Hungarian National Development Plan 2004-2006 Republic of Hungary

Hungarian National Development Plan 2004-2006 Republic of Hungary Approved by the Hungarian Government on 26 th March, 2003 Prime Minister`s Office Office for the National Development Plan and European Funds H-1133 Budapest, Pozsonyi út 56. Signed Etele Baráth Government Commissioner Political State Secretary Tel: + 36-1-329-3445 28 March 2003

TABLE OF CONTENT CHAPTER 0 CONDITIONS FOR THE ESTABLISHMENT OF THE DEVELOPMENT PLAN...7 0.1 General...7 0.1.1 Planning Process... 7 0.1.2 NDP Framework... 8 0.1.3 Components of the National Development Plan... 9 0.2 Partnership consultation...11 0.2.1 Principles of partnership... 11 0.2.2 Partnership Consultation... 11 0.2.3 Brief summary of Partners Opinions... 12 0.2.4 Conclusion... 13 0.3 The Ex Ante Evaluation...15 0.3.1 Introduction... 15 0.3.2 Timing... 16 0.3.3 Conclusion... 16 I. SITUATION ANALYSIS...18 1 SOCIO-ECONOMIC SITUATION...18 1.1 The geography of the country...18 1.2 Demographic situation...19 1.2.1 Population density... 19 1.2.2 Changing age composition... 19 1.2.3 Migration... 21 1.3 Macro-economic situtation...22 1.3.1 Real GDP growth... 22 1.3.2 Trade... 24 1.3.3 External, internal balance... 26 1.3.4 Capital... 27 1.3.5 Employment, wages... 29 1.3.6 Inflation... 30 1.3.7 On the way to meet the Maastricht criteria... 31 1.3.8 Projections until 2005... 32 2 REGIONAL CHARACTERISTICS AND DIFFERENCES...34 2.1 Spatial development and regional policy...34 2.1.1 Regional differences of economic and social development... 36 3 THE PRODUCTIVE SECTOR...40 3.1 Factors of competitiveness...40 3.2 Manufacturing...43 3.2.1 Little capital accumulation in the economy... 44 3.2.2 Low productivity in domestically owned companies whereas foreign investors are highly productive... 45 3.2.3 Multinational companies still do not organically imbed into the Hungarian economy... 45 3.3 Small and medium-sized enterprises...46 3.3.1 The existing regulatory environment is still not conducive to SME growth... 46 3.3.2 There are market deficiencies in the provision of business development services and finance to SMEs... 48 3.3.3 Entrepreneurs lack the knowledge and skills required for the successful management of enterprises... 49 3.4 Tourism...49 3.4.1 Introduction... 49 3.4.2 The main challenges of the Hungarian tourism sector in 2004-2006... 50 3.4.3 Resources... 52 3.4.4 The weakness of human resource... 53 3.5 Research & development and innovation...53 3.5.1 The total amount of R&D spending is very low... 54 3.5.2 The R&D spending is predominantly state expenditure... 54 3.5.3 The R&D infrastructure is outdated and research teams are an ageing population... 54 II

3.5.4 The link between the R&D sector and the business sector is weak, the spin-off activity is not intense... 55 3.5.5 The innovation ability of the private sector is low...55 3.6 Information society...56 3.6.1 The spending on IT is lower than the EU average... 56 3.6.2 The number of Internet users is low... 56 3.6.3 The development level of the telecommunications infrastructure is regionally very different... 57 3.6.4 The IT skills of the Hungarian society are poor, the digital content industry is underdeveloped. 58 3.6.5 The legal basis of the development of the Information Society is incomplete... 58 3.7 Differences in economic development...59 4 INFRASTRUCTURE...60 4.1 Transport infrasturucture...60 4.1.1 Hungary a hub of international transport... 61 4.1.2 Current modal split... 61 4.1.3 Construction of the motorway network... 62 4.1.4 Upgrading the existing network... 63 4.1.5 Construction and modernisation of the railway network... 64 4.1.6 Expanding airport capacity... 65 4.1.7 Improvement of the Danube corridors... 65 4.1.8 Combined Transport... 66 4.1.9 Expected trends... 66 4.1.10 Institutional System... 66 4.1.11 Differences in the accessibility... 67 4.2 Energy...68 4.2.1 The Institutional System... 69 5 EMPLOYMENT AND HUMAN RESOURCES DEVELOPMENT...71 5.1 General overview of the labour market...71 5.2 Low levels of employment and high rate of inactivity...72 5.2.1 Low levels of employment... 72 5.2.2 Relatively low unemployment is coupled with high inactivity... 73 5.2.3 Regional Disparities... 73 5.3 Special groups of the labour force...74 5.3.1 Women... 75 5.3.2 Young people... 76 5.3.3 Older employees... 76 5.3.4 People with disability... 76 5.4 Structure of employment...77 5.4.1 Sectoral structure... 77 5.4.2 Role of SMEs in employment... 77 5.4.3 Shortage of Labour... 78 5.5 Investment in and promotion of human resources development...78 5.6 Implementation of employment policy...79 5.6.1 Institutional framework... 79 5.6.2 Active policies... 79 5.6.3 Involvement of social partners... 80 5.6.4 Employment prospects... 80 5.7 Education and vocational training...80 5.7.1 Level of education... 81 5.7.2 School attendance... 81 5.7.3 Adult training... 84 5.7.4 Shortcomings and bottlenecks... 84 6 HEALTHCARE...86 7 SOCIAL INCLUSION...90 7.1 Income, social exclusion...90 7.2 Situation of the Roma Minority...91 8 EQUALITY OF OPPORTUNITY...94 9 AGRICULTURE AND RURAL DEVELOPMENT...97 9.1 Introduction...97 9.1.1 Role of Agriculture and Food Processing Industry in the National Economy... 97 9.1.2 Natural endowments... 97 9.1.3 Production structure... 98 III

9.2 The main challenges of agriculture, food-processing and rural development...99 9.2.1 Investments, the technical- technological conditions of production... 99 9.2.2 Land ownership and the characteristic features of land use... 100 9.2.3 The composition of the agricultural population from the aspects of age... 102 9.2.4 The composition of the agricultural population from the aspect of qualification... 103 9.2.5 Co-operatives, integrating associations... 104 9.2.6 Product quality, food safety... 104 9.2.7 The characteristic features of silviculture... 105 9.2.8 The main challenges in the fishery sector... 105 9.3 Situation of food processing...105 9.4 Present situation of rural areas...106 9.5 Institutional System...108 10 ENVIRONMENTAL PROTECTION...110 10.1 General state of the environment in Hungary...110 10.1.1 Air pollution... 111 10.1.2 Surface and ground water... 112 10.1.3 Protection of soil... 113 10.1.4 Natural and landscape assets... 113 10.1.5 Environmental burden of economic activities... 114 10.1.6 The shortcomings of communal infrastructure... 115 10.1.7 Raising environmental awareness... 118 10.2 Institutional structure of environmental protection and nature conservation...118 10.2.1 Differences in the quality of local life and local public administration... 119 11 EXPERIENCE OF EARLIER PROGRAMMES...121 11.1 Széchenyi Plan...121 11.2 The PHARE Programmes...123 11.3 ISPA Programme...127 11.4 SAPARD Programme...128 APPENDIX 2...134 II. THE STRATEGY AND THE PRIORITIES OF THE NDP...135 1 SWOT ANALYSIS...136 2 OBJECTIVES...141 3 THE STRATEGY...144 4 PRIORITIES...153 4.1 Increasing the competitiveness of the productive sector (Priority 1)...153 4.2 Increasing employment and the development of human resources (Priority 2)...156 4.3 Better infrastructure and cleaner environment (Priority 3)...159 4.4 Strengthening regional and local potential (Priority 4)...161 4.5 Technical assistance (priority 5)...164 4.6 Expected impacts of the NDP...165 4.6.1 Macroeconomic impact assessment... 165 4.6.2 Indicators and quantified targets... 168 APPENDIX 1: POLICY FRAME OF REFERENCES IN THE FIELD OF HUMAN RESOURCES...170 III. COHERENCE AND CONSISTENCY OF THE STRATEGY...182 1 COHERENCE WITH COMMUNITY POLICIES...182 1.1 Regional competivieness...182 1.2 Increased employment, human resources development...184 1.3 Balanced urban and rural development...185 1.4 Horizontal principles...187 2 COHERENCE WITH NATIONAL POLICIES...187 2.1 Development fields...188 2.2 Horizontal principles...192 3 COHERENCE AND CONSISTENCY OF THE STRATEGY AND PRIORITIES...194 3.1 Prior appraisal of socio-economic problems...194 3.2 Relevance and coherence of the strategy and objectives...194 IV. FINANCE...199 IV

1 THE FINANCIAL PLAN OF THE NATIONAL DEVELOPMENT PLAN...199 2 EX-ANTE VERIFICATION OF ADDITIONALITY...201 V. BRIEF DESCRIPTION OF THE OPERATIONAL PROGRAMMES...203 1 ECONOMIC COMPETITIVENESS OPERATIONAL PROGRAMME...203 1.1 Investment promotion...205 1.2 SME development...205 1.3 Research and development and innovation...206 1.4 Information society and economic development...206 2 HUMAN RESOURCE DEVELOPMENT OPERATIONAL PROGRAMME...209 2.1 Support to active labour market policies...211 2.2 Fight against social exclusion by assisting entry into the labour market...211 2.3 Support for education and training within the framework of lifelong learning policy...211 2.4 Improving adaptability and entrepeneurial skills...212 2.5 Developing infrastructure supporting education, social inclusion and healthcare...213 3 ENVIRONMENTAL PROTECTION AND INFRASTRUCTURE DEVELOPMENT OPERATIONAL PROGRAMME...214 3.1 Development of environmental protection...216 3.2 Development of transport infrastructure...217 4 AGRICULTURAL AND RURAL OPERATIONAL PROGRAMME...219 4.1 Establishment of competitive basic material production in agriculture...222 4.2 Modernisation of food processing...223 4.3 Development of rural areas...223 5 OPERATIONAL PROGRAMME OF REGIONAL DEVELOPMENT...225 5.1 Development of regional economic environment...227 5.2 Development of settlement infrastructure...228 5.3 Development of the human resources of the regions...229 VI. IMPLEMENTING PROVISIONS...230 1 MANEGEMENT...230 1.1 Community Support Framework (CSF) managing authoroity...230 1.2 CSF Management Committee...231 1.2.1 Composition... 231 1.2.2 Operation... 232 1.3 Managerial tasks...232 1.3.1 Provision on data collection and electronic data exchange... 232 1.3.2 Annual and final reports on implementation... 232 1.4 Information and publicity (CSF Communication Action Plan)...233 1.5 General provisions on the management of the Operational Programmes (OP)...234 1.6 Intermediate Bodies (IB)...236 2 MONITORING...237 2.1 CSF Monitoring Committee...237 2.1.1 Composition... 237 2.1.2 Operation... 238 2.2 The OP Monitoring Committees...238 2.2.1 Composition... 239 2.2.2 Operation... 240 3 EVALUATION...241 4 FINANCIAL MANAGEMENT AND CONTROL...242 4.1 Paying Authority...242 4.1.1 Responsibilities... 242 4.1.2 Financial flows... 242 4.2 Control...244 4.2.1 Internal Audit Units... 244 4.2.2 Verification of operations (financial control tasks described under Art. 4. of Regulation 438/2001)... 244 V

4.2.3 Authorities of Bodies performing on-the-spot Checks (Financial control tasks described under Art. 10 of Regulation 438/2001)... 244 4.2.4 Declaration at winding-up of Assistance (Financial control tasks described under Art 15. of regulation 438/2001)... 247 4.2.5 External Audit... 247 5 COMPLIANCE WITH COMMUNITY POLICIES...249 5.1 Public procurement...249 5.2 Equal Opportunities...249 5.3 Sustainable Development...250 5.4 Competition policy...251 5.4.1 De Minimis... 251 5.4.2 Block Exemptions... 252 5.4.3 Guidelines and Frameworks... 252 5.4.4 Large Investment Projects... 252 5.4.5 Monitoring of State Aids... 252 APPEDIX 1: FLOW OF FUNDS AND RELATED DOCUMENTS: DECENTRALISED FINANCIAL FLOWS MEASURE LEVEL PRO-RATA FINANCING...254 APPENDIX 2...255 APPENDIX: PARTNERSHIP...256 1 PREPARATION OF THE CONSULTATION ON THE NATIONAL DEVELOPMENT PLAN...257 1.1 Objective and Principles of the Consultation Process...257 1.2 Co-ordination and Scenario of Consultation Process...258 2 CONSULTATION ON THE NATIONAL DEVLOPMENT PLAN...259 2.1 Preliminary consultation...259 2.2 Broad consultation...260 2.2.1 The Partner organisations... 260 2.3 Methodology and Tools of Consultation...261 2.4 Events...262 2.5 Results of Consultation on the National Development Plan...264 2.5.1 Distribution of Responding Partners... 264 2.5.2 Grouping of Partners Opinion... 268 2.5.3 Third phase of consultation... 274 3 CONSLUTATION ON THE OPERATIONAL PROGRAMMES...276 3.1 Consultation on the Human Resources Development Operational Programme...276 3.2 Consultation on Agricultural and Rural Development Operational Programme...277 3.3 Consultation on the Economic Competitiveness Operational Programme...277 3.4 Consultation on Environmental Protection and Infrastructure Operational Programme...278 3.5 Consultation of Regional Operational Programme...279 APPENDIX 2...1 APPENDIX 3...1 APPENDIX 4...1 VI

CHAPTER 0 CONDITIONS FOR THE ESTABLISHMENT OF THE DEVELOPMENT PLAN 0.1 GENERAL Hungary will join the European Union on 1 May 2004 and subsequently will become eligible for support from the EU Structural Funds and Cohesion Fund. The primary objective of these funds to help reduce the development disparities between Member States and regions in order to strengthen economic and social cohesion. Pursuant to 1260/1999 EC Council Regulation on the general rules of Structural Funds in order to be able to use support from the funds Member States falling under the scope of objective 1 and having underdeveloped regions 1 must elaborate and submit to the European Commission their development objectives and priorities in the framework of a National Development Plan (NDP). Therefore the National Development Plan is a national strategic document and the Government of the Republic of Hungary is responsible for its preparation. This document will constitute the basis for the discussions with the Commission, as a result of which the Community Support Framework (CSF), representing the legal framework of support, is completed. The Community Support Framework contains the financial commitments of the EU and the Hungarian party concerning the amounts they will spend on individual jointly financed development areas between 2004 and 2006. 0.1.1 Planning Process The elaboration of the Hungarian NDP began in February 2001. Until the change of government in May 2002 the Situation Analysis Chapter of the NDP was completed. With this the plan was in 18 months delay compared to the original time schedule. Despite this delay on 30 July 2002, when the No.21. Regional Policy accession chapter was closed, the new government entering into office confirmed the obligation undertaken by its predecessor to approve the National Development Plan by the end of 2002. In the summer of 2002 the Situation Analysis, which had been written in the first half of 2001, was revised mainly relying on the comments from the European Commission. Parallel with that the elaboration of the NDP Strategy also began. The Government accepted its first version submitted in September and made it available for discussions in the society. In the middle of October the Government approved the first draft of the Operational Programmes (OP) and social consultations began with regard to the OP-s. The Strategy and 1 Where the per capita GDP figure is below 75% of the Community average. 7

the OP-s were revised on the basis of such consultations and the informal comments sent by the Brussels Commission. In the middle of December 2002 the Government approved the second draft of the entire NDP document and Operational Programmes with the condition that the NDP had to be submitted to the European Commission by the end of March 2003 following the integration of the results of discussions with competent members of the Commission and the first three activities of the ex-ante evaluation. With regard to the Operational Programmes, as a result of the discussions with competent members of the Commission held in March 2003 the Government agreed to submit those to the Commission after the integration of the results of the first phase of ex-ante evaluation by the end of April. Before the Government approval both the NDP and OP-s were discussed in partnership fora at national level (National Interest Conciliation Council, National Regional Development Council, National Environmental Protection Council), and by regional partners. After the submission of the NDP and OP-s their ex-ante evaluation will take place parallel with the discussions with the Commission. In accordance with the undertaken obligation, the Programme Complements will be submitted to the European Commission at the end of September 2003. 0.1.2 NDP Framework The National Development Plan has been elaborated taking into account Council Regulation /EC/ No 1260/1999 laying down general provisions on the Structural Funds, as well as the Vademecum regulating plans and programming documents related to the Structural Funds. The Plan is in line with the programming guidelines of the European Commission for the period 2000-2006 (The Structural Funds and their co-ordination with the Cohesion Fund. Guidelines for programmes in the period 2000-2006), which provide guidance for development policies that promote best improvement of economic competitiveness and increase of employment. In addition, it also takes into account the relevant community and national policies and strategies. In addition to all this, the National Development Plan also relied on Hungary s Medium-Term Economic Programme, which is a document for the period 2001-2004 involving longer impacts. This document outlines the macro-economic framework and economic policy in which the National Development Plan has its effects and of which it is one of the implementation instruments. The objective of the medium-term economic policy is modernisation, realignment with European standards, which is reflected in stronger competitiveness, striving for financial and price stability and effective cohesion between the economy and society. The Hungarian National Development Plan relies on the resources of all Structural Funds. Consequently, its objectives and priorities must be in line with the Regulations of the European Parliament and Council governing the Structural Funds, i.e. in respect of the European Regional Development Fund (ERDF) with Regulation /EC/ No 1783/1999, in respect of the European Social Fund (ESF) with Regulation /EC/ No 1784/1999), in respect of the European Agricultural Guidance and Guarantee Fund (EAGGF) with Regulation /EC/ No 8

1257/1999, and in respect of the Financial Instrument for Fisheries Guidance (FIFG) with Regulation /EC/ No 1263/1999. The interventions financed by the Structural Funds are closely connected with the measures financed from the Cohesion Fund at the same time. The development objectives of the Cohesion Fund are reflected in the National Development Plan and are in line with Council Regulations /EC/ No 1264/1999 and 1265/1999 on the Cohesion Fund. 0.1.3 Components of the National Development Plan The Situation Analysis of the Development Plan describes the conditions of the Hungarian economy and society, points out the key issues and examines the causes of problems. The SWOT analysis highlights Hungary s strengths and weaknesses, opportunities and threats. The long-term objective of the Hungarian National Development Plan, i.e. improvement of the quality of life and its general objective for the given period, i.e. reduction of the significant lag in the per capita income compared to the EU average are defined on the basis of the analysis. There are three specific objectives s supporting this main objective: more competitive economy, improved use of human resources and promotion of a better quality environment and regional development. The National Development Plan intends to achieve the specific goals through four development priorities: improving the competitiveness of productive sector, increasing employment and the development of human resources, providing better infrastructure and cleaner environment, strengthening regional and local potential. These are supplemented with the Technical Assistance priority assisting the implementation of CSF. The measures defined in order to achieve the above goals are implemented in the framework of 5 Operational Programmes. It is necessary for implementing the objectives of the NDP that the individual development projects of the OP-s should supplement each other and that they are implemented in an integrated fashion, using the synergy effects. This way we can prevent the fragmentation of development and a considerable effect may be achieved in the target area to be supported. The Economic Competitiveness Operational Programme (ECOP) intends to improve the general competitiveness of the economy by supporting investments aimed at modernisation in the manufacturing sector, and will increase social cohesion and employment through technical modernisation of small and medium-sized enterprises and support to their innovation networking activities, as well as passing on up-to-date management skills. It will promote economic innovation by supporting competitive research in the Hungarian R+D sector financed publicly and privately, as well as strengthening relations between the R+D sector and the economy. Another objective of the Operational Programme is to support the development of an electronic economy concerning infrastructure and digital content, as well as electronic administration. The objective of the Human Resource Development Operational Programme (HRDOP) is to increase the rate of employment and improve the competitiveness of the workforce by providing qualifications in line with the demand of the labour market and promoting social 9

integration. The priorities of the OP include support to active labour market policies, development of training and education in the framework of the life-long learning policy, improvement of adjusting capabilities and entrepreneurial skills, as well as development of health, educational and social infrastructure related to human resource development. In line with the development financed from the Cohesion Fund, the Environmental Protection and Infrastructure Operational Programme (EPIOP) has set an objective to improve the environmental conditions of the country by establishing environmental infrastructure, increasing environmental safety, and investing into nature conservation. It also aims at investing into the improvement of transport infrastructure by building motorways and bypasses around large cities. As its title also indicates, the Agricultural and Rural Development Operational Programme (ARDOP) has identified the objectives of modernisation of, and more efficient, agricultural production by developing production technologies and processing of products (especially food processing). The other aspect of the programme includes realignment of rural areas and finding alternative sources of income for the rural population, development of rural infrastructure and services, protection of rural cultural heritage. Part of the rural development measures will be financed from the national budget. The Regional Development Operational Programme (RDOP) aims at the development of economically and socially underdeveloped areas and parts of settlements within regions. The Operational Programme intends to promote this development by improving the economic environment, supporting educational infrastructure that assist tourism and economic development, developing regional infrastructure, rehabilitating settlements and improving their environment management activities, increasing human resources and the knowledge base of regions and modernising public administration. 10

0.2 PARTNERSHIP CONSULTATION 0.2.1 Principles of partnership Partnership is a principle enshrined in the EC Regulations for the Structural Funds. The enforcement of the principle of partnership extends also to the preparation, financing, monitoring and evaluation of community grants. The principle of partnership includes as well the co-operation between the European Commission and the Hungarian Government, the Hungarian central and regional units of public administration, and the co-operation between administration and social, economic, non-governmental, etc. partner organisations. This document focuses attention on the latter process in the course of the preparation of the Hungarian National Development Plan. In the meantime, the process of consultation plays an important role also in information activity and publicity relating to Structural Funds. For social partners, who are at the same time potential beneficiaries and recipients of subsidies, participation in preparing the NDP is the first phase of preparation for receiving Structural Funds. 0.2.2 Partnership Consultation The Office for National Development Plan and EU Support (hereinafter referred to as the Office) involved, together with Ministries co-ordinating Operational Programmes and regional development institution social partners, economic, professional, regional non-governmental, minority and woman organisations and also local governments associate in the process of consultation. In the course of consultation the scope of social partners, trade unions and employer s associations, professional organisations and economic lobbies traditionally participating in community consultation of interests at sectoral and macro level, were directly contacted. In the process the national and regional, the economic, social, non-governmental, minority and woman organisations all played a key role. Due to the high number of potential partners, more than three thousand settlements and local county governments in Hungary were directly contacted through their associations. Organisations working on a national level, registered on the official lobby list of the Parliament, recommended by professional and sectoral organisations and representing non-governmental and horizontal interests, respectively also expressed an opinion on the strategy. For the purpose of documenting the consultation process and maintaining effective contacts, the Office has established a partner database that is suitable for recording data on partners and partnership events and also for processing the substance of partnership, i.e. partners opinion. 11

The consultation on NDP strategy is closely linked to a wide-ranging general information campaign to introduce the NDP and the potential EU Funds. For this purpose the Office has entered into co-operation agreements with different institutions. By signing up to these agreements the Parties agreed to co-operate in the preparation of the NDP, in the coordination of wide-ranged information activity connected to social consultation and, in the long term, in the process of implementation and evaluation. The other form of consultation was personal contact within the framework of which the Office has contacted directly more than 600 partner organisations. More than 350 responses were received from these organisations. Three quarters of active partners is non-governmental, professional and budgetary entity expressed an opinion on the strategy in nearly equal proportion. The Office also organised own events and arranged for its staff to be able to participate in the conferences and seminars organised by social partners. The representatives of the Office and those of the Ministries responsible for OPs introduced the strategy, and operational programmes of the NDP at more than 100 events across the country. At the national level key forum on the macro level also discussed the National Development Plan: the National Council for Interest Reconciliation, the National Regional Development Council, the National Environment Protection Council and Regional Development Councils. In addition to the above, full text and background documents of the NDP were made available on line (www.nfh.hu) where comments on the strategy were invited through thematic interactive forum. Consultations on the National Development Plan were divided in three phases. Situation analysis and strategy were discussed during the period of October and November 2002, Operational Programmes were subject to public debate in October November 2002, and the debate on the final form of the whole documenting were held from December 2002 to March 2003. Consultation, especially on the participation of partners in the monitoring committees, on the finalisation of programming complement documents, and on issues about calling for application, will also continue following to the closure of planning. 0.2.3 Brief summary of Partners Opinions Employers primarily stressed the importance of SME sector and powerfully highlighted the role of SMEs in economic development. They urged measures to be included that provided venture capital and more favourable taxation conditions for R+D. The employers consider necessary to involve private financing in public services (Public Private Partnership). The comments by trade unions focused on the need for the modernisation of education and health care and the integration of regions into the Hungarian administrative system. Trade unions regarded development of the public sphere to be an absolute necessity and also that the role of social partners in Regional Development Councils will have to be re-established. Non-governmental organisations (NGO) felt that the role of the non-governmental sphere in the decision-making processes should be regarded as important. to improve NGO inputs further development of the non-governmental infrastructure networks would be necessary. 12

They also highlighted the importance of promoting environmental awareness, the necessity to improve equal opportunities for disadvantaged groups, including equal rights for men and women, as well as social integration of people with special needs. Regional and local partners supported the strategy as a whole and were of the opinion that the long-term vision and the knowledge- and innovation oriented development strategy provided a suitable framework for regional development. In addition to numerous comments on methodology of planning, the most concrete proposals were expressed on the topic of regional development. They emphasised the importance of building up a decentralised regional institutional system and the modernisation of the education system. They also thought it is important to encourage regional innovation, to support enterprise zones and to especially support regional environmental protection, transport infrastructure and regional economic development. Experts analysed the above mentioned opinions in the course of the planning, and built them into the final version of NDP in case that these opinions were in line with general regulations on EU Structural Funds. Thus, the final version of the document reflects both the opinion of the Hungarian Government and the different social and economic groups. 0.2.4 Conclusion During nearly two months of consultation our partners have made almost 3,000 complex, substantial and important comments often of strategic significance. Interest and active participation on an unprecedented level characterised the consultation on the NDP. The Office made contact with several hundred organisations and through them involved several thousand potential partners. This proves a truly effective consultation and resulted in better governmental work, and administration. It has been recognised that wide and active dialogue assist strategic planning and bring practical ideas, decisions and ways to implement new policies. The comments frequently brought wider-scaled issues to the surface than those contained in the frames of the original EU document. The Hungarian Government has reviewed the proposals and comments that were raised in the debate but some issues could not be included in the NDP as they have separated or wider, socio-economic development affecting areas such as housing policy, which fall outside the parameters of the Structural Funds. Therefore, the Government intends to start a much wider and comprehensive development plan and the partners will be given a chance to actively participate in that process similarly to that on the NDP. Proposals not included in the NDP will be considered when the Comprehensive Development Plan (CDP) is prepared during 2003. CDP therefore complements developments outlined in the NDP to be completed by 2004-06, and also creates the institutional and regulatory framework guaranteeing the effective implementation of developments set forth there. Similarly the preparation of the NDP is the first phase and the beginning of a process. Dialogue on the merits of major national strategic issues and the necessary developments will continue with the participation of partners. 13

(The statements of the national level partnership fora on the NDP can be found in Appendix 2-4.) 14

0.3 THE EX ANTE EVALUATION 0.3.1 Introduction The ex ante evaluation of the National Development Plan (NDP) was requested by the Office of the National Development Plan and EU Support of Hungary. The terms of reference for the evaluation are as follows: Assessing the rationale of the development strategy underpinning the NDP and the proposed allocation of resources Assessing the internal coherence and complementarity of the NDP Commenting on the degree of consistency between Community and National policies, in particular in the areas of equal opportunity, the environment and employment Reviewing the quantification of objectives in the NDP and assessing the NDP s likely impact on socio-economic situation, employment and the labour market taking into account the European Employment Strategy, the environment and equality of opportunities Commenting on the adequacy of the proposed implementation, delivery and monitoring (including proposed indicators) arrangements The terms of reference for this work are rather broad requirements and are set out in the terms of reference and in relevant Working Papers of EC. Evaluation depends on the specific circumstances involved, and the point in the programme cycle at which the evaluation occurs. Hungary is challenged by three aspects: To establish a National development strategy with long-term development objectives and strategy as well as shorter-term objectives and operational interventions for the period 2004 to 2006. The evaluation also has to comment on the Operational Programmes and Cohesion Fund Strategy. To build up the institutional capacities to manage the Structural Funds and Cohesion Funds and within the NDP embraces the complex coordination necessary to ensure the operational programmes deliver the programme effectively To prepare for an extremely short implementation period These demanding tasks have been and are currently being undertaken, based on the concentrated considerable efforts on the parts of the Hungarian administration. Given these challenges it is understandable that the evaluation work has been a dynamic preparation process and has reflected the continual evolvment of the NDP. Thus our approach could not be limited to a mere consideration of the document itself but is strongly oriented towards a dialogue with two key partners, i.e. the Hungarian Office for the National Development Plan and the European Commission, in particular DG Regio. 15

The Evaluation team had been contracted by the end of January 2003. During February 2003 the situation analysis, SWOT and strategy of the NDP has been revisited by the team. A series of workshops were held in the ONDP, including representatives of the relevant line ministries and Pre-Accession Advisors. The key objective was to add the evaluators perspective and thus contribute to the finalisation process of the plan. The ex ante evaluation team has contributed one section (Chapter 3.3) to the NDP. This section summarises the main findings on the coherence and relevance of the strategy. The complete report of the ex ante evaluation will form an annex to the NDP. 0.3.2 Timing The ex-ante evaluation was scheduled in two stages. The main parts of the first stage of the ex ante have been completed with the exception of the analysis of previous evaluation results. The second stage of the evaluation was started by the end of March 2003. The table below outlines the main steps included in each of the stages. Stage Steps Comment First Stage Analysis of previous evaluation results Will be included in the full version as an annex to the NDP Analysis of strengths, weaknesses and potential Two workshops were held Assessment of the rationale for the strategy and its overall consistency See chapter 3.3 Second Stage Will be included in the full version as an annex to the NDP Quantification of Objectives Evaluation of the expected impacts and justification of the policy mix Quality of the implementation and monitoring mechanism Employment strategy and equal opportunities 0.3.3 Conclusion Starting from the findings set out in Chapter 3.3 the second stage of the evaluation will be carried out in the coming months. It was agreed that given the tight time frame the work might run partly in parallel with early phases of the negotiation procedures. In particular the section concerning the quantification of objectives depends also on the finalisation of the Operational Programmes which is expected to happen in the short term. 16

At the end of this interactive process, the ex-ante evaluation must provide a key element in the understanding of the strategy and the allocation of financial resources (which will be the subject of negotiations between the Government of Hungary and the European Commission), stating clearly the rationale and the scope of the choices made. The evaluation is, therefore, an integral part of the NDP even if, for reasons of transparency, the output of the Evaluation Team s work will be a separate consolidated document. 17

I. SITUATION ANALYSIS 1 SOCIO-ECONOMIC SITUATION 1.1 THE GEOGRAPHY OF THE COUNTRY Hungary is a moderately developed country in Central-Europe. The annual GDP per capita calculated on the basis of purchasing-power parity was 11227 in 2000, i.e. 49,7% of the EU average. The territory of the country is 93 thousand km 2, i.e. about 1% of the area of Europe. In accordance with the Territorial Statistical System of the EU, Hungary is divided into 7 NUTS 2 level regions - each of them falling under the scope of Objective 1. These planningstatistical regions do not perform administrative functions. The second tier is made up of 19 NUTS 3 level regions and Budapest. These form the country s administrative system. Below these levels 150 NUTS 4 level sub-regions and 3135 settlements define the NUTS 5 level. In total there are 252 cities and towns and 2,883 villages. Hungary shares borders with seven neighbouring countries (Austria, an EU Member State, Slovenia, Slovakia and Romania, i.e. three candidate countries), the Ukraine, Yugoslavia and Croatia. The borders are to 2,242 km in total. Due to its central location it has become a transport hub. Its road, railway, inland navigation and air transport systems, air traffic management and telecommunications constitute an important part of the European networks. Its geographical location and its advantageous conditions make Hungary (and its capital, Budapest) a strong candidate to become a regional financial-economic centre in Southern- Eastern and Central-Eastern-Europe in the near future, and to function as a bridge between West and East in the flow of resources. 18

1.2 DEMOGRAPHIC SITUATION Key issues: Adverse changes in age composition strongly affect rural areas Internal migration mainly involves population movement and it does not counterbalance regional labour market problems 1.2.1 Population density The population of the country was 10.2 million at the beginning of 2001. Population density is 110 inhabitants/km 2, slightly lower than the EU average. At a regional level, excluding Central-Hungary, it is relatively balanced, so in general one cannot expect large labour movements due to population pressure. 17.4 % of the population live in the capital, a further 47% in other cities and 35.6% in villages. Around one-fifth of the village population live in small villages of less than 1,000 inhabitants. 1.2.2 Changing age composition The age composition of the country follows the EU trends. Nevertheless, both the ratio of those under 15 and those over 64 is slightly below the EU average (see table 1.1). Table 1.1 The age-composition of the population in 2001 Hungary EU-15 Under 15 16,6 % 17,2 % Between 15-64 68,2 % 66,4 % Over 64 15,2 % 16,4 % Source: Central Statistical Office (KSH), EUROSTAT Labour Force Survey For the last twenty years the population of Hungary has decreased by 500,000. The main reasons for the decline includes the low and decreasing birth rate and the high mortality-rate. Life expectancy at birth is low compared to Europe primarily due to the strikingly high death rate among the active male population. This situation puts larger and larger pressure on the health care system and on the generations who work. 19

Table 1.2 Major demographic indicators in 2001 Hungary EU-15 1995 2001 2001 Birth rate ( ) 11.0 9.5 10.6 Mortality-rate ( ) 14.2 13.0 9.5 Life expectancy at birth, male 65.2 68.2 75.3 Life expectancy at birth, female 74.5 76. 5 81.4 Source: Central Statistical Office (KSH) The number of births is lower than average in the capital, major cities and the more developed Central and Western Transdanubian parts of the regions. The territorial differences in mortality correlate with the regional socio-economic inequalities, and they also correlate with the size of the settlements and the level of development of their healthcare institutions. The mortality-rate is the highest in North-Hungary and in the small settlements. According to demographic trends the natural decrease of population, which started in 1980, will continue in subsequent decades, projecting the decrease of population by 30,000-40,000 per annum. Table 1.3 Forecast of the age-composition of population 2001 2010 2020 2030 Population (thousand people) 10,198.3 9,685.3 9,372.7 9,001.7 0-19 years of age (%) 23.2 21.5 20.7 20.3 20-64 years of age (%) 61.6 63 60.9 59.7 Over 64 years of age (%) 15.2 15.5 18.4 20.0 Source: Central Statistical Office (KSH) The major demographic challenges beside the decrease in the population and low life expectancy are the ageing population and changes in the country s age-composition. Most of EU member states as well as Hungary is facing the problem of an ageing population. The younger age groups entering the labour market decrease and in the meantime the ratio in the age-group of 50-64 is significantly increasing. Simultaneously to the ageing of the active population the ratio of those over 64 compared to the working population is also slowly but steadily increasing. This percentage of the dependent elderly population was 22.2% in 2001 against the 24% EU average, and will not increase significantly until 2010. However, the ageing of the population will steeply accelerate after 2010. There will be a fall in the number of the population of working age, and the rate of the elderly dependent population could even reach 31% by 2030. As a result of population ageing, not only the costs of pensions but also those of healthcare will increase rapidly. This trend places pressure on the healthcare system and social services. 20

Table 1.4 Predictions of changes in the composition of active age groups (%) 2001 2010 2030 Ratio of age 15-24 within the active 21.2 18.1 16.5 Ratio of age 50-64 within the active 26.6 29.7 35.0 Dependency ratio of elder people 22.2 22.5 30.8 Source: Central Statistical Office (KSH) 1.2.3 Migration In previous decades the main directions of internal migration of population were from the less developed areas towards the more developed parts of the country, and from villages to cities. By the 1990s this tendency partially altered. Instead of cities, their surroundings and suburban areas being the main destination of migration, the progressively developing areas of the country, particularly the Central Hungary Region, became the main destination. As a result the migration balance of cities and of the capital became negative, and in villages adjacent to urban areas in the agglomeration turned positive. The loss of population due to migration is still the highest in the less developed regions, namely in North Great Plain and in North- Hungary, though the trend is decreasing. Immigration has been gaining greater significance. However, internal migration is still low in international comparison, and is not such that could create a satisfying balance in the labour market. In the 1990s about 14,000-16,000 people immigrated to Hungary, while the number of those leaving the country was significantly lower. The positive balance of international migration has considerably contributed to counterbalancing the loss of population. 21

Table 1.5. Net migration differential per regions (persons) Region 1995 2001 Central Hungary 12724 900 Central Transdanubia -439 2200 West-Transdanubia 1286 1900 South-Transdanubia -939-100 North-Hungary -5958-1900 North-Plain -5889-2200 South-Plain -785-800 Source: Central Statistical Office (KSH) 1.3 MACRO-ECONOMIC SITUTATION 2 Key Issues: Real GDP growth Inflation Employment, wages External, internal balance External environment at present and in the near future 1.3.1 Real GDP growth In the 1990s the graph of the real GDP of the business sector parallels the U shaped curve of the total real GDP (Figure 1.1). However Figure 1.2 indicates that growth rate in the business sector was on average higher, and the growth rate of the GDP of the government sector was lower, in this period than the overall real GDP growth rate. The exceptions are years 1991, 1992 and the last year 2000. 2 See appendix 2 on the major macro-economic indexes 22

Figure 1.1 The level of real GDP and the real GDP of business sector (bn Ft, 1995) 8 000 7 000 6 000 5 000 4 000 3 000 1990 1992 1994 1996 1998 2000 2002 Real GDP Real GDP of the business sector Source: Central Statistical Office (KSH) Figure 1.2 Growth rate of real GDP, the real GDP of the business sector and the real GDP of the government sector 8% 6% 4% 2% 0% -2% -4% 1990 1992 1994 1996 1998 2000 2002 Real GDP Real GDP of the business sector Real GDP of the government sector Source: Central Statistical Office (KSH) 23

In the early years of transformation aggregate output fell for at least two reasons. In the central planning era in Eastern European countries manufacturing industries received disproportionally more (at least compared to usual allocation patterns in western economies ) resources than services. The introduction of market economy resulted in a reallocation of resources which lead to output fall in certain industries, while other industries did not yet have the capacities at that time to increase output sufficiently. Also in this early period demand shifted abruptly from certain goods to others while companies needed time to shift their production accordingly. These changes caused a substantial fall in output in the business sector for years 1989-1992, at the same time, the government sector was reluctant to downsize. In 2000 the equal growth rate of GDP of the business sector and the government sector reflects the expansive fiscal policy of the government which began in 1999. Finally Figure 1.3 indicates that in real terms the GDP of the government sector was about 1.18 times larger in 2001, while real GDP in the business sector was 1.3 times larger than their respective values in 1995. Figure 1.3 Basic indices of real GDP and its components real GDP of the business and the government sector. Base year is 1995. 140 130 120 110 100 90 1990 1992 1994 1996 1998 2000 2002 Real GDP Real GDP of the business sector Real GDP of the government sector Source: Central Statistical Office (KSH) 1.3.2 Trade Hungary is a small, open economy and hence trade is of primary importance in her economic performance. Figure 1.4 shows that both exports and imports of goods grew dramatically from 1995 on over the period to almost seven times their 1991 value. The balance of trade of goods was negative except for years 1991-1992. Trade balance looked disproportionately large in 1993-1994. The picture differs slightly if we take real figures and also consider the trade in services. Figure 1.5 shows the growth rate of imports and exports of goods and services over the years of 1996-2001. It must be noted that trade grew very dynamically after 1995 and almost all trade growth in the period took place after that year. The dynamic development of exports (15-25%) can be attributed mainly to manufacturing plants of multinational companies being established in Hungary. These plants bought much of their inputs from abroad that also caused 24

a dynamic increase in imports. 1998 was apparently an unusual year when imports grew about 5% more than exports. The world wide recession, which started in 2000-2001 resulted in a massive decrease of trade growth in 2001. Figure 1.4 Value of trade of goods (bn Ft, base year: 1995) 7000 6000 5000 4000 3000 2000 1000 0 1990 1992 1994 1996 1998 2000 Import of goods Export of goods Source: Central Statistical Office (KSH) Figure 1.5 Net exports of goods and services (bn Ft, base year: 1995) 200 100 0-100 -200-300 -400 1990 1992 1994 1996 1998 2000 2002 Source: Central Statistical Office (KSH) The balance of trade and services shows a smaller deficit than trade balance alone, because the balance of trade in services is moderately positive. (see Figure 1.5). The positive trade balance in years 1991-1992 can be attributed to the fact that transformation in some Eastern European countries (most importantly in Russia) happened one or two years later than in Hungary. Therefore old export markets still partly existed in the first two years of the period. 1993-1994 was a time of severe trade deficit that eased only after restrictive policy measures were taken in 1995. Trade in goods and services was approximately in balance until 1998, when this has changed owing to the Russian crisis and governmental policy. After that it worsened by a 25

substantial 200 billion HUF per year. 2001 shows the signs of some improvement of trade balance but in the next year the deficit dropped to its original 1998-2000 level. 1.3.3 External, internal balance After 1995 the current account deficit fluctuated between 1 to 2 billion. In general this could be financed by the influx of foreign non debt-generating capital. The increasing deficit in the trade of goods was partly counter-balanced by the service sector, primarily by the increasing surplus of tourism. The current account deficit in terms of GDP has increased 4 to 5% in 1998-99 then to 6.2% in 2000, and it was 3.4% in 2001. It again exceeded 4.1% in 2002 (see figure 1.6). Figure 1.6 Real growth rates of trade in goods and services 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 Export of goods and services Import of goods and services Source: Central Statistical Office (KSH) During the 1990s exports quadrupled and foreign exchange reserves have increased considerably, which facilitated a stable and predictable debt management. The ratio of net foreign debt compared to GDP decreased by about 50% (from 45.5% to 23.4%) during the past decade. The decline became more rapid at the end of the 1990s when GDP grew rapidly. A similar tendency can be observed concerning other debt indicators that are related to the GDP or export. Thus, the concerns of the early 1990s about the indebtedness of the country disappeared. The international credit-rating agencies improved the ranking of Hungary. 26

1.3.4 Capital Figure 1.7 Basic indices of real fixed capital formation 200 180 160 140 120 100 80 1990 1992 1994 1996 1998 2000 2002 Total fixed capital formation Private non- residential fixed capital formation Private residential fixed capital formation Government fixed capital formation Source: Central Statistical Office (KSH) As can be seen in Figure 1.7 real total fixed capital formation was increasing on average in the period. From 1995 on the growth of capital formation was steady. However, this steady increase in total capital formation is due to an even faster growth of non-residential private capital formation, while residential private capital formation remained around its 1995 level. Governmental capital formation showed an upward trend over these years but that was accompanied by very large fluctuations. Table 1.6 reveals that approximately two thirds of investment is non residential capital formation. In comparison, in the past two years, the improvement of macro-economic situation has drastically slowed down the adverse business cycle behaviour in the EU. Table 1.6 Real fixed capital formation (billions Ft, 1995 prices), total fixed capital formation, residential private fixed capital formation, non-residential private fixed capital formation, government fixed capital formation 1995 1996 1997 1998 1999 2000 2001 ITV 1125,4 1200,9 1311,4 1485,7 1573,2 1694,3 1746,3 IHV 281,8 288,3 280,6 259,9 288,3 299,7 260,3 IBV 678,7 770,9 849,0 987,4 1075,2 1128,3 1268,7 IGV 164,8 141,7 181,8 238,4 209,6 266,3 217,4 Source: Central Statistical Office (KSH) One of the important factors of production and economic growth was the rapid improvement of productivity, that amounted to more than 3% on average per annum. This growth rate is higher than the EU average. In the first half of the 1990s the primary source of improvement in efficiency was the elimination of over manning within firms. In the period the total inactive population of working age increased. The total number the employed and the economically 27

active decreased. During the last third of the decade, however, the expansion of employment also started to play an important role in GDP growth. A further key factor to increase productivity was the capital accumulation. Real capital formation grew by about 8% in an average year. Since real GDP growth was about 4-6% this resulted that real capital formation as a percentage of GDP also increasing (Figure 1.8). It started at 19% in 1991 and reached 24% by 2001. Many argue that these investment ratios will be hard to sustain, because high growth and investment ratios at the end of the transition period are attributable to a reconstruction boom as the case after World War II. Figure 1.8 Real capital formation as a percentage of GDP 26% 25% 24% 23% 22% 21% 20% 19% 18% 1990 1992 1994 1996 1998 2000 2002 Source: Central Statistical Office (KSH) Figure 1.9 Long run interest rate 40% 35% 30% 25% 20% 15% 10% 5% 0% 1990 1992 1994 1996 1998 2000 2002 Source: Central Statistical Office (KSH) The dynamics of non residential capital formation is understandable if we look at long term interest rates (Figure 1.9) and the difference between long run interest rates and devaluation of the forint in respect to foreign currencies. While inflationary expectations (and expectations of devaluation also) were decreasing from 1995 on, foreign investors could realise a sizeable 5-10% nominal interest rate even in the first year of run. 28

1.3.5 Employment, wages Initially, in Central Eastern European countries transformation considerably increased unemployment for two reasons. First, the structural transformation in the economy caused the disappearance of certain types of jobs and emergence of others, and workers who lost their jobs needed time to find new ones. Second, and most importantly, since in socialist economies labour hoarding, employing lots of non-productive workers was a common phenomenon, during transformation many lost their job. This part of unemployment was not industry specific. However, the increase in unemployment rate was less than proportional because many chose to withdraw from the labour market. The decrease in unemployment rate was parallel to the decrease in the labour force and participation rate. After 1996 though, unemployment rate continued to fall even when the labour force and the participation rate did not change. The Figure 1.10 shows that after 1997 the employment in the business sector rose while employment in the government sector fell continuously. Due to the increase in business sector, total employment also increased, but its growth rate considerably fell in 1999 and even more in 2000. Therefore, the permanent decrease in unemployment did not correspond to an increase in employment. Figure 1.10 Indices of total employment, government employees, and employment in the business sector, base year 1995 135 130 125 120 115 110 105 100 95 90 1990 19 92 1 994 1996 199 8 20 00 2002 total emplo yment go ver nme nt emplo yees employees of the b us iness secto r Source: Central Statistical Office (KSH) Improvement in employment and unemployment did not come without costs though. The policy measures in 1995 achieved the stabilisation of current account and government budget by reducing final domestic consumption. Subsequently the economy started to grow again and as a consequence, real private consumption dropped in 1995 and 1996. However, it quickly recovered, and within three years it even exceeded its original value before the crises (Figure 1.11). 29

Figure 1.11 Final private consumption (bn Ft, base year: 1995) 3700 3500 3300 3100 2900 2700 2500 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Central Statistical Office (KSH) 1.3.6 Inflation During the first half of the nineties Hungary has shown similar inflation trends to those that prevailed in the transforming and emerging economies. The success of the disinflationary policy pursued in recent period is that the Hungarian rate of inflation decreased from 28.2% in 1995 to around 5.3% by 2002. In recent years, the basic tendency of relative price changes was that the increase of prices of tradable goods was below that of non-tradable goods (typically market services and certain types of food). This process will continue in the future, since it is expected that there will be a trend of real appreciation, around 2 to 3% on average per annum can be expected. The process is connected with the rapid economic growth, the process of catching up and the convergence of the real economy to that of the EU. Real appreciation provides an effective help in reducing inflation and its influence is direct in the case of tradable products and services, and is indirect in the case of non-tradable goods. The composition of the currency basket used for determining the exchange rate consists of only EURO since 1 January 2000, this reflects the close economic integration with the EU. In 2001 the Government and the National Bank of Hungary established a new monetary system in accordance with the requirements of the European Union. The most important measures included the widening of the fluctuation band of the exchange rate to ±15%, the operation of the monetary system built on the inflation targeting, the accomplishment of the full-scale convertibility for the Hungarian Forint and the abolition of the crawling peg devaluation policy. As a result of these measures, a fully ERM II compatible exchange rate mechanism was successfully put in place. That represents an opportunity for Hungary to comply with the Maastricht inflation criteria by the date outlined in its mid-term economic strategy. 30

Figure 1.12 Consumer price index (annual average) 30% 25% 20% 15% 10% 5% 1993 1994 1995 1997 1998 1999 2001 2002 Source: Central Statistical Office (KSH) 1.3.7 On the way to meet the Maastricht criteria Hungary has gone a long way in approaching the EMU fiscal and monetary criteria. From the second half of the nineties the size of the state budget continuously decreased in GDP terms, and so the income centralised and re-allocated by the government compared to the GDP has gradually decreased. The interest liabilities also became lower. While the net interest expenditure of the government budget was 8.5% of the GDP in 1995, it was below 5% in 2001. This trend did not stop in 2001 in spite of the less favourable external conditions. The gross public debt decreased to 52.1% of the GDP by 2001, and the interest rate on 10-year government bonds is established at around 6.5% in 2002. However, one time factors resulted in a large deviation in the government deficit in 2002. The government aims to achieve the desired level of inflation and budget deficit according to the Pre-Accession Economic Programme of Hungary (PEP 2002). The exchange rate of the Forint can be considered as being stable, as it has remained within an intervention band since mid 2001 in an exchange rate regime which complies with the ERM-II requirements. Beyond that since the Hungarian economy has already embedded in that of the EU, the business cycle is also in line with that of the EU. Therefore, Hungary will able to comply with other criteria concerning the EMU-entry in the foreseeable future. 31

1.3.8 Projections until 2005 As a result of the austerity measures, the ratio of budget deficit compared to GDP decreased gradually from 8% (according to GFS standards) in 1995 to a lower range. Owing to this and to the fact that privatisation income was used for debt redemption, the government debt decreased considerably. By 2000 it had fallen far below 60% compared to GDP. The improvement of the equilibrium in the second part of the past decade was helped by the dynamic economic growth, the declining inflation and the lower debt burden. In 2002 the budget deficit increased sharply to 9.7%, and that increase has been mainly due to one time factors (see table 1.7) Table 1.7 Projections for the main figures of the Hungarian economy 2002 2003 2004 2005 Change compared to previous year(%) GDP 3.3 ~ 4.0 ~ 4.5 ~4.5-5.0 Consumer prices 5.3 ~ 5.2 ~ 4.5 ~ 3.5 Number of employees 0.1 0-0.5 0.5 ~ 1.0 Productivity of labour 3.2 3.5-4.0 3.5-4.0 ~ 3.5-4.0 Real wage per employees ~ 13.5 7-8 ~3 ~ 3.0 Household consumption 8-9~ ~ 5-6 ~ 4 ~ 4 In GDP (%) Gross public debt 55-57 54-56 53-55 50.0 Budget deficit (according to ESA 95) 9.5 ~ 4.5 ~ 3.0 ~2.5 Current balance of payments ~ - 4.1-4-5-4-5-4-5 Investment ratio 23-23.523.5 23-23.5 23.5-24 24-24.5 Foreign direct investment (billion ) 1.3 1.3-1.5 1.5-1.7 1.5-1.7 Unemployment rate (%) 5.8 5.5-6.0 5.5-6.0 5.5-6.0 Source: Ministry of Finance. Due to the unfavourable world economic trends of the recent years, the favourable macroeconomic trends were broken, growth halted and the export and investment-driven GDP growth was also interrupted. Investments into the manufacturing industry, representing the factors of future export competitiveness, stagnated and parallel with that foreign direct investments also fell. World-wide economic recession has reduced the investment intentions globally, too. Between 2003 and 2005 as a delayed impact, exports are foreseen to increase moderately. Some deterioration is projected in the current account and the trade balance. The government has reacted to the unfavourable trends of the world economy with an increase of internal demand. As a result of that, adverse impact of global recession on the low level of investments could be counterbalanced. In the previous years the sharply increasing real wages 32

encouraged consumption. At the same time important sources of competitiveness, such as private investments, have declined. The adverse behaviour of macroeconomic indicators was accompanied by an unfavourable composition of economic growth. In order to maintain the sustainable growth, the government aims at a strict fiscal policy that does not allow the uncontrolled expansion of demand and a careful income policy is put in place. To counter the current negative trends and to achieve a sustainable dynamics of the economy, the main aim of the government is to preserve fiscal and monetary stability and to upheld the country competitiveness. The purpose of fiscal policy is to limit the influence of the government budget through its borrowing requirement and maintain macroeconomic stability, so that it is in line with the monetary policy and its income policy targets. The wage policy in the competitive business sector aims at maintaining competitiveness and expanding employment opportunities in line with the growth of real wages that is in line with productivity and profitability. In 2002 there was a large wage increase in the public sector. In the coming years (2004-2005) wage increases similar to those of the private sector are expected. The monetary policy is mainly determined by the objective to comply with the conditions of the Monetary Union (EMU), and within this the reduction of inflation is crucial. If the external conditions are conductive to growth, it can be expected that Hungary s rate of growth will exceed that of her partners in the EU for a sustained period. 33

2 REGIONAL CHARACTERISTICS AND DIFFERENCES Despite favourable economic developments at the national level during the 1990s, the establishment and stabilisation of market conditions took place in different ways in the various regions. Consequently, regional disparities increased. Regional disparities are evident primarily between Budapest and the regions, and between the western and eastern parts of the country. There are also significant differences within the individual regions, and among micro-regions. In the Northwest, the border areas turned into dynamically developing areas, while those in the southern and eastern part of the country are still relatively backward. Key issues : Disparities in economic and social development are mainly caused by lack of access to transport accessibility, the lack of public infrastructure and the under-utilisation of physical or human resources. Poor living conditions, and shortcomings in the provision of public goods and services severely undermine the attractiveness and economic competitiveness of many micro regions. The dense spatial structure creates favourable conditions for markets at local/regional level and that contributes to economic and a more balanced regional development. Major efforts have been made to establish a regional institutional system in order to increase implementing capacity at sub-national level. Large regional differences in the utilisation of resources require some degree of decentralisation for the delivery and effective use of the present Structural Funds Programme. 2.1 SPATIAL DEVELOPMENT AND REGIONAL POLICY The regional policy and spatial development of Hungary is based on the Act XXI of 1996 on Regional Development and Physical Planning and the National Regional Development Concept adopted by the Parliament in 1998. A system with four levels (national, regional, county and micro-region) was established. Seven NUTS 2 level planning-statistical regions were set up on the basis of these regulations. Regional Development Councils (RDCs) were established after the Act came into force. The members of the RDCs are drawn from the county regional development councils, the ministries involved in regional development, the chairperson of the Regional Tourist Committee, the representatives of the municipality associations of regional development, and the mayors of boroughs. The RDCs direct the operations of the Regional Development Agencies (RDAs). RDAs co-operate to develop the regions and manage programmes and perform co-ordination tasks in the implementation. 34

Figure 2.1 Statistical and planning regions and counties in Hungary Figure Magyarország 2.1 Statistical tervezési-statisztikai and planning regions régiói és and megyéi counties in Hungary North Hungary West Hungary Central Transanubia Central Hungary North Great Plain South Transdanubia South Great Plain Source: Central Statistical Office (KSH) The establishment and operation of the RDCs was greatly assisted by the EU support obtained within the framework of the regional development PHARE programmes and through the support of the increasingly decentralised state funds allocated for regional development. From 1996 the regional development Phare programmes concentrated in the regions 3. The Implementing Agency involved the RDAs in the implementation of these programmes on the basis of the principle of decentralisation. From 2002 the regional development PHARE programme is managed uniformly at the national level; every region can receive support, and the objectives and components of the programme, which are in conformity with the measures, are determined two years in advance. This forms the basis for the content and implementation system of the Regional Development Operational Programme, and supports preparation for EU Structural Funds in a unique nation-wide way. 3 South Transdanubia: 1996, 1997; North Hungary: 1997, 2000-03, North Great Plain: 1997, 2000-03, South Great Plain: 1996, 2000-03. 35

From 2001 the Hungarian Government initiated for five regions, which do not receive PHARE support, the establishment and implementation of independent regional programmes. In the methodology and the principles of implementation the programmes followed the guidelines of the Structural Funds. This program greatly helped the strengthening of the planning and implementation capacities of the regional development councils and their agencies. In connection with EU accession, one of the greatest tasks of the regional development policy is to prepare and strengthen the regional institutional system. This is needed in order to facilitate the efficient use of the EU funds and to implement independent regional programmes. In connection with the reform of public administration the setting up of regions with elected bodies and their own budget, and the education and developments of experts in regional policy are required. 2.1.1 Regional differences of economic and social development Significant economic, social and infrastructure differences are evident. These are most noticeable between the capital city and the rest of the country, between individual regions, and also among micro regions and towns and villages. The differences between the capital city and the rest of the country in terms of development Compared with the rest of the country, the development of Budapest is striking. 17% of the Hungarian population lives in Budapest, while it contributes 35% (2000) to the gross national product. Its advantages result from high population density, its function as a centre for business and financial services and as an innovation transfer centre (gateway function). It has large high value added sectors, mainly business services, research and development and tourism. 28% of the companies are operating in Budapest, over half of the firms with foreign interests and 53% of subscribed capital are concentrated here. The concentration of human capital is reflected by the high ratio (41%) of university/college students and the high ratio of the funds spent on research and development (65%). The significant role of Budapest is further increased by its central geographic location and the hub role in the transport network. However, the large economic and social potential of Budapest has effect only in the agglomeration, but not in the more remote regions of the country. Differences among regions- the division between the west and the east Considering the level of economic development, household incomes and unemployment in the regions, apart from the favourable indicators of Budapest, the gap between the east and the west is large. The restructuring of the north western and central parts of the country has been successful when compared to the slowly catching up of the remainder of the country. The current dynamics of the north-western regions comes primarily from the geographical position of these regions, and from their proximity to western markets. Particularly, with neighbouring Austrian provinces, this has been the dominant factor in economic restructuring. In Central Hungary, Western and Central Transdanubia the well-trained labour force, its low cost compared with the average of the European Union, and the favourable transport network helped the influx of foreign capital and the influx of innovative and export- oriented industries 36

(car manufacturing, electronics). 85% of the total volume of foreign capital invested in Hungary was realised in these three regions. As a consequence, unemployment rate is lowest in these areas, and income conditions are also better than the national average. In order to maintain the favourable international position of these regions there is a need for a flexible training system in line with the needs of the labour-market, the development of co-operation between enterprises, the development of business services, and for a more active role of municipalities. Regions Table 2.1 Some indicators of the Hungarian economy Per capita GDP Per capita Gross income In percentage of the national average Per capita FDI Number of operating companies per 1000 inhabitants 1994 2000 1994 2001 1994 2001 1994 2001 Central Hungary 145.6 152.3 120.7 116.3 241.2 243.3 136.5 166.3 Central Transdanubia 86.4 100.5 97.7 104.7 73.5 85.0 96.9 94.0 West Transdanubia 100.7 113.9 92.1 99.6 83.8 76.2 93.8 100.0 South Transdanubia 84.0 74.8 89.6 90.8 35.3 17.9 112.5 91.6 North Hungary 69.6 64.6 89.7 86.7 32.4 48.2 63.5 69.9 North Great Plain 73.9 63.4 87.4 88.1 20.6 22.8 68.8 72.3 South Great Plain 83.3 71.9 87.9 95.4 33.8 29.3 90.6 85.5 Source: Central Statistical Office (KSH) Table 2.1 demonstrates that economic performance of the rest of the regions lags far behind the three most advanced regions. The reasons for that were the inherited industrial structure with low efficiency and its low income generating capacity. These areas were dominated by mining, heavy industries, the agri-business, and the loss of the collapsed eastern market had a dramatic impact on them. The industrial restructuring of the 1990's had the most adverse effect on North Hungary, turning the region into a depressed area. However, in areas along the motorway leading to the eastern border and the western-most areas of this region, have already shown signs of economic development. The peripheral areas along the country s northern border continue to suffer from high unemployment rate. Agriculture and food industry concentrate on the regions on the Plain and South Transdanubia. Due to its low income generating capacity of agriculture, the share of areas lagging behind is significant. In these regions the relatively low level of human resources and the high rate of the inactive limit economic restructuring. Distance from the western markets and the slow development of the transport infrastructure importantly contributed to the current state of the less developed regions. As a consequence, foreign investments are confined to the western regions and Budapest and are growing slowly along the emerging transport belt of the large regions and in the surrounding of cities. There is a great socio-economic potential is in the eastern and southern parts of the country. The appearance of investors in the East is strengthened by higher education and R&D capacities in the large towns of the regions (Debrecen, Szeged, Pécs, Miskolc, Kecskemét). Incentives for 37

investments, increasing the level of education and the development of entrepreneurial abilities is necessary in order to help the catching up of areas lagging behind. Differences at the levels of micro regions and settlements At the level of micro regions the economic development structure is more mosaic-like. There are dynamically developing regions in the eastern part of the country, coexisting with underdeveloped micro regions. At the same time, one finds poor areas in the advanced regions of Transdanubia (Figure 2.2). Figure 2.2 Regional socio-economic pattern Source: Central Statistical Office (KSH) In the 1990's the favourably situated regions enjoyed large benefits from their geographical position; similarly to areas along the western border, large city centres and dynamic axes along the motorways which grew rapidly. In these rapidly developing regions the share of foreign capital and entrepreneurial activity is high, the employment rate is above national average and unemployment rate is lower. The dynamic axes of the western part of the country are obvious: the Budapest Győr Mosonmagyaróvár Sopron (Bratislava Vienna) line and the Budapest Székesfehérvár Balaton axis, where both the larger towns and smaller centres are in a favourable position. The driving force is the closeness of the South German, North Italian and Austrian regions. These regions are near and possess a large economic influence. At the same time it is true for the less developed eastern and northern parts of the country that in each area there are large towns that stand out as dynamic centres. These regional centres attract trade, financial and economic services. They have a self-propelled development, but also drive the development of their neighbourhood. They can achieve that by building on their organising role in the respective 38

regions, and on their traditionally strong potential in higher education and on their geographical position, which will gain in importance after the EU accession. The influx of capital and the appearance of companies in the stagnating regions puts them on the path of growth. Among these catching-up areas, the industrial crisis areas form a special group, some of which are being revitalised and structurally transformed (such as Miskolc, Tiszaújváros). Most of the micro regions of the northern and eastern regions are underdeveloped. In these micro regions unemployment rate is above the national average, income position is below the average, the share of foreign capital and entrepreneurial activity is low. The reasons for this are low entrepreneurial capacity, limited infrastructure, the geographical position, the close geographical location to the country or regional border, and the lack of a dominant regional centre. It is important to develop these micro regional centres and to improve their role in increasing employment. Most of these areas have small villages and public and other services are not efficient, which makes the co-operation between settlements and the common development of transport within the area vital for them. However, there are depressed areas in Transdanubia due to agricultural character and industrial areas which have by now sunk into depression. The region in the most critical position in Transdanubia is the border area in the south, which was especially adversely influenced during the war in Yugoslavia, which blocked economic activities. In the poor regions, in addition to the lower incomes of the population, the problems include a higher proportion of the permanently unemployed, lower qualification standards and higher ratio of the Roma population compared with the national average. Most of these regions are rich in natural and cultural resources (national parks, protected natural areas) and this may offer opportunities for tourism. The bottlenecks of development include the poor infrastructure of the towns and villages, the higher than average ratio of poverty ridden residential areas and the low standard of community services and public utilities. The catching up of the regions along the southern and eastern borders, currently on the periphery, can be helped by an improved economic environment that will emerge along the new borders of the European Union. More specifically, this process will be facilitated by the revival of transport infrastructure and the economic development of the partner countries to East and South of Hungary. 39

3 THE PRODUCTIVE SECTOR 3.1 FACTORS OF COMPETITIVENESS Key issues: The income generating potential of the Hungarian economy has improved considerably after restructuring in the early 1990s In 2001 and 2002 there have been signs that the increase in international competitiveness has halted The discussion of this aspect of the economy is crucial for the evaluation of the future potential of the Hungarian economy and where it stands now. According to the evaluation of the World Competitiveness Yearbook, Hungary has continuously improved its international competitiveness in the past 5 years, and from being 37 th in 1997, it reached the 28 th position by 2002. Competitiveness has many facets, and all contribute to the income generating potential of the economy. In the past decade the dynamic growth of the Hungarian economy has been based upon the massive improvement of cost-competitiveness; the dynamics of productivity considerably exceeded the rise of costs per employee. Figure 3.1. Real exchange rate based on unit labour cost (quarterly data adjusted seasonal output measured with value added) Values larger than 100 are real devaluation percentage Source: Ministry of Finance 40

In the past two years, however, the labour cost based competitiveness (real exchange rate) which had been improving sharply from the middle of the nineties, began to worsen (Figure 3.1). In the first half of 2002, the effective real price index calculated on the basis of the specific labour costs of manufacturing industry indicated a real appreciation of 6.4% compared to the same period of the previous year. This was partly due to the production prices and partly to the rapid outflow of wages. Based on estimated data of the second half of 2002 the role of wages in real appreciation became stronger. When considering the years 2001 and 2002 together, it is probable that the rate of real appreciation in this period, was 19-20% based on unit labour costs of the manufacturing industry. The weakening cost competitiveness and the long recession has had a negative impact on international performance. Nevertheless, the position of Hungary compared to its major competitors is still favourable. The economic situation is complex behind the general picture. Real appreciation has already affected certain sectors adversely, whereas other fields remained relatively intact or the effects will occur with a delay. In general, there is an understanding that an annual real appreciation of 2-3% will be tolerated by policy makers. Figure 3.2 Investment behaviour in Hungary (annual volume indexes, 1995-2002) 130,0 125,0 120,0 115,0 110,0 105,0 100,0 95,0 90,0 85,0 80,0 1995 1996 1997 1998 1999 2000 2001 2002 * Aggregate investment Private sector investment Manufacturing investment Source: Central Statistical Office (KSH) If they are valid, competitive advantages should show up as investment in physical capital. The global upturn of the economy in the second half of the nineties, the shift of production capacities of international companies into Central and Eastern-Europe was based on large cost advantages relative to the EU. During the dynamic period of the world economy of the 1990s the investment activities were also actively promoted by the government by the reallocation of incomes in favour of the entrepreneur sector and by using international competitiveness by exchange rate and wage policies. In this context, the radical reduction of corporate taxes (from 36% to 18%), the increase of direct budget subsidies to stimulate investments and other direct incentives to investors also played an important role. However, from 2001 the dynamics of investment has slowed down. It is particularly noticeable that the growth rate of manufacturing investment (mainly multinationals) has 41

become negative. To some extent this has been compensated for by increasing public investments (figure 3.2). Therefore one may presume that both, cost competitiveness and the competitiveness based on manufacturing investment has been declining in the past two years. However, it is noted that weak international demand also contributed to this decline. Table 3.1 The sectoral shares of the production (in percent) 1995 2001 Agriculture 6.8 4.3 Industry 30.9 32 Manufacturing (part of Industry) 22.5 23.5 Services 62.3 63.7 Source: Central Statistical Office (KSH) Changes in competitiveness were very different across the sectors of the economy. The changes in the composition of the main sectors of the economy showed a large decline of agriculture in total production (table 3.1). The largest increase has taken place in services. This was partly due to the poor supply of services pre-transition, and partly to the appearance of new dynamic service activities such as financial, business and real estate consulting. Activities related to the tourist industries and media also rapidly grew. In industry, most of which is manufacturing, the changes has been profound as well. This has been important as manufacturing activities make up most of the export sector, and that determines the amount the country can import and use to modernise itself (table 3.2). 42

Table 3.2 Volume index of some branches of service and industry 1998 1999 2000 2001 Real estate, lease 106,20 105,80 110,80 108,70 Financial and other activities 104,00 103,00 110,80 108,70 Warehousing, spedition, postal and telecommunication services 101,50 108,30 109,10 108,00 Retail trade 108,80 102,20 104,70 105,60 Education 105,90 104,80 104,70 107,00 Manufacturing 114,20 112,10 119,20 103,70 Construction 100,10 105,30 106,60 111,60 Agriculture, forestry, fishery 100,40 100,50 93,70 107,90 Mining 78,00 90,70 95,00 105,90 Source: Central Statistical Office (KSH) 3.2 MANUFACTURING Since the mid-nineties, a large part of the economic expansion has taken place in the manufacturing sector and in industry. The driving force behind this dynamic was the large amount of foreign direct investment (figure 3.3) that concentrated in industrial activities. Most of these investments were made in machinery, automotive industry and electronics that are the most dynamic parts of industry. They concentrate in areas where these industries had been particularly prominent prior to transition. The manufacturing processes and the equipment were modernised by foreign direct investment. Currently, 75 percent of industrial production and 80 percent of manufacturing investment is by companies with foreign participation. This pattern of industrial development has contributed significantly to the modernisation and the restructuring of the country s manufacturing base. The modernisation and the diversification of the manufacturing sector needs to continue. In particular, emphasis is placed on the promotion of investment into a wider range of activities and aid the locally owned SMEs that have growth potential. 43

Figure 3.3 FDI in Hungary by Sectors Source: Ministry of Economics and Transport Key Issues: Little capital accumulation in the economy Low productivity in domestically owned companies as opposed to companies with foreign investment, which are highly productive Multinational companies still do not organically imbed into the Hungarian economy 3.2.1 Little capital accumulation in the economy The low level of capital stock results in low productivity, therefore there is a scope for accumulation in the Hungarian economy. The relatively low level of domestic private sector investment was to be expected in an economy of transition at a time when the banking and finance sectors were not functioning well. Since then the banking sector is privatised and a functioning stock market exists. However, the stock market plays a limited overall role, and the role of financial mediation is mainly performed by the banks. Providing finance to the private sector in general is no longer a problem experienced in transition. However, the establishment of a more business friendly environment with simplified regulations and enterprise development needs to be further developed. The volatility of the existing business environment still inhibits domestic investments. Domestic interest rates remain high in comparison with the EU, and high collateral requirements and high risk premiums for businesses limit the growth of the productive sector through restricting investment activity. With a functioning and competitive domestic banking system in place an important factor of weak investment activity is likely to be found in the regulatory environment such as slow legal procedure to enforce collateral pledged by businesses, the weakness of risk capital and the guarantee funds. 44

The difficulties that limit the growth of corporate investment seriously affect the indigenous manufacturing sector s capacity to access the supply chains of multinational manufacturers located in Hungary. As a result the multinationals source inputs from abroad where conditions for suppliers are often better and unit labour cost productivity is substantially higher. Thus making up for any potential location advantage of the competitors, Hungary needs a better regulatory environment, proper institutional arrangements and policies that allow for the reduction of interest rates. 3.2.2 Low productivity in domestically owned companies whereas foreign investors are highly productive The productivity gap is mainly caused by the low level of capital accumulation, rising labour costs for qualified workers and a lack of investment in new technology among the domestically owned firms, while foreign owned firms have a cutting edge in these respects. This state of affairs is also a result of limited management skills, especially in larger and medium sized domestic firms. Many of them have only limited access to management, training and financial advice. While these services exist in Hungary, few of them are used by domestically owned firms. This may be due to existing services targeting more lucrative consulting markets of foreign owned firms. Within the domestically owned firms there is group of middle sized firms with outdated technology, who compete in international markets in low value added industries, and they failed to be replaced by more efficient enterprises with better technology. 3.2.3 Multinational companies still do not organically imbed into the Hungarian economy Multinational firms are not willing to subcontract with firms that lack appropriate management, skills, product, and technology. As a result, foreign owned multinationals import most of their parts and do not use domestic suppliers. This limits the domestic benefits of their presence. Considerable efforts have been made to integrate the multinational companies into the Hungarian economy, and to increase the domestic added value and the number of Hungarian suppliers mainly by improving the delivery, quality and cluster-forming arrangements. The number of Hungarian suppliers within the motor industry and electronic engineering has risen, because a significant number of subcontractors owned by multinationals have relocated in Hungary. In spite of these results, the multinational companies still did not organically imbed into the Hungarian economy; their connections with the domestic small and mediumsized enterprises are weak. However, the appearance of high added value activities, mainly service activities of multinational companies (some R+D, software development, marketing, financial functions, education, etc.) has started, and is expected to strengthen. As the structural transformation of the Hungarian economy continues, it can be expected that the need for the development of higher value added activities will become more pronounced, and the valued added content of a unit of output will increase. A large amount of FDI is based on cheap labour and low value added will move on to other investment destinations. 45

3.3 SMALL AND MEDIUM-SIZED ENTERPRISES In Section 3.2 many weaknesses of the manufacturing sector have been highlighted. Now the patterns of the wider range of SMEs are presented. These can be summarised under the following issues: Key issues: The existing regulatory environment is still not conducive to SME growth There are market deficiencies in the provision of business development services and finance to SMEs Entrepreneurs lack the knowledge and skills required for the successful management of enterprises 3.3.1 The existing regulatory environment is still not conducive to SME growth Table 3.3 Share of labour employed by the SMEs and the other corporations 1998 1999 2000 SMEs 57,9 59,4 57,1 Large firms 42,1 40,7 42,9 Source: Ministry of Economics and Transport The share of the mainly domestically-owned small and medium sized enterprise sector in GDP is 45% and it provides jobs for around 60% of the people employed in the private sector (table 3.3), which is more than 1,5 million people (out of the total of 3,5 million). The Hungarian small and medium-sized enterprises are mainly specialised in the internal market, trade, tourism and personal services (table 3.4). This suggests that a large number of people get involved in the learning process associated with this activities. However, the facilitation and the speeding up of this process is desirable as productivity in this category of enterprises is low compared with the rest of the economy (table 3.5). They also play an important role in the employment level in areas, where FDI has not developed. 46

Table 3.4 Sectoral structure of the operating SMEs, 2001 Sectors Share of the sector (%) Agriculture 4,5 Manufacturing 10 Construction 8,7 Trade 24,3 Real estate, lease 28,3 Other services 6,2 Other branches 17,9 Sum 100 Source: Central Statistical Office (KSH) Table 3.5 Important facts about SMEs and large enterprises in 2000 Share in Total SMEs Large Enterprises Own capital 18.6 81.4 Employment 55.4 44.6 Value added 40.2 59.8 Export 18.3 81.7 Source: Central Statistical Office (KSH) The entrepreneurial activity doubles west to the Balassagyarmat-Békéscsaba line. Due to low levels of training and education and lower rate of foreign capital investments, the regions of the North-Plain and North-Hungary have particularly low number of enterprises. In these regions the development of entrepreneurial activity has high potential because of the low level of employment and the high level of unemployment (table 3.6). The generation of enterprise culture in these locations will take time, resources, and energy. 47

Table 3.6 Entrepreneurial activity by regions 1996, 2001 Regions Functioning enterprises Number of enterprises per 1000 inhabitants number (thousand) 1996* 2001 rate (%) number (thousand) rate (%) 1996* 2001 Central-Hungary 269.1 38.6. 328.4. 39.1. 93 116 Central-Transdan. 69.1 9.9. 86.9. 10.3. 62 78 West-Transdan. 67.0 9.6. 83.0 9.9. 67 83 South-Transdan. 64.6 9.3. 75.5. 9.0. 65 76 North-Hungary 60.7 8.7. 75.4. 9.0. 47 58 North-Plain 79.8 11.4. 93.7. 11.1. 52 60 South-Plain 87.7 12.6. 97.4. 11.6. 64 71 Country 697.9 100. 840.6. 100.0. 69 83 Source: Central Statistical Office (KSH) 3.3.2 There are market deficiencies in the provision of business development services and finance to SMEs A great number of the domestic-owned enterprises, especially the small and medium sized enterprises fail to grow due to the lack of capital. This problem is supplemented by the lack of modern technology and know-how, and results in a weak demand for their products. Due to high risk, poor return on investment and capital costs of investments, the spread of venture companies and their investment into small enterprises is possible only through the participation of the government. From 1999 to 2000, venture capital companies invested 800 million in Hungary. The financing of investment activities of SMEs remains a problem area, despite more intense competition among banks (table3.7) and an increased role of government finances as these areas have not jointly reached the critical mass to make a significant impact in satisfying demand. 48

3.7 SME loans granted by banks between 1993-2000 (Bn Ft) Absolute amount and share of the bank loans granted to SMEs compared with all the corporate loans 1993 1994 1995 1996 1997 1998 1999 2000 SME loans 85,70 89,20 71,10 62,90 64,70 63,70 72,00 73,20 total corporate loans 761,90 875,50 982,60 1260,10 1766,30 1773,10 1800 1903 Source: Ministry of Economics and Transport 3.3.3 Entrepreneurs lack the knowledge and skills required for the successful management of enterprises The skills of enterprise management are weak; adequate technical knowledge is often not accompanied by management capabilities and proper marketing skills are often missing. The entrepreneurial skills in general are not sufficient either, since the dissemination of economic skills in public education is available for a relatively low number of people. In the coming years, the increase in internal consumption, the improvement of transport and other infrastructure bring about an expanding market for the SMEs. Following accession, however, the stronger competition may counterbalance the impacts of demand increase in certain sectors. The stricter legislation in environmental protection will impose considerable excess burden on small and medium-sized enterprises. Therefore, these enterprises need help to adapt themselves to the new conditions. However, those enterprises that managed to adopt the quality and product requirements in advance of accession will have a considerable advantage in the home market in relation to the foreign owned enterprises. 3.4 TOURISM 3.4.1 Introduction Tourism has been the one of the dynamic sectors in the past decade. Its importance is underscored by the fact that Hungary is one of the main tourist destinations in Europe. However, the potential of the sector is under-utilised, and a number of issues should be addressed until the productive capacity of tourism and the activities related to it can bring about the fruits expected by experts and those working in it. 49

Key issues: The tourist sector has under exploited potential. There is a shortage of tourist services and attractions. Hungarian tourism is concentrated on Budapest and Lake Balaton, which generates 58% of guest nights. In the other areas there is a lack of accommodation at a suitable standard. The tourist supply is highly seasonal. The average expenditure per capita is low, and the length of stay is short. There is a skill shortage in the labour force of the industry. 3.4.2 The main challenges of the Hungarian tourism sector in 2004-2006 Tourism, which has blossomed since the change of regime, is one of the dynamic sectors of the economy. It provides 10% of the GDP and employs approximately 250 thousand people. Due to the improvement in the accommodation and service supply, the average per capita expenditure and the net foreign currency incomes from tourism doubled between 1995 and 2001 (figure 3.4). Despite the serious developments in tourism infrastructure and services, there are still quality gaps and lack of complex tourist products. Therefore, the average revenue per tourist is still only the fifth of that achieved in Austria, a country that receives nearly the same number of tourists. Figure 3.4 Average daily spending of visitors between 1995 and 2002* 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 Daily spending per visitor in euro (*preliminary data for 2002) Source: Central Statistical Office (KSH) The average length of stay of tourists in Hungary is only three days which is under the European average. 50

Supposing that international demand retains its expansion dynamics, there is the opportunity to increase the net foreign currency incomes by 30% by 2006. In the primary tourist regions Table 3.8 Nights spent by visitors at hotels in 2002 (%) Foreigner Domestic Total Budapest-Middle Danubia 41,1 10,3 27,7 Balaton 29,1 20,8 25,5 Secondary regions total 29,8 68,9 46,8 Hungary Total 100,00 100,00 100,00 Source: Central Statistical Office (KSH) Hungary has given priority to increase mass tourism in recent decades, particularly within the two main tourist destinations of Budapest and the area of Lake Balaton (table 3.8). Significant increases in hotel capacity has been developed to satisfy the demand, especially during the peak summer season. In the last few years serious efforts have been made to improve the quality and unique services for tourists. Table 3.9 The composition of tourism in the regions (1994. 2001) Region Total number of visitors The proportion of foreigners out of visitors (%) 1994 2001 number proportion (%) Number proportion (%) 1994 2001 Central Hungary 1809000 34.6 2 224 700 36.6 65.8 77.3 Central Transdanubia 563 000 10.8 654 200 10.8 46.2 42.7 West Transdanubia 803 000 15.4 929 700 15.3 37.5 44.6 South Transdanubia 657 000 12.6 766 200 12.6 43.8 39.0 North Hungary 534 000 10.2 601 400 9.9 25.4 17.7 North Plain 433 000 8.3 500 600 8.3 47.0 27.8 South Plain 428 000 8.2 396 200 6.5 46.5 28.4 Country 5 227 000 100 6 072 900 100 49.6 50.6 Source: Central Statistical Office It is still necessary to continue this modernisation programme: to improve customer care to diversify the tourist market from the two main areas to increase stay and spend 51

The tourist industry faces other challenges: The low exploitation of facilities, in the frequently visited areas, in the shoulder and off peak seasons Low number of attractions and the poor quality of facilities, services and customer care in the regions beyond the main tourist destinations Outside the main tourist destinations the tourist infrastructure has major deficiencies: there is little high-quality accommodation, the services related to the attractions and sites are scarce and of low quality, the integration of tourist products is lacking. There are few cultural events and facilities offered at country mansions and castles are often poor. The tourist attractions are often developed and marketed independently with uncoordinated marketing, which blocks the possible synergy of different regions attractions. The attractions are insufficient for sophisticated tourists, the package market and the repeat business. The facilities are poorly managed and customer care is low. As a result of deficiencies tourism is highly seasonal with 45% of the nights spent by the visitors are between June and August. 3.4.3 Resources The cultural and natural resources provide the opportunity for establishing internationally attractive facilities. Tourism contributes to the revival of cultural and natural values by exploiting the aptitudes and abilities of the people and providing valuable high-quality products for the visitors. This development should be carried out with emphasis on the protection of the environment. The better use of resources can also lead to increased income and better quality of life in rural areas and help to mitigate the structural transformation of agriculture. Improving the accessibility, the quality of roads and transport will be an important factor to long term development of the tourist industry. The main type of resources for this renewal can be summarised under three headings: During the thousand-year history of Hungary, outstanding cultural values emerged. There are eight UNESCO World Heritage sites. Cultural tourism can support the protection of the built and natural heritage. Valuable public art collections and the national and ethnical traditions are especially noteworthy. The vibrant and creative music traditions of Hungary are examples of the opportunities, the performing arts, as well as the cultural values, the richness of Hungarian wines, food and the horse riding traditions which all offer tourist potential to Hungary. The natural resources of Hungary are particular rich with the natural spas (and spa-based services) and their links to health-tourism. Diverse landscapes, lakes and rivers, nature trails, areas of outstanding natural beauty and national parks provide the background for improving active tourism. The natural conditions for the development of horse riding and youth tourism are also favourable (e.g. 11 thousand kilometres of signed hiking routes already exist but are not properly serviced for the tourists). 52

During the recent years Hungary and Budapest have been listed among the top twenty destinations in the world and among the top fifteen destinations in Europe. The existing top hotels and service providers attract conferences but this business/tourism market needs expanding to other locations which is greatly aided by Hungary s central location. 3.4.4 The weakness of human resource Ensuring a highly professional and customer orientated attitude toward the visitors is an essential and fundamental factor to tourism. However, there are currently a number of limitations in terms of skill levels in the industry and attitude towards customer care. The tourist businesses generally, and especially outside of Budapest, have poor IT knowledge and language skills. Therefore it is important to encourage the workers to train and to develop their skills to achieve the highest international standards. Tourism is a key factor in economic restructuring. In the past decade this sector has become one of the driving sectors of the Hungarian economy, generating one tenth of the GDP and providing jobs and income for nearly 250,000 people. Regarding the natural and cultural values of regional and local areas, there is a great potential for tourist development all over the country. It may be regarded as a problem of the tourist industry that despite of the dynamic growth and favourable features experienced in recent years the regions cannot adequately utilise the economic potentials of the sector. The basic conditions of high-quality and diverse exploitation, and the appropriate underlying services (shortcomings in accommodation and basic infrastructure) are missing. The unique development of attractions in the micro regions and settlements need a local co-ordination and decision making within the framework of regional development. 3.5 RESEARCH & DEVELOPMENT AND INNOVATION Key issues: The total amount of R&D spending is very low R&D spending is predominantly state funded and the distribution is regionally imbalanced The R&D infrastructure is outdated and research teams are an ageing population The link between the R&D sector and the business sector is weak, the spin-off activity is low The innovative ability of the private sector is low. 53

3.5.1 The total amount of R&D spending is very low As a result of the economic crisis accompanying the transition in Hungary, the proportion of spending on research, development and innovation compared to GDP dropped significantly at the beginning of the 1990s to less than half the previous rate. (From about 1.61% to 0.67% of GDP). The figure has remained at the lower level throughout the second half of the decade. This unfavourable trend was broken in 2000 when the proportion of GDP increased, mostly as a result of state subsidies. In 2001 the figure was 0.94%. However, this ratio (and particularly in absolute terms) is still very low and half the EU-15 average of 1.9%. In order to close this gap in spending, resources from the state and private sector need to work in partnership and concentrate on the key areas for R&D and innovation to reach the EU average. 3.5.2 The R&D spending is predominantly state expenditure In addition to the low level of research and development expenditure the financing structure for this work is also unfavourable. Over half of R&D expenditure is provided by the business sector in developed EU countries, in Hungary the figure is far less. The share of the public sector expenditure for R & D in 2001 was 53,6% and in the business sector it was 34.8%. In well developed economies, businesses in domestic ownership usually spend a greater portion of their sales revenues on R&D expenditure than comparable companies in foreign ownership. The reverse is true for Hungary: the current R&D expenditure within the domestic corporate sector is extremely low, (0.07% of the production value) whilst foreign owned companies in Hungary spend more (0.25%). 65% of the R&D spending is concentrated in Budapest, and is much weaker in the Regions. However, Budapest accounts for 61.8 % of the researchers whilst the Regions account for the rest. The state dominance in R&D spending and the low return on corporate R&D investments contributes to the under achievements in this area, especially for companies in Hungarian ownership. To resolve these problems state interventions should target support at the key sectors and profitable businesses and seek a far greater collaboration between the state, education and business sector. State funding should aim to pump-prime effective corporate investment. 3.5.3 The R&D infrastructure is outdated and research teams are an ageing population Financial under investment, outdated infrastructure and ageing population involved in R&D activity have led to a significant decline since the 1990 s. Between 1987 and 1998, the ratio of researchers between 30-49 years of age dropped from 65% to 52%, yet the ratio of those over 50 years increased from 22.5% to 35%. As demand for highly qualified research and development professionals grows world-wide the migration of highly qualified professionals represent a serious threat to scientific research in Hungary. This is exacerbated by the low wages paid to Hungarian researchers. The decline in R&D investments during the 1990 s, also caused the equipment to became out dated, as the research establishments failed to modernise and keep pace with technological change. 54

Hungary has joined the EU s 5 th Framework Programme from 1998 to 2002 and 6 th Framework Programme (2002 to 2006). However, successful international co-operation is hindered by the obsolete equipment and facilities within the publicly financed research establishments. This inhibits the Hungarian researchers ability to fully participate in the various R&D programmes in the EU on an equal basis. Under investment is therefore hampering the advancement of the R&D sector, inhibiting partnership arrangements and turning the results of research into successful business innovations and opportunities. R&D and Innovation will concentrate on a mixture of developments to guide and direct key research, promote financial investment and foster productive partnerships and co-operation. 3.5.4 The link between the R&D sector and the business sector is weak, the spin-off activity is not intense The lack of networking and knowledge transfer (innovation centres, technology transfer centres and technology incubator houses) is evident and restricts development. The research and development results lack effective implementation and ideas are rarely brought to market. If they are implemented, there can be significant delays before they are productive which affects profitability. Inter-company co-operation is weak and the lack of pooling and sharing of knowledge restricts partnerships and joint ventures. R&D activity amongst SMEs is very poor and the creation of spin-off companies from R&D activities is very low. In Hungary an ivory tower academic research activity is prevalent and the good ideas often fail to reach the commercial market. This weakness is explained by the inherited institutional structure, lack of experience and practical commercial sector knowledge, lack of knowledge about business start-up and enterprise opportunities. A strong spin-off activity for R&D restructuring will be the development of environment friendly technologies that will aid economic development. 3.5.5 The innovation ability of the private sector is low The weakness in the R&D sector has resulted in less commercial activity. The knowledge production, transfer of technology and the research and innovation activity does not take the form of protected intellectual property. In 2001 106 patents were registered in Hungary and 173 Hungarian patents were registered abroad. This is only one fifth of the number registered in 1990. Eurostat data for 2001 shows Hungary is significantly behind the European average concerning the number of patents per one million residents (80 in Hungary - 161 in Europe, EPO). The figures clearly show a weak innovation activity stemming from low spending on the R&D and the under-developed innovation systems which requires changes to be made to and increased investment (financial, infrastructure and human resources) as well as a framework for R&D and innovation ability. 55

3.6 INFORMATION SOCIETY Key issues: The spending on IT is lower than the EU average The number of Internet users is low The IT skills of the Hungarian society are poor, the digital content industry is underdeveloped The legal basis of the development of the information society is incomplete The development level of the telecommunications infrastructure is regionally very different 3.6.1 The spending on IT is lower than the EU average Hungary is lagging behind the EU countries in terms of information technical, computer aided applications, Internet access and preparation for the impact of the Information Society. It is crucial to increase expenditure and training people. In 2000 the IT expenditure in GDP percentage was 2.7% in Hungary, compared with 3.4% in the EU-15 group. Since the absolute GDP per capita figure of the EU is higher than of Hungary, and the prices of the IT-assets are world-wide very similar, the absolute spending difference between the EU and Hungary is huge. This will hinder Hungary reaching the level of development of the Information Society experienced in the EU in the short term. This can be attributed to the lack of finance, the low level of IT-skills of the possible users of IT, including those in employment, individuals and low government expenditure. To achieve increases in these areas it is essential to develop the skills and infrastructure. 3.6.2 The number of Internet users is low In Hungary in 2001 10% of the inhabitants had access to the Internet while this figure was 30.4% in the EU-15 group. The average number of Internet Users was 14.8% in Hungary compared with 31.4% in the EU. Most of the Internet connections are used at work, approximately 8% of households have PCs with an Internet connection. Many underdeveloped regions do not have the basic infrastructure to connect to the Internet. The data show a significant lagging behind for Hungary and this represents a major bottleneck for developing the Information Society network infrastructure. The problems can be explained with the telephone costs which are treble the EU average and this linked to lower wages, is a major barrier to increasing Internet connections. To resolve these problems stronger competition and investments are necessary in the telecommunications 56

sector and the IT skills of society (individuals, entrepreneurs, employees) should be strengthened in order to make them able to use the IT. National/local government action must be taken to develop the network infrastructure in the regions where market based development is not going to take place. 3.6.3 The development level of the telecommunications infrastructure is regionally very different As mentioned above, the telecommunication and network infrastructure is a bottleneck to Internet access. In a considerable part of the country, public telephone services are provided by subscribers endpoints with radio technology (RLL) instead of telephone lines which is the result of the development deficiencies of the network infrastructure. These radio sections are the most severe bottlenecks in the telephone network. The density of telephone lines varies significantly, spreads and depends on the strength of the economy of the area concerned (see table 3.10). Table 3.10 Supply of telephones lines Size of town and village (number of residents) Density of supply (%) 0 3000 28.1 3001 20,000 30.6 20,001 50,000 35.0 50,001 48.5 National average 37.1 Source Central Statistical Office (KSH) Broadband services are only accessible in the larger cities. The Hungarian telecommunications infrastructure needs to be comprehensively developed both in terms of bandwidth (data transmission speed) and improved coverage. The lack of a regional wide telecommunications infrastructure is a major obstacle for the economic development. According to EU analyses, one of the key factors of economic development is a significant increase in broadband Internet access. The lack of investments in the telecommunications sector which can be explained by the weak financial state of the telecommunications sector, due mainly the following factors:- the legal basis which does not allow sufficient competition, low demand for telecommunications services and high service prices. Spontaneous development therefore is unlikely. To remove these impediments actions should focus on infrastructure development particularly in the underdeveloped regions. 57

3.6.4 The IT skills of the Hungarian society are poor, the digital content industry is underdeveloped Development of the human capital is as important as the infrastructure and will be the main driver for change. The two components that need to be tackled are the development of skills and the wider issue of general education particularly amongst the adult population. The number of IT teachers and the IT skills of non IT teachers is very low. The lifelong-learning is yet to be embedded and it is necessary to re-train teachers. The variety of training available for adults is growing, in 2001 about 20% of manual workers and 25% of the professional workers had taken part in some training. There is a significant lag in Hungary in the field of software applications. This is indicated by the small Hungarian software market. In the recent years numerous initiatives (e.g. NAVA program) were prepared for recording the national heritage. Despite the considerable improvement the provision of the cultural institutions with information and communication tools, as well as interactive systems is still insufficient and missing from development concepts. In the business sector the modern information systems are not used or available for communications and transactions between companies. This is due to the lack of IT skills, legal framework, and that government has not yet modernised its approach when dealing with companies. The necessary government actions can be summarised as follows: continuously develop the IT skill transfer in the education system, provide IT training for the disadvantaged, unemployed and SMEs, continue the electronic recording of the cultural heritage and modernise its own administration. 3.6.5 The legal basis of the development of the Information Society is incomplete The lack of development in the telecommunications sector are partially due to legislative problems and that hinders development of the infrastructure. The XXXV./2001 act on digital signatures was not enough to create the platform for the use of the digital signatures. The CVIII/2001 act on e-commerce services and other services related to the Information Society has so far not been used in practice. Hungary is still lacking the legislative framework for distance work. There is no act regulating the accessibility of state administration information, and the area of digital media is also not regulated. The current telecommunication act is not able to enforce competition in the Hungarian telecommunications sector. The steps taken so far are modest, however, they start and begin to build the legislative conditions for the development of the Information Society. In 2002 the Ministry of Informatics and Telecommunications was formed which indicates the government s decision to emphasise the developments. The legislative programme required to conclude this work is huge but it is recognised that impact will have far reaching benefits for economic development. 58

3.7 DIFFERENCES IN ECONOMIC DEVELOPMENT The factors that determine most the economic competitiveness of the regions are capital investment in the local economy, the activity of enterprises (especially the SME sector), research and development (R&D), the level of business services (banking, business consulting) and information society. These are inadequate in the backward regions and micro regions. The differences in the economic structure play a pivotal role in shaping regional differences. The strengthening of the service sector can be observed in general. Financial and business services play a crucial role in creating a differential of dynamics between the capital city and the rest of the country. However, the driving force of the shift among the regions and the counties between the West and the East is the industry. Industrial production has shifted towards the west, generating dynamic growth in the western regions. Table 3.11 Sectoral distribution of employed persons (%) Agriculture Industry and construction Services 1994 2001 1994 2001 1994 2001 Central Hungary 1.9 1.2 25.7 23.9 72.3 74.9 Central Transdanubia 8.9 5.9 44.8 48.2 46.2 45.9 West Transdanubia 9.9 4.8 42.7 47.2 47.4 48.0 South Transdanubia 13.7 8.4 32.9 35.2 53.5 56.4 North Hungary 6.3 3.9 41.8 40.1 51.9 56.0 North Plain 9.7 6.4 37.8 36.5 55.5 57.1 South Plain 11.6 8.0 36.3 37.0 52.0 55.0 National average 7.2 4.4 34.4 34.9 58.4 60.7 Source: Central Statistical Office (KSH) The efficient operation of local public administration influences the performance of the local economy, social and cultural initiatives and its development. However, local public administration is not fully capable to perform this role. This is partly due to the bad financial position of local governments, and to its low capacity. In order to promote efficiency there is a need for the training of public administration employees, with special regard to the development of IT and language skills, and also to improve the access to IT infrastructure. 59

4 INFRASTRUCTURE 4.1 TRANSPORT INFRASTURUCTURE A functioning and sufficiently well developed transport system is a precondition to fully exploit the benefits of closely integrated economies. To strengthen Hungary s position in this regard is one of the key priorities in a mid-term perspective. The rail network is extensive, but is in need of much modernisation. However, the road network is below the standards and size of the countries with similar level of development. Apart from international corridors, the road networks that play a role in the development of interregional and local links within the country are in poor state and require heavy investment. The transport infrastructure is a limitation on the growth of economy and a major cause of regional disparities and all means of transport are in need of large-scale investments. Key issues: Expansion of the motorway network Upgrading the existing road network Construction and modernisation of the railway network Expanding airport capacity Improvement of the Danube corridor 60

4.1.1 Hungary a hub of international transport Hungary is a landlocked country and is at the cross-road of several important transport corridors (figure 4.1).Three pan-european networks of roads, railways and water corridors cross Hungary and three more corridor sections belong to the system. With Budapest as a node, the corridor IV, corridor V, Corridor VII, and corridor X connect Hungary to the Trans- European Transport Network. As it is shown in the figure below, Hungary plays a central role in international transport connections of Central and Eastern Europe and South-East Europe towards the West and the East. These international corridors play a crucial role within Hungary and in her international relations and they have great importance for the trade of the European Community as well. Figure 4.1 Helsinki corridors in Central and Eastern Europe and in Hungary Source: www.europa.eu.int 4.1.2 Current modal split In accordance with the European trends, the output of the road transport of freight is dynamically increasing and its share measured in freight ton-kilometre was 48.2% in 2001 (EU: 43.4%). The share of about 47% in road passenger transport is slightly more than half of the EU average, which is 80.8%. The reason for this is partly the well-organised public transport and, partly, the nearly two-fold difference between the level of motorization in the EU and in Hungary. Annually 10 to 13 million foreign vehicles use the main roads, and the transit transport on the main roads is increasing by 5 to 7% per annum. The dynamic increase in transport, related to the increase in the total number of vehicles, contributes to the deficiencies in road quality. 61

The market share of the railways is 28,3% in passenger transport and 29,5% in freight transport thus by far exceeding the EU average. Passenger transport increased from 8.3 billion to 10.7 billion passenger/km, while volumes in freight transport increased from 7.4 billion to 7,5 billion tonne/km between 1995 and 2001. 4.1.3 Construction of the motorway network The network of motorways which would considerably contribute to economic development and modernisation is in need of significant expansion. The length of the national road network is 30300 km and this carries about 70% of the entire road traffic in the country. However the total length of the motorways is only 448 km, that of the speedways is 57 km with only one motorway being directly connected to the West-European network (figure 4.2). In 2002 the Hungarian Government has spent about EUR 456 million on motorway development. Figure 4.2 The trunk network, expressway network and road network of Hungary Source: Central Statistical Office (KSH) The density of road network compared with the total number of roads is 1.46 km/km 2, which is 88% of the EU average. However, the density of motorways is still only one forth of the EU average, and it is only at about 50% of the density warranted by the level of GDP. According to the European Transport policies the demand for motorways will increase in Central and Eastern Europe. Hungary s present road network is not sufficient to satisfy the requirements of Pan European transit and inland transport. Trends in transport are obvious: shares of road transportation are steadily increasing which leads to an increasing burden on the environment. Thus in the development of the road transport system, balance with the environment should be taken into account in order to minimise environmental burden. 62

4.1.4 Upgrading the existing network The entire road network is 135.000 km, out of which 105.000 km are roads maintained by local authorities, and 30.000 are national (public) roads. Thus an overwhelming share of the overall network serves local and regional transport. The quality of the domestic road network (load capacity, accident risk, environmental impact), and the low density of the speedway network do not meet the increasing demand on transit and inland traffic, neither the requirements of the European Union. The radial structure of the main road network, with Budapest in centre, and the insufficient number of the river bridges hinders the strengthening of regional relations and cause significant disparities in the level of accessibility. Table 4.1. Main transport indices of regions, 2001 Region Main road (km) Other national road (km) Motorway motor road Primary road Secondary road Total road density (km road/km² surface area national roads Central Hungary 158 239 247 1 908 2 605 0.37 Central Transdanubia 138 359 563 2 905 3 965 0.35 West Transdanubia 72 239 782 3 756 4 848 0.43 South Transdanubia 18 274 702 3 338 4 334 0.30 North Hungary 64 299 516 3 777 4 655 0.35 North Plain - 418 739 3 749 4 905 0.28 South Plain 56 291 782 3 881 5 010 0.28 Total/Average: 505 2,173 4,330 2 3331 30 322 0.32 Source: Central Statistical Office (KSH). The load capacity of most of the road network is only suitable for 100 kn axle-load, in contrast with the EU requirement of 115 kn. A total of 466 km road sections have been marked out as the most urgent ones in the framework of the National Road Rehabilitation Programme with a view to meeting the requirement of the increased maximum axle load of 11.5 tonnes for trucks in 2009. Heavy transport has caused a very rapid deterioration in the quality of road. This has had a particularly strong impact on roads that feed traffic to the motorways. There is a low number of roads with more than two lanes and few bottlenecks have appropriate by-pass roads. 28% of the national roads are crossing inhabited areas and cause serious transport safety and environment problems. 63

A further major deficiency of the road network is the lack of paved roads connecting villages in the peripheral parts of the country. Thus support of local business development is seriously impeded by long delivery times, surplus transportation expenses. 4.1.5 Construction and modernisation of the railway network The railway network coverage is 83 km per 1000 km 2 (EU: 65 km per 1000 km 2 ), which is favourable compared with the European figures. However, the quality of infrastructure, the railway lines and the rolling stock has been declining for many years. As a result now, there are speed restrictions imposed on 40% of the rail network. Another problem is that the proportion of costly and low-traffic branch-lines is very high. Only 16% of the railway lines are multi-track and only 34% of them are electrified. This is in sharp contrast with the EU indices of 41% and 48%, respectively. This clearly reflects that the Hungarian railway network is conspicuously lagging behind in terms of the quality of the service it can provide. Recent increases in the market shares both in passenger and freight transport - were made possible by the track reconstruction work started in the last decade, by the development of upto-date safety devices, by the modernisation of the traffic control system, by the electrification of the main line network, as well as by upgraded rolling stock on the intercity routes. These developments mark the beginning of a high speed network running at 120 to 160 km/h, which considerably would improve the conditions for an efficient co-operation with the European railways. Within the framework of the railway development programme, the Slovenian- Hungarian railway connection was constructed in 2001, co-financed by PHARE. In 2000-2002, four new major projects were launched to modernise the lines of the Helsinki railway corridors, with considerable support from the ISPA pre-accession fund. The continuous development of the Budapest Inter-modal Logistics Centre built with EU support, as well as of the terminals that have been operating on the main railway border crossing points help to meet the demand for the rail freight transport. Due to deficiencies in the rail network, access to public rail transport is poor in some regions, especially in North-Hungary. Although the geographical distances are not great, some towns and villages can only be reached by large detours due to the lack of any direct connections. Poor electrification and the absence of multi-track networks are the characteristics of the railroad networks in the South-Transdanubia and the Southern-Plain regions. In general there are large differences in volume and quality of the railway service across the country. In general investment in rail transport is seen as one of the options to counterbalance the rapid increase of road transport and its adverse impacts on the environment. A second important aspect is that road transport networks have currently reached their capacity limits in certain areas. The modernisation and investment into rail networks can ease this pressure and brings environment benefits. 64

4.1.6 Expanding airport capacity Due to geographical and historical reasons internal flights are very low and international air traffic is significant. Since the beginning of the 90s air transport has been marked by dynamic increases. Since 1994 the passenger transport increased by 56%, air freight by 79% and the traffic of the Hungarian air space increased by 273%. In 2001 the ratio of air transport within long-distance personal passenger transportation in Hungary was 0.3%, 14% in passenger kilometres and only 0.2% in freight transportation. The country has only one international airport that can meet the present traffic level. In line with international trends the traffic at Ferihegy International Airport in Budapest and also at temporary airports is gradually increasing. However there is no regular inland air service. Compared to other important hubs in Central and Eastern Europe Budapest has considerably strengthened its position in recent years. Its current passenger volume is approx. 30% less than in Vienna and 10% less than in Prague. If the trend continues an expansion of Budapest airport could be envisaged in a short-term perspective, developing its position as a hub for transit flights to Eastern Europe and to the Middle East. At regional level there are up to four airports offering future potential for commercial use. Currently the airports of regional importance except for Debrecen and Sármellék can receive only small- and medium-sized planes safely, and only function for seasonal tourism, sport and business journeys. 4.1.7 Improvement of the Danube corridors Navigation is possible along 1,600 km of the rivers in Hungary. Commercial navigation exists on the river Danube and to a very small extent on the Tisza river. Furthermore there is occasional crop transport on the Kőrös river. The Hungarian Danube section is part of the Helsinki corridor VII. However, the technical parameters do not make it possible to permanently run self-propelled pusher crafts and barge-combinations of EU standards in every season of the year. The vessel capacities can be exploited only at a rate of 60 to 70%, in contrast with the European average of 80 to 100%. This also restricts the maximum exploitation of the transport opportunities offered by the Danube-Main-Rhine canal. The network density of public ports is underdeveloped likewise the connecting transport facilities and these limitations impair the competitiveness of river transport. Recent past has been marked by massive losses of traditional markets of shipping goods (e.g. steel production). While the average density of ports is 50 km per port in the Danube-Main-Rhine network, this indicator is 150 km per port in Hungary. In 2001, share of water transport was 3.4% (2.9 million tons), calculated in freight ton-km which is low compared with the EU member states bordering the Danube. Improvement of the Danube corridor is entirely dependent on international cooperation. Given a coordinated strategy of the countries concerning water transport on the Danube might significantly develop its position among East-west corridors at European level. The advantages of inland navigation in terms of reduced environmental burden - are clearly stated in the Green Paper on the Impact of Transport on the Environment, a Community Strategy for the sustainable mobility. 65

4.1.8 Combined Transport The share of combined transport lags some 2%, behind the EU average of 8%. Its infrastructure facilities were built along the river Danube and in the neighbourhood of the main railway border crossing points. Their development and modernisation is ongoing. About 80% of the traffic is accomplished through five large terminals. The traffic of the RO-RO (Roll-off-Roll-on) combined transport on the river Danube suffered a major set back by the shipping restrictions caused by the Yugoslav war. The Hungarian shipping production - 2,4 million tons annually - is hardly 1/140 th of the EU member states. 4.1.9 Expected trends A clear trend towards an increasing role of road transport has to be stated. In line with international trends, the share of railway transport will decrease since the given overall increases of transport volumes both in passenger and freight transport actual transport volumes of railways and inland navigation tend to develop slowly or even stagnate. This would happen even if inevitable quality improvement is implemented in the long term. The current low performance of shipping and air transport is expected to increase, parallel with the improvement of various international and economic conditions. However, at present these modes do not represent a competitive alternative to the other means of transport.. Combined transport appears as one of the most promising alternatives which could help to dampen the current trend. 4.1.10 Institutional System Since May 2002 Transport policy has been the responsibility of the Ministry of Economic Affairs and Transport. The main supervisory institution is the General Transport Inspectorate (GTI). This body which oversees the activities of the road, rail and inland transport sectors is currently being strengthened. The specialised institutions under the supervision and professional control of the Department contribute to the safe operation and development of the infrastructure. The executive administration of public road, railway and water transport is adapted to the structure of the government administrative system and exercises authority via the municipal and county organisations of the General Directorate of Transport. The Directorate of Aviation is the responsible authority for air transport. The air control system is an independent organisation operating in harmony with the operation of Ferihegy Airport. The national carrier (MALEV) has undergone restructuring. The Hungarian authorities continue to take into account the objectives and priorities and the respective Community guidelines and the requirements of TEN financing. Administrative capacities for the management of the significant investment funds have been reinforced. At the same time, the hierarchic intra-ministerial and intermediate organisations managing the funds provided by the ISPA have been developed and are fully operational. The Hungarian State Railway Company (MAV) is the responsible authority for freight and passenger railway transport. The improvement and efficiency of the management, the separation of the tracks and the commercial activity to establish the preconditions for 66

competition are all on the agenda of the Hungarian State Railway Company. The amended Railway Act entered into force in January 2002, stipulating provisions for the separation of passenger and freight transport. Community-owned companies that have regional supply obligations handle public road transport. 4.1.11 Differences in the accessibility A determining factor in the disparities between and within regions is the difference in accessibility of the individual regions and the inadequate transport network. On the basis of the accessibility of significant European economic centres by road the location of the regions of Western and Central Transdanubia and Central Hungary is more favourable. Although the radial main highway network with Budapest in the centre and the insufficient number of bridges over the large rivers hinder the strengthening of regional links and create significant disparities in the level of accessibility. The weak cohesion within the regions and the periphery position of some micro regions is caused by the absence or poor quality of internal transport routes. At micro-regional level the inadequate transport network hinders the development, towns and villages. Most of the areas have inadequate networks of byroads and roads connecting settlements. The number of settlements with dead-end roads, and the number of very poor quality low priority roads is also very high. The regions and micro-regions close to the borders of North Hungary, North and South Plain and South Transdanubia are in worst position, although there are remote and detached communities in every region. Concerning an environmentally friendly transport systems, the establishment of cycle paths and related infrastructure is extremely important. The construction of cycle roads and supporting infrastructure should play an important role in the development of lagging behind areas and the improvement of transport networks among settlements. At the moment, there are approximately 1600 km of cycle paths built, of which 200-300 km contain full service infrastructure. The topography makes the development feasible and will support tourism. Cycling could become an effective way of transport in cities and the countryside as well. 67

4.2 ENERGY The supply, distribution, and the consumption patterns of energy have undergone dramatic changes in the past ten years. This included the introduction of a new price system, privatisation, the creation of the institutional framework for competition in some areas. However, many problems are unresolved, and these issues have been identified as follows: Key issues: Overdependence on imported fuel Insufficient and poor energy conservation and limited energy efficiency in industry Development of disadvantaged regions at the periphery of the country is hampered by poor distribution systems Small share of renewable energy Domestic energy generation has been marked by a steady decline since the beginning of the 90s from 0.6 PT in 1990 to about 0.47 PT in 2000. In 2000 about 30% of energy production was based on electricity generated by the nuclear power plant, about 26% on thermic energy generated of coal, 38% of hydrocarbons (primarily natural gas). The remaining small production relies on other sources (wood, hydroelectric power stations). Due to the lack of natural resources Hungary is heavily dependent on energy imports. In 2001 the dependence of the country on energy imports was rated at 72.6%; at 2001 prices, annual energy imports exceeded HUF 792.2 billion. Due to the exhaustion of economically exploitable fossil fuel sites and an expected increase in energy demand, Hungary s dependence on energy imports is to grow in the next few years. Between 1994 and 2000 energy consumption in Hungary more or less stagnated and amounted to 1,054.7 PJ in 2001. In order to generate one unit of GDP, the Hungarian economy uses more than 1.5 times as much energy as the developed EU member states so there is a lot to improve in terms of efficiency. There are yet unexploited possibilities for improving energy efficiency, especially in the fields of heating technology, district heating and agriculture. The energy efficiency of the processing industry shows an improving trend, but the buildings, including residential buildings, are outdated and account for considerable energy losses The bad state of repair of certain components of district heating systems represents a particular problem, which causes district heating not to be competitive in respect of price and services. The permanent and dynamic energy consumption growth in the transport sector is expected to continue and as incomes are going up, a steady increase is also expected in the energy consumption of the residential sector. 68

The state of the distribution network differs considerable across the regions. The appropriate quality of the network minimises the delivery loss of energy and improves the overall efficiency of energy use. At the same time it should be considered a fact that the different quality of network results in different costs across the regions for the same product. Low quality networks are situated in the poorer regions. Due to the high share of energy in consumer spending and in the cost of the firms these regions are particularly adversely affected by that. Currently, the proportion of renewable resources out of the total energy production is 3.6% (EU average: 11.3%), and 0.76% of electricity generated with renewable energy resources compared to total electricity consumption. Future increasing use of renewable energy resources requires significant investment support as well as much higher purchase prices guaranteed in the long run as compared to traditional energy resources. In order to ensure sustainable development, it is especially important to enforce environmental requirements for both existing power generation and consumer equipment and for future developments. It is necessary to develop the utilisation of renewable energy resources, paying particular attention to the utilisation of renewables in power generation in order to reduce dependence on imports and environmental damage in line with the EU objective according to which the proportion of renewable energy resources in the total use of primary energy resources should be increased to 12% by 2010. The aim of Hungarian government within the framework of the Hungarian Energy Conservation Programme and Action Plan is to reach a share of renewable energy consumption of at least 6% by 2010. Hungary's greatest opportunities lie in the utilisation of biomass-based and geothermal energy, but there has been a favourable shift in the field of using wind and solar energy over the recent period. 4.2.1 The Institutional System Responsibility for energy policy lies with the Ministry of Economic Affairs and Transport, where a separate Directorate General deals with energy policy. The Ministry regulates the prices for electricity and natural gas with tariff schemes being adjusted on an annual basis. These regulatory tasks concerning electricity, gas, quality of public services and consumer protection are carried out in shared responsibility with the Hungarian Energy Office. The Energy Centre was established in 2000 and carries out promotional activities on energy efficiency and renewable energy. In the field of nuclear energy the Hungarian National Atomic Energy Authority exercises its functions as regulatory authority and maintains a register on nuclear and radioactive material. The ten-year energy savings programme specified in Government Resolution No. 1107/1999 (X.8.) embraces a range of energy efficiency programmes to be implemented in the business, household and municipality sectors and pays adequate attention to promoting the additional use of renewable energy resources. The Government has provided significant resources for all this from 2000. From 2001, energy efficiency programmes were carried out in the framework of the Széchenyi Plan. A total of about EUR 15 million has been spent in 2001 for energy efficiency projects. The EU and the OECD by extensive regulations on environment protection, as well as the UN and other organisations by applying a broad range of conventions make considerable efforts to mitigate the detrimental effects of energy consumption and generation on the 69

environment. Hungary has to meet obligations set forth in a number of international agreements in the field of protecting air purity. The decline in energy demand following the economic recession made it easier to fulfil the former undertakings (SO 2, NO x ). The fulfilment of the latter undertakings (Sulphur II, CO 2 restrictions) is subject to effective energy saving and a quick shift to the increased utilisation of renewable energy resources. Air quality limit values were reviewed and Hungary adopted the air quality limit values specified in the EU directive on large firing equipment. With the adoption of the new Act on Electricity in 2001, the country took a significant step towards joining the EU's internal energy market, by fulfilling the EU requirement on market liberalisation regarding electricity. 70

5 EMPLOYMENT AND HUMAN RESOURCES DEVELOPMENT 5.1 GENERAL OVERVIEW OF THE LABOUR MARKET At the beginning of the nineties, the most significant characteristics of the Hungarian labour market were the dramatic decrease in employment and economic activity, the sudden increase in unemployment, the relocation of the labour force among the main sectors and occupations, as well as the rapid improvement of productivity. With the stabilisation of the national economy, the labour market adapted to the new and quickly changing market environment. The legal and institutional frameworks of the employment policy were established and strengthened. Unemployment decreased remarkably and employment and activity rates started to increase, following the increasing economic development in the last third of the decade. In 2001 employment remained constant due to the effects of recession in the world economy. In Hungary however, unemployment continued to decline despite acute problems of the labour market, such as the high inactivity and low employment of some groups of the population, large regional differences and low regional mobility of the labour. Also some new structural characteristics began to emerge, such as the lack of skilled labour force in some regions and occupations and an increasing ageing of labour force in some industries. The analysis of the situation will be presented under the issues of crucial importance in the field of employment and human resources, which are as follows: Key issues: low levels of employment and high rate of inactivity high level of regional disparities in employment and unemployment and low regional mobility of the labour force poor labour market opportunities for special groups of labour market structure of employment and bottlenecks investment in and promotion of human resources development implementation of employment policy 71

Table 5.1 Main indices of employment, 1995-2001 (annual averages) Population between ages 15 and 64, in 1,000 persons Economically active population (15-64) in 1,000 persons Hungary EU-15 1995 1996 1997 1998 1999 2000 2001 2001 6891,4 6877,3 6876,5 6831,7 6803,1 6784,4 6792,3 248125 4060,5 4020,3 3973,1 3988,7 4073,7 4087,7 4074,4 171702 Activity rate (15-64) as % 58,9 58,5 57,8 58,4 59,9 60,3 60,0 69,2 Employed (15-64) in 1,000 persons 3646,2 3622,5 3627,4 3679,0 3789,1 3825,7 3841,7 158653 Rate of employment (15-64) as % 52,9 52,6 52,7 53,9 55,7 56,4 56,6 63,9 Rate of unemployment (15-74) as % 10,2 9,9 8,7 7,8 7,0 6,4 5,7 7,4 Rate of long-term unemployment as % 5,0 5,3 4,2 3,7 3,5 3,1 2,7 3,3 Youth unemployment (in % of the 15 to 24 year-old population) 7,2 6,4 6,1 5,5 5,1 4,7 3,9 7,1 Source: Central Statistical Office (KSH), Labour Force Survey, EUROSTAT 5.2 LOW LEVELS OF EMPLOYMENT AND HIGH RATE OF INACTIVITY 5.2.1 Low levels of employment As a result of the transition to a market economy, the total number of people in employment decreased by more than a quarter, i.e. by nearly one and a half million. In 1998 employment and economic activity started to increase again, following a recession of more than two decades. However, due to the global economic slowdown, this rate of increase slowed down in 2000 and completely stopped in 2001. In spite of this, the employment and activity rates are still considerably lagging behind the figures of the European Community (by 7% and 9% respectively). The socio-demographical composition of the employed people changed favourably. The difference between the employment levels of men and women slightly decreased, and also the tendency of the older employees being driven out from the labour market turned around. The education level of employed people is continuously improving and the number of young people entering the labour market with higher than average educational qualifications has significantly increased, as has the number of people in employment with better qualifications. In 2001, only one-sixth of employed people were unskilled, one-third of them had vocational or secondary school qualification, and more than one-sixth of them completed higher education. Besides these favourable trends, the change in the qualification structure of the 72

employed people also reflects the fact that people with no schooling and no qualification are more likely to be excluded from the labour market. The composition of both the unemployed and the inactive population is much worse; the ratio of the lower educated is much higher among them than within the employed population. Therefore in order to increase employment the development and support of education, training and active labour market policies are necessary. 5.2.2 Relatively low unemployment is coupled with high inactivity The unemployment indices of Hungary are relatively favourable with international comparisons. By 2001 the rate of unemployment decreased to 5.7% (EU: 7.4%), and long term unemployment to 2.7% (EU: 3.3%). In Hungary the rate of unemployment among women is permanently lower (5%) than that of men (6.3%) (2001 figures). However, the relatively favourable unemployment rate also reflects the shortening of the payment period of the unemployment benefit, and the narrowing of the group of people eligible for the social allowance. The long-term unemployed people represent 46% of those unemployed. It is necessary therefore to introduce measures which prevent the drift into long-term unemployment and promote the labour market reintegration of those excluded from the labour market through training and labour market services. In the early 1990s early retirement of employees who lost their job or were threatened by unemployment (especially the unskilled workers with lower schooling and the older age groups) was facilitated in order to reduce social tensions and this has greatly contributed to the growing inactivity. In 2001, the number of economically non-active people of working age was 2.23 million, of whom 31.0% were studying at a daytime educational institution, 13.1% received child-care benefits and 31.9% were retired. Exact information is not available about the remaining 25% of the inactive population. Therefore to reduce inactivity measures are needed to promote the labour market integration. To increase the economic activity of older age groups and to maintain the long term financing of pensions, the pension system was reformed already in 1998. Within the frames of this reform in addition to several major measures, the retirement age was gradually increased to 62 years both in case of men and women, from the previous 60 and 55 years respectively. The new retirement age was reached by men already in 2001. Women will reach that only by 2009. 5.2.3 Regional Disparities The economic transformation was accomplished in very different ways in every region, as a result of which considerable discrepancies developed in the labour markets. While the unemployment rate in the more developed western and central parts of the country was close to 4% in 2001 and the employment rate was 60 to 63%, in some of the industrial centres it was the lack of skilled labour force that characterised the local labour market. Unemployment in the regions of North Hungary and the North Great Plain was twice as in the better off regions, and the employment rate was below 50%. 73

Table 5.2 Employment and unemployment by regions Region Employment rate (%) Unemployment rate (%) 1993 2001 1993 2001 Central Hungary 58.8 60.9 12.4 4.3 Central Transdanubia 55.6 59.9 8.9 4.3 West Transdanubia 60.9 63.3 9.8 4.2 South Transdanubia 53.3 52.6 12.7 7.8 North Hungary 49.6 49.7 15.9 8.5 Northern Plain 48.7 49.7 14.6 7.8 Southern Plain 53.8 56.3 12.2 5.4 National average 54.8 56.6 11.9 5.7 EU average 60.0 63.9 10.2 7.4 Source: Central Statistical Office (KSH), Employment in Europe Labour market differences have multiplied in the last decade at the level of micro regions and locally, and these differences may even be many times higher than the regional figures indicated above. Unemployment is highest in small villages with a few hundred inhabitants, where the socio-demographic composition of the population is also less favourable than the average. The mitigation of inequalities is aggravated by the fact that job creating investments are primarily focused on the more developed regions of the country and the mobility of labour is traditionally low both within the regions and the country. Mobility is aggravated partly by the rigidity of the real estate market and the lack of adequate transport infrastructure. 5.3 SPECIAL GROUPS OF THE LABOUR FORCE Certain demographic groups are particularly disadvantaged or risk exclusion from the labour market which tends to contribute to high rates of inactivity. Those groups who suffer are women leaving the labour market for a period of time to have children; school-leavers, older age groups or those returning to the labour market, people with disabilities and the Roma community. The labour market situation of these groups will be summarised below (table 5.3). The situation of the Roma is described in the section Social Inclusion. 74

Table 5.3 Labour market patterns of men and women 1995 1996 1997 1998 1999 2000 2001 Men Total population (000) 4903,7 4883,9 4863,3 4841,9 4817,6 4791,8 4864,0 Population aged 15-64 (000) 3374,2 3359,8 3369,4 3346,7 3335,0 3332,9 3336,2 Activity rate (ages 15-64) (%) 67,9 67,4 66,6 66,2 67,8 68,0 67,8 Employment rate (%) 60,2 60,2 60,3 60,6 62,6 63,3 63,5 Unemployment rate (%) 11,3 10,7 9,5 8,5 7,5 7,0 6,3 Youth unemployment rate (ages 15-24) (%) 20,7 18,0 17,4 14,9 13,2 13,0 11,5 Women Total population (000) 5342,0 5328,4 5311,2 5293,5 5274,2 5251,4 5333,0 Population aged 15-64 (000) 3517,2 3517,4 3507,3 3485,1 3468,3 3451,5 3456,1 Activity rate (ages 15-64) (%) 50,3 49,9 49,3 50,8 52,3 52,7 52,4 Employment rate (%) 45,9 45,5 45,5 47,3 49,0 49,7 49,8 Unemployment rate (%) 8,7 8,8 7,8 7,0 6,3 5,6 5,0 Youth unemployment rate (ages 15-24) (%) 15,6 16,4 14,5 11,6 11,3 10,9 9,8 Sources: Central Statistical Office (KSH), EUROSTAT 5.3.1 Women The level of employment and activity of women dropped in the transition period but not as fast as the employment and activity rates of men. Since 1997, the employment level of women has grown slightly faster than that of men and in 2001 their employment rate grew to 49. 6%, thereby reducing the difference to 13.7 % (EU: 18.1 %) between the rates of the two genders. In 2001 the employment rate of women (49.6%) was also lower than the EU female average (54.9%), but not as much as the male employment rate (63.3%<73.0%). The en masse liquidation of jobs affected the areas characteristically employing less women than men (i.e. the industrial sectors and agriculture). In 2001, the unemployment rate of women was 5.0% and that of men reached 6.3% (EU: 9.7% and 7%, respectively). However, the lower unemployment rate of women is partly due to their lower participation in the labour market, which is related to child-raising and the lower retirement age. 75

5.3.2 Young people The labour market situation of young people differs from the EU indicators broadly to the same extent as those of the whole population. In this group, both the employment and the unemployment rates are lower than the community average. In the year 2001, 31.4% of the 15-24 year-old people had work, as opposed to the EU average of 40.7%. Unemployment affects young people more than the adults, but at the same time it is promising that youth unemployment has dropped more than the average. As a result, in the year 2001, only 3.7% of the total unemployed people were between 15-24 years of age, half as much as the EU average (7.1%). At the same time it is also true that the unemployment rate of 10.8% is almost twice as high as the figure for adults, but much lower than the 14.9% community average. The employment of young people is made difficult, especially in the disadvantaged and stagnating areas of the north-eastern regions of Hungary. A substantial number of young people still enter the labour market without any qualifications or with qualifications that do not meet the requirements of the labour market. The employers are still reluctant to engage school leavers with no working experience and who require training. 5.3.3 Older employees In the early nineties, a possible way of escaping from unemployment was early retirement and disability pension. This option was encouraged by the state. However, in the second half of the decade, the preconditions of early retirement have been gradually made stricter and hence, since 1998, the number of people of economically active age who retired due to health or employment policy reasons has dropped. As a result of earlier en masse retirement policy, only a small minority of people above 55 years of age are present in the labour market. Improved economic fortunes has led to the expansion of employment and older workers were more able to find employment (the employment rate of the 55-64 years grew to 23.7% in 2001 EU: 38.5%). Older people within the labour market find it more difficult to adjust to the changing labour market challenges and they suffer from greater discrimination. As shown above special groups within the labour force have not only low employment rates but inactivity plays a crucial role in their opportunities in the labour market. 5.3.4 People with disability Social exclusion affects the disabled and those with serious health problems to the largest extent, whose total number is estimated at 900,000. Their position in the labour market is extremely poor in comparison with that of the EU. Only about a tenth of them find employment (EU: 40%), in spite of the fact that employers are required by law to employ them in at least 5% of the work force. Their levels of qualification are low, and their economic activity is only one sixth the average of the total population. Their employment rehabilitation is made more difficult by the fact that the medical educational system is not primarily aimed at rehabilitation and work reorientation, but rather to substantiate passive care. Although the system of protected employment was developed nation-wide, the employment opportunities for the disabled are still poor, mostly restricted to jobs providing low income. There are also considerable regional differences. 76

5.4 STRUCTURE OF EMPLOYMENT 5.4.1 Sectoral structure With the transformation of the economy, the sectoral structure of employment has changed considerably. The rearrangement of the employed among major sectors was characterised by a decreasing employment in agriculture and an increase in the proportion of those employed in the service sector. In the year 2001, 6.2% of the employed worked in agriculture, 34.2% in industry and 59.6% in the service sector (EU: 4.4%, 26.9% and 68.8%, respectively). In this respect, there are significant regional differences. The role of agriculture in employment is well above the average in the regions of Great Plain and South Transdanubia. Recently the rate of employment in industry has continued to increase in the regions of Central and West Transdanubia that have already been industrialised earlier, while it was stagnating in North Hungary. The proportion of employment in the service sector is the most significant in Central Hungary. Table 5.4 Regional distribution of the employed by sector, 2001 Region Proportion of the employed (%) Agriculture Industry Service Together Central Hungary 1.9 26.3 71.8 100.0 Central Transdanubia 6.0 44.4 49.6 100.0 West Transdanubia 5.4 41.9 52.7 100.0 South Transdanubia 9.8 33.8 56.5 100.0 North Hungary 4.8 38.8 56.4 100.0 North Great Plain 8.1 34.1 57.8 100.0 South Great Plain 14.1 33.7 52.1 100.0 National average 6.2 34.2 59.6 100.0 EU average 4.4 26.4 69.4 100.0 Source: Central Statistical Office (KSH), Employment in Europe, 2002 5.4.2 Role of SMEs in employment The structure of employment altered substantially and a significant modification occurred in the size of employer organisations. Individual entrepreneurs and micro-enterprises represent more than 1 million jobs. Small and medium sized enterprises provide a further 1.5 million 77

jobs. Therefore, from the aspect of employment policy, it is especially important to promote the operations and labour supply of these enterprises, in addition to maintaining and improving their competitiveness. 5.4.3 Shortage of Labour Besides low employment and high inactivity, a shortage of qualified labour is evident in certain occupations and regions. There is a mismatch between the demand for workers with specific skills and the excess supply of labour without such skills. It is primarily the regions of Central Hungary, West Transdanubia and South Great Plain where labour shortages prevail. Filling these vacancies are impeded on the one hand by the lack of adequate qualifications, competencies and skills (IT, foreign language and communication skills), and on the other, by the low level of wages offered by employers. Lack of investment flows to North-Hungary, the North-Great-Plain and South-Transdanubia contributes to the existing mismatch between labour market demand and labour force supply. 5.5 INVESTMENT IN AND PROMOTION OF HUMAN RESOURCES DEVELOPMENT The mismatch between the needs of the labour market and education and training is considerable therefore steps should be taken in both formal and informal education and incompany training to reduce these gaps. The level and nature of the qualification obtained by people graduating from the education and training system do not properly correspond to the requirements of the labour market due to the lack of appropriate links between the education and training system and the economy. This requires significant investment in human resources and the development of education and training systems including vocational and adult training areas to be analysed in depth in the Education and Vocational Training section of the analysis of situation. In-company training and human resource development have particular importance with regard to improving the competitiveness and adaptability of the workforce and enterprises. According to a survey 4 conducted by the CSO in 2000, it is primarily the size of the company that determines whether further training is organised for the employees in a given year or not. In 1999, most (85%) of large companies employing more than 500 persons supported a professional training programme, almost half of the companies with 50 249 employees took advantage of this option and less than one third (29.2%) of small companies (from 10 to 49 persons) did the same. Considering the important role that SMEs play in employment, their training policy and practice is decisive for the training options of a majority of the employed. 4 The data presented above represent calculations based on a survey completed by the Central Statistical Office titled Main data on training at workplaces. This survey encompassing both the EU Member States and the candidate countries was completed in 2000. 78

However, many of these enterprises cannot afford to invest in human resources development, therefore measures are to be taken to promote in-company training in the SME sector thus strengthening their employment potential and adaptability. 5.6 IMPLEMENTATION OF EMPLOYMENT POLICY 5.6.1 Institutional framework The most important institution of implementing employment policy is the Public Employment Service (PES) operating under the supervision of the Ministry of Employment and Labour. The PES comprises the National Employment Office, the labour centres of Budapest and the 19 counties and the 174 local branch offices, as well as the 9 Regional Labour Development and Training Centres. The Public Employment Service is responsible for surveying the labour market situation, promoting the co-ordination of labour supply and demand in order to improve the employment situation, mitigating regional labour market tensions, promoting employment and reducing unemployment and disbursing unemployment benefits. All these functions imply that servicing, regulatory and financial activities are also pursued. The active and passive measures in the labour market and the operation of the PES are financed from the Labour Market Fund. The Labour Market Fund is generated from the employers and employees contributions and is supervised by the Ministry of Employment and Labour. The utilisation of the Fund is managed by the tripartite Steering Body. Following accession, the Labour Market Fund will be the main source of the domestic co-financing of the ESF supported measures, while the PES will be the most important institution of implementing the European Employment Strategy. 5.6.2 Active policies In 2001, 22 per cent of the unemployed participated in active programmes and financing these programmes represented 55% of all expenses spent on unemployment benefits and services. The most important active labour market tools of the Public Employment Service are the job brokering services, the training programmes, the community work programmes and subsidised employment. Despite the growing importance of active policies, the services provided by the PES reach only certain groups unemployed, constituting a heterogeneous group concerning their skills, qualities and social background. People unable to get a job usually loose touch with the labour organisations once the unemployment benefits expire and therefore their chances of returning to the labour market are further reduced. In addition to a further increase in the number of unemployed participating in active programmes, the effectiveness and quality of these services should be improved. 79

5.6.3 Involvement of social partners The most comprehensive forum of employment policy consultation is the National Council of Interest Reconciliation, in charge of all labour issues. This body provides a forum for economic policy consultation among employers, employees and the government, with special regard to the discussion on the minimum wage and the annual average increase of wages as well as the approval of a joint policy position. In addition to respecting the flexibility of the labour market, the government intends to intensify the social dialogue with partners involved in employment. 5.6.4 Employment prospects Despite the increase in retirement age for women by three years the total number of people in the employment age is only expected to increase by approximately one hundred thousand until 2006. Due to further economic growth the total number of people employed per annum is likely to increase by 1 to 1.5% (equivalent to about 40-60,000 people) and the activity rate will probably increase by 0.6-0.8 %. On the supply side the re-integration of the economically inactive people into the labour market is hoped. On the demand side increases in employment are anticipated through the new jobs created in the wake of economic growth, employment in the black economy turned into real opportunities in proper businesses contributing to the national economy, and by regional development programmes targeting those in disadvantageous positions. Following the economic restructuring and the further increase in the total number of employees in the manufacturing, the service industries, tourism are expected and a moderate decrease in the numbers of employed in the agriculture and public administration can be expected. 5.7 EDUCATION AND VOCATIONAL TRAINING Although the Hungarian education system performs satisfactorily, the education and vocational training system has to continue to modernise and adapt to the challenges resulting from the socio-economic transformation, the technological development and demographic changes to ensure that it reaches and maintains international standards. 80

Key Issues: Insufficient links between education, training and the labour market Weakness of the school system in combating social inequalities and providing equal opportunities Poor conditions of physical infrastructure in education system Gaps in implementing of life long learning can be found 5.7.1 Level of education When considering the population between the age of 25 and 59, the rate of those who completed only primary school (8 grades) has considerably decreased, while the rate of those who have completed secondary or higher education has notably increased: The average education level of the economically active population now approaches the EU average. (see table 5.5) The expansion of higher education is not yet reflected in the qualification structure of the population between the age of 25 and 59. Table 5.5 Changes in the composition of the population between the age of 25 and 59, according to qualification, 1990-1999 (%) Hungary EU-15 Highest level of education completed 1990 1999 2000 8 grades or less 47.6 26.5 36 Vocational school 18.0 30.2 Secondary school 22.3 29.4 43 Higher education 12.1 13.9 21 Total 100.0 100.0 100 Source : Central Statistical Office (KSH) 5.7.2 School attendance The Hungarian education system can be regarded as reasonably well developed. The budgetary expenditure on education constituted 5.2% of the GDP in 2001, which is equivalent to the EU average. In the last decade the secondary and higher-level education expanded 81

dynamically even in international comparison. Compared to the 40% level of attendance a decade before, currently 60% of the secondary school generation attended schools offering G.C.E., corresponding to the international upper secondary level (the EU average: 64%). A further 20% attends vocational schools. The total number of those attending higher education has increased by three and a half times, from 102,000 to 350,000 in the same period. The number of young people between the age of 18 and 24 attending higher education has more than doubled (in the academic year of 2001/2002 the rate of those attended full-time higher education was 19%), however, their participation rate is still lower than the EU average (23%). The most important feature of the changes affecting vocational training in the nineties was the reduction in number of students studying in vocational schools which dropped by half. The number of those enrolled in secondary vocational schools has risen by 40%. Figure 5.1 gives an outline of the Hungarian education system. 82

Figure 5.1 The structure of the Hungarian educational system Munkaerőpiac és továbbképzési programok PHD PROGRAMOK 6 KOR Esti és levelező felsőoktatási tagozatok GIMNÁZIUM FELNŐTTEKN EK F E L NŐ T T O K T A T Á S 23 18 8 osztályos gimnázium 6 osztályos gimnázium. EGYETEM 4 osztályos gimnázium FŐISKOLA ÁLTALÁNOS ISKOLA Óvoda Szakközépiskola AKKREDITÁLT FELSŐFOKÚ SZAKKÉPZÉS Szakközépiskol ák 5-6 osztályai Szakmunkásképző iskola K ö t e l e z ő O k t a t á s 4. 2 1 0 Source: Ministry of Education 83

5.7.3 Adult training During the last decade adult education attendance at primary school level has decreased (2002 the number of people taking part in adult education at this level has dropped below 3,000). The number of participants in adult education of secondary grammar schools level has more than doubled (in 1990/1991 18.820 persons, in 2001/2002 41.207 persons). The number of students in part-time and distance learning education programmes was 129.000 in 2001/2002, five times more than it was a decade before. Despite the increases in student numbers there are still large shortages and mismatch between the demand from the labour market and supply from education and training. The proportion of employed people attending in-company training annually is half of the EU average (8.4%). 5.7.4 Shortcomings and bottlenecks Insufficient links between education, training and the labour market The education system, especially public education, does not respond sufficiently to the requirements of the rapidly changing conditions that characterise the labour market. Particularly in the case in the delivery of learning that relates to employment, and the relevance of the subjects matter. Particularly the teaching of basic skills, communication skills and key competencies, such as ICT and foreign languages are important. These problems have been recently revealed by an OECD survey on comparative international knowledge (PISA). The transition from school to working life still presents problems for many young people, as there is no nation-wide, comprehensive career-guidance that encompassing schools, the national employment services and employers organisations. These problems are reflected in the fact, that the rate of unemployment amongst young people remains high. (10.8% in 2001 in the population between the age of 15-24, and 5.7% in the population between the age of 15-64.) Weakness of the school system in combating social inequalities and providing equal opportunities According to the conclusions of relevant international surveys the Hungarian education system is weak in dealing with the young people with special educational needs, and especially in combating cultural implications of social inequalities. This is particularly valid regarding the education and training of young people of Roma origin. In their teaching special approaches are needed. This is also reflected in the relatively high rate of drop-out from school and the low average school attainment of these young people. The Roma children account for some 10% of pupils at primary level, but less than 10% of all Roma children pass the secondary education certificate, and they represent only 0,2% of the total student population in colleges and universities. 44% of Roma pupils in primary education learn in segregated classes. 84

Currently less than 10% of disabled students or children with special educational needs participate in different forms of inclusive education. Poor conditions of physical infrastructure in education system The physical condition of buildings and their equipment are unsatisfactory and lags behind the EU-average. In many schools sanitary conditions are particularly poor. According to a nationwide survey conducted by the National Public Health Service, 50% of school buildings need to be refurbished, 1% of the buildings are to be demolished, and in 40% of schools sanitary and electrical equipment are obsolete. The ICT equipment in schools is also poor and distribution is uneven. The shortcomings in the physical infrastructure of the higher education are partly due to the fact that the huge expansion of higher education has not been accompanied by the development of their material and technical facilities. The availability of residential student accommodation is especially low and the physical conditions of the existing buildings are poor. Pronounced regional disparities exist, and access to certain levels, types of education and educational services is limited. This is reflected in the poorer performance of school children attending these establishments. Gaps in implementing of lifelong learning can be found Major gaps can be found in the participation of lifelong learning as well as in the development of its supportive institutions and partner s networking. Acquiring the basic skills fundamentally related to the lifelong learning is not yet satisfactory in the basic education. The adult training has its serious problems as well. This can be proved by the fact that the active workers participating in the different forms of training remains low compared to the EU average. Hungary has the lowest grade in the list of those countries expecting to join next. The enterprises have not realised the economic benefits of investing in education and training of their own employees. In order to heal this situation the Act of the Adult Training recently being forced allows that the companies can pay for their own employees training with third of the employer s contribution to the VET (1,5% of the wage costs). There is a low ratio of those having no qualification and take part in the training. The Act contributes to implementing lifelong learning education nevertheless its impact expected to be profound in a long term period. As a part of a comprehensive logic of the lifelong learning, a single system of adult training is to be shaped which will provide a standard quality assurance. 85

6 HEALTHCARE The health of the population in Hungary is one of the poorest in Europe and in the recent decades comparative indicators show that the population s health has deteriorated. Key Issues: The poor health condition of the population limits adversely the size of the active work force as a percentage of overall population and thus has serious economic consequences. The healthcare system is underfunded. Too many patients are treated in hospitals. Outpatient care needs to be developed. The equipment is often insufficient and obsolescent. The development of accessibility of services is necessary. The potential of IT is unexploited. Working conditions in healthcare are poor. Due to the poor health condition of the population, the expected number of healthy years (HALE) is 61.8n. Also the World Health Organisation data in 2001 showed that people could expect to experience health problems for approximately 13.8% of their life. On the basis of these two indicators, Hungary is ranked 57 th and 50 th respectively on the international list. Poor health leads to deterioration in the quality of life and limits labour supply in terms of employability and reliability. This contributes to inefficiency within the economy and hinders competitiveness. The loss of productive economic activity due to the sickness benefit payments, sick-leave, disability and mortality at an economically active age exceeds 4% of the GDP annually. The health conditions and demand for services from the population also places a considerable burden for the healthcare system. The poor conditions compared to European standards are indicated by the low life-expectancy and the high rate of infant mortality. Infant mortality is 8.2% of births and this mortality rate has declined to one fifth of the figure in the sixties, however, it is still almost double of the EU average. The morbidity and mortality of the working age population, especially the in case of the male workers, is a serious concern. These facts put pressure on the health service and have far-reaching consequences on economic competitiveness and the labour market. The early mortality is twice as high as the EU average. In 2000 40% of men in Hungary died before the age of 65 years. An unhealthy lifestyle, deficient health culture, environmental 86

factors and the state of the healthcare system are the main contributory factors to this situation. The aspects of an unhealthy lifestyle that contribute to these conditions are smoking, alcohol consumption, nutritional and eating habits and lack of physical exercise. Half the deaths are caused by cardio-vascular diseases, developed as a result of the selfdestructing lifestyle. One-quarter of the deaths are caused by cancer, which occurs two to three times more frequently than the EU average. The health conditions and survival chances of individuals are closely related to their socio-economic status and income position. These factors contribute to Hungary being amongst the worst nations in relevant international health indicators. In addition, difference in life expectancy between those at the top of the social hierarchy and the Roma population, who are the most socially disadvantaged group in Hungarian society, is about 10 years. The regional differences in mortality generally follow the regional socio-economic disparities. The differences can also be partly linked to the size of settlements and the availability, quality and accessibility of the health care facilities. With regard to several morbidity and mortality indicators, it can be stated that regions Northern Hungary and the Northern Plain are in the worst situation. Beyond that also Southern Transdanubia shows drop back tendency in mortality and life expectancy indicators. In these regions also the number of days off work due to sickness and the number of people, who need rehabilitation is high. In the services problems of accessibility appear. the distribution of both services and modern equipment is unequal. There is no co-operation between the providers. It is reasonable to analyse the services related to the main morbidity and mortality indicators. Especially outpatient care and specialised home care services need to be developed. The outpatient care is unduly concentrated to the regions with medical faculties. In the regions with higher mortality the services and the increase of performance are lower than required. By examining the health and service indicators, the early mortality and number of days off work, the regions need to be developed. The inefficiency within the healthcare system is in part a result of insufficient funding. The real value of the total healthcare expenditure increased at the beginning of the nineties and then decreased by more than 20% between 1994 and 1998. Since then expenditure has been increasing, but still has not exceeded the level of 1994. The total expenditure on healthcare was the 8.3% of the GDP in 1994, and 6,7% of the GDP in 2001 (EU: 8.6%). Its value calculated at purchasing power parity is just 40% of the EU average. The public expenditure decreased from 6.5% to 5.1% of the GDP within the total health expenditure in the last ten years. The share of direct compensation for sickness of the population doubled in the same period, and already exceeded 23% of the total health expenditure in 2001. Serious workforce shortage of about 30-40% exists in nursing and ancillary staff in the health service due to recruitment difficulties, poor work conditions and low pay. These factors affect the quality of medical services. There are 362 doctors per 100.000 inhabitants. This is close to the EU average, but their specialisation and regional distribution is unbalanced. Amongst the OECD countries, Hungary has the highest rate of specialists (286/100,000 inhabitants) and the lowest rate of nurses. The government intends to improve the situation and as a first step increased wages in the healthcare sector by an average of 50%. The unfavourable service structure and the problems of the former performance financing result in the fact that in the majority of cases, patients are treated at unreasonably high cost levels in hospitals. This led to misuse of high quality specialised services, which increased the 87

problems in the distribution of resources between the levels of the health care services and the regional inequalities regarding accessibility. As a result of the ineffective working practices too many outpatients are treated in hospitals. The primary care services on occasions refer patients unnecessarily to hospitals, which leads to misuse of the some high-quality and specialist services, increases pressure and restricts services for those in real need. Specialist services and supply networks that would assist the integration of socially disadvantaged people into the community are underdeveloped or absent. Table 6.1 Main indices of healthcare provision per region Regions Total number of patients per general practitioner Total number of specialist s working hours in outpatient care per 1000 patients Total number of active hospital beds per 10 thousand patients Total number of doctors per 10 thousand patients 1995 2001 1995 2001 1995 2001 1995 2001 Central Hungary 2046 1939 1883 2121 112.4 94.5 46.2 50.9 Central Transdanubia 2116 2041 892 1223 79.3 70.1 25.8 24.9 West Transdanubia 1952 1955 1001 1295 91.1 79.5 29.4 31.1 South Transdanubia 1850 1826 1183 1541 86.7 75.2 32.0 35.7 North Hungary 2060 2026 884 1262 81.6 73.1 25.8 24.4 North Plain 2135 2096 1021 1302 74.8 74.3 28.2 27.7 South Plain 2072 2008 1228 1531 83.0 71.9 31.6 31.7 Country 2040 1982 1276 1569 90.7 79.6 33.7 36.2 Source: Central Statistical Office (KSH) Lack of equipment and obsolete equipment often prevents the provision of high quality services and treatment. Investments have also been lagging behind demand, resulting in the deterioration of the buildings. The provision of modern diagnostic and therapeutic equipment has improved in Hungary and the gap between the Europe average has narrowed since 1990, but the regional distribution of equipment remains unbalanced. The health sector IT capacity is limited and there is no integrated healthcare IT system. Only 23% of the inpatient treatment institutions have an integrated IT system, while only 10% of the outpatient treatment institutions have such facilities. The current situation prevents improvements in the efficiency of treatment, inter-institutional communication and control. Primary care has been developed and the privatisation of general practitioner zones is essentially finished. However, the operational conditions are deficient and hinder the provision of good primary care and the provision of an effective gatekeeping role for the 88

healthcare service. Sixty seven general practitioners are available for the treatment of 100.000 inhabitants, which meets the EC average. The patient turnover in specialised care for outpatients has increased remarkably (the EU average was exceeded by 88% in 1996). The total number of hospital beds available has decreased by 22% in 10 years. Currently, there are 832 beds available for 100.000 inhabitants, which is still high compared to the EU average. The total number of inpatient admissions is also 30% higher than the EU average. Within these figures there is a structural problem on the distribution of active beds, (i.e. 576 beds/100.000 inhabitants), which is high but the total number of chronic beds is low (i.e. 256beds/100.000 inhabitants). Through significant increases in expenditure, amounting to 0.6-0.8% of the GDP in the past two years, the consolidation process of the healthcare system has been launched. The long term consolidation programme is under preparation, aims to modernise the hospital and primary healthcare services, settle the income conditions of healthcare employees, eliminate existing structural disparities and promote self-care. Consequently, the next ten years will be a period of re-alignment and narrowing of the gap between Hungary and Western-Europe, both in terms of health conditions and the healthcare system. This will result favourably on the well-being of the population, improve employability and economic growth. 89

7 SOCIAL INCLUSION 7.1 INCOME, SOCIAL EXCLUSION The socio-economic transformation in the nineties imposed a heavy burden on society but the risks of poverty and loss of security which accompanied the transition cumulatively appeared in some disadvantaged, vulnerable groups. The Roma, the unemployed people, those with little qualifications, unskilled, the disabled, people in poor health, addicts, the 260.000 registered children at risk, single parents making up 10% of the families, the homeless, those living in poor housing conditions and disadvantaged settlements are amongst these groups. The key feature of these groups is that they are excluded from society and they are in a marginal position in the labour market, in a broad sense the exclusion implies insecurity, uncertainty of income-earning capacity, scarcity of opportunities for social participation, limited support systems, i.e. low social chances in life. The gap between the uppermost and the lowest income decile widened until 1997, and since then it has stabilised at a level of approximately 7.5-8 times, corresponding to the Community average. Similarly, other indicators of income inequalities are also converging to the EU average. The income of the richest 20% of the population in 2001 was 4.7 times higher than (EU: 5.2) that of the poorest 20%, and the 33% value of the Gini-coefficient is near to the EU average of 31%. Figure 7.1 Development of characteristics of households, 1992-2001 90 80 70 60 50 40 30 20 10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Rate of households having market income Rate of households living above the median income Rate of households getting grants Rate of households having unemployed person Rate of households without employed person Source: TÁRKI Institute, 2001 The income structure of households was considerably transformed during the nineties. With the increase in unemployment and inactivity, households acquiring income in the labour market has decreased and that of those having share in welfare benefits increased. 90

The disparities between per capita income is large, also at regional level. In Central Hungary the per capita gross income exceeds that of North Great Plain, the most disadvantaged region, by 36%. The poor proportion increased until 1998, but has slightly diminished since then. In 2000, 15.2% of the population had an income smaller than 60% of the median value of per capita net income in contrast to the EU, where 18% of the population is living below the threshold of poverty. According to a different approach, however, poverty is considerably larger than that; about a quarter of the population live on an (monthly) income below the so-called social minimum (HUF 25,600 per person in 2000). The risk of social exclusion and the increase of poverty manifest themselves, to a greater extent, in less developed regions. The micro-regions of small villages with cumulative socioeconomic disadvantages, the slum quarters of cities and the disadvantaged settlements that provide no employment opportunities for their populations. The NDP stresses the promotion of the Roma minority, which is the far most disadvantaged group in Hungary (see the section below). The situation of disabled people is discussed in the section 4. Employment and Human Resources Development, the actions related to disabled person is described in the relevant operational programmes. 7.2 SITUATION OF THE ROMA MINORITY Key issues: Low level of education and the lack of modern work based skills and business knowledge Poor health and living conditions Geographically concentrated, especially in the regions where heavy and obsolete industrial production is situated High unemployment rate and social exclusion Strong negative discrimination especially in rural areas The Roma is the largest ethnic minority in Hungary and Hungary has the fourth largest Roma community in Europe. The Hungarian Roma population is estimated to be approximately 500,000-600,000. The proportion of the Roma minority is growing within the population of Hungary. Considering their social conditions and their socio-economical situation, the Roma people are the most disadvantaged group in Hungarian society. The substantiation of this statement is made difficult by the fact that data on ethnic minorities can only be gathered on a voluntary basis. As a result, experts rely on estimations from academic research The low educational level of the Roma minority is represented by the fact that only 77% of Roma children complete primary education. Only 50% of the Roma students who complete their studies at primary education continue their education beyond that level. The numbers that enter higher education are still very low (0.2% compared with 13.9% of the population as 91

a whole in 1999). The integration inclusion of Roma people into the education system, the labour market and society generally fails them from childhood through into adulthood. The education system must be the starting point for root and branch reform and changes and it needs to inspire the Roma children to achieve their full potential and overcome disadvantage. Parental support and acceptance for such change will also be vital as well as teacher support and acceptance so that Roma children are not automatically streamed into the low performers classes. Most of the Roma people live in disadvantaged settlements, typically in villages where living conditions are extremely poor and incomes are low. Integrated community support is necessary to provide the basic infrastructure for the Roma families. In many cases families are wholly dependant on state benefits and experience permanent poverty. The health conditions of the Roma minority is far below the level of the majority of the society. Despite the recent improvement the life expectancy is about 9-10 years less than the Hungarian average. The regional distribution of the Hungarian Roma population is concentrated in the less developed areas and areas of high unemployment, such as North Hungary, Northern Plain, and Southern Transdanubia. Furthermore the Roma live in the regions where the former heavy industry was predominant and is now largely obsolete and employment structure has had to change. The unskilled Roma people are the least able to manage change and have been the first people to become unemployed. This change started to affect their communities in the early 1990 s. Many Roma people have had to earn a living from odd jobs and have fallen out of the labour market and paid employment. As a result the Roma population suffers high level unemployment. Following the change of regime, more than half of the previously employed Roma people of working age lost their jobs. Therefore all unemployment indicators for the Roma population are considerably worse than those for the majority of society. For the uneducated and unskilled Roma people the formal labour market hardly offers employment of any sort. The rate of employment is half of the non-roma population, while the rate of unemployment is 3-5 times larger compared to the majority of the society as a whole. The number of dependants per salary earner is three times larger than the non-roma people. The Roma population suffers discrimination in the labour market. The experience of recent years shows that the great majority of society neglects the problems of Roma population, and is not interested in improving their situation. Strong discrimination against Roma can be identified in the field of education and the labour market. Due to the discriminatory practices the majority of the Roma minority are excluded from the society. Awareness raising and educational campaigns must be an integrated part of a long-term strategy for social integration of the Roma. The Office for National and Ethnic Minorities (ONEM) was responsible for Roma issues until 2002 when a State Secretariat was established within the Prime Minister s Office. It was given overall responsibility for the integration of the Roma population into society. The policy to promote social integration of the Roma people and to improve their living conditions, social status and legal security has led to changes in the legal provisions. However the rights of ethnic minorities including the Roma, although guaranteed by law and guarded by the Parliamentary Commissioner for the Rights of National and Ethnic Minorities still need significant efforts to bring about real and lasting change. 92

The Roma have cultural autonomy, a dynamically developing system of minority selfgovernment unparalleled in Europe and a widespread network of civil organisations and foundations. There are approximately 3.000 Roma representatives working in 753 Roma minority municipalities. Anti-Roma prejudices are dealt with under local legal systems within communities, the Anti-Discrimination Interdepartmental Committee was set up in 2001, as well as the nation-wide Anti-Discrimination Roma Reception Network. The measures taken according to the medium-term programme launched in 1997 and renewed in 1999, aimed at lessening the social exclusion of the Roma, improving their living conditions, and enhancing their collective identity and culture. These should be regarded the first steps in a deliberate, systematic and consistent long-term strategy to be implemented over time to achieve social integration of the Roma people. Note: the collection of accurate statistical data related specifically to the Roma population is difficult as the collection is voluntary under the Hungarian constitution. 93

8 EQUALITY OF OPPORTUNITY Equality of opportunity for men and women is a major issue that affects the development of the economy and society in general both in Hungary and in the European Union. Hungarian legislation is in harmony with the European practice and the Hungarian Constitution prohibits discrimination on the basis of race, ethnicity, gender, language, religion, political and other opinion, national or social origin, property ownership and place of birth. However, despite the existence of the equal opportunities legislation, equality of opportunity has not been achieved. Further work needs to be carried out to implement policies, introduce effective changes and implement the legislation. The introduction of positive action policies have not achieved major advances so far. Key Issues: Horizontal and vertical segregation of women on the labour market Insufficient family-friendly policies Disadvantageous employment practices and low wage earning capacity Lack of or insufficient competitive skills required by the labour market Ineffective gender mainstreaming policies The disadvantageous situation of women compared to men and this is particularly evident in the field of law enforcement, entering the labour market and in the world of work. Women are further disadvantaged through the unequal distribution of the household and family duties (unpaid work). There is a growing inactivity among women which also endangers their short and long-term social position and ability to take advantage of opportunities. This prevails despite Labour law provides women with basic rights during the last four weeks of pregnancy and after child birth. Those women who take the responsibility for bringing up children and taking care of elderly usually live in villages or small towns, and/or belong to a socially disadvantaged group (e.g. the disabled, the Roma). Therefore these groups face additional difficulties. To eliminate or at least to mitigate inequality between genders a well-elaborated strategy and a well co-ordinated group of measures and actions are needed. Horizontal segregation occurs when women and men work in different sectors or they do different jobs even if they work in the same sector. Whereas women dominate in the provision of services, education, and social- and healthcare, men predominate in the productive sector and technology based occupations. In the table below, individual occupations have been 94

grouped into segregated and non-segregated categories in order to demonstrate how the labour market is affected by segregation (table 8.1). 8.1 Occupational segregation*, 1999 Occupations with Percentage distribution of Individual occupations Female employed 90-100% women, 0-10% men 11 35,7 60-90% women, 10-40% men 19 34,2 40-60% women, 40-60% men 16 17,2 10-40% women, 60-90% men 27 11,7 0-10% women, 90-100% men 27 1,2 Total 100 100,0 In numbers 617 1726700 * Percentage distribution of individual occupations and employed women who work within totally segregated, heavily segregated and not segregated occupations Source: Calculations based on CSO LFS data Vertical segregation means that the lower a position is in the jobs hierarchy the more women are employed and vice-versa. Despite the fact that the educational attainment of women is higher than that of men, women s employment structure remains less favourable. Almost all administrative positions are filled by women and they are also over-represented in jobs not requiring any vocational training. On the other hand only one third of managerial positions are filled by women. Their share among the entrepreneurs is even lower: 30,9%. Insufficient family-friendly policies prevent women - and in certain cases men - from achieving a balance between their job and family care duties. After the political and economic transition an effort has been made to help women remain at home longer with their children. The trend has been that women themselves see maternity leave as the only option and way to avoid the double burden of family responsibilities and work. Unfortunately, men do not generally take an active role in domestic tasks and this is a further barrier for women to restore or obtain economic and professional equality. In the 90s, the provision of nurseries declined. In 2003 only 10 per cent of children below 3 years are cared for in nurseries (between the age of 1-3). The number of kindergartens (between the age of 3-6) is adequate (coverage 87%), but they are often only open for the same hours as the normal working time and their long summer holidays often leave the families with no child-care facilities during these periods. Part-time work amongst women accounts for only 5-6% of employment in Hungary. Other flexible working arrangements (e.g.: work from home, job sharing) are rare and therefore do not allow for the reconciliation of work and family life. 95

Women generally have better formal education than men but still lack the qualifications which enable them to compete equally in the labour market, particularly in the non traditional sectors and occupations. The skills in greatest demand are foreign languages, management, computer and technology based skills. By providing training in these areas and preparing women for jobs in the new economy will promote their opportunity for employment and overcome segregation. In addition the provision of entrepreneurial skills such as marketing, budgeting, accounting and business planning will prepare women to establish their own business. There is also an education gap between the generations. To solve this problem, the concept of life long learning needs to be developed and embedded for those in employment and those seeking or returning to the labour market. A programme for education of adults of all ages should also be created focusing particularly on older women, who, above 40 are especially in a disadvantaged position on the labour market. In 1997, the (monthly) level of existence was HUF 23000 for men and HUF 17000 for women. Although the latter was the same as the official minimum wage, the difference in approach put unemployed women returning to the labour market at more disadvantage than men. The representation of the interest of women is generally weaker, therefore the promotion of gender equality is a key issue to decrease the differences in the level of existence. In many of female dominated occupations women have less opportunity to obtain better salaries, premium jobs, shift working and the opportunity to earn additional money than in the male dominated occupations. Such structural issues result in further disadvantage for women within the labour market. In spite of higher educational qualifications, women s average gross earnings are lower by 19,5% (EU: 28%), net earnings by 16% and in comparable occupations women are paid on average 13% less, than those of their male counterparts. In addition to the inequality of opportunities in the labour market demonstrated by statistical evidence, indirect discrimination is experienced in the cases of certain groups of women. This discrimination happens primarily in the case of mothers with small children who wish to return to work following an absence because of childcare or other reasons. The principle of gender mainstreaming, or positive action to achieve improvement in the position of women in the labour market has not appeared so far in the statistics. Further development and evaluation of policy processes is required, so that a gender equality is incorporated into all policies, at all levels and stages. All policy-making need to be engaged to embed the principles of equality of opportunity for all in Hungary. The Office for Gender Equality within the Directorate-General for Equal Opportunities of the Ministry of Employment and Labour is responsible for the policy that formulates, enforces and implements equal opportunities for women and men. Its activities are supplemented by the Council for Women s Issues, a consultative body formed from representatives of all the Ministries and the Prime Minister s Office, NGOs and gender experts. There are currently ongoing activities to formulate a new Action Plan to implement Equality of Opportunities policies, which will involve all the key partners and seek to strengthen gender mainstreaming. 96

9 AGRICULTURE AND RURAL DEVELOPMENT 9.1 INTRODUCTION 9.1.1 Role of Agriculture and Food Processing Industry in the National Economy The weight of the agricultural sector within the national economy has been decreasing in Hungary, similarly to the situation in developed countries. Along with the drop in the ratio of the sector within the national economy the inputs and performances have also decreased in absolute terms. Despite that Hungarian agriculture contributes twice as much to the GDP as the EU average and its share in export is by some 22% higher. The rate of employment is by 34% higher than the EU average. The significance of Hungarian agriculture comes primarily from the favourable climate, the availability of the natural endowments and production traditions. Agriculture plays a key role in preserving rural values, in the sustainable development of rural areas, in shaping the rural society and also in reducing social problems and regional differences. During the last ten years the performance indicators of agriculture dropped substantially due to the ownership and organisational changes. The significant reduction in domestic food consumption and the loss of the traditional Eastern markets contributed to the changes. The contribution of the sector to the GDP between 1990 and 2000 dropped to less than one third, while almost two-third of its labour force has left the sector (table 9.1). Table 9.1 Role of agriculture in the national economy, % 1995 2000 Hungary EU-15 Hungary EU-15 Contribution to the GDP 6.8 2.2 3.7 1.7 Share in employment 8.0 5.5 6.5 4.3 Share in export* 20.3 6.8 6.9 6.2 *with foodstuffs, drinks and tobacco Source: Central Statistical Office (KSH), EUROSTAT 9.1.2 Natural endowments The conditions of agricultural production are favourable in general, but there are significant differences among the various geographic regions concerning the suitability of the terrain, the 97

physical characteristics of soil, the natural fertility and water management of the soils, and climatic features. The utilisation of land and the production structure have only been partly adjusted to the natural features of the lands since the change in ownership structure. Because of the decrease in the number of ruminant animals the yield of almost half of the grassland is wasted. Natural features make the production of special, and specific products possible in several agricultural regions. Extensive farming is dominant in environmentally sensitive areas with low productivity. Due to the favourable climatic, soil and terrain conditions, in most agricultural products the level of self-sufficiency (ratio of domestic production and consumption) is 120-130 %. Compared to the EU average the share of agricultural and arable land is higher, while the share of forests and grassland is significantly lower. Land supply (agricultural area per one agricultural employee) which is 23,3%, and is higher than the EU average (19,3%), despite the comparatively high ratio of the people employed in agriculture. The environmental burden in agricultural production is comparatively low, mainly because of the low level of the use of chemicals. There are several risk factors in this respect (the protection of soil, water and flora/fauna). However, it should be noted that 10-12% of Hungary s territory are nature conservation areas and are practically untouched by farming. In 2001 a National Agri-Environmental Programme was launched that gives significant state subsidy to these purposes in conformity with the principles and regulations of the EU. 9.1.3 Production structure In 2002 crop cultivation contributed 51.4% to the value of agricultural production and the share of animal husbandry was 48.6%. The volume of output dropped by some 30% between 1990 and 2000. There was no significant change in the share of crops; some 60% of the crops grown on arable land are cereals. Sugar beet and sunflower are the key industrial crops. The land used to grow fodder dropped because of the decrease in the size of animal stock. The key sectors of animal husbandry are cattle, pig and poultry farming. During the last decade the size of animal stock dropped significantly in all sectors. The animal density (the number of animals per 100 ha of agricultural land) is much lower than the EU average, especially in the case of cattle (13.9 heads, EU:60.4 heads) and sheep (15.5 heads, EU:71.9 heads). Plantations (orchards, vineyards) are especially important from the aspects of rural employment. The features are favourable, yet, despite the intensive programme for the establishment of plantations, they remain low in number. According to a survey made in 2001 we have 97.5 thousand hectares of orchards and 91 hectares of vineyards. The composition of the types and varieties of fruits produced on the orchards is obsolete (half of the volume of fruit produced in Hungary is apple) and 50% of the size of the orchards is less than 10 hectares. Grape production is primarily targeted on wine production and we have traditions in the production of high quality, branded wines provided for the export markets. Hungary has the necessary expertise to expand this production into 98

mass production. The composition of the vineyards from the aspects of age and variety has to be improved. The vineyards are small, 73% of them are smaller than 10 hectares. 9.2 THE MAIN CHALLENGES OF AGRICULTURE, FOOD-PROCESSING AND RURAL DEVELOPMENT In agriculture, food-processing and rural development we identified the key issues, which require earliest possible intervention, and reflecting also the directions of development. These can be summed up as follows: Key issues: Low level of investments due to lack of capital endangers competitiveness. Land ownership and the use of land have been separated and the lease contracts are typically of short term. The operation structure is bipolar. The age composition of agricultural population is most unfavourable. The qualification standard of private farmers is inadequate, consulting system is not properly established. Sales co-operatives, co-operation in production are missing in agriculture and in food processing. Small and medium sized companies engaged in processing agricultural products suffer from capital shortage needed to meet EU standards in the areas of product quality, food safety and environmental protection. Unexploited possibilities in timber processing and forest management. The number of forest management associations continues to be low. The competitiveness of the fishing industry is hindered by the obsolete, outdated fishponds and the inadequate standard of fish processing. Rural areas are at a disadvantage compared to urban regions with respect to demographic processes and employment possibilities. The standard of rural production and demographic infrastructure is low, the standard of services are detrimental for the rural population and deteriorate the capability of the rural areas to attract capital, and make diversification also more difficult. 9.2.1 Investments, the technical- technological conditions of production The excessive capital shortage of agriculture has in recent decades led to a drastic drop in investments, wear and tear of production capacities and as a consequence competitiveness has been gradually decreasing. As a result of the changes in ownership and in organisational structure, conformity between the forms of management and production capacities (machines, buildings, irrigation facilities, plantations) has collapsed. 99

Along with the operation of the obsolete production capacities, Hungarian agriculture which has been suffering from the significant capital shortage had to provide for the technicaltechnological basis of a farming structure which was much different from the former system. The difficulty of the process can be also seen from the fact that the share of agricultural investments dropped to 3.3% in 2000 from the 8.7% typical of the early 1990s. The renewal of the technical-technological system have not taken place and the income earning capacity of production has been low on the long term, there are very few sectors the income of which would permit the modernisation of technology (table 9.2). Table 9.2. Technical-, technological investments, 1990-2001 Item 1990 1994 1995 1996 1997 1998 1999 2000 2001 Total investment 100.0 37.7 36.7 40.4 47.0 56.0 55.6 48.6 51.1 of which construction 100.0 25.0 27.2 30.3 37.9 46.2 41.6 37.8. Machines 100.0 42.0 46.2 50.0 56.9 67.3 58.0 47.4 46.7 Others 100.0 82.5 35.6 42.7 41.6 46.9 118.0 113.4. Source: Central Statistical Office Almost half of production capacities are left idle in animal husbandry because of the reorganisation and the drop in the number of animals. The idle machinery has deteriorated and the majority cannot be used in the new farm structure. Depending on the types of the buildings the average age of the buildings is 20-30-year and the ratio of the new buildings erected for animal husbandry is only 2-5%. Therefore animal farms must be modernised and the modernisation of the animal hygiene systems and that of the animal protection (housing) requirements require further measures and funds. The age and type composition and the system of planting of the plantations are unfavourable. These require modernisation in order to improve competitiveness, to enable producers to bring the delicious Hungarian fruits onto the international markets. Because of the obsolete stock of equipment and the low level of inputs the yields in agriculture are low and fluctuating despite the otherwise favourable features. The rate of return on equity in most sectors is below 5% on the long term. Recurring draughts leads to an increased use of irrigation. However the irrigation facilities are available only for 4% of the agricultural area. A similar tendency can be observed also in the area of agro-technical inputs. In 2000 60.6 kg fertiliser was used per one hectare of agricultural land and that represented only 58.4 % of the amount used in 1990 and the same index in 2001 was also only 64.4 kg/ha. The use of good quality biological basis (seed, propagating material, breeding stock) is insufficient. The use of materials with high biological value is hindered mainly by capital shortage, and to a lesser extent (mostly on the private farms) by lack of expertise. 9.2.2 Land ownership and the characteristic features of land use As a consequence of the change in the ownership structure 86-88% of arable land is now privately owned. Land ownership has become however even more separated from the use of 100

land. The larger part (59.5%) of the arable land is used by almost 8,400 economic organisations as leasehold, while private farms operate on 40.5% of the land (table 9.3). Too small units of production is a general feature, and it is especially typical of the private farms. Among private farms, the production structure is dual. There are a few modern, large and medium size private farms with appropriate capital, and these coexist with a large number of very small production units without proper capital and equipment. Table 9.3 Land ownership by farm size Farm size Farms number distribution % land area Average farm size, ha Private farms hectare distribution % Below 10 ha 908595 94.8 890590 34.1 0.9 10-50 ha 42846 4.5 916730 35.1 21.4 50-100 ha 4601 0.5 324920 12.4 70.6 100-300 ha 2205 0.2 360209 13.8 163.4 Above 300 ha 287 0.03 121551 4.6 423.5 Total 958534 100.0 2614000 100.0 2.7 Economic organisations Below 10 ha 1065 12.7 3067 0.1 2.9 10-50 ha 1771 21.1 40640 1.0 23.0 50-100 ha 809 9.7 45625 1.2 56.4 100-300 ha 1635 19.5 232724 6.1 142.3 above 300 ha 3102 37.0 3511944 91.6 1132.2 Total 8382 100.0 3834000 100.0 457.4 Source: General Agricultural Census, 2000 Regional Data, Central Statistical Office, 2000 The number of private plots the size of which reached the requirements of farms 5 was 958.5 thousand in 2000, 60.4% of these farms only produced agricultural products for their own consumption. The ratio of farms specifically producing for the market is 8% (76.7 thousand farms). In 2000 there were more than 8.5 thousand economic organisations (most of them share companies or limited liability companies, with a smaller number of co-operatives) operating in agriculture. 91.6% of them operated on over 300 hectares of land and on 1,132 hectares on the average. Compared to the EU it is an unfavourable fact that in Hungary the farms with less than 10 hectares have greater share in land use than in the EU. On the other hand it is 5 In accordance with the General Agricultural Census conducted in 2000 households are considered farms which have a production land of more than 1,500 m2, at least 500 m2 plantation and animal stock of at least one animal unit. 101

favourable, that in Hungary the share of farms of over 50 hectares have a higher share in Hungary than in the EU (71.3%, as against 61.4% in the EU). The legal successors of the earlier large-scale farms are essentially leasing organisations, but private farms also lease significant amount of land. Some 60% of the land used for agricultural purposes is leased, and those lease contracts are typically of short term (3-5 years on the average), which is a real danger for the rationalisation of land use. 9.2.3 The composition of the agricultural population from the aspects of age The size of the agricultural population was 693 thousand in 1990 and that number dropped to 251.7 thousand by 2000. The reduction of the role of agriculture in providing jobs continued in 2002 as well; in the first quarter of last year only 232.2 thousand people worked in agriculture. Another 1.9 million people are also engaged in agriculture but not in full-time job. A very high percentage of such people approximately 40%- are pensioners. The presence of the younger generations in agriculture is 10% points lower than the average of other sectors. Older workers are overrepresented by 8-9%. Concerning the age composition of the labour force within families, the share of those below the age of 30 - the source of labour for the future - is only 5%. Almost half of the people working on private farms are above the age of 50 (table 9.4). The early retirement schemes of full-time agricultural workers and support for young farmers is a key issue to the improvement of age structure and to the strengthening of agricultural production. A favourable sign is that the average age of the family members working on the private farms is more favourable than the average age of the farm managers (55-year). The economic objective also modifies the age structure of those participating in production. 102

Table 9.4 Composition of the agricultural population by age Item Employees 1) Family labour 2) number of persons composition % Number of persons composition. % Age between 14-29 36849 17.9 93396 4.7 Age between 30-39 47412 23.1 529007 26.7 Age between 40-49 69843 34.1 409697 20.7 Age between 50-X 51164 24.9 950579 47.9 Total 205268 100.0 1982679 100.0 1) in 2001 2) in 2000 Source: The utilisation of labour by the private farms 2000, KSH Budapest, 2001 Census 2001 2. Detailed data on the basis of representative sample, KSH, 2001 9.2.4 The composition of the agricultural population from the aspect of qualification The average standard of vocational training is good, although it is yet not fully adapted to the changed farming conditions. In 2001 7.7% of the people working in agriculture were university/college graduates, 58.2% completed secondary education. 27.9% of the private farmers do not have any agricultural qualification, and only 1.9% of them graduated at agricultural university or college. A basic requirement for competitive production is to raise the qualification standard of agricultural producers and to improve the standard of professional consulting. Professional training and retraining is of major importance for all the farmers who want to adjust their production to the market conditions. Table 9.5. Composition of agricultural population by qualification Item Farm employees 1) Family labour 2) number of persons composition. % Number of persons composition. % Primary school or less 69885 34.1 1084586 54.7 Secondary school 119539 58.2 773570 39.0 University/college 15844 7.7 124523 6.3 Total 205268 100.0 1982679 100.0 1) In 2001, 2) In 2000 Source: The utilisation of labour by the private farms 2000, KSH Budapest 2001 Census 2001 2. Detailed data on the basis of representative sample, KSH, 2001. The labour force of the private farms engaged in primary production is better trained than the average. Almost 50 percent of the 165 thousand people working there have finished secondary 103

school, but it is certainly a bottleneck that only 8% of them completed vocational agricultural secondary school. Less than 5% of them are graduates from some agricultural college/university (table 9.5). Private farmers have limited knowledge in issues related to the European Union market such as production regulations, the subsidy system, the quality related requirements of the products, the standards for housing animals, environmental requirements - but their knowledge on farm management, production analysis, product marketing is also insufficient. 9.2.5 Co-operatives, integrating associations Due to compensation, the change in the farming structure, privatisation, the bankruptcy of large farming units after the transformation of the system, the average size of farms dropped drastically and the efforts of large farms to integrate smaller ones into larger units slowed down. Therefore it has become important to strengthen co-operation among private farms (to form co-operatives, organisations arranging for sale and purchase), to increase the size of farms and significantly rise the number of economically viable farming units. The conditions for growing vegetables are generally good. Hungary has traditional vegetable producing areas especially in the regions of the Great Hungarian Plain. For the profitability of the sector it is of key importance that private farms produce most of the vegetables and are organised into production organisations. A good reconstruction programme, the integration of the farmers who are still producing in insular way and technological development could make grape (wine) and fruit production increasingly competitive. 9.2.6 Product quality, food safety Over the recent period, food processing has developed unevenly. The general position of the industry has improved due to the reorganisation and modernisation of the privatised companies of certain branches (such as the mineral water and soft drinks, sweets, plant oil, breweries, spirits, tobacco). These companies, employing more than 250 persons, are close to the EU level or are at the same level in terms of technical development, compliance with the requirements, quality development and operating indicators. In other industries, mainly in those which are directly connected to agricultural production, the structural changes have not taken place yet. This has an adverse impact on the competitiveness of the given sectors. In addition, especially in the case of Hungarian-owned small and medium-sized enterprises producing for regional needs, the development of the plants, the compliance with the fundamental requirements of food safety, hygiene, environmental protection and animal welfare are hindered by the lack of capital. Non-compliance with the rules makes the operation of a significant part of the production vulnerable. It is realistic to assume that many of these enterprises will be phased out unless they modernise. These industries perform the primary processing of the products of agriculture and fishery (agri-food sector), in which the most important items are meat, fish, poultry, egg, milk, vegetable and fruit, but wine production also plays an important role. 104

9.2.7 The characteristic features of silviculture 19% of Hungary s land is used for forestry, which is low compared to Europe and due to ecological reasons the variety of trees also differ. The stock of live trees and their saplings and timber production per hectare of forest surpass the EU average. In the European Union 60% of the forests are managed according to the forestry plan, while in Hungary that applies to all the forest area. The ratio of state owned forests in Hungary is 59%, compared to 21% in the European Union. After the transformation of the system, mostly as a consequence of compensation, some 700 thousand hectares of forests lands is in private ownership. Due to new forestation programmes the area of privately owned forests increased to 755 thousand hectares. The number of private forest owners on the operational part of the forested area is close to 250 thousand, reflecting how small the private forest areas are. The ratio of forested areas operated under joint management is 82%. Actual timber production is only some 80% of the felling possibilities and that means that we have a significant volume of renewable raw material or source of energy left unutilised. Land owners seem to be increasingly interested in forestation primarily on lands which are less suitable for agricultural production. Hungary has to help small forest owners to organise themselves into forest farming and utilisation organisations. An alternative way of utilisation of the forests is to do it for the purpose of energy and that is also among the priorities of the European Union. The extension of primary timber processing capacities is justified by the increasing timber production possibility arising from the growth in forestation. 9.2.8 The main challenges in the fishery sector In Hungary registered fishing in natural waters is being conducted on a water surface of some 131 thousand hectares. The area of operating fishponds is 23 thousand hectares out of a total of 25 thousand hectares. The overwhelming majority of the fishponds had been established for some time and need modernisation. In 2001 the total volume of fish production for food was 19 thousand tons- including the volume of fish caught in natural waters- of which 13 thousand tons were supplied by the fish farms. 75% of the fish supplied by the fish ponds and fish farms come from small producers. Hardly 20% of the fish produced for food is processed. The processing plants are obsolete, incapable of meeting quality requirements and the quality of the products they manufacture fluctuates. 9.3 SITUATION OF FOOD PROCESSING With an annual production value of over HUF 1,800 billion in 2001, the food processing industry accounted for 3.0% of the GDP. The food processing industry processed and made marketable the 75% of the agricultural products and basic materials and thus it is the most important economic partner of the agricultural industry. The foreign trade balance of the 105

industry has been positive for a long time, but the ratio of export could be further increased by technical-technological development and by improved marketing. The number of food processing companies has been growing fast during the last decade. 95% of the some 8,400 companies employ less than 50 persons and thus are considered micro or small businesses. The overwhelming majority of the processing capacities operate in rural areas. The number of people employed in the food processing industry dropped by 35% in the period of 1990-2000. In 2001 123 thousand people were employed in the industry. The ratio of people employed in the food processing industry is around 3-4%. The reduction of the staff of the food processing industry was due to the change in the company and ownership structure, to the loss of market, on the drop in the volume of output in general and the rationalisation of the industry. During the 1990s the dynamic increase of investments into the food processing industry came mostly from the foreign investors renewing technique and technology in the industry. In certain sectors with perspective which could be considered as being of strategic importance (meat, dairy, poultry, milling, feed industries, fruit and vegetable processing, wine production) the influx of foreign capital was previously slow because of the difficulties of transformation and domestic capital investment was also very limited. The development of small and medium sized companies working for regional supply is hindered by capital shortage and by the partial or full absence of conditions required by the Union for food production from the aspects of food safety, environmental protection and animal protection. Such deficits may put even the future of the companies, businesses at risk. Restructuring and production modernisation investments are needed for the primary processors of agricultural products. Especially the companies processing and distributing traditionally large volume of agricultural raw materials need to be developed. The focus in the development programmes of the sector will include food safety, hygiene, environmental considerations and the need to improve international competitiveness. 9.4 PRESENT SITUATION OF RURAL AREAS Over 95% of Hungary s territory is considered as rural area; that is the home of 73.5% of the population. The ratio of the basically rural areas is 62%, and that is where 33.5% of the population lives. That ratio is 3.5-times higher than the EU s average (9.7%). 36.5% of the population lives in villages and over one fifth of them in villages with less than 1,000 inhabitants each. 59% of the Hungarian villages belongs to that category. The living environment of the countryside - although at risk in several aspects - is basically healthy, suited for the purposes of recreation, vacationing also. The civil organisations enjoy the state of renewal and the public areas, community facilities in rural areas, especially the rehabilitation of the villages representing historic values, increase the attractiveness of settlements and strengthen the feeling of belonging of the rural population. The colour locale 106

and the protection of natural resources, the rehabilitation of the damaged natural environment are also increasing the value of rural areas. The services supporting farmers and the rural population in general are as yet underdeveloped. Energy supply and telecommunication facilities generally meet requirements but other elements of infrastructure are as yet not properly developed and their standard varies from one type of settlement to the other. In the villages 30.6% lack certain public utilities and that is by 60% worth than the national average (18.4%). From the aspects of all indicators the small settlements (typical of North Hungary and the South Transdanubia regions) are in the most unfavourable position. Their supply (public utilities, services, infrastructure) is generally behind even the supply of larger villages and transport, access possibilities are especially poor. Agriculture related infrastructure (the sites of private farmers, roads on the farms, water supply and rainwater drainage facilities, modern manure deposit) require significant development. The demographic conditions of rural areas in Hungary are less favourable than those of the urbanised regions. The birth rate is decreasing, the age structure of the population is unfavourable and ageing, the inhabitants are moving away from the small settlements and the ratio of economically inactive inhabitants is high. The ratio of the economically inactive residents of small villages reaches even 70% in several micro regions. 107

Table 9.6 Labour market patterns in rural areas Type of settlement Active earners Unemployed Unemployment rate 1),% number of persons ratio, % number of persons ratio, % Nationally 3484825 100.0 406210 100.0 10.4 of which in Budapest 708893 20.4 32967 8.1 4.4 countryside towns 1624393 46.6 188847 46.5 10.4 Villages 1151539 33.0 184396 45.4 13.8 of which with population below 499 persons 63926 5.5 16327 8.8 20.3 500-999 persons 129881 11.3 27788 15.1 17.6 1000-2999 persons 539578 46.9 82360 44.7 13.2 3000-4999 persons 198247 17.2 32158 17.4 14.0 more than 5000 persons 219907 19.1 25763 14.0 10.5 1 According to the old computation method, the rate compared to the number of active earners. Source: Calculation based on the data of the National Labour Methodology Centre, June 1998. The unemployment rate in the villages is by some 30% higher than in the national average and is twice as high in the villages with inhabitants less than 500. There is insufficient number of jobs for unskilled people and for older workers, and although that is a general phenomenon it is even more difficult to be managed in the villages. Employment and earning possibilities could be improved by the diversification of agricultural production, by the extension of operations which are close to agricultural production. Halting the depopulation of rural settlements by improving the quality of the environment in the settlements, by increasing social activity, and by the better utilisation of tourist attractions ( puszta, farm areas of the Plain) is of high importance. Besides generating income for the rural population it also contributes to the preservation of the countryside. The utilisation of empty farming and other buildings for services, for recreation and tourism, the processing of agricultural and forestry products on the farms, the production and local distribution of food products specific for the region or the settlement could also contribute to the improvement of local opportunities. Similar effect could be achieved by the development of old village crafts, by the home industry utilising agricultural and forestry materials too. 9.5 INSTITUTIONAL SYSTEM The targeted funds for agricultural and rural development are guaranteed by the act on the budget and on agriculture. The subsidy system operates mostly on the basis of a system of applications, under the competence of the central and county Agricultural Offices, the Regional Rural Development Offices and the Forestry State Service. The institutions of market regulation (Product Councils, the Office of Agricultural Regulations, Agricultural 108

Intervention Centre) have been set up, representative organisations were established and a mechanism reconciling interests is properly functioning. A network of village farming consultants supporting private farmers has been established some years ago and development projects are supported by managers of micro regions. The farmers using subsidies are registered. In 2000 the SAPARD Office was established. In 2002 it already accepted applications for three programmes, and it had its regional offices also opened. The National Land Fund supporting the rationalisation of the use of land started operating in 2002 and the realisation of the National Agri-Environmental Programme has also started. The subsidy policy serves primarily the purpose of improving the competitiveness of agricultural production and food processing, the strengthening of private farms and the reduction of the disadvantages of the countryside. Its aims include the moderation or halt of the deterioration of the technical- technological deterioration of the conditions of production, and through the diversification of operations to ease employment problems. The national agricultural policy measures helped private farmers to achieve a concentration of farms, to see their operation conditions improve. Environmentally friendly production enjoys greater attention and the forestation of lands of the poorest quality continued. 109

10 ENVIRONMENTAL PROTECTION 10.1 GENERAL STATE OF THE ENVIRONMENT IN HUNGARY Hungary is rich in natural assets. In order to preserve natural assets and improve the environmental state of the country, in the coming future we must make sure that economic and social development does not generate an increased pressure on the environmental burden and the aspects of environmental protection and nature conservation are integrated into the national and sectoral development plans. This is the main objective of the second National Environmental Programme for the period 2003 2008. The previous decade brought about favourable environmental changes in Hungary. However the current position is not yet satisfactory. In Hungary a considerable number of indicators characterising the environmental conditions are nearing the average of the Member States of the European Union but in some areas considerable efforts are still needed to comply with EU standards. (see table 10.1 on the details). Based on the structural environmental indicators applied in the summary report adopted in the Barcelona meeting of the Council of Europe one could conclude that the state of the environment in general is close to the EU average. However, behind this general picture there is a number of problem areas that are identified, where action will be needed. Key Issues: Air pollution Protection of water resources, waste water treatment and improvement of drinking water quality Remediation of contaminated land Proper waste management Efficient preservation of nature and landscape assets Minimising environmental burden of economic activities Raising environmental awareness 110

1. Total emissions of greenhouse gases Table 10.1 Structural indicators Indicator Definition of EUROSTAT Hungary EU average 2. Energy intensity of the economy 3. Transportation (goods and persons) output compared to GDP 4. Goods and passenger transportation mode The aggregated emissions of the most important six gases (CO 2, CH 4, N 2 O, HFC, PFC and SF 6 ) causing greenhouse - effect in CO 2 equivalent (1990=100) Gross domestic energy consumption compared to GDP (kgoe/1000 ) Transportation output (goods and persons) index compared to GDP Measuring unit: ton-km/gdp, Or passenger km/gdp, 1995=100 Ratio of road transportation Ratio of personal transportation by road 97.4 (2000) 82.4 (only net CO 2 ) (2000) 598.9 kgoe/1000 (2000) 117.7 (2000) 104.8 (2000) 50.5% (2000) 76.1% (2000) 96 (2000) 193.9* kgoe/1000 (2000) 105.7 (2000) 95.1 (2000) 77.3% (2000) 84% (2000) Ratio of air transportation 5. Urban air pollution The ozone load and 6. Communal solid waste Collected, 7. Ratio of renewable energy resources solid pollutant contamination exceeding the limit values in cities disposed and incinerated communal solid waste per capita per annum (kg/person/year) Electricity generated with renewable energy resources compared to total electricity consumption 3.5% (2000) 27 days (2000) 18 days (2000) 400 kg/person (2000) 376 kg/person (2000) 34.7 kg/person (2000) 3.0% (2000) 31 days (2000) 40 days (2000) 533 kg/person/year (2000) 292 kg/person/year (2000) 102 kg/person/year (2000) 0,76% (2000) 14.7 % (2000) *Preliminary data Source: Ministry for Environment and Water, EUROSTAT 10.1.1 Air pollution The changes over the past ten years, the notable decline in industrial production, the increase in motor vehicle traffic, the prohibition of the sale of unleaded petrol, etc. have had a considerable influence on air quality. The emission levels of most of the traditional industrial air pollutants have decreased remarkably but emission of some transport related air pollutants have increased. Currently, transport has became one of the most significant source of air pollution. 111

It can be stated in general that the concentration of the three most frequent air pollutants released in the highest quantities (sulphur dioxide, nitrogen oxides and solid particles) shows a decreasing tendency over the longer term. The air quality in Hungary can be considered to be at the medium level in international comparison. 10.1.2 Surface and ground water Surface water Due to the basin character of the country the annual average water-flow per capita (120 billion m³ p.a.) is one of the highest in the world. 96% of the surface water resources in Hungary originate beyond its frontiers. More than 90% of the water flowing through the country is concentrated in two main watercourses (the rivers Danube and Tisza). As a result of river regulation and flood control, the river sections in Hungary were shortened from 3,850 km to 2,200 km. In the shorter river beds, there is an increased danger of floods due to faster flow, which meant that flood control system had to be reinforced. About one third of the country s arable land can be found in flood protected areas. 30% of the area of Hungary is subject to the threat of flood. The earlier peak flood levels have increased by nearly 1.5 m in recent years. 2.5 million people live in areas threatened by flood. The total length of flood-control works is 4,000 km, of which 62.4% meet the dyke length satisfying safety requirements. Flooding threatens the Eastern regions especially along the River Tisza. Cyanide and heavy metal pollution of the River Tisza originated from the neighbouring Romania and have caused massive economic damage to the country, indicating increased risk of disastrous pollution. The devastating floods also coming from countries upstream the major rivers added to the damage. However, it must be further noted that usually surface waters are more polluted at their points of exit from the country than where they enter. Therefore an appropriate surface water quality control policy is needed. The damage caused by inland waters and floods has affected nearly 400 thousand hectares of agricultural land in recent years. Action in the field is needed as floods endanger the livelihood of a large number of people and the productive potential of mainly poorer areas of the country. Ground water More than 90% of the drinking water supply, as well as part of the industrial, irrigation and other water demand is provided by ground waters. The utilisation of thermal waters for medicinal and heating purposes is also significant. Some third of the sub-surface waters are vulnerable to pollution of surface origin. The confined waters found in deeper strata are in general protected. The quality of sub-surface waters is, in general, better than in numerous other European countries and their adequate preservation should be considered. The implementation of the National Environmental Remediation Programme an the National Drinking Water Aquifers Protection Programme has been going on since 1997 and is expected to be completed by 2009. The proportion of irrigation in agriculture is lower than necessary and insignificant in comparison with the water resources potential. 112

10.1.3 Protection of soil Treatment of contaminated land There is a number of sites with industrial contamination the cleansing of which is required. Under the National Environmental Programme the following key areas for remediation have been identified: Uranium mines, Hungarian and former Soviet military bases, land owned by the Hungarian State Railway Company. Agricultural land 83 % of the area of Hungary is suitable for cultivation. The physical, chemical and biological attributes determining the state of the soil are good, the rate of soil deterioration is relatively low and the soil condition in the country is better than in many of those in Western Europe. However soil erosion caused by water and wind affects 40% of the country. The main reasons can be found in inappropriate cultivation techniques in agriculture and forestry paired with land use patterns in sensitive areas. The areas vulnerable to soil decay are found in North Hungary and Transdanubia. Acidification is primarily found in the regions of West Transdanubia and North Hungary as well as in the South-eastern part of the South Plain, and secondary salinization is found in the North Plain. 10.1.4 Natural and landscape assets By the standards of the countries of the European Union, Hungary is among the areas with more valuable natural fauna and flora. Unfortunately, the pattern of the original natural habitats has changed greatly and the relatively untouched proportion of the country s area has decreased to 15% of the whole. Simultaneously, the separation of the habitats that used to be connected to each other in the past to provide continuous transitions, has started. However, the country still has considerable natural assets considering international standards. 695 plant species and 965 animal species enjoy protection by law and of those, 63 plant species and 137 animal species are under enhanced protection. In 2002 only 9.2% of the total area of the country came under nature conservation representing a natural area protected with an individual statutory regulation and, within that, 1.2% under enhanced nature conservancy protection. The share of protected areas in the region of North Hungary is the highest (13.4%) and in the region of South Transdanubia is the lowest (5.7%). The network of wetlands accounts for a considerable part of the national ecological corridor system. The water habitats have been restricted to small areas due to the flood control. The quality of these habitats and the quality network of wetlands has deteriorated significantly in the past decades due to drying out, eutrophication, constructions, reservoirs, dyke systems etc. For the protection of these sensitive ecosystems 21 areas are part of the Ramsar Convention. 19% of the country is covered by forests, approximately 70% of these are ranked as natural forests. In total about 80% of the forested area is used for economic purposes. There are 65 forestry reservations ensuring by law the special protection of the forests. Further afforestation is performed in accordance with the National Afforestation Programme, primarily in areas which are less suitable for agriculture or have protection function. 113

10.1.5 Environmental burden of economic activities Due to economic development in earlier decades failing to sufficiently consider the aspect of environment and deficiencies in regulation and law enforcement, areas of heavy and extensive pollution have formed around the country and this can hinder further development. With the decline of the outdated and non-competitive industries in the first half of the nineties, the environmental pollution caused by manufacturing diminished considerably. From around the middle of the decade, production in the manufacturing increased dynamically but was not accompanied by an increase in traditional pollution. Though the mining production accompanied by increased waste generation burdening air, surface waters and soil has decreased recently, the accumulated environmental problems (primarily the elimination of tailings) are still waiting for solution. Since nearly 70% of the total area of Hungary is under agricultural use, this sector has the most important influence on the natural environment. The use of agricultural land has decreased recently in Hungary, which is favourable in terms of the survival of the natural ecosystems. The use of fertilisers dramatically declined from a very high earlier level after 1990, then it has been showing a slight but continuous increase since its lowest point in 1995. From the nineties onward ecological management has gradually appeared and has had a favourable influence on the maintenance of fertility in the areas of production. Agriculture has caused the most striking changes in the environment through its transformation of landscape (timber exploitation, soil erosion established following longitudinal cultivation on slopes). Transport related air pollution causes concentrated air and soil pollution, which is very harmful to human health. Large quantities of hazardous wastes are generated by this sector like used batteries, tyres, scrapped vehicles, etc. Multi-lane highways cut off individual plant and animal populations from each other, and the diversity of species and varieties in the small interior zones is low, hence domestic bio-diversity is decreasing. The extreme noise caused by transport damages not only human health but the constant vibration also threatens the condition of buildings in the vicinity. In the future road transport is expected to increase and therefore actions that mitigates its air polluting impact will be needed. The air polluting effect of the energy sector, including the thermal power stations is shown in the high levels of sulphur- and carbon-dioxide emissions. The coal-fired power stations in Central and South Transdanubia, and the oil-fired power stations in the region of Central Hungary cause considerable air pollution. In 1999, 42% of the total non-hazardous production waste and 73% of the total quantity of accumulated non- hazardous production waste came from the energy sector. Some 5% of the annually generated production waste is hazardous. From 1999 to 2000 the total quantity of hazardous production waste decreased by 11.5%. The slurry beds and dumping sites of power plants are sources of serious soil pollution. The re-cultivation of slurry beds is undertaken continuously by the power stations. The disposal of radioactive waste from the Paks Nuclear Power Station and the accomplishment of the tasks of environmental protection connected to the future closure of the reactors will pose special problems for the future. 114

In general tourism leads to an increase in environmental burden (as a result of sometimes wasteful use of natural resources, air and water pollution as well as waste generation). The most severe harmful effect of the sector is structural intervention (road construction, conversion of natural environment into an artificial one). The most prominent example is Lake Balaton as a sensitive ecosystem and a key destination for seasonal mass tourism. Recent developments in eco-tourism point at successful examples to harmonise tourism and sustainable use of natural resources. 10.1.6 The shortcomings of communal infrastructure Drinking Water At the end of 2000, 98% of the population was supplied with piped drinking water. The proportion of homes connected to the main supply network is 92%, matching the European average. However at regional level significant disparities have to be stated with the most backward region being Northern Hungary, while Western Transdanubia is the most developed part (see table below). In terms of quantity, the supply of drinking water is adequate, but the quality of water supplies falls short of the requirements in some areas. Particular components in 42% of the supplied drinking water do not comply with the new domestic regulations, which adopted the quality requirements of the EU. 27.4% of the population is affected by the high level of such elements that adversely affect human health, in particular arsenic and nitrate pollution in the Great Plain. Sewage At the end of 2000, the proportion of the population connected to public sewage was 62.9%, while that of connected homes was 51.4%, this latter being lower than the EU average (65%). The length of the network of public sewers is continuously increasing but the total number of new connections is increasing at a lower rate. Population living in areas without sewerage system use septic tanks with about 90% of these utilities being inefficient and hazardous to the environment. In accordance with the relevant EEC Directive an Implementation programme has been developed. All major settlements with more than 2,000 person equivalents (PE) will be covered by appropriate collection systems. Wastewater Treatment Most of the wastewater is discharged by the region of Central Hungary. That mainly caused by Budapest discharging 60% of its sewage water into the River Danube untreated. Besides Budapest also several other county cities require either capacity increases of biological treatment or the introduction of biological and/or tertiary treatment. Specific support has been paid in 2000 and 2001 for municipalities situated on vulnerable aquifer (Győr, Szeged, Sopron and Pécs). Currently 62% of the collected wastewater undergoes biological treatment. Following the requirements of the relevant EEC Directive Hungary has developed an implementation programme until 2015. This programme prioritises agglomerations in sensitive areas (tertiary treatment), in general by 2015 all settlements of more than 2,000 PE will be connected to secondary (biological) treatment. 115

In areas with many small villages the connection to regional waste water treatment systems would not be justifiable in many cases due to high investment needs. In these areas marked by settlements with less than 2,000 inhabitants, a viable solution could be the development of local alternative forms of waste water treatment. Although the great regional discrepancies in the provision of the population with public utilities (gas, water, and sewerage) have decreased during the past ten years, they are still large. 116

Table 10.2 Provision of the population with public utilities by region, 1994, 2001 Region Proportion of homes connected to piped water supply (%) Proportion of homes connected to the sewers network (%) Household connected to gas supply (%) 1994 2001 1994 2001 1994 2000 Central Hungary 86.7 95,6 67.7 74,8 78.9 88.8 Central Transdanubia 89.2 95,8 42.9 59,3 40.3 62.4 West Transdanubia 88.9 94,6 41.8 58,9 49.3 70.6 South Transdanubia 80.7 93,4 39.1 49,3 37.7 53.2 North Hungary 67.2 87,3 33.4 41,6 44.9 67.5 North Great Plain 65.8 91,5 25.6 35,3 48.5 70.2 South Great Plain 62.6 87,7 24.7 31,8 64.1 86.1 National average 77.3 92,6 49.1 53,5 52.0 71.3 Source: Central Statistical Office (KSH) Waste The decrease in generated waste (from the annual 106 million metric tons to 68.7 million metric tons in ten years) was more the consequence of economic decline than of conscious preventive measures. Nearly half of the non-hazardous waste is generated in agriculture and in the food industry and most of it is utilised. Only about 30% of non-hazardous industrial waste, however, is utilised and more than 60% is dumped. In 2001 the share of homes involved in regular waste collection was the highest in Central Hungary (95.1%), while it is the lowest in the Northern and Southern parts of the Plain (72.3%). More than 90% of communal solid waste was collected in 1999. In the framework of public services 665 landfills are operated. The technical safety of 85% of the operating disposal sites lags behind the norms of the European Union. The satisfactory disposal sites, amounting to 15%, most of them being regional ones, all in all serve 5.5 million inhabitants. Additionally the estimated number of abandoned, closed or illegal dumps amounts to 2,000. There is no organised waste collection in 468 communities inhabited by 4% of the population. The utilisation of communal solid waste to generate energy is taking place in one incineration plant in the country and 8 to 10 facilities at disposal sites, established for bio-gas extraction and utilisation. The priorities, and the regional and national waste management programmes are included in the National Waste Management Plan to 2008, which is awaiting parliamentary approval. 80% of hazardous waste is neutralised and only 20% is utilised. One waste disposal site with a general collection scope and a capacity of 15 thousand metric tons/year is operating to dispose of hazardous wastes. In addition to this, 12 waste storage and disposal sites are in operation. There are 13 incineration plants of a capacity of at least 1,000 metric tons/year operating in Hungary. A considerable part of the smaller incineration equipment does not meet the environmental requirements of the European Union, and so this issue needs to be addressed. 117

The noise emissions of road transport affects 50-55% of the general population and 60-65% in the cities. That of railway transport affects 8 to 10% of population. The noise load from air transport is limited to particular areas. Noise emissions above the limit values are experienced in about 30% of the inspected industrial plants. The total number of plants exceeding the limit values is the highest in the northern and southern parts of the Plain while it is the lowest in West Transdanubia. 10.1.7 Raising environmental awareness In accordance with the common requirements of the National Basic Syllabus (NBS), environmental education has become a task within the scope of every subject and for every teacher. The knowledge of environmental protection and nature conservation has been integrated into training programmes both within and outside the school system at every level. In order to enhance environmental awareness, the partnership with the participants in the economy, professional pressure groups, non-governmental organisations and the citizens need to be developed successfully. 10.2 INSTITUTIONAL STRUCTURE OF ENVIRONMENTAL PROTECTION AND NATURE CONSERVATION The institutional system of environmental protection and nature conservation has a relatively short history stretching back only a few decades. In the past decade a qualitative change took place in the institutional system. The Department of Environment and Water Management is performing the tasks of operating a strategic, legislative and supportive system while the Central Environment and Nature Conservation Inspectorate under the supervision of the Department and its regional bodies (12 environment inspectorates and 10 national parks directorates) accomplish the administrative tasks of regional importance. The tasks of environmental protection and nature conservation at settlement level belong to the competence of the local authorities. The enforcement of the principle of prevention has come to the foreground recently in place of, and in addition to the earlier supervisory work in the operation of the authorities for the environment. Also, EU support has contributed considerably to the development of the institutional system during the past ten years and, partly as a result of that, the appropriate capacities in the Ministry have been developed to receive and manage the ISPA support. The state tasks of water management excluding the tasks determined in independent legal provisions belong to the competence of the Ministry of the Environment and Water Management, and are fulfilled by the National Directorate General of Water Management and its regional bodies (12 directorates of water management). Under Act LIII of 1995 on The General Rules of Environmental Protection, the National Environmental Council as a Government consultative body involving representatives of the scientific, economic and civil spheres gives its opinion on the principle issues of environmental programmes, and on legislation and decisions related to the environment. 118

The share of the environmental investment financed from the central budget with different earmarked funds is about 1% of the GDP. Most of the national environmental budget originates from central government revenues. Environmental revenues from local governments remain insignificant. The share of earmarked funds has doubled in the last decades, in particular with the environmental product charges. The central government budget provides support for various environmental investments, mainly for combating water pollution, for waste management, for nature conservation, for air pollution control and protection against noise and soil contamination. 10.2.1 Differences in the quality of local life and local public administration The differences in the quality of local life are evident primarily not on the regional level, but rather between micro regions and settlements. The unfavourable socio-economic situation lead to the deterioration of the state of the community environment in other areas of the country as well. Dilapidated urban districts (unregulated public areas, settlement centres without functions, housing estates which turned into slums) are mostly situated in areas inhabited by people in a disadvantageous position. Unemployment rate is very high and so is the rate of people living on welfare, which makes the realisation of development projects more difficult. The quality of the residential surrounding of settlements with small number of inhabitants, and with poor infrastructure is not adequate. The regions with micro villages situated in the peripheries of South Transdanubia, North Hungary and the North Plain are in the worst position. In these villages most people have low education - often Roma citizens- whose social position is very poor. The bad state of transport infrastructure (dead-end villages, poor public transport, etc.) and shortages of the institutional system are found in the field of basic supply (primarily education and social facilities). There is a great number of abandoned, run-down industrial fields and former military sites, which are in a very bad state and represent potential danger to the environment. Most of these areas are still disused and new investments in industry location focus on green-field areas instead of old, deteriorated and contaminated community brown-field zones. Some proposals were made to transform these sites into industrial parks, incubator houses, university campuses, or residential areas, but their socio-economic utilisation has to be resolved, due to the degree of their deterioration and their contaminated environment. In underdeveloped areas the unsolved wastewater management causes serious problems. Due to the structure of settlements in Hungary there are numerous villages with a population of fewer than 2000 residents (there are 826 such villages, 165 of which are located in a sensitive area). Less than 20% of these have sewage systems. The efficiency and environmental protection aspects of methods of wastewater management in small villages and in areas with scattered settlements must be given careful consideration. These areas do not necessarily need sewage system and central wastewater management, here the application of simpler, individual purification procedures must be considered. The development of the population s living standards, as well as the focus on sustainable growth and environmental aspects require the use of more environment friendly, renewable energy sources. Hungary has considerable amount of unexploited renewable energy sources, but they only contribute to 3.6% of the total energy consumption, which is below the 5.9 % 119

average of the EU. With regard to the regional and local resources renewable energy could play an important role in small scale, local heat and electricity production. 120

11 EXPERIENCE OF EARLIER PROGRAMMES 11.1 SZÉCHENYI PLAN The Széchenyi Plan is a large-scale economic development programme of the Hungarian government. The six main programme fields are the following: Enterprise Promotion Programme, Housing Programme, Tourism Development Programme, Research, Development and Innovation Programme, Information Society and Information Economy Development Programme, Motorway Construction Programme and Related Infrastructure Programmes, Regional Economy Development Programme. 120 billion HUF have been allocated so far, which is 0.7 % of the expected GDP of 2002. The analysis of the application suggests that each forint invested from public money generates HUF 4 investment from other sources. This represents a total sum of 442 billion HUF. In half of the Hungarian towns and villages there has been an investment or development project in the framework of the Széchenyi Plan. The programme aimed to reduce the differences between the western and eastern part of the country: most of the new jobs originating from the programmes will be created East of the river Danube. According to certain estimations the 2001 GDP increased by 0.9 %, due to the Széchenyi Plan. The increase appeared mainly in the building industry, in the building material industry, in the machine industry and in metallurgy, and a significant impact can be observed in the field of services. The full impact and first significant results will appear 3-4 years later, when the supply effects of the new infrastructure add to the demand effect of the programme. Assuming 5% efficiency improvement, the plan may accelerate the rate of economic growth by 0.4-0.6%. The development programmes are expected to create 30-40 thousand new jobs. The estimated 400 million Euro additional import of the Plan should be weighted against the increased export and foreign exchange generation of investments. However the Plan s contribution to the foreign trade balance is undoubtedly positive. 121

Table 11.1 Strength and weaknesses of Széchenyi Plan Strength Weaknesses The application system approaches the EU practice by standardisation of application announcements and guides and by the diversification of application management functions Establishment of the application management organisations including the concentration of central application management functions into one organisation Introduction of IT system supporting process of application management, which enables the administration of all the stages of the application management The IT system of the Széchenyi Plan is capable of informing the publicity and the management appropriately The preparation of the application manual, which meets the EU requirements and can be used as national standard Established knowledge, work culture and organisational practice first of all at the MVF Kht., which enables the cost efficient management of standardised mass applications The marketing and PR activity of the application system during the introduction of the system and publication of results The commencement of the establishing the control system The acquired application practice of enterprises. municipalities and private persons at wide scale The acquired experience of applicants and application managers can be used during the preparation for applying the EU supports Source: Government Control Office Slow, not enough transparent, ambiguous and imprecise legal regulation with frequent changes Exclusive ministerial decision adjudication The preliminary impact studies related to the application objectives and use of resources are missing The outputs and the indicators of efficiency and effectiveness are not planned neither in the programs and sub-programs nor in the applications Due to the lack of indicators the achievement of the objectives neither in case of the programs nor at level of applications Nor the application managers nor the applicants are not aware of the financial framework of the applications The applied tender evaluations led to the exploitation of resources as soft budget items. The lack of organisation with appropriate competence, and the lack of body providing the operational management and co-ordination of the applications in the Ministry Hardly transparent application management with too many participants, the diversification of tasks and contacts has not been clarified The content and layout of application forms are not appropriate for the evaluation, organisation and IT processing of tenders The lack of preliminary accepted viewpoint system The applications are evaluated mainly in respect of the formal criteria rather than content The system hardly provides the comparison of application evaluations and equal opportunities The insufficient integration of IT support The inappropriate reliability level of data and the related responsibility is not clarified The classification of data in the publication conceals important correlations and differences Limited accessibility to data and limited publicity Due to the deficiencies of the control system the instruments of damage prevention and management 122

The application system had five target groups: companies municipalities churches sole entrepreneur other 13 371 applications were accepted and 10 710 applications were awarded in 2001. 118 915 billion HUF was distributed among winners. The most successful applicant city/county was Budapest, the second most successful was Pest county. The least successful county was Nógrád county. In 2002 both the numbers decreased drastically: 2 990 tender won out of 3 437 applicants. In this year also Budapest obtained the highest amount of support and submitted the highest number of tenders, and still Nógrád county had the worse performance. 11.2 THE PHARE PROGRAMMES PHARE is a programme of the European Union providing non-repayable support to the countries of Central and Eastern Europe. The objective of the PHARE programme is to assist these countries in executing their social and economic reforms and support their preparations for integration. The PHARE programme was launched in 1989. The Framework Agreement approved in September 1990 governs the general legal, financial and administration issues related to the granting and utilisation of support, as well as the rights and obligations of the countries receiving the support. The actual contents of assistance are decided during the annual negotiations between the Hungarian Government and the EU Commission. A so-called Country Programme (since 1998 Annual National Programme) is compiled each year on the basis of the main support directions. The twelve-year history of the PHARE programme to date can be divided into two parts. Between 1990 and 1997 programme preparation was limited primarily by the economic and institutional development priorities of the beneficiary states. The main requirement for the contents of the support programmes was a match between the proposed projects and the government programme. 123

The annual support to national programmes in aforesaid period is shown in the table 11.2. Table 11.2 PHARE support in Hungary between 1990 and 1997 Year Million ECU Source: Prime Minister s Office 1990 90.0 1991 119.5 1992 97.5 1993 99.0 1994 84.5 1995 92.0 1996 101.0 1997 104.0 Total 787.5 (appr. HUF 175 billion) Since 1998 PHARE support can only be used for the programmes that are directly related to the adoption of the Acquis Communitaire in Hungary. Only those proposals can be eligible for EU support as programmes closely related to the accession progress which are supported by the relevant Ministry and are aimed at the achievement of priorities laid down in the Accession Partnership Document established between the European Union and Hungary as well as in the National Programme aimed at the adoption of the Acquis Communitaire. These two documents, of which the first one was prepared by the EU and the second one was written by the government of the associate country, have basically the same objectives. They list and detail the priorities and specific tasks that need to be completed by the candidate country concerned by the time of accession. This is programming `defined by the accession`. The PHARE support provided to various sectors during the first 10 years is outlined in the table 11.3: Table 11.3 The PHARE support provided to various sectors during the first 10 years Development and restructuring of the economy, 36% Infrastructure, environmental protection 22% Human sector, administration development 22% Service sector, other areas 13% Preparations for integration 3% Cross-border co-operation (CBC) 4% Total: 100% Source: Central Statistical office (KSH) With regard to the development and restructuring of the economy, support to privatisation and related company restructuring were the most important activities. Support for the development 124

of agriculture is related to sectoral reforms, institutional development required for the transition to market economy, revision of regulations and the extension of loan funds extended to agricultural producers. Infrastructure development and support to environmental protection includes technical assistance for the development of sectoral development policies in the energy sector, transport, telecommunications, water management and environmental protection as well as co- financing for energy efficiency programmes. With regards to the development of human resources and administration, most of the support was given to education and vocational training. In the service sector and other areas, PHARE funds are primarily related to the modernisation of the financial sector, improvement of research & development, and the development of the customs and statistical systems. Preparations for integration were eligible for very little support until 1996. Between 1992 and 1999 five PHARE programmes were launched in regional development. Together with the Cross Border Co-operation programmes, the five programmes received approximately 124 million support. From the year 2000 potential PHARE support has advanced in two directions. 1. In accordance with Agenda 2000 support to associate countries has been extended with two pre-accession instruments, i.e. ISPA, financing infrastructure and environmental protection programmes, and the SAPARD programme supporting agriculture and rural development objectives, while support from PHARE is also available. Simultaneously, pursuant to the provisions of the 1266/1999 European Council Regulation co-ordination must be achieved among the three instruments with regard to execution and areas eligible for support. 2. The Economic and Social Cohesion support programme, which is aimed at preparing for the European Regional Development Fund and the European Social Fund appears as a separate chapter. Programmes are executed continuously, therefore their specific impact on the economy cannot be measured yet. The evaluation of the already concluded programmes is currently in progress. Between 2000 and 2003, the PHARE programme provides Hungary with a support of 312 million, approximately HUF 78 billion for the purposes of economic and social cohesion. The funds made available will be concentrated in the following areas: support to the local economy, development of human resources and infrastructure projects that are important for the business sector. The framework of complex investment projects is laid down in the Preliminary National Development Plan. The document prepared for three years from 2000 to 2002 is based on EU criteria and methodology and functions as the strategic document for strengthening economic and social cohesion. From the year 2000 more stress has been put on regional development programmes in the overall PHARE programme. Due to the limitation of available funding, support can only be used in a limited area of the country, i.e. in certain specified target areas, North Hungary, North-Plain and South-Plain regions. In view of the fact that structural policy preparations must begin in all the other regions as well, the Hungarian Government decided to provide similar support to the other four regions from the budget to enable them to launch similar regional preparation programmes. These are the so-called mirror regional programmes. 125

Seven projects are implemented from the 2001 PHARE budget. The human resources development projects are also concentrated in the target regions. Regarding projects aimed at economic and social cohesion the year 2002 represented another breakthrough. In the framework of the PHARE, Hungary launched programmes, which were closest to the Structural Funds of the European Union so far. This programme contained the ORPHEUS programme for infrastructure and human resources development mobilising a record amount of approximately 200 million funds. Half of this is provided by PHARE, 40% comes from the Hungarian budget, and 10% will represent the equity of project owners winning the tenders. In addition to the much higher budget, the so called ORPHEUS programme involved some other new features too, such as: Multi-year programming for the first time PHARE will finance winning projects for two programme years instead of one and therefore the PHARE funds related to 2003 can automatically be used for programmes launched in 2002 without any further negotiations. Larger geographic scope it is the first time that all Hungarian regions can simultaneously be eligible for PHARE regional development support. Dominance of tender funds while in the previous years PHARE preferred large projects, now, in accordance with the system of Structural Funds, the majority of the support is allocated in open tenders. In the framework of the ORPHEUS programme the tenders for funds are launched in the last quarter of 2002, and therefore a detailed analysis of the results as well as regional and sectoral impacts of the individual projects cannot be provided earlier than the second half of 2004. Project management institutions as well as project owners gained considerable experience in relation to the management of EU funds. Since the regional development programmes in 1996, part of project management activities have taken place in a decentralised fashion, involving Regional Development Agencies. The relevant local organisations have also been involved in the execution of the programmes in human resource development. The 7 million Phare budget for the 1998 Special Preparatory Programme supported institutional development in central administration agencies which will be involved in the execution of ISPA and SAPARD programmes as well as the utilisation of Structural Funds in the future. The budget involved 5 million technical assistance and 2 million for financing of small demonstration projects. In the framework of this programme the experts of the EU Member States prepared the Hungarian experts of Ministries for the management of these funds, with special consideration given to programming (National Development Plan), legal and financial skills, institutional framework, administration issues, co-ordination, reporting and monitoring requirements in the form of long term technical assistance. A logical supplement to this is a similar type project in the National Programme for the year 2000 aiming at the development of the Regional Institutional System. With its 4 million support, the Regional Preparatory Programme, RPP gives an opportunity to foreign experts helping to strengthen regional implementation capacities. As the date of accession is getting closer the areas involving further institutional development requirements are becoming more and more clear, starting with central administration. With regards to programmes supported from Structural and Cohesion Funds the requirements for the institutional system are clear. On the basis of the results of earlier programmes and identified requirements, the planning of the third generation of such institutional development type programmes started in the autumn of 126

2001. The programme receiving 6 million from the fund aimed at the completion of preparations for the Structural and Cohesion Funds is targeted at the practical training of the experts of Ministries participating in the implementation of programmes supported by the European Regional Development Fund (ERDF) the European Social Fund (ESF) and the Cohesion Fund (CF), as well as the establishment of administration and control systems. With so called twinning programmes long term experts delegated from the EU Member States assist the preparations in the public administration agencies. As a result of this programme Hungary will have its operating institutional structure in place for managing the Structural and Cohesion Funds in the form of Managing Authorities and Implementation Agencies by the summer of 2003. 11.3 ISPA PROGRAMME The ISPA programme (Instrument for Structural Policies for Pre-Accession) is the forerunner of the Cohesion Fund. Its legal basis is laid down in the 1267/1999 European Council Regulation of 21 st June 1999, which is known as ISPA Regulation. The main objectives of the Regulation are the following: to prepare the candidate countries for receiving support from the Cohesion Fund, and to solve specific problems in infrastructure (transport and environment protection) which hinder the accession. Within the frames of this programme, Hungary receives 88 million ISPA aid from the European Commission annually from the year 2000, to be equally divided between environment protection and transport. The support can be used for the objectives stated in the Accession Partnership Documents that are also in line with the national tasks of improving the environment and the transport infrastructure. In the year 2000 the EU Commission decided on the support of six environmental protection projects, three transport projects and six technical assistance projects in Hungary. The total cost of the project is 518.3 million to which the European Union contributes 50 75% support. Of the projects submitted in relation to the 2001 ISPA budget the European Commission approved five environmental protection projects, one transport project and three technical assistance projects. The total cost of the project is 136 million to which the European Union contributes 50 75% support. In 2002, Hungary submitted applications to the European Commission for five waste management projects in environmental protection, two transport projects and one technical assistance project. The total cost of the projects is 296.5 million, with 50 75% ISPA support. As the ISPA programme is a pioneer for the Cohesion Fund, the projects which are not completed by the accession date will receive further financing from the Cohesion Fund. The biggest task in 2003 will be the preparation of the projects for the Cohesion Fund, because Hungary can expect the available funds to be doubled then. 127

It is too early to assess the impact of the ISPA programme as the implementation of the projects is starting now. At the same time, a feasibility and environmental impact study is prepared for each project, assessing the potential impact on the economy and environment. In the first step of the establishment of institutions required for receiving and managing the Cohesion Fund, at the end of 2001 and the beginning of 2002 the Government Control Office (Hungarian abbreviation KEHI) identified the insufficiencies in institutions involved in the management of the ISPA programme that will definitely need to be eliminated. In parallel with that survey the European Union Commission also reviewed compliance with the minimum requirements for the implementation of the ISPA programme. Providing the Implementation Agencies meet these requirements and state the special provisions concerning invitations to tender, assessment and evaluation of bids, the approval of contracts, and the application of the Public Procurement Directives of the Community in a financial agreement, the provisional approval of these processes will be transferred into the competence of the Hungarian authorities with an ex-post audit conducted by the European Commission. The estimated date for this to take place is June 2003. 11.4 SAPARD PROGRAMME The SAPARD programme (Special Aid Programme for Agriculture and Rural Development) entered into force on 1 st January 2000 in accordance with the 1268/1999 European Council Regulation promulgated on 26 th June 1999. SAPARD has a dual objective: to provide assistance to the candidate countries in the implementation of the Acquis Communitaire, with special consideration given to preparations for receiving the European Agriculture Guidance and Guarantee Fund (EAGGF) and to contribute to the solution of problems through the establishment of sustainable agricultural and rural development. On the basis of a decision made by the Hungarian Government the following measures and actions are eligible for SAPARD support: Development Measures in the Structure of Agriculture investments into agricultural enterprises (development of buildings, other investments related to service structures) and, in the year 2000, in machines development of processing and sales of agricultural and fishery products (meat and dairy products, eggs, fruit and vegetables, other and miscellaneous products (e.g. honey) establishment of producer groups (animal husbandry, plant cultivation, vegetables, fruit and other products). Measures in Agricultural and Environmental Protection production methods supporting agricultural and environmental protection and nature conservation. 128

Rural Development Measures vocational training modernisation and development of villages, conservation of rural assets diversification of activities to create alternative income sources development and improvement of rural infrastructure. In the framework of the SAPARD programme Hungary will receive approximately 38 million (approximately HUF 10 billion) support each year. The proportion of national co-financing varies in accordance with the nature of the programme and form of support. In case of income generating investment, the EU contribution cannot exceed 75% of the total eligible public funds, whereas in case of income generating investments, 75% of the total support. Therefore, in the latter case, the Hungarian budget must allocate approximately HUF 3.3 billion for such purposes each year in addition to the HUF 10 billion provided by the EU. The basic requirements for launching the SAPARD programme were met in Autumn of 2002 when the SAPARD Agency was accredited although the accreditation was related to three measures only. Consequently tenders have been issued for these measures. Considering the special financial instruments introduced with regards to the SAPARD programme, Hungary can use the community support due for the year 2000 until 31 st December 2002. However according to the latest proposals of the European Commission, which are also contained in the draft financial agreement for 2001, Hungary will be able to use the support which was originally allocated for the year 2000 by the end of 2003. 129

APPENDIX 1: CHARACTERISTICS OF THE REGION Central Hungary The development of the most dynamic region of Hungary is basically determined by the high concentration of population and production resources, and its infrastructure that is more developed than that of the rest of the country. The economic transformation of the region is principally due to the dynamics of business and financial services and commerce. Today Budapest is one of the most dynamic and attractive financial, commercial and tourism centres in Central Europe. This region is outstanding in the country in the aspect of all the economic indices; 42% of the GDP is produced here, two third of foreign investments and 40% of the operating enterprises can be found here as a result of which Budapest fulfils gateway functions in absorbing modernisation and innovation as well as in area organisation. The living standards offered by the region are largely determined by the higher level of employment provided by the developed economy. Budapest is the centre of the country s centralised transport network and, in addition, three Trans-European transport corridors and three corridor-branches cross the area. At the same time the heavy transport in the capital and its agglomeration and the resulting noise- and air pollution represent a serious problem here. The region with excellent tourist conditions and a developed infrastructure has an outstanding share in the field of quality tourism and is managing more than half of the foreign tourist trade of the country. Typical urban problems are more and more pressing in Budapest: public transport is hugely overloaded, the share of green areas is diminishing quickly, buildings are in a poor state of repair and about three quarter of the sewage water flows untreated into the Danube. The social problems primarily affect the homeless, the Romany minority and the elderly. Within the region, the capital with dynamic economic development and 1.8 million inhabitants and its agglomeration are distinctively separated from the closing up micro-regions of Northern, Eastern and South-eastern edge of the region. Central Transdanubia Between 1994 and 2000, in the industrial centres of the region, showing the fastest growth rate development, modern industries were established. Green-field investments promoted the revival of the industry and innovation-oriented development, and the region has a considerable surplus of immigration owing to the job opportunities created by the modern industrial centres. Further development could be hindered by the narrow capacities of higher education in comparison to the development of the economy. Its outstanding tourism is dominantly based on the seasonal mass lakeside tourism connected to Lake Balaton, which is the largest freshwater lake in Central Europe, and the historical wine regions. The transport-geographical position of the region is extraordinarily favourable, as three Trans- European corridors cross the area, thereby it is well accessible from the directions of Budapest and Western Europe as well. On the contrary the level of transport infrastructure do not serve internal cohesion. As for the internal proportions, this region is heterogeneous. It includes the 130

dynamically developing industrial areas found along the main transport axes (Székesfehérvár), the tourist region around Lake Balaton as well as the rural regions lagging behind. West Transdanubia Owing to its Western frontier position, cultural relations and the high rate of the foreign capital influx, the region bordering the European Union is one of the regions best adapting the conditions of the market economy. The weight of its export oriented and modern industries (car production, electronics) attracting a considerable amount of foreign capital and creating a great number of jobs is continuously increasing in its economy. Consequently, the rate of unemployment is the lowest, with significant local differences though, and the level of incomes is also higher than average. Business relations between the large (multinational) companies and the domestic small and medium-sized enterprises are still weak but cluster initiatives can also be observed in several fields (car industry, timber industry). The capacities of science and high-level education are poor even in a national comparison. The internationally renowned thermal springs and Lake Balaton attract the most significant tourist trade to the region. West Transdanubia Region is favourably located, however, its connection to the international road network is insufficient, therefore the transit traffic can not be managed appropriately. The improvement of the North-South connection is of fundamental importance from the aspect of strengthening internal cohesion in the region. Regional disparities are primarily emerging between the dynamically developing Northern part and the Southern part scattered with small villages. As a result of the settlement structure characterised by small villages, the treatment of communal sewage water and waste, for the most part, is unsolved in the small settlements of this region. South Transdanubia The region of South Transdanubia is one of the less developed ones. This is mainly because many parts of the region have poor accessibility from the foreign and domestic economic centres, as well as because its location is close to the South border of Hungary. The crisis in South-eastern Europe and the decline of heavy industry and mining had severe impact on its economy which could not have been counterbalanced by the extremely low influx of foreign investments (hardly 2 % of the capital invested in the country came to this region). The ratio of actually active SME-s is the lowest here in a national comparison and there are no big companies around which groups of supplying small enterprises could develop. The region has a substantial R&D capacity outstanding of the country average that is, however, limited to the Pécs university centre. The region has an outstanding agricultural ecological potential, but its efficiency of production is low due to the lack of capital and its structure of land ownership characterised by small, segmented plots of land. The most competitive sector is traditional grape and wine culture. Although tourism is rather seasonal based on Lake Balaton, thermal and wine tourism, as well as the World Heritage city of Pécs, plays an important role in the economy of the region. 131

South-Transdanubia is in a peripheral situation both in international and domestic aspects. Its transportation system is characterised by the complete lack of motorways in North South and East West directions, poor network of railways, inadequate number of bridges and border crossings. The underdeveloped network of regional roads weakens internal cohesion. Appropriate roads connecting the county capitals are missing and there are too many isolated and inaccessible villages. North Hungary Before the change of the political and economic system the economy of the region had been dominated by the heavy industry and mining. In the beginning of the nineties, the whole region could be described as depressed because of the industrial output decline and since then unemployment has been the highest here nation-wide. Some big industrial enterprises (mechanical engineering, chemical industry) were, however, modernised with the help of foreign investments and the region maintained its industrial feature. Higher education especially technical training has a determining role, its relations with the business community, however, are poor yet. The region has some tourist attractions such as diverse natural landscapes, folklore traditions, thermal waters and the famous wine culture but the potentials of tourism are as yet, not properly exploited. The accessibility of North Hungary via internal roads is poor due to transportation that is difficult because of the mountains. Economic development in the western part of the region close to the motorway and to the Central Hungarian Region is already visible but half of the micro-regions within the region are stagnating or underdeveloped. The area, with small villages along the Northern border of Hungary, is the poorest part of the country, hit by a high rate of emigration. North Great Plain Almost half of the population of the region lives in areas that are stagnating or underdeveloped from social-economic point of view and where employment and income situation is below the average, rate of foreign investments and entrepreneur activity is low. Due to its natural features the region plays an important role in the country s agriculture. Manufacturing, namely food processing, mechanical engineering and textile industry are dominant in its industrial sector. The cities of Debrecen and Nyíregyháza have important traditions of higher education, which serve as a good starting point for developing the knowledge base. The major tourist attractions of North Great Plain are health tourism and the National Park of Hortobágy. There are large and densely inhabited settlements in the central and northern parts of the region, while the parts along the Eastern national border are dominated by a small-village structure. This partly explains the backwardness of the region. The accessibility of the region is very poor due to its layout alongside a long and single transportation line and to missing motorways. Its western parts have stronger connections outwards than towards Debrecen due to the economic importance of the Central Hungary Region. The region has an important transit role and its borders will become Schengen borders after EU accession. 132

South Great Plain The region situated in the Southern and South-eastern part of the country is the most important agricultural region in Hungary where agriculture and food industry are of outstanding significance. Its main natural resource is the most excellent arable soil in Hungary. This region also has an international reputation of the high-quality special Hungarian products (Hungaricums) being important export products. In comparison to the national average, the food and textile industries are over-represented in the structure of industry. Regional impacts of foreign investments coming in this area are not important yet. The frontier situation stimulated the establishment of SMEs but there are still few innovationoriented medium-sized and big companies operating a network of suppliers. Owing to its university traditions and biological-agricultural research bases of international standard, the region is one of the most significant research centres of the country. South Plain is rich in supplies of spas and thermal waters providing the opportunity for health tourism. Further major opportunities are to be explored in the development of small-farm and rural tourism. The accessibility of the region is disadvantageous because of its huge area and the insufficient East-West connections. The Western and Eastern areas farther off the motorway are peripheral not only from the aspect of their transport-geographical positions but also in the aspect of socio-economic conditions. Its settlement system is characterised by large villages and market-towns surrounded by small hamlets. Isolated villages and homes as well as small farms are all struggling with severe problems of infrastructure and supply. 133

APPENDIX 2 Table 2.1 Major macro economic indicators, 1995-2001 Hungary EU-15 1995 1996 1997 1998 1999 2000 2001 Hungarian GDP on basis of purchasing power parity compared to EU average, % 45,6 45,7 46,9 48,0 49,0 49,7 51,9 2001/1995 % Change compared to pervious year, % EU-15 GDP 1.5 1.3 4.6 4.9 4.2 5.2 3.7 126.4 115.6 Consumer prices 28.2 23.6 18.3 14.3 10.0 9.8 9.2 220.4 115.5 Number of employees -1.9-0.8-0.1 1.4 3.1 1.0 0.3 105.6 107.8 a 3.5 2.1 4.7 3.5 1.1 4.2 3.5 120.5 107.4 Productivity of labour Gross real-incomes -8.9-2.6 3.4 3.5 5.5 3.4 8.0 122.8 Consumption per capita -6.8-3.1 2.1 5.3 5.1 4.4 5.2 120.3 Gross National Debt in GDP% 85.2 71.9 62.9 61.1 60.4 55.3 52.1 70.2 62.8 General government deficit* -6.4-3.0-4.8-6.6-5.3-3.0-4.7 Current balance of payments in GDP% -3.6-2.5-1.4-4.7-5.1-6.2-3.4 1.5 1.0 Gross capital formation in GDP % 20.0 21.4 22.2 23.6 23.9 24.3 23.7 23.7 20.6** Net external debts (including proprietary loans, billion ) Influx of foreign direct investment (including incomes from privatisation, billion ) 11.7 10.4 9.1 9.5 10.1 12.8 13.6 3.5 1.4 1.6 1.3 1.6 1.5 1.1 Unemployment rate (%) 10.2 9.9 8.7 7.8 7.0 6.4 5.7 10.2 7.4 Source: Central Statistical Office (KSH) 134

II. THE STRATEGY AND THE PRIORITIES OF THE NDP The NDP strategy sets the major development policy objectives and priorities to be supported under the Structural Funds in Hungary for the period of 2004-2006. However, only three years of the programme is a limited period to implement a comprehensive national development policy and to tackle the major issues raised in the Situation Analysis. The purpose of the current NDP is to reduce the existing development gaps between Hungary and the countries of EU. It is also important to signpost the longer-term development policies sets in place the main elements of a relevant strategy for the next planning period. The National Development Plan strategy explains these longer term objectives that will exceed the current programming period for after 2006. The implementation of the programme will result in a considerable improvement in the quality of life of the people of Hungary. In this chapter we present the main weaknesses, strengths and opportunities, and threats to Hungary in order to support the development strategy. The objectives of the NDP are identified together with the priority fields of actions. 135

1 SWOT ANALYSIS The SWOT analysis explains the current economic and social state in Hungary. It will serve as a basis for the formulation of the objectives development strategy and for the setting development objectives and priorities. The strengths, weaknesses, opportunities and threats to Hungary are summarised in four tables (see table 1.1-1.5) Table 1.1 Major strengths and weaknesses of Hungary Strengths Weaknesses Economic development Economic and political stability Evolving economic potential Successfully attracting FDI Advanced integration into European economy Strong internationally integrated manufacturing Industrial restructuring is advanced Privatisation is completed Dynamic service sector Development land available Good basic business infrastructure/financial services Rich natural and cultural heritage Two well established tourist destinations (Budapest and Balaton) Favourable geographic location Thermal and medical waters for health tourism Rich domestic scientific and cultural heritage that after digitalisation may be easily accessible and used Relatively high number of public Internet access points that help to promote digital skills and knowledge There is a need to increase in investment to close technology gap Large performance gap between foreign and domestic firms Little knowledge and technology transfer from foreign firms Small local value added in production Deficit of management and marketing skills in SMEs SMEs do not utilise business services enough The system of finance for SMEs is not satisfactory SMEs are not prepared enough for stricter environmental regulation Shortage of tourist services Regionally concentrated tourist industry Shortage of accommodation at an appropriate standard Average expenditure per tourist is low and a length of stay is short Skill shortage in the tourist industry Low exploitation of facilities of popular areas out of season Low number and quality of facilities and services in regions outside the main tourist destinations Small Internet penetration, and not sufficient business and cultural data available via the web Low level of real business software usage and applications 136

Table 1.2 Major strengths and weaknesses of Hungary (continued) Agriculture and rural development Comparative advantages in natural resources for agricultural production High quality and diversity of natural stocks (wheat, corn/live stock) Agriculture has been largely restructured Competent agricultural skills in general Good conditions for high value crops (wine, food, vegetables, special products Cultural heritage and tradition in handicrafts Regional development Large parts of the country have successfully integrated into the European markets Budapest is a dynamically developing centre of the region Along the main transport corridors prosperous areas have formed There are dynamic towns in every region In every region there are universities with strong traditions. Technology and innovation Internationally recognised, high level research tradition at university (academic) level Good track record in natural sciences, engineering and medical sciences International companies with R&D activities are locating into Hungary Research integrates in international R&D networks (Sixth Framework Programme) Shortage of capital in the agriculture Procurement, sales co-operatives and production cooperation are scarce in agriculture Lease contracts are too short The age composition of agricultural work force is unfavourable Skill and education level of small farmers is adequate and in agriculture consultancy services are not properly established SME firms in food processes suffer from capital shortage Number of forest management associations is low Obsolete fishfarming facilities in adequate standard of fish processing capacities Rural areas suffer due to adverse demography and employment possibility Standard of services crucial to sustain rural population are often poor There are large disparities between the East and West, between the capital and the rest of the country, and within the regions. Transport infrastructure prevent the formation of efficient networks across regions, and among microregions The tourist potential of many regions are underutilised Community facilities and environment, human and entrepreneurial potential are often inadequate The problem of the Roma population are regionally concentrated The amount of R&D expenditures are low R&D is predominantly state funded R&D infrastructure is obsolete and the research staff is an ageing population The innovation activity of corporate sector is low The link between the R&D sector and businesses is weak: the spin of activity is low 137

Transport infrastructure Table 1.3 Major strengths and weaknesses of Hungary (continued) Favourable location for transport Limited extent of motorway network Favourable topography The existing road network needs upgrading Well-organised local/long distance public transport The construction and modernisation of the railway is required Shortage of airport capacity There is a need to improve the Danube corridor Human resources Increasing number and share of people with higher level education In education the GDP based expenditure is equivalent to EU average in education Quality labour force in the IT sector, in the engineering and medical sector In general, adequate quality workforce (with large regional skewedness) Skill mismatch between labour demand and supply Insufficient link between education, training and the labour market Weakness of school system in tackling social inequalities and providing equal opportunities Poor physical infrastructure in education Low activity rate of the labour force High qualification level of women Growing risk of exclusion from labour market for several groups (young people, older employees, Roma, disabled, unskilled workers High level of regional disparities in employment and unemployment Social conditions and equal opportunities Sufficient kindergarten places for 92% of 3-6 years old children The educational gap between the Roma and the majority of the society is high Increasing social legislation Poor health and living conditions of Roma people Broad based social protection system Extended maternity care High unemployment rate and social exclusion of Roma minority Discriminating working practices and lower reservation wage for women Horizontal and vertical segregation of women on the labour market Ineffective gender mainstreaming policies Insufficient family friendly policies 138

Table 1. 4 Major strengths and weaknesses of Hungary (continued) Healthcare Quality labour force in health sector 362 doctors for 100,000 citizens (around the EU average) Hospital places are abundant Environmental protection High level of biodiversity Institutionally recognised reserves of natural landscape Abundance of natural waters (mineral and drinking water) Good conditions for the use of renewable energy sources, especially biomass and geothermal energy The health condition of population is poor The healthcare system is underfunded Outpatient health care is underdeveloped Healthcare equipment is often obsolete Working conditions in healthcare are poor Too many patients in hospitals Air pollution in industrial agglomerations and urban areas The quality of drinking water and the protection of ground water requires improvement Waste water treatment and waste management need substantial investment High number of contaminated land sites High environmental burden of economic activities Poor communal infrastructure to assist environment protection Environment awareness is weak Low share of renewable energy Low energy efficiency for a variety of reasons 139

Table 1.5 Opportunities for and threats to the development of Hungary Opportunities Threats A closer economic integration with the EUcountries Higher levels of cross-border co-operation The improvement of Hungary s international standing through EU accession An expanding service sector The improvement of the communications and IT sector Increasing demand on the faster spread of results in information technology Rapid development of high-technology sectors Cultural and academic content development for purposes of information society Increasing weight of knowledge intensive sectors Growing demand for quality services and food products Sustainable development of cultural heritage The appreciation of the countryside Enhancing social cohesion and solidarity Higher environmental awareness The improved health awareness Unfavourable external macroeconomic conditions An increasing gap in IT use between sections of society Increasing regional disparities Brain drain The adverse aspects of global warming Lack of coherence of the transport infrastructure Ageing society Increasing urbanisation and motorization posing a threat to the environment Poverty risk Risks to agricultural producers Rural regions falling behind The strengths of the Hungarian economy can serve as a starting point for the promotion of harmonious development and at the same time development policy actions are required to overcome the weaknesses. 140

2 OBJECTIVES The long term objective of all development actions of the NDP and domestic development policies is to improve the quality of life for the population of Hungary. This depends on the income level of the population, and on many other aspects, including the state of the environment, the level and quality of public services and how successful development of all regions and all groups of society is. In most of these areas there are considerable gaps between the state of Hungary and that of the EU average. Therefore, actions are needed to achieve a comprehensive improvement in the determinants of the quality of life. However, during the first three years after accession the national strategy will focus primarily on reducing the income gap, and at the same time not neglecting factors that affect the sustainable modernisation process of the country. The overall objective of the current planning period is therefore to reduce the income gap relative to the EU average. The reduction of this gap to a large extent depends on how successfully Hungary can increase her income, and so actions should contributing to this overall objective. More specific objectives will help to formulate actions and the make it easier to identify those implications that matter most for the NDP. For the reduction of the income gap a sustained period of high growth in the economy is required. The necessary condition for that is the creation of a competitive economy that performs well in an international context. For a small and open economy such as Hungary s the establishment of well performing enterprises and conditions that allow for businesses to start up and modernise, these activities is essential. Therefore, the first specific objective of the development strategy aims at increasing the competitiveness of the economy. In addition to economic competitiveness, an improved use of human resources also becomes a specific objective. This objective has two aspects. It means an improved human capital that relates to the abilities, skills and knowledge of labour, and it also allows a fuller use and more efficient use of the existing labour. The talents, knowledge and working capacities of the people excluded from employment need to be used more effectively. This will allow a better use of the existing human capital and labour and thereby increase per capita income. Improving competitiveness and the better use of human resources are mutually reinforcing. Improving economic competitiveness increases the demand for skills and knowledge and it also helps increase employment, and the activity rate. In turn, the successful integration of people into the labour market and the improvement of their skills promotes economic competitiveness and higher value added activities. However, increasing economic competitiveness does not necessarily mean that the state of the environment improves or that automatically decline. 141

There are wide differences in the standard of living across the Hungary. Action is required to create the conditions in which all regions benefit by making use of their potential and the resources available. This requires improvements in living conditions, and the transport networks that link the regions. Creating enterprises, job opportunities and the development of skills locally are needed to retain the people in the regions. This will help mitigate regional differences and increase the well being and the social cohesion of the country. At the same time an improved environment also increases the real value of income of the population. In Hungary the state of the environment varies greatly. Where the situation is the worst, the NDP action will greatly contribute to the real income of the population. In addition, a better environment is a condition to a sustained development and the NDP strategy aims to reduce negative impacts on the natural resources of Hungary and promote a more rational use of them. The third objective is therefore the achievement of a better environmental and a more balanced regional development. The attainment of this specific objective does not only contribute to mitigating the real income difference relative to the EU, but it also influences the other specific objectives. An improvement in the quality of the environment improves the working conditions and the health of the population and in so doing economic competitiveness increases. At the same time it also facilitates a better use of human resources. A reduction in the regional disparities in public services increases the competitiveness of the overall productive sector, and leads to increased participation in the labour market. Actions relating to other specific objectives also influence the third objective: successes in increasing competitiveness, and improving human resources have repercussions on regional disparities and on the state of the environment. Increasing economic competitiveness creates resources for the improvement of the environment and reducing regional differences. However, in the effort to improve competitiveness, the NDP has to ensure that the appropriate environment standards are satisfied and do not destroy environmental resources. Actions should satisfy the horizontal principle of sustainability. Increased competitiveness may also result in either increased or reduced regional disparities, dependent on the regional pattern of competitiveness. Therefore, the NDP pays close attention is to the consequences of its action in this respect, so that it mitigates regional disparities rather than increasing them. As shown in the Situation analysis, Hungary lags significantly behind the EU average in terms of the development indicators. However, the implementation of these three specific objectives together ensure a dynamic and sustainable development of Hungary that leads to a better use of its human and natural resources and to the reduction in development gaps (see Figure 2.1). 142

Figure 2.1 Objectives, priorities and Operational Programmes of the NDP 143

3 THE STRATEGY Based on the SWOT the previous section sets the objectives of NDP. The NDP strategy provides a justification of links between these objectives and the future development actions. The short period for implementation and the resources available make it necessary to concentrate the funds into selected areas. The first objective of the National Development Plan is to increase the competitiveness of the country and its regions both on international and European Union level. In general, the choice of this objective is justified by the low productivity, the scarcity of capital, low level of technology, weak SME sector and the low use of agriculture potential, and low use of modern IT applications offered by new ICT technologies, the weak use of the results of information society, poor R&D activities and transport infrastructure, and underutilised potential for tourism. Joining the Single European Market implies a more intense competition for enterprises in Hungary. Eventually Hungary will be part of the Euro zone, and that will further increase the competitive pressure from within the EU. Therefore it is paramount that efforts are taken in areas that enhance the competitiveness of the productive sector. This objective covers the conditions that are needed to improve the income generating potential of productive sector in Hungary. The increases in efficiency and productivity are essential in the catch up process. To achieve these gains several actions are needed. A solid regulatory and macroeconomic environment and a well functioning institutional framework of a market economy are paramount. These have been put in place in the past decade. However, the weaknesses still exist, so structural actions are needed to strengthen competitiveness. The strength of the economy depends on modernising productive capacities, on stimulating capital accumulation, taking over new technologies, improving the quality of products and building business infrastructure: all these make a positive contribution to the objective. The introduction of new technologies is required not only for these purposes, but in order to reduce environmental risk, and reduce pollution. NDP will support these areas through promoting investments and providing physical investments to improve the performance of the productive sector. This is particularly important in those regions where under-utilised labour can be found. Competitiveness in Hungary is particularly dependent on the SME sector. The upgrading of their technology, improved management skills, improved opportunities in the capital market, a better business infrastructure, and developing SME s e-capacities to help their communication with their environment and business partners will all lead to higher value added and considerably strengthens overall competitiveness. There is significant potential to develop better supply chain links between SMEs and large firms, and among SMEs so that they could integrate better into international markets. The strengthening of female participation in the SME sector should also be promoted via equal access to business support measures and 144

entrepreneurial training. A more intense innovation, the new knowledge of the workers and the management all increase productivity. The strengthening of the development of new products, technologies in R&D centres, in both the corporate and the non profit sector will help to the attainment of the objective. These actions carry a lot of importance outside the capital, where R&D activity is low, and there is an underused local potential to pursue research (e.g. universities). The dissemination of the research results and brining new ideas to the market will help to increase competitiveness. But this is currently weak in Hungary. A more expansive use of information technologies in the enterprise sector, and in society at large facilitates the adoption of new technologies and e-learning, and so action related to this will enhance competitiveness. The formation of e-commerce, e-administration, the networks, and content development to foster information society leads to more rapid knowledge accumulation and value added. The improvement of telecommunication networks, the quality and security of ICT services, and applications and the network in underdeveloped areas contributes to improved competitiveness. The use of ICT improves the marketability of the products which is often leads to decreasing production costs. Economic progress is closely dependent on the links, effective co-operation in between administration and businesses, in order to maintain effective transactions. The potential of the tourism sector in Hungary is large. To strengthen overall competitiveness of the sector, investments are required to improve the quality and amount of accommodation and services, complex product and skills must be addressed by utilising the cultural and natural heritage of the country. These facilitate a higher spending per tourist and lead to an extended stay of the visitors in the country. Appropriate attention must be paid to the preservation of the environment so that the country s natural resources are not harmed by this development. In order to increase the benefits from local and the regional potential, accessibility between and within regions is desirable for increased competitiveness. This requires new social and business links to be established that improve local competitiveness. Such partnerships improve local administration, facilitate the rehabilitation of brownfield sites, and establish better networks between local universities and the business sector. Improvements in the quality of the environment, be it based on environment protection (sewage and waste management, improvements in water or air quality) or nature preservation, increases the attraction of the country as a tourist destination. It also improves the capacity of the population to work and thereby it increases competitiveness. A good community environment is crucial in attracting investments, too. Steps that promote a more efficient use of energy in the productive sector also have a positive impact. An efficient transport system connected to the European transport network is a major and direct contributor to economic competitiveness. It will facilitate the integration into the European Market and allows the development of new activities in the domestic market. Hungary should benefit from its geographical position by attracting high value services related to transport. However, due to its poor quality, the transport infrastructure risks becoming a constraint to development. Improvements in infrastructure will improve the accessibility of the country and its regions for tourists. The construction of transport infrastructure will mitigate the effects upon the environment and seek to preserve its natural resources. 145

Increasing economic competitiveness requires a better use of human resources. Active labour market policies support the increases in employment will help reduce unemployment. In Hungary the elimination of the mismatch between the education and the labour market would allow the development of a more productive and active labour force. The improvement of education and training as part of life long learning continuously increases the skills of those in work or still in schooling age. Life-long learning, self-motivated learning, the acquisition of skills and knowledge will be promoted by lowering the cost of learning through the use and spreading access to the Internet and web-based information and data sources. Increased competitiveness also requires a better use the disadvantaged groups of society. It is particularly difficult for women to return to the labour market, despite the fact that they are well educated. Another under-utilised and large group of society are the Roma whose better involvement in the enterprise sector would mean a better use of the country s human potential. The share of agriculture in GDP has been dramatically declining throughout the 1990s. Its potential is considerable, but that still remains under-utilised. The creation of an agriculture sector that is more competitive is vital for Hungary in the Single Market. The failure to invest new technology, the lack of capital, and failure to improve efficiency and modernisation would result in the further decline of the sector (in GDP). Considerable investments are needed, without that, despite its potential, the sector would become a burden on the rest of the economy. The modernisation of food processing, forestry, fishery contributes to an increased value added and helps to develop the potential of the sector. Many rural areas are poor and have been particularly hard hit by the decline of agriculture. The improvements of basic services and the development of skills that help replace usual agricultural activities (e.g. tourism, traditional activities, handicrafts) contribute to the increase of the income potential of these often poor areas. Success in modernising agricultural production and an increased prominence of other activities both assist the appearance of more competitive rural areas. The second objective of the NDP is to increase employment and to develop human potential. The choice of this objective is justified by the low participation rate in the labour market; the high share of long-term unemployment; social exclusion (disadvantaged and the Roma), the discrimination of women in the labour market, the low flexibility and ability of education and vocational training in meeting labour market needs and its weak infrastructure, and the weakness of services that promote employability. A higher level human capital helps to bring Hungary in line with the rest of Europe by making it easier for individuals, businesses, civic and government institutions to co-operate across the borders. Countries with highly skilled labour forces and better human capital have a better chance to catch up, thus, it is crucial for Hungary to develop its human resources. In addition to that, the skill-biased technological change and growth patterns observed in the world economy suggest that those countries that channel a major part of their resources into developing human capital should significantly benefit from technological development. Human capital has turned out to be a crucial factor for long-term growth in the world economy, and it is expected to remain so in the future. Henceforth, Hungary should invest in this field to avoid falling behind. A better-trained society also makes it easier to deal with cyclic fluctuations of the global economy. 146

Actions in a wide range of areas can lead to a better use of human resources. Promoting and improving active labour market policies, preventing and tackling unemployment and the strengthening of labour market institutions together contribute to a higher level of employment. Actions that ease the social and employment discrimination against disadvantaged groups of society such as the Roma increases social cohesion. These groups of society are concentrated in microregions that are lagging behind. Ensuring equal opportunities already in the schooling system and the support of social inclusion has large benefits for the future labour market performance. Direct measures to improve the current labour market position of the disadvantaged enhance their employability, and they lead to improvement in their social status. The improvement of access to ICT services and data, information and knowledge in underdeveloped areas, where disadvantaged groups are concentrated, contribute to local community and overall cohesion. It would also facilitate their inclusion in information society and help their social integration. A better participation of women in the process of economic development should be based on easier access to education, training and employment opportunities and on promoting the number of employers and training organisations adopting equal opportunity policies and working practices to reconcile work and family life. Actions relating to assisting the reintegration of the women in the labour market are particularly effective, as their level of education and their share among inactive are high at the same time. The need for higher level of human capital makes it necessary for people to obtain the necessary knowledge required by the continuously changing economy. The rapid advance of knowledge, and skills requires a permanent upgrading of the skills of the people. This learning means lifelong learning. The basis of this should be laid down already in primary education with the attainment of skills and competencies indispensable for lifelong learning. The concept of lifelong learning will help people retrain and upgrade their knowledge, thus improve labour market participation by tackling skills obsolescence and improving employment prospects. In order to better benefit from these actions the content and the methodologies of teaching and training need to be adequately developed. Vocational education and training system should also fit to the needs and structure of the labour market. There are a large number of SMEs and self-employed in Hungary. Actions that increase the employment capacity of these firms, improve their flexibility, their entrepreneurial skills, and improve their chances of survival contribute to higher employment and a higher quality human capital. In Hungary the state of infrastructure of education in some areas is poor and the quality of the building stock and their equipment in many areas causes problems in meeting the needs of education. The remedy to this situation is investment in the infrastructure of education that directly contributes to the objective by improving the quality of education. The poor health condition of the population seriously restricts the employability of the population, and results in high inactivity and leads to shorter working life. Communication between the service providers in health and the improvement of equipment in health are major bottlenecks identified in the area. Upgrading these areas will help raise the quality of the labour force, and increase competitiveness of the productive sector, too. 147

Increasing the capacity to attract and adsorb investment, the modernisation of production technology, and the improvement of business infrastructure result in a better performance of the firm sector. Successful actions that result in higher investment in the enterprise sector lead to higher employment. SMEs are labour intensive relative to the rest of the productive sector so enterprise development by improving the management skills in SMEs, their modernisation of technology, and the support given to improve their access to finance and their co-operation with other firms leads to increases in their labour demand. The role of R&D in contributing to a better use of labour resources takes several forms. The low level of aggregate and corporate R&D activities, and spending in Hungary restrict the competitiveness of the country. The improvement in R&D spending and the spin off activities help competitiveness and improve labour demand. A well functioning R&D system directly contributes to a higher quality workforce in the field and their better employability. The improvement in spin off activity serves the creation of new industries with high quality workforce and that pursues high value added activities. Actions relating to the environment improve the employability by improving the health of the population. In number of areas there is need to improve the environment and that serves a better employability by a better quality environment of the labour force of the country. That requires an increased environment awareness of the population and training. Transport infrastructure improves accessibility of underdeveloped regions and areas, both from within the country and from outside, and so it improves work opportunities by increasing competitiveness of the regions and areas that benefit from the development projects. It also helps people to find work by increasing the range of jobs that can be taken as these projects improve conditions for commuting There are large regional and local differences in employment opportunities. Many areas of action help mitigate these differences. However, local knowledge can be best used at the local level, so actions at the local level have high potential to contribute to a better use of human resources. Enhancing the social economy contributes to job creation and help to reintegrate the most disadvantaged. The improvement of employability and the flexibility of local SMEs are also a feasible field of action to reach the objective. This is particularly so in the case of tourism, where the use of local potential has high rewards. A better use of human resources in agriculture can be served in many ways. Actions that improve the technology, efficiency, and assist the modernisation of the production in sector increase competitiveness and so they contribute to reducing imbalances in the labour market. Due to new technologies agriculture releases a large amount of labour. Therefore the retraining of people employed in agriculture is needed. At the same time the support and training of young farmers is required to prevent the appearance of similar problems for them in the future. In rural areas the improvement of employment opportunities requires the diversification of local activities away from agriculture and the so there is a need for training of people new activities and the introduction of new sources of income. A better preservation of local cultural and natural heritage help the development of tourism that is a dynamic industry providing new employment. 148

The potential contribution of investment in human resources is developed further in the Policy Frame of Reference for Human Resource Development (See the Annex at the end of the chapter). This sets out the framework for Structural Fund support for human resources in supporting both social and economic cohesion and the European Employment Strategy in Hungary. The third objective is to raise the quality of the environment, to provide for a sustainable natural resource management, and to achieve a regionally more balanced development. The choice of this objective is justified in general by the need for the reduction of environmental burden, by the large regional disparities in quality of life across the country. Economic competitiveness and the reduction of the gap in income do not automatically provide for improvement of the environment. This objective is required to ensure that economic activity does not lead to unsustainable use of the environmental resources. The other aspect of the objective concern regional disparities. While in some regions real income is close to the EU average, in others it is less than one third of it. These differences reflect a variety of reasons that need to be addressed in the NDP. Although in general, the state of the environment and nature conservation is not bad relative to the EU, in a number of important respects a considerable improvement is required. These areas of action are closely related to community environment. Waste and water management, the improvement of the water quality, the reduction of air pollution are issues that considerably increase the welfare of communities. Another field of action that presents concern for the communities is the improvement of flood control and the water pollution control. For the improvement of the environment a better use of energy is also required. Now a unit of GDP is produced with fifty percent more energy than in the EU. If that continues it ignores the value of energy conservation and leads to an unsustainable use of resources. The state of the environment must not be harmed by damage to biodiversity either. A reduced biodiversity is undesirable from a preservation point of view, and it would have serious consequences for tourism and local activities related it. These action all contribute to a better quality environment. The community environment can be further improved by certain types of transport infrastructure developments. The diversion of traffic from environmentally sensitive areas alleviates the burden on the natural environment. In other cases the building of by-pass roads reduces environmental risk to communities. The regional disparities in the quality of life have a number of factors. Differences in local and regional skills, accessibility and the potential for linking with other regions and communities varies, and so does the quality of public services, and the share of disadvantaged communities in local population. Action to mitigate the disparities depend on improving the potential of local enterprise to absorb capital, to draw new kinds of investments, and to create job opportunities that correspond to local labour force patterns. Special attention should be paid in the regions to all sections of society to ensure equal opportunities between men and women. A better use of domestic potential requires local universities to co-operate with local enterprise more closely, that helps find new sources of competitiveness. This would be 149

particularly effective in the poorer parts of the country. other sources of local potential are the utilisation of brown fields and the improvement of community environment that increases regional and local quality of life. The elimination of transport bottlenecks that threaten to hinder the local and regional production activities is needed for a better use of resources. At the local level the construction of bypasses and ring roads to ease the local traffic, improve the quality of living and increase the safety of the inhabitants are seen as necessary in their development. In areas with potential in tourism, the existing tourist attractions need to be developed so that they would be more competitive in the international market. At the same time, the utilisation of cultural and natural values of areas that are lagging behind foster the creation of new jobs and increase the entrepreneurial activity by expanding the range and improving the quality of services. In these actions attention is paid to ensure that these developments do not result in damage to the environmental and natural resources. In rural areas the potential for development is based not only on tourism, the modernisation of agriculture, food processing, forestry and fishery. The diversification of activities into handicrafts and the production of special local products, the preservation of local culture contribute to the introduction of new sources of prosperity. Support to the development of basic services in rural areas helps the development of new businesses and serves the needs of local population. In general, improving competitiveness through the modernisation of the productive sector and by improving the business infrastructure contributes to the improvement of the environment by creating financial resources. However, the NDP puts emphasis of such sources of competitiveness that ease the pressure on environment. Such policies are aimed at increasing the role of R&D policies and technology intensity of production, and the spreading of the results of information society so that the resource intensity of production declines and the value added content increases at the same time. The modernisation of the SME sector is required in this respect as these are the firms that lack environment friendly technology and will find it difficult to adapt themselves to the environmental aquis. So successful action in this field leads to an improved environment. An improved use of regional and local human resources facilitates the mitigation of regional disparities. This should reflect local education and training needs of the local population, and alleviate the reintegration of the disadvantaged section of society (the Roma minority) trying to return into the local communities and the local labour markets. That is also supplemented by the need for the reintegration of women into the local labour markets so that local human potential is utilised more fully than before. In general a higher level of human capital leads to a better environment by improving environment consciousness, and by generating additional resources for protecting the environment through a better-trained workforce. In a bettereducated society it is easier to increase environment consciousness and implement environment friendly policies. Areas of action have been identified that contribute to the achievement of specific objectives, and they assist the reduction of the real income gap in the current planning period. At the same time they help in attaining our longer the term objective, the improvement of quality of life of the people of Hungary. 150

The strategy has identified four main areas of intervention based on the discussion of the objectives of the NDP and the areas of policy action. These are: the productive sector requires action to promote productivity; innovation and other factors that improve competitiveness human resources need education, training, better health and expanded labour market opportunities; infrastructure requires action to improve the transport system and to ensure better environment protection regional disparities require a more balance development and a fuller use of local and regional resources Based on that the priorities selected for policy action for 2004-2006 are: Improving the competitiveness of the productive sector Increasing employment and the development of human capacities Providing better infrastructure and cleaner environment Strengthening regional and local potential The relative importance of the priorities is reflected in the Chapter 4 of the NDP, where the financial tables are presented. The chosen priorities correspond to the level of development of Hungary and the SWOT. In formulating the priority areas the following points have been accounted for: The development needs of Hungary based on the SWOT and the Situation Analysis The financial terms of the use of EU funds, the conditions of cofinancing The certainty with which the investments can be implemented The experiences of other Objective 1 countries The experiences of earlier Hungarian development programmes In addition to the four priorities a fifth priority has been set up covering all the actions that are needed to ensure a sound and effective use of public resources in the implementation of the NDP. This priority is: Technical assistance 151

As it was indicated in the strategy there are a number of areas where action is needed to ensure equal opportunities and sustainable development. The above mentioned priorities will therefore be implemented taking into account these two horizontal principles. 152

4 PRIORITIES Now we present the priorities areas of the NDP, the intervention areas, and their relation to each other. 4.1 INCREASING THE COMPETITIVENESS OF THE PRODUCTIVE SECTOR (PRIORITY 1) Key issues: While Hungary has made major steps towards industrialisation, agriculture remains the predominant industry in rural areas and is critical to rural employment, development of rural areas and social inclusion in those areas. The Government has reflected this significance through a high allocation of resources to agriculture within the period 2004-2006. The development of agriculture in this period will concentrate particular on investment to modernise the agricultural sector and on the development of the food processing industry an area where Hungary has a significant international competitive advantage which is being eroded by current low levels of investment in new technology. Investment from Priority 1 in the regional and rural economy will be relatively low as the sector will receive significant support under Priority 4. In the industrial sector concentration in 2004-2006 will reflect the need to support further investment in higher technology industries while increasing linkages between Hungary s SME sector and large-scale investors. In this programming period this will mean a concentration on investment in infrastructure to encourage investment in selected technologies and support programmes to encourage sub/contracting, the development of specialist clusters and the transfer of technology from universities and research institutes to enterprises. Hungary considerably lags behind the EU average in productivity in all sectors, and so its economic performance is weak compared to its future competitors in the Single Market. There have been a number of areas of action that serve the formation of a more competitive productive sector and so their joint treatment in one priority is desirable. There are several areas of actions that promote the competitiveness of the productive sectors. An increase in the non fiscal competitive advantage of Hungary as a location for foreign direct investment needs to be addressed. Other areas of intervention include the promotion of investment activity, the development of SMEs, the support of research and development, the creation of the condition to an information society, and the improvement of agricultural performance. A better performance of the productive sector needs better-trained and equipped workers and modern machinery. The first element requires the increase in investment in the economy, 153

while the second expresses the need for higher technology. Competitiveness is increased through promoting investment, the development of business infrastructure 6 and the use of higher technology, and by helping producers to carry out successful innovation activities. Successful innovation activity allows the development of higher value added products, strengthen the international position of domestic products, and they lead to a lesser use of environment. It is not only the development of new technologies and products that lead to a higher value added, but other activities (such as the use of know-how and franchising, too). A more expansive use of information and communication technologies and applications based on modern ICT, as well as extensive use of information offered by them have large potential in improving the competitiveness. Better marketing skills and the knowledge of the management of firms also contribute the development of higher value added products, and increased competitiveness. Actions will be aimed at reducing the two economy pattern. This implies actions that facilitate co-operation between large firms and the SMEs by enabling small and medium sized firms to meet the subcontracting requirements. Investment and the level of technology is particularly low in SMEs. This is indicated by the fact that they carry much less weight in value added and exports than in employment. The large increase in productivity in sectors dominated by large foreign multinational brought little benefits to them. Technology transfer from them has been small so action facilitating that contributes to increased overall productivity. These firms typically have low technology, are ill prepared for the new environmental standards, and have a deficit in skills. Their dispensation with outside financial and business advice also restricts their competitiveness. Compared with international trends their research and development activity is particularly small. The alleviation of these problems contributes considerably to the competitiveness of the productive sector. The simplification and improvement of the administrative and regulatory business environment for small enterprises is another crucial step in order to promote firm performance. There is a need to reduce market deficiencies in the provision of business services and finance to smaller enterprises thus enabling small businesses to improve their competitiveness, to gain access to new markets and to develop new products, thereby generating growth and employment. It is particularly problematic with regards to the productive sector that very little innovation and research and development are taking place. This issue embeds into a wider problem of low research and development activity. In countries with better-developed research and development the role of both non-profit and corporate research is much higher, and crucially, there is a substantial spillover from the non-profit sector to the firms. The development of new results, technologies, and products lead to a higher value added and more technology intensive production. R&D in the firm sector, in the non-profit sector and the links between them is to be enhanced. The support of information society and knowledge economy is needed as the new technologies they represent a potentially large part of future sources of competitiveness. These technologies are the engine of future progress, contributing to all sectors of the economic and social life. Well-developed knowledge driven management and marketing methods, production and costumer-relations may largely increase productivity, opportunities to enter 6 Industrial parks, enterprise development zones and logistical centres 154

new markets, and widen business opportunities. The development of partner networks, e- commerce services and content bring large benefits for the productive sector. The development of information industry and the content of e-services vitally supplements these areas of action. These technologies also lead to a higher value added and to such an industrial structure that is cleaner and more efficient at the same time. The modernisation of agricultural production and fisheries is desirable as its productivity lags behind that of the EU. Actions contribute to increased competitiveness by revitalising an ailing sector of the economy. They include activities that lead the increased of productivity, efficiency, and the improvement of the productive structure. The introduction of new technologies that facilitate the development of high value added product are supported. In addition to these the improvement of environmental, hygienic and livestock welfare conditions are areas where action is particularly justified. In order to reap the benefits of a more productive and higher quality agriculture, there is a need for improvement along similar lines in the processing of agricultural products. Investment in fishing facilities and in raising the standards of fish production and processing will also be promoted. The modernisation of food processing is vital if the country wants to turn better agricultural production into high value added and competitive food products. To this end the introduction of new technologies in production is foreseen. These technologies do not only allow a better production performance, but are combined with appropriate investments with a better protection of the environment. These measures are supplemented by improvements in quality of the product, food safety, and a better system of marketing. Therefore, food production is more productive, with better and higher quality products, while accounts for environment concerns at the same time. In rural areas there is need for the improvement of basic services, and the development of skills. These should help replace agricultural employment with other activities such as tourism, handicrafts. These actions should go in hand with the modernisation of agricultural production as well. There is also a large scope for improving and a better use of rural potential by improving access, networks and by diversifying into new activities. The grouping of these areas of action is justified on the grounds that in the longer term they serve a different productive sector in Hungary from the current one. It is not based on low value added activities in a dual economic structure, but it would help the creation of a dynamic productive sector with cleaner technology, better management, a wider use of the results of information society, and the results of research and development activities. In these productive sector domestic firms, particularly SMEs, draw substantial benefits from the presence of large and foreign firms. Under the first priority actions related to investments, SMEs, research and development, and information society will be funded from the European Regional Development Fund (ERDF). Measures related to agriculture and rural development are financed from EAGGF and fisheries from FIFG, respectively. The priority will be implemented through the Economic Competitiveness Operational Programme and the Agriculture and Rural Development Operational Programme. 155

4.2 INCREASING EMPLOYMENT AND THE DEVELOPMENT OF HUMAN RESOURCES (PRIORITY 2) Key issues: Hungary has the long-term objective of becoming a knowledge-based society. All the actions described below are considered essential first steps in creating the foundations of such a society. Hungary has an excellent and well regarded academic educational system, but substantial investment is required in the upgrading of its schools and other educational infrastructure if this excellence is to be maintained. The Government has reflected this significance through a high allocation of resources to educational infrastructure within the period 2004-2006. The extension of education into a policy of lifelong learning is vital if Hungary s workforce is to maintain the flexibility and adaptability to change essential to maintenance of international competitiveness and for this reason the Government has allocated significant resources to supporting education and training in 2004-2006. Hungary suffers from high level of inactivity within the labour market due to previous labour market policies. Vocational and educational skills for a wide segment of the population do not meet the demands of a modern labour market. The development of active labour market policies and the modernisation of the Public Employment Service are vital to overcome these issues. The Government considers these to be vital aspects for urgent attention and therefore has given significant allocation of funds in 2004-2006 to this area. Another key cause of inactivity within the labour market is the poor state of the nation s health compared to EU Member States and other accession countries. The Government plans major investment in health infrastructure linked to skills upgrading in 2004-2006 in order to improve as a matter of urgency the state of the nation s health and thus reduce the level of inactivity of the labour force. Equal opportunities for men and women is a fundamental policy of the Government and is reflected through a horizontal policy of gender equality running throughout the NDP. In 2004-2006 the Government plans an educational and awareness programme for opinion formers and society at large to help embed the principle of gender equality throughout Hungarian society. Improving adaptability and the development of entrepreneurial skills receives a relative low allocation of resources in 2004-2006 reflecting the significant allocation to SME development under Priority 1 in 2004-2006. The second priority is the development of increasing employment and the development of human resources. A higher level of human capital increases productivity and competitiveness. The shortcomings of the current state of the Hungarian labour market and the deficiencies of public services promoting employment highlight a number of problems where appropriate measures are needed. 156

Despite some strengths in quality of the labour force, the existing skills will prove inadequate to the needs of a market economy that is based on high value added activities and not on low skills and low wages. As the economy grows, these deficits in the human capital stock are not automatically solved. Investments targeted at the development of human capital are to bridge the skill gap. The strategy will embrace elements of active labour market policies aiming at the improvement of employability, preventing and tackling long-term unemployment and supporting the reintegration of the unemployed and the inactive into the labour market. In addition to increasing the number of unemployed participating in active measures and the ratio of input, emphasis should be laid on enhancing effectiveness and quality. In order to achieve sustainable results, the effectiveness of labour-market oriented training, job brokering and other services of the Public Employment Service should be improved. The increased level of employment requires the promotion of job creation, through supporting training programmes related to investments and direct and indirect support for selfemployment and starting up businesses. Actions in this field comprise training of the young people, too. The widening of provision of higher level and post-secondary vocational courses in order to increase the numbers of young people opting for this route is desirable to ease their transition into work after secondary schooling. The training of entrepreneurs helps to increase the employment capacity of these firms, improve their flexibility, their entrepreneurial skills, and improve their chances of survival, contribute to higher employment and higher quality of human capital. The improvement of access to training/employability for the most disadvantaged groups (including the long-term unemployed, the young, the elderly, the disabled, and the Roma) is a requisite to a further increase in employment. The tackling of social exclusion by improving employability of the disabled, the Roma minority and other disadvantaged groups complement other actions in promoting employment and in their contribution to the improvement of their social conditions. These actions are required as the Roma are at particular disadvantage in the labour market and that the inadequate integration of the Roma into society weakens social cohesion. Special attention will be paid to the entry and improved participation of women in the labour market, including measures that facilitate their access to new jobs, launching business enterprises, reduces vertical or horizontal segregation by gender in the labour market, and increasing participation and the rate of self-employment of women. Despite the fact that women are often well educated, they often face discriminatory working practices, and find it difficult to return to the labour market. Measures will be taken to improve the opportunities of a better female labour market performance with equal opportunities. The promotion of employability and the needs of the labour market as part of lifelong learning is an area that contributes to improving human capital. In implementing a successful lifelong policy priority should be given to the modernisation of the content of both general education and vocational training, training teaching staff and improving and modernising the teaching material, and its dissemination. These actions foster the development of basic skills and competencies. The structural development of the education and training makes them more 157

responsive to the needs and expectations of the society. The improvement of educational and vocational guidance is also an inherent element of such a strategy. The increase in the adaptability and the promotion of better entrepreneurial skills and an increased performance of the firm sector. The increased needs of the firm sector will have to be matched by education and training. These actions are supplemented by better adult education that further promotes employability. The state of the building stock and equipment in education is often badly in need of repair and improvement in many areas of the country, and action in the field increases the efficiency of teaching. The general health of the population of Hungary is weak, and it seriously hinders performance in the labour market. It compels many to become inactive early, and reduces the productivity of work in general. The equipment of hospitals and communication between service providers is poor, investment in the outpatient care considerably increases the effectiveness of the health service. These interventions are helpful in enabling the health system to cope with the burden of Hungary s ageing population. The areas of action give a consistent picture of active labour market policies and education. They jointly contribute to the removal of the mismatch between the labour market and the output of education and they lead to higher employment, lower unemployment, and a better quality of the labour force with better health. In this labour market and education disadvantaged groups enjoy better opportunities than before. Labour market and education related areas of action are supported by the desire to tackle social exclusion and steps are taken that mitigate the discrimination of the Roma in the labour market and in education. This contributes to their social reintegration and an improvement in social standing. The potential of these actions are enhanced by areas of action that have beneficial longer term implications by promoting life long learning, the development of the physical infrastructure and the equipment of education. The second priority is assisted by two Structural Funds. Employment, education and training are supported by the Human Resources Development Operational Programme and it is funded primarily by the European Social Fund (ESF). To implement infrastructure development related to human resources development, the Operational Programme also uses the support of the ERDF. This priority is closely related to the implementation of the European Employment Strategy in Hungary. 158

4.3 BETTER INFRASTRUCTURE AND CLEANER ENVIRONMENT (PRIORITY 3) Key issues: The Government has defined a clear policy for the separate but linked implementation of the Cohesion Fund and the Structural Funds to support closure of Hungary s infrastructure deficit and the improvement of its environment. The Government plans significant expenditure in 2004-2006 utilising the Cohesion Fund on improving transport links especially the Trans-European Networks and on major expenditure on the environment. Hungary s rural settlements are poorly served with respect to effective waste water and sewage treatment. The Government intends to concentrate significant resources in 2004-2006 on reducing this environmental infrastructural deficit and thus ensure a more balanced quality of life between the nation s urban and rural inhabitants. Transport expenditure using the Structural Funds in 2004-2006 will be comparatively low reflecting the Government s initial priority to concentrate Cohesion Funds on developing the major transport corridors essential to reducing the unbalanced development between the East and west of the country. Transport expenditure from the Structural Funds will concentrate in this programming period on the development of feeder roads to link with the new major transport arteries. The third priority is the development of a better infrastructure and a cleaner environment in an integrated manner. The priority is justified on the grounds that there is a considerable gap in the transport infrastructure of the country compared with the EU and also by the fact the fact that Hungary lags being in many respects in her protection of the environment. The joint treatment of the two areas of action is based on the recognition that both areas are crucial for the development of the country and that they are closely related. The joint treatment of the two areas of action ensures that the modernisation of Hungary, in which transport infrastructure has to play its role, will be an environmentally sustainable one. Hungary s road system is inadequate to serve the development of the country. Its motorway system is small even for modest size of the economy and only partially links the country to her international partners and is inadequate for domestic transport needs. The density of the road system is generally acceptable, but its quality is in such a poor state that it fails efficiently to link regions and restricts achievement of their potential. The railway system is in a similar situation: its density is adequate, but its quality is not up to the standard of the EU. In air transport the national airport has reached the limits of its capacity, while regional airports play essentially no role in economic activity, despite the fact that in international comparison the air transport of Hungary would justify the use of around three regional airports. In water transport the Danube is significantly under-utilised as an international corridor, and investments are needed to improve the situation The main areas of development in this sector are therefore the expansion of the motorway system and the improvement of the current road system. The construction and improvement of some important train lines is also foreseen. The significant improvement of the infrastructure on the Danube corridor (the modernisation and expansion of a port south of Budapest is 159

projected) and an enlargement of air transport facilities will also take place so that they can serve the increased demand for air travel and cargo. The national airport and two regional airports shall be expanded. Since heavier road traffic inevitable increases the environmental burden, it is crucial that transport development is carried out with the least possible burden on the environment. To this end the construction of by-pass roads that improve community environment and the promotion of railway developments that replace road transport are emphasised. The establishment of a developed public road network requires the development of infrastructure in co-operation with the population and non-governmental organisations involved in the protection of the environment. Investments financed by the Cohesion Fund concentrate on the Helsinki road and railway corridors. Under the Cohesion Fund the development projects that facilitate the use of the Danube as an international transport corridor are also foreseen. In the framework of Environment and Infrastructure OP, the development of expressways and highway sections connecting to the corridors, constructing by-pass roads and developing regional airports are financed by ERDF. Developments supporting the improvement of intra regional accessibility are also financed by ERDF in the Regional Development OP. Thus, the development of the transport network and the allocation of the funds are planned with a clear division of tasks. The long-term objective of NDP is the improvement of the quality of life, which cannot be reached without appropriate regards to sustainability and environmental concerns. Improvement in the infrastructure of environmental protection contributes to this objective to a large extent. Areas of action comprise the environmental protection of the main towns and concentrate on areas where the gaps compared with the EU average are considerable. Investments are directed to developing waste water facilities, improving the quality of surface and ground waters, developing complex solid waste collection and treatment systems, and reducing air and noise pollution concentrated in industrial and urban areas. The improvement of environmental safety (flood control, water pollution) is a paramount, as in recent years such changes have taken place in the environment and nature that endanger the quality of life in large areas of the country. The strengthening of nature protection are important areas where investments take place to preserve biodiversity. Cohesion Fund concentrates on four areas: waste water and solid waste management in larger towns, large projects to improve the quality of drinking water, and the removal of land contamination. Investments into solid waste and drinking water management concentrate on developing systems of regional importance under the Cohesion Fund, while the Structural Funds finance individual supplementary systems that link up with the regional ones. The division of action in the area of waste water between the two funds is that projects in large towns take place using CF funding, while projects in smaller towns are funded by the Structural Funds. The removal of large land contamination will be removed with the help of the Cohesion Fund, while smaller ones under the Structural Funds. It must be noted that the Structural Funds will be directed to nature protection, environment safety, and smaller projects relating to the provision of quality water. Reduced air pollution and noise in towns and industrial centres are also funded under Structural Funds. Furthermore, the Structural Funds will invest in nature protection, environment safety, and the expansion of the role of renewable energy. 160

Besides the protection of natural resources and keeping the biological diversity, the development of environmental friendly energy sector is also a key to an environmentally sustainable development. Incentives for production of renewable energy and support energy saving systems contribute to the long-term objectives of NDP to a large extent. This priority is internally coherent as it jointly sets out to develop the transport infrastructure and it ensures the appropriate environment standards are respected on Hungary s path of development. The joint treatment assists to avoid an income convergence to the EU average that is based on an extensive use of the environment that would endanger the state of the environment. In fact, the strategy foresees transport developments required by economic prosperity to go in hand in with appropriate regards to environment and nature. The Cohesion Fund and the ERDF will finance the priority. Regarding the latter, actions under this priority will be implemented under the Environmental Protection and Infrastructure Operational Programme. 4.4 STRENGTHENING REGIONAL AND LOCAL POTENTIAL (PRIORITY 4) Key issues: Tourism offers the best prospects for significant economic growth in the less developed regions of the country and thus receives significant concentration of resources in 2004-2006. Priority 4 will address tourism at both a national and regional level to ensure a coordinated approach to the development of the sector. Investment is also planned to improve other areas of the regional economic environment, including the development of community enterprises and the linking of enterprise and education at a regional level. Significant investment is also planned in 2004-2006 for the rehabilitation of regional settlements and the development of the network of local roads to provide access to tourism attractions and regional business support infrastructure. This reflects the importance the Government gives to improving the quality of life in regions and in creating regional employment to help stem urban and sub-urban migration. In the programming period 2004-2006 Hungary will not implement separate NUTS 2-level RDPs, but may well choose to do so in future programming periods. The Government plans essential investment in capacity building at regional and local level to ensure capabilities exist to manage and implement such future regional development programmes. This priority is justified on the basis of the large regional disparities in Hungary. While in some regions income levels of close to that of the EU-15, in others it is less than one third of it. The origins of these disparities are due to several factors: geographical situation, inherited industry structure, poor economic, and human conditions, abundance or limitedness of natural and cultural heritage, and poor accessibility were crucial in the formation of the current situation. The large regional differences exist between the East and the West of the country, between the capital city and the rest of the country. In addition, there are large discrepancies 161

within regions and across microregions, too. Therefore, this priority should serve this special, local and regional needs flexibly. To reduce regional and socio-economic differences, development actions must take place to enhance the economy of the regions, to stabilise medium sized towns by improving living conditions and employment in underdeveloped regions. It is crucial to prevent these regions from falling behind by the promotion of a better utilisation of their resources. Tourism is an activity where regional and local differences are a potential. The development of tourist sites is combined with the development of their marketing. Investments are made to improve the benefits drawn from local natural and cultural heritage. The more attractive tourist sites and their marketing should be complemented by better accommodation facilities and services. This kind of integrated development of tourism leads to a more complete, higher quality service that allows a higher value added in the sector. The modernisation of tourism-related infrastructure and the improvement of their efficiency are crucial. The improvement of the infrastructure (e.g. better public transport connections, improved local roads, and signs, complex tourist products, managed foot/cycle paths) allows a better service and a more effective use of existing resources. The sustainable treatment of existing cultural and natural heritage should supplement the development of the infrastructure. The provision of ancillary service such as better facilities for people with disabilities and a more efficient provision of information should be part of a modern tourist industry. Regional and local quality of life depends on the state of networks. One of the most important networks is transport infrastructure. Investments in these areas help locals by upgrading road leading to local industrial parks and logistic centres improve the conditions of public transport and construct bicycle lanes. It is not only the roads leading to industrial sites that need upgrading, but often the sites themselves. Another network development is more social in its orientation. These measures of the NDP aim at improving the community facilities in dilapidated areas with high tourist potential. In addition, the development of community buildings, green areas, sports facilities, and the rehabilitation of housing estates in poor condition is on the agenda. These actions help regenerate communities that have hardly benefited from the transformation of the past decade. The state of community facilities considerably depends on the wealth and the spending priorities of municipalities, and this results in a great variation across communities in this respect. Help is needed to mitigate this discrepancies. Furthermore, in some microregions extreme poverty prevails, and this is associated with high numbers of the Roma community who live in those areas. Steps are taken to improve the infrastructure, housing, and the dangerous and unhealthy environment these people often live in. Differences are apparent in the quality of community environment. In the past decade there have been a great shortfall of investments in the brown fields. The rehabilitation of brown fields in former industrial areas and military bases is another source of economic activity. Improving waste water management in villages will also be implemented under this priority. These action complement efforts to create a competitive tourist sector. In local communities different energy sources can be optimal. This depends on the energy suppliers, and local natural resources. Communities realised that it can be better for them to 162

have their own (small) energy generating facilities and this provides an opportunity to develop renewable energy sources, and improve local quality of life. The development of economic activity is weak in many areas partly because local enterprises have little or no contacts with universities and rarely benefit from their presence directly. Outside Budapest university education is concentrated in the poorer regions and this potential is currently under-utilised. The usual interaction between universities and the enterprise sector in most regions is very weak. Spin off activities and businesses based on the knowledge base of the region and research of the universities is scarce. There is a need for the development of regional knowledge centres, from which local and regional businesses benefit, and they contribute to local prosperity. This interaction is facilitated by investments in the services and the infrastructure of these universities. These actions help establish the towns with universities as a driving force of development of the regions. The improvements in community buildings and physical developments need to be coupled with actions on the human resources development side: the employment of disadvantaged groups of the local communities is supported on one side, while on the other SMEs and entrepreneurs are trained to make a better use of their own potential. Recently observed economic processes hint at a different kind of difficulty as before. There is an increasing demand for skilled and flexible labour force. While some regions can be characterised by the lack of labour force with appropriate skills, in others there is still a large number in active people without marketable skills. In order to reduce the disparities in regional labour markets, it is especially important to improve the employment capacity of the high number of long term unemployed in areas that are lagging behind. As demand for labour increases, support should be given primarily to participation in retraining and improving the ability to adapt to the needs of local enterprises. There are large differences in the labour market across regions, counties, and microregions. In areas where the employment rate is remarkably low and the unemployment rate is above the average. The establishment of the social economy, that is, the emergence of activities based on local initiatives should be given a special role and support should be given to them. However, a more significant increase occurred only in certain regions and industries, which is partly due to the fact that the skills of the registered unemployed do not meet the requirements of the employers. Inactivity is highest in certain social groups (primarily the Roma and the people with disabilities) and concentrates in certain areas. Problems arising from the high unemployment rate and low employment level in these groups are characteristic for regions with low economic activity. Local public administration and non-governmental organisations play a pivotal role in shaping the quality of life in local communities. Their poor operational efficiency and low level of co-operation with each other is characteristic in all across the country. In addition, local administration should be trained so that it would be able to cope with the participation in Structural Funds programmes. That requires organisational, language and IT skills. The priority is justified as it reflects the integrated approach regional development takes. Accordingly, a number of factors have to be addressed so that the measures jointly will be effective. They can be very different from region to region, however, the needs indicated that 163

the development of local potential based on business infrastructure, the development of network, transport, administrative and social inclusion at the same time contribute to a birth of regional prosperity. Overall the priorities together suggest a path of development for Hungary that is dynamic enough to take a large step ahead in catching up with the EU. The prosperity associated with this path is based on activities with more value-added production, based on a highly skilled population. At the same time this path is such that it helps preserve Hungary s natural and cultural heritage and contributes to the higher profile and a better life of the disadvantaged groups in the country. This priority covers a range of measures, most of which are funded by ERDF. These channel investments to tourism, and to the development of accessibility and community infrastructure. The human aspect of community development, however, is funded by ESF. It involves the training of local administration, entrepreneurs, and the disadvantaged of the communities. The measures of the priority are managed by the Regional Development Operational Programme. 4.5 TECHNICAL ASSISTANCE (PRIORITY 5) Key issue: The Government has allocated resources to support the implementation of the Community Support Framework and the Operational Programmes in the period 2004-2006 to improve the efficiency of both management and implementation. In accordance with EC Regulations 1260/99 Article 23 Technical Assistance is made available to finance the preparation, monitoring, evaluation and checking of measures necessary for implementing the Structural Funds. A Technical Assistance Strategy has been designed to ensure that Technical Assistance resources effectively contribute to the Structural Fund interventions. Main areas of technical are as follows: To ensure strategy and cohesion between the Structural Funds and the National and Regional strategies and where these strategies are not fully developed, to assist in their advancement. To commission research supporting the development and delivery of Structural Funds. To support the development and embedding of the cross cutting or horizontal topics. To assist in the implementation and delivery of the Programmes efficiently and with accountability. To conduct effective monitoring and evaluation of the Programmes. To maximise the quality and impact of the Programmes. To ensure good communication channels and publicity for the Programmes. 164

To assist and strengthen the institutions involved in the implementation to reach adequate levels of performance while handling the Structural Funds. Taking into account these priorities and the guiding principles, The Government has, first, identified those measures in the Regulation which are best able to address those Priorities. Second, taking account of the overall level of funding and, where relevant, the existence of other instruments to meet national objectives, The Government sought to prioritise which measures should be used and the reallocation of the funds between them. 4.6 EXPECTED IMPACTS OF THE NDP 4.6.1 Macroeconomic impact assessment To approximate the impacts of the NDP on the performance of the Hungarian economy, a modelling exercise has been carried out. That analysis has been based on a macroeconomic model constructed for Hungary. The macroeconomic model was specified with one purpose in mind: it should be able to evaluate the macroeconomic impacts of the various instruments of the NDP. The measures of the NDP are primarily aimed at the supply side of the economy to foster structural change, growth, convergence and employment. However, a complete impact analysis of NDP has to consider its effects both on the supply and the demand side, and the interdependence of the two should also be accounted for. The model has drawn on different models of Hungary and other countries. The core of the model s supply side rests on a model developed for West Germany. It has been used extensively and successfully for simulating the impacts of regional investment subsidies, regional policy reforms, and changes in technological efficiency on labour and investment demand, output and labour productivity growth in areas of West Germany. However, it is a partial model that only covers the supply side of the economy and is not able to capture the effects of NDP on the demand side. To remedy this shortcoming, demand side mechanisms have been installed in the model in a conventional way as developed in several other macroeconomic models and also, e.g. in the OECD-INTERLINK sub-model for Hungary. In this macroeconomic modelling framework a third aspect has been introduced. Investments in basic infrastructure, human resources and research and development have an extra impact on the supply side of the economy, as they impinge upon the level of technology, so enhance long-run growth of output and productivity. Therefore, the model has been extended by separately modelling Total Factor Productivity (TFP). The complete equation system of the macro-model for Hungary is made up of four main blocks: 165

A supply side block including a labour market, representing the economic activities of the business sector, production, productivity (labour efficiency), investment, employment and unemployment, production costs and inflation. A demand side block, determining the most important behavioural relationship of the private households, consumption, and other components of final demand (government consumption, foreign trade etc.) in real and nominal terms, and their deflators. The income distribution block, determining private and government income (labour and property income, profits) and the transfers of income between these private households and the government (taxes, social security transfers, other transfers between these sectors). The Total Factor Productivity block modelling changes in TFP as a function of knowledge-related variables and other NDP measures such as the promotion of physical infrastructure and human capital. Policy simulations were carried out using the macro-model extended by the TFP-function. The various NDP measures are introduced into the model, and then a scenario with policy influence is drawn up. That scenario is compared with the no NDP policy (baseline) forecast for the period covered by the simulations (2004 to 2010). The results, obtained then by subtracting the baseline from the policy scenario, represent the effects of the NDP interventions on the Hungarian economy. The simulated impacts of the NDP interventions are shown together in Table X. The intervention measures assumed in the scenario have been based on the financial tables of the NDP. The impacts on three basic variables are discussed shortly: GDP growth, capital formation, and employment. 166

Table 1.6 Demand and supply side impacts of the NDP Demand and supply side impacts of the National Development Plan NDP measures assumed to run out after 2006 -Differences to baseline in % (1) or absolute terms (2)- 2004 2005 2006 2007 2008 2009 2010 Gross Domestic Product, Volume, GDPV (1) 2,43 3,23 4,05 2,62 2,66 2,67 2,68 Growth Rate of GDPV, DGDPV (2) 2,40 0,77 0,80-1,39 0,05 0,01 0,01 Gross Total Fixed Capital Formation, ITV (1) 6,33 7,14 7,90 3,08 2,95 2,82 2,72 Total Employment, ET (2) 75,50 92,20 107,10 48,90 41,70 33,70 26,10 Labour Force Participation Rate, LFPR (2) 0,92 1,18 1,40 0,74 0,61 0,49 0,39 Compensation Rate of the Business Sector, WSSE (1) -0,30-0,62-1,15-1,46-1,80-1,90-1,94 Growth Rate of Total Labour Productivity, DPDTY (2) 0,50 0,37 0,45 0,06 0,23 0,21 0,20 Labour Productivity of the Business Economy, PROD (1) 0,23 0,55 0,97 1,26 1,54 1,79 2,04 Inflation Rate of GDP, DPGDP (2) -0,82-0,96-1,18-0,59-0,57-0,43-0,33 Impacts up to 2006 GDP Growth The initial jump (in the second line of the table) reflects the demand shock caused by NDP policies. After that, the growth rate of GDP is about 0.8 percentage points higher in each year compared with the baseline (without NDP) scenario. This means, that on the supply side significant growth effects appear that are permanent and do not fade away, as it would be the case with only demand effects present. That results in an increasing difference between the GDP level with and without NDP policies (first line of the table). According to the predictions, by 2006GDP level under the scenario with NDP would be 4.05 percent higher than under the one without. Investment The values in the table show a strong and increasing impact on total investment over time. The difference between the baseline and the scenario with NDP increases from 2004 to 2006 to 7.9 percent. Therefore, CSF support leads to a more rapid capital accumulation. This is mainly due to the lower effective unit capital-labour costs caused by the TFP increase on the one side and the decrease in the user costs of capital (induced by the supports for productive investments) on the other. Higher output growth also plays a role, which itself is induced by the higher TFP growth. Thus, by improving the total factor productivity, favourable economic conditions are created which foster production, productivity, capital accumulation, and ultimately strengthen competitiveness. This brings about a sustained increase in the standards of living of Hungary. Employment A pattern similar to the behaviour of the GDP and investment can be observed in the case of employment. The difference in the number of employed between the scenario that assumes NDP and the one that does not, is increasing over time. Until 2006, the extra employment 167

compared with the baseline is a large number (107.000 workers). That increase goes hand in hand with a rising labour force participation rate. Impacts after 2006 The simulation illustrated in the table was run under the assumption that NDP expenditures are terminated after 2006. When NDP measures cease, however, all effects on the demand side are reversed and the values of the variables would return rapidly to their no-policy baseline, provided there were no long-term supply side effects. With regards to GDP, it can be seen from the table that NDP results in a path more than 3 percent above baseline. That remains even after the supporting period covered by the NDP, indicating a large and sustained supply side effect of NDP. Private investment declines considerably (against the baseline) when support terminates in 2007. However, due to a higher production capacity of the economy, investments are still higher than they would be, if no supports had been paid from NDP. Similarly, the increase in employment is interrupted when expenditures cease after 2006. Nonetheless, 50 percent of the additional workers remain employed because of the higher production capacities created by NDP and the more jobs are now available. It must be noted though, that employment declines gradually as capacities depreciate and labour working on depreciated machines are laid off. Due to short run demand side multipliers, the suspension of NDP acts like a negative shock on the growth rate of GDP in 2007. Thereafter, the growth effect almost completely vanishes, and the growth falls back to its baseline. The growth rate of productivity declines temporarily, and returns to above the baseline and remains at a higher value than without the NDP scenario. Finally, the effect on the inflation rate is halved in the period after NDP and it slowly decays over time. Thus we can summarise that the impacts of NDP taper off, if expenditures run out after 2006. But the decay mechanisms work very slowly, due to the medium and long run effects resulting from the former increase in total factor productivity. 4.6.2 Indicators and quantified targets The cumulative (until 2006) impact of the NDP in per capita GDP (in constant forint) amounts to 4-4.5 percent of the GDP in 2006. The growth rate of labour productivity will be 0.45 percent higher, while employment is raised by about 100-110 thousand by 2006. Other NDP indicators will be quantified during the second stage of the ex-ante evaluation. 168

List of indicators: GDP per capita Labour productivity Employment Ratio of the GDP of the region with highest GDP with that of the smallest Rate of treated solid waste Rate of treated wastewater 169

APPENDIX 1: POLICY FRAME OF REFERENCES IN THE FIELD OF HUMAN RESOURCES 1.INTRODUCTION The purpose of the policy frame of reference (PfR) is to ensure the coherence between the Hungarian employment objectives defined in the Joint Assessment Paper and through its Progress Report and the priorities of the National Development Plan selected for Structural Fund Support. Furthermore it establishes links with the European Employment Strategy (EES), in line with Article 9 of Council Regulation 1260/1999/EU on the use of Structural Funds. The policy frame of reference therefore serves as the basis for Structural Fund interventions in human resources development in Hungary from accession to the European Union on 1 May 2004 until the end of the programming period in 2006. 2. THE EUROPEAN CONTEXT OF HUMAN RESOURCE DEVELOPMENT The European Employment Strategy launched in the 1997 Luxembourg summit consists of four pillars and annual employment guidelines grouped around them, which together set the policy background of national employment strategies embodied in the national employment action plans of the Member. At the Lisbon European Council (2000) the long-term objective for the European Union to become the most competitive knowledge-based economy by 2010 was formulated. Investment in human resources is a central component of efforts to reach this ambitious objective and therefore European Employment Strategy plays a key role in helping attain this objective. The European Commission reviewed the EES in 2002 and found that the strategy significantly contributed to increasing and maintaining the employment level in the member states. However it recognised that there was a need to simplify the EES and to establish fewer and more stable guidelines. The EC Communication the Future of the European Employment Strategy (COM 2003 6 final) set three new objectives and eleven priorities for the new guidelines, which are to be adopted by the European Council in Spring 2003. The three new objectives of the EES are: full employment, quality and productivity at work and cohesion and an inclusive labour market. The Communication establishes eleven priorities in support of the objectives. The following priorities are the most relevant to the Structural Funds: active and preventive measures for the unemployed and the inactive, fostering entrepreneurship to create more and better jobs, 170

promoting active ageing and adaptability in the labour market, investment in human capital and strategies for lifelong learning, gender equality, supporting integration and combating discrimination in the labour market for people at disadvantage and addressing regional disparities. The new EES aims to promote changes and structural reforms in future members states and these policy changes must be taken into consideration in the Hungarian policy frame of reference for 2004-2006. The National Employment Action Plan will be the key document in the implementation of the European Employment Strategy and until accession the Government prepared the Joint Assessment Paper and the annual progress reports to define employment strategy up to accession. 3. NATIONAL EMPLOYMENT OBJECTIVES In line with the recommendations of the accession partnership, the Government of the Republic of Hungary together with the European Commission, prepared the Joint Assessment Paper (JAP) describing the Hungarian employment and labour market policy, and agreed that the Government will monitor the implementation of the JAP in a Progress Report. The latter document recorded the results achieved between April 2001 and May 2002, and defined future tasks. The Hungarian Government will prepare another Progress Report on the Joint Assessment Paper during the first half of 2003, which if necessary could identify new emphases in employment policy, taking into account the experience of the period since the 2002 report, and the revised European Employment Strategy. 3.1 Based on the analysis of the labour market situation, the JAP formulates the following five objectives for Hungary: 1) increasing the employment rate, 2) reducing the unemployment rate, 3) investments in human resources development, 4) strengthening of institutional and legal frameworks. 5) creation of a more flexible labour market and an environment that promotes increased employment 171

3.1.1 Increasing the employment rate The objective of generally increasing the employment rate is crucial for sustainable economic growth and is in line with the first objective of the new EES and with the objective of increasing the employment level in the EU to 70 per cent by 2010. The increase of the employment rate requires increased flexibility in the labour market and the creation of an employment-friendly environment, including the review and monitoring of tax and benefit schemes with regard to their effect on job creation and incentive to work. Increased competitiveness of the economy and the sustainability of the social security system assume a substantially greater participation of labour force in the labour market. In order to promote this, measures are required on both the supply and the demand side of the labour market. On the supply side of the labour market, inactive groups can provide significant source of labour for expanding employment. One of the most urgent tasks for employment policy is to re-integrate these groups in the labour market by assisting them to acquire qualifications and skills to match the needs of the emerging economy. On the demand side, increasing the employment rate requires job creation and an increase in the employment capacity of small and medium enterprises and that of the service sector with particular regard to information society services, as well as exploiting the possibilities inherent in the environmental and health investments that accompany accession to the European Union. Effective active labour market policies require the modernisation and improvement of the Public Employment Service, with special regard to its job brokering service. 3.1.2 Preventing unemployment and integration of the inactive Preventing unemployment and integration of the inactive play a major role in providing the necessary labour supply for economic growth. The unemployment rate is favourable when compared to the EU average, however addressing the needs of unemployed people, it is also important to take measures to prevent the flow into unemployment and to improve the labour market participation of those currently economically inactive. Disadvantaged groups in the labour market require additional, targeted assistance to help them to both access and stay in the labour market. The rationale for assistance is not only to provide the necessary labour supply for the economy but equality of opportunity in accessing the labour market is crucial to their social inclusion. This requires a comprehensive approach towards the problem in line with the third new objective of EES. The Joint Memorandum on Social Inclusion is under preparation, nevertheless, its findings and objectives have to be taken into account in developing interventions in the field of social inclusion. 3.1.3 Investments in human resource development The development of human capital is necessary to improve economic competitiveness and to ensure that the knowledge and skills of employees meet labour market requirements, and the 172

supply of labour matches the needs of economy. To achieve this requires the preparation of medium- and long-term labour market forecasts, forging closer links between employers and and education training institutions. Systems of primary, secondary and higher education and vocational education have to be developed and teaching staff need to be developed in order to provide them with the knowledge and skills required by the labour market and to embed a culture of life long learning. Adult and continuing vocational education need to be improved so that employees are developed and offered the skills that match labour market requirements. The utilisation of opportunities offered by the knowledge-based economy and the improvement of the level and quality of employment requires consistent adaptation of the work organisation. In order to strengthen the competitiveness of enterprises, they should be assisted in accessing information and consulting services and in developing entrepreneurial and management skills. 3.1.4 Strengthening of institutional and legal frameworks and the creation of a more flexible labour market require further action in reforming tax and benefit systems to boost job creation and in establishing the institutional background necessary to implement the EES and to manage the Structural Fund assistance. 3.2 Regional dimension of national employment objectives In order to reduce the disparities in regional labour markets, it is especially important to improve the employability of the high number of long-term unemployed in the areas that are lagging behind; as demand for labour increases, support should be given primarily to participation in re-training and to improving the ability to adapt to the needs of new enterprises. In areas where the employment rate is particularly low and the unemployment rate is above the average, the establishment of the social economy through activities based on local initiatives should be given special attention. 3.3 In order to achieve the main objectives, the Joint Assessment Paper and the Progress Report identified the following tasks for development: promoting job creation and enterprise development with special regard to regional disparities by employment policy instruments; development of human resources: preventive programmes in order to improve employment capacity, promoting the re-integration of population groups threatened by social exclusion into the labour market by improving their employment capacity, improving the adaptability and flexibility of labour force, combating social exclusion and discrimination, providing supported jobs for groups excluded from the competitive sector, 173

ensuring equality of opportunities, modernisation of and expansion of the services of the labour market organisation. 4. HUMAN RESOURCES DEVELOPMENT AND THE PRIORITIES OF THE NATIONAL DEVELOPMENT PLAN The overall objective of the National Development Plan (NDP) is to reduce the income gap relative to the EU (by 2013) and to reduce regional imbalances. The NDP for the period of 2004-2006 can achieve moderate results in this respect for its limited time scale but it is of great importance to establish the necessary framework and conditions for continued improvements in the period of 2007-2013. In order to attain its overall objective, the NDP sets three specific objectives: increasing economic competitiveness, improving the use of human resources, and a better environment and more balanced regional development. In order to achieve these objectives, the NDP identifies the following priorities: a competitive productive sector, increased employment and human capacities, better infrastructure and cleaner environment, strengthened regional and local potential. These objectives support the main objectives of the JAP and the Progress Report, and will lead to increase in employment rate, the labour market integration of the inactive and disadvantaged groups, increased investment in human resources and strengthening of institutional framework necessary for effective implementation. The specific objective to improve the use of human resources is in line with the objectives of the new EES, as it promotes the increase of employment, it contributes to social inclusion by the labour market integration of disadvantaged groups. By investing in human resources and promoting entrepreneurship and the modernisation of work organisation it can also help improve the quality of jobs and the productivity of labour force. 4.1 Contribution of the priorities to the improved use of human resources With increasing competitiveness and profitability of the production sector profit will foster growth and as a consequence companies will expand and create employment. This will require companies to invest more in training or to make contributions to participation in state (PES) training programmes. The steps aimed at human resource development will increase the employment level directly by improving the employability and job creation. Measures taken on the basis of the priority concerning the infrastructure have a more indirect influence on the level of employment, inasmuch as the production sector becomes more profitable, it becomes possible to increase investments into human resources. The construction of new infrastructure properties supported in the framework of this priority will require the development of human resources. 174

Investment in health care will be significant and aims to reduce the number of people absent from the labour market for health reasons - and ultimately the GDP loss originating from this. Infrastructure development will help reduction in regional disparities in the labour market and will increase the mobility of the labour force. Strengthened regional and local capacities contribute to the overcoming of regional disparities and finding the best responses to regionspecific needs. 4.2 How investment in human resources contribute to the attainment of the objectives of the NDP Interventions under the increased employment and development of human resources priority of the NDP not only promote employment but also support the effectiveness of the whole of the NDP. Investment in human resources increases the competitiveness of companies, it reduces the skills mismatch or shortage of appropriate skills in certain sectors, promotes the knowledge and use of IT skills, contributes to effective R&D measures and is an important element to attract and retain direct foreign investment in the country. It significantly supports the productive sector priority and the objective to increase economic competitiveness. To achieve long-term changes in environmental standards promoting sustainable development and making students and workers environmentally conscious through education and training through the work place is important. Measures promoting employment and supporting investment in human resources all have a local dimension or application, but Structural Funds support interventions directly serving local needs, for instance in the field of social economy, promoting job-creation trainings designed to meet local needs or investment in human resources that attracts capital investment in the regions. 4.3 How fields of intervention promote employment and development in human resources Beyond the relationships presented above, increased employment and human resources development are directly served by the development areas and objectives presented under the increased employment and development of human resources priority of the NDP. Fields of intervention identified under this priority are in line with the main objectives and tasks defined by the JAP and the Progress Report and listed above in this section. Interventions under this priority are implemented primarily by support from the European Social Fund and supplemented by the support from the European Regional Development Fund. It is important that the interventions of the two funds are implemented in synergy and in a co-ordinated way, as it will be discussed under section 6. The shortcomings of the Hungarian labour market and the deficiencies of public services promoting employment highlight a number of ways in which appropriate measures are needed to promote employment and social inclusion and require a skilled labour force supply necessary for sustainable economic growth. This priority is closely related to the implementation of the European Employment Strategy in Hungary and to that of the JAP and its Progress Reports. The priority consists of the following elements that will be supported through the Structural Funds: 1) Active labour market policies to promote employment and to reduce the consequences of the mismatch between the needs of the labour market and education, with regard to the labour market needs of knowledge based economy and by improving the public employment services among others. 175

2) Tackling social exclusion by improving employability of the disabled, the Roma minority and other disadvantaged groups, with special attention to the entry and improved participation of women into the labour market. 3) The promotion of employability as part of lifelong learning is an area that contributes to improving human capital by training teaching staff, modernising teaching material, perfecting vocational training, education and guidance, and facilitating entry into the labour market. 4) The improvement of adaptability and the promotion of better entrepreneurial skills will lead to increased demand for employment. This is supplemented by a better adult education that promotes employability. 5) The state of the building stock and equipment in education and social services is in great need of repair and improvement. In many areas of the country actions are needed in this field to increase the efficiency of teaching and to promote social inclusion. 6) The general health of the population of Hungary is poor, and it seriously hinders performance in the labour market. It compels many to become inactive too early in their working life, and reduces the productivity of work in general. The equipment of hospitals, accessibility of services and communication between service providers is poor, investment in these areas will considerably increase the effectiveness of the health service and lead to improvement in competitiveness. 5. STRUCTURAL FUND SUPPORT OF HUMAN RESOURCES DEVELOPMENT THROUGH THE NDP The previous section presented the areas of development selected for Structural Fund support. While these will primarily involve the European Social Fund and ERDF will have an important role to play in promoting the wider human resource objectives. In order to justify the contribution of ESF to these fields, now we present the fields of intervention and the rationale behind them according to the ESF policy fields, as defined in Art. 2. of Regulation 1784/1999 on the European Social Fund. 5.1 Developing and promoting active labour market policies 5.1.1 The analysis of the situation considers the following areas as key issues in this field: low levels of employment and high rate of inactivity amongst certain groups of workers, investment in and promotion of human resources development and implementation of employment policy and reinforcement of institutional framework. The employment and activity rates are considerably lagging behind the figures of the European Community (by 7% and 9% respectively), while the qualification structure of the employed people reflects the fact that people with no or inadequate qualification are more likely to be excluded from the labour market. In these groups, both the employment and the unemployment rates are worse than the community average. There are also special groups of the labour market that suffer more greatly e.g.: young people have an employment rate considerably lower than that of the EU average (in 2001: 31.4% vs. 40.7%), and unemployment also affects young people more than the adults. This is caused partly by the fact that a substantial number of young people enter the labour market without qualifications or skills that meet labour market requirements. For those people above 55 years of age, significantly less are employed in the labour market (23.7% v.s 176

38.5% in the EU in 2001), as a result of earlier en masse retirement. Economic growth in the recent years has provided opportunities for older workers but still they find it more difficult to adjust to the changing labour market challenges and therefore suffer greater discrimination. 5.1.2 In order to reduce the labour market problems described above the JAP and the Progress Report set the objectives to increase the employment rate, promote the integration of the inactive and for this purpose defined the following tasks: preventive programmes in order to improve employability, modernisation and expansion of the services of labour market organisation and development of human resources. 5.1.3 Structural Fund support for active labour market policies To promote the employability of the unemployed Structural Funds will support training and re-training, customised counselling and guidance, career orientation services as well as programmes that ensure the obtaining of work experience. Actions in this field comprise training of the young people, the older workers and women, that is labour market groups of special needs since active labour market policy has to pay special attention to improving the employability of these groups and integrating them into the labour market, in line with the EES objective Cohesion and an inclusive labour market. The effective implementation of active labour market policies, and the improvement of the level and quality of employment require consistent improvement of the public employment services, too. These actions contribute to the reduction of long term unemployment. Raising the level of employment will also require the promotion of job creation through support for self-employment. These actions will contribute to the implementation of objective 2 of the NDP and the first objective of the new EES, that is, to the increase of employment. This field contributes to the new EES priority Active and preventive measures for the unemployed and the inactive and Promoting active ageing. On the other hand, the programmes aimed at improving employment capacities improve the skills of labour force, which also contributes to objective 1 of the NDP, that is, they contribute to competitiveness. 5.2 Promoting equal opportunities for all 5.2.1 The situation analysis of the NDP drew attention to the extremely disadvantaged labour market position of certain social groups the Roma, the long-term unemployed, those living with disabilities, addicts and those living in underdeveloped regions. It cites poor labour market opportunities for the special groups, weaknesses of the school system in combating social inequalities and promoting equal opportunities, as key issues in the field of human resources. Social exclusion also affects the disabled and those with serious health problems - in total it is estimated to be 900,000 people. Their labour market position is extremely weak in comparison with that of the EU, as only about a tenth of them find employment (EU: 40%), and their plight is aggravated because of their low levels of qualification. All those entering the labour market should have equality of opportunity and special action is needed for persons exposed to social exclusion. 5.2.2 The JAP and the Progress Report identified the following tasks in this field: combating social exclusion and discrimination, providing subsidised jobs for groups excluded from the labour market and 177

promoting the re-integration of groups threatened by social exclusion from the labour market by improving their employability. In order to achieve this, the NDP has the objective of helping those with disabilities, people who belong to the Roma minority and other excluded groups. This contributes to objective 2 of the NDP as well as the objectives of the Community Action Programme for combating social exclusion, and the third objective of the new EES. Measures under this field support the new EES priority Supporting integration and combating discrimination in the labour market for people at a disadvantage. 5.2.3 Structural Fund support for promoting equal opportunities for all The improvement of access to training/employability for the most disadvantaged groups (including the long-term unemployed, the young, the older workers, disabled people, and particularly the Roma who are not integrated into society) is a requisite to a further increase in employment. Tackling social exclusion requires improving the employability of the excluded and a number of different activities are needed, including training and education, improving the management, the quality and accessibility of employment and social services and the fostering of a positive attitude to change. Support for social economy and local employment initiatives will be important to provide employment opportunities for disadvantaged people. 5.3 Promoting and improving training, education and counselling as part of lifelong learning policy 5.3.1 The analysis of the situation highlights two areas as key issues in the field of education and training: the insufficient links between education, training and the labour market and the poor conditions of physical infrastructure in education system. Based on the analysis of the situation, it is necessary to develop education and training in the schooling system thereby creating the foundations for life-long learning and supporting the learning of skills and abilities that correspond to the needs of the labour market, with particular regard to IT knowledge. Only economies that have adequate levels of skilled labour and better human capital are able to keep up with international competition, so the development of human resources is an especially important task for Hungary within the European Union. 5.3.2 The JAP and the Progress Report also highlighted investments related to human resources development, in which the modernisation and improvement of education and training systems play a crucial role as it was pointed out in the situation analysis. Therefore, the support for life-long learning contributes to achieving objective 2 of the NDP as it helps the qualification level of labour force to meet demand in the labour market and allows it to flexibly adapt to demands as they arise. It also improves the qualifications and therefore competitiveness of labour force which is objective 1 of the NDP. Investments in this policy field also contribute to the three new objectives of EES and to the EES priority Investment in human capital and strategies for lifelong learning. 5.3.3 Structural Fund support for training, education and counselling The promotion of employability as part of lifelong learning is an area that contributes to improving human capital by developing teaching staff and improving and modernising the teaching material. As part of the policy of life long learning, support should be given to supporting and improving the vocational training, education and consulting, facilitating entry 178

into the labour market, improving and sustaining employment capacity and support to employment mobility. These actions have the purpose of facilitating employment opportunities, vocational knowledge and encouraging mobility (diversification and improvement of the supply of training, improving the quality of school and vocational education system and the dissemination of IT skills). The widening of provision of higher level and post-secondary vocational courses in order to increase the numbers of young people opting for this route is desirable to ease their finding work after secondary schooling. 5.4 Promoting a skilled, trained and adaptable workforce, innovation and adaptability in work organisation, developing entrepreneurship and conditions facilitating job creation, and enhancing skills and boosting human potential in research, science and technology. 5.4.1 Low employment and high inactivity are the most serious labour market problems, there is a shortage of qualified labour in certain occupations and regions and a mismatch between the supply and demand for workers with specific skills. This is due to the lack of inflexibilities within and appropriate links between the education and training system and the economy. Adult training and in-company training has a major role in improving the competitiveness and adaptability of the workforce and enterprises. It is primarily the size of the company that determines whether further training is organised for the employees, with small companies investing significantly less in training than the large ones. Individual entrepreneurs, micro-enterprises, small and medium sized enterprises provide a 2.5 million jobs and these employees receive insufficient training. Knowledge-based society and the rapidly changing economic circumstances set new types of requirements for the labour force and for the entrepreneurs. Ensuring that the labour force is well-trained and is capable of adaptation is an important condition for competitiveness. 5.4.2 The JAP and the Progress Report also identified the improvement of the adaptability and flexibility of labour force as an important area for development. Investment in this field enhances labour productivity and quality of jobs, which is one of the new objectives of EES and it contributes to the EES priorities Promoting adaptability in the labour market and Fostering entrepreneurship to create more and better jobs. 5.4.3 Structural Fund support to promote adaptability and entrepreneurship The training of entrepreneurs helps to increase the employment capacity of these firms, improve their flexibility, their entrepreneurial skills, and improve their chances of survival, contribute to higher employment and higher quality of human capital. This is supplemented by improved adult education that promotes employability. 5.5 Specific measures to improve women s access to and participation in the labour market 5.5.1 The situation analysis points out that although the labour market position of women is more favourable than the EU average (unemployment rate, difference between the employment rates for women and for men), there exists a considerable gap between the genders and women face difficulties in returning to the labour market. The employment level 179

of women has increased faster than that of men since 1997 (employment rate 49. 6 %in 2001), thereby reducing the difference between the rates of the two genders to 13.7 % (EU: 18.1 %). However, the lower unemployment rate of women is partly due to their lower participation in the labour market due to child-raising and their lower retirement age. 5.5.2 The integration and equality of opportunities for women in the labour market and in society also appears as a horizontal objective in the NDP, ensuring equal opportunities for women in all intervention areas, and is defined as an important task is the JAP and the Progress Reports and supports the new EES priority Gender equality. 5.5.3 Structural Fund support to promote the labour market participation of women Special attention will be paid to the entry and improved participation of women into the labour market, including measures that facilitate their access to new jobs, launching business enterprises, reduces vertical or horizontal segregation by gender in the labour market, and increasing participation and the rate of self-employment of women. Despite the fact that women are often well educated, they often face discriminatory working practices, and find it difficult to return to the labour market. Measures will be taken to improve the opportunities of a women in the labour market and ensure that equality of opportunities is practiced. 5.6 Horizontal fields 5.6.1 Local initiatives concerning employment The situation analysis of the NDP draws attention to the fact that considerable discrepancies have emerged in the labour markets between regions in the last decade. These differences have multiplied at the level of micro regions, and they may even be many times higher than the regional figures. Job creating investments are primarily focused on the more developed regions of the country and the labour in more disadvantaged areas is not mobile. For this reason Structural Fund assistance will be directed to support local initiatives concerning employment, particularly initiatives aimed at agreements that serve the purpose of local employment and regional employment, as well as to support social economy which has a potential to increase local employment and interventions in the field of job creation and human resources development. These mean actions complementary to sectoral programmes but sectoral programmes should also take into account regional needs. Actions in this area support the EES priority Addressing regional employment disparities. 5.6.2 The social and labour market dimensions of information society The development of human capital in the field of Information Society Technologies is a main driver for change. The knowledge and use of IT skills is indispensable in the labour market and the information technologies sector has a significant job creation capacity. The number of IT teachers and the IT skills of teachers is very low. The lifelong-learning is yet to be embedded and it is necessary to re-train teachers. Training in It skills for employees and adults in particular is needed. Entrepreneurs and the business sector require training in IT skills 180

because in some instances where IT systems are available the systems are only partly used due to the lack of appropriate skills. Structural Fund support has to be targeted at actions to develop IT skill transfer in the education system, to provide IT training for the disadvantaged, unemployed and employees of SMEs, as well as at the dissemination of information technologies in the field of distance learning such as e-learning - and labour market services. 5.6.3 Equal opportunities for women and men The analysis of situation pointed out the following key issues in the field of equal opportunities: horizontal and vertical segregation of women in the labour market, insufficient family-friendly policies, disadvantageous employment practices and low wage earning capacity, lack of or insufficient competitive skills required by the labour market, and ineffective gender mainstreaming policies. Structural Fund support can be devoted to reduce the labour market segregation of women and to provide women the skills necessary for finding a suitable job. Direct Structural Fund assistance is provided for the labour market integration of women under policy field Specific measures to improve women s access to and participation in the labour market. Apart form this, it is important that equal opportunities are dually observed throughout all programmes supported by Structural Funds, which can be ensured by effective monitoring and control systems. 6. CO-ORDINATION OF FUNDS TO SUPPORT HUMAN RESOURCES DEVELOPMENT Structural Fund support for human resources is provided through the ESF for the fields described above and under priority Increased employment and human capacities. European Social Fund assistance is directed towards the areas in Art. (2) of Regulation 1784/1999, and section 5 of Policy Frame of Reference describes the fields of intervention in the territory of Hungary between 2004 and 2006. ESF support can be provided through various operational programmes provided these measures are complementary to each other and secure the efficient and concentrated allocation of funding. The ERDF support is will complement ESF support in a particular field by investment in infrastructure, which will make the use of ESF support efficient and/or mitigate regional disparities. ERDF can support investment in social and educational infrastructure to accompany and facilitate the implementation of measures aiming at the modernisation of education and promoting social inclusion, as well as in health care infrastructure contributing to the prevention of diseases and absence from work and mitigating regional existing disparities in this field. Co-ordination and complementarity of ESF and ERDF support can be ensured through the operational programmes and through and effective and co-ordinated implementation system. 181

III. COHERENCE AND CONSISTENCY OF THE STRATEGY 1 COHERENCE WITH COMMUNITY POLICIES According to Article 10 of the general provisions on Structural Funds 7, the Commission published Guidelines 8 to help Member States in preparing their programming strategies concerning support that may be requested from the Structural Funds. To reduce economic and social disparities, the Guidelines propose an integrated and coherent strategy for Member States based on three major objectives: strengthening of regional competitiveness to create sustainable jobs; enhancement of employment and social cohesion; primarily through human resource development as well as promotion of balanced development of urban and rural areas. The strategy of the National Development Plan intends to improve the quality of life and raise the income of the population by contributing to the establishment of economic and social cohesion through more competitive economy, improved use of human resources, furthermore better environment and balanced regional development. This process should take place in a manner that does not endanger the quality of the environment. 1.1 REGIONAL COMPETIVIENESS Proposed interventions targeted at infrastructure development supporting regional competitiveness are concentrated mainly on the following fields: infrastructure of transport, research and development and business services; creation of conditions for the establishment of an information society. As far as the development of transport and haulage infrastructure is concerned, primary tasks specified by Guidelines of the European Commission are the improvement of the 7 COUNCIL REGULATION (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds 8 The Structural Funds and their Co-ordination with the Cohesion Fund: Guidelines for programmes in the period 2000-2006 (COM(1999)344) 182

efficiency of transport systems, enhancement of a balance of transport methods, better access to transportation networks and sustainable development. One of the major factors hindering economic growth in Hungary is the poor accessibility of certain regions. In line with Commission Guidelines, the Plan provides for the improvement of accessibility, based on the extension of secondary connections of road and railway network in line with the TINA strategy of the Commission. The National Development Plan ensures appropriate co-ordination with major investments targeted at the extension of primary road and railroad networks (Trans-European Networks) financed from the Cohesion Fund and the quality improvement of the transport and haulage networks. Some of the development plans already have the endorsement of the European Commission as approved components of the ISPA strategy. An effective, diversified and competitive energy sector can significantly contribute to sustainable regional development. Structural Funds can assist this process through a more effective use of energy and the exploitation of renewable energy sources. In Hungary, the dependence on external energy suppliers and the low permeability of international connections are not major concerns. Therefore, the Plan does not target the development of energy networks for support. At the same time, the National Development Plan strategy considers the difficulties of those regions that cannot easily be connected to the public utility network, thus, it suggests developments of a local energy supply based on renewable sources. In addition to that, environmental considerations also include support issues of renewable energy sources and the investments in the field of effective energy use. Commission Guidelines place special emphasis on the establishment of an Information Society. The NDP strategy is in line with these Guidelines, the recommendations of the initiative e-europe: An Information Society for All, the Lisbon Action Plan and the Technical Paper 2 of the European Commission 9. It prioritises the training of potential users and the spread of new types of services and uses. The implementation of the objectives of the Information Society in other fields (such as education, training, agriculture or rural development) complements efforts foreseen under the priority improving the competitiveness of the productive sector and it also effectively contributes to the reduction of the digital gap. In March 2002, the meeting of the European Council in Lisbon stipulated that the dynamic and competitive knowledge based society requires a cheap but good quality broadcasting infrastructure. The private sector alone does not always provide an acceptable solution for the domestic broadcasting market. Due to the digital gaps the NDP strategy must take into account the necessary ICT solutions needed for the successful implementation in remote areas. A high level and quality of Research and Development and innovation are key elements of regional competitiveness and sustainable domestic growth. The National Development Plan applies the recommendations of the Guidelines ( Towards a European Research Area COM (2000) 6, The Regional Dimension of the European Research Area COM (2001) 549 (final), More Research for Europe. Toward 3% of GDP COM (2002) 449) in terms of developing new products, services and technologies, improving the research and infrastructural 9 Technical Paper 2: Information society and regional development. ERDF Interventions 2000/2006. Criteria for programme assessment 183

conditions, the forms of institutional co-operation as well as the innovation capacity of enterprises and their supply networks, and the regions. The coherence was also strengthened by the Hungarian accession to the 5 th RTD Framework Programme (1998-2002) and the 5 th EURATOM FP (jointly 5 th Framework Programme) in 1999. Hungary is a full member of the 6 th Framework Programme ( FP6 (2002-2006) ). Interventions proposed under Priority 1 Competitiveness embrace the development of national and regional infrastructure, the enhancement of business and research contacts as well as the intensification of innovative activities of the competitive sector with special regard to small and medium sized enterprises. In the field of human resources, interventions targeted at the establishment of conditions promoting innovation include the improvement of capabilities of both the enterprises and employees. The strategy applies the horizontal approach of innovation focusing on technological development among others within the priority improving the competitiveness of the productive sector. Innovative solutions increasing efficiency also play an important role in the reform of the healthcare system. With regard to the internal weaknesses of the Hungarian productive sector, and with view to increasing regional competitiveness, the strategy lays great emphasis on the direct support of enterprises especially small and medium sized enterprises, the development of business environment promoting enterprise and the creation of sustainable jobs. Based on priorities of the European Charter of Small Enterprises, the National Development Plan aims to provide the following: support of technological renewal, the development of business services accessible for small and medium sized enterprises, assistance in marketing, strengthening local economic development in regions with low employment rate, improvement of innovative and business skills and promotion of the transfer of knowledge and technology. The strategy also considered the regional dimensions of enterprise promotion as it concentrated its available support largely on sectors with high job creating potential (like tourism) and regions especially short on job opportunities. As mentioned by the Guidelines, tourism has a considerable potential in the field of job creation as well as the support of a balanced and sustainable regional development. Interventions proposed by the Plan are targeted at the creation of additional economic activities and new jobs through the development of products and services, the improvement of infrastructure, the promotion of networking, the increase of professional skills and a multidimensional capacity development. 1.2 INCREASED EMPLOYMENT, HUMAN RESOURCES DEVELOPMENT In accordance with articles 9 and 16 of the General Regulation, the Policy Frame of Reference provides a framework for human resources development activities under the National Development Plan and sets a general strategic context for Structural Funds assistance in the field of human resources. An increase in the rate of employment and achieving full employment is one of the underlying objectives of the European Union agreed at the Lisbon summit in Spring 2000. The NDP endorses this objective by targeting increase in the Hungarian employment rate. The National Development Plan fully takes into consideration the priorities of the European Employment Strategy and other relevant community strategies. Interventions foreseen under 184

Priority 2 Increasing employment and the development of human resources of the strategy are in line with intervention fields of the European Social Fund (ESF): developing and promoting active labour market policies to combat and prevent unemployment, to facilitate the reintegration of the long-term unemployed into the labour market, and to support the occupational integration of young people and of persons returning to the labour market after a period of absence; specific measures to improve women's access to and participation in the labour market, including their career development, their access to new job opportunities and to starting up of businesses, and to reduce vertical and horizontal segregation on the basis of gender in the labour market. fighting social exclusion through promoting access to the labour market; promoting and improving training, education, counselling as part of lifelong learning policy to: facilitate and improve access to, and integration into, the labour market, improve and maintain employability, and promote job mobility; promoting a skilled, trained and adaptable workforce, innovation and adaptability in work organisation, developing entrepreneurship and conditions facilitating job creation, and enhancing skills and boosting human potential in research, science and technology. The objectives of the NDP concerning human resources development are in line with the European Lifelong Learning Strategy which is a key element of the Lisbon Strategy. This emphasises that the knowledge-based society demands a radically new approach to education and training and focuses even more on lifelong learning, including the full range of formal, non-formal and informal learning. The Hungarian NDP also reflects the findings of the Future Objectives of Education and Training Systems in Europe adopted by the Council and the Commission at the meeting of the Council in February 2002. Actions to promote greater social inclusion will reflect priorities agreed within the European co-ordination process of social inclusion policies. To ensure the effectiveness and efficiency of the interventions supported by the European Social Fund, assistance from the European Regional Development Fund will complement these measures through supporting the development of the infrastructure of education, training, health and social services. 1.3 BALANCED URBAN AND RURAL DEVELOPMENT According to principles specified by Commission Guidelines and the European Spatial Development Perspective, Structural Funds must contribute to the enhancement of urban networks, the development of rural areas and the improvement of co-operation among towns and villages to promote the balanced and sustainable development of European Union regions. The National Development Plan considers the role of towns as catalysts for economic growth and job creation. Consequently, the strategy intends to contribute to the development of urban 185

centres through the enhancement of regional innovation and technological centres and the development of infrastructure, education and professional training in medium sized towns. Targeted support for innovative enterprises (especially small and medium sized enterprises) or job creation actions are heavily concentrated to urban regions where appropriate conditions and co-operation networks are partially present. The development of waste management, sewage treatment and public-transport systems foreseen under Priority 3 Providing better infrastructure and cleaner environment significantly contributed to the solution of urban problems. The strategy of the National Development Plan also implements the double objective of rural development as it supports harmonious regional development and maintains the European agricultural model as the second pillar of CAP (Common Agricultural Policy). In rural regions, the most important tasks of structural support within the Agricultural and Rural Development Operational Programme (ARDOP) are the strengthening of local economy and especially the competitiveness of the agricultural sector through diversification and infrastructure development, as well as the improvement of living conditions on a larger scale, including basic services for the local population, environmental protection and the conservation of cultural heritage. Planned interventions can be implemented through the cofinancing provided by the Guidance Section of EAGGF and from the national budget, whereas funds from the ERDF and ESF can be received mainly for purposes of infrastructure development and the establishment of entrepreneurial and human resources conditions enabling economic diversification. The Plan also includes modernisation objectives for development of the local fishery industry that is eligible for FIFG support. Rural development is also supported through the measures included in the National Rural Development Programme financed by the EAGGF Guarantee section. In several cases, interventions are related to relevant measures of PHARE programmes and are in line with the SAPARD strategy. In order to establish a polycentric Europe, the strategy intends to intensify co-operation among urban and rural regions through the promotion of co-operation among small regions based on partnership. Interventions targeted at strengthening institutional capacities of rural areas and promoting co-operation can be found in the Regional Development Operational Programme. The decrease of the regional inequalities, the reinforcement of the social and economic cohesion has a basic priority in the National Development Plan in accordance with the regional policy of the European Union. The strategic objectives and the course of action of Hungary s regional policy are defined in the National Conception of Regional Development (1998) in conformity with provisions of Act XXI of 1996. Such Conception envisages attenuation of the regional development disparities, promoting the spreading of innovation and knowledge, implementation of a development policy ensuring sustainable use of the resources within regions with different natural and geographical capacities, as well as integration of the country s regions into the European economic space, as its main objectives. The NDP contributes to the attainment of most of the comprehensive objectives conceived in the National Conception of Regional Development. The Regional Development Operational Programme grants priority to the implementation of the local elementary infrastructure and to its accessibility. The Program pays regard to the necessity of the sustainable regional 186

development by supporting local actions aimed at protecting and improving the quality of environment. Balancing of the regional disparities is also advanced by the need of taking into account the existing regional differences and the different specific potentials of the regions in the area concerned. 1.4 HORIZONTAL PRINCIPLES There are two horizontal principles defined by the Guidelines for the development of programmes, namely the sustainable development and equal opportunities for men and women. These objectives require special attention and a specific approach in Hungary. The National Development Plan strategy sets the promotion of sustainable development as a major horizontal principle. In line with the environmental protection policy of the European Union, the Plan meets the requirement that elements of environmental protection policy must be integrated into all fields of intervention when programming Structural Funds. The third specific objective of the strategy namely, the better environment and more balanced regional development is in line with the Sixth Community Environmental Protection Action Programme including medium- and long term qualitative and quantitative objectives as well as with relevant Directives of the Council. The strategy included developmental necessities and priorities of co-financing, based on the logic of support available from the Structural Funds and the Cohesion Fund. The strategy states that the standard of living can only be improved in tandem with economic growth, together with the conservation of natural heritage, the protection and sustainable exploitation of natural resources and the establishment of an environment of appropriate quality. The above should also be in line with requirements of the Community Sustainability Strategy and principles of the Rio Declaration ( the polluter pays principle, the caring principle and the efficiency principle). The other general horizontal principle formulated by the Regulation 1260/99/EC is the promotion of equal opportunities of women and men. The National Development Plan strategy defines the principle of equal opportunities in the sense of gender mainstreaming as a horizontal principle which cuts across all fields of development The Amsterdam Treaty underpinned the Community s commitment in terms of promoting equal opportunities. The NDP aims at supporting positive measures to reduce inequalities and to promote the participation of women in the labour market. 2 COHERENCE WITH NATIONAL POLICIES In general, the National Development Plan is in line with Hungarian economic policy and the philosophy of major specialised policies that are relevant to economic and social cohesion. Defined objectives and priorities of implementation are in line with economic policy efforts of 187

the Government and they complement structural interventions defined by specialised policies in several fields. As specified by the Medium-term Economic Policy Programme for 2002 submitted to the European Commission in August 2002 (Pre-Accession Economic Policy - PEP), the long-term objective of economic policy is the modernisation of the country and its re-alignment in terms of the European development level. Therefore, the Government must concentrate on creating conditions of economic growth favouring sustainable, export and investment driven development path without unsettling the general balance of the economy. Within this period, major focus must be on the following: strengthening economic competitiveness especially among small and medium sized enterprises through the improvement of framework conditions and infrastructure, the creation of a more flexible labour market and the development of education and training adjusted to demands of the information society; maintenance of fiscal and price stability through a prudent fiscal and income policy and competitiveness; and increasing economic-social cohesion especially through increased employment and improved social policy. The National Development Plan strategy respects the above principles of economic development. Planned interventions support and complement the economic policy in the development fields, in accordance with specific directions of various Structural Funds. 2.1 DEVELOPMENT FIELDS Investment promotion focused on direct foreign investment is still the most important objective of Hungarian structural policy including the modernisation of information systems, infrastructure development and training as it was defined by the Medium-term Economic Policy Programme of the Government and the SMART Hungary Medium-term investment promotion programme in 2002. However, the strategy also takes the priorities of the European Union s regional policies into account and it also complements economic policy efforts by placing a special emphasis on endogenous regional growth, the improvement of business environment, the modernisation of companies and the simplification of setting up and operating enterprises. The National Development Plan strategy pays special attention to the improvement of operating conditions and general competitiveness of small and medium sized enterprises that are also primary objectives of the Medium-term Economic Policy Programme mainly through the promotion of innovation and human resources development. Major directions of intervention are in line with PEP, the ministerial decree issued in October, 2002, entitled Medium-term tasks for the development of small and medium sized enterprises as well as with regulations of Act XCV/1999 on small and medium sized enterprises and the support of their development of 1999. Nevertheless compared to the strategy of the sector, these assign higher priorities for training programmes, knowledge transfer and networking, 188

including co-operation between the economic sector and research. The investment promotion action targeted to comply with EU norms in terms of regulations in the field of environmental protection and working safety also plays pivotal role in the modernisation of the business sector. The reduction of regional differences is also among the targeted interventions. Another important objective of the National Development Plan is the development of tourism as a field especially rich in potential. To reduce strong seasonal and spatial concentration, the strategy of the Plan sets the objectives of developing tourism infrastructure and the creation of high quality services especially in priority target areas for tourism. As a result of that, it becomes consistent with the national tourism policy and with regional tourism development strategies. Concerning R&D and innovation, the Plan is synchronised with the science and technology policy objectives of the government, making a top priority to support the R&D sector and promote innovation. In accordance with the Government Programme Hungary 2002-2006, the Plan calls for the development of tools fostering innovation, as well as for the preparation of the regions for the reception of international (EU) and domestic funds in support of innovation. In line with the science and technology policy objectives defined in the Science and Technology Policy 2000 strategic document, the Plan puts an emphasis on strengthening the co-operation between R&D institutions and the business sector, the development of the innovation capabilities of the SMEs and encouraging regional innovation. The Plan also complies with the Medium-term Economic Policy Programme of Hungary, which sets forth the objectives of creating an innovation-friendly regulatory environment, making Hungary attractive as an R&D site, improving the protection of intellectual property, and expanding the resources for innovation available for the SMEs. At the same time, the Plan also recognises the significant deficiencies in Hungary in terms of Information Society. The integrated approach defined in the strategy and in the field of proposed interventions is consistent with the document entitled Information Society Strategy (ISS) prepared by the Ministry of Information Technology and Communication targeted at better access to new technologies, the preparation of users and the spread of new applications. In the field of skill development and to prevent the widening of the digital gap, special attention is paid to small and medium sized enterprises and disadvantaged groups like the Roma. The modernisation of public administration and non-governmental sectors through the use of information technology as well as the establishment of an Information Society are coherent with the general approach and the priorities of the ISS. The National Development Plan strategy emphasises the importance of quality environmental protection infrastructure. Investments proposed are in line with environmental protection priorities of sectoral policy, the Second National Environment Protection Programme for 2003-2008 (NKP II) that will be accepted in the near future, giving priority for the complex programmes and active participation activities concentrated primarily on the following issues: waste management and recycling; protection of air quality, reduction of severe air pollution; and 189

solutions for wastewater management with special regard to the extension of urban sewage treatment systems, wastewater purification and canalisation networks. In addition to investment priorities, the National Environment Protection Programme defines other objectives as well, such as the more severe requirement of the Polluter Pays principle and that the budget of the environmental protection fund should be increased from 1% to 1.15% of the GDP during 2003 and 2004, most probably, with the active support of the Community. The National Development Plan strategy includes relevant legislation, international trends and requirements as well as professional and implementation experiences of previous programmes in an integrated way and it further concentrates resources, promotes co-operation within the sector and a greater integration of environmental protection and industrial policies. It was also recognised that the development of transport infrastructure is crucial from the aspect of regional competitiveness. The National Development Plan gives special priority to the creation of further TENs, secondary connections, the improvement of the quality of the road network as specified by the conceptional document entitled Hungarian Transport Policy 2003-2015 and the four year plan of Hungarian Road Transport Policy 2003-2006. Major investments supported by the Cohesion Fund are concentrated primarily on the public road development programme and the development of railroad transportation, whereas major projects funded by the Structural Funds promote the implementation of the National Regional Development Concept.. The introduction of an effective traffic management system and the improvement of urban mass-transportation can contribute to the achievement of sustainable growth. To promote economic and social cohesion, the increase of employment is also an integral part of the National Development Plan strategy supported by all priorities. The proposed interventions are consistent with the national employment strategy as specified by the European Commission and the Hungarian Government in the document Joint Assessment of the Priorities of Hungarian Employment Policy, signed in November 2001. These links are discussed in detail in the Policy Frame of Reference. The NDP will contribute to promoting social inclusion by helping the integration and reintegration of disadvantaged people (especially the Roma and people with disabilities) into the labour market through improving their employability and adaptability. These interventions are in line with the strategy defined in the Joint Memorandum on Social Inclusion. Concerning the social integration of the disabled, the Plan contributes to the objectives set by the National Programme for the Disabled launched in 1999 on the basis of Act XXVI/1998. This concentrates on rehabilitation and enabling the active participation of the disabled in all aspects of social life by providing assistance to their labour market integration, and improves the quality of life through providing better access to services and transport and fighting against social prejudices. The development of education and training will promote both employment and social cohesion. The aim of the intervention planned in the field of education and training under the Increasing employment and the development of human resources priority is to strengthen the 190

links between education and economy, supporting life-long learning, concentrating on adaptability, entrepreneurial skills and the improvement of the quality and infrastructure of education and training. The development of public education infrastructure co-financed through ERDF is in line with the priority of PEP to reduce regional disparities in the field of education and training. The National Regional Development Concept also explicitly names this objective. To modernise and regionally balance the healthcare services, the strategy aims to reduce regional disparities relative to the Community average and the negative impact of poor health conditions on social cohesion and growth. To support these interventions the assistance of ERDF will be used. The Government Programme and the Johan Béla National Healthcare Programme place special emphasis on the modernisation of the sector to improve access to services and reduce regional differences. The National Development Plan contributes to the above mentioned objectives by supporting the modernisation of, equipment and machinery to provide better accessibility, to reinforce regional capacities and to develop networks and information technology applications. The environmental protection programmes also serve public health objectives. The strategy of the National Development Plan emphasises the importance of social inclusion to be implemented in various development fields, especially under the Increasing employment and the development of human resources and Strengthening regional and local potential priorities. To enhance social inclusion the Government supports programmes to fight against poverty and discrimination although no integrated national strategy has been developed considering the decisions of the Göteborg European Council in the field of preventing poverty and social segregation. Similarly, Hungary has not yet developed a social statistical system to meet EC standards providing data and indexes on poverty and social exclusion. The Plan also recognises the need to improve the situation of the Roma with special regard to their employability. The strategy reinforces this objective by a horizontal approach applied in several development fields, with special regard to the Increased employment and the development of human resources and to the Strengthening regional and local potential priorities. The Plan contributes to the integrated efforts of Government Decree 1047/1999 (V.5) on measures targeted at the improvement of the living conditions and social status of the Roma, specifying a single strategy for education, culture, employment, regional development, social issues, healthcare and housing programmes, outlining major directions for antidiscrimination programmes and social communication. Concerning the special impact of agriculture and rural development on economic and social cohesion and on European harmony, the Plan defines special priority axes for these fields. The development strategy currently valid for agriculture is defined by Act CXIV/1997. This act is aimed at the establishment of an agricultural sector that can be integrated into the European agricultural model, creates competitive job opportunities and protects the natural environment. In coherence with the national agricultural development strategy, the approved Hungarian SAPARD Plan is based on three major priorities: To increase the competitiveness of the agricultural sector; 191

To put greater emphasis on environmental protection; and To strengthen the economic base of rural areas and extend employment opportunities through the establishment of conditions for competitiveness. The National Development Plan strategy follows the approach of the SAPARD Plan and the agricultural development plan, reflecting the standpoint of the government that rural development must be viewed as the second pillar of the Common Agricultural Policy. Interventions shall contribute to the priority of improving the competitiveness of the productive sector including agriculture. Among objectives targeted at the creation of an Information Society or the development of human resources, special tasks to do in the field of rural development were especially accentuated. The National Agri-environmental Programme which started in 2002 supports the implementation of environment friendly development. The comprehensive objective of regional development can significantly contribute to the implementation of objectives of the Medium-term Economic Policy Programme and the National Regional Development Concept. Measures defined by the above documents are consistent with measures of the SAPARD Plan and they also take results and experiences realised during previous PHARE programmes into consideration. In accordance with the above, the National Development Plan strategy gives priority to the establishment of local level infrastructure and access to create attractive conditions for regional competitiveness and extending employment opportunities. In addition to that, the strategy stresses the importance of strengthening innovation and the necessity of a wider use of information technology. The National Development Plan also considers the indispensable character of sustainable regional development as it is aimed at supporting local actions targeted at the protection of environmental quality. 2.2 HORIZONTAL PRINCIPLES The National Development Plan strategy clearly defines the principle of sustainable development. NKP II as relevant national policy pays special attention to the necessity of intervening in priority sectors as the majority of environmental protection tasks result from efforts targeted at driving the impact of economic activity to environmentally sustainable directions. The most effective tool to achieve the above is the streamlining of environmental protection considerations into sectoral policies and interventions. Key areas of integration within the sector are energy management, transportation, industry, agriculture, tourism and commerce. Accordingly, the principle of sustainable development with special regard to guidelines concerning waste management, environmental safety and greater environmental consciousness is also embraced by the National Development Plan among its intervention field measures. The NDP supports sustainable environment through the following priority areas: Sustainable management of natural resources and the improvement of environment quality 192

Integration of environment in regional and sectoral policies Protection and improvement of natural heritage in order to preserve nature and biodiversity Foresting environmental education and information The NDP contains a number of areas, that directly contribute to environmental sustainability: Increasing the coverage of population regarding supply of quality water Increasing the rate of treatment of domestic and industrial waste water Rationalising the collection and treatment of urban solid waste Promoting an integrated and inter-sectoral policy for nature protection Defining areas for nature protection like natural parks and creating areas for nature conservation Improving planning and management of water resources including flood prevention Controlling air pollution Opting for environment friendly solutions The NDP promotes the idea of sustainability not only in the field of environment and nature protection. It fosters action in a wider context. It contributes to a sustainable management of urban system by helping their improvement and restructuring, and by teaching such behaviour that improves social cohesion. The promotion of innovation and quality in production, and better human resources are overarching elements of the NDP and they constitute a crucial aspect of sustainability. The NDP fits in the wider context of sustainability as economic terms it promotes the new sources of competitiveness other than those based on cost and low technology, and at the same time, helps create the social embededness of these directions of development. In accordance with the obligation laid down in Art. 1 of the General Regulation, the National Development Plan strategy defines gender mainstreaming as a horizontal principle which means that the differences between the conditions and needs of women and men should be systematically considered in the process of planning, implementation and evaluation of all measures of the NDP. Besides the general consideration of equal opportunities, positive measures will also be implemented in order to support the participation of women on the labour market and improve their employability through the promotion of special training, the development of child care services. Measures will be supported to create jobs in the form of new enterprises and initiatives to reduce vertical and horizontal gender segregation on the labour market. The strategy intends to achieve its objectives through interventions under the Increasing employment and the development of human resources priority where conclusions of the Joint Assessment of the Priorities of Hungarian Employment Policy were also taken into consideration when defining interventions. 193

3 COHERENCE AND CONSISTENCY OF THE STRATEGY AND PRIORITIES The Ex Ante Evaluation Team has sought to assess the coherence and consistency of the programme. 3.1 PRIOR APPRAISAL OF SOCIO-ECONOMIC PROBLEMS Section 1 of the National Development Plan describes the social needs and development problems which justify the existence of the programme. Section 1 of the National Development Plan undertakes a comprehensive problem analysis. This has sought to identify the negative aspects of the existing situation in Hungary namely the existing development gaps between Hungary and the Member States of the EU. Section 1 of the National Development Plan has successfully undertaken three steps: 1) Precise definition of the framework and subject of analysis: the analysis focuses on the key problem to be addressed that development gaps exist between the EU and the Member states. 2) Identification of the major problems faced by target groups and beneficiaries: Chapter 1 identifies and generally has substantiated the existence of the problems which have caused the development gaps. 3) Established a hierarchy of problems. Chapter 1 of the National Development Plan has produced a hierarchy discernible throughout most of the chapter. A visualisation (in form of a problem tree) might have proved helpful for a better understanding. The third point is significant as it is vital to identify the cause/effect relationship between different levels of problems. The analysis in Chapter 1 of the National Development Plan is aimed at identifying the real bottlenecks which are preventing Hungary catching up with the Member States of the EU. Chapter 1 of the NDP does present a relatively comprehensive picture of the existing, negative situation with respect to the development gaps between Hungary and the EU member States. To a large extent Chapter 1 is now successful in presenting the socio-economic handicaps and development problems of Hungary that warrant the attribution of support within the framework of the Structural Funds. 3.2 RELEVANCE AND COHERENCE OF THE STRATEGY AND OBJECTIVES The formulation of the strategy has a number of clear steps: 194

Step 1: Establishing a hierarchy of objective Analysis of objectives is a methodological approach employed to: Describe the situation in the future once the problems identified in the Situation Analysis have been remedied [the future goals]; Verify the hierarchy of objectives;?illustrate the means-end relationships in a diagram. The negative situations of the problems diagram are converted into solutions, expressed as positive achievements. These positive achievements are in fact objectives, and are presented in a hierarchy of objectives tree showing the means/ends relationships. The hierarchy of objectives can therefore be conceptualised as the positive mirror image of the hierarchy of problems [or problem tree ], in which the cause and effect relationships become means to ends relationships. The hierarchy of objectives should provide a clear overview of the desired future situation. The hierarchy of objectives should flow down through the NDP, its priorities and each resultant Operational Programme. The global objective of each NDP priority now broadly reflects one of the specific objectives of the NDP [thus showing the natural linkage]. However, the same hierarchical linkage should be maintained throughout down through the operational programme, the operational programme s priority axes, its measures and its actions. If we review the objectives within the NDP then the development objective [the highest level objective to whose achievement the whole National Development Plan is targeted] is to reduce the income gap relative to the EU average. This objective would, by definition, then require the focal problem to be A major income gap between Hungary and the EU average. This is not coherent with the NDP s strategy which states that The purpose of the current NDP is to reduce the existing development gaps between Hungary and the countries of EU. Taking closure of the income gap as the overall objective does not fully reflect Hungary s other objectives as stated in the body of the NDP. However, the Government has selected this objective as a simple and relatively clear sign of socio-economic growth. The ex ante evaluation team are satisfied that despite the existing rather narrow wording of the objective a broader concept of closing the development gaps exist between Hungary and the EU Member states is the overall objective of the NDP and that this is therefore a coherent overall objective for the NDP. The specific objectives selected in the NDP are: more competitive economy. Improved use of human resources Better environmental and a more balanced regional development. 195

These indicate that the underlying problems are: Reduced competitiveness of the economy. Poor use of human resources Poor environment and unbalanced regional development. Reduced competitiveness of the economy: The situation analysis does focus on the issue of declining growth in Hungary s international competitiveness and its underlying causes. The situation analysis also notes that Hungary has a recent history of growth in international competitiveness which is now being put at risk by a number of specified factors. This makes it clear that Hungary has suffered from a lack of sustainability with respect to its competitiveness. This is not reflected fully in the problem or the objective. Poor use of Hungary s human resource: The situation analysis fully supports this statement. Poor environment and unbalanced regional development: The situation analysis does demonstrate that there are gaps in Hungary s protection of the environment and that there is undoubted major disparity between the level of developments of its constituent regions. However the bundling of the two problems in this manner suggests an inter-relationship which is not obvious and is not justified by the Situation Analysis. The EC s Guidance for 2000-2006 The structural funds and their coordination with the cohesion fund: guidance for programmes in the period 2000-06 highlights that certain elements are necessary to create the basic conditions for regional competitiveness: [a] transport infrastructure; [b] energy; [c] telecommunications; research, technological development and innovation and [d] infrastructure for a high-quality environment. Under the Treaty of Amsterdam, the EU financial instruments are required to work, simultaneously and in the long-term interest, towards economic growth, social cohesion and the protection of the environment; in other words, sustainable development. Therefore it would be useful to place the environment under the appropriate objective relating to sustainable international competitiveness [under which the strategy also describes it as a sub-objective]. Furthermore at the lower level objectives aspect of social inclusion should be stressed that is, ensuring that growth in social and economic development is spread equitably across the country not just geographically through balanced regional development, but also socially [including to the Roma minority]. Beneath these three NDP specific objectives the definition of sub-objectives in the NDP could be improved by structuring the hierarchy and inter-linkages. Thus the existing general description of the desirability of a broad range of actions under each heading should be complemented by a clear definition of sub-objectives. Objectives are goals which are expected to be achieved and therefore need clear definition. By a clear definition of objectives and a classification according to their degree of importance 196

priorities could be determined, as to which should be implemented utilising a limited and finite budgetary resource. The objectives at this sub-level do not directly link to those within the relevant Operational Programme. The general objective of the Economic Competitiveness Operational Programme [ECOP] should be the same as one of the NDP s specific objectives and it is, namely Increased competitiveness of the economy. ECOP has three specific objectives: Development of knowledge economy, knowledge base, and increasing the level of innovation capabilities Establishment of an economy based on technology-intensive industries Reducing the economy s duality through the development of small and medium enterprises The linkage between these objectives and those in the NDP could be substantially improved. Therefore the ex ante evaluation comes to the conclusion that the hierarchy of objectives is acceptable in its current form, but that significant improvements still should be achieved. Step 2: Selection of the strategy In the final step strategy analysis - the strategy which will be used to achieve the desired NDP objectives is selected. Strategy analysis involves deciding which of the identified objectives will be included IN the NDP and its OPs, and what objectives will remain OUT. This step requires: Clear criteria for making the choice of strategies The identification of the different possible strategies to achieve the objectives The choice of the project strategy In the hierarchy of objectives, the different clusters of objectives of the same type are all called strategies. No Government has adequate resources to address all of the objectives identified through its problem and objectives analysis. The NDP identifies the following priorities: Improving the competitiveness of the productive sector Increased employment and development of human capacities Providing better infrastructure and cleaner environment Strengthening regional and local potential 197

The NDP does explain to the satisfaction of the Ex Ante Evaluation team the basis for the selection of priorities for implementation in the very brief programming period [2004-2006] addressed by the NDP. With such a more accurate definition of the hierarchy of objectives and the subsequent classification of objectives according to their degree of importance a significant improvement of the NDP could be achieved, but it can be concluded that the existing NDP has reached an acceptable level of coherence and consistency. 198

IV. FINANCE 1 THE FINANCIAL PLAN OF THE NATIONAL DEVELOPMENT PLAN In accordance with the Article 16 (1) paragraph c) point of the Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds the Plan includes the indication of the planned use and form of the financial contribution from the Structural Funds and, where appropriate, the European Investment Bank (EIB) and the other financial instruments including the expected requirement for technical assistance. The methodological working paper of the Commission 10 describes in detail the necessary content of the financial tables. These guidelines were taken into account throughout the planning process. The calculations were based on the information provided by the European Commission on the available resources for structural expenditures 11. These figures have been fine tuned on the basis of the 1999 figures per country and year as calculated by the responsible Commission services and provided by DG Regio recently. The presented and referred amounts always indicate the level of commitment, the actual payments will depend on the implementation of programmes and projects. In accordance with the agreement with the representatives of the EIB the financial table presently does not comprise EIB financing. Its definition will take place during the finalisation of the Community Support Framework and the Operational Programmes. Applying the principle of concentration and ensuring absorption, the planned level of EU financing is kept at a relatively high level under each assistance. The contribution form the funds were calculated in relation to the total public or similar eligible expenditure. 10 The New Programming period 2000-2006: methodological working papers, Working Paper 1: Vademecum for Structural Funds Plans and Programming Documents 11 INFORMATION NOTE, CHAPTER 21: REGIONAL POLICY AND CO-ORDINATION OF STRUCTURAL INSTRUMENTS - FINANCIAL ALLOCATIONS TO THE NEW MEMBER STATES (D(2002) 70238 - Brussels, 19 December 2002) 199

1.1 table Indicative financial table of the Hungarian NDP by priority and by year 2004-06 million Euro 1999 prices Priority Total cost Public Private EIB loans Cohesion Fund Total Community participation National Public Participation Total ERDF ESF EAGGF FIFG Total Central Regional Local Other 2004 Improving competitiveness of the productive sector 580,6 228,9 171,7 98,6 0,0 72,0 1,1 57,2 54,7 0,0 2,6 0,0 351,8 0,0 0,0 Increasing employment and the development of Human Resources 156,2 156,2 117,1 42,4 74,7 0,0 0,0 39,0 35,5 0,0 3,6 0,0 0,0 0,0 0,0 Providing better infrastructure and cleaner environment 70,8 61,0 45,8 45,8 0,0 0,0 0,0 15,3 12,1 0,0 3,2 0,0 9,8 0,0 340,2 Strengthening regional and local potential 111,7 102,2 75,6 68,0 7,6 0,0 0,0 26,6 22,5 0,0 4,1 0,0 9,4 0,0 0,0 Technical Assistance 16,5 16,5 12,4 6,9 2,6 2,9 0,0 4,1 4,1 0,0 0,0 0,0 0,0 0,0 0,0 Total 935,9 564,9 422,6 261,7 84,9 74,9 1,1 142,3 128,8 0,0 13,4 0,0 371,0 0,0 0,0 2005 Improving competitiveness of the productive sector 812,7 320,4 240,3 138,0 0,0 100,8 1,5 80,1 76,5 0,0 3,6 0,0 492,4 0,0 0,0 Increasing employment and the development of Human Resources 218,6 218,6 164,0 59,4 104,6 0,0 0,0 54,7 49,7 0,0 5,0 0,0 0,0 0,0 0,0 Providing better infrastructure and cleaner environment 99,1 85,4 64,1 64,1 0,0 0,0 0,0 21,4 16,9 0,0 4,4 0,0 13,7 0,0 280,1 Strengthening regional and local potential 156,3 143,1 105,9 95,2 10,6 0,0 0,0 37,2 31,5 0,0 5,8 0,0 13,2 0,0 0,0 Technical Assistance 23,1 23,1 17,3 9,6 3,7 4,0 0,0 5,8 5,8 0,0 0,0 0,0 0,0 0,0 0,0 Total 1309,9 790,6 591,5 366,3 118,9 104,8 1,5 199,1 180,3 0,0 18,8 0,0 519,3 0,0 0,0 2006 Improving competitiveness of the productive sector 1032,3 406,9 305,2 175,3 0,0 128,0 1,9 101,7 97,2 0,0 4,5 0,0 625,4 0,0 0,0 Increasing employment and the development of Human Resources 277,7 277,7 208,3 75,4 132,8 0,0 0,0 69,4 63,1 0,0 6,3 0,0 0,0 0,0 0,0 Providing better infrastructure and cleaner environment 125,9 108,5 81,4 81,4 0,0 0,0 0,0 27,1 21,5 0,0 5,6 0,0 17,4 0,0 373,8 Strengthening regional and local potential 198,6 181,8 134,5 121,0 13,5 0,0 0,0 47,3 40,0 0,0 7,3 0,0 16,8 0,0 0,0 Technical Assistance 29,4 29,4 22,0 12,2 4,7 5,1 0,0 7,3 7,3 0,0 0,0 0,0 0,0 0,0 0,0 Total 1663,8 1004,2 751,3 465,3 151,0 133,1 1,9 252,9 229,0 0,0 23,8 0,0 659,6 0,0 0,0 Improving competitiveness of the productive sector 2425,6 956,1 717,1 411,9 0,0 300,8 4,4 239,0 228,3 0,0 10,7 0,0 1469,5 0,0 0,0 of this, more competitive agriculture sector 1204,4 407,0 305,2 0,0 0,0 300,8 4,4 101,7 93,1 0,0 8,7 0,0 797,5 0,0 0,0 Increasing employment and the development of Human Resources 652,5 652,5 489,4 177,2 312,1 0,0 0,0 163,1 148,2 0,0 14,9 0,0 0,0 0,0 0,0 Providing better infrastructure and cleaner environment 295,9 254,9 191,2 191,2 0,0 0,0 0,0 63,7 50,5 0,0 13,3 0,0 41,0 0,0 994,1 Strengthening regional and local potential 466,6 427,1 316,0 284,2 31,8 0,0 0,0 111,1 93,9 0,0 17,2 0,0 39,4 0,0 0,0 Technical Assistance 69,0 69,0 51,7 28,8 10,9 12,0 0,0 17,2 17,2 0,0 0,0 0,0 0,0 0,0 0,0 Total 3909,5 2359,7 1765,4 1093,3 354,8 312,8 4,4 594,3 538,2 0,0 56,0 0,0 1549,9 0,0 0,0 EAGGF 1200,8 417,1 312,8 0,0 0,0 312,8 0,0 104,3 95,6 0,0 8,7 0,0 783,7 0,0 0,0 ERDF 2216,0 1463,5 1093,3 1093,3 0,0 0,0 0,0 370,2 324,6 0,0 45,6 0,0 752,4 0,0 0,0 ESF 473,1 473,1 354,8 0,0 354,8 0,0 0,0 118,3 116,6 0,0 1,7 0,0 0,0 0,0 0,0 FIFG 19,6 5,9 4,4 0,0 0,0 0,0 4,4 1,5 1,5 0,0 0,0 0,0 13,7 0,0 0,0 200

2 EX-ANTE VERIFICATION OF ADDITIONALITY In accordance with the Article 11 (2) paragraph of the Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds the Commission and the Member State concerned determine the level of public or equivalent structural expenditure that the Member State is to maintain in the sum of its regions covered by Objective 1 during the programming period. Thereby it is assured that the appropriations of the Structural Funds may not replace public or equivalent structural expenditure by the Member State. The types and scopes of expenditures showed in the table are determined by Commission guidelines 12. It is emphasised that the table comprises actual data i.e. payment levels according to the provision of the Final Account Act while the financial table of the NDP performs data on commitment. According to the document of the Commission the Member States compared the annual average of the former programming period (1994-1999) with the annual average of the following programming period (2000-2006). However in the new Member States there has been no former programming period, so the future indicators will be compared with the actual data of the period chosen by the new Member State. With regards to the fact that the average of three years (2004-2006) shall be compared with the data of a former period, and also considering the actual data available, the period of 1999, 2000 and 2001 has been chosen as period of reference. In this way a more realistic view can be obtained, then from data of a single year. 12 Working Paper 5: Ex-ante verification of additionality 201

2.1 table Financial table summarising public or other equivalent structural expenditure in Objective 1 regions (in million euro 1999 prices) Annual average 1999, 2000, 2001. Annual average 2004-2006 Total of which: public enterprises CSF Not EU cofinanced Total Total of which: public enterprises EU+national (central+local) EU+national* EU national (central +local) national (central+local) national (central+local) EU+national (central+local) Community Support Framework EU+nationa*l EU national (central +local) Not EU cofinanced national (central +local) Total national (central+local) 1 2 3 4 5 6 7=5+6=2-4 8 9 10 11 12 13=11+12=8-10 1. Basic infrastructure 871,08 871,08 871,08 1 091,79 66,03 22,01 1 003,75 1 025,76 Transport 508,87 508,87 508,87 610,62 12,17 4,06 594,39 598,45 Telecommunication 21,72 21,72 21,72 41,88 16,34 5,45 20,10 25,54 Energy 0,33 0,33 0,33 6,93 5,20 1,73 0,00 1,73 Environment 224,98 224,98 224,98 283,50 18,91 6,30 258,28 264,59 Health 115,17 115,17 115,17 148,86 13,41 4,47 130,98 135,45 2. Human resources 698,25 698,25 698,25 924,14 102,97 34,32 786,84 821,16 Education Training RTD 3.Productive environment 605,81 605,81 605,81 807,96 95,51 31,84 680,61 712,45 Agriculture/Rural 236,33 236,33 236,33 332,21 54,28 18,09 259,84 277,93 development/ficheries Industry 110,39 110,39 110,39 153,37 23,54 7,85 121,97 129,82 Services 231,57 231,57 231,57 274,77 2,43 0,81 271,52 272,33 Tourism 27,52 27,52 27,52 47,61 15,25 5,08 27,28 32,36 4. Other 50,35 50,35 50,35 96,75 37,55 12,52 46,69 59,21 Total 2 225,48 2 225,48 2 225,48 2 920,64 302,06 100,69 2 517,89 2 618,58 * no information available 202

V. BRIEF DESCRIPTION OF THE OPERATIONAL PROGRAMMES The relationship between the priorities of the NDP and the OP s is described in subsection 2.4. The financial contribution of the funds to the OP s and the priorities are presented in the financial table of the NDP (Chapter 4). 1 ECONOMIC COMPETITIVENESS OPERATIONAL PROGRAMME The primary objective of the Economic Competitiveness Operational Programme (ECOP) is to strengthen the Competitiveness of the Hungarian economy. The convergence of the Hungarian economy to the level of development of the European economy will be achieved by the improvement of economic competitiveness, the modernisation of enterprises and the fostering of a developed economic environment. In an increasingly competitive international marketplace, Hungary can rely on its strengths and the results achieved to date. These include the performance of modern manufacturing industries in dynamically developing economic centres - in Budapest and Western Hungary - operating mainly with foreign investments. As a result of the growing importance of its geographic location, Hungary can become the business and service centre in the South East European region. The obstacles hindering development will be reduced by improving the availability of capital and by modernising management skills in SMEs, development of R&D and innovation activities, forging stronger relations between the research and development and business sectors. Hungary has to capitalise on the opportunities offered by the IT technology and applications. The level of telecommunications infrastructure differs strongly between regions and therefore balanced regional development and the reduction of significant regional disparities will receive special attention. Objectives: Development of a knowledge-based economy and developing innovation capacities Development of an economy based on technology-intensive industries and services Developing small and medium-sized enterprises to reduce the dual nature of the economy The objectives are supplemented with certain horizontal objectives, such as improvement of the quality of environment, sustainable resource management and promotion of balanced regional development. 203

Strategy: Development of a knowledge-based economy and developing innovation capacities by supporting research and development and innovation, the application of information technologies and the promotion of an information economy and society. Research and development and innovation represent a key and dynamic factor in the transition to a knowledge-based economy to create long-term sustainable growth, increasing economic competitiveness based on Hungary s competitive advantages in these areas. Hungary's strong scientific culture and relatively well-developed educational system in the key R&D areas are a solid basis for development. The developments related to the information society and electronic economy also supports the emerging knowledge-based economy. The EU also considers these areas very important from the aspect of competitiveness, yet in this area Hungary is lagging behind the average indicators of current EU Member States even more than in the area of productivity. The establishment of an economy based on technology-intensive industry requires investment in modern processing, manufacturing and services industries with a high added value. However, Hungary s investment attracting capabilities have recently declined in parallel with an increase in labour costs and more intensive competition from low cost economies. This calls for a shift in investment promotion policy: the objective now is to support the attraction and retention of activities representing a high added value and promote their embedding into the Hungarian economy. Investment promotion can be successful only if it provides the appropriate business environment in addition to direct and targeted support to investments. The business environment will be improved through the development of the knowledge base as mentioned above, the supply of sufficient business infrastructure and services, as well as infrastructure and human resource development activities utilising resources outside the ECOP. The ECOP is mono-funded from the European Regional Development Fund with no European Social Fund funding, its successful implementation is therefore critically dependent on its integration and coherence with the other OPs to ensure that sectors or areas targeted development are approached in a holistic way. It is also important that investment promotion contributes to the reduction of regional economic disparities where investments will impact in inducing growth, creating jobs and supporting catching-up in less developed regions. Developing small and medium-sized enterprises to reduce the dual nature of the economy. The SME sector is a very important segment of the economy. Significant support will be provided to the SME sector in an attempt to eliminate insufficiencies and weaknesses identified in the situation analysis. As a result of technological modernisation, development of corporate management skills, promoting co-operation, sub-supply activities and the use of information technology devices, SMEs will also benefit from the growth induced by the modernisation of economy, developing knowledge base and technology intensive activities. Reducing the gap between the economic performance of SMEs and large firms and developing a healthier business environment is of fundamental importance for the strategy of improving economic competitiveness. 204

On the basis of the strategy, the objectives of the ECOP will be implemented through the following four priorities: 1. Investment promotion 2. SME development 3. Research and development and innovation 4. Development of information society and economy The above priorities will be supplemented with a fifth priority, promoting the implementation of the ECOP under the title of Technical assistance. The above listed priorities represent an integrated part of Hungary s overall economic development strategy, which intends to improve economic competitiveness, create sustainable growth and reduce state involvement in the economy. 1.1 INVESTMENT PROMOTION The investments of the corporate sector will continue to have a key role in the modernisation of Hungarian economy, improvement of the capital attraction and retention capabilities of the economy and reducing the problems of the labour market. Improving the competitiveness and modernisation of enterprises and developing an entrepreneurial environment will promote job creation, and the establishment of long-term jobs. In order to improve the entrepreneurial environment, the legal regulations of the establishment and operation of enterprises need to be simplified. A fundamental requirement for strengthening the ability of underdeveloped areas or regions with high unemployment to attract investments is the development of appropriate infrastructure, which can support manufacturing industry producing modern products. Modernisation of the corporate sector is also necessary to comply with environmental protection, labour safety, information protection and property protection norms and to develop European regional business centres. The infrastructure for the business sector can be improved most efficiently by the development of industrial parks and logistics service centres offering high-quality services. Simultaneously, the attraction of potential investors to Hungary requires more extensive, target-oriented and more effective marketing activities. The development of the economic environment and local infrastructure in the framework of Regional Development OP needs to be closely co-ordinated with the ECOP. 1.2 SME DEVELOPMENT The major role of the SME sector in the economy, society and employment justifies its selection for development under separate priority. The underused resources inherent in the SME sector provide opportunities for increasing the employment rate, improving competitiveness, adjusting capabilities and encouraging social integration. Enterprises of different sizes, pursuing different activities in different situations require different interventions; the ECOP provides a portfolio of inputs to cater for these varying needs. It is 205

necessary to modernise the equipment, technological processes and strengthening of the innovation activities of SMEs in order to produce products that are also marketable in the EU. In the framework of modernisation it is extremely important to introduce up-to-date quality assurance systems, disseminate business expertise and modernise equipment to match international standards. Strong co-operation between SMEs and development of their subsupplier relations with multinational and regional companies are key factors to successful market performance. Joint actions increase the economic strength of the enterprises involved, reduce costs, improve information flow and access to business services. The business development inputs will include improving and making accessible entrepreneurial skills and the quantity and quality of business knowledge necessary to effectively manage the business process. This will assist managers of small and medium-sized enterprises to identify and capitalise on market opportunities. Small and medium-sized enterprises will also be assisted by business consultants in order to increase their chances of successfully bidding for tenders. 1.3 RESEARCH AND DEVELOPMENT AND INNOVATION In order to achieve long-term economic competitiveness and sustainable growth, it is necessary to develop products, services and technologies containing a considerable amount of intellectual added value. Therefore, research and development investment must be increased and R&D co-operation must be supported. Resources must be concentrated in areas that are important for the national economy, creating the critical mass which allows for the development and commercialisation of the results of the R&D activities. Generic technologies offering solutions to the challenges of our age (information and communication technology, biotechnology, and technology of new materials) as well as development of environmentally friendly procedures, products and services will be considered a high priority. Hungary can only accede successfully to the European Research Area with effective R&D activities and modern R&D capacities. In this context, it is necessary to modernise the relatively obsolete infrastructure of research sites financed from the state budget and also the infrastructure of non-profit sites (for example, universities, academic research institutes and foundations). Complex co-operation between universities and companies will be supported through the creation of joint research centres. In order to increase the competitiveness of the national economy, innovation capabilities and capacities of companies, primarily SME-s - need to be increased. SMEs will be encouraged to outsource or directly undertake R&D work and to participate in knowledge and technology transfer. Significant support is required to establish and strengthen start-up and knowledge and technology-intensive spin off companies. The R&D activities in the corporate sector will be assisted through the development of existing research sites, establishment of new sites and support for the related investments and infrastructure development. 1.4 INFORMATION SOCIETY AND ECONOMIC DEVELOPMENT The development of information and knowledge-based society improves competitiveness primarily through its positive impact on efficiency, as a result of which technological development can also be accelerated. Changes in the skills required and the spread of new- 206

type services require a higher skilled workforce, increase the number of jobs and lead to the production of products and services of higher value and quality and to the creation of a value chain. In order to be able to face the challenges of international economic and cultural competition, it is absolutely necessary to develop new services and a high-quality and fast broadband infrastructure transferring these, as well as to implement programmes supporting the use of such services. Information and communication technologies and the economic, marketing and market information and data available through them, have a very important role in the future competitiveness of all industries. Consequently, the e-economy and e-commerce focus on investments related to the development of infrastructure, e-administration, services, applications and content. In order to develop an electronic economy, it is absolutely necessary to develop up-to-date economic production and operating conditions and promote the development of effective knowledge management. Therefore, public instruments will be needed to encourage the establishment of easily accessible information networks, use of web technology, and the effective use of active, up-to-date and economically relevant information in all economic processes. One of the areas of the e-economy with best global growth prospects is intelligent and dynamic electronic commerce, i.e., high-quality and diversified consumer-centred commercial activities. The support required for the development of e-commerce promotes an increase in the number of consumers and their trust in the security of electronic purchases and transactions. Enterprises can benefit from use of the Internet to access up-to-date business-related digital content. Hungary currently does not have sufficient digital content to support the needs of enterprises and the general population. A sufficient volume of easily accessible content will create an attraction for using IT technology for both enterprises and the population. Therefore, the existence of digital business, scientific and cultural content is absolutely indispensable for creating an information society and e-economy. The ECOP support promoting the development of the digital content industry is aimed at the development of software products, at the production of business, scientific and cultural content in Hungarian and foreign languages and the organisation of trade and distribution activities. A developed digital content industry is an indispensable element for the competitiveness of the Hungarian economy operating in the EU market. The introduction of e-public administration is absolutely necessary and both market participants and administration institutions will benefit from the time saving and costeffective use of e-administration. As a result of this development, public administration will become the biggest service provider possessing, collecting, managing and supplying digital data and information, as a result of which it will also contribute to an increase in the effectiveness of the IT market. With fast and effective administration new business activities can be launched more easily, participants in the market will find it easier to comply with their administrative obligations (tax and customs matters, obtaining licences, etc.), and will increase their efficiency. User friendly electronic public administration will also encourage the population to use information technology and more and more individuals will become customers, consumers and partners extending the economy, market opportunities and skilled human resources. 207

The success of the implementation of the measures of the Economic Competitiveness OP are closely dependent on the parallel implementation of the measures of the other OP-s supporting, for example: environment and infrastructure development; human resource development, training, retraining and further training required for equal opportunities, SME capability enhancement; the development of IT infrastructure and skills; integrated regional and sub-regional development; the development of the agriculture sector. The state and public administration must continue to streamline regulatory processes so as to reduce the bureaucratic burden on enterprise. In addition to the establishment of e- administration services, the state will also contribute to an increase in economic competitiveness by creating favourable regulatory conditions, representing the basis for e- administration services, and creating better conditions for the market. 208

2 HUMAN RESOURCE DEVELOPMENT OPERATIONAL PROGRAMME In Hungary the level of employment is significantly lower than the EU average, inactivity is high, while in certain occupations and regions the lack of skilled workforce causes shortages in the labour market. Exclusion from the labour market and society increasingly affects the most disadvantaged groups, including Roma people, those living in disadvantaged areas, and disabled people. The extremely bad health condition of the population of employment age, and underdeveloped rehabilitation cause significant losses with regard to the competitiveness and productivity of the workforce. Although the level of education of the population is continuously increasing, the knowledge level and knowledge base of the society, and the adaptability of the workforce cannot meet the requirements of the changing economic environment. The formal education and training does not sufficiently ensure the acquisition of basic skills, key competences and problem-solving. Formal education and vocational training is not properly adjusted to the needs of the economy. On the other hand, there is a significant human potential in the country. There is a need to increase investments into the development of human capital, to improve the qualifications and knowledge of the workforce, to increase its innovation capabilities and to improve the institutional and infrastructural framework supporting human resource development. In order to improve the level of employment it is absolutely necessary to develop outpatient healthcare services related to health protection and recovery. Objectives: To increase the rate of employment, To improve the competitiveness of workforce, To promote social inclusion These objectives are supplemented with certain horizontal objectives, such as equal opportunities for men and women, and the application of the principle of equal opportunity in general for the Roma population. Strategy: The improvement of competitiveness of the economy assumes a higher participation of the potential workforce in the labour market. In the area of employment and human resource development, the most important objective is to increase the rate of employment, in accordance with the Joint Assessment of Employment Policy Priorities (JAP). Demand for workforce can primarily be increased with the instruments of the economic policy, but human resource development can also contribute to the creation of new jobs by providing a 209

workforce that meets the requirements of the newly created jobs. On the workforce supply side the increase of employment must be promoted by helping the unemployed and inactive population to return to the labour market. The most important instrument for that is to support qualifications that meet the requirements of the economy and the acquisition of skills, as well as the supply of services adjusted to individual characteristics, requirements and opportunities. The fast restoration of health conditions also increase employability. In order to overcome the shortage of workforce in specific occupations and regions, occupational and regional mobility of the workforce should be eased and encouraged. A knowledge-based society requires competitive and trained workforce, capable of adjusting to changes in the society and the new challenges of the labour market. For the purpose of improving the competitiveness of the workforce strengthening the links between the education system and the economy is of strategic importance. The education and vocational training system must ensure the acquisition of qualifications, knowledge and skills that satisfy labour market requirements. In order to ensure that economic development is not hindered by the lack of knowledge or information, or by adjustment difficulties, there is a need to increase investments in the development of human capital. Consequently, the Operational Programme aims at the training and further training of the widest possible group of people, as well as development of competitive knowledge and skills required for successful integration into the labour market. An important factor of competitiveness is health conditions, and therefore health protection of the workforce should be developed in order to improve competitiveness. Human resource development should also promote social inclusion by reducing inequalities in opportunities, and helping the elimination of disadvantages originating from social and economic positions. In order to create opportunities in the labour market and prevent social exclusion, more attention should be paid to providing equal opportunities in education and training, as well access to social services. Therefore, the interventions of the Operational Programme must promote the labour market integration of the most disadvantaged groups of the society, the improvement of access to and quality of services, and the reduction of regional disparities. On the basis of the strategy, the objectives of the OP will be achieved through five priorities co-financed by the European Social Fund and the European Regional Development Fund. 1. Supporting active labour market policies, 2. Fighting social exclusion by promoting access to the labour market, 3. Supporting education, and training within the framework of the lifelong learning policy 4. Improving adaptability and entrepreneurial skills 5. Developing infrastructure supporting education, social inclusion and healthcare The above listed priorities are supplemented with a sixth priority supporting the implementation of the OP under the title of Technical assistance. 210

2.1 SUPPORT TO ACTIVE LABOUR MARKET POLICIES In international comparison, employment rate is low in Hungary and the ratio of inactive people excluded from the labour market is high. Active labour market policies promote the increasing of employment through the prevention of unemployment and helping the unemployed in re-entering the labour market. An indispensable requirement for this is that the Public Employment Service with which the unemployed first establish contact should have sufficient information on the workforce requirements in the whole country, within a specific region or area, and that it should contribute to ensuring appropriate links between the education and training system and the economy, and should also be capable of adjusting labour market training to the requirements of the economy. In order to improve the efficiency and effectiveness of labour market services, a service system needs to be put in place, which is in line with local requirements, individual characteristics and opportunities. 2.2 FIGHT AGAINST SOCIAL EXCLUSION BY ASSISTING ENTRY INTO THE LABOUR MARKET One of the most important instruments for promoting social integration, prevention and elimination of poverty and social exclusion is the strengthening of the integration capacity of the education system and the promotion of participation in the labour market. In addition, the fight against exclusion and poverty includes access to resources, rights, goods and services, the avoidance of risks of exclusion, assistance to the most helpless, involvement of all parties concerned into these processes, and support to activities that contribute to a better understanding of social exclusion. Equality of opportunities should be provided to the most disadvantaged groups of a society - especially the Roma population, people in disadvantaged situations and disabled people - in education and in access to labour market and social services. Participation in the labour market, based on education and training, can lead to long lasting improvements in the quality of life of these groups of the society. The objective of the measures is to promote social cohesion and integration with special regard to the education of young people struggling with learning difficulties, development of services promoting co-ordination between family and work, special employment, social, community development and social solidarity, strengthening programmes for disadvantaged groups - such as people without education skills, disabled groups, Roma population, children and young people at risk, homeless people, people living in disadvantaged areas - and promoting a better understanding of the processes of social exclusion. 2.3 SUPPORT FOR EDUCATION AND TRAINING WITHIN THE FRAMEWORK OF LIFELONG LEARNING POLICY The quality of school-based education fundamentally influences the chances and employment opportunities of young people entering the labour market. Therefore, with the comprehensive development of the education and training system, young people should be able to obtain the 211

key skills and knowledge in school-based education, which are indispensable for establishing a basis for lifelong learning and for successful integration into the labour market. In order to prevent unemployment, strengthening the relations between the education system and the economy and assistance to the transition from training to work are of strategic importance. Continuous development of knowledge and skills adjusted to the changing requirements of the economy and the labour market also make it necessary to provide the opportunity for lifelong learning to all groups of the society. The objective of the measures in this development area is to introduce substantial structural and operational changes in the entire education system, as a result of which this sector will better correspond to the policy of lifelong learning. A further objective of the measure is to increase the quality and efficiency of the education and training system, and to make labour market integration easier with the support of training adjusted to requirements. The implementation of the measures will also help people enter the labour market by the development of key competences and language skills. Integration into the information society calls for the application of information and communication technologies in the entire education system. 2.4 IMPROVING ADAPTABILITY AND ENTREPENEURIAL SKILLS The knowledge-based society, rapidly changing economic conditions set new types of requirements for the labour. The availability of professionally well-trained staff, capable of adjustment, as well as the improvement of the innovation and adjusting capabilities of working organisations are important conditions for competitiveness. In order to improve the adaptability of employees, especially employees of small and medium-sized enterprises, an appropriate framework for lifelong learning and the adjustment of the contents of the training to economic requirements must be ensured. Because of the significant employment potential of micro, small and medium-sized enterprises, it is especially important to develop entrepreneurial skills and assist them in adjusting to the changing economic environment. Using instruments of human resource development, the priority contributes to job creation by supporting training programmes related to investments. All this assumes a training system operating according to the required standards, offering training courses with adequate contents and infrastructure, in line with the permanently changing requirements of the economy. The training programmes improving the competitiveness of SME-s and the ones related to new economic investments play a very important role in developing the adaptability of employees and enterprises. The measures of the Human Resource Development Operational Programme aimed at the improvement of adaptability and competitiveness of the labour force are also supplemented by measures of the Operational Programme for Regional Development supporting sector-specific training programmes for employees and entrepreneurs. 212

2.5 DEVELOPING INFRASTRUCTURE SUPPORTING EDUCATION, SOCIAL INCLUSION AND HEALTHCARE In order to ensure the effectiveness and efficiency of human resource development interventions supported by the European Social Fund, it is necessary to develop infrastructure. The priority implemented with the support of the European Regional Development Fund intends to develop the infrastructure of institutions which are indispensable for the supply of competitive, skilled and healthy labour. Reduction of regional disparities in the education, training, social and health systems, equal access to services and improvement of the quality of services will all contribute to the integration of people in disadvantaged situations into the labour market and the society. Considerable institutional infrastructure investments are necessary to provide effective education techniques and methods and the conditions necessary for an adequate level of skill and competence development. The planned measures support the modernisation and extension of buildings of public education institutions and background infrastructure of related services. Special attention needs to be paid to the improvement of conditions in small settlements, as well as loosely populated and disadvantaged regions. Infrastructure development of social institutions contributes to the implementation of the Community strategy against social exclusion. The objective of the development of social and child protection services is to promote the integration of certain disadvantaged groups into the society. One of the conditions for successful social integration is an improvement of labour market opportunities. As a precondition - apart from job creation and training - special institutional services should also be created for those who need them for some reason. In relation to human resource development, those services should be developed which are aimed at the rehabilitation, successful integration and re-integration into the society and labour market of groups which are in a disadvantaged position in the labour market due to some reasons. The development of the outpatient healthcare system reduces significant regional disparities (between and within regions) in the supply of institutions with equipment. The development of medical devices in outpatient care, supporting access to modern services, will help to establish an early, quick and accurate diagnosis, and will have a favourable impact on the efficiency of medical treatment and rehabilitation. Development of information technology tools and establishment of communication connections are required for registering and transferring the results of examinations conducted with modern digital instruments. Development of medical equipment of outpatient healthcare providers will concentrate on regional programmes that are aimed at increasing the competitiveness of the region by improving the health conditions of the population of the region, and retaining and restoring the working capabilities of the labour. 213

3 ENVIRONMENTAL PROTECTION AND INFRASTRUCTURE DEVELOPMENT OPERATIONAL PROGRAMME Basic environmental and transport infrastructure in Hungary requires significant investment to support its development and bring it up to European standards. This is justified by the state of transport infrastructure and the condition of environment. Hungary s obsolete infrastructure, slow access to areas, and a heavily concentrated road network. hinders economic development. The principles of environmental protection, sustainable and balanced development will be observed during its development. In the energy sector, the environmental load can be reduced, beyond environmental investments, primarily through an increased use of renewable energy resources and environmentally friendly development in transport. Objective Promotion of environmentally friendly development This will be achieved through two specific strategic objectives: Improvement of the state of the environment in the whole territory of the country, Improvement in accessing main transport corridors and reducing the transport load on residential areas. Strategy: The strategy has two elements, each one addresses one of the specific strategic objectives. The problems affecting the environment of the majority of the population determine the state of the environmental situation in the country and these are manifest in settlements. The measures taken to improve these conditions and the longer-term preservation of environmental values also contribute to completing our future EU membership obligations. Amongst the top priorities are measures to supply the population with healthy potable water and protect the potable water basis, and collect and treat communal wastewater. Other priorities cover waste reduction and waste management, air pollution control and reduction of noise load. Nature conservation, preserving biological diversity and the Hungarian landscape, is another priority, particularly where habitants are threatened by flooding. Hungary wants to reduce both its dependence on imported fuels and environmental damages. Inline with the EU appropriations, the ratio of renewable energy sources must be increased to 12% in the consumption of total primary energy sources by 2010. The use of renewable 214

energy sources should also be developed, especially focusing on the consumption of renewable energy sources in electricity generation. The Hungarian economy uses more than 1.5 times more energy for the production of one unit of GDP calculated at purchasing power parity, than the EU Member States. However, this includes a lot of opportunities for improving efficiency, especially in heating technology, district heating and agriculture. Improving access times and reducing traffic loads In the period to 2015, the basic transport infrastructure supporting economic development should be put in place, which involves the completion of missing sections of the Helsinki corridor roads starting in or crossing Hungary, the construction of additional roads connecting the corridors, and supplementing the radial structure of transport, full reconstruction of the lines of the railway core network, and development of the network of public roads to 115 kn load bearing capacity. As far as Structural Funds are concerned for the first period, access to main transport corridors can be improved by constructing the network of motorways to a degree that on a long-term basis they can be accessible from all settlements within 30 minutes. Among the motorways, motorways moderating the radial structure of transport should be given priority. The development of regional airports connected to the network of European airports will promote the improvement of accessing main transport corridors, furthermore establishing a more environment friendly transport, and last but not least, it will also greatly contribute to the utilisation of economic potential of the regions concerned. In order to reduce the transport load on residential areas, it is necessary to extend the bypass programme around cities and settlements, which will result in a significant decrease in transport related noise, vibration and air pollution in all settlements concerned. The OP complements the support from the Cohesion Fund, which finances environmental and transport infrastructure large investments. The Cohesion Fund and the OP are closely coordinated through joint planning and implementation structure. Investments are differentiated by type, size and location and clear selection criteria prevent any overlap between the investments supported by the Cohesion and Structural Funds. The developments serving the improvement of the intra-regional accessibility are found in the Regional OP. The twin strategic objectives of the strategy outlined above will be implemented as two priorities financed from the European Regional Development Fund. 1. Environmental protection development 2. Development of transport infrastructure These priorities will be supplemented with a third priority, which will support the implementation of the OP under the title of Technical assistance. 215

3.1 DEVELOPMENT OF ENVIRONMENTAL PROTECTION The fields of development on the basis of the strategy are the following: strengthening environmental protection in settlements, by encouraging energy management and pollution control, increasing environmental safety and strengthening nature conservation. Hungary s accession to the European Union, application and compliance with the Community legislation and requirements call for significant investments in environmental protection. These investments are needed to reduce the load on the environment and people, to improve the environmental conditions of settlements, and to preserve environmental and natural resources. The environmental protection development objectives are in line with the Second National Environmental Protection Programme. As concerns settlement protection, over 42% of the population live in settlements in Hungary where the quality of potable water does not satisfy the EU requirements or does not comply with the limit values set out in Hungarian government decrees; therefore, the primary task is to improve the quality of potable water. More than 90% of the potable water supply comes from subsurface water bases, two thirds are susceptible to contamination therefore, sources of pollution must be eliminated. To protect surface and subsurface waters, proper waste water management and treatment is essential for all settlements, industrial and agricultural sites. It is preferred that natural treatment - particularly biological - methods are used. Waste management is an important aspect of environmental protection, however, the quality of infrastructure and related services is significantly below the expectations of the society and European Union average. Hungary emphasises the need for selective waste collection systems, and various utilisation options as well as adequate management of hazardous waste. The main source of noise and air pollution is transport and it needs to be reduced. Before effective action can be taken in this area investment is needed to develop an integrated noise and air pollution measuring network, this will help pinpoint hot spots so that remedial actions can be properly targeted. Small and medium sized enterprises (SMEs) are a corner stone of Hungary s economic development. This priority will encourage them to examine to reduce their impact upon the environment by encouraging energy efficiency, waste minimalisation and control of pollution at source. The objective is to gradually increase domestic renewable energy resources, so lowering dependency on imported energy and also by reducing the environmental load from energy generation. Energy-efficient investments by the production and service sectors as well as local government needs to be supported. 216

As far as environmental safety and nature conservation are concerned, over 550 Km of river need strengthening to minimise the risk of flooding; this needs to be placed within the context of an integrated protection system co-ordinated with the Romanian, Ukrainian and Slovakian authorities. The first priority is to protect the flood plane of the river Tisza. Land remediation is a challenge, particularly as the industrial and military legacy of past decades poses a threat to ground waters and aquifers. Actions will concentrate where the environmental risks are greatest. To preserve and maintain rich biodiversity and the natural landscape heritage, the level of protection of live and non-live natural assets needs to be strengthened. This will be achieved through implementing the National Ecology Programme and by establishing the Natura 2000 Network. 3.2 DEVELOPMENT OF TRANSPORT INFRASTRUCTURE The strategy covering transport infrastructure has two directions: Settlement protection by the construction of bypasses and other roads relieving traffic in order to reduce transit traffic and the environmental impacts, Improving accessibility by the development of motorways and other connecting road (easing the radial structure), and by the modernisation of regional airports. This will be achieved by reducing transit traffic in settlements by building bypasses and other roads to relieve traffic. This programme has already started, and our objective is to involve an increasing number of settlements in development, which is implemented through the construction of new routes, and development of already existing roads built by local governments. These roads will increase the economic potential and investment attracting capabilities of the regions concerned, whilst at the same time minimising the environmental impact of roads by building noise barriers. Economic development of underdeveloped regions is greatly enhanced by improving accessibility. The backbone to improving accessibility is the building of motorways and highway sections; these will establish connections between Helsinki corridors and increase the capacity of existing highways. These new roads will provide the missing North-South, and East-West elements of the spatial road structure, ease the radial structure, and increase the opportunities of economically underdeveloped regions for realignment. At the same time, we also intend to improve accessibility by developing regional airports, which will have a positive impact on the turnover of the region concerned for both business and tourism considerations. This development is in line with the standard EU practice, according to which regional airports are operated at every 100-200 km. All the development projects in the EIOP will be co-financed from the European Regional Development Fund. The ERDF support will be supplemented with resources from the Cohesion Fund allocated to environmental and transport investments. Specifically the Cohesion Fund will concentrate on completing the Helsinki corridors, wastewater issues where the population equivalent exceeds 50,000 and regional waste management, and 217

improving potable water in the East of the country. All the environmental initiatives outlined above are part of the 2 nd NEP, and the transport actions form part of the national transport programme, all of which will receive state support with selective funding from IFIs. 218

4 AGRICULTURAL AND RURAL OPERATIONAL PROGRAMME In Hungary, following the political system change, the land use and ownership conditions in agriculture changed fundamentally, and the organisation and operating structure of the agribusiness were also transformed. The changes in ownership and structure partly due to the compensation given to earlier owners and the identification of owners for assets held by the state and by co-operatives caused a significant removal of capital from agriculture. The low profitability has not allowed the re-accumulation of capital. The falling domestic demand for foodstuffs, which was further aggravated by the loss of traditional export markets, also had an effect on production. These factors have a negative impact on the Hungarian agricultural and food-processing sector. This limits the utilisation of comparative advantages, that of the country s resources excellent for producing agricultural products, and that of the professional skills of agricultural professionals acknowledged in international comparison. The socio-economic transformation had a vital impact on vulnerable rural areas. Regional differentiation to the detriment of rural areas has also increased significantly. This has lead to increased disparities of income among those dependent on agriculture, to the increasing poverty of the countryside, to the deterioration of living conditions, and to the significantly growing proportion of population in adverse situations and of those economically inactive. In this fundamentally changed environment the objective for agricultural policy is to increase the efficiency of agricultural production and to make the competitive and market positions of the producers more favourable and more secure. It should also support the multi-functionality of agriculture. This, in addition to an increase in competitive production, will contribute to the retention of rural communities, to the protection of landscape, environment and cultural heritage, and will improve employment and living conditions of rural areas through the complex utilisation of these factors. Achieving the objectives formulated below is a fundamental national interest, which is also aligned to the goals articulated by the EU. The implementation of these goals may be promoted by accession to the EU as well as the combined utilisation of European Union and domestic funds in terms of time, schedule and efficiency. The measures applied in the interest of achieving the objectives promote sustainable development, the evolution of a European agricultural model, the emergence of a new enterprise and plant structure in agriculture and the increased importance of economically viable operations particularly among individual farms, the increase of the efficiency of production and the proportion of competitive products, and mitigate the detrimental economic and social consequences of regional differentiation. Objectives of Agricultural and Rural Development policy: to improve the competitiveness of agricultural production and food processing, environmentally friendly development of agriculture, rationalisation of land use, to promote the realignment of rural areas. 219

Of the above objectives, ARDOP only serves the achievement of the first and third objective, while environmentally friendly agricultural development, and rationalisation of land use are included in the National Rural Development Programme containing the accompanying measures financed by the EAGGF Guarantee Section. However, in order to treat this area in a complex and coherent manner, it is necessary to demonstrate all the objectives as a whole. Strategy The strategy is based on the analysis of the situation, the SWOT analysis related to it, as well as the actions to be taken as formulated in the Act on sectoral development (Act CXIV of 1997) that identified the main areas for agricultural and rural development, aligned to the objectives of rural development measures set out in Title II of Regulation 1257/1999 (EC) (hereinafter: the Regulation). The strategy is in line with the rural development principles declared in the European Charter of Rural Regions (Council of Europe, 1995) and the Cork Declaration (1996) as well. The achieving of objectives is accompanied by measures that link national aids, the own resources of those who implement the development and EU funds according to the principle of additionality. Improvement of competitiveness of agricultural production and food processing includes: modernisation of agricultural production and improvement of personnel conditions of agricultural production, and modernisation of food processing. This objective relies particularly on the favourable ecological and crop-growing conditions, the low environmental load, the skilled labour force, the quality capacity of the biological bases, good R&D intellectual background, the food processing integrated into the international market and the raising market demand for high-quality foods. The implementation of this objective allows for mitigating a significant part of weaknesses thus, in particular, the fact that land ownership and land use are separated, and the land ownership and land use of individual farmers are fragmented; the standard of melioration and irrigation is not appropriate; the entrepreneurial and market skills of individual farmers are deficient; the outdated composition of species and varieties in plantations; the inappropriate standard of the technical and technological assets; and the lack of capital appearing in the production of base materials and processing. The measures that serve to implement the objectives may significantly reduce threats loss of markets, outdated product structure, decrease in employment. The results will appear primarily in efficiency and the strengthening of market positions and improving competitiveness on a medium-term basis. Plantation development may take place only in harmonisation with the regulations and restrictions of the Common Agricultural Policy. The implementation of this objective will be assisted with measures of ARDOP, other national measures as well as some measures (such as support to the establishment of semi self-subsistence farms, compliance with EU standards)contained in the National Rural Development Plan (NRDP). Concerning food processing, primarily through technological development of small and medium-sized enterprises, product quality, food safety and food hygiene can be improved, the environmental load can be reduced, and working conditions of employees can also be made better. Such development activities will have a positive effect on the competitiveness of enterprises and gradual transformation of the product structure too. The measures that accompany the objective aimed at the environmentally friendly development of agriculture and the rationalisation of land use cannot belong to the ARDOP's measures due to the different nature of the funds that may be allocated to them 220

(EAGGF Guarantee Section). These measures are contained in the National Rural Development Plan. Stressing the complexity of the objectives of the strategy, and principle of coherence, we outline the measures related to this objective below. The Rural Development Plan embraces the accompanying measures that will be supported by the EAGGF Guarantee Section in integral relation to the ARDOP, namely: support to agri-environment, to areas subject to environmental restrictions, and to less favoured, early retirement, afforestation of agricultural land, support for semi-subsistence farms, creation of producer groups, support to compliance with EU standards, and technical assistance. Within the framework of ARDOP, the promotion of realignment of rural areas includes: development of the rural economic potential and improvement of employment, as well as making the rural environment more attractive. This objective relies on the healthy environment; the variegated landscape features and the great degree of biodiversity; the valuable water resources, the cultural traditions of rural communities as well as their material and spiritual values. The measures that serve to achieve the objective partly counter the weaknesses (such as the lack of work possibilities, the underdeveloped infrastructure, the low entrepreneurial potential, the excessive dependence of rural communities on agricultural production), but promote the extension of a healthy lifestyle for society as well. The involvement of additional resources will ease the lack of capital for rural small and mediumsized enterprises, integration will strengthen, and the chances of local unique (specific) products to enter the market will increase. The threats concerning rural areas, namely the increasing depopulation of small settlements and the deterioration of living conditions in the countryside will be reduced. The implementation of the objective improves the chance for preserving the healthy rural environment, reduces the dependence of rural settlements on agricultural production, the countryside s ability of adaptation will strengthen and employment conditions as well as living conditions in the countryside will be more favourable. The development of rural areas which are the venue of agriculture - aims at modernising existing production capacities, the involvement of new production assets aligned to the structure and size of production consisting of viable enterprises, and at the creation of a production structure that better fit terrain features of production. All this is manifested in the widespread application of environmental protection and environmentally friendly production processes as well as quality and food safety and hygiene requirements. The strategy relies on the initiatives of individual enterprises and companies as well as of those living in the countryside, the exploitation of the favourable features of production and the embracing of developments motivated by local needs. A high number of the Roma and other groups in detrimental positions (women, young persons) live in the countryside, whose position may be improved by ensuring that they receive special attention compared to other applicants for measures linked to some of the priorities. Thereby the strategy promotes the reduction of inequality of opportunity between genders and different groups of society, with regard to the objective formulated in the last phrase of Article 2 of Regulation 1257/1999 (EC). On the basis of the strategy, the objectives of the OP are implemented through the following three priorities: 1) Establishment of competitive basic material production in agriculture, 221

2) Modernisation of food processing, 3) Development of rural areas. The above priorities will be supplemented with a fourth priority, supporting the implementation of the OP under the title of Technical assistance. 4.1 ESTABLISHMENT OF COMPETITIVE BASIC MATERIAL PRODUCTION IN AGRICULTURE Modernisation of agricultural production is necessary because it helps to increase competitiveness in accordance with Article 4 of the Regulation. The complex set of objectives of the priority aimed at increasing competitiveness of agricultural production creates a common framework for the modernisation and more efficient utilisation of production means and resources, development encouraging the use of cost-effective technologies, by improving the quantity and quality characteristics of the workforce required for their operation, and increasing their special skills. As a result of all these, the costs of agricultural production can be reduced, productivity can increase, production and activity structure can be extended and improved. The increasing proportion of better-quality products will have a favourable impact on sales, productivity of enterprises involved in production, and the living of entrepreneurs and their employees. The measure formulated on the basis of the objectives (investment in agricultural holdings) serves to improve competitiveness and efficiency by ensuring that support for investments is given to farms that are economically viable; comply with the minimum requirements concerning the environment, hygiene and livestock accommodation; where the farmers have appropriate professional knowledge and abilities, in line with Article 5 of the Regulation. Development of products which do not have adequate market possibilities will not receive support, in line with Article 6 of the Regulation. Preference will be given to sectors where the products are competitive also in the longer run. The funds available for meeting this objective primarily at economically viable operations contribute to the general development and modernisation of agriculture, and thereby to improving competitiveness. Modernisation of fisheries, which may be supported on the basis of the provisions of the 1263/1999 EC Regulation, is mainly aimed at the modernisation of existing lake farms, improvement of technical equipment of fishery farms, hatching farms and new-born raising lakes, as well as development of fish processing in order to ensure high and balanced production. Improving the personnel conditions for production creates the foundation for increasing competitiveness from the perspective of personnel conditions, primarily among family farms. In this respect, support to young farmers based on Article 8 of the Regulation which serves to improve the age structure and the strengthening of the concentration of farms plays an important role. Early retirement financed out of the Guarantee Section (Article 10 of the Regulation) is closely linked to this, for similar purposes. The provision of further training for farmers Article 9 of the Regulation is aimed at providing professional preparation for the farmers, primarily by transferring knowledge related to the European Union which is relevant for producers (such as: market regulation, support possibilities, alternative income earning possibilities, alternative farming biological farming) 222

4.2 MODERNISATION OF FOOD PROCESSING The modernisation of food processing Article 25 of the Regulation serves directly to improve competitiveness by introducing new technologies, improving the conditions for entry into the market, improving the quality of products and by increasing food safety and hygiene. Modernisation and rationalisation of the sales channels used for processed products, and identification of new sales opportunities will contribute a great deal to strengthening the market position of food processing companies, and, indirectly, agricultural base material producers. It also serves this purpose indirectly by providing assistance to food processors to meet environmental requirements and to properly treat by-products and wastes. These development activities will lay the foundation and prepare for the unavoidable restructuring of food processing on a long-term basis. 4.3 DEVELOPMENT OF RURAL AREAS The development of rural areas especially adversely affected by the socio-economic changes of the last decade and putting the rural economy on a new path of growth, and the catching up of the population living in such areas are fundamental interests of society. Improving the living conditions, income and employment position of those living in the countryside and stopping the processes of depopulation and ageing are important conditions for the social, economic, cultural and environmental renewal of the countryside. The development of the economic potential and the improvement of rural employment conditions are important elements to the development of rural areas. One way of doing this is to develop the infrastructure that creates the basis for sustainable agricultural production and local processing (land improvement and melioration, development of agricultural roads, improving agricultural water resource management) and the development of basic services that assist farmers. The means of improving rural employment and income earning possibilities is the expansion of rural business activities (development of village and agricultural tourism with lower accommodation capacity than of those financed by the OPRD - and crafts, diversification of production and processing by producing food and nonfood products that are typical to the region), the enhancement of the range and quality of products and services produced in the countryside, and the improved efficiency of sales and marketing. This allows for ensuring the subsistence of a part of the labour force that departs agricultural employment due to the modernisation of production. The improvement of rural living possibilities may be ensured by the creation of attractive village conditions (village renewal with lower scale investments than financed by the OPRD), high standard and diverse services (basic services for rural enterprises and households). This may constitute the basis of a number of business activities (commercial, tourism activities, etc.). The integration and coherence between the different players and sectors of development and the individual projects of mainstream measures may be created by the regional area based rural development strategies created within the framework of the LEADER+ programme. A fundamental requirement for each of the supported developments is that they cannot put increased load on the environment. The application of sustainability in the environmental, economic and social sense may be achieved by ensuring the application of the integrated approach. 223

The strategy takes into account also the impacts of the accompanying measures set out in the National Rural Development Plan, mentioned above. These measures will strengthen the impact of structural measures. The priorities and measures of the NDP aimed at agricultural and rural development are based on the co-ordinated use of resources made available from various funds, which can significantly improve the effective implementation of objectives of both planning documents (ARDOP, NRDP) as well as secured use of funds. In the course of implementing the developments, in line with the principles of co-financing, the strategy - besides calculating with the support possibilities of the Structural Funds (EAGGF, FIFG) takes into consideration the related national subsidies and the own resources of those who implement the development. Therefore the following measures of the ARDOP will be entirely financed from the national budget: improving basic services for rural economy and population; diversification of rural economic activities; renovation and development of villages and protection and conservation of the rural heritage. 224

5 OPERATIONAL PROGRAMME OF REGIONAL DEVELOPMENT During the 90 s, economic development, the emergence of market conditions and their stabilisation occurred in a differentiated manner in each region. As a consequence, the existing regional differences in the level of development arising out of geographic location, traditions, former sectoral structure were intensified, and on the other hand, the new economic situation led to a further increase in the differences between individual regions and micro regions. Apart from the outstandingly favourable development indicators of Budapest, the strong East-West division of the country stands out. The successful restructuring and renewal of the north-western and middle parts of the country can primarily be compared to the slower realignment of the other parts of Hungary. However, looking at small regions and local characteristics, the disparities vary a lot more than the simple East-West division. Approximately one third of the areas can be considered as fast developing, these are mainly located in the central and north-western parts of the country, as well as settlements adjacent to large urban areas. At the same time, it also applies to the more underdeveloped Eastern and Northern parts of the country that all large cities stand out from their environment, forming local, dynamic centres. In the next years, these cities can rely on their organising role in their regions, traditionally strong higher education capacities and geographic location, which will be appreciated after the EU accession, as a result of which they can promote not only their own development, but the development of their environment too. In general in dynamically developing regions entrepreneurial activity and the rate of foreign investments are high, employment is higher, unemployment is lower, and living conditions are better than the average. However, a lot of growth potential has remained unused as a result of the level of education - which often does not meet market requirements - the lack of use of cultural and natural resources for economic purposes, and the lack of developments which did not take place in certain settlements and former industrial areas. On the other hand, there is a significant number of lagging behind and stagnating areas. In these underdeveloped areas, unemployment and the income situation are worse than average, there are only few foreign investments and low entrepreneurial activities. The main reasons for that include the agricultural characteristics, low entrepreneurial capacities, insufficient infrastructure of these areas, their location alongside country or regional borders, lack of a dominant regional centre or the unfavourable settlement structure. In addition to a lower income position in underdeveloped regions, there is a high proportion of long-term unemployed, the local population has lower qualifications, there is a high level of inactivity, while the ratio of Roma population is higher than the national average. The bottleneck of development is the insufficient local infrastructure and higher than average ratio of poor residential areas with little comfort. The majority of these areas are rich in natural and cultural resources (national parks, nature conservation areas) the utilisation of which could improve the operating environment of enterprises, increase entrepreneurial activity, and create new jobs. 225

ROP intends to achieve its objectives by implementing developments which: fall under local decision-making competence, i.e., tasks of local governments; are related to the geographic features and specific economic sectors of a particular region or micro-region; concern small-scale infrastructure development promote co-operation within the regions, and promote the development of network relations; create human resource development programmes directly related to developing the economic sectors that are particular to a region or a micro-region, or improve the related infrastructure. The overall objective in regional development is to promote a balanced regional development. The efforts aimed at this comprehensive goal set the direction for development policy. The different regions with their various socio-economic features develop in different development routes particular to each region but in harmony with one another, while regional disparities are mitigated and the country becomes organically linked to the European spatial structure. In order to implement the objectives of OPRD, it is necessary to implement development in a supplementary and integrated fashion, making use of synergic effects. With this we can prevent the fragmentation of development funds, and a relevant effect can be achieved on the target areas to be supported. Consequently sectoral operational programmes should be clearly interpreted according to regions, i.e. their regional effects must be perceivable and measurable in the individual regions. This aspect requires the segmentation of the contents of all operational programmes according to regions, including the description of resources to be allocated for the developments planned in the individual regions. The structure of the programme does not contain priorities or measures limited to particular regions, but it sets out objectives, so-called thematic priorities and measures, equally available for the whole country and all regions. In its current structure, the programme gives an opportunity for developing a more effective implementation structure, in the framework of which the EU support granted to the programme can be fully used at national level. Objectives Developing the economic environment of the dominant centres Development of areas that are lagging behind in socio-economic terms and parts of settlements inhabited mostly by disadvantaged people. Strategy The last ten years have not allowed for ensuring an adequate amount of development funds. This led not only to the further decline of certain poor areas but a lot of growth potential remained unused even in more developed areas as a result of the development not taking place. In order to promote regionally balanced development, create equal opportunities for the quality of life, and use available resources better, both types of areas need to be developed. 226

The economic environment of the dominant centres ha to be developed, so that they gain strength in international competitiveness, adapt flexibly to the challenges of EU accession and to the globalising economy. The development contributes to mitigating the differences between the regions and between the level of development of the regions and the average level of economic development in the EU. In economic centres, such a combination of infrastructure conditions that determine the quality of life, economic activities and human resources should be developed, which reacts flexibly to the challenges of the changing market environment and promotes job creation. Development of areas that are lagging behind in socio-economic terms and parts of settlements inhabited mostly by people in a backward situation, in order to mitigate social tensions within the country and to create acceptable living conditions. The developments may reduce the socio-economic differences between more and less developed areas within the country, the size and efficiency of physical and human resources involved in income generation will increase. In areas lagging behind and development of settlements should be encouraged to ensure infrastructural conditions missing for general development, improve employment potential and living conditions. On the basis of the above, the Operational Programme for Regional Development for the period 2004-2006 with respect to the limited resources - will assist balanced regional development - including the dynamisation of more developed centres, and the realignment of underdeveloped areas - by the implementation of the following specific objectives: Use of natural resources and cultural heritage for the purposes of tourism; Strengthening the economic potential of economically-socially backward regions; Establishment of an attractive communal environment to support economic activities and to improve living conditions; Creation of a society capable of renewal. On the basis of the strategy, the objectives of the OP will be implemented through the following priorities: Development of regional economic environment Development of settlement infrastructure Development of the human resources of the regions The above priorities will be supplemented with a fourth priority supporting the implementation of the OP under the title of Technical assistance. The priorities of ROP related to economic development and local infrastructure building will be financed from the European Regional Development Fund (ERDF), while the priority related to the human sector will be financed from the European Social Fund (ESF). 5.1 DEVELOPMENT OF REGIONAL ECONOMIC ENVIRONMENT Developing regional economic environment is an absolute necessity for the development of both developed areas and of those that are lagging behind. Local resources, as such the values 227

of the natural and cultural heritage need to be utilised in order to increase income generation. In areas with a significant potential in tourism, the existing tourist attractions need to be developed to a level that is competitive also in the international market, while the utilisation of the natural and cultural values of areas that are lagging behind (mainly larger projects related to tourism which exceeds the size of projects financed by ARDOP, in terms of rural accommodation capacity) promote the creation of new jobs and increase the entrepreneurial activity by expanding the services sector. A determining factor of the economic conditions is the quantity and quality of the labour force available. Therefore, the infrastructure of higher education institutions should be developed in order to flexibly adapt to market needs and to be adjusted to special economic sectors of the regions, in regional centres in the countryside (out of the capital), which fulfil an economic organising function at regional level. With a higher level of qualification of the labour force that is capable of better adjusting to market needs, the utilisation of the innovative potential of the regions will improve, and a basis may be provided for the emergence of the innovation and knowledge centres that are currently missing and therefore limit development. 5.2 DEVELOPMENT OF SETTLEMENT INFRASTRUCTURE The development of settlement infrastructure should promote the strengthening of network relations within the area, increase the economic radiation of micro-regional centres by developing transport (regarding the network of lower grade roads does not covered by EIOP, and which differs in type from the agricultural connecting roads financed by ARDOP), environmental and community infrastructure. The absence of infrastructure puts a barrier to economic development primarily in the areas that are lagging behind, while it represents a bottleneck in more developed regions in the field of the greater utilisation of resources. While infrastructure determines the operating environment of businesses, it also influences the quality of life of the population. When developing the infrastructure, the characteristics, the built and natural values that differ in each region should be taken into account. Instead of greenfield investment and unjustified intervention in nature, it is important to protect built heritage, the residential environment and the rehabilitation of brown field areas in settlements. Developing the quality of the built environment is fundamental for improving the conditions of living for groups that are mostly in a backward situation and on the periphery of society. It is important to ensure that in the field of communal services and supply (e.g. sewage treatment, energy supply - concerning smaller projects do not covered by the national-wide priorities of EIOP, in both areas) such conditions are established in these settlements that are similar to those of larger towns, as these are often fundamental prerequisites to the operation of businesses. In case of community services, priority must be allocated to solutions contributing to job creation, to increased profitability in the given region and to the reduction of dependence on external conditions and environmental pollution. 228

5.3 DEVELOPMENT OF THE HUMAN RESOURCES OF THE REGIONS Economic and infrastructure development actions alone without the human resources development of the regions are not enough to re-align backward regions. Human conditions must be renewed with special regard to local administration and development policy. This can promote the more efficient management of local issues and municipality tasks like settlement development and job creation in the whole country. The relatively high rate of disadvantaged people mostly long term unemployed represents severe problems and social tensions especially in backward regions but in major settlements as well. This requires the launch of employment programmes flexibly reacting to local problems that can help the employment of mainly inactive people driven out from the labour market, at the same time improve their chances for earning. During the implementation of employment and training programmes, special emphasis should be put on the initiative role of non-governmental organisations. In line with market demands, it is necessary to further train labour force and extend the training as this can significantly improve the competitiveness of enterprises, the flexibility of more developed regions in terms of labour market demands and the educational level of labour in backward regions. 229

VI. IMPLEMENTING PROVISIONS 1 MANEGEMENT 1.1 COMMUNITY SUPPORT FRAMEWORK (CSF) MANAGING AUTHOROITY According to Chapter 2 (d) of Article 17 of Community Regulation No. 1260/1999 of June 21, 1999 Community Support Framework Managing Authority (CSF MA) is responsible for the implementation of Community Support Framework. The CSF MA based in the Office of the Prime Minister will be responsible for the coordination of the Structural Funds in Hungary. The CSF MA is responsible for the effective and sound management of the CSF in line with the EC No. 1260/1999 Article 34. This responsibility can be defined as follows: To establish a functional system that will gather reliable financial and statistical information on the implementation of the programmes To ensure implementation of, and where necessary, adjust the CSF in close co-operation with the CSF Monitoring Committee To co-ordinate the submission of the OP Annual Reports to the EC, to prepare a comprehensive CSF Annual Report To ensure that the implementation of the CSF is continuously supervised and propose improvements if necessary To provide guidelines on any issues which ensure the consistency of CSF implementation To ensure that information and publicity is given in respect of Structural Funds operations To act as the key focal point for contact with the European Commission concerning the CSF To be the Centre for Excellence for CSF issues According to Government Decision 2199/2002. (VI. 26.) the Community Support Framework Managing Authority is located in the Office of the Prime Minister, within that in the Office for the National Development and EU Support (short name: National Development Office, NDO). 230

1.2 CSF MANAGEMENT COMMITTEE While the Monitoring Committee will ensure the co-ordination of assistance from a technical point of view, administrative processes need equal attention. Throughout the lifetime of the CSF it will be a priority to ensure that implementation procedures are compatible or where justified, useful and feasible standardised across all Operational Programmes. This will save resources, and make implementation more transparent to all involved. The necessary coordination will be ensured by the CSF Managing Authority, upon regular consultations with the CSF Management Committee. The Committee was established and its operational procedures were agreed in September 2002. The Management Committee addresses management and administrative issues with horizontal relevance to all or several OPs and the Cohesion Fund. Without prejudice to the responsibilities of the CSF Monitoring Committee, the Managing Authorities and Cohesion Fund line ministries /Intermediary Bodies, the Management Committee will discuss and propose to the CSF Authority horizontal guidelines on these issues in order to ensure, where necessary, the application of uniform standards and requirements and define common best practices for all SF and/or CF operations. The competence of the CSF Management Committee within the scope of the Community Support Framework shall not harm or narrow by any means neither the decision-making competence of the Monitoring Committees, nor the responsibility of the Managing Authorities for the efficiency and correctness of management and implementation, as defined in Council Regulation 1260/1999/EC. The Management Committee will be responsible for making sure that where necessary any horizontal guidelines are subsequently transposed into the appropriate level of national legislation (e.g. Government decisions and decrees). In order to ensure sufficient flexibility, OP Managing Authorities may decide to use procedural solutions that are specific to their Operational Programme. However, in order to ensure consistency, such solutions will be subject to a discussion in the CSF Management Committee. 1.2.1 Composition The Management Committee is chaired by the Head of the CSF Managing Authority. The permanent members of the Management Committee are the heads of the Operational Programme Managing Authorities, the head of the Paying Authority and the head of the Cohesion Fund Managing Authority and the heads of the Implementing Bodies (line ministries) for Cohesion Fund operations. 231

1.2.2 Operation The Management Committee operates according to its own rules of procedure elaborated by the Committee itself. The frequency of meetings of the Management Committee depends on the co-ordination demand of the Community Support Framework but in general the Management Committee meets more frequently than the CSF Monitoring Committee. The CSF Managing Authority provides administrative support for the operation of the Management Committee. 1.3 MANAGERIAL TASKS 1.3.1 Provision on data collection and electronic data exchange The monitoring information system shall be supported by a sound electronic system. The electronic system shall collect and process all data related to the implementation of projects, measures and operational programmes and the financial and physical indicators of implementation. The system shall have a global nature, i.e. it shall include all relevant data for each OP, and cover EU and national funding also. The IT system to be used for this purpose is able to provide real-time data on all levels of the implementation system, and can also serve as a means for electronic communication between the Commission and Hungary. The data in the information system will be accurate and up-todate as the use of the information system will form an integral part of daily management tasks. In addition to the generation of monitoring indicators, the organisations concerned will rely on this system to produce all standardised documents used in the operation of the programme. In order to get the IT system fully functional, it needs to be further developed. For this development needs have been identified with the help of experts funded by the SPP-II programme. This needs analysis will be complemented by a detailed action plan for the development of the system. The plan embedded into an overall monitoring strategy for the Hungarian CSF is under elaboration in the National Development Office. 1.3.2 Annual and final reports on implementation Within six month of the end of each full calendar year of implementation, CSF and OP annual or final implementation reports have to be submitted to the Commission. Implementation report will be prepared by the Managing Authority and approved by the Monitoring Committee. Information required in implementation reports: 232

any change in general conditions with importance for the implementation of the assistance, a report on progress in the implementation of each priority and each measure, in particular the quantification of targets and indicators established at the start of the programme, the progress of the financial plan with particular reference to the agreed financial indicators, the steps taken by the Managing Authority and the Monitoring Committee to ensure the quality and effectiveness of implementation, the steps taken to ensure compatibility with other Community policies, progress and financing of major projects in a separate section of the report. The final implementation report will comprise information on the whole period 2004-2006. The CSF implementation report will be based on the OP implementation reports. Additionally, the CSF implementation report will also focus on topics related to more than one OP, including horizontal issues or the linkages between activities financed under different OPs. 1.4 INFORMATION AND PUBLICITY (CSF COMMUNICATION ACTION PLAN) All information and publicity measures related to Community Support Framework of 2004-2006 shall be implemented in accordance with the requirements set down in Commission Regulation No. 1159/2000 (EC). Each Managing Authority is responsible for compliance with these requirements. The objectives of information and publicity measures are as follows: To ensure transparency through the provision of information on the Structural Funds regime, the availability of funds and application procedures for potential and final beneficiaries, regional and local authorities, the economic and social partners as well as the Non-Governmental Organisations. To improve understanding of Community measures through raising awareness of the role played by the Structural Funds and the European Union in regional development as well as in the support of economic and social cohesion in Hungary. The implementation of information and publicity measures conform to the Communication Plans to be prepared for the Community Support Framework and the Operational Programmes by the CSF and OP Managing Authorities. The Communication Plan sets out the objectives, strategy, content, target groups, budget allocation, responsible department or body for each publicity and information measure as well as a set of criteria to be used for evaluating the effectiveness of the measure. The Programme Complement includes measures intended to publicise the operational programme. 233

The means of providing information, including newsletters, leaflets, posters, Internet websites and video programmes, need to be further developed in order to improve knowledge and awareness of Structural Funds in Hungary. In accordance with Commission Regulation No. 1159/2000 (EC) the Community emblem is to be clearly displayed on all communication materials, application forms, letters of grants, etc. The information and publicity strategy and measures related to the Community Support Framework are co-ordinated by the Department for Partnership and Information of the Office of the National Development Plan and EU Support within the Prime Minister s Office. Under the supervision of the Department for Partnership and Information, an EU Funds Information Centre is to be established. The main task of this Information Centre is to provide wide-ranging and comprehensive information on the availability of funds to potential beneficiaries (representatives of regional and local authorities, economic and social partners and non-governmental organisations), and the general public. It is the responsibility of the centre to: Establish and maintain a database of available funds; Create and maintain a dedicated website; Establish a central Information Unit in Budapest and units in the regions, in close cooperation with the European Information Centres and other relevant organisations; Operate a Call Centre. A publicity and information officer is to be appointed within each OP Managing Authority. 1.5 GENERAL PROVISIONS ON THE MANAGEMENT OF THE OPERATIONAL PROGRAMMES (OP) Managing Authorities are responsible for ensuring the efficient and correct management and implementation of European Structural Funds programmes, so as to bring the maximum economic benefits to the areas concerned consistent with horizontal Government policies. In carrying out their responsibilities MAs will, in liaison with other Ministries and social partners: implement programmes in line with the OPs, taking account of the views of the relevant Monitoring Committee, and relevant European Union legislation; aim to achieve the agreed programme outputs, results and impacts and to exceed them wherever possible; encourage local partnerships to look strategically at the programmes and develop links with other OPs and Experts Policy in Ministries, to ensure that the strategic direction of the programme reflects current and developing policies of the Hungarian Government. In undertaking all the above the MAs will also: 234

comply with the EC s requirements to achieve value for money from projects which contribute to a clear Structural Funds strategy designed to ensure coherent and targeted support; encourage partners to work within a framework of economic strategies and partnership; and recognise the value of regional delivery; take account of the significant contribution, whether direct or indirect, the private sector can make to programmes both in terms of economic development and finance. Their involvement should be maximised consistent with the need to ensure sufficient private sector contributions to programmes to allow grant to be claimed from the Commission; ensure appropriate liaison between two or more programmes benefiting a geographical area, to ensure compatibility and synergy; use agreed project appraisal methods to ensure selection of good quality projects which fit strategic objectives; in concert with Ministries, monitor and evaluate the delivery of programmes and act on the results to maximise value for money, outputs and impacts and to ensure interventions remain consistent with Hungarian Government policies as they develop over the lifetime of the programmes; Based on the Regulation 1260/1999/EC and pursuant to the requirements resulting of the responsibilities defined for the MA in the same regulation, the following tasks are identified for each OP MA: the institution of a system for the collection of reliable financial and statistical data on implementation, for the indicators for monitoring and evaluating the intervention, and for their transmission to the Commission, use computerised systems which allow the electronic exchange of data; the adoption, the presentation to the Commission, the adaptation and the implementation of the programme complement; the elaboration and the presentation of the annual report on implementation; responsibility for the use, by the bodies involved in the management and implementation of the action, of a separate accounting system or of an appropriate accounting codification for all the actions foreseen in the OP; the regularity of financial operations, by means of the implementation of measures of internal control compatible with the principles of good financial management; implementation of the observations or of corrective measures at the recommendation of the Commission on the basis of ascertained irregularities; the respect of community policies in the management and implementation of the intervention; the respect of obligations in terms of information and publicity, the organisation of meetings of the OP Monitoring Committee, including the assurance of the necessary technical and logistical support; the implementation of the deliberations of the Monitoring Committee; 235

the annual examination with the Commission of the results of the preceding year; the predisposition of an adequate audit trail. 1.6 INTERMEDIATE BODIES (IB) MAs are responsible for several functions that may be delegated to IBs for the delivery of Structural Funds. The status and role of an Intermediate Body is defined by the scope of tasks delegated from the Managing Authority or Paying Authority to the Intermediate Body. The scope of the delegated tasks differs by Operational Programmes. The IB, to which management and control tasks as well as payment tasks may be delegated, must supply adequate guarantees on the use of systems of management and control suitable to guarantee a sound financial management of community funds, and must, in line with article 3 of the Regulation of the Commission 438/2001/EC, ensure: a clear definition, a clear assignation and an adequate separation of the functions of management, control and payment, so as to guarantee sound financial procedures; the transmission to the OP MA information on the execution of their tasks and on the means employed; the undertaking to communicate to the OP MA its own organisation and the system of management and control in force, and according to the scope of the tasks delegated to the IB, the procedures relative to reception, verification and approval of requests for reimbursement of expenses, and for the authorisation, the execution and the registration of the payments to the final beneficiaries, and the dispositions which regulate systems of management and control; that the OP MA receives data for financial, physical and procedural monitoring, within the deadline established by the OP MA; that the independent assessor of projects receives the necessary data and information for the evaluation; the provision of support to facilitate the activity of control by all the national and community bodies assigned to this task, including the body responsible for carrying out the checks of the 5% as specified in art. 10 Reg. 438/2001, that all information related to irregularities that might lead to a reduction or revocation of the contribution is supplied in a timely manner; that all information related to judicial proceedings of a civil, criminal or administrative kind, which might interest the co financed operations or which they are responsible, is supplied in a timely manner. 236

2 MONITORING 2.1 CSF MONITORING COMMITTEE The CSF Monitoring Committee (CSF MC) will be appointed within three months after the approval of the CSF and will be responsible for supervising the assistance and assessing how the funds are being managed by the OP MAs. The CSF Monitoring Committee (CSF MC) will have responsibility for the implementation of the Objective 1 Programmes. The MC will supervise the efficient and effective implementation of CSF. The Operational Programmes delivering the Structural Funds will have individual Monitoring Committees who will have specific responsibilities for the programmes. It is anticipated that the CSF MC will meet in prior to the commencement of Structural Funds operations in order to oversee training activities aimed at ensuring familiarisation with the task of implementing the CSF. The roles and responsibilities of the CSF Monitoring Committee will be as follows: To review progress made towards achieving the objectives of the CSF To examine the results of implementation, particularly the achievement of the CSF targets and the results of evaluations To consider and approve annual and final implementation reports of the CSF before submission the EC To consider and approve any proposals to amend the contents of EC decisions on funds To propose to the OP Managing Authorities / Monitoring Committees any adjustments or reviews of the CSF priorities likely to impact on the attainment of objectives. To adopt a national publicity strategy concerning CSF and ensure that there is good communications related to the SFs. 2.1.1 Composition The membership of the CSF Monitoring Committee will be as follows: Full members: CSF Managing Authority: Office of the Prime Minister (Chairman) Heads of Managing Authorities of each of the OPs (5) Ministry of Education 237

Ministry of Environment and Water Management Ministry of Health, Social and Family Affairs Ministry of Information and Communications Representative of the Regions Economic and Social partners Representative for minority and equal opportunities interests Permanent bodies with consultative role: Representative of the Paying Authority (Ministry of Finance) Government Control Office European Commission European Investment Bank (where appropriate) Gender and ethnic balance would be sought from the nominations and the selection of members, where appropriate, would be on merit and on the contribution they could make to the management of the programmes. 2.1.2 Operation After constituting, the CSF Monitoring Committee will draw up its own rules of procedure. As a general rule, but without prejudice on the decision to be taken by the CSF MC considering its own operation rules, the following framework is given for the operation of the CSF Monitoring Committees: The Monitoring Committee shall meet at least twice a year. The agenda and all documents of the Monitoring Committee meeting shall be sent out to the members at least 3 weeks before the meeting. The Monitoring Committee shall take its decisions possibly by consensus. The CSF MA is responsible for providing the secretariat to the Monitoring Committee. The administrative tasks of the secretariat and the operational rules thereof shall be subject to the decision of the Monitoring Committee. 2.2 THE OP MONITORING COMMITTEES The OP Monitoring Committees are responsible for the overall co-ordination and decisionmaking of the Operational Programme. The Monitoring Committee has the following tasks and responsibilities: 238

it confirms or adjusts the programme complement, including the physical and financial indicators to be used to monitor the assistance. Its approval must be obtained before any further adjustment is made; it considers and approves the criteria for selecting the operations financed under each measure within six months of approval of the assistance; it periodically reviews progress made towards achieving the specific objectives of the assistance; it examines the results of implementation, particularly achievement of the targets set for the different measures; it considers and approves the annual and final implementation reports before they are sent to the Commission; it considers and approves any proposal to amend the contents of the Commission decision on the contribution of the Funds; it may in any event propose to the Managing Authority any adjustment or review of the assistance likely to make possible the attainment of the objectives of the Structural Funds or to improve the management of assistance, including in respect of financial management. 2.2.1 Composition According to Regulation 1260/1999/EC, the Monitoring Committee is set up by the Member State, in agreement with the Managing Authority after consultation with the partners, shall be chaired, as a general rule, by the Member State or the Managing Authority, furthermore the Commission and, where appropriate, the EIB shall be represented in the Monitoring Committee. According to these rules, the following general scheme is set up for the composition of the OP Monitoring Committees: Chairperson: Head of the OP Managing Authority Full members: Representatives of the CSF Managing Authority the Ministries and departments concerned in programme implementation (key ministerial partners) each Intermediate Body of the Operational Programme the economic and social partners organisations representing horizontal issues (equal opportunities, environment, Roma issues, etc.) the Regions Permanent bodies with consultative role: Representatives of the European Commission the EIB (where appropriate) the Paying Authority 239

the Government Control Office Vertical partnership will be assured by the representation of Regional Development Councils, which also represent the local governments of their respective regions. Economic and social partners, and organisations representing horizontal issues will be invited following a standardised procedure for each OP. Besides permanent members, the representatives of other entities otherwise not represented directly in the OP Monitoring Committee or experts may be invited to Monitoring Committees on casual basis according to the decision of the Monitoring Committee. 2.2.2 Operation After set-up, the OP Monitoring Committees will draw up its own rules of procedure. As a general rule, but without prejudice on the decision to be taken by the OP MC considering its own operation rules, the following framework is given for the operation of the OP Monitoring Committees: The Monitoring Committee shall meet at least twice a year. The agenda and all documents of the Monitoring Committee meeting shall be sent out to the members at least 2 weeks before the meeting. The Monitoring Committee shall take its decisions possibly by consensus. If no consensus can be reached to a given question, the issue shall be object to further conciliation between the OP MA, the CSF MA and other parties directly concerned in the given question. The OP MA is responsible for providing the secretariat of the Monitoring Committee. The administrative tasks of the secretariat and the operational rules thereof shall be subject to the decision of the Monitoring Committee. 240

3 EVALUATION In order to gauge its effectiveness, Community structural assistance shall be the subject of evaluation designed to appraise its impact with respect to the objectives set out and to analyse its effects on specific structural problems. The effectiveness of the operations of the Funds shall be measured by the following criteria: their overall impact on the goals set out in Article 158 of the Treaty, and in particular the strengthening of the economic and social cohesion of the Community; the impact of the priorities proposed in the development plans and of the priorities incorporated in each Community support framework and in each case of assistance. In accordance with Council Regulation (EC) No. 1260/1999) specific, ex-ante evaluation is to be carried out by the authorities responsible for preparing the plans, assistance and programme complement. The purpose of ex-ante evaluation is to provide a basis for preparing and evaluating the National Development Plan and the Operational Programmes. The ex ante evaluation of the Hungarian NDP focused primarily on an analysis of the strengths, weaknesses and potential concerned. The ex-ante evaluators gave a detailed assessment of whether development issues have been diagnosed correctly, whether the strategy and objectives proposed were relevant, whether the coherence with EU policies and guidelines was ensured and the expected impacts were realistic. Following workshops and consultations with the relevant authorities and the ex-ante evaluators, the draft of the National Development Plan was finalised and submitted to the Commission. In view of the relatively short planning period and scarcity of resources mid-term evaluation shall not be carried out. Ex-post evaluation shall be the responsibility of the Commission, in collaboration with the Member State and the Managing Authority. It shall cover the assistance and be carried out by independent assessors. It shall be completed not later than three years after the end of the programming period. 241

4 FINANCIAL MANAGEMENT AND CONTROL 4.1 PAYING AUTHORITY 4.1.1 Responsibilities The Ministry of Finance is designated as the single Paying Authority for all Structural Funds and the Cohesion Fund, and will therefore have responsibility for drawing up and submitting payment applications and receiving payments from the Commission. The Paying Authority is also responsible for: Submitting not later than 30 April of each year expenditure forecasts to the Commission for the current and following year (article 32.7 of Council Regulation (EC) No. 1260/1999) Managing the payment on account of Funds Drawing up and submitting certified payment applications to the Commission on the basis of expenditure actually incurred by the Final Beneficiaries. Making sure that the final beneficiary receives the EU contribution as quickly as possible (article 32.1) Recovering sums due to the Funds and the application of financial corrections where they arise as a result of the discovery of administrative errors, or from events arising from the management of the programme or from the establishment of irregularities under article 39. Submitting the Commission once a year a statement of the amounts awaiting recovery at that date, classified by the year of initiation of the recovery proceedings. 4.1.2 Financial flows 13 Drawdown of Funds Payments from the European Commission can consist of payment on account (advance), interim payments and payments of the final balance. Payment on account Funds are paid in the form of an initial advance (payment on account) of up to 16% of the commitment when the Operational Programme is approved by the Commission (article 32.2). 13 See Appendix 1 on flow of fund and related documents. 242

It will be subdivided over two budget years: 10% in the first year, 6% in the following year. Payments on account are made to the Paying Authority for each of the Funds. Throughout the lifetime of an OP, the Paying Authority will use this payment on account to pay the Community contribution to expenditure relating to this assistance. If no payment application is made (that is, if there is no evidence that the programme is being implemented) within 18 months of the Commission s decision to make the payment on account (in respect of each Fund where applicable), all or part of the payment on account must be repaid to the Commission (article 32.2). Interim payments Interim payments are made by the Commission on the basis of certified expenditure declarations from the Paying Authority and are subject to a number of conditions, including the submission by the Managing Authority of the annual implementation reports at the appropriate times. Interim payments are made to reimburse actual expenditure by final beneficiaries as certified by the Paying Authority. Payment applications should be grouped three times a year, the last applications being submitted no later than 31 October each year. Payments are based on expenditure at measure level on the basis of the cofinancing rate identified in the Programme Complement. Final balance The European Commission pays the final balance under the following conditions: a) That the Paying Authority submitted the certified statement of expenditure to the European Commission within six months from deadline for payment laid down in the decision granting a contribution from the Structural Funds; b) That the Managing Authority submitted the final report on implementation of assistance to the European Commission, and the latter approved the report, c) That the Declaration of winding-up the assistance (to be prepared by the Government Control Office) is submitted to the European Commission. If the Member State has not delivered an application to the European Commission to change the application within nine months from the date of submission of the application for payment of the balance, any supplementary adjustment of that payment by request of the member state is no more possible. 243

4.2 CONTROL 14 4.2.1 Internal Audit Units Each institution or body involved in the management of assistance granted under Structural and Cohesion Funds shall have its own internal audit unit carrying out classical internal audit functions. According to the legislation in force every budgetary organisation has to operate an internal audit unit reporting directly to the management (according to Government Decree 15/1999. (II.5.) on the governmental, supervisory and internal budgetary control of central, social security and public corporation budgetary organs). The internal audit units of the ministries (reporting directly to the minister or state secretary) and the internal audit units of the Managing and Paying Authorities (reporting directly to the head of the MA/PA) are to be functionally and structurally independent. 4.2.2 Verification of operations (financial control tasks described under Art. 4. of Regulation 438/2001) The Managing Authorities, more specifically their financial control officers will have the responsibility for the verification of operations for Structural Funds, as contained in Article 4 of Regulation 438/2001. Managing Authorities control the delivery of products and services and its physical accomplishment, the compliance with community and national laws, the reality of expenditure claimed. Article 4 of Regulation No. 438/2001/EC also prescribes to keep a record of the management and control procedures and measures taken by the competent managing authorities and intermediate bodies in respect of discrepancies. Where any physical or administrative verifications are not exhaustive, but performed on a sample of operations, the records shall identify the operations selected and describe the sampling method. 4.2.3 Authorities of Bodies performing on-the-spot Checks (Financial control tasks described under Art. 10 of Regulation 438/2001) Hungary has to ensure an all-comprehensive control of 5% of operations earlier already controlled by the Managing and Paying Authorities (or in the case of operations supported from the Cohesion Fund 15% of the operations). Government Decision No. 2213/2002 on the implementation and control tasks relating to the management of the EU s Structural and Cohesion Funds which was adopted in July 2002 14 See Appendix 2 Flowchart describing the allocation of the main control functions 244

designated the bodies responsible for 5% (and 15%) checks. (See Annex 3 Government Decision No. 2213/2002) The Ministry of Finance - bearing the overall responsibility for the regulation and development of the Public Internal Financial Control System included in Government Decree 140/2002 (VI.28.) on the statute of the Minister of Finance has also the overall responsibility to ensure the establishment of adequate, sound financial management and control systems for the Structural and Cohesion Funds. Within the Ministry of Finance the Financial Control Department shall perform this task, which department is operationally and functionally separated from the NAO Office, designated as Paying Authority of Structural Funds and Cohesion Fund. Because of the huge financial control capacity needed for this task, several control and audit bodies were designated to realise of these controls and audits in Government Decision No. 2213/2002: 1.Existing internal audit units of the Ministries in which the Managing Authorities are located; According to Government Decree 15/1999. (II.5.) on the governmental, supervisory and internal budgetary control of central, social security and public corporation budgetary organs these units already have among others the task of control and audit the use and administration of international assistance, subsidies and contributions. These units are as it noted above in paragraph Internal Audit Units functionally independent from the internal audit units of the Managing Authorities. 2.The Government Control Office (GCO); The GCO has already been carrying out similar in depth audit and control (system audits and ex-post comprehensive controls), and joint audits together with EU experts. (According to Government Decree 61/1999 (IV. 21.) on the supervision, tasks and competencies of the Government Control Office (Article 2., paragraph 1), the GCO is already authorised to control and audit the use of the funds, including the financial support received on the basis of international agreements and the financial aids allocated to economic organisations, foundations, development councils both at county and at regional level, civil organisations not including the political parties.) For the proper co-ordination over this 5% (15%) control and audit activity the Ministry of Finance established and chairs the Inter-ministerial Committee for International Assistance Control. Under the authority of the Ministry of Finance this committee will elaborate guidelines concerning the methods and procedures to be used by the control bodies and harmonise their control activity. This Inter-ministerial Committee began its activities in early October 2002. The Government Decision 2213/2002 also prescribes that each internal audit department involved in the 5% 245

(15%) checks has to appoint two colleagues for the preparation for the Structural Funds and two other colleagues for the Cohesion Fund. Responsibilities of the Inter-ministerial Committee are the followings: Elaborate and conciliate proposals and methodology for the 5% (15%) checks including the division of tasks among the above mentioned bodies, adaptation of a risk assessment model, etc. Monitor and co-ordinate the control and audit tasks carried out by the different bodies. Monitor whether the sample was accordingly balanced from the point of view of the types and size of transactions, and whether intermediate bodies playing a significant role and the end users of significant support have been controlled at least once before the winding-up of different supports If any problem occurs in the execution of these checks, the Committee initiates measures to solve them. Approve the annual report which has to be prepared on these controls and the changes made in management and control systems. Approve the report on collected or collectable amounts which shall be submitted to the Commission. Keep track of the changes in the requirements related to Structural and Cohesion Funds Elaborate and comment on regulatory and methodology proposals in the field of financial control. In the course of these checks the control and audit bodies have to examine the followings: The practical application and effectiveness of management and control systems; Considering the adequate number of accounting records, the correspondence of these records with the supporting documents held by the intermediate bodies, final beneficiaries and bodies or firms carrying out the operations; The presence of a sufficient audit trail; Considering the adequate number of expenditure items, the compliance of the nature and timing of a given expenditure with Community requirements, the approved specifications of the operation and the works actually executed; Compliance of the application or planned application of the operation with what has been described in the application for Community co-financing; Financial contributions of the Community are within the limits prescribed in the applicable Community provisions and they have been paid to the final beneficiaries without any reduction or unjustified delay; The actual availability of the appropriate national co-financing; The realisation of co-financed transactions had taken place in accordance with the rules and policies of the Community. Article 122/A of Act XXXVIII of 1992 on Public Finance includes provisions in connection with independent on-the-spot checks. The ministry in charge of implementing EU programmes stipulates in the assistance contract to be signed with the beneficiaries that the beneficiary is obliged to help and co-operate with the representatives of the relevant Hungarian authorities and the European Commission, the European Court of Auditors, and the appointed bodies by them in their control work including the on the spot control, and has to 246

deliver documentation, accounts, and other materials serving as proof for the implementation of the programme to them. 4.2.4 Declaration at winding-up of Assistance (Financial control tasks described under Art 15. of regulation 438/2001) For issuing the winding-up declaration the Government Control Office (GCO) was designated by Government Decision No. 2213/2002. In the framework of issuing the winding-up declaration the GCO has to summarise the findings of controls performed earlier and evaluate the validity of an application for disbursement of the closing balance and the legality and regularity of transactions covered by the final certification of expenditure. If this final control discloses irregularities due to which an application for the payment of the final balance cannot be validated, the Commission may request further checks in order to remedy the irregularities within a given period. 4.2.5 External Audit There is a wide range of public and private sector organisations which are involved in the management of Structural Funds. All these bodies are subject of audits carried out by the following external audit bodies: 1. European Court of Auditors (as external auditor of the Commission); 2. Commission services; 3. State Audit Office (as the independent supreme external audit institution in Hungary) The European Court of Auditors The European Court of Auditors primary tasks are to examine the accounts of all revenue and expenditure of the European Communities; examine whether all revenue and expenditure has been received or incurred in a lawful and regular manner; and to examine whether financial management is sound. The Court is an independent institution whose role is to assist the European Parliament and the Council of the European Union in exercising their powers of control over the implementation of the budget. Additionally, the Court may, at any time, submit observations on specific questions and deliver opinions at the request of one of the European institutions. 247

As part of their audit, the Court examine expenditure on the Structural Funds. Their auditors have access to any document or information relating to the financial management of the departments and other bodies subject to its audits, and may carry out audits of all bodies receiving community funds. Commission services Community expenditure is subject to audit by the Commission s services. In all cases, activities may be audited by staff from the managing service and/or by staff of the Commission s Financial Controller. The audits carried out by Commission services may include audits of financial systems or expenditure claims (whether of actions supported by a single Fund or two or more Funds, or of whole operational programmes), and performance audits. The State Audit Office The State Audit Office is the supreme body of external audit in Hungary reporting to the Parliament and having general authorisation within its scope of responsibilities as provided by law. As such, this body is authorised to carry out audits at all public or private institutions which administer financial support from the state budget and from Structural Funds. 248

5 COMPLIANCE WITH COMMUNITY POLICIES According to Article 12 and Article 34(1)(g) of the general regulation, operations financed by the Structural Funds shall be in conformity with the provisions of the Treaty, with instruments adopted under it and with Community policies and actions, including the rules on competition, on the award of public contracts, on environmental protection and improvement and on the elimination of inequalities and the promotion of equality between men and women. This compliance is verified in the examination of requests for funding as well as during the implementation of measures. Verification is done by OP MA or in some cases by the intermediary body to whom this task is delegated. The National Development Plan and the Operational Programmes will be delivered in full compliance with Community policies. 5.1 PUBLIC PROCUREMENT Implementation of measures part-financed by the Structural Funds must comply with Community requirements as set out in the Public Procurement Directives, plus national rules stricter than the Directives. This compliance is assured through the following steps: There is a separate chapter on procurement in the grant contracts. (The standard grant contract is published so beneficiaries can get informed about their obligations at an early stage.) Beneficiaries have to provide information on procurement measures taken in the project progress reports. No payment will be made in case procurement measures required are not taken. Evidence of procurement measures are checked at audits. For projects regarded, notices will be sent for publications in the Official Journal of the European Communities. 5.2 EQUAL OPPORTUNITIES Equality of opportunity is fundamental to the success of the CSF and OPs. Every opportunity will therefore be taken to utilise the leverage afforded by the Programmes to help achieve this. In addition to specific targeted measures in the OPs, the principal actions to be undertaken to achieve this are: 249

Mainstreaming the policies into all priorities, measures and projects by including specific selection criteria, with appropriate weightings. Each measure will identify the action needed to integrate equality of opportunity and the outputs to be achieved. Applicants for Structural Funds assistance will be asked to demonstrate how their project will address key equality issues relevant to the corresponding priority and measure, for example, by providing local detailed evidence about the labour market, barriers faced by the target groups and how the individual projects can help to enable these barriers to be overcome. Use of Technical Assistance to improve the information base and in order to monitor the outputs, results and impacts of operations. Reporting of Equal Opportunities related activities in the OP annual and final reports. Ensuring gender balance on the Monitoring Committees The same tools will be used to support actions in respect of other disadvantaged members of the community, including the Roma community, the disabled and people with learning difficulties. 5.3 SUSTAINABLE DEVELOPMENT In addition to ensuring that Structural Funds Programmes do not result in actions that damage the environment, it is also essential to utilise the financial resources available to influence positively wider environmental impact by helping bring about changes in the way that sectors and regional players operate, thus helping Hungary move to a more sustainable development path. Specific environmental measures under the OPs and the major environmental projects under the Cohesion Fund will have a major impact, but sustainable development will operate as a cross-cutting theme across the whole CSF in the following ways: A pre-approval environmental assessment of projects to ensure environmental considerations have been taken into account A higher weighting in the scoring system for projects offering additional environmental benefits, prudent use of natural resources, promoting environmental goods and services etc A higher grant rate for projects targeting brownfield land and redundant buildings The provision of environmental guidance to project applicants The inclusion of environmental representatives on Monitoring Committees. Use of Technical Assistance to establish baseline data and to monitor progress. Reporting of environment related activities in the annual and final reports. 250

5.4 COMPETITION POLICY Article 12 of the General Structural Funds Regulation (EC) No 1260/1999 requires that operations financed by the Structural Funds shall be in compliance with the provisions of the Treaty, with instruments adopted under it and with Community policies and actions, including the rules on competition. The Operational Programmes will be developed having regard to the Commission s Guide to the Community Rules on State Aid. The provisions of Articles 87-88 of the Treaty in relation to competition rules will be fully respected. In accordance with Articles 9(m), 18(2)(b) and 19(3)(b) the Operational Programmes will contain a summary description of the measures planned to implement the priorities, including the information needed to check compliance with state aid pursuant to Article 87 of the Treaty. In order to fulfil the requirements of the above regulation, the Hungarian authorities will provide a list of state aids by measure, according to the format requested by the Commission. As a general rule, the list referred to above will cover all state aids already notified and approved by the Commission and which shall be co-financed by the various measures of the programmes. The new amendment of June 2002 Act XXXVIII of 1992 on Public Finance introduced a general prohibition to grant state aid. The exemptions from the general prohibition defined in accordance with the relevant EU rules are laid down in a new Government Decree 163/2001 (IX. 14.) on the Exemptions from the Prohibition of Granting State Aid to Undertakings. It is the responsibility of the Minister of Finance to ensure that state aid in Hungary is granted in accordance with the state aid rules of the Community. Besides state aid already notified and approved, state aids or ad hoc aid granted under the measures will be either compatible with the de minimis rule or will be applied, when adopted, under a block exemption regulation, or one of the guidelines and frameworks. 5.4.1 De Minimis Aid which complies with the conditions on de minimis rules need not be notified and does not require prior approval. The ceiling for aid covered by the "de minimis" rule iseur100,000 over a three-year period. The ceiling applies to the total of all public assistance considered to be de minimis aid and will not affect the possibility of the recipient obtaining other aid under schemes approved by the Commission. The de minimis rule does not apply to state aid relating to agricultural products. A national IT system (OTMR) has been established as an adequate machinery to ensure that for the same recipient of aid under separate measures, all of which are covered by the de minimis rule, the total amount of aid does not exceedeur100,000 over a period of three years. Data of all projects financed by the Structural Funds will be entered into the system. 251

5.4.2 Block Exemptions The Commission has adopted regulations declaring certain categories of state aid compatible with the common market and exempting them from the notification requirements laid down in Article 88(3) of the EC Treaty. For the categories of aid to small and medium-sized enterprises, aid for research and development, aid for employment and training aid, guidelines and frameworks have been abolished as block exemption regulations have been adopted. 5.4.3 Guidelines and Frameworks Besides those under the de minimis rule or a block exemption, horizontal, regional or sectoral state aid may be notified under one of the guidelines and frameworks. For the 2004-2006 period, the whole of Hungary will be eligible for regional aid under Article 87(3)(a). Although all regions will be eligible areas, different maximum aid intensity ceilings are defined for different areas (state aid map). Specific obligations as regards notification apply to aid granted in certain industrial sectors: coal and steel, synthetic fibre sector, motor vehicle industry, shipbuilding, transport, agriculture, fisheries and aquaculture. 5.4.4 Large Investment Projects As regards large investment projects, pursuant to Article 88(3) of the EC Treaty, any proposal to award regional investment aid within the scope of an approved scheme or ad hoc aid where either of the following criteria are met has to be notified to the Commission: the total project cost is at leasteur50 million (EUR15 million in the case of projects carried out in the textile and clothing sector), and the cumulative aid intensity expressed as a percentage of the eligible costs is at least 50% of the regional aid ceiling for large companies in the area concerned and aid per job created or safeguarded amounts to at leasteur40,000 (EUR30,000 in the case of projects carried out in the textile and clothing sector); the total aid is at leasteur50 million. 5.4.5 Monitoring of State Aids In general, all state aids are monitored by the State Aid Monitoring Office within the Ministry of Finance. For operations within the Operational Programmes, managing authorities and intermediate bodies will have the responsibility to assure compliance with state aid rules, during the stages of project selection, approval of payment claims and on-the-spot checks. The 252

annual implementation reports shall detail the steps taken to ensure that all operations comply with state aid rules. 253

APPEDIX 1: FLOW OF FUNDS AND RELATED DOCUMENTS: DECENTRALISED FINANCIAL FLOWS MEASURE LEVEL PRO-RATA FINANCING EUROPEAN COMMISSION OP MANAGING AUTHORITY Submission of application for payment Declaration of certification of expenditure Declaration of expenditure Claim for EU support PAYING AUTHORITY Structural funds Payment on account, interim payments, final payment Claim for EU and central budgetary support Ministry responsible for national co-financing (may be different from the MA) Transfer order for national co-financing HUNGARIAN STATE TREASURY Budgetary appropriation account PA-OP account Transfer order for EU support Re-payments INTERMEDIATE BODY Payment order both for EU funds and national co-financing IB measure account FINAL BENEFICIARIES Invoices already paid and verified by the final beneficiary Payment of EU and national funds 254

APPENDIX 2 255

APPENDIX: PARTNERSHIP Based on the Council Regulation laying down general provisions on the Structural Funds of the European Union (Council Regulation No. 1260/1999/EC of 21 st June, 1999.) the principle of partnership extends to the preparation, financing, monitoring and evaluation of European Community grants. The principle of partnership includes co-operation between the European Commission and the Hungarian Government, Hungarian central and regional units of public administration, and social, economic, non-governmental, etc. partner organisations. This document focuses on the latter process in the course of the preparation of the Hungarian National Development Plan. In accordance with the principle of partnership the consultation process conducted in connection with the National Development Plan also plays an important role in ensuring publicity in relation to Structural Funds. In Hungary, in the course of political transformation and due to the democratic evolution of the 90s respectively, consultation became regular and widespread within an institutional framework. The tradition of social dialogue at macro level, as well as of the social-civil dialogue in a wider sense, was established and has been operating since 1988 within changing institutional structures and several reforms. The framework of consultation at sectoral level is presently undergoing change as the establishment of sectoral dialogue committees supported by the EU s PHARE programme and the strengthening of social dialogue at sectoral level is underway. In respect of the regions, in recent years Regional Development Agencies have gained partnership (consultation) experience since 1997, in connection with regional development concepts and programmes, respectively, and that provide a suitable base also for the consultation on the National Development Plan. In Hungary various forum of consultation with different interest groups (economic, social, professional, non-governmental, minority, woman etc.) were established since the political transformation. These forum, especially the ones operating with relevant partners from the aspect of the National Development Plan, were involved in the process of consultation on the NDP. These were primarily forum of macro level (National Council for Interest Reconciliation, European Integration Council, National Regional Development Council) and sectoral forum of key importance regarding the NDP Operational Programmes, (National Council for Environmental Protection and other sectoral forum operated by the Ministries).

1 PREPARATION OF THE CONSULTATION ON THE NATIONAL DEVELOPMENT PLAN 1.1 OBJECTIVE AND PRINCIPLES OF THE CONSULTATION PROCESS The extensive consultation process achieved in the course of the preparation of the National Development Plan served a double purpose. To meet the provisions of Article 8 of Council Regulation No. 1260/1999/EC and to meet the wish of the Hungarian Government to consult fully the most important social, economic and regional partners, getting acquainted with and incorporating their opinion was a key element of the preparation of the NDP. Addressing local, regional, sectoral and social group interests to the fullest possible extent has been one of the key elements of the success of the National Development Plan. Elaboration of objectives, tasks and measures that different players are able to make, and the utilisation of resource could also prove to be of vital importance for the successful implementation of the NDP. Besides, the role of the above-mentioned partners in the utilisation process of Structural Funds is not limited to the preparatory phase but can be extended to financing, monitoring and evaluation. Participation of the partners in the preparation of NDP is the first phase of the preparation for receiving Structural Funds. The other objective of extensive consultation on the National Development Plan is to provide information about NDP, in accordance with the provision in Article 46 of the above regulation related to the information and publicity. Within the framework of the partnership process institutions and organisations that have not necessarily got involved in the consultation process but they were informed about the preparatory works and processes of the NDP. This will be important in the process of implementation. The principles behind the consultation process were: co-ordination social consultation on the NDP is co-ordinated, comments are received in accordance with a defined system of criteria with the involvement of all governmental bodies participating in the formulation of NDP, in a structured way documentation steps of consultation, views expressed by the partners involved are documented continuity consultation process on the NDP is continuous starting from establishing priorities to the discussion of the final version feedback dialogue on the merits is created in the course of structured processing of and responding to comments, proposals transparency social consultation on the NDP takes place via the Internet, in print and electronic media under the utmost possible publicity 257

equal opportunities - in the whole consultation process on the NDP equal opportunities for men and women will is secured 1.2 CO-ORDINATION AND SCENARIO OF CONSULTATION PROCESS Consultation on the National Development Plan was divided into three phases. In the first phase (September October 2002) NDP strategy was consulted on extensively primarily in the circles of the most significant economic, social sectoral-professional, regional,nongovernmental, minority and woman partner organisations. In the second phase (November December 2002) of consultation operational programmes were discussed publicly with the participation of professional and sectoral organisations affected most in the formulation and implementation of the given OP. In the third phase (December March 2003) of consultation the whole document submitted was discussed. In the course of the preparation and co-ordination of the consultation process, the Office has established close working relationship with the Ministries concerned and with the Regional Development Agencies. The role of the Office in the consultation on the NDP strategy was to conduct nation-wide social debate, to co-ordinate regional consultation, to provide professional background and generate extensive publicity, furthermore, to sum up, process and incorporate in the Plan all the responses, proposals and views received. Among the further tasks of the Office there was the co-ordination of the consultation of Operational Programmes and the documentation of the consultation of the whole NDP. The Ministries were involved in determining the scope of partners to be involved in consultation, in making the Strategy widely known, and also in professional consultation and processing of proposals. The designated Ministries ( Ministry of Economy and Transport, Ministry of Agriculture, Ministry of Employment and Labour and the national Office for Regional Development) were responsible for the consultation on the Operational Programmes. Regional Development Agencies in co-ordination with the Office and the Ministries responsible for OPs have played key role in the regional social consultation of NDP Strategy and Operational Programmes that they arranged in accordance with their own rules of procedure and methodology involving as wide range of regional, social, economic, local governmental, local minority and woman partners as possible. Responses, proposals received from the regions were summed up, documented and passed on to the Office and the Ministries concerned. 258

2 CONSULTATION ON THE NATIONAL DEVLOPMENT PLAN 2.1 PRELIMINARY CONSULTATION In July and August 2002 the Office completed preliminarily consultation on situation analysis of the National Development Plan, as prepared in summer 2002, as well as the outline of the strategy and operational programmes with nearly 400 potential non-governmental and social partners. The Office called upon the partners in writing to comment on the documents presented. The primary aim of consultation was to collect and systematically organise information necessary for the official social consultation starting after 20 th September 2002, and also to build up a database and to preliminarily test the efficiency of the measures and methods of consultation. Nearly one hundred of those invited responded positively to the request of the Office, most of them professional organisations, non-governmental or regional partners. The economic partners responded very actively. Partners thought that the following NDP priorities were extremely important: to develop small- and medium sized enterprises, to support active labour market policies, environmental protection developments, education and training, research, development, innovation, transport development, incentive to invest and development of tourism. 259

2.1 Distribution of priorities of special importance Improving human resources of production 5% Modernization of agricultural production 5% Improving the access to the regions 5% Fight against social exclusion 5% Development of information society and economy 5% Modernization of food processing 3% SMEdevelopment 12% Supporting active labour market policies 9% Environment prot. development 9% Development of Tourism development adaptability and enterprising 7% kill Incentive to invest 6% 7% Transport development 7% Research, development innovation 7% Supporting edu training 8% Source: Database of the Office for National Development Plan and EU Support 2.2 BROAD CONSULTATION 2.2.1 The Partner organisations Consultation on the National Development Plan was conducted including social, nongovernmental, professional, sectoral, regional, minority, woman and local partners that represent interests markedly reflected in the NDP and groups having significant influence within the society. For the purpose of documenting and maintaining contacts a partner database has been created from the data of the Office, Ministries, partners lists from Regional Development Agencies, the effective lobby list of the Parliament and more than 900 partners registered on the interactive homepage operated by the Office. (Diagram 2 shows the percentage split of partners consulted.) 260

The following groups were involved in the consultation process on the National Development Plan: Social partners, economic and professional organisations Social partners, trade union- and employers associations, professional organisations and economic lobbies traditionally participating in domestic consultation at sectoral and macro level, respectively were contacted directly. Regional partners and local governments In the course of consultation on the regional level, Regional Development Councils and Agencies were involved. They commented on the Plan according to the usual rules of procedure by involving the economic, social and non-governmental organisations of the region. Due to the high number of potential partners, the more than three thousand settlement and county local governments located in Hungary were directly contacted through the associations. Non-governmental organisations Organisations working on national level that are registered on the official lobby list of the Parliament, recommended by professional and sectoral organisations and representing important non-governmental interests received the Strategy for consultation (in printed and/or electronic form). The Office handled with great importance the involvement of minority and woman partner organisations. 2.3 METHODOLOGY AND TOOLS OF CONSULTATION The consultation on the NDP is closely linked to the general communication activity on the NDP. As a result, the tools and methods of consultation cannot be separated from the general information activities. Co-operation agreements During the period of 2002 September and 2003 March, the Office concluded co-operation agreements with the Hungarian Chamber of Commerce and Industry (MKIK), six national Trade Union Associations representing employees, the Association of Economic and Scientific Societies (GTTSZ), the Hungarian Chamber of Agriculture, the National Association of Local Governments (TÖOSZ), the Society for Dissemination of Scientific Knowledge (TIT), nine national employer s associations representing employers and with the Association of Technical and Natural Science Societies (MTESZ), the Higher Education and Research Council, the Local Parliaments Association and the Hungarian Association of Content Providers The agreements providing framework for co-operation stipulate that in the course of the preparation, implementation, evaluation and supervision of the NDP the Parties will cooperate in the sharing and supplying information, education, training and social consultation. The cooperation agreements, naturally beyond the consultation of the strategy, are related to both the whole planning period and the co-operation in course of the implementation of the NDP. Direct contact the Office contacted more that 600 partner organisations directly by 261

personal mail or via the Internet and received about 350 responses again electronically or by post. Personal communication In Autumn 2002 the Office, the Ministries responsible for the Operational Programmes and the regions, respectively took part in consultation and providing NDP-related information. The Office has organised independent forum, informative programmes and events. The two of these events deserved special attention were the Training of Trainers seminar held on 7 th November 2002 and the national partnership conference, held in the Parliament on 21 st November 2002. The leaders and staff of the Office, as well as the staff of the participating Ministries in the preparation of the NDP ensured that due emphasis in proportion with the significance of the NDP would be given to the NDP in those events organised by other institutions and organisations. Therefore the representatives of the Office and the Ministries responsible for OPs introduced the importance, strategy, Operational Programmes and different aspects of the NDP at more than 170 events between September 2002 and March 2003 in about 200 days.. National, sectoral and regional forum the NDP is a strategic document that will be, in accordance with traditions, subject to consultation with social- and sectoral-professional partners at the usual and established forum of the Hungarian consultation system. Of the macro level forum, NDP Strategy and the final version to be submitted to the EU Commission was discussed with the National Council for Interest Reconciliation, (NRC), (at a plenary meeting and at the meeting of NCIR NDP Committee, newly set up and operating as a permanent committee) and the National Regional Development Council. Out of various sectoral forum, especially the National Environmental Protection Council, the newly established National Romany Council and the Regional Development Councils discussed the different documents of the NDP. Internet www.euforium.hu Web-page contains the largest volume of information regarding the National Development Plan. This Web-page made it possible to download versions of the strategy, situation analysis, SWOT and operational programmes available for consultation and to directly submit comments and amendments through interactive forum. 2.4 EVENTS July August, 2002 Preliminary consultation, requests for opinion, establishing contact with partners participating in consultation, making direct contact with 350 partners (sending Direct Mail (DM) letters), processing responses, summarising and analysing experiences. Building up a database, elaboration of methodology of consultation and consultation with concerned Ministries and Regional Development Agencies. September, 2002 Signing of co-operation framework agreements: Hungarian Chamber of Commerce and Industry (MKIK), six national Trade Union Associations representing employees, Association of Economic and Scientific Societies (GTTSZ) 262

9 September, 2002 Meeting of the National Council for Interest Reconciliation, requesting social partners to participate in consultation, decision on setting up NDP Permanent Committee, secretarial tasks of the Committee are performed by the Office. 9-19 September, 2002 Definition of operational tasks, timetable, labour division of consultation involving the Government Ministries and Regional Agencies. 13-19 September, 2002 Participation at the Budapest International Fair (Budapesti Nemzetközi Vásár - BNV), dissemination of information on the NDP 20 September 2002 Governmental approval of consultation document on NDP strategy 23 September 2002 Official commencement of social consultation on NDP strategy, making direct contact with 600 social- and economic organisations with national authority (see partners list), calling upon 2,000 regional partners, non-governmental, minority, woman organisations and local governments through Regional Development Agencies. Start up and continuous operation of communication campaigns (media, event organising, and interactive Internet forum). 26 September 2002. Meeting of the National Regional Development Council on NDP Strategy 23 September 15 October, 2002 Process of regional social consultation, organisation of 7+1 regional consultation forum. Formulation of regional opinions, summing up regional consultation 4 October 2002 Meeting of the National Environmental Protection Council 16 October 2002 Statutory meeting of NRC NDP Committee October 2002 Signing of co-operation framework agreements: the Hungarian Chamber of Agriculture, the National Association of Local Governments (TÖOSZ), Society for Disseminating Scientific Knowledge (TIT), nine national employer s associations representing employers 16-30 October, 2002 Processing incoming proposals, preparing summary, feedback to partners 30 October, 2002 NRC plenary meeting, NDP Strategy on the agenda 7 November, 2002 Office event Training the trainers 12 November, 2002 Meeting of NCIR NDP Committee 263

21 November, 2002 National Partnership Conference in the Upper House Chamber of the Hungarian Parliament November, 2002 Signing of co-operation framework agreements: Association of Technical and Natural Science Societies (MTESZ) 12 December 2002 NCIR NDP Committee, discussion of the entire document 13 December 2002. NCIR plenary meeting 2.5 RESULTS OF CONSULTATION ON THE NATIONAL DEVELOPMENT PLAN 2.5.1 Distribution of Responding Partners In the course of the consultation on the National Development Plan, the Office contacted more than 900 partners. About 50 of those are so called umbrella organisations and through their member organisations views of a further several thousands of partners have been received and channelled into the NDP consultation process. The Office took highly into consideration the opinions of minority and woman partner organisations. More than 350 partners responded actively to a request made by the Office and nearly 3,000 remarks (comments and concrete proposals, respectively were received). Three quarters of active partners are non-governmental, professional and budgetary entities expressing opinion on the strategy in nearly equal proportion. (Diagram 2.2 indicates the status of partners who responded and diagram 2.3 shows the distribution of partner responses by sector.) 264

2.2 Distribution by status of partners actively responding to the request by NDP Office Private entity 8% Corporatio 7% Social 1% Non-govmnt. 27% Local govmnt. 8% Budgetary entity 24% Prof. organozatio 25% Source: Database of the Office for National Development Plan and EU Support 2.3 Distribution by sector of partners actively responding to the request of NDP Office Service ind. 2% Agriculture 3% Scientific 4% Enterprisepromotion s 2% Health care 2% Tourism, catering 1% IT, tele- Comm. 1% Constr. Ind. 1% Trade 0% Environment. prot. Water management 20% Industry 4% Inter-sectoral 6% Transport, infrastructure 6% Local govmnt. 8% Education Employment 8% Reg. development 11% other 19% Source: Database of the Office for National Development Plan and EU Support Only 1/3 rd of the partners contacted are based outside the capital, while 45 % of active respondents are from outside the capital, meaning that they are 30 % more active than those from the capital. Diagrams 2.4 and 2.5 summarise these facts. 265

Rest of country 33% 2.4 Distribution by region of partners of social consultation on the Budapest 67% 2.5 Distribution by region of partners actively request by the NDP Rest of the county 45% Budapest 55% Source: Database of the Office for National Development Plan and EU Support Significant proportion of comments and proposals from partners addressed priority axes (OPs) as per NDP structure (43%). (See diagram 2.6) 266

2.6 Distribution by NDP structure of partners opinion Comments 16% on General comments 12% Comments on priority axes 43% Comments on target systems 29% Source: Database of the Office for National Development Plan and EU Support A more or less similar proportion of comments were made on Environmental Protection and Infrastructure OP, Economic Competitiveness OP and Human Resources Development OP. Regional Development OP and Agricultural OP received fewer comments. (See diagram 2.7) 2.7 Distribution by priority axis of partners opinion Regional development 16% Agricultural and Regional development 14% Environmental protection and infrastructure 25% Economic competitiveness 24% Human resources 21% Source: Database of the Office for National Development Plan and EU Support 267

Most concrete proposals addressed the Human resources development OP (25%) while the least addressed ECOP (12 %). (See diagram 2.8) 2.8 Distribution by NDP structure of partners opinion Comments SWOT 16% on General t 12% Comments priority 43% Comments target t 29% Source: Database of the Office for National Development Plan and EU Support Source: Database of the Office for National Development Plan and EU Support 2.5.2 Grouping of Partners Opinion Social partners, professional organisations 268

Social partners, employers and employees, play an outstanding role in the preparation and implementation of the National Development Plan. Accordingly, six trade union associations participating in consultation at national level and nine employer associations, and through them their members and member organisations, joined in the planning process of the NDP on several levels. On one hand, co-operation agreements with all the fifteen organisations create the contractual framework for long-term co-operation. On the other hand, participation in the national consultation process provides the possibility of direct negotiations among the three parties. Employers: In connection with the strategy and the individual operational programmes, the representatives of agricultural employers associations expressed the importance of reasonable treatment of agriculture. Due to the lack of own resources small-scale producers or family farms would lose out in the course of application the resources that are to be provided by the NDP. Therefore it is inevitable to create special schemes for these groups. Information on the NDP has to be brought down to company-level because as applicants, executors of the projects of the operational programmes will play a leading role in the implementation of the Plan. Employers expect governmental measures that restore the participation of social partners in Regional Development Councils. In respect of economic competitiveness, in connection with investment incentives, the appearance of venture capital is an absolute necessity. This aim cannot meet the principles of the National Development Plan, but the Ministry of Economy and Transport had already started a capital program in this direction. Employers disagree that concerning SMEs the strategy automatically adopts the classification system used in the EU. Inadequately defined classification excludes generally deserving and needy enterprises from support and therefore and amendment is necessary. More favourable taxation conditions for research and development, innovation activity would contribute to achieving a level that is closer to the financing rate desirable in this sector and defined as 2 % of GDP, and within that the rate of financing provided by the government and the competitive sector would also need to be settled. The Plan places emphasis primarily on the supplying chain activity of SMEs and evidence from the SMEs shows that such activities account for only 10-15% of their business. A stronger emphasis on the role of the SMEs in vocational training would be desirable. The planners accepted and put more emphasis on the proposal, mainly in connection with the Human Resource Development and Regional Operational Programmes. Preparatory works related to the involvement of private financing in public services (Public Private Partnership) needs to be accelerated and legal- and technical background of cooperation has to be established by the time of accession. Based on EU experiences, PPP can only be successful if implementation is based on experiences gained from pilot projects. Considering the time available, it requires even faster preparatory work. 269

Employees: Most of the target objectives, - life-long learning, improved standard of living -, it would be necessary to include modernisation of existing structures (education, healthcare) in the NDP. This proposal cannot be implemented in line with the objectives of the EU Structural Funds, but the governmental work and the preparation of this reform conception had already started in the two fields. Social inclusion as indicated in the programme is not only applicable to the Romany population and this should become apparent in the NDP. Development of the public sector is vital, inadequate wage policy are counter-productive to recruitment in public administration, education and healthcare professions. There is a need for reforms in education and that could prove to be the key to the implementation of life-long learning and encouraging of social inclusion (in relation to the scope of job creation) and as such it should feature more strongly in the NDP. In respect of strategic objectives, categories should not become too narrow, as this would restrict our application possibilities. The problem of integrating regions into the Hungarian public administration system also needs to be addressed and the role of social partners needs to be restored in Regional Development Councils that are key recipients of the Structural Funds. Non-governmental organisations Non-governmental organisations strongly believe that the state as a service provider and creator of opportunities is inconceivable without the full involvement of the local communities and non-governmental organisations. The standard of social competitiveness urged by the NDP can only be raised if individual and collective awareness of responsibility is further strengthened by creating partnerships, improving awareness of the civil institutional system and local communities and facilitating civil dialogue. Non-governmental organisations could play a leading role in the implementation of the national development strategy, as these institutions intermediate between public administration, economic players and citizens. Within this framework further development of non-governmental infrastructure networks currently being built and the establishment of infocommunication relationship among the organisations and with governmental sector is necessary in future. Supervision of the regulatory system of the non-profit sector started in 2002 and may provide a chance to analyse the regulatory conditions under which non-governmental organisations are able to operate most efficiently. Without proper attention, non-governmental organisations may be losers after EU accession as they will have to compete with non-governmental organisations in other EU member states for resources. Non-governmental organisations also recognise that currently environmental protection is a less exposed topic and therefore not sufficient emphasis is put on it either in socio-political debates or in the media. Due to this regrettable fact the population is not fully aware of the magnitude of the already existing environmental issues. Increased economy actively produces and does not eliminate environmental and social problems. Therefore, environmental 270

awareness and sustainable development policies needs to be strengthened both at local and governmental level. It is important at local level because local problems are best known by local organisations. The government would supplement this by taking role in strict official intervention. The role of renewing energy resources and the possibility of equal access to them shall be given high priority. In accordance with partner proposals, the importance of environment protection had increased in the whole NDP, and the supporting to the renewing energy resources missed by the partners was given a high priority mainly in the Environment Protection and Infrastructure Operational Programme. Equal Opportunities The comments of minorities and woman organisations was given a high priority in the consultation process of the National Development Plan. In accordance with partner opinions, healthcare supplies specifically effecting women and preventive methods need to be developed. Women s labour market position and re-employment have to be improved and realised by special forms of retraining and post-graduate training and by the improvement of services helping social adaptation, and the elaboration of special labour market programme and increased labour law protection for women over 45 cannot be postponed any longer. According to the comments emphasised in course of the consultations, the Human Resource Development Operational Programme includes as well two measures in the interest of the implementation of the woman s equal opportunities. Equal opportunities are included in the NDP especially in the Human Resource Development OP and as well in the relating consultation process by a high involvement of woman organisations. According to the estimations of the Office responsible for the coordination of the consultation, 30 percent of the participants representing the partner organisations in the course of the different consultations was woman. The basic condition of social integration of the disabled is the creation of obstacle-free environment and also the establishment of a complex rehabilitation system including the tools for medical, social and employment rehabilitation. When building up advanced transport infrastructure people with disabilities need to be taken into consideration. Non-governmental organisations pay special attention to the improvement of the standard of living and social equal opportunities for disadvantaged groups. Within that, attention is paid to the employment issues of the ageing generation, women, the Romany population, people with large family living around the poverty threshold, single parents, working parents starting their career, people returning from parental leave, orphans, children in state run foster homes, the homeless, the disabled and also those with low or non-existent qualifications, the young unemployed living in or near poverty and those who are trapped outside the social security system. Positive action to help the above segments of society is the general expectation. The first task should be to eliminate the above disadvantages and the process of closing up the gap could follow that between these and the rest of the society. Regional organisations, local governments Regional consultation of the Strategy was conducted by Regional Development Agencies. They involved and informed the relevant social and economic partners in the regions (Regional Development Councils, County Development Councils and General Assemblies, Small Region Unions, Local Governments, decentralised professional-sectoral-economic 271

organisations, representatives of non-governmental sector) and summarised partner proposals. The discussion with local governments were proceeded directly through local government associations. Regional and local governmental partners supported the Strategy as a whole and believed that the vision of Creative Hungary, knowledge and innovation oriented development strategy will provide suitable framework for enforcing regional development efforts. In addition to numerous planning methodological remarks, the highest number of concrete proposals were made in connection with regional development. In general, remarks focused on the necessity of raising the standard and quality of life. This aim should permeate the whole process and therefore it should not appear as a main objective but as one of the horizontal principles. More emphasis should be placed on the introduction of regional differences, especially microregion differences. In the interest of strengthening the impact of horizontal aspect of sustainability., the issues included in the sustainable development strategy had become part of the NDP in accordance with the partner proposals. The problem tree facilitating the visualisation of the system of objectives and problems, the greatest shortcoming of the system of measures (is that the borderline between sectoral and regional Operational Programmes is not clearly defined, leaving a significant overlap e.g. between regional and infrastructure or regional and agricultural and also between economic and infrastructure operational programmes, respectively) had disappeared in accordance with the partner proposals. Regional organisations were convinced that regional policy may play an important role in strengthening regional cohesion, improving economic competitiveness, modernising public administration, stimulating innovation and for this purpose regional local government should be elevated to constitutional level, the institutional system of regional public administration should be established and regional knowledge centres created by the integration of higher education linked with the prominent economic-administration institutions of the given region. The development and modernisation of the establishment of administrative regions and the wider socio-economic structures connecting to them, that of medium ranged administrativepublic services system (county), regional co-operation, planning and development functions and the promotion of economic and social evolution of small regions, provision of funds, organisational and operational conditions for them, regional harmonisation with the programmes of neighbouring small regions, are all of extreme importance. Appropriate measures are included in the Regional Operational Programme. The Plan should place a stronger emphasis on national and regional characteristics and features. The Plan shall support the development of coherence between the various regional developments and between regions and border. Co-operation is important to strengthen the institutional, social-culturalscientific-economic links with Hungarians living outside Hungary, via the Euro-regions. This latter proposal cannot take part of the NDP as this activity is supported by the EU Interreg Programme. Gradual implementation of the NDP makes is possible to take formerly planned administrative reforms and already started processes, like modernisation, establishment of servicing information administration and building up electronic local government system further and complete and perhaps conceptionally revise them. Decentralisation and coordination of regional development resources that have been delayed too long, could also become possible. This measure proposed by the partner organisations was built in the NDP by the planners. 272

Complex analysis of investigations related to regional problems and the impact of regional consequences of certain strategic priorities was recommended. Conditions supporting the transition period leading to innovation controlled development model described in the Strategy, and in which competitiveness is ensured most effectively by integrating different resources into a regional network, shall be defined at regional level. In the field of settlement development, improved co-operation, networks linking cities, highlighting the role of towns of special status and with county rank are to be supported, especially in fields where large-scale development programmes should be drawn up and implemented in order to improve economic fortunes. For that reason, a special regional development measure can be found in the NDP. It was proposed that the ICT developments into the Central Region are used as gateway project for the country as a whole. Finding own resources for applications and projects is considered as a basic problem and to solve this, the establishment of a central Support Fund helping to finance especially the disadvantaged small regions, was proposed. More emphasis should be placed in the Plan on the development of co-operation between local governmental and competitive sectors and on the increase of the number of joint projects. The planners included this proposal in the Economic Competitiveness Operational Programme. In the field of developing human resources, it was proposed to modernise the education system, to improve problem solving abilities alongside lexical) knowledge and to create a market for those with existing, high-standard and modern scientific knowledge - in addition to alignment with market conditions, and in accordance to this proposal an independent measure was considered in the NDP. It is important to strengthen the non-profit economic sector as non-governmental organisations may play a key role in the implementation of national development strategy because these organisations act as intermediates between public administration, economic players and citizens. The establishment and development of regional innovation and knowledge bases are of extreme importance. In addition to involving foreign capital, mobilisation of domestic, existing capital portfolio is also important for improving economic competitiveness. so that the planners of NDP took into consideration this argument. More emphasis should be placed on the promotion of small- and medium-sized enterprises (SME) to become suppliers this consideration was put into the NDP as an independent measure. The view that development of SMEs is the result of domestic policy, while the presence of multinational companies is that of global policy should be strengthened. Besides dual economy, regional specialisation or clustering, the supporting and strengthening of working organisations in enterprise zones as measures of regional economic development were represented in the ECOP.. The Plan should give priority to the establishment of industrial estates and industrial parks in order to promote inward investment and job creation, to improve social conditions and for better utilisation of local resources. 273

In the field of economy, the development of tourism would deserve a stronger emphasis and the support for development aimed at restructuring should be made more attractive in order to increase competitiveness. Within the increase of profitability in tourism it is urgently necessary to not only solve the current tasks listed but also to create new products of tourism and accommodation, to raise the standard of services and especially to increase the role of tourism. In accordance with the partner proposals, these considerations are included in the Regional Operational Programme. Priority approach facilitating the formulation of information society should be fine-tuned: access to and use of the Internet is not a goal in itself and not even the exclusive measure of advance but simply a tool allowing effective organisation of other social and economic functions and simpler execution of certain processes. Within the scope of agricultural structure and regional development the definition of optimum real estate structure by land type has been proposed. In respect of basic material production, it is reasonable to develop the existing adult education institutions and to include them in the funding system. As to the development of processing industry it has been proposed to increase the share of locally processed food products, to develop nature friendly and organic farming and to implement closed-circuit agricultural production. The description of priority for modernising food processing, in accordance with the partner proposals mentions the sustainable consumption or e.g. meeting HACCP requirements. The planners completed the range of environmental protection and infrastructure development with the objective aiming at research, development and increase of renewable sources of energy. When discussing the infrastructure of environmental protection, the aspect of preventing pollution is barely touched upon, the priority is over-focusing on treating already existing problems. 2.5.3 Third phase of consultation The third phase of consultation of the National development Plan began in December 2002. The whole document was discussed by the National Regional Development Council and the National Interest Reconciliation Council. In the course of the meeting held on the 12 th December 2002 by the National Regional Development Council, the Regional Operational Programme, and the whole document of the NDP were discussed. During the debate, social partners put emphasis on the necessity of transport development, and especially on giving a higher priority to treatment of motorways network and public transport issues. The Regional Councils put more emphasis on the strengthening of regional level and the further decentralisation in resource distribution. The deputy for the Hungarian Academy of Sciences considered the special supporting of research facilities as a task of strategic importance. 274

Social partners put more on emphasis on the importance and thoroughness of consultation relating to the National Development Plan in the course of the meeting organised on the 13 th December 2002 by the National Interest Reconciliation Council. Employers stated to have further proposals about issues relating to the development of information society, SMEs, and employing agriculture or the special supporting of particular Hungarian products, but they considered the NDP to be acceptable during this phase of the planning. They supported to the maximum extent the preparation of the Comprehensive Development Plan. The employees of the NIRC concentrated on the tasks relating to the human resource development, and urged measures on issues about revenue level, life-long education, development of healthcare, and overall amelioration of employment situation. They put foreground the special validation of partnership principle in the course of the further, operational phases of the National Development Plan, and fully supported the preparation of the Comprehensive Development Plan. Experts of the Hungarian Government and the European Commission discussed the document accepted by the partner organisations during the period of January and February 2003. The PMO-NDPO, the Office responsible for planning, proposed the document following the modifications for a final consultation. New, more concentrated opinion transfer and information activities had started about this document in the final phase of the NDP s preparation. The National Regional Development Council, the National Environment Protection Council, and the National Interest Reconciliation Council on a plenary meeting, and the NDP Committee of the NIRC also discussed the document ( ).As part of the final phase of consultation, the document was sent to those partner organisations which endorsed co-operational agreement with the NDPO during the period of September 2002 and March 2003. (See list in Annex 3.) For further information, the Office also transferred this document to all previously requested partner organisations which are included in the partnership database of the Office. The National Development Plan and EU Support Office continued the large-scale information activities also during the spring 2003. As a result of these activities all small regions had received basic information about the NDP, and the EU Structural Funds. In the framework of the partnership process, closed during the spring 2003, consultation began with partner organisations about tasks emerging after the planning phase of the NDP. The new document includes issues about the participation of partner organisations in the monitoring committees, the Programming Complement Documents, and also the subjects of current calling for application. The consultation process continues as well following to the preparation of the final version of the NDP and the closure of the planning phase. 275

3 CONSLUTATION ON THE OPERATIONAL PROGRAMMES The consultation on Operational Programmes took place between 20 October and 20 November 2002 with the co-ordination of the Office, under the leadership of Ministries responsible for OPs (Ministry of Employment and Labour, Ministry of Agriculture, Ministry of Economy and Transport, National Office for Regional development), and with the participation of Regional Development Agencies. Detailed description of the consultation process constitutes an integral part of the individual Operational Programmes and it is found in the Annex to Partnership Document. 3.1 CONSULTATION ON THE HUMAN RESOURCES DEVELOPMENT OPERATIONAL PROGRAMME In the course of planning and consultation on the Human Resources Development Operational Programme, extensive co-operation took place between planning officials of interested Government Ministries (Ministry of Employment and Labour, Ministry of Education, Ministry of Health and Social Affairs, Ministry of Youth and Children, Ministry of Information and Technology, Ministry of Economy and Transport, Ministry of Environment and the Prime Minister s Office) and the representatives of the regions. All Ministries discussed the plan with the most prominent social partners. Parts of the document on employment were discussed by the HAC (Hungarian Accreditation Council), the Labour Market Committee, the Labour Science Committee of the Hungarian Academy of Science (HAS) and also by the representatives of the most important organisations of employers and employees under the training courses preparing for the European Union, as well as the representatives of non-governmental organisations for employment. The Ministry of Education consulted the following leading professional policy partners: Higher Education Consultation Council, Higher Education and Scientific Council, Public Education Consultation Council, Public Education Policy Council, National Student Rights Council, National Council of Minorities, National General Education Council. As part of the consultation process between professional partners and the Ministry of Health and Social Affairs, partial planning documents were also discussed by the Social Council, the Church Council and the Council for the Disabled. On the basis of the lists complied by the responsible Ministries and organisations, several hundred professional and non-governmental organisations received the Programme in printed or electronic format for comments. The content of the OP was presented and discussed by the authors of the Programme at professional, non-governmental and regional forum. The electronic version of the Programme was introduced on the home pages of the Ministry of 276

Employment and Labour and the Ministry of Education where a forum was operated for debate. The issue of equal opportunities for Woman and Man was given a high priority in the course of the consultation. Processing and evaluation of comments received from the partners took place in a structured way according to a unified system of criteria. In the course of professional and social consultation of the Operational Programme the comprehensive objectives and priorities of OP, the elaboration of further measures have been accepted and approved and an extension of the content and target group for existing measures have been urged. 3.2 CONSULTATION ON AGRICULTURAL AND RURAL DEVELOPMENT OPERATIONAL PROGRAMME Based on the principle of partnership the Ministry of Agriculture widely involved its social partners in the preparation of AROP that is forming part of the NDP. Based on the Government decision taken on 22 October, 2002, the Ministry made the Agricultural and Regional Development Operational Programme available for social debate, the AROP and the notice published for social debate were both available on the homepage of the Ministry. The Ministry of Agriculture summarised and evaluated the comments received in the course of social consultation and discussed them on various forum. Experts, who participated in the preparation of the Plan and the AROP, respectively, also attended the forum. Participants of the social debate were agro-industrial business- and professional organisations, non-governmental organisations (especially the so called Rural Parliament with its nearly 500 member organisations, organised independent forum, as well) and the regional organisations (Regional Development Councils, Regional Agencies) and also the Agro- Industrial Council, (AT), the Ministry s advising body. On the basis of the comments and notes, the planned AROP measures may be considered professionally grounded and in line with the national interests and with effective EU rules and regulations. Consultation, however, revealed that professional and non-governmental organisations - and especially the general population - are not yet sufficiently informed about EU-related issues, including agricultural and regional policy. Therefore the Ministry of Agriculture commenced an intensive campaign aiming at wide - dissemination of information on agricultural- and regional policy and especially ARDOP. 3.3 CONSULTATION ON THE ECONOMIC COMPETITIVENESS OPERATIONAL PROGRAMME The Operational Programme was prepared under the responsibility and co-ordination of the Ministry of Economy and Transport, as the state administration body acting as OP Management Authority, and actively involving numerous planning units from various 277

ministries, social, economic organisations and regional development regions. At its meeting held on 22 October 2002, the Government discussed the Economic Competitiveness Development Programme and made it available for social debate. Partnership consultation took place at three parallel levels: Firstly, OP documentation was sent for comments and distribution to the economic, social organisations being in contact with the Ministry and the departments involved in the preparation of the OP. Secondly, the Operational Programme was introduced at regional level on conferences, Regional Development Council meetings and at other professional forum. Thirdly, OP documents were made accessible to citizens electronically on the homepages of both of the Ministry of Economy and Transport and the Prime Minister s Office, Office for National Development and EU Support. Partnership communication, correspondence, forum, comments made at conferences were all processed in the course of the preparation of the Programme. In general, the OP received a favourable reception, the partners agreed upon the objectives and principles they supported rather than criticised main directions. So an agreement exists regarding the main elements, but there are differences in emphasis. There were notes, additions and proposals that will be useful in the course of implementation. Many of the comments relate to the general regulatory environment, such as the importance of environmental protection and the changing of competition rules. 3.4 CONSULTATION ON ENVIRONMENTAL PROTECTION AND INFRASTRUCTURE OPERATIONAL PROGRAMME In the course of the preparation and consultation on the Operational Programme, intensive consultations took place with the social partners, Regional Councils under the direction of the Ministry of Economy, then as from June, 2002 Economy and Transport, that is responsible for the co-ordination of the elaboration of the Programme, pursuant to the relevant governmental decree. Consultations were carried out partly at inter-ministry forum and its departmental meetings, partly in the course of on-site consultation. At these forum the already prepared chapters of the Operational Programme were introduced. Comments, proposals from the partners were taken into consideration and incorporated into the draft of the Operational Programme according to the consensus reached in the course of consultation. Measures used in the course of OP consultation included both traditional and electronic communication. The OP was made electronically accessible on several Internet home pages, partner organisations and regions respectively received the documents both electronically and by post. Comment templates prepared for channelling and processing comments were also available as an attached document to each participant. Various forum and conferences also 278

offered possibilities to express opinions and the views and those were recorded in the memorandum prepared on the given meeting. 3.5 CONSULTATION OF REGIONAL OPERATIONAL PROGRAMME The National Regional Development Office of the Prime Minister s Office is responsible for the preparation and consultation on the Regional Operational Programme. Planning was the responsibility of the planning team set up at the Directorate of Regional Development at VÁTI. Planners of Regional Development Agencies (RDA) were also involved in each phase of the work. Parts of the documents still under preparation were frequently discussed at the meetings of NDP Regional Work Team with the planners from the regions and sectoral ministries. In connection with the Regional Operational Programme, primarily Regional Development Agencies were responsible for consultation within the region. The purpose of the consultation was to introduce the content of the Regional Operational Programme as widely as possible to partners, to collect the partners opinion about the programme, to prepare the final version of the Operational Programme by processing these comments. Successful implementation of the Operational Programme is largely dependent on incorporating the interests of local, regional, sectoral and social groups to the greatest possible extent, as the key to successful implementation and utilisation of funds is the elaboration of objectives, tasks and measures that other actors are able to use. The consultation on the Operational Programme was basically divided into three phases. In the first phase situation and SWOT analysis of the Operational Programme was conducted, in the second phase regional strategies were widely reconciled, while in the third phase the Operational Programme was publicly discussed amongst the most prominent social, sectoralprofessional, regional and non-governmental partner organisations. Target groups of consultation were the National Regional Development Council, Regional Development Councils, national umbrella organisations, heads of County Development Councils and Local Governments, leader and members of Micro Regional Societies, Local Governments, social partners, representatives of regional professional, economic and non-governmental organisations. Partners of the regional, national umbrella organisations and non-governmental organisations were contacted through e-mail or by direct contact (direct mail). Structured questionnaires for processing comments were published on the home pages of the regions, Euforium and VÁTI. Between 28 October and 08 November 2002 Regional Development Agencies organised regional forum that served, in addition to ROP, the consultation of 4 sectoral Operational Programmes, as well. 279

Region Forum Date Place Central Region Hungary ROP 8 November 2002. Budapest, County Hall Central Transdanubia Region ECOP, AROP,HRDOP, EPIOP, ROP 30 October 2002 Székesfehérvár, Technika Háza, West-Transdanubia Region ECOP 29 October 2002. Zalaegerszeg, ZMKIK AROP 30 October 2002. Szombathely, TESZÖV Headq. HRDOP 29 October 2002. Gyõr, Labour Centre EPIOP 31 October 2002. Szombathely, County Hall ROP as above South-Transdanubia Region ROP 29 October 2002. Pécs, Hotel Pátria North-Hungary Region North-Plain Region ECOP, AROP, HRDOP, EPIOP, ROP ECOP, AROP, HRDOP, EPIOP, ROP 6 November 2002. Miskolc, Pannónia Conference Room 4 November 2002. Debrecen Academy Committee (DAC) Headquarters South-Plain Region EPIOP 4 November 2002. Békéscsaba - Jókai Theatre OPARD 5 November 2002. Hódmezõvásárhely Hotel Fekete Sas HRDOP 6 November 2002. Szeged - MTESZ Headquarters ECOP 7 November 2002. Kecskemét Incubator house ROP All date indicated above Balaton Region ECOP, AROP, HRDOP, EPIOP, ROP 7 November 2002. Siófok, City Hall 280

APPENDIX 2 National Regional Development Council Budapest, 25 March 2003 STATEMENT The National Regional Development Council has discussed the final version of National Development Plan to be submitted to the European Commission and took the following position: 1. Regional partners had an active and important role in the preparation of the National Development Plan. Since September 2002, the Hungarian Government has conducted a continuous and thorough consultation process with Regional Development Councils, local authorities, and other social, economic and non-governmental partner organisations about the strategy of the National Development Plan, its Regional Operational Programme and other relevant chapters. The partners in National Regional Development Council stated that their opinion had highly contributed to the contents and quality of the document. 2. The regional partners in National Regional Development Council highly appreciate the governments willingness to co-operate during the process of drafting the NDP. The Government applied the principle of partnership related to the implementation of EU Structural and Cohesion Funds and declared its commitment to continue the co-operation. 3. The regional partners in National Regional Development Council give their consent to the content of the situation analysis and strategy of the National Development Plan, and agree with the general objectives and targets of the Regional Operational Programme. At the same time, partners in NRDC regret that opportunities for inclusion of regional characteristics and decentralised implementation have been limited. 4. The regional partners in National Regional Development Council expressed their willingness to continue the co-operation that started in the planning phase of the NDP. 1

They also consider necessary to enforce the principle of partnership, direct and continuous participation in the establishment of the institutional system, preparation of support management as well as the establishment and operation of monitoring committees. The National Regional Development Council urges that regions and other regional development representatives participate beyond the Regional Operational Programme - in the process of content harmonisation of the other four Operational Programmes about issues relating to regional development, as well as in the implementation of Operational Programmes in general. 5. The willingness of regional partners in National Regional Development Council and the Government to co-operate extends EU Structural and Cohesion Funds. Hungary, as an EU Member State, intends to effectively formulate the new regulations relating to the budgetary period starting in 2007, especially considering regional support management and implementation. Signed by: Zoltán Kis Bódog (on behalf of the Council) Ferenc Kékes Dr. (on behalf of the Council) István Kolber Dr. (on behalf of the Council) Gábor Szabó (on behalf of the Council) József Frank Dr. (on behalf of the Council) Péter Kiss (on behalf of the Government) Sándor Nagy Dr. (on behalf of the Government) 2

APPENDIX 3 National Council for Interest Reconciliation Budapest, 24 March 2003 STATEMENT The National Council for Interest Reconciliation (NCIR), the representatives of trade unions, employers organisations and the Hungarian Government discussed the final contents of National Development Plan to be submitted to the European Commission and took the following position: 6. The Hungarian Government conducted a continuous and thorough consultation process about the strategy of the National Development Plan (NDP), the Operational Programmes and other relevant chapters. The social partners in National Council for Interest Reconciliation confirm that the operation of NCIR s National Development Plan Committee, founded during the initial phase of co-operation, contributed to the content and quality of the document. 7. The social partners in the National Council for Interest Reconciliation consider the governments willingness to co-operate during the process of NDP s preparation as highly important. The Government applied the principle of partnership related to the implementation of EU Structural and Cohesion Funds and declared its commitment to continue the tripartite co-operation. 8. The social partners in the National Council for Interest Reconciliation give their consent to the content of the situation analysis and strategy of the National Development Plan, and agree with the general objectives and targets of the Operational Programmes. 1

9. The social partners in National Council for Interest Reconciliation agree on the importance of continuous co-operation that started in the planning phase of the NDP. They also consider necessary to enforce the principle of partnership, direct and continuous participation in the establishment of the institutional system, preparation of support management as well as establishment and operation of monitoring committees. In these processes, the Government gives a high priority to social partners. 10. The aim of social partners in the National Council for Interest Reconciliation and the Government is to extend co-operation with regard to EU Structural and Cohesion Funds. Hungary, as an EU Member State, intends to effectively formulate the new regulations relating to the budgetary period starting in 2007, especially considering regional support management and implementation. Signed by: dr. László KUTI (on behalf of the trade unions) Antal CSUPORT (on behalf of the employers) Gábor CSIZMÁR (on behalf of the Government) 2

APPENDIX 4 Mr. Etele Baráth Government Representative Political State Secretary Prime Minister s Office National Development Plan and EU Support Office Ref. no. OKT 00053/2003. Budapest, 20 March 2003 Dear Mr. Baráth, At the request of the Ad-hoc Committee of the National Environment Protection Council, documentation of the National Development Plan was discussed on 20 th March 2003. In accordance with the debate the Committee took the following position: i) The National Development Plan (NDP) is not a general programme for Hungary s economic and social development. At the same time, the Council understands that the European Union desires and is capable of offering support for infrastructure development in projects established under this title. Thus, in the opinion of National Environment Protection Council (NEPC), the Plan is suitable for the achievement of the set goals, therefore the Council agrees to submit it to the European Commission. ii) The Council welcomes that the National Development Plan and EU Support Office puts a high priority on a wide consultation and information process in connection with the Plan. The NEPC, capable by its distinctive composition to assess public opinion, is an important participant of this interactive consultation process. iii) The National Development Plan and EU Support Office has committed itself to carry out an ex ante evaluation on the NDP (LIII/1995.) that is appreciated by the Council. The Committee considers this process highly important, and intends to 1

give an opinion on the report relating to the long-term impacts of NDP on environment and on the institutional system for environmental protection. iv) The Committee states that sustainability should be given a high priority in the implementation process of the Operational Programmes of NDP. v) NEPC proposes to present based on the completed and agreed expert study - a realistic picture in the situation analysis about the quality of environment in Hungary and not to add darker shades to it in order to obtain desired EU support, as it could turn out to be detrimental for the country on a longer term. It is important to communicate that the heritage of Hungarian environmental and natural resources is for the benefit of the European Union in general. vi) vii) Development of public transport should be represented among NDP s priorities not only in the interest of environmental protection but also ameliorating of conditions which assure mobility in labour market. The Committee proposes to use the preparation of the Comprehensive Development Plan for the establishment of an analytical mechanism in sectoral consultation wherein conceptions of environment and sustainability enjoy a high priority. The aforementioned sectoral consultation process should be relevant in a rolling planning process in order to ensure ongoing consultation with the NEPC. Sincerely yours, Miklós Bulla Dr. Chief Secretary National Environment Protection Council 2