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Europaudvalget 2001-02 (1. samling)
EUU Alm.del Bilag 184
Offentligt

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 13.11.2001

SEC(2001) 1746

2001

REGULAR REPORT

THE CZECH REPUBLIC'S

PROGRESS TOWARDS ACCESSION

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2001

REGULAR REPORT

THE

CZECH REPUBLIC’S

PROGRESS TOWARDS ACCESSION

***********************

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Table of contents

A. Introduction.................................................................................... 6

Preface ..................................................................................................................... 6

Relations between the European Union and the Czech Republic ................. 8

Recent developments under the Association Agreement (including bilateral trade)............ 8

Accession Partnership / National Programme for the Adoption of the Acquis .................. 9

Community aid .............................................................................................................. 9

Twinning ..................................................................................................................... 13

Negotiations / screening............................................................................................... 14

B. Criteria for membership.............................................................15

1. Political criteria ............................................................................. 15

Introduction................................................................................................................. 15

Recent developments................................................................................................... 16

1.1. Democracy and the rule of law ...........................................................................16

The Parliament ............................................................................................................ 16

The executive .............................................................................................................. 17

The judicial system...................................................................................................... 18

Anti-corruption measures............................................................................................. 20

1.2. Human rights and the protection of minorities .............................................21

Civil and political rights................................................................................................ 22

Economic, social and cultural rights.............................................................................. 24

Minority rights and the protection of minorities.............................................................. 24

1.3. General evaluation ...............................................................................................26

2. Economic criteria .......................................................................... 28

2.1. Introduction ...........................................................................................................28

2.2. Economic developments ......................................................................................28

2.3. Assessment in terms of the Copenhagen criteria...........................................32

The existence of a functioning market economy ............................................................ 32

The capacity to cope with competitive pressure and market forces within the Union...... 37

2.4. General evaluation ...............................................................................................39

3. Ability to assume the obligations of membership.......................... 40

Introduction................................................................................................................. 40

3.1. The chapters of the

acquis....................................................................................42

Chapter 1: Free movement of goods....................................................................42

Overall assessment ...................................................................................................... 43

Chapter 2: Free movement of persons ................................................................46

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Overall assessment ...................................................................................................... 46

Chapter 3: Free movement of services................................................................47

Overall assessment ...................................................................................................... 48

Chapter 4: Free movement of capital .................................................................50

Overall assessment ...................................................................................................... 51

Chapter 5: Company law.......................................................................................51

Overall assessment ...................................................................................................... 52

Chapter 6: Competition policy..............................................................................53

Overall assessment ...................................................................................................... 54

Chapter 7: Agriculture..........................................................................................54

Overall assessment ...................................................................................................... 58

Chapter 8: Fisheries..............................................................................................59

Overall assessment ...................................................................................................... 60

Chapter 9: Transport policy .................................................................................60

Overall assessment ...................................................................................................... 61

Chapter 10: Taxation ............................................................................................62

Overall assessment ...................................................................................................... 63

Chapter 11: Economic and monetary union.......................................................64

Overall assessment ...................................................................................................... 64

Chapter 12: Statistics ............................................................................................65

Overall assessment ...................................................................................................... 66

Chapter 13: Social policy and employment ........................................................67

Overall assessment ...................................................................................................... 68

Chapter 14: Energy................................................................................................70

Overall assessment ...................................................................................................... 72

Chapter 15: Industrial policy...............................................................................74

Overall assessment ...................................................................................................... 75

Chapter 16: Small and medium-sized enterprises...........................................75

Overall assessment ...................................................................................................... 76

Chapter 17: Science and research......................................................................76

Overall assessment ...................................................................................................... 77

Chapter 18: Education and training ...................................................................77

Overall assessment ...................................................................................................... 78

Chapter 19: Telecommunications and information technologies...................78

Overall assessment ...................................................................................................... 79

Chapter 20: Culture and audio-visual policy.....................................................80

Overall assessment ...................................................................................................... 80

Chapter 21: Regional policy and co-ordination of structural instruments...80

Overall assessment ...................................................................................................... 81

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Chapter 22: Environment......................................................................................83

Overall assessment ...................................................................................................... 84

Chapter 23: Consumers and health protection..................................................85

Overall assessment ...................................................................................................... 86

Chapter 24 - Co-operation in the fields of justice and home affairs .............88

Overall assessment ...................................................................................................... 90

Chapter 25: Customs union ..................................................................................93

Overall assessment ...................................................................................................... 94

Chapter 26: External relations ............................................................................94

Overall assessment ...................................................................................................... 95

Chapter 27 Common Foreign and Security policy ............................................96

Overall assessment ...................................................................................................... 97

Chapter 28: Financial Control.............................................................................98

Overall assessment ...................................................................................................... 99

Chapter 29: Financial and Budgetary Provisions ............................................99

Overall assessment .................................................................................................... 100

3.2. Translation of the acquis into the national languages.................................100

3.3. General evaluation .............................................................................................101

C. Conclusion..................................................................................104

D. Accession Partnership and National Programmes for the

Adoption of the

Acquis:

Global assessment ..........................108

1. Accession Partnership ................................................................. 108

Short-term priorities .................................................................................................. 108

Medium term priorities............................................................................................... 111

2. National Programme for the Adoption of the

Acquis

................. 115

Annexes.............................................................................................116

Human Rights Conventions ratified by the Candidate Countries, 30

September 2001............................................................................................117

Statistical data......................................................................................................118

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A. Introduction

Preface

In Agenda 2000, the Commission said it would report regularly to the European Council on

progress made by each of the candidate countries of Central and Eastern Europe in

preparations for membership, and that it would submit its first Report at the end of 1998.

The European Council in Luxembourg decided that

“From the end of 1998, the Commission will make Regular Reports to the Council, together

with any necessary recommendations for opening bilateral intergovernmental conferences,

reviewing the progress of each Central and Eastern European applicant State towards

accession in the light of the Copenhagen criteria, in particular the rate at which it is adopting the

Union

acquis”

… “The Commission’s reports will serve as the basis for taking, in the Council

context, the necessary decisions on the conduct of the accession negotiations or their extension

to other applicants. In that context, the Commission will continue to follow the method adopted

by Agenda 2000 in evaluating applicant States’ ability to meet the economic criteria and fulfil

the obligations deriving from accession.”

On this basis, the Commission presented a first series of Regular Reports in October 1998, a

second series in October 1999, and a third in November 2000. The Commission has prepared

this fourth series of Regular Reports with a view to the Laeken European Council in December

2001.

The structure followed for this Regular Report is the same as that used for the 2000 Regular

Report. In line with previous Regular Reports, the present Report:

describes the relations between the Czech Republic and the Union, in particular in the

framework of the Association Agreement;

analyses the situation in respect of the political criteria set by the 1993 Copenhagen

European Council (democracy, rule of law, human rights, protection of minorities);

assesses the Czech Republic’s situation and prospects in respect of the economic criteria

defined by the Copenhagen European Council (a functioning market economy and the

capacity to cope with competitive pressures and market forces within the Union);

addresses the question of the Czech Republic’s capacity to assume the obligations of

membership, that is, the

acquis

as expressed in the Treaties, the secondary legislation, and

the policies of the Union. This part gives special attention to nuclear safety standards, as

underlined by the Cologne and Helsinki European Councils. It encompasses not only the

alignment of legislation, but also the development of the judicial and administrative capacity

necessary to implement and enforce the

acquis,

as emphasised by the Madrid European

Council in December 1995, and confirmed by the Gothenburg European Council in June

2001. At Madrid, the European Council underlined the necessity for the candidate

countries to adjust their administrative structures, so as to create the conditions for the

harmonious integration of those States. The Gothenburg European Council emphasised the

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vital importance of the candidate countries’ capacity to effectively implement and enforce

the

acquis,

and added that this required important efforts by the candidates in strengthening

and reforming their administrative and judicial structures.

This Report takes into consideration progress since the 2000 Regular Report. It covers the

period until 30 September 2001. In some particular cases, however, measures taken after that

date are mentioned. It looks at whether intended reforms referred to in the 2000 Regular

Report have been carried out, and examines new initiatives. In addition, this Report provides

also an overall assessment of the global situation for each of the aspects under consideration,

setting out for each of them the main steps which remain to be taken by the Czech Republic in

preparing for accession.

In accordance with this approach, the assessment of progress in meeting the political and

acquis

criteria (including the Czech Republic’s administrative capacity to implement the

acquis)

focuses on what has been accomplished since the last Regular Report, complemented with a

view of the global situation for each of the aspects discussed. The economic assessment, for its

part, provides, besides an assessment of progress made over the reference period, also a

dynamic, forward-looking evaluation of the Czech Republic’s economic performance.

The Report contains a separate section examining the extent to which the Czech Republic has

addressed the Accession Partnership priorities.

As has been the case in previous Reports, “progress” has been measured on the basis of

decisions actually taken, legislation actually adopted, international conventions actually ratified

(with due attention being given to implementation), and measures actually implemented. As a

matter of principle, legislation or measures which are in various stages of either preparation or

Parliamentary approval have not been taken into account. This approach ensures equal

treatment for all the candidate countries and permits an objective assessment of each country in

terms of its concrete progress in preparing for accession.

The Report draws on numerous sources of information. The candidate countries have been

invited to provide information on progress made in preparations for membership since the

publication of the last Regular Report. The National Programmes for the Adoption of the

Acquis

of each of the candidate countries, as well as the information they have provided in the

framework of the Association Agreement and in the context of the analytical examination of the

acquis

(screening) and the negotiations

, have served as additional sources. Council

deliberations and European Parliament reports and resolutions

have been taken into account in

the preparations. The Commission has also drawn on assessments made by various

international organisations, and in particular the contributions of the Council of Europe, the

OSCE and the International Financial Institutions, as well as that of non-governmental

organisations.

As in previous years, the Report does not mention any commitments undertaken or requests made in the context of the

accession negotiations.

For the European Parliament the

rapporteur

is Mr Jürgen Schröder.

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Relations between the European Union and the Czech Republic

Recent developments under the Association Agreement (including bilateral

trade)

The Czech Republic has continued to implement the Europe Agreement and contributed to the

smooth functioning of the various joint institutions. The seventh Association Council meeting is

scheduled for November 2001, and the seventh Association Committee meeting was held in

July 2001. The subcommittees continue to function as a forum for technical discussions, and

seven out of eight sub-committees met during the first half of 2001. The Joint Parliamentary

Committee comprising representatives of the Czech and European Parliaments met in

December 2000 and in May 2001.

In February 2001, the European Union and the Czech Republic moved to the second stage of

the transitional period of the Europe Agreement, indicating that the Czech Republic has further

liberalised its legislation on establishment and movement of capital.

Trade between the EC and the Czech Republic has continued to increase. Between 1999 and

2000 EC exports to the Czech Republic increased from € 18.4 billion € 23.8 billion and EC

imports from the Czech Republic increased from € 16.8 billion to € 21.4 billion. Major

categories of Community exports in 2000 were machinery and electrical articles (€ 8.6 billion),

transport equipment (€ 2.7 billion) and base metals (€2.4 billion). Major Czech exports to the

Community were machinery and electrical goods (€ 6.2 billion), transport equipment (€ 4.3

billion), base metals (€ 2.6 billion) and textiles (€ 1.3 billion).

In July 2001, the Protocol to the Europe Agreement on European Conformity Assessment

(PECA) entered into force, facilitating trade by steadily extending recognition in the area of

conformity assessment and the acceptance of industrial products.

Regarding agricultural products, a new agreement on reciprocal concessions with the Czech

Republic entered into force in July 2000 on an autonomous basis, pending the conclusion of an

Additional Protocol to the Europe Agreement. As a consequence of this agreement,

approximately 54% of the traditional EC agricultural imports from the Czech Republic is duty-

free while 29% of the EC agricultural exports to the Czech Republic is exempted from duties. A

second round of bilateral negotiations for trade liberalisation is presently being prepared and

would cover more sensitive sectors, in which current trade is low in particular due to a high

degree of tariff protection.

Negotiations on agreements on the reciprocal recognition, protection and control of wine names

and spirit designations with the Czech Republic are ongoing. When concluded, the agreement

will be implemented through a new Additional Protocol to the Europe Agreement.

Negotiations are also ongoing in the field of processed agricultural goods.

As regards negotiations on concessions in the field of fish and fishery products, an agreement

with the Czech Republic was reached at technical level in March 2001 and an Association

Council decision is under preparation.

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The Government is committed to withdrawing in January 2002 the Decree adopted in

November 1999, which increased customs duties on imports of road tractors for semi-trailers

originating in the EC countries. Therefore, as of January 2002, the Czech Republic will have

removed the last import duties on industrial products originating in the EC.

An anti-dumping proceeding was initiated by the EC concerning imports of certain tube and

pipe fittings of iron and steel, originating

inter alia

in the Czech Republic in June 2001.

Definitive anti-dumping measures were imposed in August 2001 on steel stranded ropes and

cables originating in the Czech Republic.

Accession Partnership / National Programme for the Adoption of the Acquis

A revised Accession Partnership was adopted in December 1999 – its implementation is

reviewed in part D. This Regular Report is accompanied by a proposal from the Commission to

update the Accession Partnership.

In June 2001 the Czech Republic presented a revised National Programme for the Adoption of

the Acquis (NPAA), in which it outlines its strategy for accession, including how to achieve the

priorities of the Accession Partnership of 1999

(see part D below).

Community aid

There are three

pre-accession instruments

financed by the European Community to assist the

applicant countries of Central and Eastern Europe in their pre-accession preparations: the

Phare

programme;

SAPARD,

which provides aid for agricultural and rural development; and

ISPA,

which finances infrastructure projects in the fields of environment and transport. These

programmes concentrate their support on the Accession Partnership priorities that help the

candidate countries to fulfil the criteria for membership.

For the years 2000-2002 total financial assistance to the Czech Republic amounts annually to

around € 79 million from Phare, € 22 million from SAPARD, and between € 55 and 80 million

from ISPA.

The

Phare

programme has been providing support to the countries of Central and Eastern

Europe since 1989, helping them through a period of fundamental economic and social

transition and political change. Its current “pre-accession” focus was put in place in 1997, in

response to the Luxembourg European Council’s launching of the present enlargement process.

Phare provides the applicant countries of Central and Eastern Europe with support for

institution building (around one third of the Phare allocation), investment to strengthen the

regulatory infrastructure needed to ensure compliance with the

acquis

(equally around one third

of the allocation), and investment in economic and social cohesion (the remaining one-third of

the Phare allocation). This support comprises co-financing for technical assistance, “twinning”

and investment-support projects, to help these countries in their efforts to adopt the

acquis

and

strengthen the institutions necessary for implementing and enforcing the

acquis.

This also helps

the candidate countries develop the mechanisms and institutions that will be needed to

implement Structural Funds after accession and is supported by a limited number of measures

(investment or grant schemes) with a regional or thematic focus.

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The Phare programme allocated to the Czech Republic commitments of € 563 million during

the period 1992-1999 and €101.5 million

in 2000.

The 2001 Phare Programme for the Czech Republic consists of a national allocation of € 65.4

million, which is concentrated on the following priorities:

– Strengthening the civil society sector in the Czech Republic (€ 3 million).

– Applying EC directives in the railway sector (€ 2 million).

– Ensuring the Czech Republic is capable of applying Internal Market rules and regulations, in

particular in areas such as tax and customs administration, oversight of pharmaceutical and

medical products, the electricity sector, intellectual property rights, and economic

competition (€ 6.5 million).

– Ensuring that the Czech Republic is capable of implementing the acquis in the area of

agriculture, including improving veterinary supervision and oversight in the phytosanitary

sector, and preparing for the Common Agricultural Policy (€ 8.28 million).

– Ensuring that the Czech Republic is capable of implementing directives in the area of the

environment, with regard to air and water pollution (€ 5.1 million).

– Addressing important issues in the area of Justice and Home Affairs, including the fight

against corruption and economic crime, the fight against violent and organised crime, asylum

and migration policies and the improvement of border control and the functioning of the

judiciary, the prison service, and the police (€ 13.25 million).

– Ensuring that the Czech Republic is compliant with the acquis in the area of employment and

social affairs, including the equal treatment of men and women and social security (€ 1.75

million).

– Strengthening the administrative capacity to implement the acquis, including the preparation

of Czech authorities for the independent administration of EC funds, training for the Supreme

Audit Office, and the preparation of regional administration for the implementation of the

acquis

(€ 4.75 million).

– Improving economic and social cohesion, including devising strategies for the development of

industrial zones and brownfield sites, finalising the structures necessary for the effective

implementation of Structural Funds, and investment in business related infrastructure (€

13.55 million).

An additional € 19 million was allocated from the Phare 2001 budget to Cross-Border

Cooperation (CBC) Programmes with Germany (€ 10 million), with Poland (€ 5 million), and

with Austria (€ 4 million).

In 2001, the Czech Republic continued to participate in Phare funded multi-beneficiary

programmes, such as TAIEX, the Small and Medium Sized Enterprise Facility, and the

Statistics and Business Support Programme.

This includes an allocation of €19 million to Cross-Border Co-operation (CBC) Programmes.

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Furthermore, the Czech Republic participates in various Community Programmes, namely

Socrates, Leonardo, Youth for Europe, FISCALIS, Culture 2000 and SAVE. Following the

ratification and entry into force of the agreement, the formal participation of the Czech Republic

in the European Environment Agency will start in January 2002. In order to streamline

Community legal procedures and thereby facilitate future participation of the Czech Republic in

Community programmes, a Decision is in the process of being adopted by the EU-Czech

Republic Association Council establishing general principles for such participation.

Overall, the impact of Phare has been positive. Effective transfer of know-how, equipment and

financial resources has taken place in a number of important fields. In the Czech Republic,

examples of Phare support include:

- With regard to the political criterion, a project on the development of multi-cultural education

curricula and curricula which target the needs of Roma students has been undertaken. This

project aims to foster appreciation of cultural and ethnic diversity from an early age. Also,

provision of advice to the Office of the Government on issues of anti-discrimination, particularly

with regard to the adoption of relevant EC legislation and on the establishment of a monitoring

body.

- As to the economic criterion, the study of a restructuring strategy for the steel sector with a

view to meeting the Europe Agreement requirements in this field has been undertaken. Also, a

Supplier Development programme began in June 2001 to help Czech suppliers to understand

better the needs of foreign investors, and therefore to be become more competitive

internationally.

- In the agricultural sector, support has been given to preparations for implementation of the

Common Agricultural Policy through the restructuring of the Ministry of Agriculture and the

establishment of a Market Intervention Agency. As a result of the project, substantial changes

have been made by the Ministry of Agriculture.

- In the field of the environment, support has been provided for the implementation of the EC

acquis

concerning water quality, inter alia, nitrates and drinking water. Also, a major works

project (€ 14 million) was begun in Brno in order to reconstruct the sewage system, while a

grant scheme (€ 2.5 million) to regenerate forests destroyed by acid rain is underway.

- The area of Justice and Home Affairs has benefited from considerable support in the last year.

For example, advice and equipment were provided to help the Alien and Border Police with

preparations meeting for Schengen requirements. The judicial courts benefited from a large

supply of IT equipment with a view to increasing speed and efficiency. Further advice and

equipment is being provided to strengthen the fight against organised and economic crime.

- With regard to public administration reform, technical assistance has been provided to design

organisational changes with a view to improving efficiency and coordination at ministerial level.

The Phare Review for 2000 confirmed the accession-driven approach and emphasised the

importance of helping countries to prepare for the Structural Funds. The Review foresees the

possibility that management of the Phare funds can be fully decentralised from 2002 if the strict

pre-conditions set down in the Co-ordination Regulation 1266/99 are met. Second, Phare

programming can be moved onto a multi-annual basis if supporting strategies are in place. Third,

the trends introduced in 1997 continue with an increased role for Delegations, further

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streamlining of procedures and, lastly, increasing emphasis on raising the verifiable and

quantifiable impact of Phare projects in institution building, investment in compliance with the

acquis

and economic and social cohesion.

The management of Phare programmes has improved since the last Regular Report. The

contracting process has significantly speeded up and all parties involved will therefore

experience fewer bottlenecks, while projects will have ample time for implementation. The

Phare programme has also benefited from a new monitoring system which has more firmly

integrated project implementation with policy objectives.

Nevertheless, the comments contained in the last Regular Report are still considered to be valid.

Therefore, in order for the Czech Republic to move smoothly from managing pre-accession

funds such as Phare to the far larger amounts under Structural Funds, improvement of the

capacity of public administration is paramount. Of particular importance are adequate human

resources and efficient and effective organisational structures for all relevant bodies.

In the past year the importance of the National Fund has been increasingly recognised by the

Czech authorities. In February 2001, it was upgraded from a unit to a department in the

Ministry of Finance, its staff was more than doubled and its structure re-organised to deal more

effectively with the 3 pre-accession programmes running. The National Fund’s capacity has

therefore increased significantly since the last Regular Report. However, the Commission and

the National Fund need to cooperate to further improve the channelling of funds to contractors.

In the near future, the National Fund faces some tough challenges, the most important being the

preparation of the Czech bodies which managed Phare and ISPA for accreditation by the

Commission.

Regarding the performance of the main Czech management bodies, implementation by the

Central Finance and Contracts Unit has been satisfactory. This is also the case for the

implementation of works projects by the Centre for Regional Development; however, the

preparation of grant schemes under Cross Border Cooperation (99 SPF and SME fund) by the

Centre for Regional Development has not been entirely satisfactory. Preparation for Structural

Funds by the Ministry for Regional Development has been steadily progressing. The second

draft of the National Development Plan was finalised in July 2001. However, more work

needs to be done on the preparation of individual projects.

The Czech authorities have continued to prepare for the establishment and implementation of

the

SAPARD

programme. The Czech Rural Development Plan, on which SAPARD is based,

was approved by the Commission in October 2000. Since then, the Multi-Annual Financing

Agreement and the Annual Financing Agreement for the SAPARD 2000 programme were

signed in February 2001. The final step concerns the accreditation of the SAPARD Agency at

the Ministry of Agriculture. The accreditation package was submitted to the Commission in

October 2001.

As concerns the

ISPA

programme, since the last Regular Report, three transport and two

environment projects have been approved for financing from the 2000 budget (total allocation

69.3 million) on the basis of the sectoral strategy documents for transport and environment. All

projects proposed for the 2001 budget have been submitted, and two have been approved by

the Commission.

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The implementing agencies for ISPA are the Ministry of Transport for transport projects, and

the Centre for Regional Development at the Ministry of Regional Development for environment

projects. It is anticipated that the management of the ISPA programme in the Czech Republic

will be decentralised in late 2002 after accreditation of the relevant managing entities by the

Commission.

Twinning

One of the main challenges the candidate countries continue to face is the need to strengthen

their administrative capacity to implement and enforce the

acquis.

As of 1998, the European

Commission proposed to mobilise significant human and financial resources to help them in this

respect, through the process of twinning of administrations and agencies. The vast body of

Member States’ expertise is now being made available to the candidate countries through the

long-term secondment of civil servants and accompanying short-term expert missions and

training.

To start with, twinning focused primarily on the priority sectors of agriculture, environment,

public finance, justice and home affairs and preparatory measures for the Structural Funds. It

now covers all sectors pursuant to the

acquis.

A total of 372 twinning projects, primarily in the fields of agriculture, environment, public

finance, justice and home affairs and preparation for the management of Structural Funds, have

been funded by the Community between 1998-2000. These represent the principal priority

sectors that have been identified in the Accession Partnerships. But also other important

sectors of the

acquis

have been addressed through twinning, for example, social policy, fight

against drugs, transport, and telecommunications regulation.

Thanks to the strong support and response from EU Member States 103 twinning partnerships,

funded by Phare 1998 and involving all candidate countries and almost all Member States are

coming to an end or have been concluded. Under Phare 1999 a further 124 projects are being

implemented and the programming exercise for Phare 2000 includes a further 145 twinning

projects. The 2001 programming exercise foresees 131 twinning projects in all Phare

beneficiary countries as well as Cyprus and Malta. Furthermore, the candidate countries are

being offered the possibility of drawing on Member States’ expertise through Twinning light, to

address well-circumscribed subjects of limited scope, which emerge during the negotiation

process as requiring adaptation. It is estimated that around 250 twinning projects are

operational throughout the candidate countries at any one time.

For the Czech Republic, the first twinning projects from Phare 1998 have come to an end and

the first positive results are being seen in the strengthening of administrative capacity. In

addition to the 8 projects which commenced in 1999, a further 10 projects started in 2000.

These projects aim to strengthen the phyto-sanitary administration, help implement strategies in

the water sector, make recommendations regarding the system of indirect taxation, improve the

control and management of EC financial flows, combat economic crime, prepare for the

implementation of Schengen, combat organised crime, make recommendations regarding human

resource policies and prepare for the European Social Fund, improve health and safety at work,

and assist in the design and implementation of supplier linkage and upgrading programme. All

18 twinning projects are currently being implemented, while a further 23 projects are due to

start before the end of 2001.

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Negotiations / screening

The analytical examination of the

acquis

(screening) for the Czech Republic has taken place in

the context of meetings of the Association Committee and the sub-committees.

Since the opening of accession negotiations, substantial discussions on the individual chapters of

the

acquis

started, and by June 2001, negotiations on all chapters (with the exception of

chapter 30 – Institutions and chapter 31 – Other) had been opened. By the end of September

2001, the following 19 chapters had been provisionally closed: science and research, education

and training, small and medium-sized enterprises, statistics, industrial policy,

telecommunications, fisheries, consumer protection, free movement of goods, customs union,

external relations, common foreign and security policy, EMU, free movement of services,

company law, social policy and employment, environment, free movement of capital, culture

and audio-visual policy. Negotiations continue for the remaining chapters.

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B. Criteria for membership

1. Political criteria

Introduction

The political criteria for accession to be met by the candidate countries, as laid down by the

Copenhagen European Council in June 1993, stipulate that these countries must have achieved

“stability of institutions guaranteeing democracy, the rule of law, human rights and respect for

and protection of minorities”

In its 2000 Regular Report on the Czech Republic’s progress towards accession, the

Commission concluded that:

“The Czech Republic continues to fulfil the Copenhagen political criteria. Recent significant

developments include, in particular, a more effective collaboration between the government and

Parliament.

There has been progress in setting the legal framework for regional government. However, the

reform of the public administration has not advanced significantly and therefore the short term

priority of the Accession Partnership in this field has not been met. The reform of the judiciary

is equally a short term priority of the Accession Partnership. Whilst progress has been made, it

is regrettable that certain key parts of the reform have not yet been adopted. Administrative

and judicial reform are both essential for effective enforcement of the

acquis

and improved

good governance. Thus efforts must be pursued in these fields, in line with the medium term

priorities of the Accession Partnership.

Furthermore, the fight against corruption and economic crime has so far been insufficient.

Tangible results in this field will respond to public concern and help ensure a transparent

business environment.

The Czech Republic continues to respect human rights and freedoms and has developed its

internal institutional framework in this field. Nevertheless, areas of concern remain, in particular

overcrowding of the prison system and persistence of trafficking in women and children.

Increased and, in some areas, significant efforts have been made since last year regarding the

situation of the Roma community, notably with regard to the education system. However, a

lasting improvement in the situation of the Roma requires sustained effort over time. Further

progress is needed, as indicated in the medium term priorities of the Accession Partnership.”

The section below aims to provide an assessment of developments in the Czech Republic since

the 2000 Regular Report, as well as of the overall situation in the country, seen from the

perspective of the political Copenhagen criteria, including as regards the overall functioning of

the country’s executive and its judicial system. Developments in this context are in many ways

closely linked to developments regarding the Czech Republic’s ability to implement the

acquis,

These principles have been emphasised in the Charter of Fundamental Rights of the European Union, that was

proclaimed at the Nice European Council in December 2000

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in particular in the domain of justice and home affairs. Specific information on the development

of the Czech Republic’s ability to implement the

acquis

in the field of justice and home affairs

can be found in the relevant section (Chapter

24 – Co-operation in the field of justice and

home affairs)

of part

B.3.1.

of this Report.

Recent developments

The social democrat (CSSD) minority government has entered into its fourth year in office in a

context of overall political stability. It continues to function normally in both domestic and

foreign affairs and to pursue its programme of economic and social reform and preparation for

EU accession. Recent developments include the announcement by the Prime Minister of his

intention to stand down at the next elections, which are scheduled for June 2002, and a

government reshuffle following the resignation of the Finance Minister.

The “Opposition Agreement” between the government and the main opposition party, the ODS,

was renewed in March 2001 and extended until the next elections on the basis of reciprocal

commitments relating to the government programme. Four centre-right parties (KDU-CSL,

US, ODA and DEU), combined into the “Quad-coalition”, who have been actively participating

in the democratic process, have declared their intention to run together in the next general

election for the first time. Elections were held in November 2000 to one third of the Senate and

to 13 of the 14 newly created regions. As a result, the Quad coalition became the largest party

in the Senate, the ODS the second largest and the CSSD the third largest. In the regions, the

ODS became the leading party in 7 of the new regions, the Quad in 5 and the communists

(KSCM) in one.

There is a basic consensus amongst all political parties represented in Parliament in favour of

EU accession. Furthermore, the government, the ODS and the Quad coalition now meet

regularly to review progress on EU accession, both as regards preparatory work and the

negotiations, with a view to maintaining momentum. The President and the government are

active participants in the debate on the post-Nice agenda.

1.1.

Democracy and the rule of law

As mentioned in the previous Regular Reports, the Czech Republic has achieved stability of

institutions guaranteeing democracy and the rule of law. This section focuses on the most

significant developments of the past year.

The Parliament

The Parliament continues to

function

smoothly overall, and the enhanced procedures

mentioned in the previous Regular Report remain in place. The Committee for European

Integration of the Chamber of Deputies continues to hold discussions with Ministers on

legislative proposals prior to submission by the Government to the Parliament. The Senate, in

plenary and in its committees, has continued to play its role in the legislative process and some

of its proposed amendments have been accepted by the Chamber of Deputies. The Senate

also conducted its first public hearing, which dealt with the late 2000-early 2001 crisis in Czech

TV. .

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The pace of the legislative process has somewhat diminished compared to the previous period.

From October 2001 to the end of September 2001, 94 Acts were promulgated in the

Collection of laws (compared to 132 Acts indicated in the previous Regular Report), of which

27 were identified by the government as EU-related (compared to 79 indicated in the previous

Regular Report). Also, as regards EU related legislation, the Parliament has sometimes

adopted legislation which is insufficiently aligned with the

acquis,

forcing the government to

resubmit proposals, and thus delaying the alignment process. The available fast-track

procedure has not yet been used to adopt EU-related legislation.

In January 2001, the Constitutional Court abrogated key provisions of a CSSD-ODS

sponsored electoral law, on the basis of a complaint from the President. The Court ruled that

the law violated the Constitution’s guarantee of proportional representation in elections to the

Chamber of Deputies. A second amendment to the electoral law is thus now necessary to bring

it in line with the Constitutional Court’s ruling.

The executive

The structure

and

functioning

of the government and administration is in general stable and

some improvements in effectiveness have been achieved. However, the outstanding reform

agenda remains long and has only just begun to be tackled in key areas.

In particular, the Czech Republic still does not have a specific legal framework for its civil

servants. The 1999 Accession Partnership established as a short term priority the adoption and

implementation of the Act on the Civil Service. Furthermore, the Government’s 1998

Manifesto identified the Act on the Civil Service as one of the most important objectives to be

reached by mid-election term (ie mid – 2000). The Act on the Civil Service has been proposed

by the government and a first reading was held by Parliament in May 2001. However,

discussions so far have shown that a sufficient consensus on the reform is still lacking in

Parliament. In view of the key importance of this Act, this is regrettable.

In the meantime, some positive steps have been taken by the government. Thus, a Department

for the Civil Service has been established within the Office of the Government, with the task of

coordinating civil service reform. Also, a Code of Ethics for civil servants has been established.

Furthermore, a decision has been taken to set up an Institute of State Administration which will

be responsible for organizing training for all state civil servants.

In January, an amendment to the “Lustration Law” entered into force, prolonging its validity until

the Civil Service Act is adopted. As indicated in the previous Regular Report, it is important

that this deadline for terminating the lustration measures be respected.

The adoption of the Civil Service Act remains a precondition for establishing an independent,

professional, stable and accountable public administration. The previous Regular Report

identified the absence of this Act as impacting negatively on the effectiveness of the public

administration, in particular by encouraging short-term political appointments and by preventing

the establishment of attractive career prospects.

These concerns remain undiminished. Thus, a political agreement needs to beachieved in order

to take reform, including the Civil Service Act, forward. Membership of the EU will also create

new demands on the public administration, in terms of European policy-making, implementing

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the

acquis

and managing funds. Full political commitment is needed to adopt and implement the

necessary modernization of the administration for the Czech Republic to be prepared to fully

benefit from EU membership.

More progress has been achieved in taking forward the process of decentralisation with the

establishment at the beginning of 2001 of regional authorities and regional offices. Following the

November regional elections, several important laws entered into force: in particular, the Acts

on Regions, District Offices, and Budgetary Rules. The regions are still in the process of taking

up the new competencies attributed to them, (education, regional development, social affairs,

transport, culture, environment, health); in particular, the financial arrangements remain to be

settled.

The judicial system

Since the previous Report, the reform process has regained momentum, and the new Minister

of Justice has conducted a review of the comprehensive reform programme with a view to

ensuring Parliamentary acceptance of the remaining elements. The re-codification of civil law

has made good progress whilst efforts continue on criminal law as well as the organisation of the

courts and self-government of the judiciary.

The judicial system is composed of four main tiers: district courts, regional courts, high courts

and the Supreme Court. In addition there is the Constitutional Court, which may be addressed

directly in some cases. Prior to the communist era, the court system was largely based on that

of the Austro-Hungarian Empire. Subsequently, post 1989 basic codes have drawn upon pre-

war, communist and modern elements and thus have required extensive revision.

Currently, judges are nominated by the Ministry of Justice and appointed for life by the

President of the Republic. State prosecutors are subject to a security vetting procedure. T

Ministry of Justice determines the number of judges and state prosecutors and their promotion

and administers the budgetary resources of the judiciary. Judges’ salaries, which are relatively

high, are set by Parliament. Judges are constitutionally independent, although the Minister of

Justice can formally recall them.

The 1999 Accession Partnership established as short and medium term priorities the

implementation of a programme to reform the judiciary by filling vacancies, simplifying

procedures, and stepping up the training of judges in EC law, and furthermore by reforming the

functioning of the judges and state prosecutor’s office. The following developments can be

noted over the reporting period:

•

An important reform of the Criminal Proceedings Code has been adopted. The reform

eliminates the former duplication of tasks between investigators and prosecutors by shifting

the responsibility for the pre-trial phase to the prosecutors. Accelerated proceedings have

also been introduced for minor crimes. Thus the reform aims to increase the capacity to

investigate cases and bring them expeditiously to trial.

As regards civil and commercial law, the Act on Judicial Executors (Bailiffs) entered into

force in May 2001. Based on the French model of “huissiers de justice”, this Act aims to

ensure greater effectiveness in the application and enforcement of court judgements.

Subsequently, the first 89 executors were appointed. Also, amendments of the Civil

•

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Proceedings Code and the Commercial Code, which aim to simplify and accelerate

proceedings as discussed in the previous Report, came into force in January 2001.

•

Training is provided in a number of areas including human rights and civil and criminal

judicial cooperation. However, with a view to improving training capacity, the Ministry of

Justice is in the course of establishing a Judicial Academy, reworking the curricula for

training of judges, with assistance from Phare.

Some improvement has been achieved in the provision of administrative support to judges.

591 higher court officials (assistants) now work with judges and should help in speeding up

court proceedings.

Over the last year there has been an increase in the number of judges and state prosecutors

and these new posts have been almost fully filled. In April 2001 the number of posts for

judges was increased to a total of 2,893 (against 2,081 in 2000) with 2,585 serving judges,

implying 308 vacancies. The number of posts for State Prosecutors was increased to a total

of 1,055 posts (against 990 in 2000) with 936 serving individuals, implying 119 vacancies.

A new proposal has been made by the government to take a first step towards self-

government of the judiciary. It envisages the creation of new Judicial Councils which would

have the powers of consultative bodies. Emphasis is also put on life-long training and re-

examination of judges. The Parliamentary debate on this issue is ongoing.

•

The key areas for further improvement of the judicial system remain the speeding-up of court

proceedings, the enforcement of court judgements, training of judges and prosecutors and

administrative support for judges and courts. The implementation of the amended Civil

Proceedings Code should be underpinned by adequate human and material resources. Figures

from the Ministry of Justice show that the duration of criminal proceedings has been slightly

reduced in 2000 in comparison with 1999 and 1998

. However, as regards civil proceedings,

the situation has deteriorated

. It should be noted however that the amendment to the Civil

Proceedings Code only entered into force on 1 January 2001. In 2000, 32 disciplinary

proceedings were initiated against judges, and 20 so far in 2001 (July 2001).

Courts (in particular district courts, and partly regional courts) continue to suffer from a lack of

modern equipment and information technology, although some progress has been made. The

Phare programme is contributing to remedy shortcomings in this area.

Notwithstanding the key positive development represented by the setting up of specialised units

at the High Public Prosecution Offices and the Supreme Public Prosecution Office in Prague,

Olomouc and Brno, efforts need to be stepped up as regards the capacity to handle complex

cases of economic crime, including money laundering, and organized crime. In addition, special

attention needs to be given to ensuring ability to cope with EC law.

It remains important to find a workable consensus on the independence and self-government of

the judiciary.

(251 days for cases in district courts against 263 days in 1999 and 292 in 1998; 506 in regional court s against 542 days

in 1999 and 517 in 1998).

(555 days for cases in district courts in 2000 against 483 days in 1999 and 458 in 1997-1998).

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Overall, the judicial system is facing the task of upgrading itself to meet the increasingly complex

demands which are made of it. The government is making significant efforts to this end, and the

system is improving. The number of judges and prosecutors can be considered satisfactory and

the conditions are being created to allow increases in efficiency. However, further efforts are

needed.

Anti-corruption measures

The Czech authorities have taken some important measures to strengthen the fight against

corruption and economic crime. Nonetheless, corruption and economic crime (fraud, money

laundering, institutional theft and the phenomenon of “tunnelling” or asset-stripping) remain a

serious cause for concern. In fact, surveys of public opinion show a consistent increase in the

perception of corruption and economic crime. Concern is greatest as regards the state

administration, the police and intelligence services, healthcare, banking and the political sphere.

To address this issue, the following steps were undertaken during the reference period:

•

As mentioned above, the Criminal Proceedings Code has been adopted with the intention

of making the investigation of crimes more effective and increasing the capacity of the

authorities to bring cases to court.

Specialised units at the High Public Prosecution Offices and the Supreme Public

Prosecution Office on corruption and economic crime have become operational in Prague,

Olomouc and Brno. These Public Prosecutors have formed joint investigation teams

together with specialised police and investigation offices. Following these organisational

improvements there has been an encouraging increase in the capacity to bring cases to trial,

and during 2001 there have been a number of high-profile prosecutions and sentences for

economic crimes

In order to improve coordination among law enforcement agencies, the Government

created the National Criminal Office in January 2001. It brings all the specialised police

services together under a single framework.

The new Act on Witnesses provides the police with a legal instrument for applying

specialised protection measures for witnesses, in particular in cases concerning corruption,

economic crime and organised crime. This step should help ensure more effective

prosecutions.

•

At this stage it is too early to assess what impact these measures, together with the new

Criminal Proceedings Code, are having in practice. Figures made available by the Ministry of

Justice show the judicial results obtained during 2000. As regards corruption (bribery), there

were 160 prosecutions and 117 convictions. As regards “abuse of the position of public

officials” there were 232 prosecutions and 100 convictions. As regards “fraud” there were

9,445 prosecutions and 6,034 convictions, in “credit fraud” there were 619 prosecutions and

243 convictions, in “legalisation of proceeds from crime” there were 15 prosecutions and 6

convictions.

They have, so far, been processing 47 cases of serious economic and financial crime, involving 101 individuals.

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The Government’s report on progress in implementing the “Clean Hands Campaign” launched

against corruption in 1999 highlights concerns about possible cases of corruption among Judges

and State Prosecutors. It also highlights that organised corruption is most often encountered in

the traffic police and aliens services. The report further underlines a growing willingness on the

part of police officers to cover up corruption among colleagues. When analysing the typology

of the crimes committed by the police force, it is evident that crimes of abuse of power are

dominant (166 cases in 1999-38% of the total).

The report concludes that the lack of success of anti-corruption policy so far is due to

“implementing activities by state administration not

[being]

accompanied by adequate changes

in the political environment”. Thus there continues to be a need for clear political leadership and

setting of example from all political figures in order to create a more favourable environment for,

and to mobilise a sceptical public opinion behind, anti-corruption measures.

However, the continued absence of a civil service law and its counterpart for the police,

combined with insufficiently attractive career prospects, hamper efforts to fight corruption. In

this context, it is important for the government to ensure a high level of transparency in public

procurement decisions. Whilst the Act on Conflicts of Interest and the Code of Civil Service

Ethics establish standards which should be respected, they do not provide instruments for

enforcement, such as strong sanctions.

In November 2000 the Czech Republic signed the Council of Europe Civil Law Convention on

Corruption. The other major anti-corruption conventions have already been ratified. The

Czech Republic continues to participate actively in the monitoring of anti-corruption measures

adopted by the OECD working group on bribery in international commercial transactions.

1.2.

Human rights and the protection of minorities

As mentioned in the previous Regular Reports, the Czech Republic continues to respect human

rights and freedoms. The following section concentrates on major developments since the last

Regular Report.

The Czech Republic furthermore completed its participation in the

main international human

rights conventions

by signing the revised European Social Charter (see annex). However, the

Additional Protocol to the European Social Charter, providing for a system of collective

complaints, has not been signed.

In November 2000 the Czech Republic signed Protocol No. 12 to the Convention for the

Protection of Human Rights and Fundamental Freedoms, prohibiting all forms of discrimination.

Through the adoption of the new Law on the Rights of National Minorities, a first step forward

has been taken in transposing the anti-discrimination

acquis

(see below).

The internal institutional framework in the field of human rights remains stable and has been

consolidated. The outgoing Government Commissioner for Human Rights has been replaced

and the new incumbent continues to chair the Council for National Minorities, the Council for

Human Rights and the Inter-Ministerial Roma Commission. These structures together employ a

total of 13 staff and are financed from the budget of the Office of the Government. The

Commissioner and his staff could further develop the breadth and depth of their activities if

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more resources were made available. The role of these structures is discussed in more detail in

the relevant sections below.

The Public Protector of Rights (Ombudsman), and his deputy were elected by the Chamber of

Deputies and began operating in mid-December 2000. Since then the Office of the

Ombudsman has quickly acquired a high profile and attracts much public interest. Thus the

Ombudsman received a total of 3,538 complaints between February 2000, when the law

entered into force, and the end of April 2001. A total of 1617 (i.e. 46%) complaints have

already been dealt with. Most of the complaints concern restitution claims, disputes over real

estate and complaints about social insurance, the police, army and prison services. The Office

employs 46 people, including 14 lawyers, and has an independent chapter in the 2001 State

Budget amounting to € 4.3 million.

Following the loss of a number of cases in the course of 2000, a law on the provision of

information to the European Court of Human Rights and the statute on a government

commissioner to represent the Czech Republic at the European Court of Human Rights were

adopted.

Civil and political rights

Additional steps have been taken to further improve the protection of civil and political rights,

although some issues continue to merit attention.

There has been strong NGO criticism of the treatment of protestors detained by the

police

during the IMF/World Bank meetings in November 2000, with concerns about violations of

human rights being raised. The inspection service of the Ministry of Interior and the Police

Presidium carried out investigations but concluded that only 4 cases were found to be justified

and no police officers were charged with committing a criminal act. This outcome has raised

some questions about the effectiveness of the existing police complaints procedures.

As regards

police detention,

persons in detention continue to be unable to notify a third party

of their situation.

Trafficking in women and children

remains a cause for concern and therefore the government

has adopted a National Plan Combating Commercial Sexual Abuse. T Czech Republic

continues to be at the same time a country of origin, destination and transit. Increased efforts

are needed to successfully suppress such trafficking, which is closely linked to organised crime.

Also, increased provision should be made for the care and protection of the victims of

trafficking. Sex tourism prevention has been more actively enforced by patrols in high risk areas

and by public awareness campaigns.

Prison conditions

generally continue to meet minimum international standards and the Minister

of Justice has continued to take steps to improve the situation. Statistics from the Prison

Services indicate that as of May 31

the total population has fallen to 21,758, or 108% of

capacity, with pre-trial detainees making up 27% of the total. A further decrease is expected

due to the impact of the amended Criminal Proceedings Code which should shorten the time

necessary to bring cases to court and thus reduce the number of detainees held in

pre-trial

custody.

Also, the amendment to the custody law which came into force in January 2001

improves the conditions of detainees held in custody in line with the recommendations of the

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Committee of the European Convention for the Prevention of Torture and inhuman or degrading

treatment or punishment (CPT).

In July, the Government decided to grant temporary protection to Chechen refugees. In 2000,

8,788 people requested

asylum

in the Czech Republic, an increase of 22% on 1999. As of

May 13

, 6,315 people had requested asylum in 2001, suggesting another steep increase. In

2000, 133 people were granted asylum and, by December, 1,192 people covered were living

in the Czech Republic after being granted asylum there. The government continues to fund an

integration programme.

The

Aliens’ law

was amended in April 2001, on the basis of proposals made by the Czech

Council for Human Rights. In particular, new provisions allow children of foreigners living in the

Czech Republic to automatically acquire permanent residence. Most parts of the amendment

came into force in July 2001 while some parts will only enter into force in January 2002.

The Ministry of Interior’s Report on Extremism noted that in 2000 the number of

racially

motivated crimes

rose to 364, compared to 316 in 1999 and 133 in 1998. The Human Rights

Commissioner has called upon law enforcement agencies to be tougher in dealing with racially

motivated crimes.

In November an amendment to the Penal Code entered into force which imposes prison terms

of between 6 months and 3 years for denying the Nazi holocaust and the Communist genocide.

The amendment also outlawed the incitement of hatred based on race, religion, class,

nationality, or other group.

As regards

freedom of expression

and the media, in early 2001 certain Czech journalists and

the International Federation of Journalists expressed concerns as regards alleged political

influence in the Czech media. The Council of the Czech Republic for Broadcasting, charged

with oversight of public service TV, was accused of being subject to political influence. In

December 2000 it dismissed the Director-General of public television and then hastily

appointed a new, allegedly partial, Director-General. As a result, the staff of the public service

television first went on strike and then started to produce their own, competing, news

broadcasts. The annual report of the Czech Human Rights Commissioner concludes that neither

version of the news was objective.

New legislation has since been adopted , on the basis of which a new Council for Broadcasting

has been elected. The amended legislation aims to ensure that the composition of this Council

reflects a broad range of political, regional, social and cultural opinion. In addition, the

Chamber of Deputies adopted a Resolution calling on all politicians and constitutional bodies to

respect the independence of Czech Television.

The spirit in which these changes were made should be maintained.

Freedom of religion

is enshrined in the Constitution of the Czech Republic and no particular

problems have been noted in this regard.

The government has supported the

civil society

sector through the publicly funded Foundation

Investment Fund . In order to ensure that NGOs can become self-sufficient, the authorities are

encouraged to continue to develop a legal and fiscal framework which is favourable to NGO

development and which promotes a responsible domestic donor culture.

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As regards the

restitution of property,

in August the government took the first decision on the

transfer of property and land to the Association of Jewish Communities in the Czech Republic.

This decision was based on the Act on Moderating some Property Injustices caused by the

Holocaust, which entered into force in July 2000.

Economic, social and cultural rights

Some significant steps have been taken to further improve the respect of economic, social and

cultural rights, although certain issues continue to merit attention.

The amendment to the Labour Code that entered into force in January 2001 brought about

major legislative changes by introducing the principle of

equal treatment

for all employees and

strengthening the ban on any form of discrimination. Also, the amendment to the Civil

Proceedings Code, which came into effect in January 2001, shifts the burden of proof in cases

of discrimination based on gender.

The optional protocol to the Convention on the Elimination of All Forms of Discrimination

against Women (CEDAW) was ratified in February 2001.

According to statistical office data, in 1999, the average income of women was 73.2% of that

of men. In comparison to 1996, this implies a deterioration of 4%. The report on the fulfilment

of government priorities for the realisation of the equal opportunities between men and women

points to limited financial resources. Of the 200 members of the Chamber of Deputies, 31 are

women (16%) whilst of the 81 members of the Senate, 10 are women (12%). The Cabinet of

the government includes no women.

The Czech government has taken some steps to address the unequal access to employmentfor

the

disabled.

Thus, an amendment to the Act on Income Tax has increased the tax deductions

of employers who employ handicapped people.

The Czech-Moravian Confederation of Trade Unions, the major umbrella

trade union

organisation has denounced the labour practices of some foreign investors obstruct the right to

unionise. These worrying developments were also reflected in the Report on the Human Rights

situation for the year 2000, which stated that there had been efforts by employers to limit the

right of employees to unionise.

Minority rights and the protection of minorities

The 2000 Regular Report noted that increased efforts had been made by the Czech authorities

to address the condition of the Roma, notably in education, but that a lasting improvement

would require sustained effort over time. Over the reference period, considerable further efforts

have been made by the Czech government as regards national minorities and the Roma.

Overall, the situation as regards non-Roma minorities (for example, Slovaks, Poles, Germans,

Hungarians and Ukranians) is satisfactory. Part of the Roma population, estimated to be up to

300,000 or 3% of inhabitants, continues to suffer from widespread discrimination and from far

below average living conditions and opportunities. They also continue to be victims of racially

motivated crimes.

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Education levels for Roma children remain low. These children still account for some 70 % of

the children sent to special schools, with little chance of later entering mainstream schools. There

are a number of cases still pending at the European Court of Human Rights alleging

de facto

segregation. The Roma continue to suffer from a very high rate of unemployment and there has

been little progress in reducing this. Housing conditions are still much worse in the Roma

communities than amongst the general population. Many Roma reside in low-quality municipal

apartments often with inadequate hygienic conditions, which leads frequently towards social

marginalisation.

The 1999 Accession Partnership established as a short and medium term priority the continued

improvement of the situation of the Roma, by strengthening policies and budgetary means. The

following developments have been noted during the reference period:

•

Implementation of the Framework Convention for the Protection of National Minorities has

proceeded and was the subject of an opinion by the Council of Europe in April 2001. This

welcomes the efforts made by the Czech Republic and makes recommendations to further

help improve implementation.

The Law on the Rights of National Minorities, which entered into force in August 2001,

strengthens the legislative framework for the protection of minorities by providing a point of

reference for the judicial system and the administration. The law provides a definition of a

national minority as, “a group of citizens of the Czech Republic living on the current territory

of the Czech Republic that differentiate themselves from the rest of the citizens and through

their ethnic, linguistic and cultural origin create a minority that at the same time wish to be

considered a minority”. The rights which are granted to national minorities are set out in the

Law and include the right to use minority languages and the right of consultation on minority

issues.

Furthermore, the Law consolidates the institutional framework by formalising the status of

the Council for National Minorities as an advisory body to the government which, in the

future, will be headed by a member of the government. The body aims to ensure that

minorities have access to the decision making process as well as the opportunity to make

proposals. Thus the Council is to comprise representatives from the “national minorities”

together with representatives from state bodies. It also has responsibility for administering

state budget funds which are allocated for activities supporting minorities.

Building on the first experience in 2000, in 2001 the government allocated a further €

700,000 to the Inter-Ministerial Roma Commission to administer projects for the support

of the Roma community. Moreover, the permanent staff of the Commission was increased

by two.

Active steps have continued to be taken to promote mutual respect and to fight

discriminatory attitudes. State grants are given to support a number of activities by or for

national minorities. For example, the government approved the allocation of € 300,000 for

an anti-racism campaign entitled “Tolerance Project ” consisting of communication and

cultural activities focusing on the national minorities present in the Czech Republic.

The Ministry of Education has adopted a strategy for the improvement of the education of

Roma children. In June 2001, there were 221 assistant teachers helping Roma children in

•

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kindergartens, primary schools and special schools. In addition, the Ministry of Education ,

in conjunction with the Ministry of Culture, has taken measures to increase cultural

awareness and understanding by organising special seminars for teachers and continuing to

support the distribution of Roma publications in public libraries and schools.

•

The network of “Roma advisers” in the districts has continued to play a key positive role.

In practice, advisers have gradually become contact-points for the Roma communities

themselves. Advisers liase with the Inter-Ministerial Roma Commission and some are

currently members of it.

In April the Government Commissioner for Human Rights submitted the first report on the

fulfilment of one of the tasks contained in the government policy for Roma of June 2000. The

report indicates that the task concerning the legislative framework to allow for “equalising

actions” has not been fulfilled. The complete report is to be submitted by the end of October.

So far, however, progress on achieving the tasks set has been mixed. For example, the

government proposals to phase out the system of special schools and to facilitate integration of

Roma into mainstream primary schools were unsuccessful because they were part of a wider

reform of the education system which, regrettably, was rejected by Parliament.

Other areas requiring attention include the full integration of policies concerning the Roma and

other minorities at regional and municipal levels. Strategies need to be developed to improve

opportunites for Roma in employment and housing.

More generally, efforts need to be continued to strengthen respect within administrative bodies,

law enforcement authorities as well as in the majority population for cultural and ethnic diversity.

The central government should avail itself of the necessary means to be able to ensure that all

levels of administration, including regional and local, fully abide by and implement the legislation

in place as regards minority rights.

Inter alia,

an effective appeal system, which may lead to

appropriate compensation and sanctions, is required in order to deal with cases of

discrimination. Equally, the police and judiciary have a key role to play in ensuring impartiality

in their dealings with the Roma community.

Over and above the measures taken by the government and which have been reviewed above,

the challenge of improving the situation of the Roma community will need to be pursued

resolutely and vigorously.

1.3.

General evaluation

In its 1997 Opinion, the Commission concluded that the Czech Republic fulfilled the political

criteria. Since that time, the country has made considerable progress in further consolidating and

deepening the stability of its institutions guaranteeing democracy, the rule of law, human rights

and respect for and protection of minorities. Over the past year, further efforts have been made

in this direction. The Czech Republic continues to fulfil the Copenhagen political criteria.

The government has also taken steps to improve the functioning of the central and regional

administration. However, it is regrettable that the Czech Republic continues to lack a Civil

See "Making a success of enlargement: Strategy Paper and Report of the European Commission on the progress towards

accession by each of the candidate countries", COM (2001) 700.

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Service Act for its public administration; this is essential for establishing independence,

professionalism and stability.

The reform of the judiciary has gained significant momentum. Work in the area of civil law has

made good progress whilst efforts continue on criminal law as well as the organisation of the

courts and self-government of the judiciary. In particular, a radical reform of the Criminal

Proceedings Code has been adopted which aims to increase the capacity to investigate

effectively and bring cases efficiently to trial.

Some additional measures to fight against corruption and economic crime have been taken.

Nonetheless, corruption and economic crime remain a serious cause for concern, as evidenced

by a governmental report which calls on support from the political forces to address the issue.

The Czech Republic has consolidated its internal institutional framework in the field of human

rights. However, increased efforts are necessary to better fight the persistent trafficking of

women and children.

Considerable efforts have been made by the Czech government as regards Roma and other

minorities. However, further measures to combat widespread discrimination are needed, in line

with the government policy for the Roma of June 2000. The central government should ensure

that all levels of administration, including regional and local, fully abide by and implement the

legislation in place as regards minority rights and that the financial resources necessary to do so

are available.

Some progress has been made in addressing the Accession partnership priorities although

continued efforts are necessary. The government has proposed a

Civil Service Law

to the

Parliament but this has not been adopted and implementation of a comprehensive reform has

thus not started. Continued and encouraging progress has been made on the

reform of the

judiciary.

The majority of the tasks contained in the government’s resolution of 1997

concerning the

Roma

have been fulfilled and the government has adopted a long-term policy

towards the

Roma.

However, further efforts are needed to implement measures to fight

discrimination.

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2. Economic criteria

2.1.

Introduction

In its 1997 Opinion on the Czech Republic's application for EU membership, the Commission

concluded:

“The Czech Republic can be regarded as a functioning market economy; it should be able to

cope with competitive pressure and market forces in the Union in the medium term provided

that change at the enterprise level is accelerated.”

This finding was confirmed in the 1998 and 1999 regular reports. In its 2000 regular report the

Commission found that:

“The Czech Republic can be regarded as a functioning market economy and should be able to

cope with competitive pressure and market forces within the Union in the near term, provided

that it keeps up and completes the implementation of structural reforms.”

In examining the economic developments in the Czech Republic since the Opinion, the

Commission’s approach was guided by the conclusions of the European Council in

Copenhagen in June 1993, which stated that membership of the Union requires:

the existence of a functioning market economy;

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

In the analysis below, the Commission has followed the methodology applied in the Opinion and

the previous annual Regular Reports.

2.2.

Economic developments

The overall macroeconomic situation in the Czech Republic has improved.

In 2000, for the

first time after three years of recession, the Czech economy experienced positive GDP growth,

which accelerated in the first half of 2001. The economic upswing was primarily driven by high

fixed investment in the context of restructuring in the corporate sector and considerable foreign

direct investment inflows. This development has brought along a widening current account

deficit and has contributed, jointly with high energy import prices and price deregulation

measures, to an increase of the inflation rate. Driven by high foreign capital inflows, the Czech

koruna has appreciated against the euro. In order to stem this appreciation, monetary policy

eased modestly but has been tightened again in the light of stronger inflationary pressures. The

fiscal stance has remained quite loose and has a pro-cyclical effect on the economy. While, the

high general government deficit reflects the costs related to the clean up of the banking and the

corporate sector, it is also the result of only insufficient reforms in the area of mandatory

expenditures and shortfalls on the revenue side.

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Main economic trends

Czech Republic

Real GDP growth

rate

Inflation rate

- annual average

per cent

1996

4.3

1997

-0.8

1998

-1.2

1999

-0.4

2000

2.9

2001 latest

4.0 Jan-June

per cent

9.1

8.0

9.7

1.8

3.9

4.7

September

4.7

- December-on-

December

per cent

8.6

9.4

5.8

2.5

4.0

September

Unemployment

rate, end-year

- ILO definition

General

government budget

balance

Current account

balance

per cent

3.9

4.8

6.5

8.7

8.8

8.5

September

per cent of

GDP

per cent of

GDP

Million

ECU/euro

-1.7

-2.7

-3.8

-4.0

-4.2

-7.5

-6.1

-2.4

-2.9

-4.8

-3,426.3

-2,845.0

-1,191.8

-1,470.2

-2,567.5

-1,259

Jan-

June

Foreign debt

- debt export ratio

- gross foreign

debt

Foreign direct

investment in flow

- balance of

payments data

per cent

Million

ECU/euro

43.2

42.5

44.1

37.4

29.9

10,330

11,224

13,055

11,659

11,764

per cent of

GDP

Million

ECU/euro

2.5

6.6

11.6

9.0

2,579

Jan-

June

1,140.3

1,152.2

3,317.3

5,932.8

4,979.6

PROXY HICP since 1996 (see methodological notes).

Moving 12-month average rate of change, national CPI

National CPI

Source: Website of National Bank

National CPI

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Progress in the area of structural reform has been mixed.

As indicated by strong foreign

direct investment and a substantial growth rate in fixed investment, restructuring and

modernisation in the corporate sector accelerated and strengthened the production capacities of

the economy. Foreign-owned companies developed better than domestic enterprises which still

face considerable difficulties in access to bank and market financing. Though the financial

sector has been improving, its role as a financial intermediary has remained weak. The

privatisation of the last majority-state-owned commercial bank in June 2001 should contribute

to a further improvement. Though privatisation in the corporate sector did not progress as

initially scheduled, four strategic enterprises have been privatised. The efforts of the government

to clean up the bad assets through Konsolidacni Banka were encouraging but have stalled.

Since September 2001, Konsolidacni Banka has been transformed into the Czech

Consolidation Agency, a non-bank institution which is officially assigned with the task of

managing and pooling bad assets and selling them off to private sector investors.

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Main Indicators of Economic Structure in 2000

Population (average)

GDP per head

thousand

PPS

Per cent of EU

average

Share of agriculture

in:

- gross value added

- employment

Investment-to-GDP ratio

Gross foreign debt/GDP

Exports of goods & services/GDP

10,273

13,500

per cent

Million Euro

Euro per head

3.9

5.1

28.3

40.8

71.4

22,732

2,213

Stock of foreign direct investment

P: provisional data

The Czech Republic has made no further progress in catching up with the EU.

The 2000

average per capita income in purchasing power standards amounted to 60% of the EU average.

This was the same level as in 1999. Hence, last year the downward trend starting in the mid

nineties has come to a halt. There is a marked difference between the capital and the rest of the

country. The capital, Prague, reached 115% of the EU average but all other regions remained

well below 75% in 1998. The economic activity rate has remained rather constant at around

60% - 61% between 1995 and 2000. However, over the same period, the employment rate fell

significantly, reflecting the rise in unemployment. The unemployment rate was 8.8% in 2000 with

higher rates for young people (17%) and women (10.5%) than for men (7.3%). Unemployment

has been increasingly concentrated among the less skilled and the rise of long-term joblessness

has continued for several years now. Long-term unemployment continues to rise and reached

4.3% of the labour force in 2000. Prague is hardly affected by unemployment while regions

under industrial restructuring are burdened with persistently high unemployment rates.

Figures have been calculated using the population figures from National Accounts, which may differ from those used in

demographic statistics.

Agriculture, hunting, forestry and fishing.

Data refer to Gross fixed capital formation as % of GDP.

Estimated.

Figures have been calculated using the population figures from National Accounts, which may differ from those used in

demographic statistics.

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2.3.

Assessment in terms of the Copenhagen criteria

The existence of a functioning market economy

The existence of a functioning market economy requires that prices, as well as trade, are

liberalised and that an enforceable legal system, including property rights, is in place.

Macroeconomic stability and consensus about economic policy enhance the performance of a

market economy. A well-developed financial sector and the absence of any significant barriers

to market entry and exit improve the efficiency of the economy.

There is a consensus about the most urgent economic policy priorities in the Czech

Republic but longer-term structural issues remain to be addressed.

The agreement

between the minority government and the largest opposition party has continued and the state

budget for 2001 was approved by Parliament on time, which had not been possible in the year

before. Although there is a consensus on economic policy priorities, no agreement on the

implementation of measures to reduce budget deficits could be found. As a result, the

government has resorted to extra-budgetary funds (housing, transportation) and short-term

adjustments in order to meet the growing needs for public investment on the one hand, and the

increasing costs of the clean up of the banking sector on the other hand. Also, a consensus

needs to be built on a strategic approach to employment and social policy.

In April 2001, the government approved the first Czech "Pre-accession Economic

Programme" (PEP), which is part of the pre-accession fiscal surveillance procedure

launched by the EU Commission.

The PEP was prepared under the leadership of the Ministry

of Finance. Line ministries and institutions like the Czech National Bank (CNB) contributed to

the drafting. Since the government has approved the PEP, it represents a firm political

commitment, and it is important that the PEP is fully anchored into the government’s decision

making process.

In June 2001, the government approved the "Strategy for Promoting Economic

Growth", the so-called "Big Bang plan".

Under the approved scheme, a total of CZK 166

billion would be spent in 2001 and 2002. For the current year, the envisaged expenditures are

included in the approved budget.

The Czech economy has returned to growth.

In 2000, real GDP growth amounted to 2.9%.

The economy enjoyed significant export growth with 23.4% at current prices. However, this

impressive development was outpaced by even stronger import growth of 27.9%. The

recovery of domestic demand was primarily due to a rise of 4.2% in fixed investment reflecting

the realisation of latent restructuring needs and high foreign direct investment inflows. Overall,

gross capital formation jumped by 10.3%. Household consumption rose only 1.8% and

government consumption decreased by 1.3%. In the first half of 2001, GDP grew by 3.4%

annually. Gross fixed capital formation and final consumption of households, with growth rates

of 7.7% and 3.8% respectively, pushed up GDP, while government consumption fell. Over the

last twelve months, labour productivity grew faster than real wages.

The nature of the economic pick-up has had a delayed impact on the labour market.

The

participation rate fell from 71.8% in 1999 to 71.2% in 2000, and the employment rate

decreased from 65.6% to 64.9%, respectively. New investment generated new employment

opportunities while accelerating restructuring resulted in job losses. The widespread use of

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early retirement schemes also influenced the decrease of unemployment. The unemployment

rate rose slightly to 8.8% at the end of 2000, from 8.7% in 1999, but has been decreasing since

and reached again 8.5% at the end of September 2001. Unemployment has been increasingly

concentrated among the less skilled. The rise of long-term joblessness has continued for several

years now. In 2000, it increased to 4.3% of the labour force, up from 3.1% in 1999. Efforts

of the authorities to improve flexibility on the labour market have been unable to reverse this

unfavourable trend so far. The scarcity of affordable housing in particular has hampered

mobility. The mismatch between social benefits and minimum wages has been another

restraining factor.

The inflation rate edged up to 3.9% in 2000 from a very modest 1.8% in 1999.

In the light

of increasing economic activity, the impact of price deregulation, and higher oil and gas prices,

inflation nevertheless remained subdued. Net inflation amounted to 3%. Yet again in 2000, the

net inflation target of the CNB, set at 4.0±0.5%, was undershot. In the second quarter of

2001, inflation accelerated at a faster pace. The structure of the price increases (mainly food,

transport and recreation) indicated that inflation was not only driven by external factors but was

more broad-based. However, inflation (national CPI) decelerated again in September 2001.

In April 2001, the CNB changed its inflation target from net inflation to headline

inflation.

For the current year, net inflation still serves as the reference and is targeted to end

up at 3.0±0.5%. The "Long-term Monetary Strategy for the period 2002 to 2005" has

embarked upon headline inflation targeting, which facilitates the reception by the public, even

though in an economy with transition features headline inflation might be more difficult to

forecast. However, the central bank would apply escape clauses should unexpected moves in

administered price deregulation occur. The inflation target is set as a band which should

continuously fall from 3% - 5% in January 2002 to 2% - 4% in December 2005.

Monetary policy has remained accommodating over the last twelve months.

In February

2001, the CNB lowered all its policy rates. The key two-week repo rate was cut to 5%, the

discount rate to 4% and the Lombard rate to 6%. The move did not feed through in higher

lending to the corporate sector as commercial banks, still in the process of improving their risk

assessments and overall governance, have remained cautious in lending. In reaction to the pick-

up in inflation throughout the first half of the year, the CNB increased the policy rates by 25

basis points at the end of July this year. This step underpins the CNB’s commitment to price

stability.

In an environment of strong foreign capital inflows, the Czech koruna has continued to

appreciate against the euro.

The appreciation has not adversely affected the competitiveness

of Czech exports so far. However, to avoid an undesirable strength of the currency, the

government and the CNB have agreed on joint measures. One of these is the establishment by

the CNB of a special account to collect privatisation receipts from foreign investors. The CNB

has expressed its willingness to use intervention in the foreign exchange market.

The current account balance has been deteriorating significantly.

In 2000, the current

account balance showed a deficit of 4.8% of GDP and in the second quarter of 2001, it is

estimated to amount to 5.5% of GDP. The sharp deterioration is due to the rising trade deficit.

The latter has been influenced by rising oil prices but also by the need to import sophisticated

investment goods in the light of economic restructuring. In particular, the structure of imports

indicates that there has been no move towards a higher share of consumer goods so far. The

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current account deficit has been more than fully covered by the surplus on the financial account.

The Czech Republic has been recording massive inflows of foreign direct investment which

reached 9.1% of GDP at the end of 2000 and the performance in the first half of 2001 has been

similar. However, the portfolio investment balance recorded a net outflow, which mainly reflects

Czech commercial banks’ purchase of foreign securities.

The general government deficit widened in 2000.

Based on GFS methodology, the general

government featured a deficit of 4.3% of GDP in 2000 excluding privatisation revenues, up

from 1.6% of GDP in 1999. According to harmonised EU standards (ESA 95), the general

government deficit widened from 4% in 1999

to 4.2% in 2000

. The deficit for 2001 has

been planned at 7% of GDP. The rising deficit is the result of shortfalls on the revenue side. On

the expenditure side, they combine two effects. One is the one-off effect of the clean up of the

banking sector and the restructuring of the corporate sector, due to delayed implementation of

structural reforms. The second effect is the increase in mandatory expenditures from insufficient

reforms of the social security system, and which represent a medium-term challenge to fiscal

consolidation. The government has started to reform the pension system by modifying generous

early retirement schemes and strengthening the relationship between contributions and benefits.

However, only a more profound reform of the complete social security system can ensure its

sustainability, as regards the ageing population, inter-generational acceptance and

competitiveness.

General government debt has been growing fast, though its level is still low in

international comparison.

The deficits of the state budget as well as the losses of

Konsolidacni Banka, and ad hoc expenditures related to covering costs (e.g. the collapse of the

credit unions) have added to the debt stock. In 2000, the general government debt, in ESA 95

standards, increased to 17.3% of GDP compared to 15% in 1999. This general government

debt does not include all liabilities of the state nor the indirect liabilities of the government in the

form of state guarantees, which in the Czech Republic are substantial.

Some progress was made towards greater fiscal transparency, but the implementation of

new off-budget funds has complicated the structure of public budgets.

Starting with the

2001 budget, the government has integrated into the state budget the operations of the State

Financial Assets and Liabilities, which include what are termed "transformation institutions" such

as Konsolidacni Banka. This move has reinforced the credibility of the state budget balance

and strengthened parliamentary control over public finances. However, the implementation of

the new off-budget entities created in 2000 - the Transportation Fund and the Housing Fund -

to finance infrastructure expenditures, has unnecessarily added to the complexity of public

budgets. The National Property Fund is supposed to provide financing to these funds (which

links their financial basis to a certain extent to privatisation receipts). In the context of pension

reform, the government is planning to set up another extra-budgetary fund, the Social Insurance

Fund.

A large part of this rise in the 1999 deficit is due to the different accounting rules for bank restructuring costs, under the

GFS or ESA 95 methods.

Two figures are given for the government balance. One is based on the most commonly used national concept, and the

other is calculated according to the European System of Accounts (ESA 95), which was reported by the candidate

countries for the first time this year.

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First steps to enhance the budgetary process are taken.

In 2001, the new Act on

Budgetary Rules, which defined the budgetary process for the state budget, came into force.

Furthermore, the government is preparing a new framework that refers to all governmental

levels. The concept is based on five principles (fiscal transparency, budgetary stability,

allocative and operational efficiency, decentralisation, and financial management) which should

help to better plan and control budgetary processes. The implementation of an adequate

budgetary framework comprising planning, execution, monitoring and final evaluation of

budgetary processes on all administrative levels seems to be an urgent task.

Policy co-ordination between the government and the CNB has remained good.

It has not

been adversely affected by the new procedures set out in the amendment to the CNB Act,

which entered into force at the beginning of 2001. In April 2001, the government and the CNB

reached agreement on the inflation target for 2002 and the new inflation targeting framework.

In view of the appreciating trend of the Czech koruna, both institutions have furthermore agreed

on joint measures to keep the exchange rate at an appropriate level.

Market forces determine the prices of the vast majority of goods and services.

Trade and

foreign exchange regimes have been liberalised. The government has committed itself to

completing the process of price deregulation by the end of the parliamentary term in mid 2002.

Keeping to the schedule of price adjustments is crucial, to support the CNB's inflation target

and to allow for cost recovery specifically in the area of utilities. Administered prices form

nearly 18% of the consumer basket. Price alignments in the energy sector have continued in

2000 and in 2001. The government's effort to replace the current regime for rents, which had

been deemed unconstitutional by the Constitutional Court, by an alternative system was brought

down in Parliament. The persistence of the rent regime hampers labour market mobility and

acts as a strong disincentive for potential investors in housing.

The privatisation process has continued.

80% of GDP is produced in the private sector. The

State, through the National Property Fund, holds stakes in 281 companies, but only those in 38

"strategic" companies are financially significant. Since the last Regular Report, only four big

privatisations have taken place so far: Prazske vodovody a kanalizace (operations, but not

infrastructure), Komercni Banka, Ceske Radiokommunikace and Ceska Pojistovna . The

government has committed itself to an ambitious privatisation plan for 2001, which includes the

telecommunication companies, the electricity and gas operators and distributors, and the steel

makers. Privatisation remains a central element of the government’s economic reform strategy.

Overall, market entry and exit mechanisms are slowly improving.

Business registration

continues to be a cumbersome process, marred by inequality of treatment and lack of

transparency. The number of newly created firms in the SME sector amounted to roughly

25,000 in 2000 while the total number of SMEs reached about 760,000. Domestic start-ups

continue to face a difficult financing environment, as the commercial banks have remained

cautious in lending.

The implementation of the amended Bankruptcy Law in May 2000 has resulted in only

modest improvements.

Though creditor rights in bankruptcy procedures have been somewhat

strengthened, they remain limited as regards the creditor's possibility to control the process.

The role of the court continues to be dominant. Composition (reorganisation) as an effective

proceeding to resolve insolvency cases by mutual agreement has still not been sufficiently used.

The Bankruptcy Law needs to be amended yet again in order to provide the enterprise sector

with an efficient way to disposing of assets of companies in difficulty. The government is

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preparing a new Bankruptcy Law which aims at resolving the remaining problems and which,

furthermore, needs to be fully compatible with the acquis.

There continues to be serious concern about economic crime and its impact on the

business climate in the Czech Republic.

In particular, the practice of stripping of assets from

enterprises, known as “tunnelling”, has become more sophisticated. This situation represents a

major challenge for the law-enforcement authorities. The police has increased the number of

cases brought to the attention of the courts, and the courts have handed down convictions in

several high-profile cases.

Banking restructuring has made considerable progress.

At the end of June 2001, the

banking sector comprised 40 commercial banks, of which 27 had majority foreign ownership.

Nearly 90% of total banking assets are managed by foreign-controlled banks. With the sale of

Komercni Banka privatisation of the banking sector was completed. Prior to the sale, Komercni

Banka had been largely freed of its non-performing loans, which had been transferred to

Konsolidacni Banka. Additionally, the state provided a guarantee worth CZK 20 billion in

order to cover doubtful loans. The take-over of Investicni a Postovni Banka (IPB) by

Ceskoslovenska Obchodni Banka (CSOB) in June 2000, after IPB had been put into forced

administration, has still not been finally settled. In order to encourage the take-over, the

government had initially issued a full guarantee over IPB's assets which was supposed to expire

by the end of June 2001. However, the government and CSOB have not yet reached

agreement on the final conditions of IPB's sale.

The overall health of the banking sector has improved in 2000.

Total bank assets

represented about 143% of GDP at the end of 2000. Commercial banks achieved a profit of

CZK 15.0 billion against a loss of CZK 5.6 billion in 1999, and their capital adequacy has risen

from 13.6% to 14.9%. In spite of an increase in the volume of client deposits, the volume of

outstanding loans has decreased. Financial intermediation reached only a modest 57% of GDP.

The high amount of non-performing loans continues to act as a drag on the banking sector,

though the government bailouts have decreased the share of classified credits to 29.5% as a

percentage of total credit volume at the end of 2000, down from 32.2% at the end of 1999. In

2000, reserves and provisions covered about 65% of non-performing loans.

Non-performing loans of Czech commercial banks have reached 28% of GDP.

In 2000,

roughly 35% of the non-performing loans of commercial banks were labelled as losses. Non-

performing loans of the old IPB could amount to additional 4% of GDP. In aggregate data, the

Konsolidacni Banka group had assets of CZK 284 billion at the end of 2000. Konsolidacni

Banka has started to tackle its portfolio of assets in order to maximise recovery and minimise

the costs of managing these assets. In February 2001, Konsolidacni Banka auctioned off a first

block of some 500 loans worth a nominal CZK 12 billion which drew interest from international

debt-recovery firms. The proceeds from the sale reached 7% of nominal value, which compares

favourably to the return on assets through the bankruptcy procedure. Konsolidacni Banka also

sold some CZK 1.9 billion worth of claims on the Internet. Since then, however, this process

has stalled. In August 2001, Konsolidacni Banka ceased to exist and was replaced by a Czech

Consolidation Agency, dedicated to the management and recovery of bad assets. This new

agency will work without a banking licence, which frees it from restrictions concerning

ownership positions.

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Financial intermediation of the securities market has remained on a low level.

Market

capitalisation reached 23.2% of GDP at the end of 2000. As regards the other non-bank

financial sector, its importance is also very limited, but in particular the insurance and the leasing

sectors show dynamic growth tendencies. The situation on the Czech capital markets is

improving slowly. The Czech Securities Commission has played a more active role and

progress in legislation has been made. The legal environment has been adjusted towards EU

standards with the entry into force on 1 January 2001 of three pieces of legislation: the

amendments to the Commercial Code, the Securities Act, and the Bonds Act. Another

amendment regarding the competencies of the Securities Commission is under discussion. It

aims to increase the Securities Commission's regulatory and enforcement powers and to transfer

from the Ministry of Finance to the Securities Commission the supervision of pension funds.

Supervision of the financial sector has improved but needs further strengthening

particularly in the non-banking sector.

Supervision of the financial sector is carried out by

three bodies, the CNB, the Ministry of Finance and the Czech Securities Commission. They

co-ordinate their supervisory work based on a trilateral agreement. The supervisory bodies

jointly aim to develop a system of consolidated supervision, which is urgently needed.

Furthermore, the building of risk-based supervision and supervision of financial conglomerates

remain to be tackled.

The capacity to cope with competitive pressure and market forces within the

Union

The ability to fulfil this criterion depends on the existence of market economy and a stable

macroeconomic framework, allowing economic agents to make decisions in a climate of

predictability. It also requires a sufficient amount of human and physical capital, including

infrastructure. State enterprises need to be restructured and all enterprises need to invest to

improve their efficiency. Furthermore, the more access enterprises have to outside finance and

the more successful they are at restructuring and innovating, the greater will be their capacity to

adapt. Overall, an economy will be better able to take on the obligations of membership the

higher the degree of economic integration it achieves with the Union before accession. Both the

volume and the range of products traded with EU Member States provide evidence of this.

The Czech economy is a functioning market economy.

Macroeconomic stability has

improved during the last twelve months but remains endangered by simultaneously growing

external and fiscal imbalances. Macroeconomic policy has been conducted with a sufficient

degree of predictability to allow proper decision-making by economic agents. Co-ordination of

economic policies and an improved macroeconomic stability have contributed to a better

environment for economic activity.

The Czech Republic has a well-skilled labour force.

The good quality of professional

education and short qualification periods of the labour force represent an asset in competition

for foreign direct investment. However, the share of persons with tertiary education amounts to

12%, which is low in international comparison while most of the labour force has completed

secondary schools (66%). With rapidly changing requirements on the labour markets and the

increasing integration into the world economy, the Czech education system faces the challenges

of increasing the share of academics and of providing tools to enable the workforce to adapt to

life-long learning.

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Employment policy measures are focused on fostering labour market flexibility.

There

seems to be a policy consensus on the most pressing labour market deficiencies in the Czech

Republic: increasing regional disparities in unemployment, rising unemployment levels within

what are considered high-risk groups and a declining employment rate, especially in the older

age groups. Nevertheless, progress towards resolving these problems has been slow. The

mobility of the labour force remains restrained as long as adequate housing cannot be provided

due to the highly regulated rent market. Active employment policy measures need to be

focused on target groups with a clear linkage to market requirements. The abolition of too

generous early retirement schemes, as introduced recently with the first step of pension reform

measures, will help to safeguard an adequate employment level.

For years, the Czech Republic has experienced high levels of gross fixed capital

formation.

As a ratio of GDP, fixed investment has been fluctuating around 27% of GDP.

Physical infrastructure is well developed overall. The additions to the capital stock have

improved output growth, and taken into account recent progress in corporate restructuring, it is

evident that investment is starting to bear fruit. It is worth noting that productivity growth has

continued to outstrip real wage increases. As regards general government expenditures , it is

noteworthy that the share of capital expenditure as a ratio of GDP has remained high compared

to the EU average. For 2001, it is planned to amount to 6.1% of GDP (6% in 1999).

The Czech economy has continued to successfully attract strong foreign direct investment

(FDI) inflows.

In 2000, the inflows amounted to € 4.98 billion or about 9.3% of GDP. 82%

of FDI inflows originated from the EU and about 95% from OECD countries. FDI was

concentrated in manufacturing and financial services. In the first half of 2001, the Czech

Republic received an amount of € 2578 million of FDI inflows. Greenfield investments in

manufacturing have been particularly promoted by the investment incentives packages

introduced in 1998 and made uniform by law since 2000. The programme has been adjusted in

2001 in order to fully bring the investment incentives under the Act on State Aid in line with the

acquis. Currently, the benefits of the programme are being extended to investments in high

technology and services. The package of investment incentives contains the possibility of direct

tax holidays of up to ten years, duty free technology imports, job creation and training grants,

and subsidies for building up infrastructure.

The process of enterprise restructuring has been uneven.

Restructuring of export-oriented

firms in foreign ownership has been proceeding considerably faster than that of domestic firms.

The financial performance of the corporate sector as a whole has begun to improve, mainly

thanks to the development of foreign-owned enterprises. A large part of the domestically

owned enterprises have remained highly indebted and loss-making. The revitalisation

programme introduced in 1999 has been reoriented. The Revitalisation Agency, which was in

charge of restructuring eight large-scale enterprises in distress, has been re-integrated into

Konsolidacni Banka. However, two enterprises have been privatised and another four

companies are supposed to be sold soon. The results of revitalisation have been difficult to

achieve, mainly because of the delays and inadequacies of the legal framework, especially the

bankruptcy procedure. Restructuring of the steel sector and of the chemical industry still has to

be tackled.

The importance of small and medium-sized enterprises (SMEs) has been growing though

these suffer from difficulties in external financing.

In 2000, SMEs comprised nearly 60%

of the Czech workforce and they produced around 40% of the GDP. As regards external

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trade, the SME sector contributed slightly more than 36% to total exports and absorbed 49%

of the Czech imports. However, limited access to outside financing and to business advice have

continued to restrain the economic potential of this sector. Commercial banks have remained

cautious in lending money to SMEs. The government has adopted a number of measures to

further enhance the economic environment for SMEs, but only full and transparent

implementation of the programmes can contribute to substantial improvements.

The openness of the Czech economy has been growing continuously.

In 2000, exports and

imports of goods and services amounted to 150% of GDP, compared to 127% a year earlier.

Trade integration with the EU has reached a high level. Czech exports to the EU accounted for

about 69% of total exports while imports from the EU amounted to 62% of the total. In

general, trade with developed market economies has intensified further. As regards the

commodity structure, external trade is focused on higher value-added goods. Machinery,

transport equipment and other manufactured products have remained the main traded goods.

These categories have also continuously increased in importance as a share of total exports to

the EU. The price competitiveness of Czech goods improved slightly in 2000.

2.4.

General evaluation

The Czech Republic is a functioning market economy. Provided that it makes further progress

towards medium-term fiscal consolidation and completes the implementation of structural

reforms, it should be able to cope with the competitive pressure and market forces within the

Union in the near term.

The macroeconomic performance has improved overall. Growth has resumed and broadened,

while the favourable performance on inflation has been maintained. Efforts are being made to

increase the transparency of the public accounts. Sustained high domestic and, in particular,

foreign, investment has engendered substantial restructuring and high productivity growth in the

corporate sector. Further progress has been made on the restructuring of banks and

privatisation of this sector is complete.

However, the current account deficit has widened and the budget deficit has considerably risen,

driven by transformation related one-off costs and an accommodating cyclical stance. In

addition, the medium-term sustainability of public finances is not yet assured. Further

improvements of the legal framework for market entry and exit, as well as a forceful

implementation of the prudential regulations for the financial sector are essential. The authorities

should resume the process of disposing of bad loans after the restructuring of banks. Their

efforts to privatise or restructure the remaining large state-owned enterprises should be pursued

actively so as to strengthen corporate governance and efficiency.

See "Making a success of enlargement: Strategy Paper and Report of the European Commission on the progress

towards accession by each of the candidate countries", COM (2001) 700.

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3. Ability to assume the obligations of membership

Introduction

This section aims to update the Commission’s 2000 Regular Report on the Czech Republic’s

ability to assume the obligations of membership - that is, the legal and institutional framework,

known as the

acquis,

by means of which the Union implements its objectives. Alongside an

evaluation of relevant developments since the 2000 Regular Report, this section seeks to

provide an overall assessment of Czech Republic's ability to assume the obligations of

membership, and of what remains to be done. This section is structured to follow the list of

twenty-nine negotiating chapters, and incorporates an assessment of the Czech Republic’s

administrative capacity to implement the

acquis

in its various aspects. The Czech Republic’s

progress in translating the

acquis

into its official language is assessed in a separate section.

The European Council in Madrid in December 1995 referred to the need to create the

conditions for the gradual, harmonious integration of the candidates, particularly through the

adjustment of their administrative structures. Taking up this theme, in Agenda 2000 the

Commission underlined the importance of effectively incorporating Community legislation into

national legislation, and the even greater importance of implementing it properly in the field, via

the appropriate administrative and judicial structures. This is an essential pre-condition for

creating the mutual trust indispensable for future membership.

The European Council in Santa Maria da Feira and in Gothenburg in June 2000 and June 2001

respectively recalled the vital importance of the applicant countries’ capacity to implement and

enforce the

acquis,

and added that this required important efforts by the applicants in

strengthening and reforming their administrative and judicial structures.

Building on the

assessment of the Czech Republic’s administrative capacity provided in the 2000 Regular

Report, the present Report seeks to add further depth and detail, focusing on the main

administrative structures which are required for implementing the

acquis

in its various aspects.

In the 2000 Regular Report, the Commission concluded that :

“Since the previous Regular Report there has been a significant acceleration in the rate of

legislative alignment with the EC acquis although further efforts are needed in a number of key

areas. There has also been some progress in strengthening administrative capacity although the

delays in administrative and judicial reform have hampered these efforts.

There has been good progress in legislative alignment in key areas of the

internal market

acquis. Regarding the free movement of goods, legislation has been adopted covering a wide

range of sectors from toys to pharmaceuticals. As regards the free movement of capital, the

law against money laundering has been strengthened although a clear timetable is needed for the

cancelling of existing anonymous bank accounts. In the area of free movement of services,

capital market surveillance needs to be further strengthened. In the fields of intellectual property

significant progress has been made in aligning with the acquis although the effectiveness of the

regulatory bodies needs to be improved. As regards competition law some gaps remain on

anti-trust but legislation has been further aligned regarding state aids.

Concerning the field of

innovation,

a great deal of progress in transposing the acquis has been

made concerning the liberalisation of the telecommunications market through the strengthening

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of the regulatory body and the abolition of the exclusive rights of the current operator. On

audiovisual policy, further efforts are needed for alignment with the acquis and it is necessary in

particular to strengthen the supervisory authority.

Progress has also been made on sectoral policies. As regards industry, the government has

promoted enterprise restructuring and accelerated privatisation, in particular through the work

of the Revitalisation Agency, with the exception of the steel sector. For transport, alignment has

progressed in all sectors; on high-speed rail systems, road transport, air transport, inland

waterways and maritime transport.

In the area of

economic and social cohesion,

good progress has been registered. In the field

of social policy and employment, employment strategy is in line with EU principles and policy

and social dialogue has been strengthened. On regional policy, territorial organisation is in line

with EU classification, a new Act regulates regional development and the institutional framework

has been clarified.

In the field of

agriculture,

progress has been made to prepare the measures required to

implement the

Common Agricultural Policy,

notably with new legislation on the establishment

of the State Agriculture Intervention Fund. In the field of

veterinary and phytosanitary

legislation, progress has been made with alignment.

As regards the

environment,

further efforts are needed to transpose the acquis in the areas of

air pollution, waste management and water quality and Environmental Impact Assessment.

Furthermore, more coherent medium term financing strategies need to be established.

In the field of

Justice and Home Affairs,

the effectiveness of border policing continues to be

deficient with co-ordination still needing to be improved between ordinary and border policing,

as well as with customs authorities. There has been no substantial progress in the fight against

corruption and organised crime.

As regards

administrative capacity,

the bodies responsible for standards and certification of

goods generally function well. However, in the field of services, the Securities Commission

should be further reinforced. As regards competition, the state aid monitoring authority needs to

be reinforced whilst the Office for the Protection of Competition is well established. As regards

agriculture, progress has been achieved as regards the introduction of an administrative structure

for common market organisations, notably with the adoption of the Act on the State Agricultural

Intervention Fund. In regional policy, preparation for the structural funds has been taken forward

with the establishment of territorial units in accordance with the acquis classification. For the

environment, approval has been given to increase the staff in the Ministry of Environment and in

the Czech Environmental Inspectorate, although training needs to be improved and financial

resources increased. As regards Justice and Home Affairs, visa matters are now overseen by the

newly established Department for Immigration and Border Control and a first step in reforming

organisational structures was taken to improve border controls. However, overall, insufficient

progress has been made in this area, which suffers from insufficient staff and poor equipment as

well as organisational weaknesses.

The majority of the priorities of the

Accession Partnership

have been addressed although the

efforts made thus far should be built upon in order to meet more fully the set objectives.

Progress has been particularly satisfactory on free movement of goods, employment and social

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affairs and telecommunications. However in some areas the short-term priorities have not been

sufficiently pursued. This is the case as regards Company law with respect to minority

shareholders, and in the area of the free movement of services where capital market surveillance

has not been adequately strengthened. As regards the audio-visual sector, little alignment has

taken place. Progress on the environment and Justice and Home Affairs has been limited.

The Czech Republic has already started to address a number of the medium-term Accession

Partnership priorities.”

3.1.

The chapters of the

acquis

As indicated, the review of the Czech Republic’s ability to assume the obligations of

membership that is below has been structured in accordance with the list of twenty-nine

negotiating chapters. Accordingly, this section opens with an assessment of progress related to

the so-called “four freedoms”, the cornerstones of the internal market, and continues with a

systematic review of progress on each of the chapters, to cover the

acquis

in all its various

aspects, including sectoral policies, economic and fiscal affairs, regional policy, environment,

justice and home affairs, external policies, and financial questions.

Chapter 1: Free movement of goods

The positive assessment of the last two Regular Reports, noting continued progress, can be

repeated this year.

Framework legislation in the area of

horizontal and procedural measures

is largely in place.

The Act on Public Health Protection entered into force in January 2001, further aligning

horizontal legislation on public health protection with the

acquis.

The July 2001 Act on General

Product Safety provides the framework for safety checks at external borders in line with the

acquis

on product safety in the case of products imported from third countries. There are no

particular developments to report in the areas of administrative capacity for free movement of

goods between Member States (the ‘strawberry’ regulation), notification, or the interchange of

data between administrations, where preparations are ongoing.

Further progress has been achieved on the alignment of

sector specific legislation

with the

entry into force of new Government Orders and amendments to existing Government Orders

transposing the relevant New Approach Directives. About 90% of Harmonised European

Standards have now been implemented.

Concerning the New Approach Directives, following the entry into force of the new

Telecommunications Act and two implementing decrees in 2000, a Government Order on

technical requirements and conformity assessment for Radio and Telecommunications Terminal

Equipment entered into force in May 2001. Government Orders have entered into force for

Home Appliances and Non-Automatic Weighing Instruments (NAWI) with elements of the

latter (mainly on marking) to come into force on accession. Progress has been achieved with

the adoption of new Government Orders on Recreational Craft and

in vitro

diagnostic medical

devices and amendments to the existing Government Orders on medical devices and active

implantable medical devices. An amendment to the Act on Mining, Explosives and State Mining

Administration has further aligned Czech legislation with the

acquis

on explosives for civil use.

Authorised bodies for NAWI and for Recreational Craft are in place.

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Concerning the Old Approach Directives, an amendment to the Act on Fertilisers transposing

the

acquis

on fertilisers entered into force in January 2001. Government Orders on gas

pressure tanks and aerosol dispensers have been adopted and will enter into force in January

2002. Following amendment of the Act on Consumer Protection, steps have been taken to

align with the

acquis

on crystal glass and labelling of footwear with decrees effective since

January 2001. Pre-market approval has been abolished for cosmetic products. In the field of

legal metrology and pre-packaging, progress has been achieved through the adoption of

implementing Decrees to the amended Act on Metrology. The 1995 Decree on Good

Laboratory Practice was replaced by a new one, which entered into force in August 2001. In

the area of motor vehicles, the new Act on Technical Conditions for Operating Vehicles on

Roads was adopted in January 2001 and entered into force in July 2001. In the area of

foodstuffs the Act on Public Health Protection, and an Amendment to the Act on Foodstuffs

and Tobacco Products came into force in January 2001 (see

also chapter 7 – Agriculture).

During 2001 the Czech Republic transposed much of the

acquis

on food labelling and contact

material. Along with the steady publication of implementing measures, Czech legislation in this

area has become largely compatible with the

acquis

although some gaps remain.

In March 2001 an Act on the Return of Unlawfully Exported Cultural Goods was adopted.

The strengthening of administrative capacity for the implementation of horizontal and procedural

measures and sector specific legislation continues, building from a high base. An application by

the Czech Commission for Conformity Assessment for full membership of the European

Organisation for Conformity Assessment (EOTC) has been approved. Preparations for Czech

participation in the RAPEX information system on dangerous products are ongoing and the

Czech Republic has expressed a wish to develop links with the Rapid Alert Systems for

Defective Products (RAPID). Gradual administrative strengthening (from a high base) continues

at the State Veterinary Administration (the main supervisory body for animal-origin foodstuffs)

and the Czech Agricultural and Food Inspection (CAFI) which supervises the safety and quality

of food.

The process of alignment in the fields of

non-harmonised areas,

(Articles 28 - 30 of the EC

Treaty) continues, with the focus now shifting toward how to implement the principle of mutual

recognition for products in this field.

There has been no particular progress in the area of

public procurement

since the last Regular

Report. The Office for Protection of Economic Competition is responsible for ensuring

compliance with the law, employing about 20 staff on public procurement.

Overall assessment

The Czech Republic has aligned with the acquis in this field to a significant degree. The overall

level of administrative capacity is good. The Czech Republic should continue to improve its

customs and market surveillance infrastructures, ensuring effective co-operation among

competent authorities enhances safety checks on products at external borders.

The Czech Office for Standards, Metrology and Testing currently monitors and co-ordinates

matters in the field of free movement of goods between Member States (the ‘strawberry’

regulation), and is also active in the area of exchange of information and notification about

technical requirements. Formal establishment of the structures required by the

acquis

in these

areas should be completed by accession. Preparations are ongoing for participation by the

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Czech Office for Public Information Systems in the interchange of data between administrations

to support the single market's regulatory regime and the implementation of Community policies.

Legislation concerning essential requirements and conformity assessment procedures (the

Amended Act on Technical Requirements for Products) has been in force for over a year and

functions satisfactorily. Harmonisation with the New and Global Approach Directives continues

but the majority of work has been concluded. Some gaps remain; for instance the Provision of

Information in the Field of Technical Standards and Regulations. Government Orders

transposing the technical requirements of construction products and the

acquis

on wood remain

to be adopted.

Those bodies charged with standardisation and certification continue to function well. There is

still a need for an administrative body responsible for exchange of information and notification

about technical requirements. The Czech Office for Standards, Metrology and Testing, which is

the central state administration responsible for legislation in the field of industrial goods, and

which organises the system of conformity assessment, performs its duties independently of the

Ministry of Industry and Trade (MIT), to which it is formally subordinated. The competence of

the staff and the level of equipment is generally good.

The Czech Standards Institute (CSNI) is a member of the European standardisation

Committees CEN and CENELEC and of the European Telecommunications Standards

Institute (ETSI). The Institute, which is independent, issues standards, and co-operates with its

international counterparts. The Czech Accreditation Institute (CIA) is an independent

company, although the Ministry of Industry and Trade has a role in appointing board members.

It ensures accreditation of laboratories and certification bodies. The CIA is a full member of the

European Co-operation for Accreditation (EA) and the international accreditation organisations

ILAC and IAF. It became a signatory to MLA IAF (for the accreditation of certification bodies

certifying Quality Systems) in September 1999. In November 2000 it signed the ILAC mutual

recognition agreement on results in the field of testing and calibration.

The Czech Trade Inspectorate (CTI) performs market surveillance of industrial products and is

also the main supervisory body for protection of consumer economic interests. The CTI’s

performance is generally satisfactory. Market surveillance for certain specific sectors (e.g.

foodstuffs, medicinal products, cosmetics) is performed by a range of other bodies. Market

surveillance is generally good although there is scope to improve co-operation between the

bodies involved and to refine and strengthen the collection of data, which is sometimes still

lacking as certain market surveillance data do not separate market from production surveillance.

Steps have been taken to strengthen the bodies responsible for market surveillance of cosmetics

and pharmaceuticals. However, further alignment is still necessary in the area of

pharmaceuticals, where resourcing difficulties remain and where measures concerning

registration, market authorisation, market surveillance, and co-ordination in the area of the

safety of medicinal products and advertising need to be fully transposed.

Progress has been made in the areas of explosives for civil use with amendment of the Act on

Mining, Explosives and State Mining Administration. Further adjustment will be made in the

area of chemical substances before accession and additional steps taken to strengthen

administrative capacity, for example certifying additional laboratories. The National Health

Institute contains the notification body for chemicals which will use the institute’s equipment and

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other infrastructure. The body currently employs 5 people, the intention is to double that

number by the end of 2002 with the Health Ministry providing training.

The Czech Republic has advanced well in the transposition and implementation of foodstuffs

legislation. However, the acquis is not fully transposed: for instance as regards additives,

chemical analyses of foodstuffs, hygiene and controls. General obligatory pre-market approval

of foodstuffs has been abolished but pre-market approval for foods of special nutrition remains

and should be stopped well before accession to allow the market and operators to become

familiar with procedures. Other outstanding issues include regulation of advertisement and rules

on hazard analysis and sampling.

The institutions for implementation are largely in place, divided mainly between the Ministry of

Health and the Ministry of Agriculture. The State Veterinary Administration is the main

supervisory body for animal-origin foodstuffs, its structures for control and inspection are well

established and generally function well, in the country and at the border. The Czech Agricultural

and Food Inspection (CAFI) supervises the safety and quality of food. The laboratories of the

Czech Agriculture and Food Inspectorate have been accredited according to international

standards. However, the Public Health laboratories are only gradually being accredited

according to EC standards. Proposals should be developed in preparation for engagement in

the Rapid Alert System for Foodstuffs and to optimise the performance of the laboratory

network.

In an internal process relating to the free movement of goods in the non-harmonised areas, the

Czech Republic has developed a list of measures which it deems necessary but which may be

considered contrary to Articles 28-30 of the EC Treaty. These measures will have to be

reviewed and discussed, as will the Czech Republic’s intentions for inserting relevant mutual

recognition clauses into national legislation.

The Act on General Product Safety which entered force in July 2001 has further aligned Czech

legislation with the

acquis.

Nevertheless, several issues remain to be clarified, including the lack

of a clear definition of the producers and of their obligations, confidentiality requirements and

the protection of professional secrecy.

Completion of alignment in the area of public procurement will require continued legislative

progress and appropriate administrative adjustment and strengthening. Steps should be taken

to ensure clarity and predictability in this field, including necessary legislative amendments strictly

limiting the use of fast-track procedures (Article 50 (1) paragraph (a) of the Public Procurement

Act) to emergency situations and excluding the possibility of arbitrary government decisions.

Contracts should be decided on the basis of transparent and non-discriminatory tendering

procedures.

In the area of Public Procurement the Office for Protection of Economic Competition ensures

compliance with Czech legislation, whilst the Ministry of Regional Development has been given

overall competence for public investment and currently has 15 staff working on public

procurement.

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Chapter 2: Free movement of persons

There has been some progress since the previous Regular Report but a number of the issues it

identified still require further action. Preparations have continued but the passing of legislation

and establishment of administrative structures remains to be completed.

In the area of

mutual recognition of professional qualifications

, there have been no

significant developments. A Government Resolution of July 2001 set out a timetable for the

submission of draft legislation by the Ministries of Health, Regional Development, Justice and

Agriculture and also made the Minister of Education responsible for co-ordination of the

administrative authorities in the area of mutual recognition of professional qualifications.

In the area of

citizens’ rights,

an amendment to the Act on Residence of Aliens, which aims to

achieve a higher degree of compatibility with the

acquis

regarding the treatment of both EU and

non-EU nationals entered into force in July 2001. However, further amendment will be

necessary before accession to complete alignment.

As regards the

free movement of workers

technical preparations by the Employment

Services Administration for participation in the European Employment Services System

(EURES) are ongoing.

With respect to the

co-ordination of social security systems

the Czech Republic has

continued to implement bilateral agreements and progress continues in terms of strengthening

administrative structures and capacity.

Overall assessment

A steady increase in preparatory work in this area is beginning to pay dividends. There is an

increased awareness of

acquis

requirements, accompanied by the development of strategies

and mechanisms to realise these requirements. Transposition must continue and where

appropriate, be accelerated. A significant amount of legislative and administrative capacity

building work remains. Continued legislative alignment is required in particular with the sectoral

directives, residency of foreigners and social security matters. New legislation on citizens rights

and employment (free movement of workers) will be necessary.

In the area of mutual recognition, the legal framework of both diplomas and professional

qualifications still does not match EC requirements and further efforts are needed. A general

system should be established and the gradually increasing emphasis on the distinction between

academic and professional qualifications should be developed and accelerated. Further

progress is also needed to ensure alignment with the sectoral directives. A range of ministries

and professional chambers are responsible for professional recognition, whilst the Ministry of

Education, Youth and Sports plays a co-ordinating role. The inter-Ministerial working group

for mutual recognition at the Ministry of Education, Youth and Sports is active and the key

issues on which progress is necessary have been identified: for example, approval of the Czech

Republic’s list of all regulated professions, introduction of legislation to transpose the sectoral

directives and establishment of a Centre for the Recognition of Professional Qualifications.

With respect to professional qualifications obtained before harmonisation the Czech Republic

should introduce measures to ensure that all its professionals can, as of accession, meet the

requirements laid down by the directives.

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The Nuclear Act should be amended to abolish the permanent residence requirement in this

sector. A list of regulated professions was submitted to the government in June 2001. It will

also be important to ensure that any language requirements connected with professional

recognition respect the principles of non-discrimination and proportionality. It should be

ensured that, by accession, there are no provisions in Czech legislation which contradict

Community rules, in particular with respect to nationality, residence or language. The

establishment of a Centre for the Recognition of Professional Qualifications is planned for 2002.

The Ministry of Labour and Social Affairs is responsible for the co-ordination of social security

and the free movement of workers. As mentioned in the previous Regular Report, an inter-

connected system including the Ministry of Labour and Social Affairs, the Labour Offices and

the EURES system has not yet been established. Preparations by the Employment Services

Administration for participation in the EURES system are ongoing.

Some further work will also be necessary to continue to develop the necessary administrative

structures for the future co-ordination of social security systems and to train the necessary staff.

The expansion of the foreign section of the Czech Social Security Administration will require

sustained effort in order to reach the necessary levels of capacity.

Chapter 3: Free movement of services

Steady legislative progress has been made since the previous Regular Report, with the passing

of legislation such as the amendment to the Act on Accounting and a partial amendment to the

Act on Banks. The gradual strengthening of administrative capacity continues.

In the area of

freedom of establishment and freedom to provide services,

progress has

been very limited. The new Commercial Code which entered into force in January 2001

contained provisions relating to self-employed Commercial agents.

In the field of

financial services,

transposition of the

banking

sector acquis continues, with the

adoption in August 2001 of a partial amendment to the Act on Banks which further develops

deposit claims insurance. The process of bringing credit co-operatives under fully-fledged

banking supervision should be closely monitored. Implementation of the revised Bankruptcy

Act of 2000 has been slow and procedures cumbersome.

A number of accounting amendments (scope, accounting year definition, rules on opening and

closing balance sheets and on disclosure and depreciation) were included in the Income Tax

Law which came into force in January 2001. An amendment to the Act on Accounting was

approved by Parliament in September 2001 and will enter into force in January 2002. The

amendment covers a range of institutions, including banks and insurance companies and

amongst its provisions, will allow the implementation of International Accounting Standards in

national legislation.

There have been no particular legislative developments in the

insurance sector.

The Czech

Government recently approved the sale of its 30% stake in Ceská pojištovna, the country’s

largest insurance company.

In the area of

investment services and securities markets,

amendments to the Acts on

Securities, Bonds and the Stock Exchange came into force in January 2001. The main changes

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to the Securities Act were on rules governing conflict of interest, obligations and the

establishment of a guarantee fund for securities traders. An amendment to the Act on Collective

Investment entered into force in January 2001, enabling foreign investment companies to obtain

licences for the Czech market. Two decrees, relating to the acquis on the admission of securities

to stock exchange listing and the reporting of trades, respectively, entered into force in the first

half of 2001.

The Securities Commission has been considerably reinforced, more than doubling its staff to

circa 130 persons since the last Regular Report. The Securities Commission makes use of all

the powers attributed to it in its role as market regulator, and in taking punitive action and

imposing fines (an average of 100 legally enforceable decisions every month). However,

stronger regulatory powers and an extension of the scope of its activities would improve the

transparency of Czech financial markets. Tightening the conditions for acquiring a license to

operate in the Stock Exchange has led to a dramatic decrease in companies active in the

market, which remains highly illiquid and has yet to fulfil its potential.

An amendment to the Act on Data Protection was adopted in May 2001, further aligning Czech

legislation in the area of

protection of personal data and free movement of such data.

July 2001 the Czech Republic ratified Council of Europe Convention 108 on the Protection of

Individuals with Regard to the Automatic Processing of Personal Data.

Good progress has been made in the area of the

information society,

and the Acts on Public

Information Systems and on Electronic Signatures were adopted in autumn 2000. The Office

for Public Information Systems (OPIS) was established in October 2000 and is responsible for

the creation and development of public administration information systems. The Copyright Act

which entered into force in December 2000, transposed the conditional access directive.

Overall assessment

As stated in the previous Regular Report, the overall situation is satisfactory with the Czech

Republic having introduced legislation to adopt much of the

acquis

in most of the areas covered

by this chapter. This solid base has been further developed over the past year with the passing

of legislation such as the amendment to the Act on Accounting and a partial amendment to the

Act on Banks. However, an important amendment to the Act on Banks has been delayed.

The Czech Republic should ensure that any obstacles to the right of establishment and the free

provision of services (Articles 43 and 49 of the Treaty establishing the European Community)

are identified and national legislation amended accordingly. In the field of freedom of

establishment and freedom to provide services (craftsmen, traders, and farmers) new legislation

on Trade Licensing will be necessary to meet this requirement.

In the banking sector, an important amendment to the Act on Banks, dealing with regulation and

banking supervision, has been delayed. Therefore further action is still required, in particular to

provide for the principle of a single banking licence, consolidated supervision, enhanced co-

operation with foreign supervisors, and exchanges of information. As noted in the previous

Regular Report, the Czech Republic also needs to make progress by adopting the new Act on

Payments. Alignment in the sphere of accounting has been improved by adoption of the

amendment to the Act on Accounting which applies across a range of financial organisations.

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Solvency problems within the Credit Unions sector are a cause for concern, with a high

percentage of the Unions in difficulties. Although the sector is relatively small, and while the Act

on Credit Unions of May 2000 has improved the situation somewhat, further alignment with the

acquis, improved administration and supervision, increased stability and the bolstering of public

trust are all necessary.

The Banking Supervision Department of the Czech National Bank is generally effective and its

compliance with EC and international standards is up for review. Although privatisation of the

banking system should have a positive effect on the key problem of non-performing loans, it

should also be noted that the Department will continue to face the legacy of previous banking

sector difficulties.

Further legislative steps concerning Insurance Contracts, Insurance Advisors and Loss

Adjusters will be necessary to complete alignment in the insurance sector. The Czech Republic

has yet to transpose some of the main objectives of the third-generation life and non-life

directives. The process of de-monopolisation of the insurance industry continues. The Act on

Liability Insurance for Damage Caused by Operation of a Vehicle and Amendments to the

Third-Party Motor Liability Insurance Act which entered into force between July 1999 and

January 2000 have contributed to alignment in their particular fields. Improvements need to be

made in the area of registration and further changes will be necessary to align fully with the

Fourth (Motor) Directive. In addition, steps will have to be taken to ensure the separation of

life from non-life insurance activities.

The Insurance and Pension Funds Supervision Department of the Ministry of Finance has 40

employees, with an additional 10 to be recruited by the end of 2002. Many of the present staff

are new and are therefore undergoing training. Plans to transform the Department into an

independent supervisory body are under discussion, but no legislation has been prepared yet.

More emphasis has to be put on the system of effective prudential supervision that ensures the

principle of mutual recognition in relation to cross-border insurance business within the EU. The

Ministry works with other relevant bodies in the Czech Republic, such as the CNB and the

Securities Commission, but co-ordination could be further improved.

In the area of

investment services and securities’ markets,

important progress has been

made with the amendments to the Acts on Securities, Bonds and the Stock Exchange. Further

measures will be necessary to complete harmonisation of the securities market with the acquis,

addressing issues such as co-operation between the Czech Securities Commission and those in

Member States and the minimum level of investor compensation. As stated in the 2000 Regular

Report, the Czech Securities market still suffers from the structural problem of the “two prices”

system, which will need further attention.

The Ministry of Finance is responsible for drafting legislation relating to the capital market,

whereas surveillance of the market falls within the remit of the Securities Commission, which

was established 3 years ago. Staffing of the Securities Commission is now largely adequate,

with no significant increases planned. A code of best practice was recently approved and a

new Department (on Mandatory Buy-Outs and Commercial Code subjects) established.

Stronger regulatory powers for the Securities Commission and an extension of the scope of its

activities would improve the transparency of Czech financial markets.

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In the field of the protection of personal data the current legislation is largely in line with the

acquis,

although some fine-tuning will be required for full compliance. An independent

supervisory authority - the Office for Personal Data Protection (OPDP) - was established on 1

June 2000. The Office carries out the standard activities of an independent supervisor

(registration, consulting, promotion of data protection awareness, control, issuing permissions

for data transfers abroad, etc.) and is empowered to impose financial sanctions. Staff levels are

to be increased from 45 at present (seven of whom are inspectors) to approximately 85 by the

end of 2001, with further moderate growth in 2002. Since 1 October 2000, the OPDP has

also responsible for the accreditation of certification authorities and supervision of the

accredited authorities in the field of electronic signatures. 10 employees will be involved in e-

signature matters. Emphasis should now be placed on ensuring that the office is in a position to

exercise adequate powers and that citizens, enterprises and the public sector are aware of their

respective rights and obligations in this field.

The Czech Republic has made good legislative progress in the field of the information society.

Laws on Technical Requirements, Public Information Systems and Electronic Signatures have

been in force since 2000, with further alignment to be completed upon accession. Future efforts

should concentrate on the effective implementation of the adopted laws and on the transposition

of the electronic commerce directive. Certain elements of the electronic signatures law will have

to be reviewed. The Office for Personal Data Protection will be in charge of the accreditation

and supervision of certification authorities.

Chapter 4: Free movement of capital

The previous Regular Report indicated that significant progress had been made, but since then

only a few developments have taken place.

In the field of

capital movements and payments,

the new Act on Telecommunications that

abolishes restrictions on direct investment into local telephone networks entered into force in

January 2001. Parliament adopted the amendments to the Foreign Exchange Act and to the

Act on Bonds at the end of 2000 with effect as from January 2001. The first of these

amendments allows residents to carry out operations on deposit accounts abroad, and the

second removes the need for a prior authorisation for issuing debt securities to the foreign

capital market.

New powers have been given to the Czech National Bank this year, through the amendment to

the Act on the Czech National Bank, which will administer and supervise interbank payment

systems. Also, legislation regarding payments in the capital market was further aligned, whereby

settlements may only be made by a company licensed by the Securities Commission.

As regards

money laundering,

from January 2001 new anonymous accounts (bearer

passbooks) are forbidden by an amendment to the Civil Code. However, existing anonymous

accounts remain operational, although subject to increased surveillance.

Since August 2000, when all banks were required to report all suspicious transactions to the

Financial Analytical Unit, 86 complaints have been transmitted to the Police Service for the

Discovery of Corruption and Serious Economic Crime (SPOK).

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Overall assessment

The overall level of alignment is quite high, but a number of elements are still missing.

In the field of

capital movements,

liberalisation in line with the acquis is almost completed. The

main remaining restrictions concern acquisition of real estate by non-residents and foreign direct

investment in air transport, as well as the full alignment of rules relating to placement of assets of

institutional investors.

Concerning

payments systems,

alignment with the

acquis

remains to be completed in the area

of securities’ settlement systems. A body responsible to handle customer complaints on cross

border credit transfers remains to be established.

As regards administrative capacity, the Ministry of Finance and the CNB ensure supervision of

foreign exchange and are also responsible for collecting statistical data.

As regards

money laundering,

existing anonymous accounts (bearer passbooks) have still to

be abolished. The Czech Republic will amend its Banking Act in order to discharge existing

bearer passbooks, but it needs to shorten the period during which existing anonymous accounts

can still be used.

The specialist institutions, the Financial Analytical Unit (FAU) and the SPOK are collaborating

quite effectively. The FAU, created in 1996, currently has a staff of 28 persons and the SPOK

212 policemen and 12 civilian employees. Further strengthening of the FAU and the SPOK is

necessary, in particular by filling vacancies. More emphasis should be placed on reinforcing co-

operation between the responsible bodies and on rendering prosecution of complaints lodged

by the FAU with the law enforcement bodies more effective. Adequate criminalisation of acts

of money laundering is also a priority. Compliance with the Recommendations of the Financial

Action Task Force should be ensured.

Chapter 5: Company law

Since the 2000 Regular Report, further good progress has been made.

As regards

company law

as such, the major amendment to the Commercial Code mentioned in

last year's Regular Report came into force on 1 January 2001. It aims to bring legislation fully

into line with all existing Company Law Directives by strengthening protection of creditors and

minority shareholders, introducing detailed provisions for mergers and divisions of companies,

and specifying the rules for registration of companies on the Commercial Register. This includes

a time limit of 15 days for Register Courts to make a decision on receipt of an application for

registration. Moreover, the databases of the Central Register and the seven Register Courts are

now accessible via the Internet.

In the area of

auditing,

the new Act on Auditors came into force on 1 January 2001, ensuring

full compliance with the

acquis,

in particular by aligning the legislation on conditions of foreign

ownership with the 8

Company Law Directive. A number of amendments were made to the

accounting

legislation through the entry into force of the Income Tax Act on 1 January 2001.

These changes included the scope of the Accounting Act

(see also chapter 3 – Free

movement of Services),

definition of the accounting year and rules on disclosure and

depreciation. An advisory body, the Commission for strategic issues in accounting and auditing,

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has been established at the Ministry of Finance. Its tasks include making proposals for

restructuring of the accounting system and regulation of the profession.

In the area of

intellectual property protection,

the new Copyright Act entered into force in

December 2000. This aims at full alignment with the

acquis,

covering

inter alia

computer

programmes, satellite broadcasting, data bases, rental and lending rights, copyright and related

rights and copyright in the Information Society. The Act also largely reflects the requirements of

the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty, both of

which were adopted by the Parliament in August 2001. In the last Regular Report, it was noted

that an extension of the Copyright section of the Ministry of Culture was vital in view of its

increased responsibilities under the new Act. The staff numbers have now been increased by

one to 3.5, but need to be strengthened further.

In the field of

industrial property rights,

the new Acts on Protection of Biotechnical

Inventions and Protection of Industrial Designs entered into force on 1 October 2000.

The enforcement of intellectual and industrial property rights has been strengthened considerably

by an amendment to the Civil Proceedings Code, in force since 1 January 2001, which

introduces,

inter alia,

an obligation on courts to decide on interim measures within 7 days. The

new Act on Judicial Executors, in force since May 2001, should improve the enforcement of

judgements.

In the area of administrative capacity, efforts are being made to improve the knowledge of

judges in the field of intellectual and industrial property rights, for instance through continued

training initiatives and the creation in July 2001 of specialised judicial chambers for IPR cases, in

all Regional Courts.

Overall assessment

There is already a high degree of compatibility with the overall company law

acquis,,

with only

a small number of issues still outstanding.

With regard to intellectual and industrial property rights legislation, the Czech Republic has

during the past year implemented all the remaining current EC legal instruments and is very close

to full compliance with the

acquis.

Further adaptation of the copyright legislation will be

required in the future, in view of new

acquis.

The accession of the Czech Republic to the

European Patent Convention, intended for July 2002, has yet to receive parliamentary approval.

Several measures which are required to achieve full compatibility (such as the EU-wide effect of

national exhaustion of trademark rights and the establishment of a national trademark court) can

only be enacted upon accession to the EU.

The enforcement and monitoring capacity of the relevant authorities in the field of IPR, such as

customs authorities, police, judiciary and trade inspectorate should be further strengthened. In

the light of the increasing workload, judicial and administrative bodies' mutual co-ordination and

co-operation should be improved, and continued emphasis given to specialised training for

judges and prosecutors. Efforts should be made to reduce the average length of criminal

proceedings, and for courts to apply an adequate level of criminal sanctions to persons

convicted of copyright infringement, in order to ensure more effective enforcement.

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The combating of software and music piracy and counterfeiting remains an area of concern,

despite serious efforts undertaken by the Czech authorities. The strengthening of administrative

capacity and enforcement measures (including border control) should therefore continue to be a

high priority.

With respect to the Rome Convention, the Czech Republic has to prepare the necessary

legislation in order to allow for swift implementation of the convention after accession. The

Czech Republic has started the necessary preparatory work for a swift implementation of the

Regulation replacing the Brussels Convention, especially in relation to the courts which may be

designated for the purpose of the Regulation.

Chapter 6: Competition policy

Since the last regular Report, further progress has been made, particularly as regards legislative

alignment.

In the

anti-trust

field, the Czech Republic has continued to make progress. A new Act on the

Protection of Economic Competition entered into force on 1 July 2001. It contains the main

principles of the

acquis

as regards restrictive agreements, abuse of dominant position and

merger control. The Act also makes significant amendments to the procedural provisions of the

law, in an effort to speed up proceedings and make them more effective.

As regards secondary legislation, the Czech Republic on 1 July 2001 transposed an entire set of

Community block exemptions (including the Community's new policies on vertical and

horizontal restraints) by way of Decrees. These cover certain agreements in the insurance

sector, vertical agreements, technology transfer agreements, motor vehicle distribution and

servicing agreements, research and development agreements, specialisation agreements,

railway, road and inland waterway transport agreements, and agreements concerning

consultations on prices in passenger air transport and allocation of airport slots.

During the year 2000, the Office for Protection of Economic Competition (OPC) produced 73

anti-trust decisions (5 on horizontal agreements, 20 on vertical agreements, 4 on abuse cases

and 44 on mergers). There were 16 appeals of OPC decisions, all in the field of anti-trust. In

2000, the OPC imposed fines amounting to 36,350,000 CzK ( €1.06 million).

In the field of

state aid,

the Czech Republic has also continued to make progress. In April

2000, the Ministries and central bodies of state administration were requested to provide the

OPC with all relevant information for the review of existing state aid programmes (predating the

new State Aid Act), and the Office has since assessed 92 such state aid programmes and

proposed appropriate measures to ensure their compatibility with the

acquis.

State aid

providers have been required to amend and align existing state aid schemes with the

acquis

within 2 months of the OPC's proposal.

The latest state aid Report, submitted in November 2000, covers the year 1999 and is of good

quality. A comprehensive state aid inventory is kept up to date. A notification duty was imposed

by virtue of a Decree requiring

ex ante

notification of all future state aid projects. This entered

into force in December 2000. . The Czech Republic has proposed a regional aid map, which

will fix the maximum aid intensities in the assisted regions, for joint adoption by the Association

Committee.

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As regards secondary legislation, the Czech Republic has confirmed that Czech law allows for

direct reference to the

acquis

through the Europe Agreement and its Implementing Rules. The

Czech Republic, therefore, does not need to separately adopt new secondary state aid

legislation. For reasons of transparency, the Office for the Protection of Economic Competition

has published a series of guidance notes explaining the

acquis

in the various areas of state aid

control.

In the framework of the Europe Agreement's state aid provisions, the Czech government in

September 2001 submitted a restructuring programme for the Czech steel industry. This is

currently under discussion with the Commission.

Since the entry into force of the State Aid Act in May 2000, the OPC has begun to develop an

enforcement practice in this field, issuing 140 decisions between 1 May 2000 and 15 May

2001.

Overall assessment

. The Czech Republic has advanced significantly in addressing the remaining legislative gaps,

identified in the 2000 Regular Report and the Czech Republic's legislation is now largely in line

with the

acquis.

As regards administrative capacity, the Office for the Protection of Economic Competition

appears to be well staffed and trained. It currently has a total staff of 129, consisting of lawyers,

economists and administrative personnel. The Antitrust Section of the Office has a staff of 32

qualified officials and the State Aid Section currently consists of 16 officials (including 14

qualified staff members).

The OPC has a reasonably good enforcement record in the anti-trust field, although further

strengthening of enforcement, as well as a more deterrent sanctioning policy, are required.

Priority should be given to cases which are concerned with the most serious distortions of

competition.

In the state aid field, the OPC also appears to have a reasonably good enforcement record.

However, rigorous and effective enforcement of the state aid rules, increased transparency, and

the ability of the OPC to act independently and with the full co-operation of state aid providers

must be demonstrated, including in sensitive areas, such as the restructuring of non-viable

segments of the steel industry and the final stages of financial sector restructuring and

privatisation.

Chapter 7: Agriculture

Agriculture in the Czech Republic accounted for 3.9% of gross value added in 2000

Employment in agriculture slightly declined over the past year, accounting for 5.1% of total

employment in 2000

. In 2000, EC imports

of agricultural products originating in the Czech

The source for all agricultural statistics is EUROSTAT unless otherwise specified.

EUROSTAT Labour Force Survey definitions (LFS). Agricultural employment is defined in LFS terms as economically

active persons who gain a significant part of their income from agriculture.

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Republic increased by 29 % to € 489.3 million. EC exports to the Czech Republic increased by

12 % to € 1,072.3 million. The trade balance in favour of the Community amounted to € 583.1

million compared to € 578.3 million in 1999. The most important product groups in terms of EC

imports from the Czech Republic are oilseeds (24 %) with an increase of 21 % and beverages

(20 %) with an increase of 63 %. As far as EC exports to the Czech Republic are concerned,

the most important sectors are prepared feed (12 %) with an increase of 22 %, fruit (10 %)

with an increase of 6 %, miscellaneous preparations (8 %) with a decrease of 5 %, vegetables

(7 %) with an increase of 4 % and tobacco (7 %) with an increase of 11 %.

In 2001, the state agricultural budget will amount to approximately € 391.0 million, which

represents 2% of the state budget. Support schemes for the agrarian sector amount to € 192.1

million, while support for forestry and water management account for € 14.9 million and € 9.2

million respectively. An amount of € 14.0 million has been allocated to support of renewing

assets in forestry and agriculture. The state subsidy to the State Agriculture Intervention Fund

amounts to € 118.8 million and NPAA implementation expenditures account for € 19.2

million.

Since last year’s Regular Report, the Czech Republic has taken further steps as regards its

agricultural policy, in particular as regards preparing the administrative structures necessary to

implement the Common Agricultural Policy and transposition in the phytosanitary field.

In May 2001, an amendment to the Act on Conditions of Transfer of Agricultural and Forest

Land From the State to Other Persons and to the law on the Land Fund was adopted,

facilitating sale of some agriculture premises and of the land on which they are built.

Horizontal issues

With regard to preparations for the

European Agricultural Guidance and Guarantee Fund

(EAGGF),

it has been decided that the National Paying Agency will be established as a part of

the State Agriculture Intervention Fund. The Act on Budgetary Rules entered into force in

January 2001 and aims to be fully aligned with Community rules.

As to preparations to establish the

Integrated Administration and Control System (IACS)

the identification of cattle was introduced on a voluntary basis in July 1999 and has been

obligatory since 1 January 2001. According to the Breeding Act, which entered into force in

January 2001, the obligations related to animal identification shall be met by breeders of pigs,

sheep and goats by April 2002. Digital photographs of the whole territory of the Czech

Republic have been taken and will serve as a basis for the central land register. A special IACS

department has been set up at the Ministry of Agriculture.

In the field of

organic farming,

an Act on Ecological Agriculture entered into force in January

2001, setting rules for ecological agriculture and labelling of organic foodstuffs as well as import

requirements for organic products from other countries.

Source of trade figures: Uruguay Round definition of agricultural products, figures taken from EUROSTAT COMEXT

(see U.E. 12/15: Commerce des Produits Agricoles 1988-2000, 1 Partie D.G. AGRI/A.2 Analyses quantitatives,

préventions, statistiques, études, 2001, p. 10-57 et 86-89).

Source: Czech Ministry of Finance.

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With regard to

trade mechanisms,

the structures of the State Agriculture Intervention Fund,

have been further developed to implement the acquis in this field.

In the field of

quality policy,

no particular development has been noted over the past year.

Concerning

the farm accountancy data network (FADN),

the current system, which is partly

in line with the

acquis,

has been extended to cover more farms.

As regards administrative capacity, a restructuring of the Ministry of Agriculture was

implemented in April 2001 n order to prepare for the future management of the common

agricultural policy. The new organisation is a step in the right direction, and further organisational

changes are being discussed.

Common market organisations

Good progress has been made in this field, in particular as regards the State Agriculture

Intervention Fund (SAIF), which has been developed as an administrative structure responsible

for market organisation. The statutes of the SAIF were adopted in February 2001, and the

SAIF has received additional competencies by decrees providing for market intervention in

relation to a number of commodities. A new department for the SAIF was established in the

Ministry of Agriculture in April 2001.

Concerning

arable crops,

further preparations for implementing the CAP have been achieved.

A decree has been adopted which provides for conditions and principles of financial support for

production of potato and wheat starch and subsidies for the export of foodstuffs made of potato

starch. Another decree provides for rules to be respected by the SAIF when deciding on

export subsidies for the export of malt. A government order laying down the principles of

performance of intervention purchases and sales of cereals was approved in June 2001. A

Government Regulation laying down the conditions for providing financial support and

compensation for setting aside land, as well as the principles for the sale of rape grown on set-

aside land has been adopted.

A decree defining

sugar

production quotas for 2001/2002 to 2004/2005 and a system for the

organisation of the market in sugar, using the basic elements of the EC system, has also been

approved.

In the field of

specialised crops,

measures similar to those in the Community have been

introduced for registration of wine-growing and viticulture and for import control.In the

fruit

and vegetable

sector, the Czech Republic has continued the harmonisation of its standards with

UN/ECE standards.

In relation to

animal products,

milk production quotas were introduced in April 2001, based

on the Act on the State Agriculture Intervention Fund, and the government has introduced

export subsidies for dairy products. A system to support milk consumption (“school milk

scheme”) has also been introduced. A new department for the milk sector was established in

the Ministry of Agriculture in January 2001. A Decree on beef labelling was adopted and will

enter into force partly in October 2001 and partly in January 2002. The common classification

of carcasses (SEUROP) has been used for pork meat since April 2001. A decision was taken

in September 2001 to establish the Classification Agency for slaughter animals as of January

2002.

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Rural development and forestry

With regard to the implementation of

agri-environmental measures,

a Government order has

been approved introducing a system of support for rural development programmes, which

include agri-environmental programmes. The department of rural development support has been

reinforced with 4 experts. A horizontal plan for rural development is being drafted and is

intended to serve as a basis for future support provided by the EAGGF guarantee section.

Veterinary and phytosanitary issues, including food safety

In general, little legislative progress has been noted in the veterinary field over the past year.

However, good progress was made in establishing the system of animal identification. The

identification and registration of cattle was introduced on a voluntary basis in July 1998 and has

been obligatory since January 2001. According to the Breeding Act, which entered into force in

January 2001, the obligations relating to animal identification shall be met by breeders of pigs,

sheep and goats by April 2002. An implementing Decree concerning cattle, sheep and goats

was adopted in April 2001, stipulating the manner of identification, keeping and submission of

records. Following the identification of two BSE cases in 2001, the Czech Republic introduced

testing of all slaughtered bovines aged over 30 months, removal of Specified Risk Material

(SRM) and a set of new rules for treating risk material. In the context of the Geographical BSE

Risk Assessment, the Czech Republic has been classified in group III.

In the

phytosanitary

field good legislative progress has been made over the past year. In the

field of

plant health (harmful organisms and pesticides),

an amendment to the Act on

Phytosanitary Care entered into force in January 2001, reinforcing the protection against

harmful organisms. It aims to align legislation with Community rules on the registration of

growers, producers and importers of vegetable products. The provisions on import registration

were implemented as of July 2001. A second amendment to the Act on Phytosanitary Care was

adopted in July 2001, and will enter into force in January 2002. The amendment aims to

enhance alignment with the

acquis

as concerns the registration of producers, growers and

importers of plants and plant products, introduction of a plant-passport system, protected zones

and import and export protection. However, the provisions on plant passports will not enter into

force until March 2002.

In the field of

plant hygiene,

no particular development has been noted over the past year.

In the field of

plant variety protection,

the Act on Plant Varieties entered into force in January

2001, and aims to reflect the

acquis

in this field. In particular, it widens the range of rights to

plant varieties to be protected.

As regards administrative capacity in the phytosanitary field, the Czech Republic further

prepared for incorporation into the EUROPHYT system, upgraded the equipment of diagnostic

laboratories and strengthened the central regulatory capacity of plant protection product

registration.

As regards

food safety

(see also chapter 1 – Free movement of goods),

the Czech Republic

produced a Food Safety Strategy in April 2001 which outlines the systems for co-ordination

between the various official bodies involved, their competencies, organisation and staffing.

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Overall assessment

Overall, legislative alignment has reached a good level and the setting-up of implementing

structures for the common agricultural policy is well underway.

In the field of

horizontal issues,

the administrative structures needed to implement Community

trade mechanisms

need to be finalised. In the field of

quality policy,

supervision mechanisms

in line with Community requirements need to be completed. It has been decided that the

National Paying Agency will be established as a part of the State Agriculture Intervention Fund

(SAIF), which will require an amendment of the Act on the SAIF. As regards preparations for

the Community Integrated Administration and Control System (IACS),

the legal

framework for animal identification and registration is largely in place but the establishment of

the land parcel identification system needs to be completed. As regards

the Farm

Accountancy Data Network (FADN),

the existing surveys are only partly in line with the

acquis.

There is a need to ensure collection of data and administrative capacity in conformity

with Community requirements. Co-operation on the exchange of data must also be ensured.

As regards administrative capacity, the reorganisation of the Ministry of Agriculture is a step in

the right direction, but further reorganisation is foreseen to reflect the organisation necessary to

ensure suitable implementation of the common agricultural policy by accession.

As regards the implementation of

common market organisations

, the State Agriculture

Intervention Fund (SAIF) has started working on specific market regulation in order to prepare

for the function of an intervention agency. It is currently not fully equivalent to intervention

agencies in the EU, and needs to be adapted before accession. A effective network with a

reliable market monitoring system, capable of collecting price data in real time at all points in the

chain is lacking. Legislation establishing quality and marketing standards for

arable crops

and

animal products

needs to be completed. The Czech Republic also needs to complete market

regulation for

specialised crops.

Further steps are needed to align with the

acquis

on the

market organisation for sugar. The marketing standards for fruit and vegetables are currently

aligned with Community requirements. However, the quality control system in the area of fruit

and vegetables needs reorganisation. Five producer organisations in this field have been

established and benefit from State financial assistance, but the existing legal framework for

producer organisations is not in line with Community requirements.

In the area of

rural development and forestry,

the horizontal legislation is largely in place, but

the administrative structures for implementation need to be completed.

Concerning the

veterinary

field, new horizontal legislation is in place since 1999. However,

further legislative work is needed to ensure transposition of veterinary legislation, e.g. in the

fields of

animal welfare, rules concerning imports from third countries

and

veterinary

controls.

As regards veterinary control in the internal market, the system of checks during

transport and at destination needs to be aligned. Furthermore, preparations for participation in

the animal movement control system (ANIMO) need to be completed. The system for financing

of veterinary controls needs to be aligned with the

acquis.

Border inspection and import checks

need to be reinforced and aligned with Community requirements. T border post at Ruzyne

airport needs to be completed and suitably equipped, and the staff should be trained with

regard to border inspection procedures. In the field of

control of animal diseases and animal

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health,

preparations for participation in the animal notification system (ADNS) are well

advanced.

In order to provide an efficient animal disease prevention system, the current system for animal

identification needs to be centralised and connected to the Czech epidemiological surveillance

network. Furthermore, the designation of competent authority for the setting-up of the database

for bovine animals needs to be aligned with the

acquis.

As regards

animal waste treatment,

most of the rendering plants for high-risk waste are

operating according to Community requirements. As regards

public health protection,

substantial portion of the plants processing products of animal origin do not yet meet

Community hygiene and public health requirements. An overall plan is needed with regard to the

modernisation strategy for these establishments. In the field of

animal nutrition,

the

acquis

has

largely been transposed. The State Veterinary Administration (SVA) as well as the Agriculture

and Food Inspectorate (CAFI) generally function well. The CAFI information network has

improved but an on-line connection with the Customs Directorate needs to be established.

In the

phytosanitary

field, a good level of legislative alignment has been achieved. In the field

plant health (harmful organisms),

inspection and control structures appear adequate, but

plant passports still need to be introduced as foreseen by the legislation adopted. In the field of

quality of seeds and propagating material,

appropriate inspection and control structures are

largely in place but the mechanisms need to be completed. As regards

pesticides and residue

levels,

all Maximum Residue Levels are not yet fully aligned with Community rules. . The State

Phytosanitary Administration has prepared its linking to the EUROPHYT information system in

the field of plant health and harmful organisms, but the system needs to be completed. The State

Phytosanitary Administration generally functions well, and the situation with regard to

specialised equipment is improving. However, further strengthening in terms of sufficient number

of adequately trained staff and equipment is needed. An institute for plant identification remains

to be set up and the Central Institute for Supervision and Testing in Agriculture needs to be

further aligned.

With regard to

food safety,

the system of inspections is not fully in line with the

acquis..

The

HACCP (Hazard Analysis at Critical Control Points) system, which involves measures to

identify and control hazards related to food processing and the monitoring of safety

requirements has been obligatory for all food producers since January 2000

(see chapter 1 –

Free Movement of Goods).

Chapter 8: Fisheries

Some further progress has been made in this area over the past year. Fisheries activities in the

Czech Republic are limited to aquaculture, mainly carp.

Since the last Regular Report, no particular development has taken place as regards

the

management of resources, inspection and control.

, In the field of

structural actions,

number of programming documents have been drawn up to prepare for the fisheries structural

policy.

As regards

market policy,

a producer organisation has been established in 2001, which should

help to improve the processing and marketing of fishery products in line with EC practices. The

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Czech Statistical office has started collecting market data on quantities and prices of Czech fish

production.

As concerns

state aid

to the fisheries sector, support programmes from the state budget via

subsidies granted for monitoring fish productivity continued in 2001. Subsidies will be granted

only for activities which improve the fish culture.

An amendment to the Act on Fisheries entered into force in October 2000, extending the scope

of the fishery law and introducing selective administrative procedure for fish management in

fishery districts.

As for administrative capacity, the special unit on fisheries within the Ministry of Agriculture

established in 1999 has been abolished and the personnel has been integrated into other

departments of the Ministry.

Overall assessment

The Czech Republic's fisheries policy is partly aligned to the

acquis

in this area. Further

progress is needed both as regards the legislative transposition and as concerns administrative

capacity necessary to implement the Common Fisheries Policy. Legislation regarding the control

of imported fish needs to be adopted, and the control system for sources and species of fish

needs to be set up. In order to establish a well-functioning monitoring system for the control of

fish resources and imports, co-operation between relevant authorities should be improved.

Institutions also need to be set up in order to implement the

acquis

as regards controlling the

implementation of common market standards, collecting and transmitting data concerning the

markets and applying the recognition conditions for producer organisations. Further efforts are

required also to prepare for the implementation of the

acquis

concerning the management of

Community structural actions in fisheries. Preparations for the fisheries structural policy, in

particular as regards programming documents, are well underway.

Since the Czech Republic is a landlocked country, parts of the acquis in fisheries are of lesser

importance for this country.

Chapter 9: Transport policy

Since the previous Regular Report the Czech Republic has made good progress, especially

concerning road transport legislation.

Concerning

Trans-European Transport Networks,

the State Fund for Transport

Infrastructure is progressively taking on its role as the central financing authority for transport

infrastructure investments. Financing for the development, construction, maintenance and

modernisation of roads, motorways, railways and inland waterways is provided to

approximately 100 beneficiaries, the most important of which are Czech Railways and the Road

and Motorways Directorate in the Ministry of Transport.

As regards transport infrastructure, in March the Government took an innovative step by

entering into a partnership with the private sector, when it awarded the right to build and

operate a motorway from Lipnik to Ostrava to a private company. However, concern has been

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expressed about the transparency of the award procedure which was carried out without public

tender.

Concerning investments in rail transport infrastructure, progress has been made with line

refurbishments on Corridors IV and VI.

With regard to

land transport,

a number of legislative developments have taken place. On

road transport,

the Act on the Conditions of Operating Vehicles for Road Communications

came into force in July 2001. Moreover, a new Act on Road Communications, regulating rights

and obligations of road traffic participants, and the Act on Obtaining and Upgrading

Professional Competence for Motor Vehicle Driving, came into force in January 2001. In May

2001 the Government approved the INTERBUS agreement on occasional international bus

transport.

Concerning

rail transport,

no progress can be reported in transposing the EC acquis in this

key sector, although the government has made proposals. No new developments can be

reported with regard to

inland waterways transport.

As regards

air transport,

the Czech Republic became a full member of the Joint Aviation

Authority on 12 December 2000 and is thereby bound by all Joint Aviation Requirements.

Although an advisory Committee for Slot Allocation was established in October 2000, actual

decisions concerning scheduled flights are made by the Czech national carrier Czech Airlines.

Administrative capacity has been strengthened: both Air Traffic Control, which has also been

reorganised, and the Civil Aviation Authority have received additional staff.

No developments can be reported with regard to

maritime transport.

Overall assessment

The Czech Republic is quite advanced in legislative terms, in particular on road transport.

Regarding railways, substantial further legislative changes, in particular to the Act on Tracks, will

be required. Most importantly, administrative capacities still have to be strengthened, in

particular in the road transport area.

On horizontal issues, the State Fund for Transport Infrastructure should improve the

development of transport infrastructure. However, the direct financial dependence of the Fund

on unpredictable levels of funding via privatisation revenue, even if reduced, continues to cause

problems for the financing of important infrastructure projects. Concerning road transport,

further harmonisation with the transport acquis has been achieved in particular with the

adoption of the Act on the Conditions of Operation of Vehicles for Road Communications.

Administrative capacity in the road transport sector, however, gives cause for concern, as fines

levied are too low to have deterrent effects and the supervisory capacity of the Ministry over

regional and district authorities, which are undergoing administrative reform, is too weak. The

350 transport officers working in district offices levied 1900 fines during their 7600 checks of

transport companies in the year 2000. Within the context of decentralisation, a plan for the

transfer of responsibilities is needed together with a strengthening of the supervisory role of the

Ministry.Currently a sub-section of the Department for Road Transport in the Ministry of

Transport with four members of staff supervises the enforcement of fiscal, social and judicial

measures implemented by district offices, including market and professional access requirements

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such as financial standing, good repute and professional competence. It also serves as the

appeal authority on such issues as access to the profession and observance of AETR rules.

Considering the size of its task, the sub-section is considerably under-resourced.

With regard to rail transport, the legislative delays underlined in the previous Regular Report

have not been redressed. Furthermore, new

acquis

has been adopted by the EU in 2001

concerning the establishment of a liberalised market. Thus, substantial legislative work remains

necessary in order to achieve alignment ahead of accession. In particular, further steps need to

be taken to implement the new railways

acquis

in order to ensure independent functions of the

infrastructure manager as regards allocating of capacity and charging.

Currently, the Czech Railways Authority (DU) functions smoothly in the context of existing

legislation as the executive organ for railways and rail transport. It employs about 60 staff,

spread across four regional offices. DU’s main responsibilities are the regulation of rail

transport, the allocation of infrastructure, the authorisation of infrastructure construction and the

approval of technical qualification of rail equipment. The Authority furthermore issues legislative

norms, e.g. on safety standards and checks the application of the current legislation. The

authority depends financially and organizationally on the Ministry of Transport, which sets the

budget and appoints the General Director. The Authority performed over 1000 inspections of

rail operators in the year 2000, levying 15 fines.

As concerns

air transport,

the Czech Republic has shown a clear determination to accelerate

harmonisation with the aviation

acquis.

The Czech Republic is now a member of the Joint

Aviation Authority. The establishment of the Committee for Slot Allocation is a welcome step

towards independent slot allocation. An independent air accident investigation authority remains

to be established.

Regarding

inland waterways,

an inland waterway fund, responsible for administering possible

capacity measures in case of market crises still has to be established.

The Czech Waterways Administration (SPS) is the administrative authority for all navigable

inland waterways. It employs approximately 300 people and functions satisfactorily. The

responsibility of the SPS is to establish navigation safety and to monitor the observance of the

law by all ship and port operators. The SPS also maintains a register of all vessels operating

under the Czech flag. The total registered tonnage of vessels in the Czech Republic amounts to

150 000 tonnes and decreased by approximately 10% last year. The SPS has the authority to

inspect and levy sanctions against operators. However, it is not clear to what extent these

powers are used. The maintenance of waterways and investments in waterways, as well as the

demarcation of waterways, falls under the responsibility of the separate River Management

Office which is subordinate to the Ministry of Agriculture.

Chapter 10: Taxation

Since last year's Regular Report, the Czech Republic has made limited progress, and this solely

in the area of excise duties.

As regards

indirect taxation,

a positive step was taken with the amendment to the Act on

Excise Duties, which entered into force on 1 July 2001, introducing a single combined

(specific/ad valorem) duty on cigarettes. At the same time, fiscal stamps indicating the retail-

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selling price were introduced for cigarettes, cigars and cigarillos. Under the same legislation, the

excise duty rates on certain mineral oils were increased (the Czech Republic has already

achieved the required EC minimum excise duty rate on unleaded petrol); wine has become

subject to excise duty at the zero rate; products subject to excise duties, which are placed in

free zones or warehouses and rendered back to the inland have become taxable; and tax

exemption of losses caused by force majeur has been introduced.

No progress can be reported in the alignment of VAT legislation. In fact, a step backwards was

noted, when the VAT rate for restaurant services was decreased from 22% to 5% on 1 April

2000, thereby bringing it out of line with the

acquis.

Last year's Regular Report noted the adoption of new legislation providing for the permanent

closure of duty-free shops at land borders by 31 December 2001. However, in July 2001 the

Czech parliament adopted a new Act, postponing such closure, until December 2003.

No progress can be reported in the area of

direct taxation.

Progress was made in the area of

administrative co-operation and mutual assistance.

The

Act on International Assistance in the Recovery of Certain Financial Claims entered into force in

January 2001. It transposes the

acquis

(to the extent that measures can be implemented pre-

accession) on mutual assistance in the recovery of claims related to the European Agricultural

Guidance and Guarantee Fund, agricultural levies, and customs duties in respect of VAT and

certain excise duties.

In the area of

administrative capacity

the Acts on Free Access to Information and Electronic

Signature of 2000 contribute to greater efficiency and transparency in the tax administration.

Overall assessment

While a significant degree of alignment of the tax system has already been achieved, a number

of important issues remain to be tackled in this area.

As regards indirect taxation, the 2000 amendment to the Act on VAT brought forward

alignment of indirect taxation legislation. However, further alignment is needed as regards the

most substantial issues, such as the approximation of VAT and excise duty rates, as well as the

scope of VAT exempt transactions. It will be important to ensure that existing and future

legislation complies with the principles of the Code of Conduct for Business Taxation.

As already highlighted in last year's Regular Report, the Czech Republic needs to establish an

adequately structured and coherent legislative timetable in these sensitive areas. In view of the

significant impact on consumer prices which alignment with the

acquis

is likely to have, the

Czech Republic should aim at a gradual legislative approximation of VAT and excise rates in

order to avoid economic disruption at a later stage. The Czech Republic should also ensure that

its commitment to close duty-free shops at land borders is fulfilled and implemented by 31

December 2001.

As regards

administrative capacity,

the process of modernisation of the tax administration is

underway, although it is still in the preparatory phase. Work on the establishment of an

independent authority responsible for tax and customs administration is ongoing, however the

legislative steps to ensure the creation of such a body have not yet been taken. Genuine action is

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still required in most areas and more concrete progress is needed to ensure the proper and

efficient functioning of the tax administration upon accession. In this regard, efforts should in

particular concentrate on improving tax collection.

Chapter 11: Economic and monetary union

A detailed assessment of the Czech Republic’s economic policy in its various aspects has been

given above, in the Chapter discussing the economic criteria (B-2). Therefore, the present

section is limited to a discussion of those aspects of the Economic and Monetary Union

acquis-

-as defined by title VII of the EC treaty and the other relevant texts--which candidate countries

should implement before accession, i.e. the prohibition of direct public sector financing by the

central bank, the prohibition of privileged access of the public sector to financial institutions, and

independence of the national central bank. As to the process of liberalisation of capital

movements, upon the completion of which compliance with the EMU

acquis

is conditional, this

aspect has been covered above, in the section on

Chapter 4 – Free movement of capital.

Since the previous Regular Report, progress has been made only in certain areas.

As regards the prohibition of

direct public sector financing

by the Czech National Bank

(CNB), provisions have been adopted which prevent the CNB from granting short-term credit

to the government, in line with the acquis

The CNB’s right to set the minimum interest rates on deposits and the maximum interest rates

on credits provided by or granted to banks was also abolished. This provision could have been

considered as a case of

privileged access of the public sector to financial institutions

and

its removal represents therefore substantial progress in alignment with this part of the acquis.

The amendment to the Act on the CNB which entered into force in January 2001 failed to

ensure the independence of the national central bank by stipulating that the inflation target and

the exchange rate regime shall be set in agreement with the Government and by dividing the

CNB budget into two separate parts with one of them being subject to approval by Parliament.

As regards the primary objective of the CNB, the move from “stability of the currency” to

“price stability” brought the amended CNB Act closer to the provisions of the Treaty and the

ECB Statute. However, in June 2001 the Constitutional Court of the Czech Republic ruled that

the above-mentioned provisions were unconstitutional.

Overall assessment

The Czech Republic will participate in EMU upon accession with the status of a country with a

derogation under article 122 of the EC Treaty. It will need to implement the necessary changes

to its institutional and legal framework by the date of accession.

Overall, a significant part of the EMU acquis has been adopted but some fundamental elements

are still missing.

A good level of alignment has been reached as regards the prohibition of direct public sector

financing by the Central Bank and on the prohibition of privileged access of the public sector to

financial institutions.

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As regards independence of the Czech National Bank, the decision of the Constitutional Court

invalidated the most prominent incompatibilities with the acquis in the area of institutional

independence which had been introduced with the amendment of the CNB Act: the need to

agree with the Government on the inflation target and the exchange rate regime and the division

of the CNB budget into two separate parts, one of them being subject to approval by the

Chamber of Deputies. However, other imperfections with respect to the acquis remain such as

the provisions setting the grounds for dismissal of CNB Board members and the absence of

provisions to ensure judicial review by an independent court in the case of dismissal of Board

members other than the Governor (personal independence). Thus further efforts are needed to

complete alignment with the acquis as regards central bank independence.

Following the ruling of the Constitutional Court, “price stability” cannot be implemented as the

primary objective of the CNB as long as “stability of the currency” is established as the central

bank’s primary objective in the Czech constitution.

As regards administrative capacity, the CNB functions effectively. The level of professionalism

of its staff is high and turnover of staff is low. Both the CNB and the Ministry of Finance have

good analytical capacities enabling them to conduct economic dialogue in an EU environment.

However, improvements in administrative capacity are still required in the Ministry of Finance,

in particular to prepare medium term fiscal frameworks and statistics.

Chapter 12: Statistics

The Czech Republic has made considerable progress in the field of statistics.

As regards

statistical infrastructure,

legislation is substantially aligned with the

acquis.

The

amendment to the State Statistical Service Act, which will allow the Czech Statistical Office

(CSO) access to the Ministry of Finance’s tax registers, entered into force in January 2001. Full

implementation of this amendment requires the Ministry of Finance to provide the data from the

districts.

As regards the administrative structures for implementing and enforcing the

acquis,

the co-

ordinating role of the statistical office has been strengthened and, following the creation of the

new regional governments, the CSO has adjusted its structure by establishing regional

representations in all 14 regions. At the end of 2000 the opinion poll institute was shifted from

the CSO to the Academy of Science as an independent research body.

Demographic and social statistics

are largely in line with EC standards. A major exercise

was the 2001 National Census which was conducted in line with EUROSTAT methodology.

The preliminary results for some basic indicators were available in July 2001 and final results

will be published in August 2003. Municipal and Governmental bodies were sometimes at cross

purposes and some minor irregularities in the collection of data were reported.

In the field of

regional statistics,

the Czech government has upgraded its system of regional

classification to bring it into line with the EC system of regional classification (NUTS). A new

law on the Establishment of Higher Self-Administering Units will increase the number of regions

from 8 to 14 at the NUTS III level. However, this will mean that the NUTS II level will have to

be redefined accordingly. Regional classification should be consistent with new legislation and

requires further improvement regarding the data for NUTS II and III levels. Also, the

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methodology and the collection of regional integrated data needs improvement. In particular, the

methodology for regionalisation of indicators should be fine-tuned according to EUROSTAT

standards.

In the area of

macro-economic statistics,

the CSO has improved the quality and reliability of

its output, notably in the area of National Accounts. In the field of

business statistics,

the

process of meeting the main EC requirements is still ongoing. The work on the processing of

data from the industrial sector according to the PRODCOM nomenclature has progressed, as

has the collection of data from the business environment. The quality of the business statistics

sources from other institutions. Work continues on the harmonisation of the Register of

Economic Subjects (RES) and profiling of local units and ‘kind of activity units’. Following the

amendment to the Statistical Service Act, the co-ordination of data with the tax and social

registries and RES is progressing well. The administrative capacity of the unit dealing with RES

methodology should, however, be increased.

The

external trade statistics

conform to international guidelines and the methodology used

conforms to that used by the EC. In relation to this, the administrative capacity of the relevant

unit should be increased.

For

agricultural statistics,

the methodological approach was improved to reflect the EC

requirements, and the work on covering individual commodities and the regionalisation of data is

progressing well. The analytical work following the completion of the 2000 Agro census is

proceeding well in line with the EUROSTAT standards. Data will comply with standards after

the Agro census data have been processed. The methodology for environmental data (e.g.

waste statistics) should be modified following the forthcoming entry into force of the new Act on

Waste.

Overall assessment

Overall, the Czech Republic is well advanced in the field of statistics. The CSO functions well

and is preparing for accession to the EU. The legislation is substantially aligned with the

acquis.

There is a need, however, to ensure that the various registers are updated, well co-ordinated

and harmonised. The methodology of data collection and processing needs to be fine-tuned to

reflect the EUROSTAT standards, and to avoid some remaining inconsistencies in the quality

and timeliness of data provision.

Data collection at the regional level has to be improved. For external trade statistics, access to

tax registers will be specifically important to prepare the implementation of INTRASTAT. In

this respect, the administrative capacity of the data processing unit, notably regarding regional

accounts, should be strengthened. As regards macroeconomic statistics, the main objective

should be to ensure the reliability of collected data.

The administrative structures to implement and enforce the

acquis

are largely in place and

operate in line with the principles and standards practised in the EU. The CSO has improved its

co-ordinating role particularly in respect to accessing the data of other authorities. There is,

however, still a problem concerning the tax register of the Ministry of Finance.

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Preparations are necessary in order to fully implement INTRASTAT after accession. However,

the human and financial resources of the CSO are not yet sufficient to meet the increased need

for structured data in line with the

acquis.

Also, in line with the increased workload relating to

the massive volume of processed data, overall strengthening of CSO capacity, both at

headquarters and in the field, is necessary.

Chapter 13: Social policy and employment

During the reference period the Czech Republic has continued to build on the good progress

acknowledged in the previous Regular Report.

Amendments to the

Labour Code,

aiming at transposition of much of the acquis in this field,

entered into force in January 2001, with the exception of those provisions relating to the posting

of workers and European works councils. As regards

equal treatment for women and men,

with the entry into force of the Labour Code, the Act on Civil Proceedings and the Amendment

to the Salary and Bonus Act, the Czech Republic has made further progress in aligning

legislation with the acquis in this field. Regarding

health and safety

at work, the amendment to

the Labour Code intends, inter alia, to finalise transposition of the Framework Directive. A

Government Order adopted in April 2001 addresses transposition of the acquis on chemical

agents.

In April 2001, a Government Order on health protection of employees was approved, with the

aim of transposing the acquis as regards display screens, carcinogens, biological agents,

asbestos and noise. In September 2001, the Government adopted legislation intended to

transpose the Directive on work equipment.

The Act on

Public Health

Protection entered into force in January 2001, and most relevant

secondary legislation had been prepared by June. The Act, together with the implementing

regulations, ensures alignment with a substantial part of the relevant acquis. The Act contains the

codification of rights and obligations of institutions in the protection of the population’s health

and the powers and authority of state healthcare supervisory bodies. The Labour Code

amendment referred to above bans smoking at the workplace in case there are any non-

smokers present. Actual observance of the Code should be monitored, however. In February,

an amendment to the Act on Public Health Insurance was passed extending the validity of

existing legislation beyond December 31 and incorporating a ruling by the Constitutional Court

on the bargaining procedure. The new Act stipulates that in cases where bargaining is

unsuccessful or if its outcome clashes with the law or public interest, the prices agreed on in the

previous period will remain in force.

In January, the Government passed an amendment to the Act on Health Care aiming to

harmonise the Health Care Act with the strict Act on Protection of Personal Data, which was

passed in 2000. The amendment defines medical data and who can access it, and puts

electronic storage on an equal basis with paper storage.

Regarding

social dialogue,

the entry into force of the amendment to the Labour Code and to

the Employment Act intends to promote social dialogue at enterprise level. This represents a

significant step and needs to be implemented at local level. Tripartite social dialogue at national

level continues to work well. Social partners are actively involved in the preparations for

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accession. Work between the government and the social partners for a long-term social

stability pact is ongoing.

As a follow-up to the Joint Assessment of Employment Policy Priorities signed in May 2000

between the Czech Republic and the European Commission, a first assessment of progress in

implementation of these policies took place in September 2001. The situation on the labour is

starting to improve. Unemployment started to fall at the end of 2000. The overall

unemployment rate was 8.8% in 2000 with 7.3% for men and 10.5% for women The National

Employment Action Plan (NEAP) for 2001 was adopted in February. Support for employment,

business activities and helping companies and employees to adjust to changes are the main

pillars of the plan. One of the plan’s goals is to reduce indirect payroll costs. It stipulates co-

ordination of programmes for support of small and medium-size enterprises (SMEs), and the

creation of conditions for the development of consulting services for SMEs and also stipulates

for the increase of minimum wage. It includes measures aimed at solving unemployment of the

physically handicapped and other groups experiencing difficulties on the labour market,

including the Roma.

In the field of social protection, pension reform is on-going. The amendment to the Pension

Insurance Act was adopted and came into force in July. The Act tightens conditions for early

retirement and provides incentives for later retirement.

The amendment to the Labour Code contains a fundamental

anti-discrimination

provision,

which – among other things - aims to substantially improve the protection of employees against

any discrimination in employment.

Overall assessment

Overall, legislative alignment is well advanced. However, enforcement of legislation in areas

such as occupational health and safety and public health still needs to be strengthened and in

areas where new legislation has been adopted, such as equal treatment for women and men,

enforcement awaits first assessments.

As regards

labour law,

the Directive on Young People is only partially transposed.

Strengthening of the capacity and co-operation of the institutions in charge of labour inspections

is also needed. As regards

equal treatment for women and men,

the Czech Republic has

made important steps forward in the alignment of Czech legislation The acquis on equal

treatment in occupational social security remains to be transposed and certain provisions of the

newly amended Labour Code, which seem to be incompatible with the acquis will need to be

addressed. Although some implementing secondary legislation in the field of

health and safety

has already been issued, a substantial amount of work remains to be done. Harmonisation with

the

acquis

will only be achieved once implementing regulations are issued and put into practice.

As concerns the administrative capacity to implement the

acquis,

continued efforts are needed

to strengthen enforcement bodies, notably the national labour inspectorate. Co-operation

between employers and employees in health and safety at work should be enhanced and

particular attention should be paid to small and mid-size enterprises. As regards

social

dialogue,

autonomous social dialogue needs to be strengthened especially at sectoral level,

where the number of collective agreements continues to be limited. The Czech Republic should

continue to promote forms of dialogue and workers’ participation at enterprise level, especially

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with regard to the implementation of the relevant

acquis.

Social dialogue in the public sector as

well as in public enterprises needs to be progressively improved.

The Czech Republic has further progressed in transforming the labour market and adapting its

employment

system so as to be able to implement the European Employment Strategy. The

capacity of the public employment services needs to be further strengthened, as defined in the

Joint Assessment of Employment Policy Priorities (JAP). The process of restructuring is

causing employment problems, which are particularly acute in certain regions. This makes the

implementation of further reforms of tax, benefit and social assistance systems particularly

important, in addition to the implementation of active employment policies already introduced

and planned, in particular in the context of the Joint Assessment of Employment Policy Priorities

and the National Employment Plan. In order to assure smooth implementation of future

European Social Fund (ESF) programmes, the administrative capacity of the precursor of an

ESF management office needs to be strengthened. It is also important that the contents of

future ESF interventions is embedded in the European Employment strategy and the fight against

social exclusion.

The Ministry of Labour and Social Affairs (MoLSA) is a central institution of state

administration responsible for the issues addressed under this chapter. It has a staff of over 500

people. It is competent and well informed on EU related issues, and harmonisation efforts are

well advanced. The bulk of remaining work consists in the implementation and enforcement of

new legislation, and the testing of newly created structures. Supervision of occupational health

and safety and working conditions is the responsibility of the Czech Occupational Safety Office

(COSO), which reports to MoLSA. Activities of COSO are to undergo changes further to

recent legislative developments, which aim to ensure alignment with EC standards and policies

in labour inspection.

The co-ordination on equal opportunities and equal treatment for men and women is a

competence of the Ministry of Labour and Social Affairs. In May 2001 the Government

decided that by January 2002, each Ministry should create a permanent position for an official

charged exclusively with the agenda of equal opportunities for men and women and approved

an updated list of Government priorities in this field. Despite several changes of ministerial posts

since the last Regular Report, no female members of Cabinet were appointed. The Czech

Government has had no female members since coming to power in July 1998.

As for health-related issues, the Ministry of Health (MoH) is responsible for health care, public

health and related activities. It has a staff of over 300 people. Instability in terms of political

leadership and staff over the last decade adversely affected all its departments. The situation has

stabilised in the past year but the necessary reform of the health care system and in particular of

its financing has not significantly progressed. The legislative process of harmonisation with the

acquis

in the area of public health should be continued. A new act on protection against

damage caused by tobacco products, alcohol and addiction drugs should be adopted. The

institutional basis of public health protection should be created, resulting in restructuring of

public health protection bodies with increased ability to implement the State administration

tasks, to enforce legislation and to adjust to the public administration reform. The administrative

capacity of these bodies, in particular hygienic services, should be strengthened at the central

level to continue with transposition where a significant amount of work remains to be done. An

integrated information system covering relevant public health protection issues should be set up.

Enforcement of legislation concerning tobacco control should be improved. The Czech Republic

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should develop a national system for the epidemological surveillance and control of

communicable diseases that will enable it to participate in the Community Network of

surveillance and control of communicable diseases.

The Hygienic Service section of the Health Ministry has staff of 25 of whom 2 deal with

legislation, 2 with occupational health and 3 with nutrition. A recent FVO mission concluded

that this does not correspond to the tasks and that capacity should be strengthened.

As regards social protection, the need for pension reform is recognised by the Czech Republic,

which has a number of proposals at hand. It will be important to track the development of

these reforms, and others such as the strengthening of health care financing. The combating of

exclusion, as laid down in Art. 136 of the Treaty establishing the European Community, is part

of the objectives of EU social policy. As decided at the Lisbon and Nice European Councils,

policies to combat social exclusion combine commonly agreed objectives at EU level, national

action plans. The Göteborg European Council in June 2001 invited candidate countries to

translate the Union’s objectives of promoting social inclusion into their national policies.

Further efforts are needed to ensure alignment with the acquis on anti-discrimination based on

Art. 13 of the Treaty.

Chapter 14: Energy

Since last year’s Regular Report, which concluded that significant further efforts were needed

for alignment with the

acquis,

considerable progress has been made, in particular with the

adoption of the new Energy Act.

With regard to

security of supply,

the Czech Republic has further increased oil stocks with a

view to complying with the

acquis,

reaching a considerable part of the required level.

As regards the issues of

competitiveness and the internal energy market,

the new Energy

Act came into force on 1 January 2001. This Act aims to align Czech legislation with the

acquis

and constitutes an important development in the energy sector. The Act defines the legislative

framework with regard to market regulation and a number of technical issues for the electricity

and gas sectors, as well as the heating sector. Also, the Energy Act provides for a gradual

liberalisation of the electricity market, including third party access starting in 2002. Full opening

of the electricity market is expected to take place in 2006. Furthermore, the Energy Act also

provides for third party access and a gradual liberalisation of the national gas market.

During 2001 there was some progress with price liberalisation. In January, prices for both

natural gas and electricity prices were increased.

Under the Energy Act, an Energy Regulatory Office (ERO) was established in January. This is a

state regulatory body funded from a separate chapter of the state budget, with an annual budget

of €1.6 million. The ERO is responsible for the promotion of competition and the protection of

consumers where competition is not possible. To this end, the ERO has the right to improve the

regulatory framework by passing secondary legislation. Its competencies include the granting of

market licenses, setting market rules and regulating prices.

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The Regulatory Office recruited 40 members of staff by July 2001 and has started to draft

secondary implementing legislation. It took its first independent pricing decision in July 2001,

when gas prices were raised again.

The Energy Act also extends the responsibilities of the State Energy Inspectorate. The

inspectorate will check the application of the Energy Act and the Act on Energy Management

and is the only institution empowered to levy fines. Under the Act, an Electricity Market

Operator has been established as a state-owned stock company with registered shares. In line

with the gradual opening of the market, it will develop, apply and supervise the rules of

electricity trading and set up a spot-market in electricity. It will also ensure the financial

settlement of electricity trades and clear differences between planned and actual electricity

trading.

With regard to the planned energy privatisations, some progress has been made in

implementing the Government decision of October 2000 to privatise the dominant electricity

generator CEZ

en bloc

with the regional monopoly electricity distributors, and the monopoly

gas supplier Transgas

en bloc

with the regional monopoly gas distributors.

Concerning

solid fuels,

in the year 2000 the mining industry witnessed an increase in demand

for brown and hard coal due to increased consumption by the electricity and heat generating

industry. This allowed a reversal of the long-term decline in activity. In November 2000 the

Government decided to postpone the closure of the last remaining uranium mine by two years to

the end of 2003 at the latest. In January 2001 the national uranium market was formally

liberalised and opened to international competition. However, a delay in the planned closure of

a uranium mine and the award of a contract for it to supply CEZ mean that the State-owned

mining company DIAMO will continue for the time being to supply almost all uranium currently

traded on the Czech market.

On 1 January 2001 the Act on Energy Management came into force. It aims to contribute to the

economic use of energy by outlining the framework for a National Programme for Economical

Energy Management, and it creates a framework for alignment with energy efficiency

acquis.

Furthermore, it establishes compulsory energy audits for certain projects and stipulates rights

and obligations in the management of energy.

The Czech Energy Agency monitors the enforcement of the new Act. However, little progress

has been made with the envisaged improvements in

energy efficiency.

In the year 2000, the

Czech Energy Agency reduced investments in energy savings by a third, which subsequently fell

to under a third of the 1999 level. This trend has continued in the year 2001.

With regard to

nuclear energy,

the Commission in its Regular Report 2000 encouraged the

Czech Republic to ensure that the operator and regulator of nuclear power plants reach and

maintain the high level of nuclear safety demanded by the European Council.

On 9 October 2000 fission reaction was initiated in the first reactor unit of the Temelin Nuclear

Power Plant and test operation of the plant continued throughout the reporting period. During

these tests, a number of technical adjustments were made, partly to the reactor, but mainly to

the secondary non-nuclear circuit of the plant (steam turbine). In this context, the reactor was

shut down on several occasions. These occurrences did not give rise to concerns in terms of the

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International Nuclear Events’ Scale. Nevertheless, the test operation of the plant and questions

on the plant design led to considerable public concern, particularly in neighbouring Austria.

In December 2000, the European Commission engaged in an effort to mediate between both

Governments on the basis of an agreement (“Melk Protocol”) reached between the Czech

Prime Minister and the Austrian Federal Chancellor, in the presence of the Commissioner for

Enlargement. As part of this agreement, the Czech Republic voluntarily undertook an extended

and comprehensive environmental impact assessment of the Temelin NPP, guided by the EC

acquis

on Environmental Impact Assessments. In addition, the Commission conducted an

expert mission with trilateral participation to assess nuclear safety issues regarding the Temelin

NPP. The mission concluded its work in summer 2001.

The State Office for Nuclear Safety (SUJB) has continuously monitored the developments at

the Temelin and Dukovany nuclear power plants. In the case of Temelin, it issued permits for

the plant to proceed to new testing phases upon the completion of each previous phase.

Overall assessment

The Czech Republic has transposed much of the current

acquis

in this sector and now needs to

ensure full and timely implementation of legislation. To this end, the administrative capacity of

the new bodies which have been established should be strengthened.

With regard to

security of supply,

the Czech Republic has continued to increase oil stocks

and is encouraged to continue its efforts. Regarding

solid fuels,

a substantial proportion of

electricity continues to be generated from coal. The coal mining sector has been restructured

and parts have been privatised and the Czech Republic is encouraged to continue restructuring.

The adoption of the new

Energy Act,

which is an important step towards alignment with the

internal energy market

acquis

(electricity and gas directives), needs to be followed up with

appropriate secondary legislation in order to make it fully operational. As regards energy

market liberalisation, the Act establishes the gradual opening of the national market. However,

in respect of gas the Act does not fully transpose all requirements of the

acquis.

Remaining

price distortions need to be eliminated.

Delays in the

privatisation,

as decided by the Czech government, of CEZ and Transgas, as

well as of the regional electricity and gas distributors, may hamper the ability of the privatised

firms to adequately prepare for the scheduled market liberalisations. Further efforts are needed

to improve

energy efficiency.

The adoption of the Act on Energy Management is a first step.

It must now be complemented by implementing legislation and must be strictly enforced if it is to

generate positive results. The adoption of the National Programme for Economical Energy

Management should provide positive impetus in this direction. However, continuing high levels

of energy intensity give scope for considerable energy savings. The

administrative bodies

legally established under the Act are not yet fully operational. The Energy Regulatory Office is

gradually assuming its responsibilities. It suffers from substantial administrative limitations that

can only be improved through an increased budget. Currently it is forced to borrow staff from

other institutions on an ad-hoc basis and to contract out part of its work in order to address its

most pressing responsibilities. The independence of the Energy Regulatory Office has been

questioned by independent power generators. The State Energy Inspectorate witnessed an

expansion of its responsibilities under the Energy Act, and its resources should be reinforced as

a consequence. The Czech Energy Agency should strengthen its capacity in order to deal more

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effectively with the challenge of raising energy efficiency. The administrative capacity of the

Electricity Market Operator will be verified once it becomes operational in January 2002 as

scheduled.

As regards the issue of nuclear energy, the European Union has repeatedly emphasised the

importance of a high level of nuclear safety in candidate countries. In June 2001, the Council of

the European Union took note of a Report on Nuclear Safety in the Context of Enlargement.

This report contains findings on the situation and perspective regarding nuclear safety in each

candidate country, as well as recommendations for specific improvements. In July, the

Commission conveyed this report to the candidate countries.

General recommendations of the Council Report call for all candidate countries with nuclear

power plants to complete their plant-specific safety improvement programmes, and to ensure

that their programmes include measures considered good practice within the European Union,

particularly regarding various specified safety measures dealing with matters such as assessment

practices, emergency procedures, feedback of experience, resources of the regulatory authority

and other aspects.

The report recommends all candidate countries to continue their national programmes regarding

the safe management of spent fuel and radioactive waste, and regarding the safety of their

research reactors.

With regard to the Czech Republic, the Council Report recommends measures to complete the

regulatory review regarding the bubbler condenser systems of the Dukovany NPP.

Furthermore it recommends two specific measures to ensure the safe operation of the Temelín

NPP, regarding the safety case demonstrating protection against high energy pipe breaks and

consequent failures of steam and feedwater lines, as well as measures to complete the

demonstration of the reliable functioning of safety and relief valves.

The State Authority for Nuclear Safety has a good knowledge of EU matters in its fields of

activity, supported by membership of the Nuclear Regulatory Working Group. It employs 190

people, of which 125 are inspectors. A further 140 people are employed by its two technical

support organisations. Staff turnover is very low: over the last year, 4 people left the SUJB,

mostly due to retirement. Since the beginning of October 2000, the SUJB has come under

pressure as the test operation of the Temelin Nuclear Power Plant began. During test operation

SUJB monitors the reactor carefully. It issues licenses for the reactor to move from one test

level to the next. Overall, the regulation of the nuclear industry in the Czech Republic is

comparable with Western European practice.

The Czech Republic will need to ensure compliance with Euratom requirements and

procedures. In this respect, due attention will need to be given to Euratom safeguards, in

particular regarding the reporting of nuclear material flows and inventories directly by the

persons or structures operating nuclear installations or storing nuclear material.

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Chapter 15: Industrial policy

Since the last Regular Report, some progress has been made in the development of industrial

policy, but less concrete progress has been achieved in the areas of restructuring and

privatisation.

As regards

industrial strategy,

in November 2000, the Government approved the 'Industry'

Sector Operational Programme (SOP) for 2001-2006. The programme is targeted at

implementation of defined priorities of industrial policy, which aim to enable Czech industry to

be competitive after accession to the EU, as well as preparation for the use of Structural Funds

and the Cohesion Fund. Priority is given to structurally affected regions, support of structural

changes in enterprises, support to SMEs, human resource development in industry, use of new

technologies and development of trade. The implementation of this programme has begun, and

an implementation agency (CzechIndustry) has been set up. So far, 107 projects are being

supported under the programme. As regards administrative capacity, 4 more staff have been

employed within the Ministry of Industry and Trade in connection with programme

implementation.

A 'Plan to help industrial companies with structural changes was approved by the government in

December 2000 as part of the government's wider 'Action Plan to reinforce the capacity of

industries to cope with competitive pressures' of January 2000. The latter will be implemented

over the next three years and aims to restructure major industrial companies and make them

competitive following accession to the EU. It will include support for innovation projects

seeking growth in profits, labour productivity and employment. The Office for the Protection of

Economic Competition (OPC) has approved the Plan, except where it relates to undertakings

with activities in sensitive sectors, companies in difficulty and operating aid.

A 'Programme for the promotion of industrial zones in 2001-2006' was approved by the

government in March 2001 (following consultation with the OPC) and aims to provide

municipalities, autonomous regions and developers with grants for the creation of industrial

areas and related infrastructure.

No particular developments can be reported in the field of

investment promotion.

With regard to

privatisation and restructuring,

the Revitalisation Agency, which was set up

under the 1999 Revitalisation Programme and given the task of managing the restructuring and

sale of eight large and heavily indebted industrial companies, ceased to exist on 1 February

2001 and was merged into Konsolidacní Banka. The Government has since transformed

Konsolidacní Banka into the “Czech Consolidation Agency” and the restructuring process will

be carried on by this new body, which started its activities on 1 September 2001. Most of the

eight companies which were re-nationalised through the Revitalisation Programme have not yet

been sold to private investors.

Some progress can be reported in the area of privatisation. The privatisation of the financial

sector has been completed, and the Government has launched tenders for the sale of the energy

utilities (electricity and gas).

Developments concering Industrial policy should be seen in relation to the overall enterprise policy, including the SME

policy (see

chapter 16 - Small and medium-sized enterprises).

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The

restructuring of the steel industry

has not yet begun In August 2001 the Czech

government approved a restructuring programme for the steel industry and presented it to the

European Commission.

It should be noted that an important element of any industrial policy is the control of State aid,

and that the compatibility of support schemes with EC rules, including the restructuring

provisions of the ECSC Treaty, will have to be examined (

see Chapter 6 - Competition

policy).

Overall assessment

The Czech Republic's industrial policy is largely in conformity with the principles of EC industrial

policy, and the requisite policy instruments and framework are in place. The approval of the

Sector Operational Programme (SOP) is a sign of further progress.

Continued improvement of the business environment should remain a priority (see

also Chapter

16).

The momentum of restructuring and privatisation, which was noted last year, appears to have

slowed down as regards major industrial undertakings. As was already highlighted in last year's

Report, the successful completion of restructuring and re-privatisation of the companies which

were acquired by the Revitalisation Agency should be a priority for the Czech government.

The implementation by the government of a viable restructuring programme and individual

business plans for the steel sector, which is fully in line with the state aid

acquis,

should now be

a high priority. The Czech steel industry urgently needs comprehensive restructuring to become

internationally competitive.

The institutional structures operating in the area of industrial policy work well. In particular, the

efforts of the government agencies promoting commercial activities (CzechTrade and

CzechInvest) have continued to be very successful. Their performance is positive and

contributes to attracting investment into the Czech Republic and to the promotion of Czech

business abroad.

Chapter 16: Small and medium-sized enterprises27

Since the last Regular Report, further progress has been made by the Czech Republic with

regard to SMEs, including on policy implementation.

As regards

SME policy,

in December 2000 the Government approved a Long and Medium-

term Policy for SMEs until 2004, as well as 17 support programmes for SMEs for the years

2001-2004. The Policy focuses in the medium term on the improvement of the

business

environment

for SMEs through access to capital resources, information technologies,

education, advisory and consulting services, technical standardisation and certification. The

Programmes enable SMEs to receive state support for projects relating to industrial

manufacturing, construction, crafts and services, including trade, health care and pharmaceutical

Developments concering SME policy should be seen in relation to the overall enterprise policy, including Industrial

policy (see

chapter 15 - Industrial policy).

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services. The main support instruments improving access to capital for SMEs will be guarantees

for bank credits and leasing, guarantees for capital entry, credits at reduced interest rate and

subsidies for the payment of costs related to certification systems.

The National Discussion Group, appointed by the Minister of Industry and Trade, further

developed its activities with the aim of improving the business environment for SMEs. Topics

addressed included access of SMEs to capital, advice and information and co-operation with

state administration and private institutions.

As regards administrative capacity, the Business Development Agency's staff was increased by

8 employees in 2000.

Overall assessment

The Czech Republic's policy towards SMEs is already largely in line with that of the EU.

Further efforts should be made to improve the business environment, including the efficiency of

judicial proceedings, the protection of creditors and access to capital. With regard to the latter,

the Czech-Moravian Guarantee and Development Bank and the Business Development Agency

play an important role.

The various instruments, partners and institutions comprising the business support system

function well. Existing advice and assistance services include the network of Regional and

Information Centres (which was extended from 21 to 29 in 2000), 5 Business Innovation

Centres and 7 EuroInfo Centres.

To improve links between SMEs and industry, and R&D institutes and universities, the Ministry

of Industry and Trade runs three specialised support programmes for SMEs aimed at research,

development and innovative business (Technos, Transfer and Park).

Support programmes for SME industrial research and development should continue and support

for technology transfer should be further promoted.

With regard to the SME definition, further alignment with the

acquis

should be ensured..

The implementation of SME policy is monitored by the Ministry of Trade and Industry and by

the Ministry of Regional Development. There is sufficient administrative capacity for this

purpose. Further strengthening of collaboration with the Ministry for Regional Development

should be a priority, to ensure business support in regions, with particular focus on future

financing by Structural Funds.

Chapter 17: Science and research

The Czech Republic has continued to take steps to ensure implementation of the

acquis

and to

build up the appropriate capacities in the field of research and technologies.

The Government has made progress in preparing the implementation of the National Policy in

Research & Development which was adopted in 2000. In January, the Government approved

an Order on targeted financing of science, and agreed funding conditions. Research and

development for the needs of the State, and targeted research, will be entitled to 100 % State

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budget funding. Industrial research can be subsidised at 50 % and development at 25 %. The

Order will remain valid until the envisaged new Act on Research and Development comes into

force.

In January, the Government also introduced a central registry of research and development

projects which are fully or partially funded from the State budget. The central registry is to keep

the public informed about research and development projects funded from the State treasury,

bring the funding under public control, and prevent duplicate funding of projects.

During 2001, the Czech Republic continued to be fully associated with the Fifth Framework

Programme as well as the Euratom Framework Programme. The national information network

(NINET) which was previously established as informal partnership of national, regional and

branch organisations, has become a formal network.

The state budget approved for the year 2001 covers 80 % of the Czech contribution to the

programme. As for other candidate countries associated with the Fifth Framework Programme,

the Czech Republic has been granted observer status in CREST (Comité

pour la Recherche

Scientifique et Technique).

Overall assessment

There is already a high level of alignment with the

acquis.

However, financial support for science

and development remains relatively low. For the further development of the sector and for an

effective integration of the Czech Republic into the European Research Area, it is important to

increase the gross domestic expenditure on research and technological development. Concrete

measures are also required to stimulate business enterprise expenditure on research and to

favour fresh capital investments.

Legislation on Research and Development should be adopted to harmonise the conditions for

state support of research and technological development with those within the EU, to specify the

legal status of the institutions as well as to regulate their creation and liquidation.

Though the financial and institutional framework for participation in the Fifth Framework

Programme is well established, the reinforcement of research-related administration capabilities

as well as the strengthening of research-related infrastructure is necessary to ensure successful

participation of the Czech Republic in the Framework Programme.

Chapter 18: Education and training

Some further progress has been made in this field. Since the School Act was rejected by the

Parliament in May 2001, no progress has been achieved in the field of legislative alignment. This

act was intended to further align the legislation with,

inter alia,

the

acquis

on education of

children of migrant workers and on the promotion of European pathways in work-linked

training.

In the past year, the Czech Republic has continued to participate in the

Community

programmes

in this area (see

section A.b - Relations between the European Union and

Estonia).

In the reference period, the Czech Republic started to participate in the second

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generation of Community programmes Socrates and Leonardo as well as in the new Youth

programme (which incorporates European Voluntary Service activities).

No progress has been made in alignment with the

acquis

as regards

education of children of

migrant workers.

The Czech Republic has made progress in

reforming its education and training system

and

in introducing European standards. The reform of the public administration has decentralised

responsibilities in education to regional authorities (secondary education) and municipalities

(primary education) and set conditions for more democracy and participation in the whole

educational system. The transfer of competencies started at the beginning of 2001 and is an on-

going process. An amendment to the Higher Education Act was adopted and entered into force

in July 2001, which introduces obligatory bachelor studies before masters’ studies following

recommendations made in the Bologna Declaration.

The Act on Rights of Minorities adopted in May 2001 provides for the right of any minority to

education in its language. Some initiatives have been taken to improve access to education for

Roma children, including a new Romany cultural and educational centre in Breclav and

preparatory classes in south Bohemia.

Overall assessment

Participation in Community programmes has proven to be successful and the established

mechanisms for participation are functioning well.

It is still necessary for the Czech Republic to ensure full transposition and implementation of the

EC Directive on education of children of migrant workers.

Some progress has been made as regards improving educational opportunities for children from

social and culturally disadvantaged backgrounds.

Chapter 19: Telecommunications and information technologies

Progress made by the regulatory body since the last report has been good but important policy

issues raised in the previous report have not been addressed.

Progress since the last report has consisted of various measures that give effect to the

Telecommunications Act including several important items of secondary legislation. In particular,

licences for new entrants were issued in advance of the market opening date of January 2001

and, subsequently, the new regulatory body has issued a series of crucial decisions relating to the

interconnection of competing networks. In consequence, the Czech market is now very active

and the commercial behaviour of the incumbent has changed significantly.

The development of all basic functions of the Office for Personal Data Protection (established in

June 2000) are under way. Also, an electronic public administration (e-Government) and

educational institutions access to Internet are being set up in the framework of the e-Europe+

Action Plan for candidate countries.

As regards the

postal services,

the Act on Postal Services entered into force in July 2001 as

did the related implementing decrees. The Act and procedural regulations were created on the

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basis of the

acquis

for postal services. Accessibility and quality of domestic mail service, is

provided on a level comparable to that in EU Member States. The Law implies that national

regulatory authority is the Ministry of Transport and Communications. There is as yet no

autonomous regulatory body for posts. From the operational point of view the incumbent

universal service provider has progressively modernised its infrastructures, developed new IT

services, co-operated with similar Western European operators and adopted new definitions of

mail categories in order to align them with the EC procedures.

Overall assessment

The Czech Republic has advanced significantly in this area over the last few years, but a number

of important outstanding issues remain in the telecommunications sector.

The date of 1 January 2001 for full liberalisation was fixed in 1994, but the provision of carrier

selection facilities that are vital to effective competition has been unjustifiably delayed. This has

undermined the market opening and has hindered new entrants in certain respects. This is

harmful to the interests of consumers and of investors in companies which compete with the

incumbent operator in which the state has a financial interest. This situation should be rectified

without further delay.

Also, the interconnection prices for competing networks which were determined by the

regulatory process are above the equivalent prices in the EU and were not based on the

appropriate costing methodology.

The Ministry of Transport and Communications retains significant powers of a regulatory nature.

It is inconsistent with the principle of separation of regulatory and operational functions for

Ministry officials to be involved in any way in the managerial or supervisory boards of operating

companies or in their privatisation.

Despite the above defects, much progress has been made in the telecommunications sector over

the last few years and the infrastructure's size and degree of modernisation is a good

achievement. The new regulatory body (the Czech Telecommunications Office) has made a

good start. The remaining problems regarding the alignment with the

acquis,

particularly:

separation of regulatory and operational functions, cost-orientation of tariffs, asymmetric

regulation and the availability of carrier selection facilities should be urgently resolved.

The Ministry will have to move quickly to implement local loop unbundling.

It will be necessary to ensure that any mechanism for assessing the cost of providing the

universal service identifies the real net cost, based on independently certified audits, and allows

for a transparent determination of whether the universal service obligation is an unfair burden on

the designated carrier.

As for postal services, the Czech republic has established a good basis and should be able to

adopt the relevant Community legislation timely. However, an independent regulatory body for

the Postal Services, whose legal basis in line with the Postal Directive, needs to be established.

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Chapter 20: Culture and audio-visual policy

The Czech Republic’s legislative alignment with the

acquis

has improved significantly since last

year’s Regular Report. There has been no particular progress in the strengthening of

administrative capacity.

With the entry into force of the new Act on Radio and Television Broadcasting in July 2001, the

Czech Republic has made very significant progress in aligning with the Community

audio-visual

acquis.

The Act also entrusts the Council of the Czech Republic for Broadcasting with a

number of new obligations and responsibilities, for which it is expected to receive appropriate

additional resources. Furthermore, it has created the necessary conditions for the Czech

Republic to ratify the Council of Europe Convention on Transfrontier Television and to sign and

ratify its Protocol.

In the field of

culture,

implementation of the ‘Concept for Cultural Policy in the Czech Republic’

continues in all cultural sectors.

Overall assessment

The Czech Republic is now relatively advanced in this domain, although some further efforts are

required. There has been significant progress in terms of legislative alignment but no particular

progress on administrative capacity. Should implementation of the new Act on Radio and

Television Broadcasting require strengthening of the relevant bodies then appropriate resources

should be made available.

With the entry into force in July 2001 of the new Act on Radio and Television Broadcasting, the

Czech Republic has made considerable progress in aligning with the

audio-visual

acquis.

Some further technical adjustments will be necessary before accession, but Czech legislation is

now largely in line with the acquis in this area.

It is too early to judge how effectively the new responsibilities of the Council of the Czech

Republic for Broadcasting will be exercised. As indicated in the previous Regular Report, it

remains particularly important to establish and supervise effectively a transparent and

predictable regulatory framework. The Department of Mass Media in the Ministry of Culture

administers legislation in the areas of broadcasting, film, video and periodical press. The current

number of staff (12) is adequate.

The Czech Republic should move towards ratifying the Council of Europe Convention on

Transfrontier Television. Upon ratification the Czech Republic will also be bound by the

Protocol amending the Convention.

Chapter 21: Regional policy and co-ordination of structural instruments

Since the previous Regular Report, further progress has been made in preparing for the

implementation of structural policies.

With regard to

territorial organisation,

the Czech Republic has completed the establishment

of territorial units corresponding to NUTS classification. There are 14 regions at NUTS III level

(kraj), and 8 regions (cohesion region) similar to NUTS II. The classification has been agreed

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with the Commission and has been effective for statistical purposes from January 2000, and for

legislative purposes from January 2001. At the same time, the Czech Republic has started with

the creation of a national implementation structure for the European Social Fund.

Concerning

the legislative framework,

the important Act on Support to Regional

Development and the Act on Budgetary Rules entered into force in January 2001. The Act on

Environmental Impact Assessment was adopted in December 2000 and should come into force

as of1 January 2002. The Act should ensure full compliance with the relevant

acquis.

The Act

on the Regions and the Act on Municipalities came into force in November 2000, formalising the

status of the regions and municipalities, and the functioning of their respective bodies,

administrative structures and assemblies. Related legislation on the city of Prague and district

authorities also came into force in November 2000.

The Act on Financial Control was adopted in August 2001 and is due to enter into force in

January 2002. It aims to comply with the

acquis

in this field.

As regards the

institutional structures,

the Act on Support to Regional Development

stipulates that Regional Councils should be set up at NUTS II level, ensuring programming and

implementation of regional development programmes. It is also the basis for the establishment of

Regional Development Committees, which should monitor and evaluate programme

implementation. All Regional Councils have been established. The setting up of the Committees

is at different stages. In January 2001, the new regional governments ("hejtmanstvi") at NUTS

III level were installed, and are gradually becoming operational.

The National Programming Committee for Economic and Social Cohesion (NPC-ESC) was

replaced by the National Management and Co-ordination Committee (NMCC), and should

become the future Monitoring Committee at national level.

Regarding

programming,

the revised National Development Plan (NDP) was presented to the

Commission in July 2001. It consists of 8 Regional Operational Programmes and 6 Sector

Operational Programmes.

No significant developments can be reported as regards the

preparation of an evaluation and

monitoring system.

In the field of

financial management and control,

the coming into force of the Act on

Budgetary Rules in January 2001 allows for the compilation of medium-term budgetary outlooks

and constitutes the legal basis for multi-annual programming. The Act also provides for

implementation of the principle of co-financing, in line with the

acquis.

As regards

statistics

for the implementation of the structural funds, decisions on NUTS

classification in accordance with Community rules have been taken. Monitoring of most

economic and social indicators is ensured by the Czech Statistical Office at the different NUTS

levels.

Overall assessment

Overall, legislative alignment for this chapter is well advanced. However, additional efforts are

still needed to establish operational bodies, to extend administrative capacity and to reinforce

interministerial co-ordination for the implementation of the Structural Funds. Above all, the

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administrative capacity of the units within the ministries to be designated as future Managing or

Paying authorities needs to be considerably strengthened so that they will be effectively able to

take responsibility for the management and implementation of Structural Funds assistance.

In order to complete the

legislative framework,

further efforts are needed in particular on

alignment with the public procurement

acquis

and in ensuring full compliance with the financial

control

acquis.

As regards the institutional structure, the new regional governments will function in parallel with

the existing District Offices until the latter are abolished at the end of 2002. In the meantime the

financing arrangements for the regional governments remain to be fully defined and will impact on

the ability of the regions to contribute to a functioning co-financing system for Structural Funds.

The Czech authorities should urgently take a number of fundamental decisions on the

implementation of Structural Funds Programmes, most notably on the number of Operational

Programmes, and the nomination of the managing authorities and of the paying authorities for the

future Community Support Framework and Operational Programmes. In addition, the relevant

administrative structures are not yet fully operational and political decisions concerning the

allocation of competencies need to be taken.

As regards programming, the revised NDP is a good starting point for Structural Funds

programming, but several elements will have to be added or improved in order to accept the

NDP as a development plan in the framework of the Structural Funds. The current NDP

contains a proposal for 8 Regional Operational Programmes. This proposal has still to be

formalised by the Government. The Czech authorities envisage to submit the final version of the

NDP by end 2002.

Further progress is needed to raise the technical capacity to prepare a suitable pipeline of

projects, which will be eligible and ready to be financed when the Structural and Cohesion

Funds will be released. Efforts need to be done to develop the necessary project development

capacity both at national, regional, and local level.

The partnership principle has been applied during the drawing up of the NDP, but has yet to

include comments from the self-governing regions. Further attention is needed to ensure there is

sufficient representation from economic and social partners and other relevant bodies. Attention

needs to be paid to information flows and dissemination methods as well as the time needed to

incorporate wide-ranging views into documentation, formulating strategic aims and priorities.

Application of the partnership principle in the NUTS II-level Regional Development Committees

has to be ensured.

In relation to financial management and control, the Czech Republic needs to ensure that the

necessary legislative framework is in place for the co-financing of Structural and Cohesion Funds

assistance, including provisions for transfer of funds during its implementation. Appropriate

systems and procedures for financial management and control need to be established, in

particular in relation to the structure of the managing and paying authorities, in order to fulfil the

specific requirements of the Structural Funds regulations.

A proper system and capacity for monitoring and evaluation needs further development. The

timely availability and functioning of an effective monitoring system will be of crucial importance

for the implementation of the Structural Funds programmes.

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Concerning the European Social Fund, further efforts are required to improve the administrative

capacity and the mechanism for the coordination of ESF interventions in the context of the

European Employment Strategy and the Inclusion Process.

As regards regional statistics, the Czech authorities will have to ensure that the available data are

brought up to the level required for regional policy planning and programming, in particular the

ex-ante evaluation.

Chapter 22: Environment

Since the last Regular Report, the Czech Republic has made good progress as regards the

transposition of the environmental

acquis.

Concerning the reinforcement of administrative

capacities, some progress has also been achieved.

The updated State Environmental Policy, adopted by the government in January 2001, aims at

ensuring

the integration of the environment into other policies.

The programme follows the

Environmental Action Programme and provides the basis for the forthcoming National

Strategy for Sustainable Development.

Concerning

horizontal legislation,

the adoption of the Act on Environmental Impact

Assessment in March 2001, which aims to fully transpose the acquis except for the new

Community directive on strategic environmental assessment, constitutes a major development.

The new Act on environmental impact assessment will come into force in January 2002. With

regard to

civil protection,

the Government has adopted secondary legislation implementing the

Act on Crisis Management. The decrees came into force in November 2000 and January 2001.

In the area of

air quality,

some progress has been achieved through the adoption of the Act on

the Conditions for Operation of Vehicles on Roads, which came into force in July 2001. The act

aims to align Czech legislation with the acquis on the quality of petrol and diesel fuel.

As regards the area of

waste management,

the adoption of the Waste Act in May 2001

provides the legislative framework for the reform of the current waste management system. The

act will come into force in January 2002. In addition, secondary legislation concerning the quotas

for the recovery and recycling of packaging waste and an inventory of equipment concerning

PCBs/PCTs has been adopted.

In the field of

water quality,

the new Act on Water and the Act on Water Supplies and Sewage

Systems, aiming to align with obligations from all EC water legislation, were adopted in July

2001. In addition, the Czech government took the decision to declare the entire territory a

sensitive area for the treatment of waste water, which is an important step.

In the field of

nature protection, industrial pollution control and risk management

and

nuclear safety and radiation protection,

no particular development has been noted in terms

of transposition of legislation over the past year.

In the field of

chemicals and genetically modified organisms

, a number of implementing

decrees specifying technical conditions and risk categories for the use of GMOs have entered

into force. They mainly relate to the Act on genetically modified organisms and products, which

entered into force in January 2001. Decrees related to the handling of chemicals have also been

adopted.

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Concerning

noise,

the Government order on noise emissions came into force in July 2001. It

does not, however, incorporate new acquis in this field.

The Government adopted the updated

directive-specific implementation plans,

which take

into account the progress achieved to date. In addition,

investment strategies

for certain

water and waste legislation have also been adopted by the government.

Investments

in the field

of environment in the year 2000 decreased to approximately CzK 20.3 billion (€ 0.6 billion),

corresponding to 1.04% of GDP

. In 2000, the State Environment Fund invested CzK 2.8

billion (€ 81.5 million) into the environment, mostly into water and air pollution projects.

As regards

administrative capacity

at central level, the Ministry of Environment established an

inter-ministerial commission on reporting in April 2001, in line with the reporting directive. In

2000, the staff of the Ministry was strengthened with 38 persons, and has reached a total of 511

people. The administrative reform, and in particular the creation of 14 regions as of January

2001, will have important implications for the environment field, as competences are being

transferred to the regions and municipalities. In the past year, 50 persons from the Ministry of

Environment and 19 from the District Offices were transferred to the regional authorities. In

total, an average of five staff members work in the environment department of the regional

authorities.

Enforcement of environmental rules is, to a great extent, carried out by the Czech Environment

Inspectorate (CEI), which has recruited additional staff in order to reinforce its inspection

capacities. About 60 new inspectors were hired, bringing the total number to 465. In 2000, the

inspectorate undertook 18 500 inspections, imposing fines worth € 2.15 million. Every regional

office of the CEI now employs at least one lawyer trained in the legal procedures that must be

followed when levying fines.

The State Office for Nuclear Safety (SONS), the central administrative body for the state

administration and supervision in the field of nuclear energy and radiation protection, recruited

13 new employees in 2000 and 10 in 2001 (see chapter 14: energy)

Overall assessment

The Czech Republic has achieved good legislative progress in aligning with Community

legislation. The adoption of important framework and horizontal legislation, including the Act on

Environmental Impact Assessment, the Waste Act and Water Act, constitute significant

developments. However, as regards the newly adopted waste and water related legislation,

some non-complying provisions need to be brought in line with the acquis. Adoption and

implementation of important pieces of legislation also remain to be achieved in the fields of air

protection, industrial pollution control and nature protection, in order to comply with Community

legislation. Furthermore, there are gaps related to secondary legislation governing implementation

and enforcement measures.

The recently updated directive-specific implementation plans and investment strategies still need

to be based on a bottom-up inventory, including detailed figures concerning compliance and

non-compliance and detailed implementation measures. Only after such an inventory has been

Czech Statistical Office.

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established will the Czech Republic be in a position to develop the overall investment strategy,

including a project pipeline, and back-up its financial estimates. In the mid 90s, the Czech

Republic's environmental investment was at a high level, amounting to around 2.4% of GDP. In

2000, however, there was a decrease in environmental investment to around 1.04% of GDP.

Considerable investments need to be secured, also in the medium-term, to ensure

implementation of the environmental acquis.The Czech Republic should continue to integrate

environmental protection requirements into the definition and implementation of all sectoral

policies with a view to promoting sustainable development.

Concerning

administrative capacity,

institutional arrangements for environmental protection

and enforcement have long been in place and the competencies for the main requirements of the

acquis have been identified. However, there is still a need to strengthen co-operation and co-

ordination among the different governmental bodies. Administrative capacity is weakened by a

lack of clear allocation of competencies or overlapping competencies, in particular in the water

sector.

Some uncertainties remain as regards the implications of the administrative reform on the

environmental sector. The distribution of competencies and tasks between national, regional and

local bodies needs to be clearly established. The abolition of district offices and the resulting shift

of competencies to the newly-established regional authorities and municipalities create significant

challenges to the implementation of the environment acquis. At present some 1500 people are

enforcing environmental legislation on the district level, and it is important to ensure that the

transfer of responsibilities to regional authorities is accompanied by the recruitment/transfer of a

sufficient number of staff and the provision of adequate equipment and logistics. Current

administrative overlaps in inspection activities should also be addressed in the framework of the

transfer of responsibilities from the district offices to regional authorities.

The system of licensing and permitting facilities that emit pollutants is defined, but lacks an

integrated approach. An integrated permitting system will need to be established in order to

ensure compliance with the IPPC directive.

Overall the technical infrastructure for implementing environmental legislation, such as data

collection and environmental monitoring, is of a relatively high standard, but needs to be

upgraded. A high level of compliance has been achieved for monitoring air emissions, control of

radiation protection resources, nature conservation, and in relation to limiting noise. However,

the functioning of the monitoring system in the water sector, in particular as regards groundwater,

needs strengthening.

With regard to environmental inspections, administrative capacity needs to be further reinforced.

The increase in the number of inspectors at the Czech Environmental Inspectorate constitutes an

important improvement. However, despite an increase in both the number and average value of

fines levied, the value of fines continues to be too low to have a strong deterrent effect.

Chapter 23: Consumers and health protection

Progress has continued since last year’s Regular Report. Legislative developments have been

accompanied by steady administrative improvement and an awareness of further steps to be

taken.

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Significant progress has been made as regards

safety related measures

with the adoption of

the Act on General Product Safety in February 2001, which came into force in July 2001.

Amongst its provisions the Act makes producers, importers and distributors responsible for the

introduction of safe goods on the market and obliges them to provide relevant information to

consumers. The Act brings Czech legislation largely into line with the

acquis,

although it should

also be noted that the Directive on General Product Safety is currently being revised.

Concerning

non-safety related measures,

amendments to the Civil Code relating to the

transposition of Directives on protection of consumers in respect of contracts negotiated away

from business premises, distance contracts, and on unfair terms came into effect in January

2001. A new Act on Consumer Credit which further aligns Czech legislation with the

acquis

was adopted in August 2001. It will enter into force in January 2002.

Concerning the

market surveillance mechanism,

progress has been made in clarifying the

division of responsibilities between the organisations involved.

Over the latter part of 2000 and the first six months of 2001, the Czech Trade Inspectorate

significantly increased its level of activity against the practice of ‘Dual Pricing’ – cases in which

foreigners are charged more than Czech nationals for equivalent services. This action and the

publicity it received has resulted in a decrease in the rate of incidence of dual pricing from 14.7%

of targeted inspections in 2000 to 8.2% in 2001. Given the focused nature of these inspections,

it appears that this phenomenon is becoming less significant, which is a welcome development,

as is the more vigorous regulation of this area.

In November 2000 the Government set out responsibilities between Ministries for the

implementation of the Concept of Consumer Policy for the years 2001-2005. The concept sets

out a range of consumer protection aims for the Czech Republic, including completion of

alignment, focus on new advances and the development of consumer awareness and its

appropriate supporting structures.

Overall assessment

The Czech Republic has during the past four years taken significant steps in terms of legislation,

planning and achievement of administrative reform. A number of further measures are still

required to complete legislative alignment and ensure effective administration.

With the entry into force of the Act on General Product Safety in July 2001, Czech legislation in

this area has been brought further into line with the

acquis,

including the outlining of the

structures which will be used to identify dangerous products at external borders, an issue raised

in the last Regular Report. Some further adjustments may be necessary to complete alignment

on a number of issues.

A new Act on Consumer Credit, further aligning Czech legislation with the

acquis,

was adopted

in August 2001 and enters into force in January 2002. Further work is needed in areas such as

misleading advertising, timesharing, guarantees, payments and credits provided across internal

borders, injunctions and price indication.

Overall competence in the area of consumer protection lies with the Ministry of Industry and

Trade. The consumer protection department of the Ministry has been strengthened and

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currently has a staff of 12. The Czech Agricultural and Food Inspectorate (CAFI) has 500

employees, of whom over 200 are professional inspectors and approximately 100 laboratory

staff. This appears sufficient, although low salaries hamper recruitment. The Czech Trade

Inspectorate (CTI) made almost 60 000 inspections during the last twelve months, and analysed

over 3 000 complaints from consumers. It employs over 500 staff, of whom 450 are inspectors.

Staff turnover is high, with inspectors staying an average of 2-3 years. Both the CTI and CAFI

have now started to use the wider powers granted to them by the amended Act on Czech Trade

Inspection.

The market surveillance mechanism is divided between several bodies, with the majority of

supervisory activity conducted by three organisations: the Czech Agricultural and Food

Inspectorate (CAFI) and the State Veterinary Administration are active in specified areas of

food control, whilst the Czech Trade Inspectorate (CTI) conducts much of the supervision of

non-food products and the protection of the economic interests of consumers. A range of other

smaller bodies are responsible for particular niches within market surveillance as a whole.

In addition to these bodies, the Ministries of Agriculture, Health, Regional Development, and

Finance have relevant responsibilities. The Ministry of Industry and Trade (MIT) acts as central

co-ordinator. Whilst progress has been made in clarifying the division of responsibilities between

the organisations involved, further improvements will be needed to ensure that information flows

are smooth and comprehensive. Czech preparations for participation in the Rapid Exchange of

Information System (RAPEX) are ongoing, led by the MIT. In the meantime the Czech

Republic is a participant in the transitional RAPEX system, which provides for co-operation

between Central and Eastern European countries and aims to assist preparation for the full

RAPEX system.

The concept of consumer policy has been updated for the period 2001-2005. It includes the

intention to complete transposition of the

acquis

by the end of 2002 and, as mentioned in the

previous Regular Report, measures to strengthen administrative structures, rationalise market

surveillance and boost the role of relevant non-governmental organisations (about 60 are

currently involved in consumer protection). In addition, it also calls for the simplification of the

exercise of consumer rights and increased awareness of such rights, along with enhancing Czech

involvement in relevant international organisations.

In addition to the steps already taken, administrative structures should be further strengthened as

appropriate. The concept of consumer policy recognises that a number of improvements should

still be made to the system of market surveillance, and in particular, any institutional adjustments

or reallocation of resources necessary to complete the administrative restructuring of the sector.

Twenty-eight centres for consumer consultation and complaints mediation are presently

operating in the Czech Republic. Support to relevant non-governmental organisations should

continue and their role should be enhanced. Funding for consumer organisations rose from CzK

4.5 million in 1999 to CzK 10 million in 2000. This figure did not increase in 2001. Consumer

organisations have created two umbrella organisations and have seen their membership increase

substantially. Integration into EC structures such as the European Committee of Consumer

Unions (BEUC) and European Association for the Co-ordination of Consumer Representation

(ANEC) should continue as far as possible.

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Chapter 24 - Co-operation in the fields of justice and home affairs

Since the 2000 Regular Report, further progress has been made in the Czech Republic in the

fields of data protection, border control, visas, migration and police co-operation. However,

little progress can be reported in the fight against “white collar” crime (including money

laundering, fraud and corruption).

The Czech Republic made substantial progress in further aligning its legal framework as concerns

data protection.

The Parliament adopted an amendment to the Police Act that regulates data

protection in olice matters, as required for participating in Schengen and Europol, and has

ratified t e 1981 Council of Europe Convention in this area. The Office for Personal Data

Protection came into operation following the appointment of its President by the President of the

Republic on a proposal from the Senate. Three out of the proposed seven independent

inspectors have also been appointed. The Office prepares public reports on its activities and

must give permission for processing of personal data. Any data administrator must apply to the

Office for a permit to transfer personal data abroad. The Office conducts investigations either in

response to complaints or randomly, but also according to a yearly programme, and can impose

penalties. The staff (around 50) is envisaged to grow to about 85 by the end of 2001. Within the

police, data protection is still left to the IT-Department but the Police Presidium plans to

establish a special unit dealing with this and other Schengen issues.

The Czech Republic has made good progress in aligning its

visa

policy with that of the EU,

including as regards airport transit visas. . The amendment to the Act on the Residence of Aliens,

which entered into force in July 2001, is a further step in the direction of full alignment with the

acquis.

It reduces by half (to 90 days) the time for issuing visas and removes some of the entry

requirements like the health insurance certificate. As regards administrative capacity, visa matters

are overseen by the Department for Asylum and Migration Policy in co-operation with the Alien

and Border Police. An on-line system for issuing visas is currently operating between the

Ministry of Foreign Affairs and 104 out of the 107 competent diplomatic missions and is

connected also with the main border crossing points.

With regard to

border control,

the Government has undertaken several administrative and legal

measures to ensure co-ordination between the relevant departments dealing with illegal

immigration. Controls at most official crossing points have improved over the past two years due

to new equipment (such as on-line connection to headquarters) and the decision to create, by 1

January 2002, an integrated Alien and Border Police (ABP) to ensure state border protection

and inland control of illegal immigration. The shift of responsibility for the Border Police from the

District to the Regional level has also improved the situation, although the lack of a central

border police command hampers co-ordinated action exceeding regional range. Since May

2000, special mobile search units have been in operation in the Moravian and Bohemian border

regions.

The Czech Republic is making progress in aligning itself with the

Schengen

requirements and

continues to prepare for future participation in the Schengen Information System. The

Government established a very thorough Schengen Action Plan in this respect. All new

passports are machine-readable, although no deadline has yet been set for withdrawing non

machine-readable passports.

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As regards

migration,

the Czech Parliament adopted an amendment to the 2000 Act on the

Residence of Aliens which will enter into force on 1 January 2002, and which represent further

progress in the field of family reunification and expulsion practice. The Czech Republic also

started negotiations with a view to the conclusion of new readmission agreements with Slovakia,

Italy and Benelux, Yugoslavia, FYROM, Algeria, China, India, Sri Lanka, Iraq, Iran, Vietnam,

Russia and Afghanistan.

As far as

asylum

is concerned, an amendment to the 2000 Act on Asylum, aimed at bringing

Czech legislation closer to the

acquis

in important areas, is pending in the Parliament. The

proposed amendment seeks to fight abuse of access to the labour market by asylum seekers. If

adopted, it would also create a second-instance independent appeal level, and put in place

provisions for applying the Dublin Convention after accession. As regards implementing

capacity, the number of asylum adjudicators and assistants was increased by 14 at the asylum

policy department and 3 new offices were opened with 19 new staff. Lecturers from the

Ministry of Foreign Affairs, NGOs, the UNHCR and EU Member States provide training.

Compared to previous years, asylum applications seem to have decreased. The Government

decided to provide temporary protection for Chechen refugees in 2001. The capacity of the

asylum reception centres has been increased recently.

In the fields of

police co-operation, the

fight against organised crime, corruption and economic

crime, the Czech Republic continued to make encouraging progress in aligning its legislation and

substantially reorganising its law-enforcement authorities. In April 2001, the act on witness

protection and the amendment to the Police Act entered into force, which is necessary for

participation in Europol and international co-operation. To address the lack of co-operation

among agencies, the National Police Criminal Office was created in January 2001. It unites

specialised services for organised crime, drug trafficking, corruption and serious economic

crime, surveillance, witness protection and for the central information system. The Government

took the decision to abolish the Office of Investigation, which will be merged with the Criminal

Police with a view to the creation, by 1 January 2002, of the unified Criminal & Investigation

Police Service. The Czech Republic successfully negotiated a co-operation agreement with

EUROPOL which is due to be signed at the end of 2001.

As regards

the fight against fraud and corruption

(see

Section B.1.1- Democracy and the

rule of law),

the Czech Republic signed the 1999 Civil Law Convention on Corruption and is

continuing preparations for full co-operation with OLAF upon accession. The Government is

redrafting the Criminal Code with a view to ensuring alignment with the

acquis

on corruption.

The Government adopted the new 2001 - 2004 National

Drug

Policy Strategy to be

implemented through all involved institutions, at all levels. It aims to fulfil the measures set out in

the EU Action Plan for 2000-2004. Since January 2001, the National Anti-Drug Headquarters

has been part of the new National Criminal Office, but continues to co-ordinate the regional

units and investigates narcotic cases on a national and international level.

As concerns the fight against

money laundering

(see

also Chapter 4 - Free movement of

capital),

although the Parliament approved the amendment of the Code of Criminal

Proceedings which further aligns criminal legislation in this field, only a few cases of money

laundering have been prosecuted to date. In 2001 the Financial Analytical Unit under the

Ministry of Finance conducted 15 inspections of financial institutions (including pension funds,

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leasing and insurance companies, real estate agencies, exchange offices) against 14 in 2000.

The Unit imposed fines on 5 institutions in 2000, for a total value of approx. €125,000.

In the field of

customs co-operation,

the Czech authorities have further developed their IT and

risk-analysis system, through the development of an electronic system (with risk profiles). A

pilot computer system is being introduced in an increased number of customs offices.

With regard to

judicial co-operation,

the Czech Republic has made further progress in the

field of criminal matters with the adoption of the amendment to the Criminal Proceedings Code,

which strengthens the role of the prosecutor in the pre-trial procedure and which will facilitate

direct contacts among international judicial bodies. It will also further contribute to the

preparations for Schengen judicial co-operation. On civil matters, the Convention on

International Access to Justice as well as the European Conventions on the Execution of

Children’s rights and on the Legal Status of Children born out of Wedlock were ratified.

Overall assessment

Overall, legal alignment under each topic of this chapter is now quite well advanced.

Nevertheless, further progress is still required to translate policy intentions into an operational

policing strategy, organisational structure and planning.

As regards

data protection,

the amended Police Act is now well aligned with the

acquis

and

with the 1987 Recommendation of the Council of Europe concerning the use of personal data in

the police sector. The short-term priority of the Accession Partnership has therefore been well

addressed. Nevertheless, the implementation of the new Police Act will need increased efforts

from the Ministry of Interior. Although the latter announced staff reinforcements and purchasing

of equipment, it still needs to develop a plan to guide the implementation process given the scale

of changes that will be needed. The Czech Republic also needs to implement adequate data

protection for full participation in the Customs Information System and the Naples II

Convention. As regards the effectiveness of the supervision capacity of the Office for Personal

Data Protection, the Czech Authorities are still in the very early stages of implementation. The

2000 and 2001 budgets of the Office (about 1 M and 2.2 M€ respectively) seem to be

€

sufficient to cover normal operating costs but do not reflect the need to establish suitable

headquarters for the Office, an element which strongly limits its activities.

The Czech Republic has further aligned its

visa

regime to ensure full alignment before

accession, and the new amendment to the Aliens Act has also improved the conditions for

granting visas. As regards administrative capacity, however, there is still a need to take full

account of migratory risks and to improve identity checks and the detection of the misuse of

visas. Not all official border crossings are yet connected to the on-line system for issuing visas.

Although the Czech Republic has taken a number of measures to strengthen

border control,

ensure co-ordination for full participation in the Schengen Information System and to reinforce

the policy against illegal immigration, there are still large migration flows through the territory and

widely recognised difficulties in intercepting illegal immigrants at the green borders with

Slovakia in particular. Far fewer illegal immigrants are caught there than at the Austrian and

German borders. The main reasons are the lack of personnel and equipment, deficient

communication, and inadequate organisation. The Aliens and Border Police are also clearly

hampered in their performance by serious lack of financial resources, notably to pay overtime,

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which leaves control posts understaffed on weekends and holidays. The Czech authorities still

need to decide upon the exact organisation, structure and staff of the ABP. As long as the

mobile units remain under the command of the regional police chief, who can use them for other

purposes, effective control of the green border will be hampered. An integrated border

management system needs to be established, including co-ordination with customs authorities

and the creation of a common database.

The Government has drawn up a high quality

Schengen

action plan. The successful

implementation of this high-quality plan hinges on the above constraints being effectively

addressed.

As regards

migration,

the new amendment to the Act on the Residence of Aliens is a positive

step towards the full alignment of Czech legislation, but serious constraints remain for

international companies, as the Act maintains a wait of 180 days for the issuing of a work

permit. The main problem remains the question of the readmission of illegal immigrants, since

they are not appropriately escorted by the police to the border. Moreover, these persons often

misuse the asylum system. In 2000, of the 11,792 persons readmitted from Germany and

Austria, only 2,531 were expelled. Therefore, more than 9,000 persons remained in the Czech

Republic or again entered or attempted to enter the EU. The above amendment tries to address

this problem but the Czech authorities should clearly improve their expulsion and readmission

practices.

The envisaged amendment to the Act on

Asylum,

which is aimed at bringing Czech legislation

further in line with the

acquis,

remains to be adopted. The Czech Republic provides fairly good

integration opportunities for recognised refugees. Nonetheless, the concepts of “safe third

country” and “safe country of origin” are still missing. The adoption of the amendment should

contribute to combating the misuse of asylum procedure. The Czech Republic must take steps

to ensure that the concept of "temporary protection", which has been used in the case of

Chechen refugees, is applied in conformity with international standards, and thus confined to

cases of mass influx of displaced persons. As far as implementation capacity is concerned,

training of staff, especially in the courts that will soon need to deal with appeals, should be

increased further.

In the field of

police co-operation and the fight against organised crime

, progress has been

made in alignment with the

acquis,

including the Europol Convention and international police

co-operation. The Czech Republic has signed the UN

Convention Against Transnational

Organised Crime

and should accede to its Protocols reasonably soon. As regards

implementation, the adopted amendment to the Criminal Proceedings Code, which will enter

into force in January 2002, represents very important progress. The creation of the unified

Criminal & Investigation Police Service is a major step towards the setting-up of a system

comparable to the systems of the EU Member States. The reform shifts the responsibility for the

pre-trial criminal phase from the investigator to the prosecutor and introduces accelerated

proceedings. Monitoring needs to be conducted to see whether this genuinely improves the

combating of economic and organised crime. The new law will pose considerable challenges

for District Courts and Prosecutors due to the current lack of adequate training and equipment.

Organised crime concentrates on trafficking in human beings (prostitution, illegal immigration),

drugs, stolen cars and money laundering. While the police is regarded as competent in solving

everyday minor crime, it is much less equipped to combat economic crime efficiently. The main

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difficulty remains the lack of a multi-disciplinary approach in this area. Police efficiency is

generally hampered by the absence of adequate training, human and material resource and

career planning.

Regarding the

fight against fraud and corruption,

the increased penetration of legal economic

activities by criminal organisations hampers the development of the Czech economy as well as

the confidence of foreign investors. The efficiency in combating economic crime and corruption

needs to be improved through effective co-operation between enforcement agencies, qualified

staff and adequate training. The reform of the pre-trial procedure and the internal re-

organisation of the main law enforcement bodies that have now been decided should contribute

to improving the situation.

The police are as well as other parts of the administration affected by corruption.

Administrative police departments, which deal with permissions, registration of official

documents etc. have a bad name in this respect. The whole system of registration, examination

and publication of complaints against the police needs more transparency. According to a

Police survey, officers see precise delineation of powers, greater accountability, introduction of

non-cash transactions and harsher punishment as the most successful solution.

With regard to the protection of the financial interests of the European Communities, the Czech

Republic needs to continue to align its legislation with the

acquis,

and in particular with the 1995

Convention on the Protection of the Financial Interests of the European Communities and its

protocols.

The Czech Republic has long been a transit country for

drug traffickers

. The problem of drug

abuse is still fairly low in comparison with western European countries, but criminal gangs try to

encourage the consumption. A new law to prevent the production of designer drugs (misuse of

precursors) is therefore necessary, even if the National Strategic Plan for 2001 - 2004 has been

approved. Anti-drug policy is co-ordinated by an Inter-Ministerial Drug Commission and

consists of preventive and punitive measures. The Czech Republic envisages creating a National

Focal Point to participate in the European information network on drugs and drug addiction

(Reitox) of the European Monitoring Centre for Drugs and Drugs Addiction. The efforts focus

on introducing a central information system, and on the training of all involved institutions in the

use of hardware and software and in methodological aspects.

As regards

money laundering,

besides some gaps in the legislation, which should be covered

by a new Criminal Code, enforcement still needs to be improved considerably. T lack of

adequate definition of money laundering in the Penal Code has meant that there have been

virtually no prosecutions for this crime. Moreover, the maximum punishment is significantly

lower than for financial or tax fraud. There are too many different government institutions

involved and insufficient co-ordination. The Financial Analytical Unit (FAU) is functioning.

However, the law-enforcement agencies involved in the process should provide a regular

feedback on their activities and decisions following complaints lodged by the FAU. Police

departments, prosecutors and courts continue to need specialised training.

The Czech Republic has achieved a high level of compatibility in its alignment with the

acquis

the field of

customs co-operation.

In order to complete it, a further set of amendments to the

Czech Customs Code is required. As regards administrative and operational capacity, the

Czech Republic should continue to install and implement customs-related IT applications. With

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respect to border control and enforcement, particular attention should be paid to the reduction

of waiting times at the border. Customs authorities need further training on combating illegal

migration in order to assist the detection work of the border and police authorities.

As far as

judicial co-operation

is concerned, the Czech Republic has continued to ratify

international conventions included in the

acquis

and has concluded a bilateral Additional

Protocol to the European convention on extradition and legal assistance in criminal matters with

Germany. Similar protocols are also being prepared with Poland and Slovakia. However, the

Czech Republic has not yet acceded to the European Convention on the International Validity

of Criminal Judgements, and the definition of a criminal organisation will have to be reviewed in

the context of the redrafting of the Criminal Code. New legislation is still awaited as regards

combating trafficking in human beings and sexual exploitation of children, and criminal liability of

legal persons. Improvement is still needed in practical judicial co-operation, which continues to

suffer from insufficient manpower and bureaucratic obstacles.

The Czech Republic has ratified all the

human rights

legal instrument under the Justice and

Home Affairs acquis.

Chapter 25: Customs union

Since last year's Regular Report, no further developments can be reported as regards legislative

transposition, but a number of steps have been taken to strengthen administrative capacity.

No particular developments can be reported regarding the

EC Customs Code and its

implementing provisions

or the

customs

acquis

outside the Customs Code.

As regards international Agreements and Conventions, the Czech Republic ratified the revised

International Convention on the simplification and harmonisation of customs procedure (the

Kyoto Convention) in June 2001. New intergovernmental agreements on co-operation in

customs matters have been concluded with South Africa, Turkey and Slovenia. Co-operation

agreements have also been concluded at regional level, with Germany, Slovakia and Poland.

Concerning

administrative and operational capacity

to implement the

acquis,

several

initiatives have been taken. An analysis of interconnectivity with the EC IT systems has been

carried out, with priority being given to the TARIC project, which was launched in the beginning

of 2000. Concerning the extension of the common communication network/ common system

interface (CCN/CSI) for the New Computerised Transit System (NCTS), which was agreed

between the EU and the Czech Republic in April 2000, the pilot operation began in March

2001. The Czech Customs Administration is also focusing on preparations to integrate EU IT

systems such as Quota, and the Early Warning System (EWS) into the national customs

declaration system.

The Act on International Assistance in the Recovery of Certain Financial Claims (including

agricultural levies and customs duties) entered into force in January 2001.

In the fight against corruption, a draft Integrity Action Plan of the Czech Customs

Administration has been developed, building on the principles of the 1993 Arusha Declaration

of the Customs Co-operation Council (World Customs Organisation).

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A new training system was approved in April 2001 and is implemented from September 2001.

It gives more emphasis to specialised and on-the-spot training. Specialised training focusing on

post-clearance control in economic operators' premises was launched in April 2001. The

preparatory activities of the Customs Administration to take over the administration of excise

tax have begun. An excise tax unit has been established at the General Directorate of Customs,

at the Operational Division.

Further measures have been taken to reduce waiting times at borders, including construction of

new border posts, use of simplified procedures for customs clearance and selective targeting of

controls based on risk analysis.

Overall assessment

Although a high level of alignment has already been achieved between the customs legislation of

the Czech Republic and the Community

acquis,

the amendment to the Customs Act which will

complete alignment with the

acquis

in the customs area has not entered into force yet.

From the administrative and operational capacity point of view, the Czech Republic continues to

make good progress. The Customs Directorate is a well-organised administration, and benefits

from significant autonomy within the Ministry of Finance. A computerised customs declaration

processing system, a computerised quota administration system and a computerised revenue

collection and accounting system are fully operational. The Customs Directorate has been

implementing the Action Integrity Plan and has continued its fight against fraud. Further progress

is expected once responsibility in respect of excise duties has been transferred to the Customs

administration. Moreover, a new organisational structure of the tax and customs administration

is being considered, with a view to setting up a new joint and independent institution competent

for the administration of tax and customs matters. (See

Chapter 10: Taxation)

To ensure the smooth implementation of the

acquis,

continued efforts should be made in the

area of administrative and operational capacity particularly as regards ethics, training, IT

development and border management. With regard to IT development, it must be emphasised

that flawlessly functioning EC-compatible IT systems should be in place at least one year before

EU accession, in order to guarantee interconnectivity with the EC customs computerised

systems.

Enhanced co-operation with other enforcement bodies should also be a priority in the fight

against fraud and economic crime. (See

Chapter 24: Justice and Home Affairs)

Efforts have been made to reduce waiting time at borders, but the positive effects still remain to

be seen and further improvement is required.

The Czech Republic should ensure that its commitment to close duty-free shops at land borders

is fulfilled and implemented by 31 December 2001.

Chapter 26: External relations

Since the previous Regular Report the Czech Republic has continued to align with the

acquis

with regard to the common commercial policy and to coordinate positions and policies within

the World Trade Organisation, in particular with regard to the preparation of the New Round.

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As regards the

common commercial policy,

upon accession the Czech Republic will be

required to align its tariffs with those of the EC. The Czech Republic's applied tariffs currently

average 6.2% on all products, 13.4% on agricultural products, 0.1% on fishery products and

4.6% on industrial products. By comparison the EC tariffs

currently stand at 6.3% on all

products, 16.2% on agricultural products, 12.4% on fishery products and 3.6% on industrial

products.

The Czech Republic has unilaterally applied a suspension of MFN tariffs levied on imports of

twelve civil aircraft products. This temporary measure is due to come to an end on 31

December 2001.

The Czech Republic has completed the legislative framework related to the creation of trade

policy instruments and the implementation of WTO commitments; no further developments can

be reported in this field.

With regard to administrative measures, in July 2001 a new division of the Ministry of Industry

and Trade for multilateral relations and European integration was created, which includes a

department for European integration and EC law (32 employees) and one for international

economic organisations, safeguard measures and anti-dumping (26 employees).

As regards

bilateral agreements with third countries,

negotiations were concluded for a

Free Trade Agreement between the Czech Republic and Croatia, and the text was initialled in

April 2001. Negotiations have also been concluded for non-preferential agreements with

Jordan, Syria and Saudi Arabia.

In the field of

development policy and humanitarian aid,

the Czech Republic is an active

member of the OECD and it is adapting its development practices to the principles laid down

by the Development Assistance Committee. The Interior and Foreign Ministries have together

prepared a draft Scheme on Humanitarian Aid of the Czech Republic Abroad, which specifies

the rules of co-operation and decision-making procedures in this field. The government has

also adopted a Resolution initiating a study analysing the co-ordination and implementation by

relevant Czech government ministries of foreign development aid in the years 1996-2000, with

a view to formulating future policy in this area.

Overall assessment

The Czech Republic’s trade policy and its participation in international economic organisations

is already to a large extent in line with those of the Union. In the context of the WTO

framework, EU policies and positions are generally supported.

With regard to WTO plurilateral agreements, the Czech Republic has observer status to the

Agreements on Civil Aircraft and Government Procurement and is a member of the Information

Technology Agreement. By the time of accession, the Czech Republic will need to have joined

the WTO plurilateral agreements on Civil Aircraft and Government Procurement.

WTO bound tariffs after full implementation of all concessions including - where possible - estimated ad valorem

equivalents of specific and compound tariffs.

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Further co-ordination is needed to ensure the alignment of the Czech Republic's GATS

commitments with the EC's commitments and MFN exemptions. The Czech Republic should

also ensure that its legislation on Dual Use goods is updated to take into account the new

acquis

which entered into force in September 2000.

With regard to the WTO Agreement on Textiles and Clothing (ATC), the Czech Republic has

co-operated with the Community in the process of third stage notification to align its list of

integrated products under the ATC to the EU's.

The Czech Republic is making considerable progress in the area of Export Credits. The Czech

system is in line with the OECD Arrangement and harmonisation of medium and long term

export credits with EC legislation is underway.

In addition to the FTA concluded recently with Croatia, the Czech Republic also currently has

FTAs in place with Lithuania, Latvia, Estonia, Israel, Turkey and EFTA, as well as being a

member of CEFTA.

Concerning bilateral agreements with third countries, any international agreement which is

incompatible with the obligations of membership of the EU will have to be re-negotiated or

renounced prior to accession. The Czech Republic is requested to keep the Union fully

informed about existing trade agreements with third countries and of the content of negotiations

aimed at the conclusion of any new trade agreement with a third country. This applies also to

Bilateral Investment Treaties concluded with third countries.

The Czech Republic’s alignment with and future participation in the common commercial policy

is administered by the Ministry of Industry and Trade. The administrative infrastructure which

needs to be in place as regards customs services is addressed under

chapter 25 – Customs

union.

Development and humanitarian aid are administered by the Ministry of Foreign Affairs. For the

purpose of the Czech Republic’s future financial contribution to the European Development

Fund, the Czech Republic’s management of its national budget organisation and management of

flow of funds to the EC budget is addressed under

chapter 29 – Financial and budgetary

provisions.

Chapter 27 Common Foreign and Security policy

The Czech Republic has continued to align its foreign policy with that of the European Union

and to participate constructively in the framework of the Common Foreign and Security Policy

(CFSP). The Czech Republic has also manifested its interest in taking part in the setting up of

the European Security and Defence Policy (ESDP).

The regular

political dialogue

established by the Association Agreement with the Czech

Republic has remained active. As in previous years, the Czech Republic continues to orient its

foreign policy towards the Union and to participate in the framework of the CFSP.

Since the previous Regular Report, the Czech Republic has continued to exchange information

and engage in a dialogue with the EU in this framework, both in EU+15 (i.e. non EU European

NATO members and candidates to the accession to the EU) and EU+6 format (i.e. non EU

European Members of NATO). The Czech Republic has maintained its interest and taken part

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constructively in the strengthening of the European Security and Defence Policy (ESDP). The

Czech Republic played an active role in the first Capabilities Commitment Conference in

November 2000 and offered 1000 troops to be integrated in the EU Rapid Reaction Force as

of 2003. Participation in ESDP military initiatives has been made easier by a constitutional

amendment passed in December 2001 allowing the Government to send Czech troops abroad

for up to 60 days and to decide on the presence of foreign troops in the Czech Republic for the

same period of time.

The Czech Republic continued to align itself regularly with

EU declarations, Common

Positions, Joint Actions and other CFSP instruments

which it was invited to join, including

negative measures. Since October 2000, it associated itself with 8 EU common positions,

including 3 on the Federal Republic of Yugoslavia.

The Czech Republic has continued strengthening its bilateral co-operation with its neighbours. It

has notably engaged in military co-operation with Slovakia and decided to set up a joint Czech-

Slovak unit to serve within the KFOR mission in Kosovo. The Czech Republic has participated

fully with the European Commission and Austria in a process of trilateral dialogue known as

“the Melk process” in order to promote mutual understanding and exchange of information

concerning the Temelin nuclear power plant.

Czech participation in regional fora remained strong. The Czech Republic held a meeting of the

‘Visegrad’ group Prime Ministers in Karlovy Vary in October 2000. The Czech Republic co-

ordinated its reaction to the results of the Nice Council within the framework of the Visegrad

forum, which also witnessed the signing in December 2000 of a multilateral regional co-

operation agreement to be funded by the newly established Visegrad Fund.

The Czech Republic continued to actively support the Stability Pact and expressed interest in

becoming a full-fledged member of it. The Czech Republic has maintained its participation in

both the KFOR and the SFOR peace-keeping operations. It announced, however, in May

2001 that, for financial reasons, it would withdraw its SFOR units by the end of 2001, while

reinforcing its participation in KFOR.

Based on legislation on the implementation of international sanctions to preserve international

peace and security, the Czech Republic continued to largely comply with sanctions regimes

imposed by the UN or the EU. ) As regards administrative capacity, the creation of an

electronic CFSP database is under preparation.

Overall assessment

The Czech Republic has reached a high level of alignment with the CFSP

acquis.

The Czech Republic’s political dialogue with the EU remains fully satisfactory.

The Czech Republic has also shown active interest and a will to co-operate in conflict-

prevention and peacekeeping initiatives, notably in the Balkan region (e.g. Stability Pact).

The Czech Republic’s relations with its neighbours remain good, both on a bilateral level and on

a multilateral level, such as within the Visegrad forum. The Czech Republic has intensified

dialogue with Austria regarding the Temelin nuclear power plant, in particular through an

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agreement reached with the Austrian government in December 2000, with the participation of

the European Commission, known as the Melk Protocol.

Having already subscribed to the content and principles contained in the EU Code of Conduct

on Arms Exports and as a member of the Western Europe Armaments Group, the Czech

Republic has substantially aligned its arms export sector with EU common standards. T

Czech Republic should continue to improve and strengthen its license awarding system in order

to ensure the fullest possible consistency with the EU code of conduct on arm exports.

Concerning the administrative capacity to implement the provisions relating to CFSP, the Czech

Republic has a well-staffed and functioning Ministry of Foreign Affairs. The Czech Republic’s

MFA has reorganised in spring 2000 to create the posts of Political Director and European

Correspondent. The ministry is connected to the Associated Correspondents’ Network

information system through which the EU communicates within the CFSP with the associated

partners.

Chapter 28: Financial Control

Further progress has been made in this area since the last Regular Report, in particular in

legislative alignment of the areas of public internal financial control and external audit.

As regards

public internal financial control (PIFC),

a new Act on Financial Control in Public

Administration was adopted in August 2001 and will enter into force on 1 January 2002. The

adoption of a basic legal framework constitutes a step forward in the creation of a

comprehensive PIFC system and introduces the concept of a functionally independent internal

audit capability.

As regards administrative capacity and institution building, the staff of the Control Department

of the Ministry of Finance has been increased, with a view to strengthening audit methodology

and current control systems for pre-accession funds. An internal audit unit has now been

established within the National Fund.

Considerable progress has been made in the area of

external audit.

The new Act on

Budgetary Rules came into force on 1 January 2001 and provides for significant strengthening

of the financial independence of the Supreme Audit Office (SAO). The new SAO budget

procedure will be used in preparing the State Budget for 2002. A Strategic Development Plan

designed to achieve full compatibility with internationally accepted standards was adopted by

the SAO Board in January 2001. It provides, among other things, for further strengthening of

the autonomy of the SAO and the extension of its audit mandate to all public funds including

budgets of regional bodies, as well as enhanced training of auditors and a time schedule for full

implementation of INTOSAI audit standards.

No new developments can be reported regarding the future

control of structural action

expenditure.

With regard to administrative capacity, the National Fund has been reorganised and its

responsibilities increased, and the total number of staff has increased to 17. With regard to

control of SAPARD funds, an independent internal audit unit has been established within the

SAPARD agency.

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With regard to the

protection of the financial interests of the European Communities,

discussions have continued during 2001 between OLAF and the Czech Supreme Public

Prosecution Office in preparation for operational co-operation between the respective control

services. In its Decree of January 2001, the Government decided that the Ministry of Justice

should, in cooperation with the Ministry of Finance and the Ministry of Interior, endeavour to

lay down the terms of cooperation with OLAF. In order to implement this decision, the

Ministry of Justice adopted a Regulation in July which extends the scope of activity of the

specialised units of the High Public Prosecution Office (Prague) and the Supreme Public

Prosecution Office (Brno) to the field of protection of EC financial interests. The latter has been

designated by the Ministry of Justice as the central contact point for OLAF.

Overall assessment

Considerable further efforts are required to accelerate the development of a comprehensive and

reliable system of public internal financial control which is compatible with internationally

accepted and EU-compliant standards, as well as the establishment of corresponding

institutional structures. In particular, the new PIFC legislation should be followed up closely by

the enactment of secondary legislation providing for the implementation of the new internal

control and audit capabilities, in particular on the functional independence of internal auditors.

The increase and training of staff, particularly at the level of line ministries and other spending

agencies, should also be given a high priority.

The strengthening of institution building measures and administrative capacity is important not

only in view of the new tasks and responsibilities created in this area but also as a pre-requisite

to preparations for fully decentralised implementation of pre-accession aid and, following

accession, of EC structural funds.

With a view to ensuring adequate protection of EC financial interests, the Czech Republic needs

to put in place the necessary legislation to allow the competent EC bodies to carry out on-the-

spot checks and to develop adequate administrative capacity to implement the

acquis,

including

the ability of the Czech law enforcement bodies and judiciary to address cases where EC

financial interests are at stake. Also, bilateral agreements should be concluded between the

Supreme Public Prosecutor’s Office, the Ministry of Finance and the Ministry of Interior in

order to define the roles of the different authorities involved in the protection of the

Communities’ financial interests.

Chapter 29: Financial and Budgetary Provisions

Continued progress has been made both with regard to budgetary legislation and reinforcement

of administrative capacity.

As regards the

national budget and EC co-financed measures,

the new Acts on Budgetary

Rules and Budgetary Rules of Regional Authorities entered into force on 1 January 2001,

bringing budgetary legislation more closely into line with Member States' standards. The Act on

Budgetary Rules aims to improve transparency of financial flows, provides a framework for the

management of budgetary relations with the EU, ensures equal treatment of EU and national

funds, fully integrates the National Fund into the state budget and makes it subject to the

financial control rules. It also provides for the drawing up of multi-annual budgetary outlooks.

Secondary legislation implementing certain provisions of the Act has also been adopted in 2001,

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in the form of several Decrees outlining principles and deadlines connected with the drafting

and implementation of the state budget.

With regard to administrative capacity, the staff of the National Fund has increased staff to 17

persons over the last year. An internal audit unit has been established within the National Fund.

Concerning the

application of the own resources system,

the Czech Republic has conducted

regular simulations of the theoretical calculations and procedures necessary for the proper

calculation of own resources. The Own Resources unit of the Ministry of Finance, which has 5

employees, was created last year to cover the overall co-ordination of Budgetary Relations with

the EU, and it continues to gather experience. It co-operates with the European integration, tax

and customs units of the Ministry of Finance, as well as the Czech Statistical Office and the

Ministry of Agriculture.

Overall assessment

Overall, preparations in this field are on track though continued efforts should be made.

Although basic budgetary rules are broadly satisfactory, the Czech Republic should continue to

ensure that budgetary principles and rules are brought into line with those standards generally

applicable in the Community.

In particular, the new budgetary legislation should be implemented, budgetary transparency

should be assured and the multi-annual budgetary outlook should be made fully operational.

With regard to administrative capacity, it is crucial that the Czech Republic strengthen its ability

to mobilise the human and administrative resources required to follow the Commission's

operations and instructions concerning payments of own resources. In particular, greater efforts

should be made in the area of tax collection, as highlighted in last year's Regular Report.

In addition to the measures taken for central co-ordination, measures are also needed for the

proper collection, monitoring, payment and control of funds to and from the EC Budget.

Adequate administrative capacity to duly collect and transfer in a timely manner all Own

Resources to the Community budget, building on the Own Resources unit of the Ministry of

Finance, will need to be established prior to accession, as will the ability to accurately and

regularly report to the Commission on the situation with regard to each of the types of own

resources.

In relation to the control of future EC own resources, the Czech Republic should continue its

efforts to set up effective instruments to combat fraud relating to VAT and customs duties so

that the protection of the financial interests of the EC can be assured.

Administrative capacity should also be strengthened in the context of the relevant policy areas

described elsewhere in this Report, such as Financial Control, Customs, Taxation, Agricultural

and Regional Policy.

3.2.

Translation of the acquis into the national languages

Applicant countries are required to translate the various legal texts constituting the

acquis

into

their national languages by the time of their accession. Primary and secondary legislation alone

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represents a considerable volume of acts, roughly estimated at 60,000-70,000 pages of the

Official Journal. To help the candidate countries in this process, assistance is being provided

under the Phare programme. With the help of TAIEX, a centralised Translation Co-ordination

Unit has been created in each of the ten candidate countries of Central and Eastern Europe.

The overall responsibility for the translation of the

acquis

in the Czech Republic lies within the

Office of the Government, namely, in its Department for Compatibility with EC Law (CODEC).

Within CODEC, a specialized Coordination and Revision Centre (CRC) has been assigned to

organize all translation work. A new translation agency was contracted in September 2000 and

the contract is entirely paid for by the Czech State budget. The CRC revises all translated

documents from both legal and linguistic points of view, and asks line ministries to confirm all

specialized terminology. The CRC also maintains the central database of translations which is

accessible to all ministries.

Performance in this area has considerably improved. As of August 2001, all primary legislation

and about 57 000 pages of secondary legislation had been translated. The translations are

revised in "real time" by the CRC, while the line ministries need more time for technical

verifications. Thus, about 25 000 pages had been fully revised as of May 2001. Without

prejudice to the outcome of the accession negotiations, sustained efforts are required in this

area.

Due attention must also be given to the training of conference interpreters.

3.3.

General evaluation

The Czech Republic has made further significant progress in a wide variety of chapters of the

acquis.

Nevertheless, further efforts remain necessary in a number of areas. There has also

been progress in strengthening administrative capacity, although this remains hampered by the

absence of a legal framework for public administration.

Alignment on the

single market

is overall well advanced, although the remaining gaps need to

be filled. On free movement of goods, there has been progress, except for public procurement,

and the bodies responsible for standards and certification continue to function well. As regards

free movement of persons, transposition needs to be accelerated, in particular as regards mutual

recognition of professional qualifications. In the area of free movement of services, alignment

with the financial services

acquis

should be pursued. The capacity of the Securities

Commission has been reinforced although stronger regulatory powers would be welcome to

improve supervision of financial services. As regards free movement of capital, existing

anonymous accounts remain to be abolished.

Concerning

competition,

legislation is now largely in line with the

acquis,

and the enforcement

record in the anti-trust and state aid fields is reasonably good. In the latter, rigorous and

transparent enforcement needs to be demonstrated as regards the steel and financial sectors.

The Office for the Protection of Economic Competition is overall well staffed and trained. As

regards

company law,

there is a high degree of compatibility with the

acquis;

however, the

See "Making a success of enlargement: Strategy Paper and Report of the European Commission on the progress towards

accession by each of the candidate countries", COM (2001) 700.

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enforcement and monitoring capacity of the relevant authorities in the field of IPR, such as

customs authorities, police, judiciary and trade inspection should be further strengthened.

Economic and Monetary Union,

overall a significant part of the

acquis

has been adopted

but further efforts are needed to complete alignment as regards central bank independence.

Only limited progress has been made on

taxation,

and a number of important issues remain to

be tackled on the approximation of VAT and excise duty rates. Also, more concrete progress is

needed to ensure the proper and efficient functioning of the tax administration upon accession.

There has been little recent progress on

telecommunications

although overall alignment is

satisfactory. The technical conditions need to be put into place to permit the foreseen

liberalisation to take place. There has been a significant improvement in legislative alignment on

audiovisual policy.

Further progress has been made on

sectoral

policies. As regards transport, road transport

legislation has been aligned further, and the Czech Republic has become a member of the Joint

Aviation Authority. However, there has been no significant progress in the railways sector. In

the energy sector, considerable progress has been made in preparing for entry into the internal

energy market for electricity and gas. On industrial policy, a fresh impetus is needed to take

forward the restructuring of enterprises.

In the area of

economic and social cohesion,

progress on legal transposition has continued.

As regards social policy and employment, alignment has progressed on equal treatment, labour

law and health and safety at work. On regional policy, the legal framework for the future

implementation of the structural funds has been further completed. However, additional efforts

are needed to ensure that the administrative bodies responsible are fully functional, trained and

well co-ordinated in order to be ready for implementation of the structural funds upon

accession.

In the field of

agriculture,

there has been good legislative progress in the phytosanitary field.

However, further work on alignment, for example in the veterinary area, will need to continue

across the range of issues of this extensive Community policy. Good progress has been made in

setting up the State Agricultural Intervention Fund but further efforts are needed, particularly in

the reorganisation of the Ministry of Agriculture.

Good progress has been achieved in transposition of the

environmental acquis.

In particular,

the adoption of the Act on Environmental Impact Assessment was a major development. Co-

ordination amongst the relevant government bodies needs to be improved, with particular

attention to the implications of the ongoing process of decentralisation.

In the field of

Justice and Home Affairs,

progress has been made in particular aligning visa

policy, migration policy and on strengthening the legal framework for police and judicial co-

operation. The adoption of a high-quality Schengen Action Plan is a positive development.

However, significant further efforts are needed to implement government policies for combating

organised crime and ‘white collar’ crime via effective policing strategies and organisational

measures. As regards border control, whilst checks have improved at official crossings, there

are still significant difficulties in intercepting illegal immigrants at the green borders with Slovakia

in particular.

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A high level of compatibility has been achieved with the

customs acquis,

although the

amendment to the Customs Act remains to be adopted, and operational capacity has been

improved. Nonetheless, further efforts are needed to ensure that EC-compatible IT systems

are fully functional before accession.

Concerning

financial control,

progress has been made in legislative alignment as regards public

internal financial control and external audit, although further efforts are needed to develop a

comprehensive system of control.

Overall, the

administrative capacity

of the Czech Republic is being strengthened and efforts in

this direction need to be pursued, in particular as regards agriculture, the environment, regional

policy and border controls. Further efforts are also required to establish the necessary

administrative capacity for sound, efficient and controllable management of EC funds.

The large majority of Accession Partnership priorities have been addressed and overall

satisfactory progress has been achieved in meeting them. The short term priorities relating to

the single market have generally been met although further efforts are needed in some areas.

Limited progress has been made on taxation. The priorities relating to agriculture, the

environment and Justice and Home Affairs have been partially met.

As regards the medium term priorities, those relating to the single market have been met to a

large extent, except as regards public procurement. The priorities on economic and monetary

union and on taxation have not been met. Some progress has been achieved in meeting the

medium term priorities in the remaining fields, which have generally been partially met.

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C. Conclusion