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U.S. Department of State

Diplomacy in Action

III. Regional Programs


U.S. Government Assistance to Eastern Europe under the Support for East European Democracy (SEED) Act
Bureau of European and Eurasian Affairs
January 2006
Report
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REGIONAL ASSISTANCE PROGRAMS

U.S. STRATEGIC INTERESTS

The United States has a national interest in stabilizing Southeast Europe to prevent a return to the wars of the 1990's and build a Europe that is whole, free and at peace. The purpose of U.S. Government (USG) regional assistance is to stabilize Southeast Europe by getting countries to work together on common concerns, restore the economic and democratic links that Southeast Europe needs to make permanent its transition to democracies and market- based economies, address cross-border problems such as organized crime, and increase efficiency by involving two or more countries in assistance programs. Through regional programs that bring together several USG partner countries, the United States pursues its interests in economic growth, trade, democratic reform, and reducing international criminal and terrorist threats to U.S. citizens.

KEY ISSUES

Regional assistance to the Western Balkans, an area of fragile democracies and struggling market economies, will continue to require USG support for some time. USG programs focus on helping these countries accelerate their integration into Euro-Atlantic institutions. For most regional assistance programs, the United States leverages its funding with money from European and other donors to support U.S. policy priorities.

DEMOCRATIC REFORM

U.S. ASSISTANCE PRIORITIES

The priority of regional democracy programs is to make democratic reforms achieved in bilateral assistance programs sustainable, e.g. helping non-governmental organizations become self-sustaining by working on a regional basis, and building ties between communities torn by war by getting civil society, media and other democratic institutions to work together across borders.

DEMOCRATIC REFORM PROGRAMS

Organization for Security and Cooperation in Europe (OSCE): FY 2005 was the first year that the USG regional assistance budget covered U.S. voluntary contributions to the Organization for Security and Cooperation in Europe (OSCE) and related expenses. For the SEED account, these new expenses totaled $28.8 million, which accounted for over half of regional SEED spending in FY 2005. Because funds in the FY 2005 SEED budget were insufficient, $25.6 million of OSCE costs were funded with FY 2004 USG assistance funds left over due to the non-certification of Serbia for assistance in FY 2004. The USG also provided the OSCE $3.4 million from FY 2005 USG regional assistance funds.

Fifty-seven percent of the SEED budget's contribution to the OSCE was for approximately $15 million in contributions and related expenses of OSCE Field Missions in Southeast European countries. USG assistance funds provided $5 million for the Office of the High Representative (OHR) in Bosnia and Herzegovina, and $3.2 million for bodyguards for three U.S. Foreign Service Officers working with the OSCE or OHR in Bosnia. USG assistance funds provided $3.6 million in FY 2005 to support U.S. election observers and secondees to OSCE organizations. SEED assistance also provided $ 2 million to the OSCE in extra-budgetary project contributions for projects ranging from promotion of human rights, democracy and development of a vibrant civil society to improving good governance/rule of law, and enhancing OSCE countries' counter-terrorism collaboration.

In FY 2005, the U.S. contribution was for OSCE Mission activities in Albania, Bosnia and Herzegovina, Macedonia, and Serbia and Montenegro and Kosovo. The United States joined other donors in supporting these missions, with the United States paying 14 percent of the total costs. EUR/ACE made U.S. Embassies and USAID Missions in these countries aware of law enforcement, economic and democracy assistance programs run by OSCE Field Missions in order to improve coordination with U.S. assistance programs.

The Kosovo Mission (OMIK) is the largest of the OSCE missions. OSCE activities in Kosovo in 2005 remained focused on continued support of the United Nations' Mission in Kosovo (UNMIK) in building civil society structures. OMIK worked with the Provisional Institutions of Self Government to develop and meet standards for functioning democratic institutions, property rights, media law, minority protection and decentralization. The police training facility directed by OMIK is one of the most respected institutions in Kosovo, according to opinion polls. As local capacity grows, OMIK has begun to hand off key functions such as the media commission and ombudsman.

The overall objectives of the OSCE Mission in Serbia and Montenegro in 2005 remained unchanged. The Mission continued to promote reconciliation and regional cooperation, especially by addressing refugee and war crime issues. The Mission also played an important role in fostering stability and security, particularly in the former conflict area of South Serbia, by promoting tolerance and human and minority rights throughout the country, through community policing, and by working to strengthen institutions as all levels - State Union, Republics of Serbia and Montenegro, and municipalities. The Mission also played a key role in helping institutions meet international standards and in ensuring their implementation in areas such as law enforcement, rule of law, democratization, media, and economic and environmental affairs.

As a result of parliamentary elections in July 2005, Albania underwent its first orderly rotation of power between political parties. This was in marked contrast to from previous changes of government and is a reflection of the OSCE's success in helping build civic institutions and political structures. While the conduct of the elections themselves did not fully meet international standards, due to irregularities in counting and administration, the legal structures under which they were conducted are vastly improved from prior years as a result of intensive work by OSCE legal advisors and consultants. The OSCE mission in Tirana is now working closely with the newly elected parliament to introduce further reforms that will bring Albania into closer compliance with international norms, thereby adding to regional stability.

Croatia has become a success story, with its two-year old government continuing to implement legislation on property rights and the facilitation of minority returns, much of which was drafted with OSCE input. The OSCE mission in Croatia has draw-down plans in place that match the Croatian government's commitment to rule of law, civil society, media freedom and bringing persons suspected of war crimes to justice.

The OSCE in Macedonia is assisting the government with decentralization measures called for in the Ohrid Framework Agreement and with the development of anti-corruption programs.

In FY 2005, USG assistance also funded several OSCE extra-budgetary projects ranging from promotion of human rights, democracy, and the development of a vibrant civil society to improving good governance/rule of law, and enhancing OSCE countries' counter-terrorism collaboration. These projects included approximately $15,000 of SEED funds that combined with $115,000 from the Freedom Support Act to provide assistance to the Office for Democratic Institutions and Human Rights (ODHIR). Early contributions allowed ODIHR's nascent Program on Tolerance and Non-Discrimination, whose creation itself was a major U.S. policy goal, to hire an expert staff and to launch "Informationline," an on-line database collecting information on hate-crimes legislation and incidents from the 55 OSCE participating States. "Informationline" provides governments and non-governmental organizations (NGOs) with a way to search for statistics and good practices for combating anti-Semitism, racism, xenophobia and other forms of intolerance, all of which are potential sources of conflict as well as threats to individuals and to international security.

USAID Regional Democracy and Governance: Thirty-six percent of the FY 2005 regional SEED assistance budget ($11.8 million) went to USAID programs. Of this amount, USAID spent $792,000 on democratic institutions and $4.1 million on cross-cutting programs.

This funding supported key metrics that permit USAID, the State Department, Congress, and partners to identify progress towards attaining the President and Congress's goals in promoting democratic societies. In 2005, USAID funded three key analytical tools: Nations in Transit, which provides an overall evaluation of democratic progress in the each country of the European and Eurasian region, the NGO Sustainability Index, which looks more in-depth at the progress of civil society sustainability, and the Media Sustainability Index, which measures media sustainability. These tools provided the basic data for USAID's Monitoring Country Progress reporting that USAID shared with both the Office of Management and Budget and Congress as the basis for making key country programming and strategy decisions. They are also used extensively by our USAID missions to make strategic programming decisions, such as where to focus Democracy and Governance resources in a particular country to fill gaps shown by the data.

Nations in Transit (NIT), produced by Freedom House, is an annual progress report on the status of democratic reforms in 27 European and Eurasian countries. USAID, the State Department, and other U.S. Government entities regularly use NIT measures as indicators to monitor country progress. NIT was used as the principal benchmarking instrument for determining phase-out dates for democracy assistance in the region. Freedom House published the ninth edition of NIT in 2005. In the past year, at the request of USAID, Freedom House added a distinct local governance score and sub-section to its country narratives. Interest and demand in NIT continues to grow, both in the United States and in Europe. Both governmental and non-governmental leaders from Europe have requested information about NIT's findings, as well as recommendations on changes needed to improve their scores.

The NGO Sustainability Index (NGOSI) is a comprehensive and comparative research tool that tracks the strength and viability of NGO's in Europe and Eurasia. The Index measures seven different dimensions of NGO sustainability, including legal environment, organizational capacity, advocacy, financial viability, service provision, infrastructure, and public image. The Index provides a wide-ranging and in-depth analysis of the NGO sector in each country, and it is used by both Embassies and USAID missions for strategic planning and performance monitoring purposes. Unlike Nations in Transit, the Index focuses on the sustainability of the sector and can thus be used for country-specific program design, to cover gaps in sustainability. Its long-term nature (2005 will be its 9th year) makes it an unparalleled source for information on NGO trends in Europe and Eurasia. The 2004 Index (published in 2005) included three analytical papers, including a report on Lessons Learned in NGO Financial Viability.

The USAID Regional Media Program, implemented by International Research and Exchanges Board (IREX), focuses on regional, cross-border activities that support development of independent media throughout Europe and Eurasia. The program provides an integrated management architecture that facilitates and promotes country-specific and cross-regional learning in five key areas of media sector development: investigative reporting, regional media law issues, media business sustainability, local television production, and the improvement of professional standards. A key component is the Media Sustainability Index, which has achieved wide recognition among media professionals as one of the best sources of information on media systems in Europe and Eurasia. Most USAID Missions use the MSI as the basis for their media program indicators; media development professionals regularly cite the index as a source document; and the index has helped other donors craft comprehensive media development strategies.

CDRSEE: In FY 2005, USAID funding supported the Joint History and Reconciliation Project, implemented by Center for Development and Reconciliation for South Eastern Europe (CDRSEE). The project promotes and strengthens the process of reconciliation in Southeast Europe. Through a collaborative, multicultural process involving input from more than 80 experts, the project has developed four history workbooks in English (the Ottoman Empire, Balkan Wars, Creation of New Balkan States, and World War II) for improving the teaching of history at the primary and secondary levels. The manner in which history is taught is at the center of nation-building processes, particularly for democratizing states. By adopting a unified and multifaceted approach to portraying contentious historical developments, this Joint History Project is making a very important contribution to promoting respect for ethnic and religious diversity, which in turn contributes to regional stability and economic development. The most notable achievement for 2005 has been an official launch of the Serbian language workbooks by the Serbian Minister of Education. This event will also receive recognition at a Stability Pact event in February 2006.

Non-USAID Democracy Assistance Programs

Stability Pact for Southeast Europe: The Stability Pact has been an important component of U.S. cooperation with the European Union (EU) to promote peace and stability in Southeast Europe and further integrate the region into European and trans-Atlantic institutions. Over 90 percent of support through the Stability Pact has come from European countries. Multiple donors support virtually all Stability Pact programs. Since it was launched in the summer of 1999, the Pact has helped foster regional cooperation. In FY 2005, the Stability Pact began to consider how to make regional cooperation sustainable in Southeast Europe rather than dependent on donor initiatives. The United States urged the Stability Pact to prioritize its initiatives and focus on those initiatives that Southeast European countries view as being of sufficient value for the countries themselves to sustain. The Stability Pact agreed with the United States on the need to use Pact initiatives to foster integration of Kosovo into regional activities in compliance with UN Security Council Resolution 1244. In FY 2005, the $210,000 in U.S. support to the Stability Pact Secretariat in Brussels focused on salaries and administrative costs for Southeast European nationals to work at Stability Pact headquarters.

In FY 2005, U.S. support to Stability Pact democracy initiatives included $100,000 from USAID to the Stability Pact Media Task Force. During this year, the Task Force's efforts to initiate and promote the development of media legislation led to the adoption of the new Broadcast Law in the Republic of Macedonia.

Alumni Outreach Program: In order to maximize the long-term benefits of USG training and exchanges, USG Assistance provided small grant funding for alumni from these programs. Embassy Public Affairs Officers in Southeast Europe used $150,000 in FY 2005 in USG assistance funds to maintain contact and encourage networking among alumni. Grants to both individual alumni and regional alumni associations support a broad array of activities focused on democratic advancement and economic reform. For example, a grant to a youth leadership alumni group brought together over 200 high school students from across the region for a leadership conference. Alumni grants provide the opportunity for alumni to maintain the knowledge and skills gained during exchange and training programs and to disseminate these lessons to the broader population through training, seminars, and publications.

National Endowment for Democracy: In FY 2005, the National Endowment for Democracy (NED) received $2.6 million in USG assistance funding. During FY 2005, the NED awarded 44 grants to non-governmental organizations working in Southeastern Europe. Grants focused on working with youth, including encouraging youth participation in the political process and educating first-time voters, providing training for young journalists, organizing mock parliamentary debates for members of the youth wings of political parties, training youth leaders of minority populations, and promoting civic participation among youth. Independent media projects worked to improve the media environment by providing targeted assistance to local and multiethnic media organizations, supporting investigative journalism projects, assisting media monitoring groups to advocate for freedom of information and other media reform laws, and assisting media programs seeking to raise the awareness of citizens in ex-Yugoslav countries about the events of the last decade, in particular the Milosevic regime's role in the wars in Croatia, Bosnia and Kosovo. Other projects included promoting local government accountability, strengthening the civic sector, monitoring human rights, promoting the rule of law through the adoption and implementation of legal reforms, and promoting freedom of association.

Title VIII: The Title VIII Program used $1.6 million in USG assistance funds to support advanced research, junior scholar training seminars, graduate training, dissertation workshops, research labs, library resources, and public dissemination of research data and findings on Southeast Europe, as well as specialized training in the languages of the region. Seven grants were awarded to organizations to carry out national, merit-based competitions to distribute these funds to individual scholars and institutions. Title VIII awardees conduct policy relevant research overseas and in U.S. academic centers or think tanks. A few examples of research currently in progress are "Women and Election Law: Civil Society in the Balkans," "The Serbian Radical Party's Recent Success in Serbian Municipal Elections," and "The Miniskirt or the Veil: Gender, International Aid, and Islamic Revivalism on the Edge of Europe." This year language training programs included Bosnian, Bulgarian, Romanian and Serbian, and students are expected to enter into language programs in other Southeast European languages this year. The Title VIII Program brings this expertise to the service of the U.S. Government through policy forums, research summaries, policy briefs and by facilitating connections among non-government scholars, and USG officials. For example, policy forums this year on Southeast Europe topics included "Regional Military Cooperation in North and Central Europe" and "Youth in Transition: Eurasia and Central East Europe."

ECONOMIC REFORM

U.S. ASSISTANCE PRIORITIES

To make market economies viable in the small countries of the Western Balkans by building the economic, business and trade links required for sustainability of economic reforms.

ECONOMIC REFORM PROGRAMS

USAID Regional Economic and Environment Programs

Approximately $4.5 million of FY 2005 regional SEED funds allocated to USAID were used for economic or environmental programs.

Regional Competitiveness Initiative (RCI): USAID programs throughout Southeast Europe stimulated economic growth through increased competitiveness of businesses and industries, and through an improved economic environment. These efforts addressed the challenges of developing enterprise-level productive capabilities in the individual countries to enable them to compete and further integrate in European and world markets.

RCI focused on agriculture/agribusiness, information technology, and rural tourism. A key element of RCI is the Centers for Entrepreneurship and Enterprise Development (CEED). As a legacy program, CEED ensures that support for economic reform continues after U.S. assistance ends. CEED improves business knowledge and practices for growing enterprises, and creates a network of growth-oriented enterprises throughout the region. Since FY 2005 was the first year of RCI, much of the work was preparing the ground for future successes.

RCI activities in Romania, Serbia, Macedonia, Albania, Bosnia, and Kosovo were brought together to develop an integrated agricultural product supply chain to serve supermarkets in the region. As the regional supply chains are upgraded and strengthened, producers in Southeast Europe can sell to the supermarkets in the region, and then increase sales in the rest of Europe. RCI activities in Bulgaria, Macedonia, Serbia, and Romania are also collaborating on an effort to upgrade production standards for local software companies.

Partners for Financial Stability Program (PFS): Financial sector reform is a high priority in the region. PFS accelerated the development of sound, well-functioning financial sectors through activities that supplement and leverage bilateral mission programs. It recognized that the countries in Europe face similar challenges that can be cost-effectively addressed by sharing knowledge and collaborating on implementing international standards and best practices.

Through multi-country workshops and training on technical financial sector issues and the strengthening of economic/business institutions, associations, working groups and networks that work cross-border, PFS promoted a more dynamic, effective and integrated set of financial markets.

In 2005, the geographical focus of PFS shifted from the eight Central and Eastern European countries (where the program began in 1999) to Southeast Europe. The South Eastern European (SEE) countries are particularly interested in working with their Central Eastern European (CEE) counterparts. Insurance regulators from several SEE financial sector regulatory authorities studied the practices of the Polish Insurance and Pension Regulator. A training program on internal audit for SEE Central Banks was held. SEE economics research institutes met to discuss key cross-border issues and potential collaboration to build first-class economic research capabilities in the region. Partners for Financial Stability continued its groundbreaking series of anti-money laundering seminars, which bring together judges, prosecutors and financial intelligence units in the region to discuss practical ways to cooperate to enforce new anti-money laundering laws. PFS published its fifth "Survey of Reporting on Corporate Social Responsibility" of the largest listed companies in eleven SEE and CEE countries in September 2005. This survey, the first of its kind in the region, is widely reported on by international and local business publications, raising investor interest in the region. PFS also entered into arrangements with numerous CEE financial sector partners to provide training and advisory services to their SEE counterparts in 2006.

Regional Transparency and Accountability - Anti-corruption and Regional Financial Transparency: In FY 2005, USAID supported development and use of new tools to promote transparency, accountability, good governance, and compliance with global financial reporting standards throughout the region. The following anti-corruption tools were developed, tested, and disseminated to USAID field missions and other interested parties: a handbook for assessing corruption and integrity in governmental institutions; a model scope of work that provides a template for assessing corruption and integrity; an anti-corruption quick reference source that summarizes key publications on corruption and anti-corruption programs; and a supporting analytical framework for combating corruption and promoting integrity in the Europe and Eurasia region based on transparency, accountability, prevention, enforcement, and education. Additionally, working with the South Eastern European Partnership on Accountancy Development regional association and individual members, USAID addressed the enormous regional challenge of implementing International Financial Reporting Standards, International Standards in Auditing, and International Education Standards. A pilot project developed an innovative assessment tool for determining compliance with international standards to improve financial transparency and accountability, promote global harmonization, and accelerate economic integration.

Stability Pact Energy Community for Southeast Europe: A major milestone in USAID support for the Stability Pact was reached in October 2005 with the signing of the Energy Community for Southeast Europe Treaty. This was the first legal agreement among the Balkan countries since the wars. The treaty creates a common market for electricity and natural gas that will eventually be linked to European Union countries. The signatory states agreed to adopt the European Commission (EC) directives in energy, environment and competition and to achieve non-residential energy market opening by 2008. USAID assistance helped develop sound legal and regulatory frameworks and professional utility commissions in virtually every country in the region. USAID supported the development of a regional electricity transmission planning group that identified critical bottlenecks to trade and investment and improved reliability and security of grid operations. A similar group was initiated focusing on improved national energy planning, with special emphasis on energy demand changes and energy efficiency investments. USAID also supported regional electricity market design and monitoring.

Energy Regulators Regional Association: The Energy Regulators Regional Association (ERRA), established in 2001, has 23 member national energy regulatory agencies and 4 affiliate members. The seven member Presidium is headed by an elected President, currently from Bulgaria. ERRA's objectives include: improved energy regulation in member countries; increased cooperation, communication and exchange of information; and access to U.S. and other best practices. ERRA is currently focusing on developing replicable training course modules for both classroom and E-learning formats. USAID supports ERRA through a cooperative agreement with the US National Association of Regulatory Utility Commissioners.

Energy Efficiency - Clean Energy - Heating: In the context of Stability Pact assistance, USAID provided a regional approach supporting energy efficiency, clean energy, and improved heating in the municipal and residential sectors. Specific applications included hospitals, schools, public buildings, housing, and improvements in the supply and use of heat. These applications will help reduce the significant heat and energy costs on municipal budgets (typically 10 percent to 30 percent in this region). Specific activities addressed energy efficiency pilot projects in municipalities and households that can be replicated throughout the region as well as promoting the use of energy efficiency as part of social safety net systems for vulnerable households. For example, in Macedonia, USAID worked with three municipalities to help control energy costs through energy efficiency in Macedonia schools. The program responded to the policy reform that in summer 2005 gave municipalities new authority for municipal services and responsibility to pay for their costs, including energy.

Private Enterprise Partnership - Southeast Europe Infrastructure: In 2005, USAID completed the process of creating a legacy institution designed to promote private sector investment in Southeast Europe's infrastructure long after U.S. assistance ends. This facility is jointly funded by the United States ($1.5 million) and the International Finance Corporation (IFC) ($1.5 million) with the balance of the current $8.5 million in funds coming from various European nations (Austria, Italy, the Netherlands, Norway, and Switzerland). Managed by the IFC and located in Sofia, this new facility is designed to provide the engineering, financial structuring and legal assistance to facilitate private sector financing.

Infrastructure Reform and Finance Project: FY 2005 saw the initiation of this new project designed to support Missions with analytical resources in evaluating and identifying key opportunities in the infrastructure sector (water, energy, transport and telecommunications). The Project has prepared or initiated country studies to support Mission strategy development in five countries, including Serbia and Bosnia. The project also engages in catalytic work intended to promote the early adoption of new techniques for financing and managing infrastructure in the region. For example, Montenegro is moving aggressively to develop and capitalize a revolving fund with multi-donor supporters including the German development bank KfW, the US Trade Development Agency and USAID.

Stability Pact Sava River Commission: In a development heralded as an example of multi-country cooperation in a difficult region, USAID succeeded in marking the final stages of creation of a basin commission to manage navigation, trade, flooding and water quality on the Sava River. The Sava is a tributary of the Danube River which drains large parts of four nations of the former Yugoslavia: Croatia, Bosnia and Herzegovina, Serbia and Montenegro and Slovenia. The United States, through USAID and State Department funding, provided the technical assistance needed to sign and ratify a treaty for management of this key waterway. An aggressive action plan has been developed to support restored navigation, trade, port reconstruction and flood protection, as well as providing for protection of natural and water quality resources in the basin.

Non-USAID Economic Programs

Stability Pact Trade Working Group: The Commercial Law and Development Program (CLDP) of the Department of Commerce received $400,000 in regional SEED funds during FY 2005 to support Stability Pact efforts to help Southeast European countries reduce barriers to trade, while building mechanisms for increased international and regional trade. The CLDP program contributed significantly to the development of a regional network of 31 Free Trade Agreements (FTA), which now link all Southeastern European countries of the Stability Pact, and connect UNMIK/Kosovo with Bosnia, Macedonia and Albania. In June 2005, Southeast European countries, plus UNMIK/Kosovo and Moldova, adopted a plan to reduce non-tariff trade barriers and transform the network of bilateral FTA's into a single agreement. CLDP financial support to this effort has helped ensure U.S. business interests are adequately addressed as the agreement develops. The ultimate goal of a single FTA is to establish a regional market of 55 million consumers and create better conditions for private investment and economic growth.

In FY 2005, CLDP continued technical assistance to ensure implementation of the FTA's, elimination of non-tariff barriers and conformity with the rules of the World Trade Organization (WTO). CLDP helped Southeast European countries form Working Groups on animal health, plant health and food safety to jointly deal with disease outbreaks and barriers to trade. In December 2005, the Animal Health Working Group organized a regional discussion on responding to avian flu. Through these Working Groups, CLDP promoted increased regional cooperation, and worked with ministry representatives on conforming to international standards mandated by the WTO through the agreement on Sanitary and Phytosanitary Measures. CLDP also continued to assist Southeast European countries, plus Moldova and UNMIK/Kosovo, to achieve regional cooperation towards the goals of simplification and harmonization of customs procedures.

Stability Pact OECD Investment Compact: In FY 2005, $200,000 in USG assistance funds supported OECD activities to implement the Stability Pact's Investment Compact for Reform, Investment, Integrity, and Growth. These activities included technical assistance and promotional events. The Investment Compact's objective is to lay the economic and structural policy foundations for sustained growth and development in Southeastern Europe. In FY 2005, the Compact adopted a new strategy for improving reform implementation and investment promotion through regional cooperation, including enhancing monitoring and peer reviews, better public/private dialog and support for Parliaments. The peer review and monitoring mechanism built into the Compact were instrumental in keeping Southeastern European governments focused on necessary economic reforms. The development of local Foreign Investors Councils (FICs) strengthened private sector involvement in the reform process and has brought constructive, practical advice. Several FICs produced "White Books" on the investment climate in their respective countries and presented these reports to governments as input to policy development. In July 2004, an independent evaluation of the Investment Compact by AT Kearney confirmed that the Compact is a good value for the money "that has clearly contributed to improvement in the investment environment and increasing private investment and employment in the region."

Stability Pact Disaster Preparedness and Prevention Initiative: The Stability Pact Disaster Preparedness and Prevention Initiative (DPPI) provides a framework for developing regional cooperation in cases of fire, flood, earthquakes, and other natural disasters. In concert with contributions from the governments of Switzerland and Norway, the United States provided $100,000 in USG assistance funds in FY 2005 to help fund the operations of a two-person expert DPPI Secretariat and support a number of specific projects. U.S. donations supported the transfer of DPPI to ownership by the countries of Southeast Europe through the transfer of the DPPI Secretariat to Bosnia and Herzegovina from Brussels. In FY 2005, DPPI helped Bosnia and Herzegovina, Croatia and Serbia and Montenegro agree at the expert level on border-crossing procedures and protocols to facilitate a joint response capability by the Joint Fire-Fighting Unit (JFFU) that these countries formed during FY 2004. DPPI-organized training during FY 2005 included disaster management, regional disaster response, and seismological hazard monitoring. DPPI's Flood Management Course was organized as the first phase of a project developed by Hungary to establish emergency response units in the case of flood in countries of the Sava-Danube basin.

SOCIAL REFORM AND HUMANITARIAN ASSISTANCE

U.S. ASSISTANCE PRIORITIES

Premature and unnecessary adult deaths and disability undermine and threaten U.S. goals in national security, economic and democratic transition and social disability as workforces are diminished and weakened, households are broken up, and families are impoverished. The inability of governments to deliver essential health, education, and other social services undermines citizen trust and respect for government. Regional health programs address some of the critical health issues that know no boundaries and make U.S. bilateral investments in health more cost- effective by analyzing critical issues, identifying best practices and sharing experience within the region. This sharing of regional expertise and experience has been particularly effective in securing policy change, spurring host country action and leveraging outside resources.

SOCIAL REFORM AND HUMANITARIAN ASSISTANCE PROGRAMS

In FY 2005, USAID provided $2.3 million for sustainable social services and social impact of transition. This support included four regional health projects in Eastern Europe.

Regional Health Analysis and Outreach Initiative: Each year, USAID selects a few critical health issues for further investigation and information sharing. In 2005, these included:

Access to Family Planning Services: The highest recorded abortion rates in the world occur in Eastern Europe and Eurasia. Some women have as many as 18 to 20 abortions in their lifetime. To combat this each year Congress has identified two Eastern European countries, Albania and Romania, as priorities for reprogrammed family planning (FP) dollars if they maintained their current level of effort in family planning. This has resulted in $9.7 million in supplemental non-SEED funding since 2004. Most of the funds have gone to Romania to help that country roll out its successful family planning program nationally. The result has been that the national abortion rate dropped from 3.4 to 0.84. Romania is now playing an important role as a model and guide for the full region. To build upon these gains with regional funding, USAID brought together government officials from eight countries to Romania. As a direct result of this visit to Romania, both the Governments of Georgia and Ukraine changed their national family planning policies to increase access to family planning and contraceptives, and are using Romanian experts to advise them on the implementation of their programs.

Improved HIV/AIDS Surveillance and Systems: While some of the fastest growing rates of HIV/AIDS infection occur in Eastern Europe and Eurasia, current surveillance and health service delivery systems are inadequate to track and respond effectively to the epidemic or to qualify for critical donor support such as that available through the Global Fund for Aids, Tuberculosis and Malaria (GFATM). These concerns prompted two regionally-funded studies in 2005. The first reviewed existing country surveillance systems and developed a manual which provides guidance on how countries with different resource levels can improve their tracking of the epidemics and develop the information they need to qualify for GFATM funds. A second study completed in late 2005 examined the health systems required for countries to implement and manage national HIV/AIDS prevention and treatment programs and GFATM grants.

Strategic Health Interventions: Each year, USAID supports a few regional health interventions which build upon common needs, challenges and lessons learned. These include:

Southeastern Europe HIV/AIDS Initiative: Working with governments and non-governmental organizations (NGOs), this program developed the first HIV/AIDS prevention programs in Bosnia, Croatia, Bulgaria, Macedonia and Romania. These programs targeted those most at risk and built upon shared learning in the region on how to contain the epidemic. Since U.S. assistance will end shortly in most of these countries, the focus in 2005 and 2006 is on working with the NGOs and governments to build a legacy and ensure the sustainability of these programs.

Global Fund Grants: This activity built upon regional experience to help countries prepare winning grant proposals to the Global Fund for AIDS, Tuberculosis and Malaria (GFATM), meet the criteria for the initial disbursement of the first two years of funding and successfully manage and report on their programs to qualify for the final three years of funding. With this assistance, ten countries in Eastern Europe successfully competed for 16 GFATM HIV and TB grants with a total value of $119 million. Regional funds were used to provide both training and direct technical assistance in the preparation or revision of grant applications, establishment of data bases and monitoring and evaluation systems, and the procurement and management of coordinating and oversight systems. This assistance has helped ensure that no Eastern European GFATAM grants were included in GFTAM's considerable list of non-performing grants in 2005.

Preventing and Managing Multi-drug resistant Tuberculosis (MDR-TB): Building on the earlier U.S. achievement in establishing a regional center of excellence in diagnosis and treatment of MDR-TB in Latvia, USAID worked with WHO to provide regional training and other assistance to ensure effective and compatible control and treatment plans for MDR-TB.

Prevention of Iodine Deficiency Disorder (IDD): IDD is the world's leading cause of preventable mental retardation. UNICEF and the U.S. Congress have made the Europe Eurasia region a priority for prevention of IDD, because a lower proportion of households in this region have access to iodized salt. Since USAID initiated the regional grant to UNICEF in 2000, the number of households in E&E consuming iodized salt has increased from 26 percent in 2000 to 52 percent currently. In Romania, the number of households using iodized salt has increased from 52 percent to 90 percent over the past five years. More than half of newborns in the region are now protected from brain damage due to iodine deficiency.

American International Health Alliance (AIHA) CEE: USAID's 2005 assessment of the development impact of USAID/AIHA partnership programs in Central and Eastern Europe found that the partnership approach had produced lasting results in the adoption of evidence-based medicine, engagement with the global health community, changed roles of health providers, especially nurses, and adoption of Western practices such as public-private collaboration and volunteerism.

Analytic Task Force (ATF) - Social Transition: The Analytic Taskforce is the principal vehicle used by USAID's Europe and Eurasia Bureau to access expertise, analysis, and logistical support in the social sector. Its purpose is to discern where East European countries are advancing toward phase-out goals in the social sector, or where a lack of progress could undermine related USG transition goals. ATF activities were principally divided into two categories - analysis and legacy.

Analytical Agenda: In 2005, the analytical agenda included analysis and written products on the following issues: (a) an updated comparison of cross-country education sector trends that supplements human capital data in the Bureau's Monitoring Country Progress reports; (b) in-depth analyses of education sectors in four countries, based on the identified vulnerabilities from the comparative cross-country education trends; (c) promising practices in community-based social services in CEE/CIS/Baltics; (d) assessment of vulnerable groups; (e) cross-country analysis of gender disparity; and (f) a study of the importance of social sector investments for promoting economic growth and advancement of democracy. These studies are shared with the missions and inform strategy development and project design.

Legacy activities: Legacy activities are designed to promote local capacity in the region to carry out social sector research and advocacy through establishing and strengthening networks of specialists who can gather and disseminate best practices and adapt them to individual country circumstances. In 2005, USAID European and Eurasian Bureau Social Transition team held the first Social Sector Think Tank Workshop that brought together social sector researchers from the region. This legacy activity is supported by a dedicated listserv for further promoting the exchange of information, research, interpersonal contacts, and advocacy on social sector issues. A follow-on activity in 2006 will establish an advisory council and set an agenda for a grants competition to stimulate research in high priority but underserved social sector areas.

Creating Caring and Responsible Classrooms (Values Grant): is a partnership between a US NGO (Children's Resources International) and local NGOs in Romania, Bulgaria, Ukraine, and Russia that implements morning meetings for elementary school children in order to influence democratic societal outcomes. In a two-year period, CRI trained 25,314 teachers and 857 principals and other school administrators in Romania and Bulgaria on how to conduct the practice of "Morning Meeting" in classrooms. Across SEED and FSA countries, the number of individuals who were trained exceeded the target goals of the project by over 8,000 trainees. Trainers continue to receive requests to hold additional trainings, even though the project is ending. A Morning Meeting Handbook and a Facilitators' Guide were developed and translated into languages appropriate to the countries that participated in this project. Overall, 27,000 copies of the Handbook and 900 copies of the Guide were distributed in Romania and Bulgaria. NGOs in each country have established Morning Meeting websites and will post Morning Meeting materials so that they may be easily accessible.

Strengthening the Youth Sector: FY2005 was the last year of the project implemented by the International Youth Foundation (IYF), designed to develop IYF's regional partner, the Balkan Children and Youth Foundation (BCYF); and to strengthen 400 NGOs serving children and youth in the Balkan region (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, and Serbia and Montenegro including Kosovo).

By the end of the program, IYF had helped BCYF become a functional regional foundation led by a Board of Directors consisting of a distinguished group of leaders from government, business and civil society. BCYF provided technical assistance to 242 NGOs through national training programs, 181 NGOs through regional workshops and 210 NGOs through training sessions organized during the two Annual Balkan Youth Forums. BCYF supported 58 NGOs' participation in the exchange programs; and published three "What Works" books on tolerance building, youth employment and youth engagement, all together presenting strategies and lessons learned from 28 NGOs in the region. In the last year of the agreement, BCYF entered into a partnership with the Youth Business International (YBI), a unit of the Prince of Wales International Business Leaders Forum based in the UK, in a program that supports youth business entrepreneurship initiatives. Through this program, Youth Business Albania and Youth Business Bulgaria were launched.

SECURITY, REGIONAL STABILITY AND LAW ENFORCEMENT

U.S. ASSISTANCE PRIORITIES

To encourage Southeast European countries to work together to combat the common threat of organized crime, trafficking, terrorism and other security threats, and to work cooperatively with U.S. security and law enforcement officials to decrease threats to the U.S. homeland and other U.S. interests.

SECURITY, REGIONAL STABILITY, AND LAW ENFORCEMENT PROGRAMS

Southeast Europe Cooperative Initiative: The USG has supported two major SEED-funded projects that pursue a regional, cooperative approach to rule of law and border reform in Southeastern Europe: the Regional Center for Combating Transborder Crime (SECI Center) located in Bucharest, Romania, and the Trade and Transport Facilitation in Southeast Europe (TTFSE) program. Both were developed under the umbrella of the Southeast European Cooperative Initiative (SECI) that was launched with U.S. support in December 1996 to facilitate regional peace and stability through cooperative activities among the countries of Southeastern Europe and to lay the foundation for their integration into the rest of Europe. These SECI programs have provided a mechanism for the SECI participating states - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Greece, Hungary, Macedonia, Moldova, Romania, Slovenia, Turkey and, most recently, Serbia and Montenegro - to cooperate on a regional basis to solve trans-national problems. The United States is one of 15 countries with status as a permanent observer at SECI. The United Nations Mission to Kosovo (UNMIK) is one of four international organizations with permanent observer status at the SECI Center. Both projects have had a positive impact in the SECI region.

With increasing EU assistance in Southeast Europe - particularly in accession countries - USG assistance to these programs is changing substantially. The SECI Center has become a successful, regionally-owned institution that the U.S. will continue to support, but which will increasingly receive donor assistance from its immediate neighbors in the European Union. The TTFSE program will fulfill its primary goals in 2005, and U.S. assistance will wind down in conjunction with increasing EU assistance in the area of regional trade and transport facilitation.

Regional Center for Combating Transborder Crime (SECI Center): In FY 2005, $1.3 million in FY 2005 USG assistance funds and some remaining funds from FY 2004 were devoted to activities fighting cross-border crime through the Regional Center for Combating Transborder Crime (SECI Center) in Bucharest, Romania. Twelve SECI states are parties to an agreement to share information to combat transborder crime, under which they established the SECI Center. The SECI Center functions as a regional focal point for communication and transmission of "real time" law enforcement information on cross-border crime. It is staffed by 20 liaison officers (police and customs officers) from 12 states in Southeastern Europe, working closely with law enforcement experts from most of the countries of Western Europe, Russia, Poland, Georgia, Ukraine, Azerbaijan, the United States, and others. Liaison officers exchange law enforcement information related to transborder crime in the region and lead and coordinate operational task forces in the field. The Center's four primary task forces target narcotics, commercial fraud, human trafficking, and terrorism (which consists of financial crime, small arms trafficking, and Weapons of Mass Destruction). These task forces include experts from international organizations, supporting states, and the region.

Over the past year, the SECI Center, with the support of the Southeast European Prosecutors' Advisory Group (SEEPAG), made substantial progress in its efforts to become a more effective mechanism for coordinating international investigations and prosecutions. More cases are being prosecuted involving several countries and increasingly more sophisticated crime groups. For example, in early 2005, Operation Traveler - a human smuggling investigation involving several countries within the SECI region and beyond, resulted in the arrests of three alien smugglers in Romania and five in Hungary. This investigation is ongoing and likely will result in many more coordinated arrests. Similarly, Operation Nistru, an alien smuggling case involving Romania, Moldova, Hungary and Austria, has resulted in the arrests of approximately 65 individuals in Austria. The SECI Resident Legal Advisor from the U.S. Department of Justice, working closely with the Center and the SEEPAG, was instrumental in introducing the use of video conferencing equipment in a recent trial proceeding in Macedonia involving a human trafficking victim from Moldova. The SECI Center hopes to replicate the investigative and coordinating progress it has made in its human trafficking and alien smuggling task force in other areas, including drug trafficking and financial crimes.

USG support for the SECI Center was instrumental in facilitating cooperation among the states of Southeast Europe and in laying the foundation for their integration into the rest of Europe. The European Commission recommended increased EU support for the Center, leading to the objective of its eventual transformation into a Europol Regional Office. The United States supports the Center's integration into the structures of European Union law enforcement and Justice and Home Affairs, and welcomes increased donor activity on the part of the EU.

FY 2005 USG assistance funded a second year for an expert to the Center from the Department of Justice Office of Overseas Prosecutorial Development, Assistance and Training (DOJ/OPDAT). This Resident Legal Advisor provides guidance to help the Center cement its legal protocols, develop rules of information exchange such as Mutual Legal Assistance Treaties, and implement the SEEPAG, as well a witness/victim protection program.

In addition, FY 2005 USG assistance funding supported a Coordinator from the State Department's INL Bureau to oversee assistance to the SECI Center.

Trade and Transport Facilitation in Southeast Europe (TTFSE): This program addressed the need to achieve quicker, cheaper cross-border transit of goods in the region, while fighting smuggling and corruption at border stations. This multi-year effort with the World Bank and European counterparts provided technical assistance to participating countries to reform their customs services and facilitate trade in the region. U.S. funds were leveraged against about $80 million in World Bank loans for the physical improvement of border crossing facilities in the six participating countries.

Approximately $400,000 in FY 2005 USG assistance funds were provided for TTFSE, and with these funds the Department of Homeland Security's Bureau of Customs and Border Protection (CBP) provided technical assistance to customs projects in Montenegro and Serbia, while winding down activities in Albania, Bulgaria, Croatia, Macedonia and Romania.

Results of the TTFSE project have been impressive. The wait times for commercial vehicles was reduced by 73 percent since the start of the program at some ports. The number of physical examinations of commercial vehicles was reduced by 68 percent since the start of the program, causing an increased number of discrepancies detected in the cargo declarations submitted to the various customs administrations in the region. Revenue collection in the region increased by over 140 percent, which can at least be partially attributed to TTFSE. Duty collection procedures became more transparent as a result of the implementation of a single electronic cargo declaration window in the region. CBP conducted risk management and targeting for high risk cargo training throughout the region, and also developed valuation training for Romanian customs.

FY 2005 funding was the final year of funding for this project, except in Serbia and Montenegro, where advisors will continue to work on this issue. The United States has fulfilled its commitment to the World Bank project, and is working with them and the European Union to ensure continued progress in this area.

International Law Enforcement Academy (ILEA): In 1995, the U.S. and Government of Hungary opened a training academy in Budapest, Hungary for law enforcement officers from Europe and Eurasia, the International Law Enforcement Academy (ILEA). In FY 2005, USG dedicated $1,200,000 of FY 2005 USG assistance funds to support the ILEA programs in Budapest. ILEA hosts a law enforcement training course similar to the FBI National Academy program. The eight week core program is conducted for 50 students, in five sessions per year, for a total of 250 students per year. In FY 2005, the Academy trained law enforcement officials from seven Southeast European Countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, and Serbia and Montenegro. The core program developed skills in leadership, personnel and financial management, human rights, ethics, the rule of law, management of the investigative process, and other contemporary law enforcement issues. One hundred and twelve of the core program students were from Southeast European countries. In addition, ILEA supported three different types of programs sponsored by 16 U.S. law enforcement agencies: advanced programs, regional seminars and specialized training programs.

Stability Pact Organized Crime Initiative (SPOC): In November 2002, the Stability Pact sponsored the establishment of the Initiative to fight Organized Crime (SPOC). During FY 2005, the SPOC received support from the countries of Southeast Europe, Germany, and the United States. The United States provided $70,000 in FY 2004 USG assistance funds for technical and administrative support to improve SPOC operations and management. The SPOC works to strengthen regional anti-organized crime capacities, in accordance with internationally recognized standards. The initiative focuses on adopting policies, developing strategies, drafting legislation; developing multi-disciplinary, inter-agency coordination mechanisms; encouraging the establishment of specialized units; and enhancing regional and international cooperation. During FY 2005, with the encouragement of U.S. technical assistance and the U.S. Resident Legal Advisor at the SECI Center, SPOC focused on developing a Southeast European Prosecutors Advisory Group (SEEPAG) that would allow prosecutors to coordinate better in combating organized crime in the region. The establishment of SEEPAG will help bring to justice organized criminals through better communication between prosecutors offices in the region and collaboration with the SECI Center. The SPOC also worked to join forces with the SECI Center, offering a closer relationship with the European Union, and provided the Center with policy and legal advice. The SPOC plans to further integrate its operations into the SECI Center, furthering a goal of the United States and the Stability Pact, which is to convert its initiatives into self-sustaining regionally owned and regionally run organizations. This consolidation will also streamline regional efforts to combat organized crime by bringing together the SECI Center, the SEEPAG, and the Stability Pact's connections with the EU. It will be necessary to support this effort and look for concrete results from the SPOC in FY 2006 as the US supports Southeast Europe's efforts to combat organized crime.

SEED-FUNDED ENTERPRISE FUNDS

Congress authorized Enterprise Funds through the SEED Act of 1989. That Act established the Funds as unique "public-private partnerships," whose purpose was to invest USG funds to support the private sector and nascent market economies of Poland and Hungary. Subsequent Foreign Appropriations Acts and the Freedom Support Act extended the authorization to establish Funds in other Central and European countries, as well as in the New Independent States. There are ten Enterprise Funds, seven in Central Europe (Albania, the Baltic States, Bulgaria, Hungary, Poland, Romania, and Slovakia), and three in the former Soviet Union (Russia, the Western NIS countries, and the Central Asian Republics).

The purpose of the Enterprise Funds is to help create functioning market economies by investing in small and medium enterprises. This creates goods and services to meet consumers' needs, jobs, private capital to finance productive investment, and a tax base to pay for roads, schools, and pensions. Commercial banks, home mortgage banks, and small and micro-loans programs constitute a special class of enterprises supported by the Funds that provide capital to large numbers of small enterprises and individuals so they can become property owners. This process creates a class of stakeholders who can promote the systemic changes in laws, institutions and regulations that will allow commerce to thrive. One of the most attractive aspects of this ground-up approach to reform is that the "change agents", i.e. the enterprises, are sustainable, growth-oriented entities whose influence increases geometrically over time.

The Enterprise Funds provide capital and technical advice in situations where financial markets are still evolving, and the legal/regulatory/institutional environment is not fully developed, such that foreign investors are reluctant to commit funds to emerging small and medium-sized enterprises. Consequently, most of the Enterprise Funds have not begun to match the profit performance of the venture capital funds in the United States after which they are modeled, nor are they expected to do so. But, in time we expect that the business and financial models created by the Funds, and the constituency for reform that is represented by Fund clients, will help bring about dramatic improvements in their economies. It is axiomatic that open economies can exist only within democratic systems, and a more peaceful and prosperous world.

Each Fund operates as an independent, autonomous organization, and is directed by a Board of Directors with the appropriate legal structure and authority to manage its resources. The SEED Act provides considerable autonomy, with the USG having oversight responsibility for their operations. This model was specifically designed so that the Funds could deliver assistance as rapidly as possible with enough flexibility to develop programs and use a variety of investment approaches to address the conditions found in each country.

USAID's Bureau for Europe and Eurasia has responsibility for managing all Enterprise Fund activities with oversight from the State Department's Office of the Coordinator of U.S. Assistance for Europe and Eurasia. Since their formation in the early 1990's, the Enterprise Funds have created and saved thousands of jobs, transformed industry sectors, increased the levels of business experience and corporate governance, and have been an important U.S. foreign policy success.

The majority of the Enterprise Funds have now privatized their management companies and launched private investment funds in order to attract new private investment capital and provide future incentives for their employees. In addition to their efforts in making equity investments and long-term loans to small and medium-sized businesses, the Funds have introduced home mortgage lending, mortgage securitization, credit cards, pension funds, mezzanine financing, leasing, and investment banking. These initiatives are testament to the initiative and positive reputation that the Funds' management teams have earned. Moreover, each Fund has become a resource to which other investors have turned for information on the business climate in the countries of operation. A brief summary of each Fund follows.

As of September 30, 2004, the ten enterprise funds have received from the USG about $1.17 billion. The following table shows the funding status of the seven, USG-funded enterprise funds as of the end of FY 2004.

ENTERPRISE FUNDS IN CENTRAL AND EASTERN EUROPE

Fund

Funds Authorized

Funds Obligated

Funds Expended

Enterprise Funds

Polish-American Enterprise Fund (PAEF)

$262.50m

$254.50m

$254.50m

Hungarian-American Enterprise Fund (HAEF)

$72.5m

$72.5m

$72.50m

Czech-Slovak-American Enterprise Fund (CSAEF)

$65.00m

$65.00m

$56.10m

Bulgarian-American Enterprise Fund (BAEF)

$58.25m

$57.85m

$57.85m

Baltic-American Enterprise Fund (BalAEF)

$50.00 m

$50.00m

$50.00m

Romania-American Enterprise Fund (RAEF)

$61.00m

$61.00m

$61.00m

Albanian-American Enterprise Fund (AAEF)

$30.00m

$30.00m

$22.11m

Total

$599.25m

590.85m

$574.06m


Albanian-American Enterprise Fund (AAEF): The Albanian-American Enterprise Fund (AAEF), which was established in 1995, enjoyed a very successful year in 2004. The Fund's net assets increased by more than $9 million during the year to more than $39.9 million or 120 percent of the capital provided to the Fund by the U.S. Congress, and a return of 170 percent on the expended capital of $21.2 million. During the year, the Fund achieved partial recovery on a number of less successful investments and pursued legal action in several cases to recover collateral.

The AAEF completed negotiations with the Government of Albania to privatize Mother Teresa Airport as part of a consortium of international companies and local banks. In July, SIGAL, an AAEF portfolio company which is the fastest growing insurance company in Albania, was one of the first to be awarded a license to operate a life insurance company in Albania. SIGAL was also the first Albanian company to use an international accounting firm for its outside audit using International Accounting Standards. In June, the American Bank of Albania (ABA) the Fund's largest investment, became the first Albanian financial institution to open a branch outside the borders of the country when its Greek branch opened in Athens. As of September 30, 2004, the ABA, which started with an equity investment of $4.67 million, had paid-in capital, retained earnings and reserves of $26.4 million. The ABA, with assets of $362 million and more than 290 employees, covers the country with 14 branches and ATMs. The ABA ranks among the top banks for deposits and loans.

Slovak-American Enterprise Fund (SAEF): The past year was one of significant advancement for the Slovak-American Enterprise Fund, which met its stated objectives: significant improvement of the investment process, increased value of the overall portfolio, and strengthening of the investment team. Since the beginning, SAEF has invested almost $41 million. Of that amount, $37 million went into 45 Slovak companies in the form of equity ($20 million) or loans ($17 million) under the program of Direct Investments. The Small Loan Program has provided $4 million to 51 companies. Total investments made as of the 2004 fiscal year are as follows: 49 percent equity under direct investments; 41 percent loans under direct investments; and 10 percent small loan program.

Disbursements in FY 2004 totaling $1.6 million were as follows: equity investments, 65 percent; loans, 27 percent; and small loans program, 8 percent. Included was the approval of a new equity/debt investment in a rabbit farm company. The Small Loan Program provided an additional loan to its long-time client, the Slovak-German company BIOASPA, a grower and marketer of asparagus. This successful company is an example of how the Small Loan Program is contributing to the growth of the Slovak economy. Another small company to benefit from the Small Loan Program is the LESTRA Company which received a new equity-loan investment in early 2005. The company plans to build a retail network of garden centers throughout Slovakia. LESTRA, which began as a wholesale seed company has grown into a successful, medium-sized business ready to expand their scope of its operations. The PROFESIA Company, in which SAEF is the primary investor, is the major internet job search company in Slovakia. In 2004, SAEF received a dividend equal to 13.7 percent of its original investment. In the fall of 2004, the Fund successfully sold its investment in NOVA HOREHRONSKA, a wood-processing company, to a distinguished strategic investor, with an accounting gain of nearly $1.09 million. A pipeline of potential new investments is being developed by the Fund.

Baltic-American Enterprise Fund (BalAEF): The Baltic-American Enterprise Fund (BalAEF) had a successful year of growth, innovation and results in 2004. The Fund's residential mortgage and commercial finance business lines together disbursed over $88 million during the year, as the Fund remained a leading source of American investment in the region. The total investment portfolio grew by 30 percent to $109 million, and investment income increased by $4.8 million, up by 68 percent, against a back-drop of economic growth in the region and the accession of Estonia, Latvia and Lithuania into the EU. By the end of 2004, the Fund had cumulatively invested over $250 million in the Baltic States, multiplying by fivefold the impact of its initial grant of $50 million.

Baltic-American Mortgage Holdings, a Fund subsidiary with centers in Tallinn, Riga and Vilnius, produced 3,427 loans to reach $83 million in origination volume, a 46 percent increase over 2003. In addition to creating new loans, the Fund continued its leadership in promoting the development of a more liquid secondary mortgage market over the year, packaging and selling over $36 million in loan pools to banks in the Baltics. Total mortgage servicing portfolio stands at $133 million.

Hanseatic Capital, a Fund subsidiary and the only dedicated provider of mezzanine financing in the region, invested in four new transactions during 2004, building its portfolio to ten holdings and value of $11 million.

Bulgarian-American Enterprise Fund (BAEF): The Bulgarian-American Enterprise Fund concluded its twelfth year of operations showing a net increase in fund balance from operations of $1.8 million on total investment income of $3.5 million. The total portfolio grew 17 percent during 2003 from $50 million to $60.1 million, with reflows (interest + principal + rental income + proceeds from the sales of investments) increasing from $5.3 million in 2003 to $15.4 million in 2004. During the year, BAEF disbursed $20.4 million in the form of new loans and equity investments. Since 1992, BAEF and its affiliates have made over $380 million in loans and equity investments to more than 4,500 companies across the country.

The Fund continues equity portfolio realizations via sales of its equity positions. Two such transactions took place in FY2004 and generated attractive internal rates of return. The Fund's equity holdings now include ten companies with a cost basis of $20.6 million, the largest of which are the Bulgarian-American Credit Bank (BACB), AMETA (an integrated poultry producer), and SANITA (a pharmaceutical distributor and retailer). The latter is undergoing restructuring that should be concluded in FY 2005.

The Real Estate and Property Management group expanded its lending and development activities in FY 2004. Most notable was the completion of two large "build-to-suit" complexes for leading western European companies: PRAKTIKER, a large German do-it-yourself chain, and ORIFLAME, a Swedish cosmetics company.

In the financial sector investments, BM Leasing, a joint venture between BAEF and a local firm, has successfully expanded its activity across several market niches and has a second profitable year. The BACB reported outstanding results—total assets increased 40 percent to EUR153 million and net profits increased 55 percent to EUR7.2 million. In Bulgaria, BACB remains the number one performer in return on assets and return on equity, and has one of the highest efficiency ratios among its peers.

The Balkan Accession Fund, the first private equity fund, was planned to specifically target Bulgaria and Romania, and include as cornerstone investors, the Bulgarian and Romanian American Enterprise Funds plus private and institutional investors. The new fund will raise $75 million in private capital. A total of 10-15 investments will be made in the range of EUR 3-8 million.

Hungarian-American Enterprise Fund (HAEF): The Hungarian-American Enterprise Fund (HAEF) has now completed 15 full years of investment operations and their mission under the SEED Act of 1989 has been completed. During FY 2004, HAEF began in earnest its wind-down as an investment firm and created its legacy in the "Hungarian-American Enterprise Scholarship Fund." The "Scholarship Fund," which was launched in January 2004, aims to finance work experiences in the USA for Hungarians. HAEF distributed $10 million, providing initial funding of $5 million for the scholarship fund and an equal amount to the U.S. Treasury. Scholarship recipients included 14 Undergraduate Internship Fellows and four Senior Scholar Fellows. All are exceptionally talented and are being hosted by a number of top tier U.S. companies and universities.

With a focus on exiting investments, the Fund recouped $4.1 million in full and partial exits in FY 2004. Several companies proved to be major disappointments, while other exits resulted in substantial write downs. These included three investments in the HITF, the Fund's privatized high-technology Fund which had earlier shown a great deal of promise by attracting capital of $85 million from leading investment institutions in addition to HITF's own capital. The hurdles for high technology firms in Hungary remain high and most require continuous rounds of financing. This and the short timeframe for exits contributed to the write-downs. One major success, EURONET, the independent ATM network and financial software firm, turned a $3 million investment into a $25 million return. The HAEF-sponsored parallel fund, Hungarian Equity Partners, L.P. retains only three portfolio companies and its Limited Partners have agreed to extend that fund by one year in order to improve exit opportunities.

The Fund remains focused on recouping its capital. However, it is still providing follow-on funding to protect its remaining investments or support expansion of promising portfolio companies that need capital. A case in point was MAVAD where HAEF invested approximately $600,000 during FY 2004 to buy out minority shareholders and increased its interest from 78 percent to nearly 100 percent.

Polish-American Enterprise Fund (PAEF): The Polish American Enterprise Fund (PAEF) originally received $262 million as a U.S. Government grant. The Fund officially began liquidation in 1999 and in keeping with the agreement with the Congress, the PAEF has returned $120 million to the U.S. Treasury and $120 million to launch the new Polish-American Freedom Foundation (PAFF). Subsequent reflows from the PAEF were to be given to the PAFF. Currently, the PAEF has handed over $211 million to the Foundation, and they expect this amount to be eventually increased to $235 million when the remaining assets are liquidated.

Remaining PAEF assets are valued at $24,454,000, and include: commercial investments, $2,512,000 (including private equity funds #1 and #2, and direct investments); core programs, $21,250,000 (including: FM, Community Assistance Fund, NGO loans, and Housing Development Corporation); and cash and cash equivalents, and other receivables, $692,000. The Board of the PAEF has indicated that all remaining investments will be sold but this will ultimately depend on being able to realize the true market value of these assets.

The PAEF, which has privatized as Polish Enterprise Investors (EI), are the Managers of PAEF. They are now the largest investment fund in Poland, and probably the largest in Central Europe, having independently raised five investment funds over the past 10 years worth an estimated $900 million, most of which will remain in Poland to benefit that country.

Romanian-American Enterprise Fund (RAEF): The Romanian American Enterprise Fund (RAEF) was established in September 1994. The USG initially capitalized the RAEF with a $50.0 million grant and later added $11 million to bring total obligations to $61 million. Celebrating its 10th anniversary, RAEF can highlight many achievements, including the creation of jobs in companies such as: Connecticut Manufacturing Company (aerospace hydraulics) which announced a 75 percent sales increase in 2004; Policolor (paint manufacturer) which RAEF privatized and expanded; and, Titan Mar/Marmosin (marble and limestone) which now has 95 percent of the domestic market and creating export sales the world over. RAEF was also the first to privatize a recapitalized major national bank; Banca Agricole, targeted for liquidation but now operating profitably as Raiffeisen Bank, with 210 branches and 3,500 employees.

RAEF's self-sustaining micro-loan program can be measured in the 27,000 individuals in small businesses who have been helped by $30 million in micro-loans and the demand continues to grow. RAEF's investment banking team is the first in Romania to partner with the world's leading investment banks on large scale transactions in energy and banking privatization involving billions of dollars in assets.

Domenia Credit, which began in 2003 as the first specialized, residential non-banking mortgage finance company in Romania, now writes more than $1 million a month in new mortgages and demand is increasing steadily. The fund is also playing an active role in the process that will deliver the legislation to establish a secondary mortgage market in Romania. ESTIMA CREDIT, launched as the first consumer retail finance company represents a strategic partnership with DOMO, one of Romania's largest home appliance retailers. Lending to individuals is increasing and consumer goods sales are up 30 percent. In the second half of 2004, profits were up seven-fold.

Romanian Industrial Energy Efficiency Company (RIEEC) was launched in partnership with EBRD in 2003 to target a portion of the estimated $4-5 billion investment needed in the Romanian electrical power generation system. The first cogeneration plant financed under the RIEEC program was recently installed and by the end of 2005, four additional systems are expected to be operational.

Motoractive leasing was launched in 1999 to fill a void in the market, supplying financing for new car and truck purchases needed for growing businesses. Today, the company is racing towards 100 million euros in total assets and is signing new business at a rate of EUR 5 million a month.

First Private Equity Fund: The Balkan Accession Fund was planned to specifically target Romania and Bulgaria, with the Bulgarian and Romanian American Enterprise Funds as cornerstone investors. The new fund will raise $75 million in private capital. A total of 10-15 investments will be made in the range of 3 to 8 million euros.



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