. While these 25 ineligible farmers operate only small shares of the agricultural area in each country, their share in the total number of holdings can be substantial. In the case of Bulgaria, this also represents a main reason why a comparison by nominal SAPS payments only provides a limited indication of the actual per-capita income transfer effect. 2.1.2 Nationally-funded Direct Payments - Complementary National Direct Payments 2.1.2.1 Implementation Status 32. Within carefully defined limits, Bulgaria (partially) employs national budgetary resources to "top-up" EU direct income support via Complementary National Direct Payments (CNDP). These CNDPs are granted in addition to EAGF- funded SAPS and are currently Table 2: Phasing-In of Direct Payments in Bulgaria funded from both the national Year SAPS CNDP Total budget and through reallocation of (max.) (max.) 2007 25 30 55 EAFRD funds. Topping-up 2008 30 30 60 represents a transitional option and 2009 Percent of 35 30 65 is subject to an EU-agreed phasing 2010 EU15 direct 40 30 (50)* 70 (90)* out schedule (Table 2). Starting 2011 payment 50 30 (50)* 80 (100)* 2012 level 60 30 (40)* 90 (100)* 2014 at the latest, top-ups are 2013 70 30 100 being gradually replaced by the 2014 80 20 100 phasing-in SAPS payments, and 2015 90 1 100 must be discontinued in 2016 2016+ 100 0 100 when the single area payments * Potential option following Council Regulation (EC) No. 73/2009 Sources: Ministry of Agriculture and Food, World Bank eventually reach 100 percent of the EU-15 level. However, following December 2008 decision of the European Agricultural Council, Bulgaria currently may apply for an increase of CNDPs to a maximum permissible level of 50 percent of EU15 average. 33. Upon accession, Bulgaria implemented a rather simple and transfer-efficient CNDP design. In the first year of CAP implementation, CNDPs were granted exclusively as a flat area payment to arable land10, thus topping-up direct payments to farmers taking advantage of the existing SAPS administrative system. The initial Bulgarian CNDP implementation provides for significantly less complex provisions than in many other new EU member states and opted to preferentially direct funds towards selected categories of agricultural producers (see Box 2). In 2008, however, MAF decided to implement two additional CNDPs for producers of milk and sheep, thus responding to perceived income hardships of livestock producers that produced livestock mainly on permanent grassland and that therefore were excluded from any receipt of the 10 Since 2007, the arable land CNDP applies to all arable land eligible under SAPS, except land under vineyards and other perennial crops, tobacco and permanent grassland. 26 then existing direct income support schemes. These schemes are also applied throughout 2009. Box 2: From simple to multifaceted: CNDP schemes in Bulgaria, Slovakia and Hungary Bulgaria (2007) Slovakia (2005*) Hungary (2005*) Arable crops 21.28 /ha Arable crops 68.81 /ha Beef slaughter 154.4 /head Tobacco 2,553.15 /ha (Burley Cows 136.11 /head 1948.62 /ha, Virginia 3164.94 Cattle (extensification) 51.67 /head /ha) Milk 31.34 /ton Hops 233.87 /ha Ewes 5.81/head Suckler cows 111.34 /head Sheep (de minimis) 2.50 /head Sheep and goats 16.62 /head Sheep complementary 4.55 /head Goat (female) 4.80 /head Tobacco: Burley 2997.2 /ha, Virginia 3791.9 /ha Rice 254.3 /ha Rinded fruit plant 120.75 /ha Energy plant 29.25-131.67 /ha Energy grass 78.09 /ha Energy trees 180.51 /ha * Displayed country data represents initial CNDP schemes following EU accession. Sources: Ministry of Agriculture and Food; the World Bank 34. Direct income support via CNDP in Bulgaria is lower than in most other new EU member states (see Figure 10). st Bulgaria's CNDP support envelopes Figure 10: CNDP Levels in 1 Year of EU Membership translated into per hectare payments of 21.28 EUR/ha in 2007 and 47.53 45 EUR/ha in 2008 (see Box 2), whereas the 2009 payment levels will only be determined after the 30 complete receipt of applications for the 2009 support season (after the 15 time of this assessment). 2009 CNDP support levels for milk, instated as part of the 0 abovementioned introduction of livestock CNDP, have been set at Note: CNDP converted into area payment equivalents (simplified) Source: OECD, Ministry of Agriculture and Food 22.68 EUR/cow for farms with a milk quota allocation of more than 10 tons, whereas support for sheep breeders amounts to 16 EUR/ewe in holdings with more than 50 ewes. 2.1.2.2 Challenges to the Definition of a Future CNDP Support Agenda 35. Bulgaria's CNDP regime has, so far, provided for noteworthy simplicity and relative high transfer efficiency. The current assessment, however, has identified four distinct challenges to the definition of a future CNDP support agenda that, if not carefully and immediately addressed, might create additional need for annual state budget funding in the order of EUR 200 million (BGN 380 million): 27 36. First, budgetary resources might be tightening just as demands for a broadening of the livestock support agenda are growing. This would require additional budgetary funding if not subject to more carefully defined eligibility criteria and combined with a parallel reduction in payment levels for arable land. The decision for an inclusion of CNDP payments to producers of milks and sheep into Bulgaria's CNDP support schemes was taken to support those producers that predominantly produce on extensive, permanent (and at times communal) grasslands and thus cannot adequately benefit from the so-far prevailing SAPS and CNDP support schemes. While the introduction of livestock CNDP is an understandable response to the particular production structures in Bulgarian livestock production, it may lead to problems because it: i) appears not sufficiently based on a quantitative analysis of the income situation of targeted beneficiaries but mainly in response to lobbying pressure by livestock producers; ii) incurs higher administrative cost than the arable land CNDP, because it cannot be administered through the Land Parcel Identification System (LPIS) underlying the SAPS payment, but requires creation and use of a separate interface to the animal registration systems; iii) provides limited justification for the exclusion of smaller producers (i.e., less than 10 tones of milk quota or less than 50 ewes); and iv) should be subject to a clearly communicated phasing out plan (alongside with the phasing in of SAPS) as it might lead to entitlements perceptions, be difficult to reverse, and might trigger additional support demands from other livestock producers. 37. Second, an additional EUR 40-50 million per year (BGN 78-97 million) of domestic budget funding may be required as 2009 represents the last year of reverse modulation of EU rural development funds to CNDPs. As part of the EU accession agreement, Bulgaria was allowed to shift an amount of Bulgaria's CAP Pillar 2 allocations under the Table 3: Financing Plan for CNDP in Bulgaria, 2007-2009 [EUR] European Agricultural Fund for Rural Year EAFRD reverse National Budget Total CNDP Development (EAFRD) modulation and use it for 2007 48,428,890 12,107,222 60,536,112 2008 52,690,633 13,172,658 65,863,291 supplementing the CAP 2009 44,353,294 11,088,324 55,441,618 direct income support Total 145,472,817 36,368,204 181,841,021 provided through CNDPs Source: Ministry of Agriculture and Food, National Rural Development Plan, 2007-13 ("reverse-modulation")11. This opportunity is limited to the first three years of membership, as over these years, the SAPS levels would have already substantially increased. As displayed in Table 3, Bulgaria made use of this opportunity during the first three years of accession, thus alleviating the budgetary pressure deriving from its decision to top-up and increasing the 11 As per Bulgaria's EC-accredited National Rural Development Plan 2007-13, CNDP are financed both by the national budget, and by a transfer from EAFRD for the period 2007-2009 (year 2007 - 25%, year 2008 - 20% and year 2009 - 15% of the respective annual allocation originating from the EAGGF Guarantee Section as referred to in Article 34(2) of the Act of Accession of Bulgaria). 28 absorption of CAP Pillar 2 funds. From 2010, however, Bulgaria will have to fund any CNDPs entirely from the national budget, thus increasing the potential domestic funding needs by about EUR 40-50 million, and creating the need for adequate budgetary planning in the 2009 budget cycle. 38. Third, the Council Regulation (EC) No. 73/2009 allowing Bulgaria to increase CNDPs to 50 percent of EU15 level coincides with the end of reverse modulation. If requested and eventually approved by the EC, such an increase would correspond to approximately a doubling (in nominal terms) of the current CNDP support to Bulgarian farmers to support levels to about EUR 370 million (BGN 717 million). All of this would have to be entirely financed from the state budget. The sheer availability of such option is expected to induce substantial lobbying pressure for a further increase in support levels, driven in part by higher support levels in neighboring countries (see Figure 3). 39. Fourth, the mandatory termination of transitory State Aid schemes ("sunset clause") at the end of 2009 (see section 2.3 on State Aid) will further increase the lobbying pressure on policy makers to provide new CNDP support as an offset. Pressure will be greater for those subsectors in which the provision of State Aid will be discontinued (such as e.g., the tobacco subsector, currently recipient of about in domestic support under the `existing State Aid' category). 2.1.2.2 Recommended Elements of a Future CNDP Support Agenda 40. Given Bulgaria's successful implementation of a transfer-efficient CNDP regime, we believe it is possible to meet the challenges mentioned above because: 29 a) effective future CNDP Box 3: Conversion of State Aid for Tobacco into CNDP? support can be provided Sunset Clause: Bulgaria currently provides about EUR 58 within the prevailing million in State Aid to the tobacco sector, but this support will overall support ceilings have to be phased out at the end of 2009 as part of the on the (i.e. without an increase in mandatory termination of transitory State Aid schemes after the third year of EU membership. the overall amount of CNDPs provided to the Support needs assessment: No data / analysis of the income sector); situation of tobacco growers was provided to this assessment. MAF perceives tobacco growers as being in need of additional b) enhancements in support as they depend on tobacco growing as main source of addressing prevailing income, reside in less-favored areas of the countries, and face income disparities and/or competitive disadvantages induced by small farm size, excess support asymmetries parcel fragmentation, and low degrees of alternative would be more effectively mechanization. addressed through an Options for conversion into CNDP(s): New EU member states, improved targeting rather in principle, have the option of providing CNDPs as decoupled than through increases in (i.e., "flat") or as coupled (i.e., commodity-specific) payments, as long as the envisaged CNDP meet the EC's accreditation criteria. support rates; and The conversion of the existing tobacco state aid into (commodity- c) potentials for medium- specific) CNDP should not be a preferred choice. Past specific term fiscal rationalization payments have clearly contributed to the support-dependency of exist without jeopardizing producers and have even created disincentives for modernization agreed income support and diversification to address the vulnerabilities of tobacco objectives if the following growers. recommended elements However, it is understood that a discontinuation of the existing tobacco state aid may necessitate transitory support of a future CNDP arrangements to reduce the' adjustment shock' for those support agenda for currently dependent on tobacco production. Potential new Bulgarian agriculture support should ideally be provided in a form facilitating the are being observed: adjustment of producers to toward the future mainstream CAP- funding environment in which neither State Aid nor CDNP will be permissible. 41. Attempts should be resisted to increase CNDPs to Should CNDP support to tobacco growers nevertheless be considered, it is strongly recommended: levels above 25 percent of - to program it as a transitory, de-coupled support payment; EU15 average because a - to establish eligibility criteria and funding provisions in close further overall increase in alignment to similar provisions for producer transition CNDPs is fiscally prohibitive assistance under CAP Pillar 2; and not required to safeguard - to define it as a phasing-out support program and communicate the transitory nature of the program to producers average farm incomes. From a alongside with its initiation; sector income perspective, - to instate it only within the currently existing CNDP support higher top-ups would have been envelope, and thus reduce other CNDP by equivalent more justified during the initial amounts. years of membership than they Rather than providing CNDP support to tobacco growers, would be nowadays that SAPS support should be provided through EAFRD funding under CAP Pillar 2, especially via LFA-type support and a more active and CNDP support levels have promotion of measures under all three axes of the RDP among already substantially increased potential beneficiaries. during the 2007-2009 term. For In addition to facilitating producer transition/adjustment to the the remainder of 2009, priority future mainstream CAP funding environment, this would should be given to the contribute to enhancing the absorption of available EAFRD funding. 30 identification of budgetary resources needed to compensate for the discontinuation of the reverse modulation of EARFD funds to CNDP, which, even without an increase in overall CNDP support levels, implies an additional state budget need of up to EUR 50 million (BGN 97 million). Box4: Addressing agricultural income disparities via Direct Payments ­ a good choice? There is a tendency to consider the CAP as a mechanism for providing a secure source of income to the low-income agricultural or rural population. The "agricultural" policy would thus be expected to substantially contribute to the resolution of socio-economic development challenges in rural regions. The increased importance of direct payments and rural development measures, as well as the accession of new member states with large numbers of subsistence and semi-subsistence producers, has brought this issue to the fore. In Bulgaria, a large ­even dominating- number of producers can be classified as (semi-)subsistence farmers. However, many of these producers own less than one hectare which disqualifies them from most CAP payments. Even those producers who own between 1 and 2 hectares have difficulty accessing direct payments because the cost of complying with the various directives (on environmental quality, food safety, animal welfare) governing payment eligibility is prohibitively high. Even the "semi-subsistence" measure introduced as a rural development instrument to assist new member country transition is designed to help producers become more oriented to the market. Commodity-specific CNDPs may appear to mitigate potential adverse income effects for some categories of farmers. However, evidence indicates that applying a flat, decoupled CNDP (i.e. not linked to the amount produced) scheme is preferable to using specific, coupled CNDPs (i.e. linked to the amount produced). Like in Bulgaria, concerns had been raised in many new EU member states that dairy farmers would experience substantial income losses, since direct payments would be allocated only to agricultural land. But the evidence points in the other direction: with the implementation of CAP­type policies, dairy farmers in new member states experienced an estimated income increase of up to 23 percent in the first year of accession. Commodity-specific CNDPs come at high implementation costs, administrative complexity, and a long-term distorting impact on production patterns. It is therefore preferable to use CNDPs on the most equalized and simplified basis possible. Support schemes targeting specific sectoral adjustment needs or regional income disparities are better addressed under CAP Pillar 2 (see below). Another risk attached to treating direct payments as a means of guaranteeing farmer incomes is that they might discourage farmers from restructuring, consolidating or modernizing their holdings. For example, if inefficient farmers have a guaranteed income they may be less inclined to sell or lease their land to more productive farmers. Direct payments may also serve to distort land prices and land rental rates. This is so, as payments are granted on a per hectare basis, which increases the price of buying or leasing agricultural land, discouraging people from renting land and slowing down the consolidation of farms into more viable units. Ultimately, this means that support is going to landowners, rather than farmers, and that large landowners receive more support than smallholders who would normally have lower incomes. These tradeoffs between protecting incomes and promoting competitiveness point to the need to separate social assistance measures from payments designed to ensure a viable agricultural sector. Thus, the Government would have to consider introducing social policies and services tailored to the needs of poor farm households. One possibility is to support socio-economic guidance services for the farm population. Such services would provide information and advice to farm households that would help them adapt to the new agricultural policy regime. Also, the Government may decide to introduce innovative social assistance programs that would enable poor or subsistence farmers to stay on the land. An example of this is the rural social scheme in Ireland, which provides supplementary income to farmers in exchange for undertaking work that will benefit the local community. 42. Instead, focus should be given to an improved targeting of support within the prevailing CNDP support ceilings, on a sub-sectoral level. For selected agricultural 31 production activities (such as e.g. the referenced livestock production activities), it is understood that ­while not strictly needed to safeguard average producer incomes­ the analytically well-founded establishment or increase of sub-sectoral CNDP levels might contribute to a targeted reduction of prevailing income disparities and support asymmetries (such as e.g., between crop and livestock production), and thus contribute to the rural development rather than the general income support agenda. 43. Improved sub-sectoral targeting of CNDP support must be based on thorough assessment of underlying objectives and analysis of the income situation among target beneficiaries, i.e. in line with the programming rules already applied to sector support under CAP Pillar 2 and consequently the domestic implementation of the National Rural Development Plan. Such analysis would particularly serve to better delineate the eligibility criteria that help to prevent CNDPs from unfolding potentially distortive impacts or give rise to support asymmetries (such as e.g. the national application of livestock support payments originally intended to reduce income disparities of livestock producers in less favored areas of the country). 44. To continue support for farm incomes in an environment of declining fiscal space, a gradual phasing out of CNDPs could be initiated starting as early as in 2010. Such phasing out could still be designed so to ensure Figure 11: Recommended future CNDP 100 increasing support transfers to farmers. Figure 11 displays the 80 recommended future CNDP 60 regime with a phasing-out of CNDP recommended CNDPs by an average of 5 40 SAPS percent of EU-15 annually max Dir. Payments 20 current starting in 2010. Such reduction max Dir. Payments (Council option) in CNDP would still be 0 positively overcompensated by 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 the scheduled phasing-in of EU Source: World Bank direct income support payments by 10 percent of EU-15 average. This would induce a 6 percent increase in direct income support payments per year, but would free up about EUR 30 million (BGN 60 million) annually. In addition to substantial fiscal rationalization, this would furthermore facilitate an early adjustment of producers with the mainstream CAP support provisions that will apply once State Aid and CNDP will have eventually been phased out. 32 2.2 Rural Development Support under CAP Pillar 2 45. The EU has a common rural development Table 4: EAFRD allocation for policy, institutionalized as the CAP's rural Bulgaria, 2007-13 [million EUR] development pillar (Pillar 2) and therefore implemented through the agricultural administration. It Year EAFRD is aimed at meeting the investment support and 2007 244.05 restructuring needs of rural regions through a coherent 2008 337.14 set of sectoral and territorial support measures. Within 2009 437.34 the CAP framework, it accompanies and complements 2010 399.10 the market and income support policy implemented 2011 398.06 under CAP Pillar 1. During the recent evolutions of the 2012 397.70 CAP, this rural development pillar has been gaining increasing importance. As is the case in other new EU 2013 395.70 member states, assistance under CAP Pillar 2 Total 2609.09 accounts for about 60 percent of total CAP Source: NRDP BG financial support to Bulgaria. 46. Over the current programming period 2007-13, Bulgaria's National Rural Development Program qualifies for EUR 2.6 billion potential financial assistance from the European Agricultural Fund for Rural Development, EAFRD (see Table 4). EAFRD assistance for Figure 12: Counterpart financing mechanisms under CAP most support measures is Pillar 2 in Bulgaria ­ simplified subject to a two-stage counterpart financing by the Total cost of a non-revenue generating (i.e. "public") rural national budget and project development project beneficiaries (Figure 12). Public contribution 100% Together with EUR 632 EAFRD National budget million in national public 75% or 80% 25% or 20% resources and EUR 1 billion beneficiary counterpart Total cost of a revenue generating (i.e. "private") rural development financing, this allocation is project expected to generate rural Public contribution Private contribution 50% 50% investment projects in National access of EUR 4.3 billion EAFRD budget 75% or 80% 25% or 20% 47. Rural development Source: World Bank aid is managed and delivered by the EU on a decentralized basis, unlike market and income support under CAP Pillar 1. The EU provides a common framework for CAP Pillar 2, similar to a `tool box' out of which member states can select those measures deemed appropriately addressing country-specific rural development challenges. It is therefore left to Bulgaria to define specificities of rural development strategies, programming, and implementation were left to strategic choices made by the Bulgarian Government. For that purpose member states choose from a common, extensive "menu" of support measures, grouped into four so-called "axes" (Figure 13): Axis 1 supports competitiveness enhancement in 33 agriculture and the food-industry through sectoral (investment) grants. Axis 2 (environment/land management) and Axis 3 (diversification/quality of life) support, to different degrees, the wider territorial (social and environmental) implications of farming. Axis 4, LEADER, supports implementation of the other three axes through community- based, local development strategies. Figure 13: General Structure of the European Union's CAP Pillar 2 CAP Pillar 2 RURAL DEVELOPMENT Axis 1 Axis 2 Axis 3 COMPETITIVENESS ENVIRONMENT DIVERSIFICATION Modernization of farms Micro-enterprises Setting up of young farmers Farming in less- Tourism Early retirement favored areas Basic services in the Adding value to agricultural Agri-environment rural areas Afforestation and forestry products Village renewal and Setting-up producer groups Non-productive development Restructuring semi- investments Preservation of rural subsistence holdings Animal welfare heritage ... ... ... Axis 4 LEADER 48. The actual absorption of EAFRD support under all four axes will pose major challenges to Bulgaria. EAFRD support is exclusively being granted on a reimbursement basis, and any annual EAFRD allocations are subject to the so-called `n+2 rule' under which the EC shall automatically de-commit any part of an annual commitment which has not been settled12 by the end of the second year following the year of commitment. Though the very recent start of the Bulgarian Rural Development Program does not yet allow for an evaluation of its effectiveness and its funds use structures, lessons learned in other EU member states demonstrate the need for well- integrated and synergistic programs in order to effectively leverage, mobilize, and eventually absorb available support funds. Selectivity and coherence in measure definition/delineation increase the effectiveness of support programs in addressing country-/region-specific development challenges. Timeliness in programming the specific provisions of Pillar 2 support measures and communicating these to beneficiaries and the concerned administration ensures adequate timing of investment planning/ processing. Simplicity of application and approval processes and procedures reduces transaction costs during the preparation, submission, and processing of support applications and reimbursement claims. 12 This implies that qualifying applications have to be received from beneficiaries, grant agreements have to be signed (contracted), and physical implementation progress has to be made against which reimbursement of investment costs can occur. 34 2.2.1 Structure of the National Rural Development Program 49. Bulgaria's National Rural Development Plan (NRDP) provides a coherent programming framework. As mandated and guided by applicable EC regulations, the NRP builds and expands on the 2007-13 National Strategy Plan for Rural Development (NSP) which defines three following first level objectives: i) to develop a competitive and innovation-based agriculture, forestry sector and food processing industry; ii) to protect the natural resources and environment of rural areas; and iii) to improve the quality of life and diversify job opportunities in rural areas. Based on a detailed analysis of the situation in rural areas and an ex-ante evaluation, the NRDP then lays the programming basis for the prioritization among Axes and the selection of applicable measures within Axes, alongside with financing plans, functional designations and definition of an applicable monitoring and evaluation framework. Table 5: National Rural Development Program ­ Financial Plan by Axes Public Contributions to NRDP EAFRD contribution National Share in Total public budget total public rate contribution contribution contribution [EUR] [%] [EUR] [EUR] [%] Axis 1: Competitiveness 963.9 80.0 241.0 1,204.9 37.2 Axis 2: Environment 637.5 82.0 139.9 777.4 24.0 Axis 3: Diversification 702.1 80.0 175.5 877.7 27.1 Axis 4: LEADER 61.6 80.0 15.4 77.0 2.4 Technical Assistance 98.5 80.0 24.6 123.2 3.8 CNDP rev. modulation 145.5 80.0 36.4 181.8 5.6 Total 2,609.1 80.5 632.8 3,241.9 100.0 Source: NRDP, 2007-13 50. Consistent with the main structural challenges identified13 in the analytical section of its NRDP, Bulgaria has chosen to attach highest priority to Axis 1 and 3, i.e. to supporting, through sectoral (investment) grants, the restructuring and competitiveness enhancement in agriculture and the food-industry, and the need for economic diversification. The Rural Development Program 2007-2013 foresees allocation of 37 percent of the available public contribution (39 percent of the available EAFRD allocation) on Axis 1 measures, 24 percent (26 percent of EAFRD) on Axis 2, 27 percent (28.5 percent of EAFRD) on Axis 3, and 2.4 percent (2.5 percent of EAFRD) on 13 Main challenges identified are: (i) polarized farming structure with a large share of subsistence and semi- subsistence farms; (ii) fragmented land and forest ownership; (iii) low educational level and inadequate qualification of the labor force in the sector; (iv) low productivity in agriculture and food industry; (v) difficult access to credit of small agricultural and forest holdings; (vi) aging labor force in the sector; (vii) high dependence on agriculture and poor job opportunities in non-agricultural sectors; (viii) poor access and low quality of basic services to the population in rural areas; (ix) weak social capital for local development. 35 Axis 4, and 4 percent on Technical Assistance (Table 5). The distribution of EAFRD funds among the four axes is compliant with the minimum axis allocations for the NMS as mandated by the EC14. 51. Bulgaria's prioritization among Axes follows patterns commonly observed among new EU member states (see Figure 14): Figure 14: Rural Development Allocations in New EU Member Countries with relatively States; over 2007-13; Breakdown by Axes [%, EAFRD contribution] lower labor productivity in agriculture are more CZ inclined to emphasize the SK "competitiveness"- SI oriented measures (Axis EE 1)15. On the other hand, BG countries with a higher PL per-capita-GDP have a RO stronger preference for LT measures falling under the "environment" axis.16 HU LV There is no such obvious 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% pattern for the Competitiveness Environment Diversification LEADER & Technical assistance 'diversification' axis. Source: Country NRDPs, World Bank 52. Bulgaria's choice of NRDP measures under all three Axes aims to address a wide range of identified needs. Although it is coherent, Bulgaria's NRDP attempts to address a wide range of structural improvement needs through a high number of individual support measures. Out of about 40 measures available under the EC's EAFRD regulation, Bulgaria selected 30, 23 of which are programmed for implementation in the entire 2007- 13 programming period (see Table 6)17. 17 of these 23 measures were launched between April 2008 and January 2009; the others are foreseen to be introduced by the end of 2009. Those seven measures that were selected but not yet budgeted are foreseen to be introduced at a later stage, thus necessitating a revision and EC-re-accreditation of the NRDP. 14 Council Regulation No. 1698/2005 which requires that: (i) a minimum of 10% of EAFRD contribution has to be spent on Axis 1; (2) a minimum of 25% of EAFRD contribution has to be spent on Axis 2; (iii) a minimum of 10% of EAFRD contribution has to be spent on Axis 3; (iv) a minimum of 2.5% of EAFRD contribution has to be spent on Axis 4. 15 The correlation index between the preference for "competitiveness" measures (proposed shares of axis 1 in the total rural development allocation) and the productivity of labor in agriculture equals -0.8825 and is significant at the 0.01 level. 16 The correlation index between the preference for "environment" measures (proposed shares of axis 2 in the total rural development allocation) and the level of development equals 0.8358 and is significant at the 0.01 level. 17 With the exception of measures 143, sub-measure 2 of 431 and 611, which will be implemented until the end of 2009 only. 36 Table 6: Breakdown by Rural Development Measure, 2007-13 [million EUR] Axis / Measure Public Expenditure Axis 1 ­ Improving the competitiveness of the agricultural and forestry sector 1,204.9 111 Training, information and diffusion of knowledge 102.4 112 Setting up of young farmers 102.4 121 Modernization of agricultural holdings 572.3 122 Improving the economic value of the forests 24.1 123 Adding value to agricultural and forestry products 241.0 141 Supporting semi-subsistence farms undergoing restructuring 144.6 142 Setting up producer groups 12.1 143 Provision of farm advisory and extension services 6.0 Axis 2 ­ Improving the environment and the countryside 777.4 211 Natural handicap payments to farmers in mountain areas 233.2 212 Payments to farmers in areas with handicaps, other than mountain areas 38.9 214 Agri-environment Payments 435.3 223 First afforestation of non-agricultural land 40.4 226 Restoring forestry potential and introducing prevention actions 29.5 Axis 3 ­ Quality of life in rural areas and diversification of the rural economy 877.7 311 Diversification into non-agricultural activities 140.4 312 Support for the creation and development of micro-enterprises 127.3 313 Encouragement of tourism activities 30.7 321 Basic services for the economy and rural population 412.5 322 Village renewal and development 166.8 Axis 4 ­ Leader 77.0 41 Implementation of the local development strategies 53.9 421 Inter-territorial and trans-national cooperation 5.1 431-1 Running costs, acquisition of skills and animation - selected LAGs 10.8 431-2 Running costs, acquisition of skills and animation - potential LAGs 7.2 Other Measure 303.0 511 Technical assistance 121.2 611 Complements to direct payments 181.8 TOTAL 3,241.9 Foreseen for later implementation Indicative expenditure 114 Use by farms and forestry holders of advisory services (2010-13) 36.1 124 Cooperation for development of new products, processes and technologies in the agricultural and food sector (2009-13) 24.1 125 Improving and developing infrastructure related to the development and adaptation of agriculture and forestry (2009-13) 90.4 126 Restoring agricultural production potential damaged by natural disasters and introduce appropriate prevention actions (2009-13) 12.5 213 Natura 2000 payments and payments linked to Directive 2000/60/EC (Water Framework Directive) ­ agricultural land (2009-13) 108.8 224 Natura 2000 payments ­ forests (2009-13) 15.6 341 Skills acquisition and animation with a view to preparing and implementing a local development strategy (2010-13) 61.4 Source: NRDP 37 53. The selection of a relatively high number of support measures along with the decision to launch most of these early on has constrains national absorption of EAFRD funds. As is discussed Box 5: How selective are new EU member states? further below, the administration of every separate measure binds Flexible selection of support measures within the axes administrative resources and allows member states to choose almost any number and requires potential beneficiaries combination of support schemes. A Bank review of rural development programs in new EU member states shows that to get accustomed with measure- within the axes almost all EU8+2 countries prefer similar specific application and types of measures: implementation provisions. Within Axis 1, investment support for agricultural holdings is Though the rationale for the a prime choice. But there are exceptions: Poland, for selection of a high number of instance, allocates most funds to early retirement support in agriculture, a measure getting much less support in most other measures rests on a wide range countries. of sectoral needs, these would Within Axis 2, agri-environmental support as well as have been better addressed by a payments for less-favored areas are the most frequently well-sequenced and progressive chosen measures. Hungary is an exception and attaches much implementation approach. higher importance to promoting the afforestation of agricultural land. Moreover, experience from Within Axis 3, orientation is much less obvious. Countries other new EU member states channel significant funds towards the development of micro- shows that well-prioritized and enterprises in rural areas (e.g., Hungary, Slovenia, Latvia), selective rural development basic services for the rural economies (e.g., Hungary, Poland), programs are more effective in the renewal and development of villages (e.g., Latvia, Estonia) or support for agri-tourism (e.g., Lithuania). leveraging, mobilizing and eventually absorbing the The concentration of funds on individual measures varies available support funds. The greatly. The following serve as examples within Axis 2 (environment): selectivity and coherence in o highly concentrated: Slovenia divides the axis funds measure definition increase the almost equally between only two measures; effectiveness of support o diversified: The Czech Republic and Slovakia chose eight programs in addressing country different support schemes. In Hungary the draft rural development plan outlines as many as twelve distinct specific development schemes. challenges. In addition, timeliness in programming the Slovakia serves as example for particularly a well prioritized and administered NRDP. Approximately 65% specific Pillar 2 measures and of the total public expenditure is concentrated in four communicating these to measures. This is one of the highest concentration ratios of potential beneficiaries and the the rural development resources across the EU-12. Important concerned administration administrative cost savings are generated. In particular, the ensures adequate timing of sizable less-favored area (LFA) scheme creates a significant leverage effect. The measure, which stands for 25% of the investment planning and total public support, is simple and effective from an processing. administrative perspective. Payments are made on an area- basis, similarly with and via the same institutional channels as the Pillar 1 direct payments. There scope, however, is different from that of the regular single area payments. They are designed as compensations payments for pursuing farming in mountainous areas or areas affected by various disadvantages (soil erosion etc.). 38 2.2.2 Implementation of the National Rural Development Program 54. Bulgaria's administrative arrangements for the programming and implementation of the NRDP satisfy the provisions set forth in the applicable EAFRD regulations. The administrative responsibility for the programming and the management of the NRDP rests with the MAF. It is the responsible body for the preparation of the aforementioned Rural Development Policy Documents for the period 2007-13. The administrative responsibility for program implementation rests with the Rural Development Directorate (RDD) within the Ministry of Agriculture and Food which was designated as the Managing Authority (MA), and State Fund Agriculture (SFA) as the accredited single Paying Agency (for details see Section 4). 55. As of the date of this study, 17 measures NRDP had been launched between April 2008 and January 2009. Data provided by the SFA and the MA suggests that Bulgaria' s NRDP is being met by high sector demand and uptake, as currently illustrated by a relatively high number of funding applications received (4628 applications). 56. The MFA's desire for an early launch of a high number of NRDP measures has seriously challenged the SFA's administrative capacities and capabilities over the first years of implementation. The high number of simultaneously launched measures together with a very limited announcement period (between the EC's approval of Bulgaria's NRDP in February 2008 and its launch in April 2008) has not provided the SFA with sufficient time to adjust its administrative and procedural capacity. This has led to a substantial backlog of applications not yet processed. Delays in processing posed substantial challenge the SFA, at the time of this assessment, in complying with the legally mandated response deadline to applicants three months after the submission of an application. Under the given pressures, it is noteworthy that the SFA had, at the time of this assessment, signed 1,223 contracts (amounting about EUR 100 million public support) for only 2 of the 17 measures introduced in the above mentioned period (Modernization of agricultural holdings and Setting up young farmers). 57. This generates two main risks. First, there is a medium-term uptake risk through a loss of trust among potential applicants for the program. Second, there is a budgetary risk potentially imposed should SFA's current workload negatively impact the quality of application appraisals and approvals. In context of the latter it has to be clearly understood that any approved application and investment that the EC will later find incompliant with program funding guidelines would have to be financed entirely from the state budget. Though the number of certified investments might "look good on paper", it would have to be considered unsatisfactory if the EC expressed reservations for more than 2 percent of national certifications. However, given the early stage of the approval process in Bulgaria, no assessment could yet be conducted on the rate of reservations expressed for SFA conducted certifications. 58. These imminent administrative challenges could have been avoided through a better prioritization of launch decisions by the MAF and through adequate staffing of the SFA. The current application backlog is less a weakness of the SFA, than 39 it is predominantly the effect of an overly ambitious implementation schedule by the MAF. It could have been avoided through increased selectivity in terms of the number of selected measures and by more moderate phasing and prioritization of the calls for applications under the NRDP measures. More time before different measures' launch would have allowed the SFA to adjust administrative processes and evaluate in a timelier manner the applications received. For procedural, competitive, and budget planning purposes, a `window' approach to accepting applications (instead of accepting applications for all the 17 measures on a continuous basis) should also have been introduced since the beginning of the NRDP implementation. SFA staff shortages also slowed down the processing of applications. During the preparation of the NRDP, there were expectations that the then capacity of the rural development unit of the paying agency would be strengthened. However, significant increases in personnel have not occurred until 2009, by which time the SFA central office had already become severely strained. The budgetary constraints triggered by the international financial crisis also played a role in delaying new hires. 59. MAF has recently initiated corrective actions to address these bottlenecks. Since the beginning of 2009, applications have started to be accepted under a window approach. In parallel, SFA staff responsible for NRDP implementation has been recently supplemented by some 180 people, which doubled the capacities available at the central level at the beginning of 2009. However, further improvements in the management of applications might be needed (such as better planning of windows etc.). Similarly, it is not clear whether the staffing needs have been yet satisfied, and it is proposed that a functional review of the SFA provides appropriate analytics to underpin future initiatives to upgrade SFA's effectiveness and the efficiency of its service delivery mechanisms. 60. No major challenges were identified from a fiscal point of view. NRDP implementation does not pose major national budgeting challenges per se as 80 percent of public support for RDP implementation is secured from the European Agricultural Fund for Rural Development (EAFRD), and only 20 percent - EUR 632 million for 2007- 2013 period - is to be covered from national budgetary sources (the public counterpart- financing for expenditure incurred under the EAFRD). 61. Sufficient fiscal space has been created to comply with EAFRD counterpart financing obligations. Though program implementation is at an early stage, initial projections as well as past experiences under the SAPARD program suggest that all the matching funds to the in-coming EU rural development resources are made available as needed. Consistent and timely budgetary monitoring and management has allowed for adequate reactions to under- and over-budgeting. 62. Through its financing plan, the NRDP provides a coherent framework for multi-annual budget planning. Transfers from the Ministry of Finance are reflected in the budget of the SFA, which is a first tier budget spending unit. SFA provides to the Ministry of Finance estimates on the expenditures to be incurred under different measures during the following year, including both EU and national contributions. Once the budget is approved, the funds are secured but not made available immediately to the SFA. At the 40 end of each month, SFA submits withdrawal applications to the Ministry of Finance based on the expenditures incurred during that month. SFA pre-finances all the measures from the national budget, and then they are reimbursed from EU for eligible expenditures (through the Special Account opened with the Central Bank). The reimbursement is done quarterly based on reports prepared by SFA. The time lag between the submission of the report and the reimbursement of the eligible expenditures is of 1.5 month. The funds are then transferred to the SFA budget. 63. However, the annual budget formulation process could be enhanced by putting in place more realistic disbursement projections and considering the program performance in the previous years. The planned budget allocations for 2009 show that the amounts budgeted for the RDP implementation are highly overestimated. Despite the low absorption in the first year of implementation (EUR 4.2 million ­ covering payments made under Setting up young farmers, Modernization of agricultural holdings, Provision of farm advisory and extension services and Technical assistance), SFA decided to reflect in their budget the entire RDP allocation for 2009 - EUR 437 million from EAFRD. This is likely to be translated at the end of the fiscal year in a big gap between the budgeted amounts and the payments to be actually executed. Therefore, a more realistic budget forecast is recommended, based on the existing signed contracts and on a realistic estimation of the new contracts to be signed under different support measures. 2.2.3 Further Challenges to the Definition of the Rural Development Agenda 64. As is discussed above, Bulgaria's NRDP provides a relatively coherent but not necessarily well prioritized framework to rural development. The current NRDP will be subject to an obligatory mid-term evaluation, which will be an good opportunity to examine the degree of utilization of resources, as well as the effectiveness and efficiency of the programming of EAFRD18. As part of this milestone, Bulgaria should carefully revisit and address current weaknesses with regard to measure selectivity and complementarity19 and take early corrective measures. Such corrective measures should, at the very latest, be taken in preparation of the NRDP for the 2013-20 programming periods. 65. Meanwhile, programming adjustments had to be made in the light of the ongoing evolution of the CAP: to reflect the outcomes of the 2008 "Health Check of the Common Agricultural Policy" and to incorporate the monies coming under the "recovery package". Among the most important outcomes from a rural development perspective is the forthcoming shift of financial resources from direct aid to rural development mainly for purposes of addressing "key challenges" pertaining to (1) climate 18 Article 86(6) of Council Regulation EC 1698/2005 19 For instance, Bulgaria' decision to implement the Setting up young farmers measures without the complementary Early retirement might lead to a limited impact on inter-generational asset transfers, and thus on farm restructuring, given the significant synergy between the two support measures in achieving the earlier transfer of farms. 41 change, (2) bioenergy, (3) water management, (4) biodiversity, (5) innovation linked to the previous four points, and (6) for accompanying measures in the dairy sector. This transferred money will be co-financed by the EU at a rate of 75 percent and 90 percent in convergence regions. In addition, at the end of 2008, EUR 33.15 million was made available under the European Economic Recovery Plan (EERP), in response to the current challenges in the international economic environment. The funds coming under this so-called "recovery package" should be used for developing broadband internet in rural areas, as well as for supporting the new priorities that have resulted from the Health Check. Bulgaria intends to use this additional budget to support water management (56% of the funds), renewable energy (35%) and restructuring of the dairy sector (9%). 66. In addition, there is a need to make more systemic efforts, within and beyond the agricultural administration, to maximize the synergies between the use of European Agricultural and Structural Fund. Bulgaria should ensure complementarity and coherence between actions to be financed by the EAFRD, the Cohesion Fund, and the European Social Fund on a given territory and in a given field of activity. Although the demarcation line and the coordination mechanisms between actions supported by the various Funds are defined in the national strategy plan and in the NRDP, the implementation of those provisions is still lagging behind. If not addressed properly, this might lead to overlaps between investments funded from different sources. 67. Preparation of the NRDP for the 2014-20 programming period should start in 2011 at the latest. Experience has shown that NRDP preparation and accreditation is a time-consuming process. A finalization of preparations for the forthcoming NRDP towards the end of 2012 at the latest would allow for adequate transparency and investment planning among potential beneficiaries and for adequate capacity adjustments in the agricultural administration. 68. With a view to the medium-term challenge of supporting competitiveness and efficiency enhancement in its rural sector, Bulgaria should strongly rely on CAP Pillar 2 interventions. Though many of the new EU member states require effective support to sector restructuring, the need is even more pronounced in Bulgaria, where about three quarters of all agricultural holding are below one hectare in size. The use of direct payments and other types of EU-regulated support (e.g. state aid) might be more justified to provide short-term mitigation of potential income losses during the first years of EU accession (i.e., raising incomes, contributing to income stability, correct price distortions). However, these payments are not intended to play a direct role in raisin competitiveness; on the contrary, they are more likely to reduce incentives to restructure, and carry a risk of irreversibility and entitlement. An enhanced focus on investment and risk-mitigation programs in the CAP Pillar 2 context, on the other hand, provides incentives for competitiveness enhancement and economic diversification, and thus contributes to raising farm and non-farm incomes in a medium- to long-term and reduce income (cross-regional and cross-sectoral) income disparities. 69. In this context, it is acknowledged that fragmentation in land owner- and operatorship still represents a key development challenge to the sector. Unresolved 42 land administration and consolidation challenges impede substantially on the capacity of potential NRDP beneficiaries (to provide satisfactory collateral need to obtain commercial credit to counterpart-finance potential investments. Well aware of these, Bulgaria has decided to program EAFRD resources for public support to consolidation of agricultural land. This is planned as a sub-measure of the support for improving rural infrastructure, and will be piloted in the second half of 2010. However, implementing such a decision might be considered not prudent in absence of a clearly defined Land Consolidation Strategy. It is thus strongly recommended that MAF initiates the development of a National Land Consolidation Strategy without further delay, to define its preferred future approach and related processes. 70. Unless the Bulgarian government introduces appropriate measures, beneficiaries' lack of access to rural/agricultural credit will impede implementation of the NRDP and the absorption of EU funds. One of way of addressing this issue is to support establishment of venture capital funds, loan funds and credit funds within an existing financial institution to invest or provide guarantees to enterprises on their establishment during their early stages or expansion, but only in activities that fund managers consider potentially viable. Precautions however shall be taken by the Managing Authority and the funds to minimize the distortion of competition in the venture capital or lending market. The contribution to the funds from public sources and investments made by the funds in or guarantees provided to individual undertakings are subject to the rules on State Aid (Regulation 1974/ 2006). 43 State Aid and National Programs 71. With the EU member states implementing a common sector policy via the two European agricultural funds, any additional nationally funded support to domestic agriculture is subject to substantial EU legislative regulation and EC approval requirements. State Aid and national programs remain, however, as important policy instruments, particularly in addressing development challenges not covered by the CAP and that may justify public intervention (e.g. delivery of certain public goods, support to cultural heritage such a rare horse breeds, or risk and crisis management for events like animal diseases or natural calamities). State Aid programs are primarily granted for the production, processing and marketing of agricultural products and must be communicated to the EC before their implementation20 (most need authorization from the EC)21. In the case of Bulgaria, all State Aid programs but one will be terminated at the end of 2009. The total budget envelope for State Aid was not made available for this study. National Programs, also financed out of the national budget, provide for administration and services that are either voluntary or mandated by EC regulations, such as veterinary or advisory services. National programs in 2008 represented about BGN 275 million22. 2.3.1 State Aid 72. The European Union definition of State Aid applies to any measure providing national businesses with an "advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities". The EU has therefore pronounced a general prohibition of State Aid under Article 87(1) of the Treaty. However, it also recognizes that "in some circumstances, government interventions are necessary for a well-functioning and equitable economy" and therefore allows for "a number of policy objectives for which State aid can be considered compatible" under Articles 87(2) and 87(3), the so-called "exemptions". However, these State Aid measures are tightly regulated, monitored and assessed by the European Commission through a system of rules and regulatory acts23. They fall under three categories: 20 There are a few exceptions to the notification requirement, such as aid covered under Regulation (EC) No 994/98. 21 Currently, only schemes with limited duration, which is the case for all State Aid in Bulgaria, need authorization as all but one are set to expire at the end of 2009. 22 Excluding the BGN 113 million Tobacco fund which, although in the National Programs budget, is actually a State Aid which will be phased out at the end of 2009. 23 State aid for agriculture is regulated by the European Commission, primary under (i) "Commission Regulation (EC) No 1857/2006 of 15 December 2006 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises active in the production of agricultural products and amending Regulation (EC) No 70/2001 (OJ L 358 of 16.12.2006)", (ii) "Community guidelines for state aid in the agriculture and forestry sector 2007-2013 (OJ C 319 of 27.12.2006)" which cover most sorts of State aids such as investment, environmental or disasters aids" and the Commission Regulation (EC) No 44 · Existing State Aid: State Aid measures in place before accession and approved by the EC to be extended until the end of 2009 ("sunset clause"); · New State Aid: State Aid measures put in place after accession which require EC approval (on a no-objection basis) and registration and which can be extended beyond 2009; · De Minimis: State Aid measures which, for simplification, can be put in place without prior registration and approval by the EC within a maximum authorized envelope and a limit per beneficiary. 73. State Aid rules in the agricultural sector are based on three different perspectives. Firstly, the agricultural State Aid rules follow the general principles of the European Union's competition policy. Secondly, State Aid rules in the agriculture sector have to be coherent with the provisions of the CAP. Finally, the rules have to be compatible with the Community's international obligations, in particular the WTO Agreement on Agriculture. Box 6: Types of State Aid acceptable to the European Commission EC guidelines describe the main types of aid, which the EC can accept, and the conditions attaching to the granting of the aid. These can be summarized as follows: · aids for investments on farms can normally be permitted at up to 40% of eligible expenses, or 50% in the less favored areas; higher rates of aid may be allowed for investments linked to the conservation of traditional landscapes, the relocation of farm buildings in the public interest, or to the improvement of the environment, animal welfare or hygiene; · aids for investments in the processing and marketing of agricultural products are governed by the provisions applicable to State aid in the industrial sector. The aid intensity, however, will be, in general, higher than for the industrial sector · aids granted in return for agri-environmental undertakings given by farmers and other environmental aids; · aids to compensate for handicaps in less favored areas; · aids to help the setting-up of young farmers; · aids for early retirement, the cessation of farming activities, or the closure of production, processing and marketing capacity; · aids for the establishment of producer groups; · aids to compensate for damage caused to agricultural production or the means of production caused by natural disasters or exceptional occurrences, adverse weather conditions or outbreaks of animal or plant disease, and aids granted to encourage insurance against such risks; · aids to encourage the production and marketing of quality agricultural products, the provision of technical support for producers and the improvement of the genetic quality of livestock; · aids to grant specific support for the outermost regions and the Aegean islands. · Natura 2000 payments and payments linked to Directive 2000/60/EC; · aid for meeting standards; · aid for advertising of agricultural products; · aid relating to exemption from excise duties as provided for in Directive 2003/96/EC (taxation of energy and electricity); · aid for the forestry sector. Source: SCADPlus information services of the European Commission 1535/2007 of 20 December 2007 on the application of Articles 87 and 88 of the EC Treaty to De Minimis aid in the sector of agricultural production (OJ L 3337 of 21.12.2007). 45 2.3.1.1 Existing State Aid 74. Bulgaria's existing State Aid measures are highly fragmented and do not build on a coherent objectives and results framework. Bulgaria has opted for 100 different State Aid measures for agriculture, clustered into a fairly complex set of 9 categories under 6 different Ministries or Agencies. Such a complex structure typically leads to increased administration costs and diluted impact. Since policy makers at neither the Ministry of Agriculture nor the Ministry of Finance have access to spending or budget figures for the overwhelming majority of the State Aid programs, it is reasonable to assume that these policies do not fit within an overall strategy, nor do they benefit from coordination or even a central monitoring and therefore no overall accountability. These State aid schemes are established on an annual basis, within maxima previously agreed to with the European Commission, but do not appear to have been defined by clear medium or longer term priorities. 75. The true extent of Bulgaria's spending on existing State Aid is unknown because of the highly fragmented policy development and budgeting system in place. Data is available for only 45 measures under only Table 7: Existing State Aid to Agriculture, 2008 two categories, Allocated 2008 suggesting that this Existing State Aid budget Funding Unit analysis considerably [million BGN] underestimates actual National Schemes of the SFA 60 SFA state spending for National Scheme Tobacco Fund 113 MAF 24 Individual Aid n.a. MoF agriculture (see Table SAPARD Measures 32a SFA 7). The annual envelope Tax Incentives n.a. MoF for the 45 pre-existing National Schemes of the n.a. MLSA, MoE state aid measures for Ministry of Labor and Social which data was available Affairs and Ministry of in 2008 was close to Economy and Energy Forestry Support n.a. NFA EUR 105 million (BGN Land and irrigation n.a. MAF 205 million). There is Legal n.a. not a unitary budgetary TOTAL n.a. process for these n.a: not available financing only (EC funding during 2008: BGN 95 million) a national counterpart initiatives. Instead, the Source: MAF, SFA and MoF various State Aids are spread throughout various government agencies (Ministry of Agriculture, Ministry of Economy, Ministry of Labor and Social Affairs, State Fund Agriculture, Ministry of Finance) who submit their requests and forecasts through the normal budgetary process. 76. The Bulgarian government needs to soon make a policy decision on how to replace the existing State Aid, but some critical inputs into the decision are not available to MAF. Existing State Aid measures are in most part subsidies that are non- 24 Out of the missing 64 measures, one alone has been accredited with an annual budget of EUR 40 million. 46 compliant with the EU CAP but have been given some time past accession date to be phased out or transformed into support that is compliant. In September 2008, a department was finally set up within the MAF to monitor the overall State Aid but also to help the Ministry develop follow-up policies beyond the phasing out of these measures at the end of 2009. The monitoring is still quite limited, as the department, as of early 2009, still does not seem to have complete spending data for 2007, nor budget and actual data for 2008, particularly for State Aid that is being managed by other ministries. Box 7: Two Examples of Existing State Aid Agricultural Finance: The State Fund Agriculture has established investment (7 years) and short-term (1 year) credit lines to the agriculture sector. The portfolio for these credit lines consists of approximately 1,900 long-term loans valued at 200 million BGN for crops, animal breeding and machinery investments, and 500 short-term loans valued at 13 million BGN, primarily for wheat fertilizers and seeds. While before 2000 these credit lines were primarily going through the banking sector, the SFA now operates these credit lines exclusively in the form of direct credit, through its 28 regional offices. Interest rates are subsidized (6% annual for investment and 3% annual for short-term loans) and, in addition, a number of additional subsidies are offered in the form of loan forgiveness or interest write-offs for specific subsectors (e.g. roses, bees, new machinery) or specific regions (Strandzha Sakar, Rhodopes or Northwest Bulgaria). The amount spent on these additional subsidies was approximately 13.5 million BGN, but the budget for 2009 has been decreased to only 5 million BGN. The stated arrears are about 10% of the portfolio, although this information could not be verified. The sustainability of these services cannot be evaluated as the administrative costs of these measures are not distinct from the administrative costs of the SFA. Milk Subsidy: In 2008, the SFA allocated 14 million BGN to provide a subsidy to milk producers. Out of 90,000 producers, about 2,000 were eligible for this subsidy (e.g. EC veterinary standards, minimum 5 cows per farm and other administrative requirements) and received approximately 0.06 BGN per liter quota. In 2009, under pressure from the industry, the subsidy was increased to 0.20 BGN per liter quota, but at the same time the total available envelope was cut by 40% to 10 million BGN, which suggests that this subsidy should run out of funds in the early spring of 2009. Twelve other such measures are in place for targeted subsectors (e.g. production of queen bees, potato seeds, irrigation water for rice production or cotton), totaling, in 2008, about 26 million BGN. 77. The government's options going forward are to either (a) eliminate existing state aide starting January 2010, hence considerably reducing agricultural spending, or (b) transfer part/all the budget from these measures to new measures that are compliant with EC regulations. For example, to replace the investment and short-term credit lines, there may be a rationale to deal with farmers' difficulty in accessing long-term financing and in particular the necessary pre- and co-financing of Pillar II measures. Articles 49-52 of EC Regulation 1974/2006 under EAFRD on interest rate subsidies and financial engineering actions, open the door for Governments to provide this type of aid, but it is also likely that the government would need to implement other related measures such as strengthening of non-banking institutions, contract enforcement or collateral-related issues. Another example is the current subsidy to tobacco production for which potential options have been discussed in Box 3. 47 78. Existing State Aid money has to be carefully targeted to only public goods. Many of the current state aid measures apply to goods that can be considered private in nature, hence distorting competitiveness and silencing market incentives (e.g. use of irrigation water, credit subsidies, etc.). Those public in nature (e.g. maintaining genetic resources under the Livestock Breeding Program; see below) qualify for continued government support. 2.3.1.2 New State Aid 79. Since accession, the Government of Bulgaria has successfully registered with the EC a number of New State Aid measures. Out of a dozen such measures, only one relates particularly to agriculture; it provides calamity impact compensation since this is not covered under any of the CAP support schemes. It provides during 2007- 2012, subsidized short-term loans to compensate losses (up to 80 percent intensity) incurred by agricultural producers for totally devastated areas as a result of natural disasters or adverse weather. The authorized envelope for this measure amounts to EUR 300 million (BGN 586 million) for the period 2007-12, with a maximum of EUR 100 million per year. In 2007, this fund disbursed about EUR 4.1 million (BGN 8 million) to 402 farmers. 2.3.1.3 State Aid under the De Minimis Rule 80. In its attempt to simplify State Aid procedures and monitoring, the European Council enabled the EC in 199825 to adopt "Block Exemptions for State Aid" and allowed the EC to declare specific categories of State Aid compatible with the Treaty, hence avoiding the requirement that member states notify the EC and request its approval each time. The total allowance for the De Minimis is set for every three-year period. For agriculture in Bulgaria, this allowance is set at 7,500 euros26 per beneficiary for a total of 20 million Euros. In Bulgaria, the amount and categories of De Minimis State Aid are set by the MAF and the funds are administered by the State Fund Agriculture. 81. In the first year of EU membership, the De Minimis contribution fell under a very limited number of categories. The 2007 measures were · targeted subsidies to tomato and pepper producers (EUR 0.7 million; BGN 1.3 million); · rescheduling of the farmers debt obligations under the State Fund credit lines; and · subsidies for the purchase of fodder for sheep and cows . 82. However, the bulk of the De Minimis was disbursed in 2008, in the form of a subsidy for the purchase of fodder, as a response to the 2007 drought. It appears that in 2008 alone, close to 20 million Euros were disbursed under this category, or the entire 25 European Council Regulation No. 994/1998 26 This "per beneficiary" limit was increased from 3,000 Euros in 2008. 48 three-year allocation, so that the De Minimis envelope will no longer be available for another two years. 2.3.2 National Programs 83. In addition to the above-mentioned State aid, the Ministry of Agriculture has elected to run a number of programs which should meet national priorities and be consistent with the CAP without being financed by the European Union. Several are mandated and regulated by the European Union (e.g. veterinary or advisory services). These programs range from research to irrigation, advisory services or vocational education. The 2008 budget allocations for national programs, including the Tobacco Fund, was BGN 389 million, broken down as follows: Table 8: National Programs under MAF budget, 2008 plan % of % of program program 2008 spent on 2008 spent on Budget capital Budget capital (BGN expenditu (BGN expenditu National Program million) % of Total res National Program million) % of Total res Crop Breeding (*) 135.1 34.7% 0.01% Animal Breeding 7.7 2.0% 0.01% Agricultural Lands 71.2 18.3% 11.09% Fisheries and aquaculture 4.8 1.2% 17.81% Education 50.2 12.9% 1.72% Agricultural Machinery 2.8 0.7% 1.38% Animal Health 25.5 6.6% 10.80% Food Quality 1.7 0.4% 67.17% Scientific Research 23.3 6.0% 1.68% Advisory Services 1.6 0.4% 0.07% Administration 23.0 5.9% 6.50% Improvement of living conditions 1.3 0.3% 0.00% Food and feedstock safety 21.0 5.4% 0.00% Agrostatistics and forecasts 1.2 0.3% 0.00% Hydroamelioration 8.9 2.3% 76.20% Organization of Markets 1.1 0.3% 0.00% Phytosanitary and plant protection 8.5 2.2% 0.05% Natural Resources in Rural Areas 0.5 0.1% 0.00% (*) Includes BGN113 million Tobacco Fund Source: Ministry of Agriculture 84. The National Program budget finances primarily recurrent expenses. Apart from the irrigation and food safety programs, the budget almost exclusively (94 percent) finances recurring expenses (salaries, maintenance, and subsidies) and approximately 6 percent of the budget is categorized as "administration". The structure and amounts of the 2008 budget are relatively consistent with the 2009 budget, although the exact level of volatility is difficult to estimate considering that the programs were recently restructured. 85. The spreading of budgets among 17 programs and 21 spending units makes a strategic financial allocation particularly challenging. Since a single program is implemented by several spending units and a single spending unit is budgeted through various programs, it is not clear that there is real ownership of these programs by the various directorates and spending units and therefore very little accountability to meet the multitude of indicators under each program27. Furthermore, the clustering of spending 27 Each program has between 6 and 101 indicators, with an average of 31 indicators, some of which can be found in Annex 1. 49 among programs and the definition of these programs has been significantly restructured almost on an annual basis. 86. To improve resource efficiency and guide strategic allocation decisions for the Ministry as whole, one we need to examine individual programs. Ideally, such reviews would examine whether there are clear policy objectives and priorities, and an effective system for monitoring performance. The evaluations could include not only the efficiency and effectiveness of spending but also the consistency of each program with best practice, their compliance with EU mandates and regulations and the contribution of these programs to an overall agricultural policy. To assure objectivity they should be conducted by an coordinated with an entity outside the MAF. (See also section 3.6) 2.3.2.1 National Programs to Consider for Assessment 87. Given general capacity constraints for assessing programs, Bulgarian authorities should focus initial attention on a few priority areas where there is high potential benefit to be derived. The following eight national programs should be priority areas because of their significance in annual budget allocations and/or their contribution to the achievement of the agricultural and rural development objectives of the National Rural Development Program: 88. The Agricultural Land Program (BGN 71 million) aims to ensure the sustainable use of land resources. To this end, the MAF introduces good agricultural practices to agricultural producers28 and assists farmers in the implementation of the European requirements in crop production. The main services/products provided within this program include the development of a soil resources management policy including the protection and consolidation of agricultural land, the management of the Land Parcel Identification System (LPIS) as the administration and control system underlying any CAP Pillar I area payments, and the management of land use mapping and of the State Land Fund. As the LPIS is already subject to heavy regulation and controls by the EC, a functional review should concentrate on applicable policies and processes pertaining to Bulgaria's land use policy. This is particularly relevant as agricultural land fragmentation and an incomplete land restitution process most likely representing the most pronounced hindrances to an effective absorption of CAP Pillar 2 funds and consequently to accelerated agricultural competitiveness enhancement. A proper definition of a land consolidation strategy and operational processes might then allow Bulgaria to address agricultural land fragmentation using CAP Pillar 2 funds. 89. The Hydro-amelioration Program (BGN 8.9 million) finances policy design related to irrigation and drainage, the organization of the investment process into public irrigation and drainage facilities, the organization of water users associations, the monitoring of the National Hydroamelioration Fund, and the concession and maintenance 28 Such as e.g. the forthcoming enforcement of cross-compliance obligations with environmental standards as a prerequisite to CAP Pillar I eligibility of farmers 50 of hydroamelioration sites. No specific information was made available for this study, but the role and importance of irrigation and drainage in Bulgaria (about 20 percent of all arable land is irrigable) suggest this as a priority area for a designated technical and institutional assessment and a determination of the appropriateness of current budget allocations. 90. The Animal Health Program (BGN 25.5 million) budget goes to the National Veterinary Services for activities such as policy development, the financing of the prophylaxis programs and the control of communicable diseases, and the management of the National Animal Identification Database as the administration and control system underlying any direct income support payments to livestock producers (currently via CNDP). As the national animal registration systems are already subject to strict EC control, a functional review should concentrate on evaluating the performance of Veterinary Services using the World Organization for Animal Health's (OIE) international standards of quality and evaluation (so-called PVS Tool and Gap Analysis). The outcome of such evaluation, however, may identify the need for additional investments to be aligned with international good practices. 91. The Food and Feedstock Safety Program (BGN 21 million) finances the administrative activities related to the implementation the European Food Safety Policy, and is closely related to the Food Quality Program ( BGN 1.7 million) which aims to develop an effective control system to assess the quality of agricultural and processed products29. Both programs are under the coordination and control of the MAF Directorate for the Quality and Safety of Food. Control systems to assess food quality of agricultural and processed products are exclusively under the MAF. In continuation of past arrangements, the actual supervision and control of food safety compliance in the areas of vegetable products, restaurants and food outlets is delegated to the Ministry of Health, whereas MAF conducts the control of food of animal origin and feedstuffs only30. The effectiveness and efficiency of these arrangements could not be assessed within the scope of this study and would need to be analyzed in the context of a dedicated functional review. This may help the Government determine the desirability of current arrangements 29 The terms food safety and food quality should not be used interchangeably. Food safety refers to all those hazards, whether chronic or acute, that may make food injurious to the health of the consumer, and is not negotiable. Food quality includes all other attributes that influence a product's value to the consumer. This includes negative attributes such as spoilage, contamination with filth, discoloration, off-odours and positive attributes such as the origin, color, flavor, texture and processing method of the food. This distinction between safety and quality has implications for public policy and influences the nature and content of the food control system most suited to meet predetermined national objectives. (Assuring Food Safety and Quality: Guidelines for Strengthening National Food Control Systems, FAO Food and Nutrition Paper 76, 2003) 30 The Food Safety program finances policy design, the Rapid Alert System for Food and Feed (RASFF), the audit of the Hazard Analysis and Critical Control Point (HACCP) System, TRACES system (for the tracing of trade in animals, raw materials, animal products and foodstuffs of animal origin), training of monitoring bodies, veterinary control and quarantine at border crossing points, control on the sites for extraction, production, manufacturing, storage, package and re-package of raw materials and food of animal origin, veterinary medical control over animal fodder, feed additives and supplements, registration and monitoring of producers and traders of fodder. 51 vis-à-vis the setting up a self-standing agency independent from specific sector ministries. Bulgaria has so far elected not to have a specific, independent Single Food Safety Agency and is not required to establish one under EU legislation as long as compliance with all applicable monitoring standards is ensured. 92. The Scientific Research Program (BGN 23.3 million) primarily finances the activities of the Bulgarian Agricultural Academy with the objective to strengthen the role of agricultural research. The program finances technology development and application as well as the protection of scientific intellectual property rights for innovative products. Assessment shall determine the program's effectiveness at improving the ability of the research community to undertake the technology developments and information generation and dissemination required to improve the competitiveness of domestic agricultural and rural sectors in an EU integration environment. 93. The Education Program currently represents the third largest national program (BGN 50.2 million) and provides vocational education and training through a large number of vocational schools subordinated to the MAF. Recognizing the importance of this program in producing a technically and managerially skilled agricultural work force, the recommended assessment should determine the quality and efficiency of the current network of 96 vocational schools and its staff of 5,000 to serve about 25-30 thousand students?. 94. The Advisory Services Program (BGN 1.6 million) is to finance the activities of the National Agricultural Advisory Service (NAAS), i.e. the provision of information, expert assistance and training to agricultural producers. NAAS has 28 regional advisory service branches and one analytical laboratory. Services offered by NAAS to the agricultural producers are free of charge to beneficiaries. Like in all new EU member states, advisory services are critical to facilitating the adoption of EU requirements and modern technologies by farmers as well as the absorption of EC investment aids under CAP Pillar II. Furthermore, the EC mandates that the delivery of advisory services at least cover statutory management requirements which include environment, animal registration, public, animal and plant health and animal welfare. Though no detailed assessment of this program could be conducted as part of this study, it is quite clear from regional experience that the need for advisory services in Bulgaria's agricultural sector cannot be satisfied based on the current budget allocation of EUR 0.8 million only31. This applies even though advisory services generate additional revenue from assistance to the preparation of applications to the National Rural Development Program (CAP Pillar II). This additional revenue, however, does not fund the provision of basic agronomic and managerial advisory services. A recommended designated assessment should determine whether the existing advisory services provide sufficient access of farmers and processors to knowledge on technologies, policies and related support programs. Furthermore, and in line with a recommendation highlighted in Bulgaria's NRDP, the assessment could support NAAS' strategy development towards an 31 The national budget allocated in 2008 for advisory services in Bulgaria is comparable to that of a country like the Republic of Moldova, with 600,000 farmers. 52 improvement of the range and quality of its services and the development of specialized services for different beneficiary groups. 2.3.2.2 Other National Programs 95. For the following national programs, generally less significant in budget allocation, this study has not determined a technical need for designated assessments. These comprise typical areas of intervention of agricultural ministries in EU member states and, moreover, largely constitute obligations assumed under the CAP: 96. The Market Organization Program (BGN 1 million) finances coordination and oversight activities related to the implementation of the EU's Common Market Organizations (CMOs) under CAP Pillar I. This program finances primarily policy design, as well as the SFA-executed licensing of imports of agricultural products from third countries, administration of tariff quotas, preparation of information on exports and imports of agricultural products, and regulations of activities related to the production and trade of products such as sugar, meat, eggs honey and milk. 97. The Rural Natural Resources Program (BGN 0.51 million) as well as the Improvement of Living Conditions in Rural Areas Program (EUR 0.67 million or BGN 1.3 million) finance primarily the activities of the EAFRD Managing Authority within MAF related to the policy making and coordination process for support measures under the NRDP (CAP Pillar II). 98. The Agrostatistics, Analysis and Forecasts Program (BGN 1.2 million) finances collection and processing of statistical information on crop and livestock, the structure of farms and agricultural producers' incomes, the preparation of reports on major crops in the country and the introduction of the accounting system for agriculture. It thereby contributes to the EC-demanded provision of statistical information via the Farm Accountancy Data Network (FADN). 99. The Crop Breeding Program (BGN 135 million) currently represents the largest national program. It, however, will be considerably reduced by the end of 2009 as the current tobacco subsidy, which accounts for almost 85 percent of this budget envelope, is subject to a mandatory phasing out (see discussion on CNDP and Existing State Aid above). Other activities under this program include the licensing of public grain warehouses, product labeling and laboratory analyses in accordance with EU requirements. 100. The Phytosanitary Program (BGN 8.5 million), implemented by the National Service for Plant Protection, Quarantine and Agrochemistry, monitors producer compliance with EU phytosanitary requirements, and tests and authorizes agrochemicals such as fertilizers and pesticides. 101. The Animal Breeding Program (BGN 7.7 million) finances the national livestock development policy formulation and the monitoring of livestock pedigree programs including livestock selection and reproduction management. It thereby 53 contributes to maintaining breeding book registries for high pedigree agricultural livestock, as well as to financing breeding activities and stations for traditional Bulgarian livestock breeds (e.g. East Bulgarian Horses). 102. The Fisheries and Aquaculture Program (BGM 4.8 million) finances policy formulation and is in charge of the management, monitoring and preservation of fish resources, the maintenance of a statistical information system on fisheries and the management of the resources of the European Fisheries Fund (EFF). 103. The Agricultural Machinery Program (BGN 2.8 million) finances activities related to the enforcement of national and EU provisions pertaining to the registration, technical inspection and licensing of agricultural machinery. It constitutes a central administrative element in the enforcement of cross-compliance obligations with environmental standards as a prerequisite to CAP Pillar I eligibility of farmers. 54 3. Institutional Aspects of Public Expenditure Management in Agriculture and Rural Development 104. The institutional framework in Bulgaria for implementing the CAP, is consistent with the policies and guidelines provided by the EU. The SFA, as the designated paying agency, has performed its functions with a relatively low administrative cost by EU standards ­ averaging 3 percent of the transferred amount. Implementation of CAP, however, could be improved through administrative changes that would make it easier for farmers to access the available programs. The MFA has the overall responsibility for CAP implementation, with the Rural Development Directorate (RDD) serving as Managing Authority (MA) over NRDP implementation. Despite this authority, in practice the MFA appears to play a very limited role in providing budgetary and policy guidance to SFA. Capacity challenges at MFA are most clearly seen in the budget planning and management process used for its own national programs (i.e., those not directly under CAP). Annual budget allocations are adjusted incrementally with little strategic policy analysis to inform the allocation of budget resources and/or to assess the relative impact on sector outcomes. Though the MOF encouraged introduction of performance based budgeting in all line ministries, the underlying policy planning processes of the MAF have not been strong enough to take advantage of it. Budget programs exist on paper, but the managerial structure of the MAF is not well-aligned to promote accountability for program objectives. 3.1 Institutional Responsibilities in the Sector 105. The Common Agricultural policy is implemented by the Ministry of Agriculture and Food (MAF) in collaboration with the European Commission (EC). The Minister of Agriculture is the "competent authority" responsible for the accreditation of the paying agency, the determination of the Certifying Body and the monitoring and control of the paying agency.32 The Ministry as an institution leads the policy formulation process and has been the responsible for the preparation of the Rural Development Policy Documents for the period 2007 ­ 2013. MAF ensures that all legislative, statutory and administrative provisions are adopted to ensure effective protection of the European Community's financial interests, insuring that the relevant management and control systems in place for clear allocation and separation of functions between the Managing Authority and other bodies involved in implementation of the rural development policy, and the management and control systems function effectively throughout the program period. 106. The MAF's Rural Development Directorate (RDD) acts as the Managing Authority (MA) for CAP pillar 2. In pursuance to Article 75 of Regulation (EC) No 32 This monitoring function is held by the Directorate for Monitoring and Coordination of the Paying Agency. This directorate is under direct control of the minister and provides him with information on the paying agency's performance. With regards to the link between this directorate and the minister, its role is different from that of the Certifying Body. 55 1698/2005, it contracts and defines the mission of the paying agency and other organizations linked to the implementation of the CAP; it is responsible for the technical assistance budget, attributing funds to organizations which provide assistance to farmers; administers Axis 4 (LEADER) Measures targeting local action groups; and serves as the secretariat for program monitoring which supervises and controls the implementation of the CAP through the Management Committee33. The MA has ultimate responsibility for communicating with farmers about the implementation of the CAP. Figure 14: Organizational structure of agencies implementing the CAP in Bulgaria. Ministry of Agriculture Paying Agencies Public Agricultural and Food Consultancies National level 1 office each MAF MARD PARDF PA PIAA NAAC NAAS Regional level PA-DO RPCRDF PA-LTI 11 offices District level DDA DARD CPORDF PA-RO COPIAA RAAS COAC 28 offices each Local level 234 offices related to 5529 AMS DARD LCPIAA LCAC communes Note: MAF = Ministry of Agriculture and Food; DDA = District directorate for Agriculture; AMS = Agriculture Municipal Service; PA = Paying Agency; PA-DO = Paying Agency District Offices; PA- LTI = Paying Agency Local Technical inspectorate; PA- RO = Paying Agency Regional Offices; NAAS = National Agricultural Advisory service; RAAS = Regional Agricultural Advisory Service. 107. Regional and local offices of the MAF are important to program implementation. The MAF is represented at the district level by the District Directorates for Agriculture.34 For CAP implementation, these directorates are principally responsible for coordination and communication between the central ministry and the municipal services. To some extent they also participate in the training of the municipal services and to the publicity process regarding CAP. At the municipal level, MAF is represented by the Agriculture Municipal Services35. Their central task is to register farmers and help them apply for direct payments. For direct payments, they are often the intermediaries between farmers and the paying agency. Farmers can ask them to fill out the application 33 The Management Committee is chaired by the Minister of Agriculture and Food and also includes the directors of directorates involved in the CAP implementation. For more details on the organization of this committee, please refer to the Rural Development Program 2007, 237. 34 The district level corresponds to the NUTS3 level in the European statistical regions (Nomenclature of Territorial Units for Statistics). There are 28 districts in Bulgaria. (Cf. http://ec.europa.eu/eurostat/ramon/nuts/home_regions_en.html). 35 The municipal level corresponds to the LAU1 European level (Local Administrative Units). There are 260 municipalities. Some of them do not have Agricultural Services. 56 forms, obtain satellite pictures of their land, or just send their application to the paying agency. The municipal services check the documents in order to send the correct and properly completed documents. The services often help experts who come to villages to make on the spot checks regarding land declarations. Concerning the rural development measures, the services participate in the publicity process, provide information and organize meetings in collaboration with the paying agency and the RAAS. 108. Bulgaria has accredited the State Fund Agriculture (SFA) as the single Paying Agency, through which support is provided to agriculture and rural areas with funding under CAP Pillar 1 from the European Agricultural Guarantee Fund (EAGF), under CAP Pillar 2 from the European Agricultural Fund for Rural Development (EAFRD), and the state budget contributions to both CAP Pillars. The responsibilities of SFA are to comply with EC rules and regulations regarding eligibility of requests, keeping accurate accounts of made payments and documentations. It's three main functions are (1) authorization and control of payment in order to establish the conformity of payments to claimants; (2) execution of payments, settling the authorized amount to the claimant; and (3) accounting for payments, recording all payments in the Agency's accounts. With regard to the implementation of the rural development measures, SFA performs the functions of project assessment, approval, definition of commitment levels and contracting. 109. The Rural Development Department within the SFA was set up in order to take up the responsibilities for the implementation of the measures of the RDP 2007-2013 and to be in charge of authorizing the amounts to be paid to the beneficiaries under the RDP measures. The organizational structure of the RDD department ensures internal segregation of responsibilities regarding project approval and contracting, and authorization of payments. On central level, the implementation of the measures is a responsibility of the Contracting Sector and the authorization of the payments is performed by the Authorization of Payments Sector. On regional level, these functions are charged respectively to the 28 PA Regional Offices and the 11 PA District Offices. 110. SFA has a responsibility to provide project data for monitoring purposes to the MA. Three departments carry out this duty. The Internal Audit Department is responsible for the accuracy of accounts, including independent assessments and consultations aimed at improving the operations of the SFA. The Internal Control Department carries out internal performance management. Finally, the Fraud and Corruption Prevention Department is in charge of corruption issues. 57 Box 8: Other Organizations Involved in CAP Implementation The National Agricultural Advisory Service (NAAS) is responsible for measure 143 of the NRDP: "Provision of farms advisory and extension services in Bulgaria and Romania." As such, NAAS participates in communication and technical assistance processes via its regional agencies. This organization plays a central role in helping and encouraging farmers to participate in CAP measures. The NAAS must also help farmers (mainly small farmers) with the preparation of business plans and preparing applications for three rural development measures (112, Setting up of young farmers, 121, Modernization of agricultural holdings, 141, Semi-subsistence farming) until the end of 2009. This service is delivered for free to farmers (compare with Annex 5 for details of the measures). The National Agricultural Advisory Services also have district representatives, the Regional Agricultural Advisory Services (RAAS). Experts working in these regional organizations are responsible for writing business plans and applications until the end of 2009 and for providing advice to farmers in terms of agricultural techniques. The RAAS experts number at least four: the chief, an engineer in agriculture, an agro-economist and an agronomist. Moreover, due to increasing workload, external experts have been hired to write business plans. The Certifying Body (Grant and Thornton Ltd. until 2008 and currently Deloitte) is responsible for the control of the paying agency with respect to accreditation criteria. These criteria cover the accuracy of accounts, security of IT systems and accuracy of on the spot controls. Unlike the Directorate for Monitoring and Coordination of the Paying Agency, the Certifying Body is independent from the ministry and reports to the EC. Private Extension Services are developing in Bulgaria because of the demand for assistance in applying for rural development measures from large scale farmers. These organizations mainly target large-scale farmers. Their activities range from the writing of business plans to technical assistance on topics such as cultivation techniques. They are situated both at the national and at the district level (Cf. Box 10). Some agricultural associations and NGOs at the national and decentralized levels are involved in the decision-making process through their participation in the Program Monitoring Committee.36 On the other hand, organizations like the Association of Oil and Protein Crops Production are now members of the committee responsible for assessing applications to rural development measures (Cf. Box 10). Finally, in RDP 2007-2013 it was planned that a network involving all CAP stakeholders would be created. This National Rural Network shall serve as the key venue for the exchange of practices and information among stakeholders" (RDP 2007, 63, for more details regarding this network, please refer to RDP, 2007, 275-278). 3.2 CAP Administration Costs 111. Experience across the NMS has shown that countries with single paying agency report lower administrative costs than countries having established separate paying agencies, and Bulgaria's experience is fully consistent with that. Bulgaria's CAP administration costs amount to 3 percent of the transferred amount. This is despite the fact that wage costs increased by 50 percent compared to the previous year.37 Bulgaria's administrative costs compare to about 3-4 percent in Slovakia and Hungary and about 5-7 percent on average among many EU member states. Some NMS having 36 "The Program Monitoring Committee oversees the effectiveness and the quality of program implementation with regards to program objectives and therefore shall review and take program management decisions" (RDP 2007-2013). Participants consist of CAP stakeholders from the public authorities to representatives of civil society. 37 Total number of staff increased by only 30 percent during, suggesting that some of the increase in personnel costs was due to increase in average pay. 58 chosen a two-paying-agency-approach are estimated to have administration costs of around 10 percent and above. 112. Relative costs of CAP administration in Bulgaria are projected to further decline in the coming years. A main reason for the reduction in administrative cost per transferred support budget is the projected increase in transfers from the European agricultural funds as payment rates increase along the phasing-in schedule. Administrative costs may nevertheless increase in some sub-functions, for example, the introduction of animal CNDP is expected to cause a slight increase in administrative costs compared to the area-based support scheme. On the other hand, administrative improvements could eventually lower costs in other sub-functions ­ e.g., electronic application systems and remote sensing techniques (in contrast to physical on-spot controls) are reported by the EC to be a more cost-effective control method. 113. SFA may face a fiscal risk over the long run due to additional non reimbursable payments. A 2 percent threshold is the EC accepted limit of reservation on certification projects. If there were an increase in the number of SFA-certified payments that are refused by the EC and not reimbursed that would most certainly increase administrative pressure on SFA. 3.3 Efficiency of CAP Implementation for Beneficiaries 114. While keeping costs down is an important performance criteria for SFA, the relative costs need to be weighed against the effectiveness in providing services to farmers. Though implementation of the RDP is still in its early stages, some lessons are already being drawn on how program effectiveness could be enhanced. The first four issues identified relate to how well front and back-office functions are coordinated. The later five concern the relationship between farmers and front-office functions. 115. The lack of decentralization increases regional inequalities in access to CAP measures and contributes to the delays in CAP implementation. In the case of SAPARD, the centralization of services in Sofia led the regions closer to Sofia to benefitting more from the program. This may be still the case for CAP implementation. Information does not circulate easily between the different administration levels leading to delays in the implementation of the CAP. 116. The lack of transparency and information regarding application processing impedes the efficiency of front offices in service delivery to farmers. First, information regarding changes in legislation or application forms does not reach front offices in a timely manner. NGOs as well as private extension services are sometimes required to re-do a business plan because of unexpected changes in administrative documents. Second, data used to prepare applications and process applications are not updated. 59 117. Representatives of the paying agency generally consider the three months they have to process an application to be inadequate given the lengthy procedure involved. The current delays encountered by the paying agency are firstly linked to the lack of adequate human resources at the beginning of the RDP implementation. Nevertheless, it appears that on the spot checking and the business plan monitoring take more time due to the multiple checks required. Consequently, the three months estimated for processing applications appears too optimistic, particularly with the current human resource constraints and centralized organization of the paying agency. 118. The private extension services, which could compensate for the deficiencies of the NAAS, do not reach small farmers. Given the restricted number of people working in the NAAS and the inefficiencies regarding human resources, the NAAS cannot provide assistance to all farmers who might need it. Underserved farmers can go to private extension services in order to obtain the help. However, farmers have to pay for the services received from these organizations (payments are linked to the amount of subsidies received by farmers from the rural development measures). Small farmers, who cannot afford to pay these fees, are consequently excluded from this system and cannot obtain better advice. 119. The administrative burden for small, old or uneducated farmers to apply for rural development measures or direct payment are often too high. Given the limited access they have to free services and to private extension services, farmers have argued that the administrative costs of applying for CAP measures are too high. The documents required to apply for rural development measures are difficult to access. Farmers living in remote areas find it difficult to access people who might help them. These farmers consider their investment in time and money to be higher than their potential gains. On the other hand, some young farmers need to be better informed regarding the penalties they encounter if they do not fulfill the business plan they proposed to obtain subsidies. 120. Office locations at the decentralized levels do not always adhere to the one- stop shop. The tools proposed by the MAF for farmers to provide feedback or to complain about corruption or other issues appear inappropriate. While most of respondents know where to complain, the large majority has never heard about the clients' charter, nor about the inquiry card available on the Ministry's web page. 60 Box 9: Farmers' opinion on CAP service delivery in Bulgaria An IAMO survey of 20 farmers in the Plovdiv district, Bulgaria, shows that farmers are well informed about how to make use of the different CAP measures. However, service delivery is regarded as slow and, in the farmers' eyes, government agencies expend little effort to make information and advice easily accessible for farmers. Farmers were unhappy about the assistance provided during the application process, in particular from the AMS at the local level, which they regarded as lacking the necessary competencies. Some farmers benefited from qualified, free services provided by the foundation "Land - Source of Income" in the district. In addition, private extension services were used, primarily by the better-off farmers. To receive advice, farmers prefer to contact agency staff personally, if possible, directly in the villages. Moreover, they noticed that the quality of information increases the higher the level of the agencies. The main reasons for not applying for CAP measures were high administrative costs, the complexity of the application records and the costs implied by adherence to cross compliance regulations. Some farmers formally submitted a complaint about poor services to the next higher government authority. However, the hotline for registering corruption, the client charter and the inquiry card from the MAF are not well known among the farmers. As a whole, in the farmers' opinion, the service delivered by the organizations has improved in recent years. But there is still dissatisfaction with the transparency and trustworthiness of agencies even if the farmers have no evidence about corruption practices. Finally, farmers also complained about substantial delays in payments. Source: Marquardt et al. (2009a). 3.4 Budget Planning at MAF 121. Budget planning in MAF is largely incremental without an effective integration of strategic planning into annual resource allocation decisions. Budget planning within the MAF reflects characteristics common throughout the Bulgarian public administration, where the department responsible for preparation of the budget within the ministry is generally divorced from the policy making and policy planning function. Although the budget department formally initiates and manages the budget preparation process, its role is limited to seeking inputs from various departments on their expenditure needs for the coming year. Although guided by the MOF's budget instructions, it is not uncommon for the aggregate needs of the departments and services to exceed the available resource envelope. The decisions about how to prioritize allocations among the departments is made by a senior level committee within the MAF, but with limited analytical input from the budget department with respect to policy priorities or cost-effectiveness of different program options. The budget department maintains predominately an accounting function, but no other technical unit exists that has responsibility to guide the senior ministry officials in their evaluation. Without such analytical inputs, there is a risk that annual budget allocation decisions become ad hoc and are made without reference to economic cost-benefit. 122. The sector wide perspective is missing from MAF budget documents. Though MAF's budget is only a small portion of the total aggregate spending for the sector, the ministry nevertheless is expected to maintain stewardship responsibility for the entire sector and implementation of the CAP. The program budget that is presented to Parliament in particular, presents an opportunity and responsibility for the MAF to present how its programs and activities fit within the overall outcomes envisioned for the sector. Instead, the MAF's program budget presents only national programs, with very limited reference to the programs financed under pillars 1 and 2 of the CAP. The overall dynamics of the sector should be put in perspective, possibly drawing from the body of 61 work already existing under CAP, with some linkages to how MAF's activities contribute to or supplement this. 123. Program structure is not used for planning or management purposes within the MAF. Department heads are generally unfamiliar with the program structure of the budget, as presented to Parliament. This is probably not unique to MAF, but common across the public administration, the program budget is viewed merely as a reporting responsibility of the ministry's budget department. Though the budget department reports on budget allocations and expenditures by program, it is predominately an after- the-fact reporting that does not reflect how allocation decisions are made. Even in narrowly defined programs such as Food Safety, the responsibility rests with the head of the department and heads of the relevant services outside the ministry (e.g., veterinary services). The head of the department is not specifically tasked with the program outputs to deliver, but only the responsibility of his/her department. Therefore, in budget planning the decision-making is fragmented, without someone having an overview of how to allocate within the overall Food Safety program. 124. MAF's program budget lacks information that would communicate overall sector priorities and enable assessment of sector performance. The budget document presents a collection of individual programs, but it lacks a summary that would explain the prioritization across the programs or that links the proposed allocations with the priorities for the year in financial and non-financial terms. Many of the indicators used are for very narrow outputs produced through specific activities, there are no higher level outcome measures by which policy makers could track performance of the overall sector. Although achievement of sector outcomes is not fully within the control of the MAF, the ministry should play a central role in guiding the overall sector policy development process, especially for non-CAP activities. Monitoring of outcome indicators also provides a foundation for evaluating periodically whether the annual outputs of the ministry are appropriate ones for the intended results. Unlike the outputs for the programs, the sector-wide indicators might only be feasible to measure every 3-4 years. 125. Program indicators could be better focused to reflect program priorities and used to explain funding needs. The performance indicators included in the budget document are very comprehensive and would appear to provide a good basis for departmental management, but they also suggest a lack of prioritization at the program and policy levels. Many of the indicators may be important for internal monitoring in the MAF, but they do not need to be included in this high-level document. Some of the dynamics about what is going on in each program areas, how it affects program performance, and what the MAF will do about it, are all aspects that could be reflected in a better budget document. 126. Oversight by MAF of the SFA seems weak in practice despite the formal supervision role they are assigned by law. MAF officials should understand the budget for the SFA and the working assumptions on which it is based. This is important in its overall oversight role, and more specifically, to confirm that the potential budgetary impact is accurately estimated. It appears that some basic information about the program 62 costs are not well known at MAF. Furthermore, the annual budget requests of the SFA reportedly go directly to the MOF without consultation with MAF officials. One possible consequence of the limited checks has been that SFA overestimates its budget needs for implementation of Pillar 2 programs by assuming that all EU funds programmed for the year can be absorbed in that year. However, as noted in the previous chapter, the historical data on the rate of utilization and uptake by program beneficiaries suggest that the actual need for funds from State budget will be much less. 127. The quality of spending by the MAF may be affected by wide fluctuations between the planned and the actual budget allocations realized during the year. The MAF's actual program expenditures for 2008 indicated that there have been big variances between original planned and actual budget execution (see Table 11). Some programs increased or decreased by over 20 percent during the year, even though the aggregate budget for the MAF rose by only 11.5 percent. There was a tripling in the budget for the development of agricultural infrastructure due primarily to the natural disaster that occurred that year. However, that cost could have been fully absorbed in the nearly BGN 45 million increase in the ministry's overall budget that year without reallocation from other programs. The data shows that there were other programs that experienced big increases in spending, and only one that witnessed large losses in funding (50 percent). 128. Budget planning capacity could be further strengthened in the MAF as usually the Ministry is overshooting its budget. Total spending of the Ministry is consistently higher than planned in the budget law over the last three years. Most of the overspending was directed to the administrative functions of MAF--for staff payments and operations and maintenance. While staffing was consistently lower than planned, actual labor costs were usually higher than planned and contributed to substantial part of overspending. The other line item that was usually requiring more resources than budgeted was operations and maintenance expenditure. Controls on capital spending have been the most relaxed of all, with actual spending in 2008 almost double the amount envisaged in the budget law. At the same time, despite more resources spent on administration and maintenance, subsidies to the sector turned out to be smaller than budgeted (Table 10). Table 10: MAF Budget (actual to planned*, %) 2006 2007 2008 Total expenditures 107.4 108.0 111.5 Wages and other remunerations 103.5 108.7 110.4 Social contributions 99.9 105.3 100.3 Operations and Maintenance 116.1 120.2 109.2 Scholarships 85.6 80.9 57.6 Subsidies to non-financial enterprises 95.5 87.0 99.7 Capital expenditures 162.2 132.4 188.0 * According to budget law. Source: MOF 63 129. Greater budget discipline needs to be enforced collectively by the Cabinet, and in turn by the MOF as its agent. International good practice in public finance management is to require ministries to fully anticipate the cost of new policy initiatives before the budget is sent to Parliament. Natural disasters and major changes in the economic climate can justify amendments to the budget, but the anecdotal evidence from Bulgaria suggests that many changes are driven by changes in policy that are initiated by Government. Table 11: Ministry of Agriculture and Foods, 2008 Program budget Plan Execution Difference In thousand BGN % TOTAL EXPENDITURES 389,562 434,419 11.5 Agricultural Land 71,185 35,308 -50.4 Natural resources in rural areas 509 540 6.0 Crop production 135,077 138,941 2.9 Phytosanitary control and plant health measures 8,544 11,373 33.1 Hydromelioration 8,945 42,486 375.0 Animal healthcare 25,497 33,004 29.4 Livestock breeding 7,692 10,614 38.0 Market organization 1,079 1,363 26.4 Agricultural statistics, analysis and forecasts 1,246 2,954 137.1 Scientific research 23,302 26,757 14.8 Advisory and consultancy activities 1,568 1,980 26.3 Education 50,172 66,271 32.1 Agricultural equipment 2,780 3,179 14.3 Food quality 1,731 1,893 9.4 Food and fodder safety 21,045 20,274 -3.7 Improvement of the quality of life in rural areas 1,319 1,416 7.4 Fisheries and aquacultures 4,844 5,559 14.8 Administration 23,029 30,508 32.5 3.5 MOF Oversight of the Agriculture Sector 130. Fragmentation within the MOF internal structure inhibits an effective oversight of the sector. To play an effective role in managing Bulgarian public finances, the MOF needs to maintain a clear view of the overall sector or policy area, regardless of which specific institutions receive the budget allocation. The authority to exercise that responsibility should be implicit in the budget systems law and/or other legislation on the budget process. But the administrative structure of the MOF encourages a silo approach to budget management, because they are separate directorates that are responsible for 64 different elements of the agriculture sector budget. This alone would not be a critical weakness if there were at least a single deputy minister having overall responsibility, but it is split among deputy ministers. As a result, the budget analyst responsible for MAF within the State Expenditures Directorate knows little about the expenditures from SFA and has little incentive to take interest in them. Although there have been some attempts by the Budget Directorate to use budget preparation instructions to encourage more integration of SFA within the MAF budget, it has yet to yield a significant change and MAF and SFA still prepare budgets independently. In addition, the state aid programs for agriculture administered outside the MAF are not included in any budget monitoring of the MOF. 131. The role and capacity of the MOF needs to be enhanced to direct more emphasis on quality of spending and value-for-money concerns. The introduction of performance based budgeting by the MOF is a potentially powerful reform for orienting budget discussions around the quality of spending. Some important milestones have been reached in Bulgaria. All ministries now prepare program budgets with performance indicators and they report on actual performance at year end. But for PBB to begin fulfilling its potential, the MOF needs to increase its capacity to give ministries feedback on the quality of their budget submissions, their performance specification, and their assessment of results. Currently, ministries such as Agriculture receive little if any feedback on the content of their submissions to MOF. Development of PBB should include a more direct guidance from MOF to line ministries, including resources for technical assistance. If the current staffing does not permit that, then it should be enhanced. 132. The budget preparation process within the MOF has not changed substantially to integrate non-financial information into decision-making. Substantial data is generated by the implementation reports, but it is not prepared or processed in a way that makes it relevant for decision-making. The reports are too voluminous, with too little attention given to interpreting the data that is available. But even as steps are taken to improve information quality, institutional changes may be needed within the MOF for the reform to realize its potential. The division of budget responsibilities between the State Expenditures Directorate, the Budget Directorate, and the Management of EU Funds Directorate undermines the quality of budget preparation. The institutional incentives within MOF encourage reliance upon past spending information and incremental budgeting. 133. Implementation of PBB has produced a large body of programmatic and policy information, but the challenge for MOF going forward is to improve the relevance of the information for policy makers. In the Bank's on-going technical assistance to the MOF it has highlighted the fact that performance information now is produced in a format that may be difficult for the budget process to integrate well ­ partly because of its volume and specificity and also because of challenges in interpreting the results. Where a program fails to achieve a target level of performance ­ e.g., number of inspections carried out on machinery ­ it may not necessarily require any change in funding or design of the program. However, there is no process in place currently to 65 extract the most important pieces of information, interpret the implications of high or low performance, and to propose a policy response to it. In addition, because the indicators focus so heavily on outputs to be delivered, they may fail to address basic questions about the cost-effectiveness of the activity. Moreover, for the public to increase its demand for performance information, it would need to see indicators that reflect their broader concerns about the overall quality and cost of public services. 134. As a follow-up to this sector-wide review, in-depth evaluations need to be planned on specific programs of the MAF ­ such as agricultural education and food safety ­ to identify whether the current design and management of the programs is a cost-effective one. In agricultural education, for example, a performance indicator on the number of graduates each year does not inform the government whether the benefits justify the costs. The output data in the MAF's budget implementation report is an important starting point for analysis, but it is insufficient information with which to make decisions. Likewise, further analysis is needed on why agricultural education is administered through so many separate institutions and what impact his has on cost and quality of services. There are over 300 second and third level spending units under the MAF which makes for difficult coordination and oversight. 135. The MOF should be the primary institution responsible for proposing and designing targeted program evaluations to assess value for money in public expenditures. The selection of programs to target could be undertaken in conjunction with the Parliamentary oversight committees. International experience in public administration suggests that one should not rely on self-reporting by ministries. Although line ministries possess the most detailed knowledge of program factors, their efforts need to be complimented by independent assessments in order to improve performance over the long-term. There are many different forms of evaluation that could be undertaken, some more costly and time consuming than others and each serving a different purpose. Chile is one of the countries that has led the way in using low cost, independent program evaluations to supplement and enhance their budget preparation process. The terms of reference for each evaluation are crafted by the Budget Directorate, but the analysis itself is contracted out to teams of independent economists and/or sector specialists in academia and the consulting industry. 3.6 Proposals for Improving Performance Based Budgeting 136. Some of the weaknesses in planning and budgeting in Agriculture are not unique to the MAF but reflect broader practices in the public administration. Reforms can be concentrated on a specific sector initially, but they should be supported by broader government-wide actions as well. Below is a partial list of recommendations for consideration: i. Pursue current plans to establish a unit attached to the Minister's office that is responsible for coordination of policy analysis and budget planning, including the development and assessment of performance information. The unit should be staffed with experienced economists who can encourage analysis 66 on the relative cost-effectiveness of different programs and can help follow-up on any recommended program design and/or program management changes. In addition, the unit should help to assess performance information that is used internally for management purposes but that may be too detailed for reporting to MOF. Staff of this unit would help to prioritize and limit the number of program level indicators that are sent to MOF and Parliament. ii. Agree with MOF and the Cabinet on four to six high-level outcome-oriented indicators that can be tracked and reported approximately every three years to the Parliament on the overall development progress for the Agriculture sector. Formal instructions could be issued by the Cabinet and/or Parliament to specify a deadline for submitting the proposed indicators and the proposed data collection approach. The MOF and external partners could provide technical assistance in designing the indicators. The outcome indicators would appear in the MAF's next program budget submission to Parliament. (Table 12 shows examples of indicators from Bulgaria's NRDP that are outcome-oriented. Circumstances in other countries vary and may not be applicable to Bulgaria, but the table shows select examples from France for illustration). iii. Agree with MOF on some specific programs that should undergo an independent performance evaluation in 2009. Two potential candidates would include agricultural education and food safety programs. The MOF should develop the terms of reference for the review, outlining the key issues to be addressed, and it should contract with external experts who can lead the study on its behalf and under its guidance in 2009. The review should result in specific recommendations for program design or management changes that could be programmed and agreed during the annual budget preparation cycle for 2011. iv. MOF should propose amendments to the budget systems law to reduce the number and scope of amendments that can be made to the annual budget for new policy measures. This could include binding, one-year sector ceilings introduced as part of the MTEF approved by Parliament. The MOF should also review its quarterly cash allocation practices to assure that ministries receive funding at a predictable rate throughout the year, and that funding flows are not skewed toward the last quarter. v. Assign responsibility to individuals for managing resources at program level and to deliver on program outputs. Eventually, one could move to appropriation of budget resources by program, while continuing to maintain treasury controls on economic classification. In the shorter term, MAF should consider designating a manager for each program and giving them authority to allocate resources to the various departments of MAF and/or the external institutions that contribute to program objectives. Internal reporting would also be done on a program level. In parallel, the MAF may want to review the number of programs to see whether some of the smaller programs should be consolidated. 67 vi. Improve implementation reports by giving assessment of the factors that affected performance and future mitigating actions. While covering fewer indicators per program, the ministry's performance reporting (internally and externally) should include an internal assessment of the major variances that occurred, the reasons behind them, and the impact it will have on future management. vii. Review the MOF's organizational structure and internal processes so that responsibility for the Agricultural sector budget is not fragmented across multiple Deputy Ministers. The budget analysts within the MOF need to be responsible for the entire sector (including SFA) and not merely the budget of the MAF. There also needs to be a consistency between the various directorates on how performance information is to be used in budget preparation. 68 Table 12: Illustrative Indicators for Agriculture and Rural Development Examples from Bulgaria's National Rural Development Plan: · Labor productivity in Agriculture · Land consolidation o Average size of plots as a percent of EU25 average o Number of agricultural holdings on small acreages o Reduction in semi-subsistence farming · Access to credit · Compliance with EU food safety standards · Volume of exports among food processors (e.g., by major sector) · Water quality of rivers (e.g., nitrate pollution) Examples from France's " Mission" for Agriculture in the National Budget · Turnover of agricultural managers · Number of holdings in disadvantaged areas versus all areas · Share of land in organic farming versus all farm holdings · Share of high-value added products in the French dairy industry · Trend in regrouping of agricultural producer organizations. · Cost of implementing CAP versus amount of aid received by farm communities · Level of nitrogen controlled · Average delay in mobilizing emergency aid during farm calamities Examples of indicators used in EU reporting on Rural Development: · % farmers with basic and full education in agriculture attained · Ratio between farmers less than 35 years old and farmers of 55 years old or more · Gross Value Added per annual work unit (GVA/AWU) · Gross Value Added in primary sector · annual trends in the concentration of nitrates in surface water / ground water · Sole holders-managers with other gainful activity as percentage of total number of farm holders (sole holders-managers) · Employment in secondary and tertiary sectors (nb: Diversification of the economy is expressed in the number of people employed outside the agricultural sector.) · GVA in secondary and tertiary sectors (nb: This indicator measures the gross value added (GVA) outside the agricultural sector in a region.) 69 ANNEX: Funds flow in the Agriculture and Rural Development Sector EAGF STATE BUDGET EAFRD EEF- European Agricultural European Agricultural Fund European Guarantee Fund for Rural Development Fisheries Fund National Funds Direct payments OP for the Bulgarian SAPS- Single CNDP- Pre-existing State Aid fisheries Area Payment Complementary Scheme National Direct C C Payments o o National schemes SFA u u Axis 1 Competitivness Market Arable crops n n support Payments SAPARD co-fin t t measures e e Axis 2 Rural r Priority 1: Bovine r Environment Adaptation of De minimis p p the EU payments a a fishing fleet Export Axis 3 Quality of life r subsidies Ewes New State Aid -Calamity fund r /licenses t t Priority 2: payments Aquaculture, Individual Aid Axis 4 Leader inland f fishing, f processing Ministry of Technical i Tax Incentives i assistance and n n marketing of Finance a fishery and National schemes MoLSA & MEE a Aquaculture n n products c c Ministry of Labor National programs e e and Social Affairs / Priority 3: Measures of State fund Rose common Ministry of Economy tobacco institute interest and Energy Priority 4: Ministry of Sustainable development Agriculture and Food of fisheries areas State Fund Agriculture Priority 5: Technical assistance 70 Beneficiaries