The Commission of the European Communities,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EEC) no. 1628/96 of 25 July 1996 relating to aid for Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia and the former Yugoslav Republic of Macedonia, as amended by Regulation 851/98, as last amended by Council regulation (EC) 2454/99/ of 15 November 1999, and in particular Article 12 thereof;

Whereas the present exceptional targeted support for public services is also to be seen in the broader perspective of the exceptional circumstances which led the Eco Fin Council at its meeting on 8 November 1999 to agree ‘that the EU was ready to pledge a contribution of Euro 5 million for 1999 and Euro 35 million for 2000’ to help close the residual financing needs of the Kosovo budget.

Whereas the measures which have been identified as suitable for financing are based on the criteria enumerated in Article 5 of Regulation (EC) no. 1628/96;

Whereas Article 10.5 of the amended regulation foresees that assistance may be provided to the interim administration of Kosovo;

Whereas this Regulation states that financing decisions of Euro 5 million and below shall not be submitted for opinion to the Committee provided for in Art. 12 of the Regulation but only for information;

Whereas the above mentioned Committee was informed in advance of this proposal in accordance with the above mentioned regulation;

Whereas the measures should be financed from budget heading B7-546 according to their nature and the relevant budgetary commentaries;

HEREBY DECIDES AS FOLLOWS:

The Financing Proposal described in Annex to this Decision is hereby approved for a maximum amount of Euro 5 million. The amount will be charged to B7-546 of the 1999 budget subject to the availability of the necessary funding.

Done at Brussels,

The funds authorised under this proposal will be used to provide exceptional and urgent support for public services for Kosovo in 1999 for a total budget of Euro 5 million.

This action will be complementary to the financial assistance already provided (Euro 52 million) to Kosovo as follows:

• A damage assessment and ATA facility for support to the Task Force for the Reconstruction of Kosovo (9.5 M Euro );
• An urgent, integrated rehabilitation programme (35.5 M Euro ), focusing on housing reconstruction, public utilities (electricity and water), village employment and rehabilitation, customs, de-mining, and small scale operations projects;
• Rehabilitation of the hospital of Mitrovica (1.0 M Euro ).
• A programme for support for transport and local administration in Kosovo (6 M Euro ).

In addition, a programme is envisaged to provide Euro 62.5 million for economic reconstruction, Euro 2.5 million for an emergency winter road clearance programme and Euro 15 million for the Agency for Reconstruction. These two programmes will be the subject of separate financing proposals and will result in the full commitment of the available budget for reconstruction in Kosovo of Euro 137 million for 1999.

In June 1999, the Federal Republic of Yugoslavia (FRY) accepted a G8 peace plan and withdrew its forces from Kosovo. Based on UN Security Council Resolution 1244 (1999) of 10 June 1999, the International Community has set up an international security presence (KFOR) and an interim civil administration - the United Nations Interim Administration Mission in Kosovo (UNMIK).

UNMIK's responsibilities are to establish an international civil presence and to provide interim administrative structures under which the people of Kosovo can enjoy substantial autonomy. Headed by the Special Representative of the UN Secretary General (SRSG), Mr Kouchner, UNMIK consists of four components ("pillars") which are humanitarian aid (UNHCR lead), civil administration (UN lead), institution building (OSCE lead) and economic reconstruction and development (EU lead).

The economy of Kosovo, like that of the rest of the FRY, was in poor condition long before the air strikes commenced, because of the increasing international isolation of the FRY as a whole as well as the slow pace of economic reform there. Aggravating circumstances were the chronically low levels both of public and private investment under which Kosovo suffered particularly since 1989, when Kosovo's autonomy within the FRY was withdrawn, which had provided to the province wide legislative, executive and de facto judicial powers.

As a consequence of the conflict, housing and public facilities have been damaged, particularly in the Northern and Western parts of the province. The agricultural production and related processing industries seem to have come to a virtual standstill, as it is the case for industrial production. The formal financial sector has ceased functioning; banking and payment linkages with the rest of the FRY are severed. However, there is clear evidence of a high level of entrepreneurial skills and initiative. It is now essential to establish a regulatory and institutional framework both for the economic activities that are already carried out, and to stimulate new ones.

With the assistance of the IMF and the World Bank, Pillar IV has developed estimates for the budget in 1999. The total expenditure of the approved budget amounts to DM 124.8 million, against revenues of DM 38 million. The newly introduced customs rates, excise and sales taxes represent the only direct source of income in 1999. The Kosovo budget essentially continues to be a budget for current expenditure; i.e. the large expenditure items are wages, income transfers and some overhead costs. UNMIK Regulation No 1999/17 establishing the consolidated budget for 1999 is attached as annex 1.

For 1999, the external financing needs amount to DM 86.3 million (Euro 44 million). However, a total of DM 42.7 million has been mobilised to date through donors (including roughly Euro 17.4 million already received out of some Euro 33 million that was pledged at the first donors' conference for Kosovo in July 1999). In addition, more recent pledges have been made by NL of $15 million (DM 27.9 million) and the World Bank of $1 million (DM 1.9 million), resulting in a current financing gap for 1999 of DM 13.8 million (Euro 7 million) - see annex 2 for details. However, the definite financing gap this year depends on whether the projected revenue is actually collected, whether more of the unpaid balance of the funds pledged by donors will be mobilised still this year. The functioning of basic public services is an absolute necessity for the implementation of a coherent reconstruction programme, as well as to ensure that there are local counterparts with whom donors can work. This programme is, therefore, entirely complementary to the programmes already under implementation, as well as those planned for commitment. In addition, given the European Union’s specific responsibilities with regard to Pillar IV of UNMIK, it is proposed to provide exceptional support to finance stipends/salaries in selected areas of public services (as identified in the 1999 Kosovo budget adopted by UNMIK) to UNMIK to help it secure a continuation of urgently needed facilities.

Kosovo relies on external financial assistance from official sources, with a view to ensuring the resumption or creation of essential administrative functions in Kosovo, which is a basic prerequisite for the economic reconstruction of the province. This assessment was endorsed by the High Level Steering Group for South Eastern Europe (HLSG) in Washington on 28 September 1999.

To ensure the financing of pressing needs in the process of building up a coherent administrative and institutional framework, without which the implementation of large scale reconstruction programmes will not be effective, a Euro 5 million assistance programme targeted to specific areas of public services under the Kosovo budget for 1999 is hereby proposed. This support is essential to avoid a situation whereby the already limited public services some to a complete standstill, as well as to ensure that UNMIK establishes the necessary credibility amongst the local population to be able to effectively carry out its mandate.

In order to re-start urgently needed services, UNMIK has commenced paying stipends to public workers. Due to a number of problems, however, these stipends could not be paid on a regular and systematic basis. Bearing in mind the almost entire absence of files and identity cards as well as banking structures, constituting major obstacles, there was the need to unambiguously identify beneficiaries, to establish authorizing procedures and to transfer funds for disbursements throughout the province. These problems gradually waning, it is now a key issue to rapidly normalise the situation in the public sector. The task of UNMIK therefore is to secure regularity, to provide reliability and to create confidence in the most needed services.

As most other sectors, the health sector has suffered from brain drain and under-investment during the last decade. However, the challenge in the health services is of a paramount importance to overcome many of war-related consequences. The physical and mental effects of flight, expulsion, and displacement as well as all kinds of conflict-related crimes and aggressions make it necessary to provide for a significant supply of health services. This requires a sufficient number of qualified medical doctors and health workers throughout the area.

The Serbian dominance, notably during the last decade, has harmed the quality of the Albanian language education both on school and university level. After many schools and the university have re-opened, it is now necessary to increase the enrolment ratios and the density of schools, and to improve the educational input within the whole area of the province to achieve a quick normalisation of life. Only a sufficient number of teachers and professors will be able to secure at least a basic level of education in the coming months and thus to offer perspectives for the younger generation.

UNMIK has to guarantee the functioning of a number of public utilities (including garbage collection, heating and water supply), which are of a vital importance for the people especially against the background of harsh winters in Kosovo. This comprises not only the physical rehabilitation but also the staffing for operation in the transport and communication sector as well as in the areas of fuel, energy and water supply. Additionally, UNMIK needs to reinforce the customs, tax and banking administration to stabilise and increase the revenue stream in the future.

UNMIK does not yet cover the province to a sufficient degree to be able to fully exercise its responsibilities with regard to the interim administration of Kosovo. In addition rivalling political parties are undermining the authority of UNMIK. It is therefore of utmost importance that UNMIK will be able to continue and to stabilise the payment of stipends or salaries in the municipalities until the end of the year to strengthen the authority of UNMIK, to increasingly include the local population, to develop a competitive public service and to fight corruption from the beginning.

Finally, it is already known, that on the basis of the budget prepared by UNMIK for 2000 that there will be a significant funding gap for next year also. This has been one of the major issues addressed at the second donors’ conference for Kosovo on 17 November in Brussels. In this context, the European Commission has adopted a proposal for exceptional financial assistance in 2000 of up to Euro 35 million to be financed under budget line B7-532.

The European Community will provide a grant of up to Euro 5 million targeted to contribute towards covering expenditure (predominantly salaries and stipends but also goods and services) in the following areas:

• General public services (including customs)
• Housing and community amenity
• Transport and communication
• Municipal support
• Health

Expenditure will relate only to stipends/salaries for local personnel and not that of UNMIK. Only those costs arising from 1 November 1999 will be eligible for payment under this programme.

These types of expenditure have been identified on the grounds that they correspond to needs which are most complementary to the areas of reconstruction assistance which is already being provided (or planned) under the Obnova programme.

Technical assistance is not included in this financing proposal to cover the cost of audit, monitoring and evaluation and technical/administrative assistance in the mutual interest of the Commission and the beneficiary because funds for this purpose have already been foreseen under the Administrative and Technical Assistance Facility. Under this facility technical assistance will be contracted in particular to ensure a close monitoring of the implementation of this support for public services programme.

The total amount available for this programme is a maximum of Euro 5 million. It will be provided as exceptional financial assistance in the form of a straight grant.

UNMIK Pillar IV has established a Central Fiscal Agency (CFA) which will be structured similar to a finance ministry covering the functions budget preparation, treasury, tax and customs administration and collection as well as auditing. The related regulation has been signed on 2 November to take effect from 6 November. In this context Pillar IV will set down explicit rules as well as well-defined internal control and accountability procedures.

A Financing Agreement will be signed with UNMIK, specifying the mandate and modalities for the implementation of this programme as well as defining responsibilities between the European Commission Task Force and UNMIK and conditions which must be met by UNMIK (in particular on the mechanisms for authorising payments). Through this Financing Agreement, UNMIK will commit itself to finance only eligible expenditure and to report on a monthly basis on the use of the grant, according to the requirements of the European Commission. Following acceptance of this Financing Agreement the Commission will make the payment in one instalment to UNMIK.

The payment will be made to a dedicated bank account (in a EU Member State) opened for this sole purpose by UNMIK. This account will be operated under a double signature system and all operations in relation thereto, including instructions to charge the accounts will require the signature of SRSG Dr Kouchner and Deputy SRSG Mr Dixon. Any change in this system of double signature including a proposal to change the persons authorised to sign will require prior approval of the European Commission.

UNMIK will provide all relevant information to the European Commission upon request, on the use made of funds withdrawn from the account. This accounts will be entitled "EC budgetary assistance to Kosovo".

Monitoring and evaluation of this programme, and its audit will be the responsibility of the Task Force. Once the Agency for Reconstruction is created, this responsibility will be transferred to the Agency.

The programme including all payments will be completed by 31 July 2000.

This programme will be monitored and supervised by the EC Task Force (and subsequently the Agency for Reconstruction, once operational) who shall:

1. monitor the implementation of the programme on the basis of regular reports, and

2. sign contracts with independent consultants to follow the progress of the programme and its components and carry out ex-post evaluations after completion of the programme.

In order to facilitate these activities, a detailed set of indicators of achievement will be defined for each component according to its objectives and targets.

The accounts and operations of the programme components will be checked at regular intervals by an outside auditor contracted by the EC Task Force/Agency for Reconstruction without prejudice to the responsibilities of the European Commission and the European Union’s Court of Auditors.

The programme is subject to a number of assumptions and risks. It is assumed that UNMIK will be able to establish a simple payment system to be able to decentralise the disbursement as well as to open a bank account to receive funds. The continued stabilisation of the security situation is also assumed The Task Force/Agency, will verify that the stipend support provided by the Commission is directed to the eligible group of beneficiaries as defined in this Programme.