Regular Report from the Commission on Progress towards Accession

4.2 Administrative and judicial capacity : key areas for the implementation of the acquis

In Agenda 2000 the Commission said it would report regularly to the European Council on progress made by each of the candidate countries of Central and Eastern Europe in preparations for membership and that it would submit its first report at the end of 1998. The European Council in Luxembourg decided that:

"From the end of 1998, the Commission will make regular reports to the Council, together with any necessary recommendations for opening bilateral intergovernmental conferences, reviewing the progress of each Central and East European candidate State towards accession in the light of the Copenhagen criteria, in particular the rate at which it is adopting the Union acquis." ….. "In that context, the Commission will continue to follow the method adopted by Agenda 2000 in evaluating candidates States' ability to meet the economic criteria and fulfil the obligations deriving from accession."

The European Council in Vienna invited the Commission to present its further progress reports with a view to the Helsinki European Council.

- describes the relations between Bulgaria and the Union, particularly in the framework of the Association Agreement;

- analyses the situation in respect of the political conditions set by the European Council (democracy, rule of law, human rights, protection of minorities);

- assesses Bulgaria’s situation and prospects in respect of the economic conditions mentioned by the European Council (functioning market economy, capacity to cope with competitive pressures and market forces within the Union);

- addresses the question of Bulgaria’s capacity to adopt the obligations of membership, that is, the acquis of the Union as expressed in the Treaty, the secondary legislation and the policies of the Union. This part gives special attention to nuclear safety standards following the request from the Cologne European Council that this be examined thoroughly in the regular reports.

It also covers judicial and administrative capacity as requested by the Madrid European Council which underlined the necessity for the candidate countries to adapt their administrative structures so as to guarantee the harmonious implementation of Community policies after membership.

The report takes into consideration progress since the 1998 Regular Report. It looks at whether intended reforms referred to in the 1998 Regular Reports have been carried out and examines new initiatives, including those directly related to addressing Accession Partnership priorities. The report contains a separate section which examines the extent to which Bulgaria has addressed the short term priorities and started to address the medium term priorities set out in the Accession Partnership.

While the assessment of progress in meeting the political and acquis criteria focuses on that which has been accomplished since the last Regular Report, the economic assessment is based on a longer term evaluation of Bulgaria’s economic performance. The assessment of progress made in adopting the acquis has been made on the basis of adopted legislation rather than legislation which is in various stages of either preparation or Parliamentary approval. This approach ensures equal treatment for all the candidate countries and permits objective assessment and comparison between countries in terms of concrete progress in preparation for accession.

This report draws on numerous sources of information. The candidate countries were invited to provide information on progress made in preparations for membership since the publication of the last Regular Report. Their presentations at the meetings held under the auspices of the Europe Agreement, their National Programmes for the Adoption of the Acquis, the information provided in the context of the analytical examination of the acquis (screening) were additional sources of information. Council deliberations and European Parliament reports and resolutions have been taken into account in the preparations. The Commission also drew on assessments made by various international organisations and in particular on contributions from the Council of Europe, the OSCE and the international financial institutions as well as non-governmental organisations.

Developments under the EU-Bulgaria Europe Agreement (including bilateral trade)

Bulgaria has continued to implement the Europe Agreement correctly and contributed to the smooth functioning of the various joint institutions.

The Association Council met in October 1998 and will meet in November 1999. An Association Committee was held July 1999. The system of sub-committees continues to function as a forum for technical discussions.

Since the issuing of the last Commission’s Report, the Joint Parliamentary Committee comprising representatives of the Bulgarian and European Parliaments met twice, in December 1998 and in March 1999. A first meeting of the Joint Consultative Economic and Social Committee took place in January 1999.

The share of the European Union in Bulgaria’s overall foreign trade rose from 44.7 % of all exports in 1997 to 50.6% in 1998 and 60.3% in the first quarter of 1999. The share of the European Union rose from 38.7% of all imports in 1997 to 49% in 1998 and 49.3% for the first quarter of 1999. The two main product categories that are both exported and imported by Bulgaria are textiles and chemical products. Bulgaria exports base metals to the EU and imports machinery equipment from the EU.

In March 1999, the Council mandated the Commission to open negotiations with the associated countries in view of new reciprocal concessions in the field of agriculture.

With the adoption of a decision of the Association Council for amendments to protocol No 4 to the Europe Agreement, Bulgaria introduced and applied as of 1 January, 1999 the Pan-European cumulation of origin in relation to the preferential trade partners from the EU, EFTA, CEFTA and Turkey.

An antidumping complaint against Bulgaria amongst others concerning the steel sector and relating to hot rolled coils imports was introduced in December 1998.

In conformity with the priorities of the Accession Partnership, a Joint Assessment of Bulgaria’s Medium-Term Economic Policy Priorities was signed in June 1999. A joint working group for the elaboration of a realistic timetable for the decommissioning of Units 1-4 of Kozloduy Nuclear Power Plant was set up.

In the framework of the enhanced pre-accession strategy and further to the respective decisions of the Association Council, Bulgaria participates in the following Community programmes: Youth for Europe, Socrates, Leonardo da Vinci, Save II, Third Program for SMEs, Kaleidoscope, Ariane, Raphael, AIDS Prevention, Combat against Cancer. Bulgaria is also included in the Fifth Framework Programme for Research, Technological Development and Demonstration.

An Accession Partnership was adopted in March 1998. Its implementation is reviewed in section D of this Report.

In May 1999, Bulgaria presented a revised National Programme for the Adoption of the Acquis (NPAA), in which it outlines its strategy for accession including how to achieve the priorities contained in the Accession Partnerships (see further part D).

In 1999 Phare was the main instrument providing financial assistance to help Bulgaria’s pre-accession strategy.

The programme is "accession-driven", concentrating support on the Accession Partnership priorities which help the candidate countries to fulfil the Copenhagen criteria. Around 30% of the Phare allocation is used for "institution building" (i.e. helping the countries to improve their capacity to implement the Union Acquis; see twinning below) and the remaining 70% is used for financing investments to strengthen the regulatory infrastructure needed to ensure compliance with the acquis and to reinforce economic and social cohesion including the effects of restructuring in important sectors of the economy.

The Phare programme allocated ? 865.5 million to Bulgaria during the period 1989-1999.

The 1999 Phare Programme for Bulgaria consists of a national allocation (of ? 50.5 million), concentrated on the following priorities:

An additional ? 30 million have been allocated for cross-border co-operation (CBC) programmes now being extended also to Romania. The programmes will provide support for transport infrastructure, telecommunications and environmental rehabilitation. In addition, funding will be provided under the Catch-up Facility, for projects in relation to job creation and promotion of foreign direct investment (? 14 million).

Bulgaria also participates in and benefits from Phare-funded multi-country and horizontal programmes such as TAIEX, the Small and Medium-sized Enterprises programme, and the Large Scale Infrastructure Facility.

Since 1990 Phare has provided support in addressing key economic transformation and structural reform issues. It has been delivered mainly in the form of technical assistance and used primarily in support of institution building and policy development. Increasingly Phare resources have also been mobilised in the form of support for investment priorities identified by the Government as essential to the fundamental restructuring of the economy over the medium term.

Overall the impact of Phare has been positive. Phare’s support has been instrumental to Bulgaria’s transformation process to adjust to the characteristics of a market economy, a democratic society and the other requirements of EU membership. Effective transfer of know-how and scarce equipment and financial resources has taken place in a number of important fields:

The Phare management system was reformed in 1998 and 1999 to improve the speed, efficiency, effectiveness and transparency of Phare activities. Phare assistance has been implemented on a decentralised basis since it began. The authorities in the partner country have taken responsibility for contracting and payment of the assistance. However the European Community’s Financial Regulation requires that the Commission supervise the contracting procedure and endorse any contracts financed from Phare signed by the partner country before they go into effect. The regulation co-ordinating assistance from Phare, SAPARD and ISPA, which was approved in June 1999 will allow the Commission to move to ex post control of contracting where the Financial Control exercised by the partner country is deemed by the Commission to be sufficient. This possibility will be reviewed on a country-by-country, sector-by-sector basis and introduced gradually.

In the meantime, and in order to streamline the implementation of Phare programmes, the Commission has transferred much of the responsibility for the supervision of contracting to its Delegations in the candidate countries.

Phare implementation structures have been rationalised in Bulgaria to increase transparency and avoid dispersion of funds. This process increases the responsibility of the Candidate Countries by using, as far as possible, sustainable institutions and implementing agencies which will be responsible for the management and implementation of programmes financed from Community funds after membership.

Bulgaria's performance regarding the implementation of the Phare programme has shown improvements but the Government needs to pay increased attention to ensuring appropriate and stable management capacity.

During the period 2000-2006, pre-accession aid to the candidates countries will be more than doubled. Alongside the Phare programme, it will, as from the year 2000, comprise aid for agricultural and rural development (SAPARD) and a structural instrument (ISPA), which will give priority to measures similar to those of the cohesion fund in environment and transport.

In the years 2000-2002, indicative figures for total financial assistance available will amount to around ? 300 million for Phare (including CBC), ? 156,3 million for Sapard and ? 249 to 375 million for Ispa.

One of the important challenges the candidate countries are facing is the need to strengthen their administrative capacity to implement and enforce the acquis. The European Commission proposed to mobilise significant human and financial resources to help them in this respect, through the process of twinning of administrations and agencies. The vast body of Member States expertise is now being made available to the candidate countries, in particular through the long-term secondment of civil servants. The strong support and response from EU Member States has meant that twinning partnerships covering a total of 108 projects involving all candidate countries and almost all Member States are presently being implemented.

Phare funding for twinning has so far focused primarily on the priority sectors of agriculture, environment, public finance, Justice and Home Affairs and preparatory measures for the Structural Funds.

For Bulgaria, 10 projects have so far been twinned under Phare. In the agricultural area, Italy will lead a project to improve the national veterinary control system, while France, the Netherlands and the UK will address phytosanitary control, and Germany, will lead a project on approximation of legislation. In the environmental sector, Germany, Austria and France have set up a consortium in order to assist Bulgaria in the approximation of legislation and the development of a National Action Plan. In the financial sector, the Customs Law will be revised and the capacity to fight corruption strengthened. Denmark will lead an occupational health project, while the development of regional and structural policy strategies is supported by Spain. The United Kingdom and Greece are leading projects on the development of the ISPA and SAPARD Task Forces respectively.

Twinning is foreseen for eight projects under the 1999 programme covering, apart from a broad range of projects in the sector of Justice and Home Affairs, a wider field including a project on the strengthening of the Insurance Supervisory Authority, Institution Building in the Bulgarian Ministry of Environment and Water, and the development of administrative capacity to adopt and implement the acquis in the agricultural sector.

The analytical examination of the acquis (screening) has been concluded for Bulgaria except with regard to the agricultural acquis, which is foreseen to be held mid-October 1999.

In its 1998 Regular Report on Bulgaria’s application for EU membership, the Commission concluded that:

"Developments confirm that Bulgaria fulfils the Copenhagen political criteria. There has been some progress in the fight against corruption although further efforts are needed. Continued attention also needs to be paid to respect for the rule of law at all levels of the administration and by the law enforcement bodies. Further efforts are required to prevent the social exclusion of the Roma and to reform the judiciary".

In the Accession Partnership with Bulgaria "further efforts to integrate the Roma and consolidation of protection of individual liberties" were mentioned as a medium-term priority.

The political situation continued to be stable during the last year. The reform-orientated majority under the leadership of the United Democratic Forces (UDF) has helped to secure continued support for market economy reforms and further integration Bulgaria with the European Union and Euro-Atlantic bodies. Commitment to EU membership remains high in the government agenda, one of the key foreign policy goals and a major inspiration for internal reform policies. Bulgaria is also continuing its preparations to prepare for NATO membership. Its commitment to integration was underlined again during the Kosovo conflict where Bulgaria projected an image of a stable country which respects the principles of democracy, the rule of law, market economy, was firmly supportive of all EU actions and aligned itself to all EU and NATO positions.

As mentioned in the last Regular Report, Bulgaria has achieved stability of institutions guaranteeing democracy and the rule of law. This section therefore describes only the most significant developments of the past year.

No major changes have been introduced as regards the role and the powers of the Parliament. The Parliament continues to operate smoothly. Its powers are respected and the opposition plays a full part in its activities.

Policy making in the central institutions has improved but remains rather weak. Co-ordination between officials of different ministries needs to be improved with too many issues referred for discussion at the highest level, i.e. between ministers, where conciliation mechanisms work better. Assessment of the impact of laws, although mandatory, varies in quality and is often superficial.

The results of the administrative reform process have been so far rather limited but there has been progress with the entry into force of the Law on State Administration and more recently the Civil Service Law. The implementation of these laws is still at an early stage so it is premature to judge to what extent the new legal framework will contribute to the establishment of an independent, efficient and professional civil service.

New decentralised institutions (dependent on the central authorities) have been created in the 28 new administrative regions (oblasti). These should co-ordinate the action of the government in each region under the authority of a regional governor appointed by the Council of Ministers.

The reform of the judicial system has continued. Developments since the last report focused on the structures of the judicial system and can be described as follows:

With the introduction these reforms, an important part of the judicial reform process relating to the structures of the judicial system will be completed, in line with the requirements of the Constitution.

Despite these positive steps, judicial reform will have to continue. This would be more effective with an overall strategy including measures to increase the effectiveness and transparency of the judicial system, and its capacity to enforce the acquis communautaire. Elements which need to be taken into account include assuring the full independence of the judiciary, further legislative amendments in particular to streamline or clarify procedures for the administration of justice, for example improving access to justice, the material conditions in courts, division of tasks between administrative staff and judges, and the execution of rulings. The career structure and training of judges and magistrates needs to be aligned with European standards. Long pre-trial detention is an issue of concern and there are currently delays in the handling of cases but statistics available do not allow for a full assessment of the extent or development of the backlog. Creating public confidence in the judicial system remains an important element to address in reforms.

Corruption remains a very serious problem in Bulgaria. Petty corruption is reportedly widespread in daily life. Surveys show that the sectors most affected are customs, municipalities, medical services, universities, the police, taxation authorities and courts.

Following the adoption in July 1998 of a National Strategy for combating organised crime, the government has continued to extend the scope of legislation against corruption. Bulgaria has ratified the major anti-corruption conventions, notably the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In January 1999, Bulgaria signed the Council of Europe Criminal Law Convention on Corruption. It notified its readiness to participate in the "Group of Countries for the Fight against Corruption (GRECO)" to the Secretary General of the Council of Europe in January 1999. The Parliament adopted in January 1999 a law amending the Penal Code which defines the term "foreign public official" in conformity with the OECD Convention and criminalises active and passive corruption by foreign officials.

The Government reports that 14 laws with a direct link to the fight against corruption have been adopted including amendments to the penal code, the law on customs, the tax procedure code and the law on insurance. However, Bulgarian legislation does not yet provide a concrete definition of the concept of "corruption" and further progress in the fight against corruption is also needed in the following areas: financing of political parties, strengthening of the legal framework in areas such as public procurement, financial control, liability of Ministers, improving the implementation of measures in areas such as money laundering and creating or strengthening internal and external control structures in the administration and the judiciary (including among prosecutors). Transparency and judicial control should be reinforced in the privatisation field.

Since the substantial increase in the number of criminal corruption cases dealt with in 1997, numbers have declined slightly from 142 cases in 1997 to 124 in 1998.

Despite the measures taken by the government, considerable further efforts remain necessary to achieve results in the fight against corruption.

As mentionned in the last regular Report, Bulgaria continues to respect human rights and freedoms. The following sections only concentrates on subsequent major developments.

Bulgaria has ratified most human rights conventions (see annex). In September 1998, Bulgaria signed the European Social Charter (revised) of the Council of Europe. In May 1999, Bulgaria ratified the Framework Convention for the Protection of National Minorities of the Council of Europe. On 1 October 1999, it ratified Protocol N° 6 to the European Convention for the Protection of Human Rights and Fundamental Freedoms, concerning the abolition of the death penalty. Bulgaria ratified the Second Optional Protocol to the International Covenant on Civil and Political Rights (abolition of the death penalty) in August 1999. Bulgaria has still to ratify protocols n° 4 and 7 of the European Convention for the Protection of Human Rights and Fundamental Freedoms.

In the period since the last report, the protection of civil and political rights has improved but there continue to be problems with the effective functioning of law enforcement bodies.

Progress can be noted in addressing some of the remaining human rights problems. Co-operation between the authorities and human rights groups has improved and human rights problems are considered to be an important issue in public debate. Recent developments can be summarised as follows:

Concerns about the abuse of power by law enforcement bodies, especially the police, remain. The legal framework needs to be adjusted to introduce more transparency to ensure more effective civilian control and to limit the use of and prohibit the misuse of firearms. Investigation of cases of ill-treatment of suspects by police officers and detainees awaiting trial and sentencing needs to be accelerated.

The conditions in many prisons and detention centres give cause for concern. Most problems are related to lack of funding. Government control over the security forces has improved, although this is still insufficient. Training and education in international human rights law for representatives of the judiciary must be improved.

There remain problems with trafficking of human beings, especially women, which need to be addressed in particular in the context of strengthening of border control.

The integration of disabled people is guaranteed by law and there are provisions for financial assistance. However, implementation of policies is slow or inadequate, because of the lack of sufficient resources.

Tensions regarding treatment of certain religious groups have been eased. However, there continue to be cases where local authorities and police interfere arbitrarily with the activities of such groups. Registered religious groups are given equal access to national media on the basis of the new media law and the press coverage of their activities has become in general less hostile.

Trade unions continue to play an active role in society. However their impact on the economic restructuring process has not been significant due to their limited capacities and the tendency of the authorities not to consult Unions despite formal obligations to do so.

The Framework Convention of the Council of Europe on the Protection of National Minorities was ratified in May 1999.

The Roma Minority, which represents about 5% of the population, continues to suffer from discrimination including in contacts with the administration. Police protection is inadequate. Social exclusion is considerable, with high levels of poverty, illiteracy and very high levels of unemployment. A disproportionate number of Roma children are sent to special schools for the mentally handicapped. Health and housing conditions remain considerably lower than those of the rest of the population.

The above measures reflect the political commitment of the Bulgarian government towards improving the situation of the Roma. However, the framework programme must now be followed up by concrete actions by the ministries concerned. The necessary budgetary means for the implementation of this programme also need to be allocated.

The Turkish minority (about 9% of the population) is on the whole fully integrated and represented in political life. However, some of the regions where this minority is concentrated are hit by economic problems and suffer from low investment and high unemployment. The government has decided to improve education in the Turkish language but has not yet announced concrete measures.

Bulgaria fulfils the Copenhagen political criteria. However, further efforts need to be undertaken to strengthen the rule of law and protect human and minority rights, particularly of the Roma population, where recent government decisions need .to be followed by concrete measures with appropriate financial resources. Particular attention needs to be paid to the fight against corruption and improving the functioning of the judicial system.

In its 1997 Opinion on Bulgaria's application for EU membership, the Commission concluded:

"Bulgaria’s progress in the creation of a market economy has been limited by the absence of a commitment to market-oriented economic policies; it would not be able to cope with competitive pressure and market forces within the Union in the medium term".

The 1998 Regular Report confirmed this finding, while acknowledging the progress being made by Bulgaria in the creation of a market economy.

In examining economic developments in Bulgaria since the Opinion, the Commission’s approach was guided by the conclusions of the European Council in Copenhagen in June 1993 which stated that membership of the Union requires:

the capacity to cope with competitive pressure and market forces within the Union.

In the analysis below, the Commission has followed the methodology applied in the Opinion and the 1998 Regular Report.

Despite the unfavourable external environment, macroeconomic developments in Bulgaria have remained largely positive since mid-1998. Economic activity and real incomes have recovered from the depressed levels of early 1997, inflation has been reduced to low levels and the currency has remained stable. However, the Kosovo crisis has affected the still fragile economy. GDP growth started to decelerate in the second half of 1998, and Bulgaria's external position deteriorated significantly last year, in large part due to falling exports. On the structural front, the government has pursued the implementation of an ambitious programme of reforms. While progress in privatisation has slowed somewhat, major measures have been taken in the budgetary sector. Efforts to strengthen financial discipline in state-owned enterprises have been partially successful, although the problem of tax arrears continues to need attention.

Economic activity recovered in 1998, with real GDP growth estimated at 3.4 %, after a contraction of a cumulative 17% in 1996-1997. Most of the recovery took place in the first half of 1998. The slowdown in GDP growth in the second half of the year is due to both the effects of the downturn in international markets and the ongoing restructuring in the industrial sector. A striking feature of economic developments in 1998 was the sharp decline in industrial production. Weak industrial sales and negative developments in external accounts in the first months of 1999 point to a marked deceleration of growth this year. The Bulgarian authorities have revised their GDP growth forecast for 1999 downward from 3.7% to 1.5%.

GDP growth in 1998 was driven by private consumption and investment. During 1998, consumer spending was supported by the rapid growth in real incomes and increased consumer credit. Consumer confidence has also been boosted by employment growth. However, the unemployment rate based on the ILO definition increased to 16% in 1998 from 15% in 1997.

Together with the fall in industrial sales, the sharp decline in exports observed in 1998 reflects ongoing industrial restructuring and the negative impact on the Bulgarian economy of the Russian crisis. At the same time, falling international prices for major export products were an important factor explaining Bulgaria's weak export performance. Exports fell by 13.1% in dollar terms compared with 1997 whilst imports, driven by the recovery in domestic demand, grew by 1.4%. The trade and current account balances shifted from large surpluses in 1997 to larger-than-expected deficits in 1998, of 3% and 1.8 % of GDP respectively. Exports declined further in early 1999. As a result, the current account deficit widened to ?503 million in the first six months, compared with a deficit of ?87 million in the same period of last year.

On the capital account, inflows of foreign direct investment (FDI) were about three quarters of the amount recorded in 1997. The slow progress on privatisation and the reduced interest of foreign investors in emerging markets accounted for the decline in FDI inflows and net portfolio investments.

Bulgaria's already difficult external environment has also been affected by the Kosovo crisis. Despite the termination of the military campaign, the Kosovo crisis is expected to lead to a further deterioration of Bulgaria's external accounts and affect growth prospects for 1999. The main reasons are the increase in transportation costs due to the disruption of traffic through the Federal Republic of Yugoslavia (FRY), and the contraction of regional trade, Further progress on the reduction of inflation thanks to the stabilising effect of the currency board and the fall in international commodity and energy prices. The end-year inflation rate was 1% in 1998, far below the 16% forecast underlying the budget. The downward trend in inflation continued this year, with the year-on-year inflation declining to 1.3% in July. Increases in administered prices account for the temporary surges in inflation observed in September 1998 and January 1999.

The turmoil on international financial markets did not disturb the operation of the currency board arrangement (CBA). In 1998, large disbursements from official creditors contributed to a further rise in the reserves of the central bank. They stood at ?2.7 billion at the end of 1998, which is equivalent to 6 months of imports of goods and services. Thus, the foreign reserves are more than adequate to cover the central bank’s liabilities under the CBA. Since 1 January 1999, the euro has replaced the deutsche mark as peg currency. And on 5 July 1999, the lev was redenominated by removing three zeros, so that one lev now equals one deutsche mark.

The base interest rate fluctuated between 5.2% and 6.2% throughout 1998 and declined to about 5% in early 1999. The base interest rate which is linked to the average yield of three-month Treasury bills, has been little affected by the international financial crisis.

In 1998, as in 1997, the fiscal performance was better than expected. The consolidated budget recorded a surplus of 1.1% of GDP, against a projected deficit of 1.7%. Unexpectedly high revenues together with expenditure restraint and favourable interest rate developments accounted for the improvement. The 1999 budget has provided for an overall deficit of 2.8% of GDP. However, in view of the widening of the current account deficit, the authorities adopted a general government deficit target of 2% of GDP in May. A higher-than-programmed surplus was recorded in the first half of the year.

The results of the privatisation process in 1998 present a mixed picture. Although the number of companies sold was considerably higher in 1998 than in 1997, there was a slowdown in the pace of privatisation last year when progress is measured in terms of assets sold or privatisation proceeds. The cumulative share of divested long-term assets of enterprises increased from nearly 20% at the end of 1997 to 28.7% at the end of 1998, which is a smaller increase than that recorded in 1997. As management employee buy-outs accounted for a large number of the sales and concerned mainly small enterprises, privatisation proceeds fell sharply. In some cases, management buy-outs were applied to larger enterprises, which might have repercussions on the capacity of the privatised companies to deal with restructuring. The authorities have set themselves the ambitious target to privatise all commercial enterprises, as well as a significant part of the utilities, by the end of 1999, representing about 70% of all fixed assets subject to privatisation. Significant progress has already been achieved in recent months, with the successful privatisation of the Bulgarian telecommunications company in July, for over ?450 million. Although Kremikovski, the largest Steel mill was sold, it is not clear how the restructuring of the steel sector will be carried out.

Progress in enterprise privatisation in 1998 was hampered by the reduced interest of foreign investors in emerging markets and, more importantly, by legal and administrative obstacles. Recognising the need to improve the legal and institutional framework for privatisation, the government proposed several amendments to the Privatisation Law which were adopted at the end of 1998. In particular, the amendments aim to limit the preferential treatment of management and employee buy-outs and allow the reduction or writing off of some company debts. Another amendment provides for the earmarking of privatisation revenues to the state budget as a measure designed to increase the transparency of the budget and prevent the granting of subsidies outside the budget.

Bank privatisation continued to proceed slowly. To date, two state banks, United Bulgarian Bank and Postbank, have been privatised. Three out of the four remaining state banks are expected to be privatised this year. A tender was issued for Express Bank in the first quarter, and binding bids have been received. A shortlist of potential buyers is being compiled for Bulbank..

Measures to tighten tax administration and changes in tax legislation led to higher-than-expected tax revenue in 1998. The decision to introduce a unique identification number for all Bulgarian businesses will contribute to further increasing the efficiency of tax administration provided that it is fully implemented. The 1999 budget has pursued the reform of the tax system initiated in 1998 by reducing the VAT rate, while eliminating most remaining exemptions and by lowering the corporate tax rate. In addition, as part of the health care reform, a 6% payroll tax was introduced on 1 July 1999.

On the expenditure side, a number of measures have been taken in the 1999 budget to improve expenditure management and increase the transparency of fiscal operations. Most significantly, the number of extra-budgetary funds has been reduced from over a hundred to 28. The legislation required for the implementation of the health care reform was adopted. Further progress was made to prepare the operation of the new National Health Insurance Fund expected to start in 2000. Two important laws were adopted in January 1999 with a view to streamlining facilities and employment in the health care sector. Preparation of the reform of the pension system continued and a decree tightening eligibility conditions for early retirement was adopted.

In the banking sector, measures have been taken to strengthen banking supervision and improve the efficiency of the sector. A self-financing deposit insurance system was introduced in January 1999. Prudential standards have been strengthened and the Law on Banks adopted in 1997 provides the central bank with enhanced powers to ensure compliance with these rules. As a result, the banking system is relatively sound and highly capitalised. At the end of 1998, all banks met the minimum capital adequacy ratio of 10% and the system-wide average ratio reached almost 37%. Most banks continued to reduce their open foreign exchange positions. However, the sector still suffers from high operating costs and low profitability. With the exception of one bank whose license was withdrawn in January 1999, the banking system has not been significantly affected by the Russian crisis and the turmoil on international financial markets.

The government also attaches importance to the development of the stock market which reopened in October 1997. The new Securities Public Offering Act adopted by Parliament in January 1999 aims to put in place an appropriate regulatory framework and adequate supervision. In particular, it enhances the protection of minority shareholders and strengthens the supervisory and regulatory powers of the State Securities Commission. Voluntary pension funds, which already exist in Bulgaria, are expected to play an active role in the development of domestic capital markets and a law regulating their activities was adopted by Parliament in first reading.

With regard to enterprise reform, the authorities have achieved good progress in limiting the losses of state-owned enterprises and promoting their restructuring by isolating the major loss-makers from the banking system. The isolation programme was completed for commercial enterprises (Group B) at the end of June, six months later than in the original timetable. All the 41 Group B enterprises, with the exception of one, have been privatised or put under liquidation. However, the date for the completion of the programme for these enterprises had already been extended by six months. Progress in restructuring utilities (Group A) has been less satisfactory, and no date has been set yet for completing the isolation of these companies. Measures have also been taken to strengthen financial discipline in state-owned enterprises, but wage developments in the state sector in 1998 showed that there is scope to improve compliance with incomes policy regulations. In order to improve the effectiveness of the policy, the government decided that the wage bills of loss-making state-owned companies would be frozen in the first half of 1999. Very few enterprises violated this freeze in the first quarter.

As for the agriculture sector, recent legislative amendments are designed to accelerate the land reform, notably by introducing a free of charge procedure for issuing legally binding titles. The privatisation of the agro-food industry has accelerated. As of May 1999, nearly 57% of the fixed assets under the responsibility of the Ministry of Agriculture, Forestry and Agrarian Reform had been privatised. Progress was made in the liberalisation of the price and marketing system by removing government controls on domestic farm gate prices in August 1998.

Main Indicators of Economic Structure in 1998
Population (average)	thousand	8257
GDP per head	PPS-ECU per cent of EU average	4600
Share of agriculture in: - gross value added - employment	per cent per cent	21.1 25.7
Investment-to-GDP ratio	per cent	11.6
Gross foreign debt/GDP	per cent	65.7
Exports of goods & services/GDP	per cent	45.2
Stock of foreign direct investment, according to EBRD	million ECU ECU per head	: :
Source: National sources, IMF, EBRD.

As set out in Agenda 2000, the existence of a functioning market economy requires that prices, as well as trade, are liberalised and that an enforceable legal system, including property rights, is in place. Macroeconomic stability and consensus about economic policy enhance the performance of a market economy. A well-developed financial sector and the absence of any significant barriers to market entry and exit improve the efficiency of the economy.

Low inflation and exchange rate stability have generated a wide support among the population for the currency board arrangement. There also exists a broad consensus on the medium-term reform programme which was adopted by Parliament. Further evidence of this is provided by the fact that the authorities have reaffirmed their strong commitment to structural reforms following the outbreak of the Kosovo crisis. Economic policy making could be improved by better co-ordination between line ministries. There are some encouraging signs in this regard. The Bulgarian authorities completed a Joint Assessment of Bulgaria's medium-term economic policy priorities in May 1999. A European Institute responsible for stimulating policy action needed to prepare Bulgaria for EU accession has been recently created.

Despite increasingly difficult external conditions, macroeconomic stability has been maintained. Inflation has further declined and fiscal performance has continued to be strong. Although Bulgaria's external accounts have deteriorated significantly, the authorities have managed to keep the current account position at sustainable levels. The measures recently taken to improve expenditure management and increase the transparency of fiscal operations, together with the social protection reform, will contribute to ensuring medium-term fiscal sustainability. However, tax arrears of state monopolies remain a problem and there is a need to strengthen financial discipline in state-owned enterprises.

After the significant liberalisation measures taken in 1997-98, the prices of most goods and services are determined freely by market forces. The share of administrated prices in the CPI basket stood at 17.4% in early 1999, virtually at the same level as a year earlier. Substantial progress continues to be made in bringing administered prices closer to market determined levels. This is particularly true for energy prices which are expected to be liberalised by 2001 as part of the reform of the energy sector. Most significantly, the law on prices, which formed the legal basis for state intervention in price setting, has been abolished in July 1999 and the obligation for retailers to negotiate prices with producers was removed last September. The system of monitored prices, which allows the government to influence price setting, subsists only for two types of goods, i.e. water and pharmaceuticals.

Substantial progress in the liberalisation of foreign trade has been achieved. The import surcharge was abolished ahead of schedule on 1 January 1999. Average and maximum tariff rates on industrial products have been further reduced. All temporary tariff quotas and tariff exemptions with the exception of those specified in international agreements were eliminated at the end of 1998. These measures together with the entry into force of a new customs tariff on 1 January 1 1999, contribute to improving the transparency of trade policy. The authorities have started to liberalise the non-tariff elements of the trade regime. However, some export taxes remain and the trade regime still comprises a large number of tariff rates. Although it is being progressively reduced, the average level of tariff protection for agricultural products remains high.

While more than 80% of total agricultural land has been restituted to its former owners, there are still obstacles to a proper functioning of the land market. In particular, a land cadastre needs to be established.

Bulgaria now has an adequate legal framework for bankruptcy and insolvency, but the implementation of these laws remains very disappointing because of a weak judicial capacity. By November 1998, insolvency or liquidation procedures had been initiated for 384 companies and completed in only 41 cases. Only a minority of the bankruptcy and liquidation cases concerns state-owned enterprises, which suggest a possible bias of the courts vis-a-vis private creditors. The qualifications of judges involved in bankruptcy cases needs to be improved. For banks, the liquidation procedure is especially lengthy. Amendments to the Banking Law have been drafted in order to accelerate the liquidation of the 11 banks which are already closed.

As a result of the progress made in privatisation and enterprise restructuring, the private sector has raised its share in GDP to over 60%. However, the entry of new firms and banks is still hampered by the lack of an adequate business climate. Frequent changes in the legal framework and problems with the implementation of legislation discourage private sector initiative and investment. In order to increase Bulgaria's attractiveness to domestic and foreign investors, there is a need to persevere with institutional and legal reforms to improve law and contract enforcement, reduce red tape and fight corruption.

Bulgarian banks still remain weak in fulfilling their role of intermediaries between savers and investors. The share of domestic credit to GDP fell to 20.3% at the end of 1998 from 28.7% a year earlier, as a result of the sharp decline in credit to the central government and public enterprises. By contrast, credit to the private sector increased substantially last year. The high spread between lending and deposit rates, which remained above 10 percent throughout 1998, still reflects the cautious approach of banks to lending and the absence of keen competition among them. To improve financial intermediation, banks need to build up expertise in assessing credit risk and be in a position to enforce the collection of loans when necessary. Privatisation of the four remaining state banks will be a major driving force for increasing the efficiency of the banking sector.

Bulgaria continues to make progress in establishing a functioning market economy. Implementation of the macroeconomic stabilisation and reform strategy centred on a currency board arrangement and a prudent fiscal policy have produced economic stability. Bulgaria has achieved a high degree of price liberalisation and further liberalised its trade regime. However, the reform effort needs to be sustained by completing privatisation, enforcing financial discipline in the enterprise sector (e.g. accounting standards, tax collection, etc.) and strengthening market economy supervisory bodies. Further steps are needed to ensure a stable and transparent legal framework for business.

As set out in Agenda 2000, Bulgaria’s ability to fulfil this criterion depends on the existence of a market economy and a stable macroeconomic framework, allowing economic agents to make decisions in a climate of predictability. It also requires a sufficient amount of human and physical capital, including infrastructure. State enterprises need to be restructured and all enterprises need to invest to improve their efficiency. Furthermore, the more access enterprises have to outside finance and the more successful they are at restructuring and innovating, the greater will be their capacity to adapt. Overall, an economy will be better able to take on the obligations of membership the higher the degree of economic integration it achieves with the Union prior to accession. Both the volume and the range of products traded with EU Member States provide evidence of this.

Macroeconomic stability fosters the conditions necessary to develop Bulgaria's capacity to cope with competitive pressures within the single market. Sustained reform efforts and determined implementation of the legal framework will be required to accelerate its transition to a fully functioning market economy.

Improvements in competitiveness have been hampered by low levels of investment. Gross fixed capital formation as a share of GDP was only 12% in 1998. Large investments will be required to modernise the country's productive capacity and develop its infrastructure. The three-year investment programme adopted by the government in 1998 and designed to address needs in infrastructure, more specifically in telecommunications, transportation and energy, is an important step in the right direction. However, complementary measures need to be adopted to ensure successful implementation of this ambitious programme. They include measures to increase the efficiency of the public administration, and to create a regulatory environment conducive to private investment.

Efforts to enforce hard budget constraints on enterprises are a key element of the government strategy to improve the competitiveness of the economy. The successful completion of the isolation programme, together with the recent incomes policy measures, are encouraging signs. However, further efforts to impose financial discipline on state-owned enterprises are needed. In particular, tax arrears of state monopolies which are a source of hidden subsidies will have to be significantly reduced. In addition, the issue of corporate governance in newly privatised enterprises needs to be addressed.

The degree of trade integration with the Union is increasing steadily. The EU accounted for almost 50% of exports and 45% of imports in 1998. The two main product categories that are both exported and imported by Bulgaria are textiles and chemical products. Bulgaria exports base metals to the EU and imports machinery equipment from the EU. Machinery imports increased substantially in 1998, showing that Bulgaria is upgrading its production capacity. Overall, the level of intra-industry trade between Bulgaria and the EU remains low. This indicates that much can still be done to improve the competitiveness of Bulgarian exports on the EU markets.

Since the start of transition in 1990, the number of small and medium-sized enterprises (SMEs) in Bulgaria has increased rapidly and they now account for well over 90% of all registered economic entities. The vast majority are micro-enterprises with less than five employees, and their main activities are in retail business. The share of SMEs in total employment, at about 41%, is low compared with the EU average. This suggests that there is scope for developing the employment possibilities offered by these enterprises in order to absorb the redundancies resulting from enterprise restructuring. These firms suffer from a lack of availability of long-term financing and an inadequate business environment. In order to facilitate their access to banking finance, the Bulgarian authorities have set up a state bank, Promotion Bank, specialised in lending to SMEs. In addition, a draft law designed to stimulate the development of SMEs was adopted by Parliament in April.

Bulgaria is not yet in a position to cope with competitive pressures and market forces within the Union in the medium term. Despite moving forward with its reform programme, much remains to be done to improve the competitiveness of the Bulgarian economy. Sustained levels of domestic and foreign investment are required to upgrade Bulgaria's infrastructure and accelerate enterprise restructuring. Further reform of the financial sector, in particular continued privatisation, is required to make it more efficient.

Bulgaria has continued to make progress in establishing a functioning market economy but further steps are needed and it is not yet in a position to cope with competitive pressure and market forces within the Union in the medium term.

Macroeconomic stability has been maintained thanks to implementation of sound fiscal and incomes policies under the currency board arrangement. Despite an adverse external environment, the authorities have persevered with their ambitious reform agenda.

Priority should now be given to completing privatisation and accelerating restructuring of the enterprise and banking sectors. Special attention should be paid to liquidation and bankruptcy procedures in order to make them more effective. Additional measures are needed to impose financial discipline, particularly on state-owned enterprises. The authorities should also intensify the reform of the financial sector, in particular continued privatisation. Further steps are needed to ensure a stable and transparent legal framework for business.

This section aims to update the Commission’s Regular Report of 1998 as concerns Bulgaria’s ability to assume the obligations of membership - that is, the legal and institutional framework, known as the acquis, by means of which the Union puts into effect its objectives.

In the 1998 Regular Report on Bulgaria’s Progress towards Accession, the Commission concluded that:

"The pace of transposition of Community legislation in Bulgaria has picked up in most areas. However, implementation and enforcement capacities need to be strengthened. Given limited administrative and financial resources, this remains a major challenge and it is too early to assess if the newly transposed legislation will be effectively applied.

Attention devoted to strengthening the intellectual property legislative framework and enforcement capacity reflects positively on the country’s ability to adopt and apply key legislation.

Bulgaria needs to put into place a system of standards and certification compatible with that of the EU, and to give immediate attention to the adoption of the necessary legal base. Although first steps have been taken towards control of state aids, much more needs to be done to apply the rules. In agriculture, further efforts are needed to complete land reform, to develop an active land market, to set up and operate a unified land registration system, and to strengthen veterinary and phytosanitary control. While Bulgaria is now developing a comprehensive energy plan, the intentions of the government with regard to the closure of certain units in Kozloduy are still unclear. Initial progress in justice and home affairs is encouraging but needs to be enhanced, particularly with regard to border management issues, in view of Bulgaria’s request to be removed from the common visa list.

Bulgaria has made progress in addressing certain aspects of all of the short term Accession Partnership priorities.".

The presentation which follows uses the same structure as the 1998 Regular Report. The report focuses on the progress made since October 1998. Under each heading legislative decisions and the progress in implementing and enforcing the legislation are reported.

The Union's internal market is defined in Article 14 of the Treaty as an area without internal frontiers in which free movements of goods, persons, services and capital is ensured. This internal market, central to the integration process, is based on an open-market economy in which competition and economic and social cohesion must play a full part.

Effective implementation and enforcement of these four freedoms requires not only compliance with such important principles as, for example, non-discrimination or mutual recognition of national legislation but also the effective application of common rules, such as those designed for safety, environmental or consumer protection, and effective means of redress. The same principles apply to certain common rules, for example in the areas of public procurement, intellectual property and data protection, which are important in shaping the general framework within which the economies operate.

Concerning public procurement, a new law was adopted in August 1999 which takes on the basic principles of the Community acquis. Further alignment is needed concerning preferences for offers that promote local employment provisions and social requirements and a requirement that bidders be registered in Bulgaria if they are awarded a contract. Next to legislative alignment, effective enforcement remains the main challenge. No figures are available for 1998 as collection of data started in 1999 and the tender register is still under construction so it is too early to judge the effectiveness of the new law.

As regards intellectual property rights and certain related rights, the current copyright law of 1993 was amended in 1998 in order to widen the scope of administrative violations and to increase the level of fines. Implementation of the database directive and full implementation of the rental directive, of the term of protection directive as well as of the software directive should now become a priority.

Substantial progress has been made in the fight against piracy, which now seems to be under better control, in particular as regards exports. Bulgaria was taken off the US watch list on intellectual property rights because of progress in law enforcement. The Penal Code has been amended, judicial procedures and border controls have been improved. However, more progress should be made as regards enforcement, in particular against piracy on the domestic market, and legal provisions relating to enforcement should be further strengthened.

As regards industrial property rights, Bulgaria has adhered to the main international instruments for IPR protection. In March 1999 Bulgaria became an observer in the Administrative Council of the European Patent Organisation. It has been invited to become a member of the European Patent Convention from 1 July 2002. The main implementing body, the Bulgarian Patent Office, needs to be strengthened in view of its extended responsibilities under the new laws. In September 1999, Bulgaria adopted a new law on trademarks. Bulgaria needs to make further efforts to ensure required protection of industrial property rights.

In the field of company law, not much progress has been achieved since the last Regular Report. However, legislation has a high degree of compliance. Bulgaria has carried out a detailed analysis of the existing legislation and has prepared amendments to the Commercial Code in view of its further alignment with First, Second, Eleventh and Twelfth Directives.

As far as accounting is concerned, work on the adoption of international and European accounting standards has continued. Since the last Report a number of national accounting standards were adopted in order to ensure compliance with international accounting standards. Bulgarian accounting legislation needs to be further amended to achieve full compatibility with EC law in line with the requirements laid down in the Fourth, Seventh and Eighth Company Law Directives.

As regards the implementation of a data protection policy, there has been little progress since the last report. However, a law on the identification documents was adopted in April 1999 which corresponds to relating requirement of the Council of Europe Convention n°108 on personal data protection which Bulgaria signed in June 1998 but has yet to ratify.

In the Opinion, the Commission indicated that in all areas of the internal market, Bulgaria’s legislation was only very partially in line with the acquis.

The assessment in the regular report of 1998 recognised that progress had been made but that the scale of progress still required called for considerable and sustained efforts both in approximation of legislation and in its implementation.

Bulgaria has made progress in this field in particular with the Law on National Standardisation, adopted in June 1999, which also established the appropriate administrative bodies in this field. However, the legal basis for taking on all New and Global Approach principles does not yet exist. This is necessary before specific new approach directives can be implemented.

For motor vehicles, a Road Traffic Law entered into force in September 1998. This law constitutes the framework to transpose the basic directives on Type Approval of Motor Vehicles.

In the area of drug precursors, a Law on the Control of Narcotic Substances and Precursors was adopted in March 1999. This law seems to be in compliance with the relevant acquis.

At present there are no statutory instruments containing regulations corresponding to the EU acquis in the field of glass, labelling of textile goods and on labelling of footwear but the law on Consumer Protection and Rules for Trade of March 1999 sets the legal base for the adoption of ordinances to implement the acquis in these areas.

In the field of legal metrology, three implementing ordinances have been adopted (on measurement standards, on metrological control and verification marks and on the authorisation for verification and repairing of measurement instruments) on the basis of the Law on Measurements of April 1998.

A Law on Control of Explosive Substances, Firearms and Ammunitions has been in force in Bulgaria since October 1998. This law sets up the control of activities related to the explosive substances, carried out by physical, judicial bodies and traders.

As regards product liability, considerable progress has been made through the adoption of the law on Consumer Protection and Trade Rules (see further section on consumer protection).

Bulgaria still applies an authorisation procedure for most outward capital transactions. Since the last regular report, Bulgaria adopted in September 1999 a new Currency Law which will enter into force from January 2000 and should contribute to liberalisation of capital exports.

As regards capital inflows, the regime is liberal. Under the current legislation, direct foreign investment is fully liberalised. Foreign investors can repatriate their profits freely. The tax preferences provided to encourage foreign investments were abolished in early 1999. In consequence, foreign and domestic investments are treated on an equal footing. The earlier constitutional problem prohibiting acquisition of direct ownership by foreigners of real estate is partially resolved. Joint ventures or 100%-foreign owned companies registered under Bulgarian law are allowed to buy land, including agricultural land, for business purposes

The restructuring of the banking and financial services sectors has been continued and further measures introduced to strengthen regulation.

In the banking sector, the privatisation process has continued. Two out of the six remaining state owned banks have been privatised. The privatisation process for another three has been launched and scheduled to be completed before the end of 1999. A law entered into force in 1999 to strengthen and convert the State Savings Bank into a commercial bank.

In general, the banking sector’s prudential standards, enforcement capacity as well as banking supervision have been strengthened, though further progress in these areas is still required. The liquidation of bankrupt banks has not been finally resolved. Financial functioning of banks needs to be improved, including the capacity for loan assessment, enforcing the collection of loans and the sale of collateral. The Pledges law, the Banking law and the Bankruptcy law should be revised to accelerate the court procedures for collateral sales, to ensure the functioning of special pledges and the loan registers. Procedures for granting licences for the provision of financial services and for the liquidation of banks have been strengthened. Further to the law on bank deposit guarantee, a bank guarantee fund was established in January 1999 to administer the guarantee provisions under the law. As of January 1999 banks are required to provide financial reporting in compliance with international accounting standards though these provisions have not been fully introduced. Further alignment is needed in the areas of large exposure, consolidated supervision and netting as well as for new acquis in relation to capital adequacy.

Following the 1998 law on measures against money laundering, which is largely in line with international standards and the acquis, implementing regulations have been adopted providing for the establishment in November 1998 of the Bureau of Financial Intelligence as a specialised body within the Ministry of Finance. The impact and effectiveness of the new legislation cannot yet be assessed.

The insurance market is in a consolidation phase and remains underdeveloped. Progress has been made in bringing insurance legislation into line with the acquis and developing the administrative capacity for its enforcement. The main prudential rules of the first-generation insurance directives have been adopted but further legislative work to align with the acquis communautaire is necessary. In the field of motor insurance, Bulgaria’s Green Card Bureau will comply with the EU norms by the end of 1999.

Supervision of non-bank financial institutions and the regulatory framework for securities is being established. The Law on Securities was amended in March 1999 with a view to further alignment with the acquis. The securities market is not well developed and not yet an active vehicle for the privatisation process. Further alignment is envisaged in relation to public offers, and insider trading.

In terms of companies listed, there is rapid development in other financial sectors, but the stock exchange market remains in its infancy. Mass-privatisation and privatisation of state owned enterprises via the stock market, as well as a new legal framework in the form of amendments to the Law on Securities, will be crucial for expanding the role of financial services.

Bulgaria has made progress in the process of improving its payment system since last year. However, no further progress has been made towards the implementation of a real time gross settlement system (RTGS).

Bulgaria has made progress in this field. Concerning freedom of establishment, the Law on Foreigners in the Republic of Bulgaria entered into force in April 1999 and regulates issues including those connected with the stay of foreigners with business activities, employment or education in Bulgaria.

As regards mutual recognition of diplomas and professional qualifications, the Bulgarian government has continued approximation of legislation in this area in particular through amendments to the National Education Act, Labour Code, and Laws on Foreigners and Foreign Investment, all of which were effective from January 1999. The law on Veterinary Medical Activities adopted on 12 April 1999 regulates the basic issues concerning the acquisition of diploma and the right to provide veterinary services.

The Law on the Protection of Competition and the Competition Law are largely in line with EC anti-trust rules. Secondary legislation introducing the acquis on block exemptions still needs to be elaborated and adopted in line with the acquis. The Commission for the Protection of Competition (CPC) has played an increasingly more important role over the past period, which is underlined by the number of cases dealt with effectively. In 1998, there were 179anti-trust cases and decisions were taken in 135 of these. For January to September of 1999, of the 94 cases, decisions have been taken on 87. However, the CPC should still be strengthened in terms of numbers and qualification of staff.

As regards state aids, no systematic control to ensure compatibility of state aid with the acquis yet exists. The State Aids Department of the Ministry of Finance has been established as the state aids monitoring authority. However, the Commission for the Protection of Competition is in charge of state aid control, i.e. the examination of the compatibility of state aids under the new competition act. Bulgaria still needs to invest substantial efforts in developing a state aid monitoring system.

The State Aids Department of the Ministry of Finance has prepared state aid reports covering the period 1996-1998. It does not yet follow EU methodology.

As regards state monopolies of commercial character and public undertakings, Bulgaria should be encouraged to continue its efforts in the process of liberalisation according to Article 86 of the EU Treaty.

Progress has been made in meeting the short-term priorities of the Accession Partnership, notably in the areas of intellectual property and standardisation and certification where much preparatory work is underway. Laws have been adopted in areas such as public procurement and product liability. However, in areas such as data protection, legislative alignment is still lacking In many areas notably public procurement, industrial property rights and financial services, significant efforts are now necessary in implementation and enforcement of laws.

In competition policy, Bulgaria has partly met the Accession Partnership priority. It has made progress on anti-trust policy but substantial efforts are needed to establish adequate control of state aids.

Good progress has been made since the last regular report. Bulgaria has established a Council on Information Society to co-ordinate developments between relevant government departments. 8 working groups have been established in different thematic areas and will make recommendations for action.

Bulgaria hosted the second Regional Year 2000 Conference of national co-ordinators from central and eastern Europe and central Asia on 10-12 June 1999 where the preparation of energy and telecommunications strategies and solutions and crisis planning on the eve of the second millennium were discussed.

Progress has been made in a number of areas. A new Act on Educationel levels and the curriculum has been adopted to introduce European standards. The new Higher Education Law has been amended and a new Vocational Education and Training act adopted which rationalises the training system to bring it more into line with EU standards.

Participation in Tempus has been instrumental in promoting co-operation in higher education between Bulgaria and the EU. Bulgaria now participates in the Youth for Europe, Socrates and Leonardo programmes.

The policy development capacity of the Ministry of Education and Science and needs to be reinforced and the capacity of the administration to implement new legislation should be further developed. The system needs to be further decentralised and deconcentrated, especially in financial management of schools.

In 1998-99, 98 students have benefited from Erasmus mobility grants to study in EU coutries and 1300 youg Bulgarians have taken parti in the Youth for Europe programme.

The present Community acquis does not require transposition into the national legal order. However, the research and technology infrastructure still awaits the introduction of new legislation planned concerning Higher Education, Agricultural Science, Strategy for Development of High-Tech Activities, and Promotion of Scientific Research and Technology Development.

The association of Bulgaria with the 5^th Framework Programme (1999-2002) and with the Euratom Framework Programme entered into force in September 1999. In order to prepare for successful association, several information dissemination structures have been created or consolidated recently. Nevertheless, association to the 5^th Framework Programme will test the implementation capacity, and it will be necessary to increase support to the research and technological development sector during the coming years. Bulgaria has announced that it will open up its corresponding research activities to enterprises, resarchers and universities from EU member states.

Starting from a high level of fixed line telephone penetration at the end of 1997 (31.8 lines per 100 inhabitants), the fixed line network has grown to about 33.6 lines per 100 inhabitants in 1998. Although digitalisation of the international (100%) and long distance (80%) networks is well advanced, investment is needed in the local loop where the level of digitalisation is low at only 8%. Although mobile telephone penetration has trebled during 1998, the level is low at 1.6 per 100 inhabitants, leaving considerable room for growth.

With the adoption of the new Telecommunications Law in 1998 introducing a liberalised regime for activities in the telecommunications sector and the Government's decision on the Telecommunications Sector Policy in October 1998, Bulgaria continues to make good progress in the sector. The new law has introduced liberalisation of all services except voice telephony and leased lines, which will be opened to competition on 1 January 2003. This is in advance of the WTO commitment of 1 January 2005.

Productivity of the main telephone company has increased only slightly in the 12 months to the end of 1998 and at 9.6 employees per 1000 lines is one of the lowest of candidates countries. This matter will need to be addressed if the company is to be competitive in the new liberalised environment.

Secondary legislation will need to be finalised in relation to interconnection, licensing, data protection, universal service arrangements and open network provision. Attention should be placed increasingly on effective implementation of legislation, preferably through a phased approach. Now that most of the issues in the policy document of 1998 have been implemented, it is suggested that the document be revised to cover the implementation aspects of the issues and tariff rebalancing.

In the postal sector, efforts should be sustained to ensure that the intended postal policy and legislation is completed.

Significant progress has been made in alignment to the acquis. In November 1998, the Law on Radio and Television was adopted. Together with the Law on Telecommunications adopted in July 1998, it sets the common framework for the telecommunication and audiovisual sectors. In March 1999, Bulgaria ratified the Council of Europe Convention on Transfrontier Television.

Consequently the audiovisual legal framework is closely aligned with the consolidated Directive Television without Frontiers. Whilst administrative structures (the National Council for Radio and Television) are in place, there are concerns about capacity to monitor compliance, closely linked to the existing lack of budgetary resources.

There has been progress in all sectors which indicates that for the information society, research and technological development, education and audiovisual fields, Bulgaria should have little difficulty in taking on the acquis.

Bulgaria has stated it accepts and will comply fully with EMU acquis as defined by title VII of the EC treaty and the other relevant texts. Bulgaria has also stated that the administrative structures to implement and enforce the acquis will be in place.

Bulgraia has made no additional progress in its preparation for participation in the Economic and Monetary Union. However, its currency board arrangement assures the independence of the monetary authority and excludes direct financing of the public sector by the central bank. Under current legislation, the public sector also has no privileged access to financial institutions.

Compliance with the EMU acquis is conditional upon completion of the process of liberalisation of capital movements, which is examined under section on free movement of capital.

Bulgaria’s tax legislation has in the past been characterised by being relatively general and inconsistent in its application. However, several legislative amendments have been made over the years so as to improve the level of conformity with the EC tax acquis. In the past, the main efforts have been concentrated on the preparation of a more thorough reform of the country’s VAT and excise systems.

The entry into force of Bulgaria’s new VAT Act as of January 1999 has resulted in a much more coherent application. The new VAT Act conforms to a higher degree to the general principles of the Community VAT system.

As part of the tax reform Bulgaria’s excise regime has undergone significant changes as of 1 January 1999. This has resulted in a change in the duty structure from the ad valorem element to specific duties as applied in the Community.

Bulgaria’s new VAT and excise duty Acts have brought the country a significant step forward towards the Community tax acquis. Although further adjustments are still required in particular in the field of excises, Bulgaria continues to give the same level of high priority to taxation issues, it should be able to reach a satisfactory level of legislative alignment. However, some concerns remain as regards Bulgaria’s capacity to operate and enforce its tax legislation and these issues should continue to receive special attention.

Reform in this area has been launched. A bill amending the Statistical Act came into force in June 1999 which is broadly in compliance with EC legislation. The Act establishes a partially decentralised statistical system, with the emphasis on co-ordination between the National Statistical Institute (NSI) and the other bodies responsible for producing statistics. However, as yet effective mechanisms to determine the roles of the various statistics producers have not been developed in all sectors.

New regional divisions have been created this year and the priority is to produce macroeconomic and agricultural statistics at regional level. The basis for a business register has been created but considerable efforts will be required to improve quality and to develop detailed methodology. Significant efforts are being made to improve the quality of distributive trade and tourism statistics.

Major efforts are required in macroeconomic statistics. The lack of experienced staff and development of effective co-operation with other bodies must be addressed. Work has begun on household income and purchasing power statistics, but reliable financial accounts still need to be provided. For social statistics, efforts are required to upgrade the labour force survey to operate on a quarterly basis, and to provide information on earnings, education and health. Some progress has been achieved in the quality of statistics on road transport and transport by sea but must be improved and consolidated.

Progress is still needed on land use and farm structure statistics, especially data collection from small farms (more than two million). Attention should be paid to the agriculture census.

Despite progress made, statistical reporting by the NSI cannot yet be considered up to EU standards. Further adaptations to its working methods and methodology to the ongoing changes in the economy. Internationally comparable classifications have not yet been introduced. Additional work is needed to develop implementing regulations.

Industrial policy continues to be based on the government's Bulgaria 2001 programme, which targets the attainment of sustainable economic growth, and the acceleration of privatisation and restructuring. It aims to improve framework conditions for industrial development and the competitiveness of enterprises, and to establish an environment conducive to the growth of small and medium-sized enterprises.

As regards horizontal developments concerning Bulgaria’s industrial policy, main achievements relate to the improved competition law and the amendments to the privatisation law. However, significant efforts are still needed to establish a coherent industrial policy strategy in Bulgaria.

Concerning sectoral policy, the government adopted a Strategy for the development of Bulgarian high-tech industry in February 1999, aiming at the creation of a dynamic sector for manufacturing of high-tech products and services.

In order to create a more favourable legal environment and to improve the investment climate, the government adopted a mid-term Investment Programme for the period 1998-2001 concerning projects in the fields of telecommunication networks, roads and transport facilities, energy and construction.

As regards privatisation, Bulgaria has taken steps to accelerate the privatisation process by improving the institutional framework. However, due to the effects of the financial crises on other emerging markets but also the lack of an adequate legal framework, the privatisation results were slower than expected. Together with some effects of the situation in Russia and the Kosovo crisis on foreign investors' confidence, it would seem difficult to complete enterprise privatisation by the end of 1999 as planned.

As a follow-up to the privatisation process, corporate governance issues will have to be addressed. In addition, a strategy and new legislation needs to be developed to deal with enterprise liquidation in order to ensure efficient and transparent procedures.

In the steel sector, Bulgaria has made some progress in privatisation but it is still unclear how restructuring will be carried out. Privatisation of utility companies is running behind schedule. The privatisation process of the Telecommunication Company is ongoing, but energy utilities privatisation has barely started.

An important dimension of the industrial policy is the control of state aids (see competition).

Following the 1997 increase of around 30%, gross agricultural output declined by 6.2% in 1998. The agricultural sector accounted for 21.1% of GDP in 1998, which is a 19.5% decrease compared to 1997 (26.2%). Agricultural employment in 1998 represented 24.7% of the working population.

Production of most field crops fell as a result of both sown acreage and lower yields. The reduction of acreage occurred despite a 3.4% increase in crop prices, while yields were affected by a renewed price-cost squeeze making the cost of fertilisers prohibitive for many farmers. Improved meat prices caused livestock farmers to purchase new animal stock.

The appreciation of the real exchange rate in relation to other currencies than the DM and later the Euro, dampened the recovery of exports and trade became more focused on EU countries. In 1998 bilateral trade of agricultural and food products continued to increase. EU exports rose from ? 193 million in 1997 to ? 245 million in 1998 but Bulgarian exports rose only very modestly from ? 234 million to ? 236 million while total exports fell. As a result, the Community’s trade balance which had been negative for two years (- ? 50 million in 1996 and - ? 41 million in 1998) showed a slight surplus of ? 9 million in 1998. Agricultural and food products represent 8.4 % of total Bulgarian exports and 5.3 % of imports.

Due to a risk of foot-and-mouth disease, import of live animals to the EU is banned from a 20-km border zone with Turkey, together with a ban on milk and milk-based products. Bulgaria is not authorised to export pork meat to the EU.

In march 1999, the Council mandated the Commission to open negoiations with the associated countries in view of new reciprocal concessions in the field of agriculture which will enhance the progressive and orderly liberalisation of bilateral trade.

Main Economic Trends
Bulgaria		1995	1996	1997	1998	1999 latest
Real GDP growth rate	per cent	2.9	-10.1	-6.9	3.4	0.5	Jan-Jun
Inflation rate - annual average - December-on-December	per cent per cent	62.1 32.9	123.0 310.8	1082.3 578.5	22.3 1.0	: 1.3	Jul
Unemployment rate, end-year - ILO definition	per cent	14.7	13.7	15.0	16.0	:
General government budget balance	per cent of GDP	-5.1	-15.3	-0.3	:	:
Current account balance	per cent of GDP million ECU/?	-0.2 -20	0.2 13	4.2 376	-1.8 -197	-10.2 –503	Jan-Jun Jan-Jun
Foreign debt - debt export ratio - gross foreign debt	per cent per cent billion ECU/? billion ECU/?	151 : 7.7 :	158 : 7.7 :	155 132 8.8 7.9	184 132 8.8 7.2	200 : 9.2 :	Jun Jun
Foreign direct investment net inflow - according to EBRD - balance of payments data	per cent of GDP million ECU	0.6 69	1.0 86	4.9 445	3.3 358	: 200	Jan-Jun
Source: National sources, OECD external Debt Statistics, IMF Government Finance Statistics, EBRD