Risks of corruption and the management of EU funds in Romania.

• Author: Dimulescu, Valentina
• Position: POLSCI REPORT - Report

The Problem

Romania has received a consistent piece of the EU cake, ranking fourth after Poland, the Czech Republic and Hungary, in terms of the amount earmarked for the 2007-2013 programming period with 19, 67 billion EUR given by the EU for the Convergence and European Territorial Cooperation objectives (3). Currently, Romania has the poorest absorption rate among all the EU Member States (4) and the worst among the ten new Member States. At the end of 2012, Romania registered an absorption rate, as measured by the overall payment ratio (intermediary reimbursed payments from the European Commission), of almost 12% (5), dramatically below Bulgaria (34%), Hungary (40%) and the Central and Eastern Europe (CEE) average of 44% (KPMG--CEE, 2013: 9). In addition, among the countries with the lowest contracting ratio, Romania ranks last with 70% as compared to Slovenia (72%), Slovakia (73%) and to the CEE average of 83%. An important indicator of management efficiency in terms of real distribution is the difference between the grants contracted and those paid (KPMG--CEE, 2013: 14). The biggest differences are present in Romania (58%) and Bulgaria (66%) (6), the CEE average being 39%.

One of the immediate causes behind the low absorption rate is the decision by the European Commission in 2011 to halt reimbursement claims for two operational programmes (Regional Development and Human Resources) because of problems with the public procurement procedure as pointed out by the Commission's audit missions (7). The same happened in July 2012 when five operational programmes (Environment, Transport, Human Resources, Economic Competitiveness and Regional Development) were subject to halted reimbursement claims pending the results of the Commission's audit missions (8). Moreover, at the end of 2012, Romania was subject to pre-suspension mechanisms concerning three operational programmes (Transport, Economic Competitiveness and Regional Development (9)) because of suspicions of fraud and the lack of adequate management and control functions. More precisely, they refer to faulty public procurement procedures, defective financial management and an inadequate prevention and detection practice with regard to fraud and conflict of interest (10). The direct consequence of all the suspended reimbursements was the fact that the beneficiaries received the funds later than anticipated and the Government had to continue to support the programmes financially either from the state budget (11), or by contracting loans from the international financial market, thus increasing the state deficit.

The financial corrections applied by the Commission following audit missions merit special attention because although it has the weakest absorption rate, Romania is subject to the highest level of corrections among all the Member States (Iorga et al., 2013). That particular aspect is analysed in greater detail below.

Because of its poor absorption rate which is only slowly increasing, less actual money reaches the ultimate "consumer", the citizen meant to benefit from the financing scheme. The allocated per capita spending for Romania--strictly from EU funds--is 897 EUR (if the absorption rate were 100%). Even in that respect Romania lags behind since, according to data from 2012, the total amount of payments per capita (155 EUR) is the lowest among the CEE countries (Romanian Fiscal Council, 2012: 43) (12). Therefore, 742 EUR from the allocated sum did not reach the average Romanian citizen.

The picture described above permits us to state with a degree of certainty that Romania's predicament is a result of a combination of lack of administrative capacity, mismanagement and corruption.

Once political stability seemed to have been achieved in Romania after a stormy year in 2012, structural problems resurfaced. Corruption there remains the worst in the EU-27, echoed by the anti-government slogans of the 2012 demonstrators who stated to their rulers: "We apologize that we cannot produce as much as you can steal" (13). EU funding absorption is also the lowest, although such funds would be the ideal source of economic recovery for the country. Little work has been done on the association between the two problems and that is the gap the current report tries to fill.

According to a 2012 Eurobarometer survey, 67% of Romanians believe the level of corruption in their country has increased, while 78% of respondents agreed that corruption in Romania is much more pervasive than in other EU Member States (14). In addition, 79% of Romanians did not believe their government was fighting corruption effectively (15). The QOG 2-13 ANTICORRP survey (see DATA chapter in this book) found that Romanians see a great deal of favouritism and corruption, especially in the law enforcement and health care services.

However, Romania is fighting corruption, but so far each electoral cycle is associated mostly with the prosecution of former government members. In 2012, former Prime Minister Adrian Nastase, a Social Democrat, was imprisoned after many years of being shielded by Parliament against criminal investigation. Nastase is the country's first head of government in the post-communist era to have been convicted of illegally funding presidential election campaign by collecting approximately 1.6 million Euros from companies that declared the payments as attendance fees for a government symposium. The ex-PM fought ferociously, with a dramatic suicide attempt and last-minute tactics to withdraw Government Infrastructure Agency (ISC) complaints from his file, reaching out to ISC director Adrian Balaban-Grajdan, who was later dismissed by his fellow Social Democrat Prime Minister Victor Ponta for his attempt to withdraw the complaint. Nastase was freed for good behaviour in spring 2013 but was dismissed from the Law Faculty of Bucharest University and is banned from seeking public office. He has further outstanding legal action against him. At the other extreme of the political spectrum, following his government's fall from power in 2012SorinBlejnar, the former president of the Agency for Fiscal Administration (ANAF), and the leader of his cabinet Codrut Marta were indicted in September 2012. They were accused of selectively favouring fiscal evasion, and Marta and his wife were charged with organized crime and human trafficking (16). Blejnar, an appointee of Nastase's foe, President Basescu, made similar claims that the accusations were politically motivated.

This raises the question of how well Romania is controlling corruption? Is corruption the exception in the public funds allocation process, or rather the norm, seeing that Prime Ministers themselves and the heads of tax offices seem to be at the top of this lucrative industry? And how is their general distribution pattern affecting EU funds? As a rule, the discretionary allocation of public funds is a particularly persistent problem in Romania (Mungiu-Pippidi, 2010; Romanian Academic Society, 2011; Institute for Public Policy, 2010 and 2011). The usual illustration is the so-called State Reserve Fund, a national level fund earmarked only for "urgent or unexpected situations" (Article 30, Law 500/2002) and which is annually increased discretionarily without parliamentary approval. Although its amount is established within the State Budget Law of a particular year, the sum is substantially increased through Government decisions, and it is distributed on grounds of political affiliation, not real documented natural emergencies (17). The main red flags vis-a-vis the management of the fund are the abovementioned increases which are not subject to parliamentary approval and the change in destination from mitigating urgent situations to paying arrears from municipalities (18), the building and/or consolidation of churches or the organisation of film festivals (19).

The general unwritten rule is that most of the money goes to the ruling party or the parties within the ruling coalition (Romanian Academic Society, 2011: 16). Figures 1a and 1b below show the use of the State Reserve Fund over the last four electoral cycles. The clientelism score calculates the ratio between emergency funds allocated to mayors of the government party and the share of the vote for the government party in the given region, all showing significant disproportion until recently. Although all parties in government tend to favour their own mayors, the two centre-right parties when governing by themselves had the highest rate of clientelism. The data indicate that in 2008, the year when the Reserve Fund was increased 509 times above the amount initially allocated (Romanian Academic Society, 2011: 16-17), the clientelism score was at its highest. In 2012, the discrepancies between the allocations for local authorities affiliated to government parties and the rest were lower than in previous years and, as a result, the score was the lowest since 2004. However, in 2012 four prime ministers and two parliamentary majorities changed in Romania and it is likely that the resulting political instability affected the trend. The recent improvement of the ratio is due both to a large victory by a left-right alliance--so to a more representative majority -and to a reduction in the volume of the fund due to fiscal crisis.

The Reserve Fund illustrates how public funds are distributed in Romania in some form of legal corruption. The law is circumvented, funds are distributed to client local governments which further use it to fund locally networked businesses to build churches, repair roads or other frequent public works. For example, far more churches than classrooms have been built in Romania with public funds during the last twenty years. Those businesses then...