# EUR-Lex - 31993Y1116(01) - EN

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# 31993Y1116(01)

**Court of Auditors - Annual report concerning the financial year 1992 together with the institutions' replies**
*Official Journal C 309 , 16/11/1993 P. 0001*

ANNUAL REPORT concerning the financial year 1992 (93/C 309/01) The report, together with the institutions' replies to the Court's observations, was transmitted to the authorities responsible for giving discharge and to the other institutions AndrÃ© J. MIDDELHOEK (President) Josep SUBIRATS Carlos M. MORENO Richie RYAN Ole Joergen WARBERG Constantinos ANDROUTSOPOULOS Daniel STRASSER Bernhard FRIEDMANN Maurice THOSS Roger CAMUS John WIGGINS Giorgio CLEMENTE>TABLE> >TABLE> INTRODUCTION (*) >TABLE> (*) The Commission's replies are on page 255 ACCOUNTING AND CONTROL 0.1. Ratification of the Maastricht Treaty requires the Court of Auditors to provide the budgetary authorities with a statement of assurance as to the reliability of the accounts and the legality and regularity of underlying operations. The Court, since its creation, has devoted a substantial part of its audit resources to audit of accounts and to matters of legality and regularity. Its reports have included numerous financial audit findings and recommendations. This report draws further attention to problems of administration and control which adversely affect the reliability of the accounts and increase the risk of illegal or irregular transactions. Problems of this type and importance will certainly have a significant bearing on the Court's conclusions, when the moment arrives for it to draw up the statement of assurance. 0.2. Examples of insufficient checking by the Commission of legality and regularity aspects of transactions are to be found throughout this report. 0.3. Chapter 13, which includes all the Court's observations concerning the financial audit, reveals that significant amounts of expenditure were charged to an inappropriate financial year and that neither the provisions of Article 7 of the Financial Regulation with regard to carrying forward commitment appropriations nor those for making appropriations available again when commitments have been cancelled are strictly observed. Independently of the irregularities uncovered by the Court, these findings once again illustrate the need for simplification to which the Court has moreover drawn attention in its opinion on the Financial Regulation () . 0.4. In the Structural Funds, several programmes were in general poorly controlled by the Commission, both on records and on the spot. Much ineligible expenditure had been financed. In the case of certain measures in the social field directly managed by the Commission, subcontracting supervision to a specially created consultancy partnership proved conspicuously unsuccessful. 0.5. The Commission allowed an intermediary, using interest earned on excessive advances for food aid operations, to set up an irregular fund; this operated, in contravention of the financial regulation, entirely outside the budget and accounts of the Community. Application of the rules for calculation of the European Development Funds (EDF) Stabex transfers proved to be inconsistent; structural adjustment programme funds were in several cases released without any check as to whether the beneficiaries had fulfilled the necessary conditions; the EDF accounts did not correctly reflect risk capital operations and there were serious delays in accounting for emergency and humanitarian aid. 0.6. Many cases were identified where projects or actions had been effectively terminated for some time but the unused commitments had not been cancelled. In two cases, although the national authorities had brought fraud to the attention of the Commission, steps to recover Community funds had not been taken. 0.7. Considerable expenditure was incurred on the authorizing signature of officers who did not have explicit delegated authority. Neither the Financial Controller nor the Accountant rejected the commitment proposals or payment orders concerned. 0.8. The Commission needs to take urgent action to raise the level of financial competence and awareness of those officials to whom it has delegated authorizing officer powers, as well as improving their knowledge of the correct procedures and practices. When they act in breach of rules and regulations, disciplinary action should be taken. 0.9. The Court once again reports many instances of inadequate control of Community expenditure by national agencies. In the case of the Guarantee Section of the European Agricultural Guarantee and Guidance Fund (EAGGF-Guarantee) there are in addition the risks for Community funds that result from the complexity of the national systems, insufficient coordination between regional organizations and the central paying agencies and the need to strengthen the control of export refunds and related guarantees. National controls of the common market organization for cotton were found to be ineffective in one Member State and totally unsatisfactory in another. These are a few examples showing that the Commission and Member States have generally not succeeded in establishing clear, coherent and effective administrative and control systems for the EAGGF-Guarantee. 0.10. Structural Funds payments are made on the basis of national authorities' declarations and certificates of expenditure. Many certificates had been issued without the issuing authorities exercising any significant control of the reality of operations. Many national managing authorities' files were incomplete and the Court identified significant amounts to be recovered. 0.11. The report describes weaknesses in Customs regimes and in the methods of establishment of the VAT and GNP revenue bases. The Court draws particular attention to the level of uncertainty involved in the statistical methods on which the calculations of the VAT and GNP own resources are based. 0.12. Achieving satisfactory accounting and control of Community operations is made particularly difficult when regulations are complex. The Court would strongly recommend that greater attention be given to accounting and control aspects when legislating in these areas. The inability of the present accounting arrangements to distinguish between advances of funds and final payments is a major handicap to proper financial management. 0.13. There is thus a great deal that the Commission still has to do to improve its supervision, accounting and control of Community finances. There is also much room for improvement in the Member States' own accounting, internal control and audit of those EC financial operations which are managed by national agencies. The Court can only encourage the Commission's efforts both to secure the necessary action by the appropriate Member State bodies and to make maximum use of its own powers and resources to safeguard Community funds. ECONOMY, EFFICIENCY AND EFFECTIVENESS 0.14. In this report the Court draws attention to weaknesses noted during the course of the 1992 audit and which have serious implications in terms of the economy, efficiency and effectiveness of the implementation of Community policies. The Common Market Organization (CMO) for flax and hemp has failed to stabilize the market. The CMO for cotton has similarly failed to achieve market stability, whilst large producers have broken up their holdings so as to qualify for aid to small producers. The ponderous and complex administrative arrangements of the school milk programme have discouraged many schools from participating. 0.15. The specific Community regional development actions known as 'non-quota measures` were precursors of the general reform of the Structural Funds and received total Community aid of some 900 Mio ECU. Lessons should have been learned from the many problems encountered in the preparation and implementation of these measures. However, the Court's examination of the post-reform Structural Funds reveal little evidence of real improvement. 0.16. The Court notes that the considerable increase in the transfer of Community structural funds to Member States has not been accompanied by any significant improvement in the way in which programmes are managed. Weaknesses of planning, co-ordination, monitoring and evaluation are accompanied by delays in carrying out programmes and, quite frequently, in modifications to financial plans whereby Member State contributions are reduced or deferred. The management problems seriously reduce the impact, in regional development terms, of the Community funding. Similarly, aid to Central and Eastern Europe has been adversely affected by poor preparation and problems of implementation, resulting in part from excessively centralized Commission management and sometimes ponderous administrative arrangements. Unnecessary or inappropriate humanitarian aid was supplied to Russia. LACK OF REMEDIAL ACTION 0.17. Many of the findings of the 1992 audit share certain features with similar cases quoted in the Court's previous reports. Many errors and weaknesses mentioned in this report, which concern questions of legality and regularity as well as sound financial management, had already been brought to the attention of the Commission, the Council and the Parliament more than two years ago, with little or no subsequent improvement. In such cases the Commission has had sufficient time either to act directly or to launch any necessary legislative initiative. FINANCIAL SIGNIFICANCE OF AUDIT RESULTS 0.18. The total amounts of Community funds identified by the Court's audit as having been wrongly disbursed or not received is only a first - and imperfect and partial - indication of possible savings. Thus, apart from amounts indicated in the Court's special reports () , this report mentions excessive payments of more than 115 Mio ECU and a shortfall in revenue received of about 47 Mio ECU. 0.19. Much larger sums could be saved if more account were taken of the Court's observations concerning the requirements in terms of the accounting, control and financial management. By way of illustration, mention need only be made of the fact that the Court's Special Report No 5/88 () , on the management and control of public storage, showed clearly that the system of physical inspection, of both the quantitative and the qualitative aspects of the storage of cereals bought into intervention, proved in practice to be significantly different from what had been presented as the official system and was judged by the Court to be both weak and dangerous. It is regrettable that after the publication of this report five years had to elapse before significant irregularities were uncovered by the administrative authorities. 0.20. The Court's own expenditure for the financial year 1992 amounted to 34,84 Mio ECU (of which 31,93 Mio ECU, or 92 %, was made up of staff appropriations, and 2,91 Mio ECU, or 8 %, consisted of operating appropriations).>REFERENCE TO A FILM> Observations on the Commission's revenue and operating appropriations and on the European Development Funds PART I CHAPTER 1 (*) Own resources >TABLE> (*) The Commission's replies are on page 257 1992 IMPLEMENTATION OF THE BUDGET 1.1. As can be seen from Table 1.1, the outturn for revenue for the financial year 1992 was 97,7 %. (a)The amount of agricultural levies collected was 10,8 % less than the budgetary estimates because the level of imports, especially in Belgium, Italy and Portugal, was lower than forecast. The levy rates themselves were also lower than expected; (b)the amount of customs duties collected was 97,6 % of the budgetary estimates. The value of the imports of raw materials was 11 % lower than the forecasts, but the other categories were slightly higher; (c)the amounts collected in respect of own resources deriving from value-added tax (VAT) and Member States' gross national products (GNP) were slightly lower than forecast. The changes made in September 1992 to exchange rates led to a specific loss for the budget of 71 Mio ECU for VAT and 8 Mio ECU for GNP. The VAT balances totalled 148,9 Mio ECU and the GNP balances 22,1 Mio ECU. Negative adjustments for VAT were P84,2 Mio ECU and for GNP P15,0 Mio ECU; (d)the monetary reserve was not used in 1992; the surplus for the financial year 1991, entered in 1992, was 2 762,6 Mio ECU (see also paragraph 13.32 of this report). CALCULATION OF THE VAT BASE BY THE REVENUE METHOD>TABLE> 1.2. The VAT own resource is a proportion - at most 1,4 % - of each Member State's annual VAT base; this base may not exceed 55 % of the gross national product at market prices () . The Member States have to make this base uniform by applying the provisions of Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 () . It is still necessary to impose a uniform method for calculating the basis of assessment because of the number and variety of the exceptional arrangements still applied in the Member States, which may or may not comply with the Community guidelines. 1.3. Under the method, known as the revenue method, applied by all the Member States since 1985 and adopted by the Council in 1989 as the sole method, the 'intermediate base` is obtained by dividing the net revenue collected by the rate at which the tax is levied. Where a Member State applies more than one VAT rate in the course of the year in question, it calculates the weighted average rate of its VAT, with the weighting of each rate being equal to the relationship between the value of the transactions subject to this rate and the aggregate value of all the taxed transactions for which the VAT is not deductible. 1.4. The harmonization of the base results in 'corrections` being made to the net revenue collected and in 'compensations` being applied to the intermediate base. Depending on the data available, the same type of adjustment may sometimes take the form of a correction or a compensation. THE WEIGHTED AVERAGE RATE OF VAT 1.5. The weighted average rate (WAR), examined by the Court in 1991 and 1992, is the crucial part of the VAT resource mechanism. Any fluctuation in a Member State's WAR results in a change in its VAT base and may, if need be, lead to a change in its situation with regard to the capping ceiling of 55 % of the GNP. 1.6. The importance of the WAR explains why it has to be expressed exactly to four decimal places () . Table 1.2 shows for each Member State the main factors of the formula for calculating the intermediate base for the financial year 1991 and, by way of example, indicates how this intermediate base can be affected by a fluctuation of as little as 1 % in the value of the WAR. The formal obligation to determine a WAR 1.7. In Denmark there are two rates of VAT in force, the normal rate and the zero rate, the latter applying only to sales of newspapers. Although Council Regulation (EEC, Euratom) No 1553/89 (Article 3) stipulates that in a case of this kind a weighted average rate must be calculated, for practical reasons the Commission allows Denmark, instead of calculating the weighting of the rates, to make an adjustment to the revenue, calculated as if the normal rate were applied to newspapers. The VAT rates to be used for the calculation 1.8. According to Article 4(1) of Council Regulation (EEC, Euratom) No 1553/89, the rates to be used for the purposes of such a calculation are those which affect the VAT revenue collected during the year in question. This stipulation has the logical aim of allowing the WAR to be calculated exactly by ensuring that rates and revenue are consistent. 1.9. For the purposes of applying this Regulation, however, the Member States have not deemed it necessary to break the revenue down according to the financial year in which the tax became chargeable () . The revenue for a given year therefore contains elements which concern previous financial years and which may relate to outdated VAT rates, such as refunds or payments of tax arrears or adjustments of deductions made previously. 1.10. This being so, the rates used for calculating the WAR never tally exactly with the net revenue collected, despite the principle stated in the regulations. The Member States' WARs are thus somewhat artificial, and the resultant VAT bases cannot be regarded as wholly in keeping with the Member States' true bases of assessment for tax. Transactions subject to non-deductible VAT 1.11. In order to calculate the exact weighting of the rates, it is necessary to have, for each rate, complete statistics on the transactions which are taxable at that rate and which do not entitle the customer to deduction of VAT. Since the work of measuring and analysing the bases can be carried out only on the basis of statistical data, the Regulation lists seven categories for which the breakdown by rate of VAT must be applied () : (a)final consumption of private households, including consumption on the farm by flat-rate farmers and their direct sales to final consumers; (b)intermediate consumption of private non-profit institutions and general government;>TABLE POSITION> (c)intermediate consumption of other sectors; (d)gross fixed-capital formation of private non-profit institutions and general government; (e)gross fixed-capital formation of other sectors; (f)improved and unimproved building land; (g)transactions involving gold other than gold for industrial use. 1.12. It is not always an easy matter to apply this classification and most Member States diverge from it; in most cases, the difficulty arises in connection with the expenditure of private non-profit institutions and of the exempted sectors, and with transactions involving gold which is not for industrial use. It has been found, in fact, that a harmonized presentation is impossible and that the selection of the statistical categories depends on the availability of data. 1.13. The statistical nature of some categories, in particular those relating to intermediate consumption, has little in keeping with the real tax situation. According to the Sixth Council Directive () , the main chargeable event of the tax is the supply of goods; statistics for intermediate consumption, however, are based on the actual consumption of goods and consequently take account of net variations in stocks. 1.14. In all the Member States, the expenditure attracting non-deductible VAT falling in the categories 'intermediate consumption of other sectors` and 'gross fixed-capital formation of other sectors` is confined to some 'exempted` sectors, such as banks, insurance companies and hospitals. This sector-based approach gives a very simplified picture of the real situation and offers no assurance that all the activities which the Member States exempt under the Sixth Directive are taken into consideration. Furthermore, inconsistencies are sometimes found in the way in which the Member States treat these few exempted sectors: for example, the exempted sectors used for calculating intermediate consumption are not exactly the same as those used for calculating the gross fixed-capital formation; another example is where the Member States regard as 100 % exempted sectors which are not exempted under the tax regulations and for which a deductible proportion therefore needs to be calculated. 1.15. The transactions of small undertakings to which exemption arrangements apply and for which, by definition, VAT is not deductible cannot be isolated in the statistics. Most of their production is therefore included in the statistical category 'final consumption of private households`, whereas it ought to be excluded from it; by contrast, the investments and intermediate consumption of these small undertakings are not included in the aggregates used for calculating the WAR, whereas in fact they ought to be because they are subject to non-deductible VAT. This double distortion may above all affect the accuracy of the WAR in Member States where the registration threshold is relatively high (Ireland, the United Kingdom). Furthermore, in all the Member States which make use of the option allowed to them of calculating their uniform VAT base without taking into account transactions carried out by taxable persons with an annual turnover not exceeding 10 000 ECU, the revenue adjustments are calculated on the assumption that they are totally neutral in respect of the WAR. 1.16. There is considerable diversity in the approach to statistics on improved and unimproved building land. The Member States refer to building sites where work has commenced or to completed sites or to sites where the electricity supply is in place. In Italy, transactions are considered to relate solely to land already built on; the value of the land is estimated by taking a flat-rate percentage of the value of the buildings. The sources of the data National accounts and other sources 1.17. The taxed transactions are usually broken down into statistical categories by using data from national accounts prepared in accordance with the European System of Integrated Economic Accounts (ESA). For the purpose of identifying transactions subject to non-deductible VAT and effecting the breakdown by rate of VAT, the Member States may refer to data taken from sources complementary to the ESA and capable of being adapted thereto. 1.18. The national accounts are not themselves designed for tax purposes and are from the outset ill-suited as a basis for calculating the WAR: (a)the national accounts do not enable all the expenditure subject to non-deductible VAT to be clearly identified; hypotheses and estimates have to be made, for example in order to determine the deductible proportions which have to be applied to the exempted sectors; (b)the ESA national accounts and the internal national accounts are frequently not sufficiently detailed for the purposes of fiscal analysis; the breakdown of VAT bases of assessment then becomes global or else is carried out on the basis of data not related to the national accounts; (c)since the scheme for flat-rate farmers is a purely fiscal concept, the national accounts do not provide any information about the on-farm consumption and direct sales of these farmers; (d)improved and unimproved building land, as defined in the Sixth Council Directive, and transactions involving non-industrial gold are not specific ESA categories. 1.19. All the Member States, except Greece and Belgium, are able to draw up their national accounts in accordance with the ESA. In some Member States, however, the national accounts do not fully conform to the ESA; moreover, whilst the ESA does guarantee that a uniform principle is applied to the definition of the aggregates, it does not impose any method of calculating these aggregates and there are disparities in the way they are determined. 1.20. France and Portugal are the only Member States able to calculate their weighted average rate using only one source, an econometric model developed for the purposes of their domestic fiscal policy. Even though these 'VAT models` are fully integrated into the national accounts and the input-output tables, estimates and global breakdowns have to be used for a significant proportion of the taxable bases. 1.21. The other Member States use a great variety of sources in addition to the national accounts: household budget surveys, statistics based on VAT returns, professional accounts, State budgets and accounts, the accounts of public institutions or companies, surveys, letters, specific documents, etc. In any case, the tremendous diversity of the sources makes it very difficult to compare the Member States' methods of statistical breakdown one with another. 1.22. Often these subsidiary sources have no link with the ESA norm and are not capable of being adapted thereto as required by Council Regulation (EEC, Euratom) No 1553/89. Furthermore, the information they provide often relates to only a sample of the overall amount to be broken down into rates which is given by the national accounts, even though in exceptional cases amounts of expenditure may be found in external sources that are higher than those in the national accounts. The way in which this problem is solved is not uniform; most of the Member States nevertheless charge the differences to the accounts proportionally between the various rates. For example, for the purposes of breaking down (into normal rate, reduced rate and exemption) the ordinary expenditure of general government, Italy uses data relating only to the State, i.e. around 40 % of the total; the expenditure of local communities and other public authorities is allocated by simple extrapolation; the same system is applied to the breakdown of public investments, as here too the basic data represent only 40 % of the total. 1.23. Member States with a complex structure of rates find it difficult to make a complete breakdown of some items of expenditure on household consumption, such as 'Other goods and services` of the ESA nomenclature. Whereas the general trend is for the part of expenditure that is not broken down to be divided up proportionally between the rates, some Member States (Denmark, the United Kingdom and the Netherlands) make a more detailed analysis in order to identify solely the exempted bases and the bases taxed at the reduced rate and, by deduction, classify all transactions which are not clearly identified under the normal rate. 1.24. The input-output tables are of particular interest for the purposes of dividing up intermediate consumption and gross fixed-capital formation by type of transaction and by rate of VAT. These input-output tables are drawn up by all the Member States except Luxembourg. Some Member States, whose input-output tables are not sufficiently detailed for the requirements of the WAR (Ireland, Italy, the United Kingdom), however, have to rely on other sources, such as VAT returns or direct surveys. 1.25. The frequency with which the input-output tables are drawn up varies considerably from one Member State to another. Only France and the Netherlands produce annual tables; for the other Member States, the most recent tables which were available and which were used for the 1991 WAR were as follows (the frequency with which they are drawn up is given in brackets): Germany 1986 (every two years), the United Kingdom 1984 (every five years), Spain and Portugal 1986 (every five years), Italy 1986 (every six years), Belgium and Greece 1980 (every 10 years), Ireland 1975 (every 10 years). 1.26. The Commission has stipulated the criteria which the statistics used must meet: they 'must be public in nature, i.e. they must be published. In principle, this rules out the use of special surveys conducted solely for the purpose of establishing own resources. Finally, they must be available when the statement of the base is produced. No corrections are made in the light of new statistics; otherwise, adjustments would be never-ending` () . 1.27. In fact, some Member States are obliged to have recourse to special surveys or polls in order to obtain the requisite information; in Ireland, for example, specific enquiries are made at the local authorities. In any case, it is often impossible to avoid using unpublished information. Aggregates of the reference year 1.28. The weighted average rate for the year n has to be calculated by using the statistical aggregates of the year n P2 as a reference. A Member State may, however, be authorized to use data relating to another year, which may not be earlier than the fifth year before the financial year in question. Two Member States (Germany and Portugal) make use of this option. 1.29. Portugal did not apply for authorization to use the 1986 national accounts for calculating its weighted average rates and VAT bases for 1989 and 1990 until October 1990. The proper procedure, whereby the application for the authorization must be made not later than 30 April of the financial year from which the authorization is to apply () , was not followed. The Commission granted Portugal ex post facto authorization in February 1992. 1.30. It should be noted that even the accounts of the year n P2, used by most of the Member States, do not contain definitive data. However, according to Article 10(8) of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 () , changes to the Member States' national accounts are no longer taken into account after 30 September of the fourth year following a given financial year, except on points notified within this time-limit either by the Commission or by the Member State. 1.31. The successive versions of the national accounts for the same year may contain changes on a scale that is in some cases sufficient to affect the WAR if they were to be taken into account. The most obvious differences concern the private consumption items. The Court found that in some Member States (Spain, Italy) changes in the base or in the statistical definition were sufficient to cause disparities of around 10 %, 20 % or 40 % upwards or downwards between the definitive figures for certain headings and the estimated figures used for the WAR. 1.32. Moreover, the fact that the national accounts of the year n P2 are used as the reference does not mean that all the factors in the calculation relate to that year. It has already been pointed out that the input-output tables of some Member States are more than 10 years old; and the other instruments of fiscal analysis very often relate to previous financial years, sometimes considerably earlier, and in some cases updated by means of global indexes. 1.33. The two to five year disparity between the VAT rates used and the aggregates applied for weighting them would have no effect on the VAT base if the structure of expenditure attracting non-deductible VAT were entirely stable. This hypothesis is not in fact valid: it disregards the impact of the normal short-term variations and, all the more so, the effect of exceptional events such as the Gulf War or the reunification of Germany. Furthermore, some sectors of expenditure, such as the construction industry or the car industry, react very rapidly to cyclical fluctuations or to frequent decisions to change the VAT rates. Special territorial feature 1.34. In Portugal, the net revenue collected includes that relating to the autonomous regions of Madeira and the Azores Islands, but the weighted average rate is calculated according to statistical data which relate solely to mainland Portugal. Furthermore, since Portugal's VAT base includes the islands and is more than 55 % of its GNP, which does not include them, Portugal has, since its accession, regularly been basing the calculation of both its capping and its GNP contribution on an underestimated GNP aggregate. Following the Court's intervention, the Commission initiated a recovery procedure. Changes in rates or in the tax treatment 1.35. A change in rate during the financial year implies that the calculation of the weighted average rate takes account of the time-lag between the moment when the change takes effect and the moment when the revenue arising from this change is collected. It does, however, seem contradictory for Member States to be allowed to round the period off to a complete month and yet the WAR is required to be calculated to four decimal places; in some cases the booking of a time-lag rounded off to one or zero months may affect at least the fourth decimal place. 1.36. This possibility of rounding off to a complete month has in fact always been used by all the Member States, although in the initial phase of the system some of them (in particular Belgium and Italy) calculated the exact time-lag in days. Others were late in calculating their time-lag (Spain) or omitted to take it into account in their calculations (Greece, the WAR for 1988). Checks on the weighted average rate 1.37. The weighted average rate, being a key factor in the VAT resource, should, in principle, be the subject of scrupulous checks both by the Member States and by the Commission. 1.38. The supporting documents for each Member State's most recent WARs show that accidental inaccuracies occur frequently, mainly in the fiscal analysis. The correction of an error discovered by the Court after the Commission's checks meant that the Member State concerned (Italy) had to pay an extra 12 Mio ECU for its contribution to the VAT own resource for the financial year 1989. 1.39. The Commission's task of checking is complex because of the diversity of the national situations and because amendments are continually being made to fiscal legislation. This being so, the checks that it makes usually on an annual basis can obviously not include an exhaustive fiscal analysis. 1.40. The reliability of the WAR is therefore based to a large extent on the internal control of transactions in the Member States. In some Member States, this internal control on the drawing-up of the VAT statements and more particularly on the calculation of the WAR has shortcomings which are incompatible with the size of the amounts involved: concentration of all the (WAR) calculation operations in the hands of one single national official, defects in the handling of statistical tools, inadequacy of the checks on the accuracy or plausibility of the results. 1.41. The Commission's checks on the weighted average rate ought to include a systematic study of the discrepancies, for the same year, between the theoretical bases of assessment evaluated on the basis of statistics and the bases of assessment calculated by means of the weighted average rate () . The checks made on the most recent data () show that the situation varies considerably from one Member State to another: in some Member States (Belgium, Germany, Greece, Spain, Italy, the United Kingdom), the theoretical revenue greatly exceeds the revenue collected, by between 12 % and 48 %; in other Member States (France, Ireland, the Netherlands), there is virtually no disparity; two Member States (Luxembourg and Portugal) are in an unusual situation where the actual revenue is over 20 % higher than the theoretical revenue. These situations may admittedly arise because of a combination of factors, which vary considerably from one country to another. Such cross-checks do, however, prompt questions about the realistic nature of the tax bases of assessment reconstructed for the various rates of VAT and, consequently, about the reliability of the resultant weighted average rates. Conclusion regarding the weighted average rate 1.42. The weighted average rate of VAT is fundamentally much more of a statistical concept than a fiscal one. Its basic weakness is that the national accounts offer limited possibilities with regard to fiscal analysis; for most Member States this results in great diversity in the origin of the data and considerable complexity in the way the data is handled. 1.43. The accuracy of the weighted average rate largely depends on the level of statistical development in each Member State. This level has been found to be very unequal. The present system for calculating the VAT base is valid only if it forms part of a voluntary policy of improving and harmonizing Community statistical tools. 1.44. Some elements of the system affect the accuracy of the estimates: such as the disparity of two to five years between the rates taken into consideration and the aggregates used for weighting them; the fairly large role played by estimates where data are unavailable; and the way of calculating and rounding off the time-lags. The Member States' approach to these matters is not identical and this adversely affects the uniformity of the calculation of the base. 1.45. Lastly, the weighted average rate poses serious problems of control. Even though its calculation system is complex and cumbersome, the WAR is of crucial financial importance, and it should be a matter of priority to minimize the margin of uncertainty relating to it. This would require a more active policy on the part of the Member States to prevent errors and would justify the stepping-up of checks by the Commission. CORRECTIONS AND COMPENSATIONS 1.46. In 1992, as part of its audit of the own resource deriving from VAT, the Court examined the following areas of VAT corrections and compensations: (a)the common flat-rate scheme for farmers; (b)the transactions of small undertakings; (c)the supply of buildings and building land; (d)the restrictions on the right to deduct VAT. Financial impact 1.47. The four areas of corrections and compensations examined by the Court totalled 53 933 Mio ECU or 2,16 % of the 1991 VAT basis of assessment. For the two preceding years they were 57 933 Mio ECU or 2,67 % of the 1989 basis of assessment and 53 555 Mio ECU or 2,27 % of the 1990 basis of assessment. Table 1.2 shows the amounts of these corrections and compensations in the context of the data from the Member States' statements on the 1991 VAT base, which were submitted in 1992. Common flat-rate scheme for farmers 1.48. The Member States are allowed to apply a flat-rate scheme to farmers which is intended to offset the VAT charged on their purchases of goods and services. Flat-rate compensation percentages are fixed for this purpose. These percentages are based on macroeconomic statistics for flat-rate farmers alone for the preceding three years. The flat-rate compensation is paid either by the public authorities or by the taxable person to whom the goods or services are supplied, who deducts from the VAT for which he is liable the amount of the flat-rate compensation he has paid to the flat-rate farmers () . 1.49. The revenue collected by a Member State is corrected if the flat-rate compensation percentage does not correspond to the percentage of the input VAT charge which was actually applied during the year in question to the flat-rate farmers' transactions, with the exception of that relating to consumption on the farm and direct sales to final consumers. The amount of the correction is equal to the difference between the two percentages () . 1.50. Some Member States do not include the data from all the agricultural sectors concerned in the calculation of their correction. This applies to Germany for freshwater fishing, Ireland for fishing, forestry and agricultural services, the Netherlands for forestry and cattle traders and Portugal for forestry. 1.51. Ireland does not exclude direct sales to final consumers. Moreover, even though the flat-rate scheme prohibits all other forms of deduction, in Ireland the VAT levied on the construction of farm buildings can be refunded. This situation is, however, correctly taken into account when the compensation is being calculated. 1.52. Member States are required to determine their corrections in accordance with a common method of calculation () . However: (a)some Member States (Spain, Italy) use statistics which deviate from the European Communities Statistical Office's concepts of the economic accounts for agriculture; (b)the national statistics used in accordance with 'the common method of calculation` do not always make it possible to identify the transactions which are subject to the tax arrangements in force; (c)these statistical data do not distinguish between transactions carried out by flat-rate farmers and those by tax-paying farmers; (d)other sources or estimates have to be used, the reliability of which varies considerably; (e)some components of the calculation are outdated or are of inadequate quality. 1.53. The Court detected an error in the flat-rate percentage used for calculating the correction to Spain's VAT basis of assessment for 1991. Faulty data on the final production of a category of cattle ('cattle reared exclusively indoors`) were used. As a result, the negative correction should be reduced from 3,6 Mio ECU to 1,4 Mio ECU. Transactions of small undertakings Graduated tax relief 1.54. France, the Netherlands and Luxembourg are the only Member States that apply graduated tax relief () , which is VAT relief depending on the turnover of the taxpayer. These Member States add to the amount of revenue they collect the equivalent of the revenue of which they have deprived themselves. France and the Netherlands have a computerized accounting system that contains details of the recipient undertakings' tax returns, thus ruling out the possibility of major risks in the calculation of their positive correction. 1.55. As the Commission has pointed out, Germany, which applied this system until 1989, did not include the effect of the 80 % relief for undertakings with a turnover not exceeding 20 500 DM. On the basis of data from German statements and a Bundesrechnungshof report, the tax advantage may be put at 300 Mio DM and the corresponding underestimation of Community resources at 15 Mio ECU in 1989. Undertakings with a turnover below 10 000 ECU 1.56. Member States have the option of leaving out of account, for the purpose of determining VAT resources, the transactions of taxable persons whose annual turnover does not exceed 10 000 ECU () . Six Member States make a correction (Belgium, Denmark, Spain, France, the Netherlands and, in part, Greece) and four calculate compensation (Germany, Italy, the United Kingdom and Greece for the remaining part). 1.57. There is no uniformity in the way this adjustment is calculated as each Member State has difficulties in identifying the undertakings in question. Moreover, there are still problems in distinguishing, on the one hand, supplies and services to final consumers and to other small undertakings and, on the other, supplies and services to taxable persons. 1.58. In addition to these general difficulties, there are specific areas of vagueness, for example: (a)in Spain since 1986 the transactions of small undertakings in Alava, Guipuzcoa, Vizcaya and Navarra have not been taken into account; (b)in Greece the correction takes no account of the input VAT paid; the same is true in Belgium for undertakings subject to the 'equalization` tax; (c)in Germany and in Greece profit margins are applied without any reasons being given; (d)the input-output tables used are often obsolete; (e)in Denmark, Spain and Italy, the corrections are drawn up on the basis of the taxable amounts declared, without taking account of the disparity (usually of one quarter) between what is declared and what is collected. Undertakings with a turnover in excess of 10 000 ECU 1.59. Ireland and the United Kingdom continue to apply exemption to undertakings with a turnover exceeding 10 000 ECU. This is also the case in the Netherlands for some small undertakings which receive graduated tax relief. 1.60. The main difficulty in determining positive compensation that takes account of these undertakings' transactions is the lack of information in their respect. The calculation is therefore often artificial or even hypothetical. 1.61. In the Netherlands there is still no agreement with the Commission on the method to be followed and each party has been upholding its reservations since 1985. 1.62. The method used in the United Kingdom for assessing the number of undertakings concerned by the correction is likely to result in an underestimation. 1.63. Ireland has kept to its scheme and has even extended it by increasing the exemption. The Irish compensation is based on incomplete statistics. The suppliers of services and the undertakings that have opted to pay tax are disregarded and no distinction is made between supplies made to final consumers and those to taxable persons. Supply of buildings and building land 1.64. Belgium, Denmark, Germany, Greece, Portugal and the United Kingdom continue to exempt the supply of building land and, except in Belgium and the United Kingdom, the supply before first occupation of buildings and the land on which they stand () . The basis of assessment for the VAT resource of these Member States has to be determined as though these transactions were taxed. 1.65. In Greece and Portugal compensation is determined on the basis of data taken from the declarations of direct tax made by companies which sell building land or which construct or sell buildings. But no fiscal definition can be sufficiently precise to identify these undertakings. The other Member States use statistical data that are, if need be, updated by price indexes and supplemented by estimates. In Denmark the same ratios have been re-used in the calculations every year since 1979. 1.66. In the 1990 statements, Greece failed to include supplies to the exempted sector, and the United Kingdom has not taken supplies in Northern Ireland into account. 1.67. In Germany the percentage determining the supplies to final consumers is applied only to supplies to natural persons. The same percentage applied to all supplies of building land would increase the German contribution by some 5 Mio ECU per year. Restrictions on the right to deduct VAT 1.68. During a transitional period, Member States are authorized to retain all the exclusions to the right to deduct VAT provided for under their national laws when the Sixth Directive came into force () . For the purchase of petroleum products and passenger cars used for business purposes and for expenditure relating to the leasing and hiring and also the maintenance and repair of such cars, the VAT resources base may be determined as if the exercise of the right to deduct had not been restricted () . 1.69. All the Member States except Germany, the Netherlands and Luxembourg make use of this possibility. Instead of determining compensation, Belgium calculates a correction. 1.70. The sources of information differ considerably. To varying degrees, the national statistics often have to be supplemented by other data from various public services, producer associations, leasing firms or household budget surveys. These more specific data may, however, be unreliable, as Belgium uses ratios dating from 1959, Denmark and the United Kingdom from 1979, and Spain from 1980. 1.71. Very approximate estimates were found in Ireland for the assessment of leasing costs and in Italy for the average price of cars and for the number of cars purchased by the public sector, banks and insurance companies. 1.72. In Spain, it is impossible to identify in the calculation the effects of the national law which places no restriction on the right to deduct VAT for taxi companies, driving schools and hire firms. Furthermore, the percentage of sales of second-hand cars is only 5 %. Comparable inaccuracies have been found for the purchase prices of company cars (the United Kingdom) and for the percentages of purchases by the exempted sectors (Denmark, the United Kingdom) and by small undertakings (Denmark). 1.73. The percentage for private use of company cars, which is a key element in the calculation of the compensation, fluctuates considerably: 15 % in Spain and Italy, 20 % in the United Kingdom and Greece, 33 % in Denmark and 35 % in Ireland. In Belgium, for the purposes of calculating the 'refusal rate` (for deductible VAT), it is considered that cars belonging to legal persons are 100 % for professional use. 1.74. Shortcomings were found in all the Member States that apply compensations of this type. Whilst in many of the cases referred to they are detrimental to the Community resources, they may also be to the detriment of the Member States. Conclusion regarding corrections and compensations 1.75. The corrections and compensations that have been examined confirm the complex, artificial nature of the reconstruction of the uniform basis of VAT assessment as well as the other weaknesses observed by the Court in the past. Taken as a whole, these corrections and compensations concern a total flow of 282 900 Mio ECU in terms of the basis of assessment. 1.76. All the examples referred to in previous paragraphs clearly indicate that in order to achieve satisfactory results in this field, it would be necessary not only to be perfectly familiar with the various fiscal systems in force in the Member States, to understand them and be able to implement them, but also to be able to correct, in terms of the basis of assessment, any divergent effects they might have in relation to the Community directives, i.e. by financial amounts of corrections to revenue collected or by compensations in the intermediate basis of assessment. 1.77. These amounts can sometimes be determined on the basis of fiscal data. But very often, when it is a case of, for example, calculating amounts that have not been collected by the national tax authorities, use has to be made of the national accounts and macroeconomic data. This is an area where methods of assessment predominate and where often subjective hypotheses and interpretations are involved. 1.78. The remedy is obviously to define uniform methods of calculation that are suited to each type of correction and compensation, and indeed this is the path which the Commission has recently taken, even though this method comes up against the problem that this subject is heavily dependent on the national context. CONCLUSION COMMON TO THE WEIGHTED AVERAGE RATE AND CORRECTIONS AND COMPENSATIONS 1.79. Despite the obstacles represented by the complexity of the calculations and the heterogeneity of the data, the Commission and the Member States seem to have made headway in improving the comparability of the data and the uniformity of the methods. Nevertheless, it would appear from the Court's current observations on corrections and compensations, together with the remarks on the consistency of the statistical instrument used for the calculation of the WAR, that the degree of reliability of the base of the largest Community resource is still inadequate. High priority must be given to reducing this degree of uncertainty. GROSS NATIONAL PRODUCT (GNP) Introduction 1.80. The GNP aggregate resulting from the accounts of the Member States is important for the system of Community own resources because it conditions the GNP resource itself and the VAT resource of those Member States whose basis of assessment is capped () . 1.81. The GNP aggregates are not the product of traditional accounting procedures, but of a statistical system of national accounts that makes use of macro-economic data. For the Court's audit, it therefore seemed preferable to refer to specific criteria like exhaustiveness, comparability and compliance with the European System of Integrated Economic Accounts (ESA). For the purposes of this Annual Report, the Court's audit enquiries were carried out only within the Commission and have not yet examined the question of the actual composition of the GNPs. The Commission's management Compilation and presentation of GNP 1.82. The way in which GNP is compiled by the Member States is by no means homogeneous and there are various inadequacies (some have already been pointed out by the Court () ) which adversely affect the reliability of the statistical figures sent to the Commission. 1.83. For example, the ESA is still not applied by Belgium and Greece. An examination of the inventories reveals that the data forwarded to Eurostat still contain marked discrepancies in relation to the ESA. Lastly, the Member States differ in terms of the sources used and how up to date they are: (a)Portugal and Greece keep referring to old data from the early 1970s; (b)Portugal has not updated its data on the financial years 1988, 1989 and 1990 with regard to its economic territory; France has updated its data with regard to overall GNP but not for each of its components. 1.84. Furthermore, it should be noted that the definition of GNP from the expenditure point of view contained in the Commission questionnaire refers to national final consumption and not to final consumption on the economic territory, as required by Council Directive 89/130/EEC, Euratom of 13 February 1989 () . In more general terms, in 1991, only five Member States (Spain, France, Italy, the Netherlands and Portugal) complied with the provision requiring that gross domestic product at market prices (GDPmp) be presented in terms of the three points of view of output, expenditure and income, even though the purpose of this was to provide a better guarantee of the validity of the figure for GNP by comparing assessments held to be independent. Verification of GNP data 1.85. In order to make it possible to assess the reliability and comparability of GNP data, Article 4 of Council Directive 89/130/EEC, Euratom stipulated that the Member States should provide the Commission with an inventory of the procedures and basic statistics used to calculate their GNPs and the components thereof. The Directive also sets up a committee (the GNP Committee) whose main role is to examine the data concerning the aggregates and the information contained in the afore- mentioned inventories. 1.86. In fact, these inventories were not all collected until the financial year 1991. For the financial years 1988, 1989 and 1990, the GNP Committee therefore confined itself to establishing the availability of the data required. For the financial year 1991, the data for which were available by 1 October 1992, the Committee considered that the figures supplied reflected at the time the best possible efforts on the part of the Member States to produce comparable and representative data. However, it did not qualify its judgment in terms of the degree of comparability and representativity that had been achieved. 1.87. By contrast, in its role as advisory body for the improvement of GNP data, which was also conferred upon it by the aforementioned Directive, the GNP Committee found that a number of measures still needed to be taken in the following fields: (a)greater compliance with the ESA on the part of all Member States; (b)greater standardization in the statistical bases and assessment methods and the use of recent data; (c)inclusion of the 'black` economy; (d)standardization of the evaluation of housing services and agricultural activities; (e)standardization of the procedures for converting GDP into GNP. 1.88. Up to now, only one question has been solved - the one concerning economic territory. This is evidence that simple solutions will not be easy to find. Moreover, there is nothing to indicate that the above list can be regarded as comprehensive or even adequate as a means of rendering the GNP figures as reliable and as comparable as might reasonably be expected from data that are to be used as the basis for a Community own resource. Overall issuing of 'reserves` in 1992 1.89. The GNP data forwarded by the Member States may be amended, just as the VAT statements may be rectified, during a period of no more than four years following the financial year in question. This time-limit does not, however, apply to points that are notified by the Commission or a Member State. With regard to VAT bases, such rectifications, together with the relevant notifications, are widespread. These 'reserves`, as they are known, interrupt the aforementioned four-year prescription () . 1.90. The Commission has, to date, notified no rectifications concerning GNP. In September 1992, it issued, for the first time, a total of 128 'reserves`, some of which were common to all the Member States and others of which concerned only some of them. The ones relating to all of them concerned the following points: (a)the exhaustiveness of the measurement of GNP and, in particular, the question of the inclusion of the 'black` economy; (b)the conversion of GDP into GNP; (c)the way in which housing services are treated; (d)the inclusion of subsidies and the classification of taxes; (e)the way in which private non-profit institutions and general government are treated; (f)the way in which financial institutions are treated; (g)the borderline between final use and intermediate consumption. 1.91. The number of these 'reserves` and the general nature of some of them back up the fears expressed with regard to the reliability of the data forwarded and hence to the accuracy of GNP and VAT resources calculated by using the GNP base. Furthermore, the financial year 1992 corresponded to the four-year deadline applicable to the first year of implementation of the GNP resource (1988) after which no amendments were possible. The issuing of these general and specific 'reserves` therefore looks like a useful precautionary measure, but its effect, however, is to allow all the GNP data to be deferred. 1.92. Finally, in spite of the extent of the field covered by these 'reserves`, the Court feels that certain points have not been considered. For example, there is the question of the updating of national accounts, with regard to which there is considerable disparity between Member States and for which 'reserves` should have been issued concerning GNPs that were determined on the basis of data that were too old (Greece and Portugal). There is also the case of the GNP of the former German Democratic Republic, whose previous planned economy is bound to pose problems in terms of assessment and integration into the GNP of the Federal Republic of Germany. Despite the fact that the four-year time-limit has not yet expired (Germany was unified in 1990), it is still astonishing that the Commission has not issued a 'reserve` with regard to this question. The operation of the system 1.93. Article 10 of Council Directive 89/130/EEC, Euratom stipulates that the Commission must submit a report on the application of the said Directive. This report was not submitted until March 1992 () , chiefly because the inventories stipulated in Article 4 needed to be available before it could be drawn up. 1.94. In submitting this report the Commission had the opportunity to make a preliminary assessment of the implementation of the GNP system. This assessment reviewed the enactment of the Directive, the comparability of the Member States' GNP data and, finally, the achievement of the Directive's objectives. 1.95. The Commission's opinion may be summarized in three points: (a)the GNPs of the majority of the Member States are reasonably comparable; (b)however, some Member States' assessments contain inadequacies; (c)a greater degree of comparability needs to be achieved. 1.96. Consequently, the Commission suggests a three-fold plan of action: (a)achieve more homogeneous compliance with ESA rules; (b)continue efforts to improve the accuracy of assessments; (c)take steps to ensure that national accounts give a more complete picture of economic activity. 1.97. Presented in this way, the Commission's conclusions do not make it possible to form a clear opinion of the degree of reliability of the data currently supplied by the Member States. Indeed, despite the degree of comparability achieved, which is regarded as reasonable, improvements are deemed necessary but no benchmark is given making it possible to discern what level has been achieved and what progress still needs to be made. Moreover, the representativity criterion for GNP, which is explicitly stipulated by the Directive and is an essential safeguard against the risk of distortion, has not been looked at specifically. Assessment 1.98. Although the ESA statistical frame of reference has been well defined, the Member States' systems of national accounts, on the basis of which the GNP aggregates are calculated, have not been standardized. There are important differences with regard to the sources used, how recent they are, the calculation methods employed and the assessment of certain aggregates. 1.99. At the same time, certain Member States (Den- mark, Greece, Luxembourg and Portugal) have decided to carry out an extensive revision of their statistical base. This has not yet been completed and will doubtless lead to significant amendments. 1.100. In this context, neither the existing control mechanisms nor the progress that they have achieved suggest that there will be a speedy improvement in the situation. The GNP Committee has a considerable workload; it does not plan to examine rectifications to account for the 'black` economy until 1994. As for the national audit bodies, they do not examine statistical and macroeconomic data. 1.101. It would therefore seem to be rather unrealistic to think that a pronouncement can be made, with the necessary rigour, on the reliability and comparability of the GNP aggregates that the Member States supply to the Commission. As the margin of error is difficult to estimate, it is possible to obtain an idea of the variations that occur by looking at the GNP revisions submitted by the Member States. For the financial year 1989, for example, the disparities between the initial data and the last revisions available vary from P1,6 % (United Kingdom) to + 2,4 % (Netherlands). These variations affect the total amount of GNP and VAT own resources recovered by the Community and, above all, the allocation of the burden of these own resources among the Member States. 1.102. The points raised throughout this analysis might give the impression that, at the present stage, the GNP tool is no more than an index system that indicates, with some degree of probability, the capacity of the Member States to contribute towards financing the needs of the Community. Of course, it is not a base that is as accurate and verifiable as the basis of assessment of a tax. Besides, national accounts were not designed to satisfy fiscal needs. 1.103. However, even though the GNP figure that it produces has numerous methodological flaws, the shortcomings, by virtue of the objectives pursued at the macroeconomic level, do not necessarily mean that the figure arrived at is lower than the real one. Conclusion 1.104. In view of the importance of the GNP in determining the Member States' contributions fairly, steps need to be taken to ensure that this tool is improved in terms of its most important aspects in such a way as to bring it as close to reality as possible. The progress achieved in this direction during recent years seems to indicate that the Commission has not given sufficient attention to the fundamental role that has been entrusted to it in the field in question. TRADITIONAL OWN RESOURCES Simplified customs clearance procedures Objectives and principles of the scheme 1.105. The purpose of the 'simplified` procedures is to make the clearance of goods easier for importers who carry out a continuous flow of operations. These procedures allow importers to submit global summary declarations covering several import operations rather than having to submit declarations for one operation at a time. 1.106. The conditions for access to the scheme are not particularly restrictive. They relate mainly to the customs authorities' ability to carry out their checks to the full, in particular on the basis of the accounts of the undertakings involved. Only occasional traders or those who have previously committed offences are excluded. The amounts involved are significant. In the Netherlands, they make up 50 % of collected duties, in Germany 40 %, in Belgium 29 %, in France 25 % and in the United Kingdom 11 %. Greece and Italy do not apply the procedures in question. The implementation of the scheme 1.107. Germany and France take rather a liberal attitude towards issuing authorizations; in particular, they may be granted to shipping firms and customs agents. The approaches taken by the other Member States are more restrictive. The United Kingdom requires successful candidates both to have authorized consignee status and to have a computerized system of data management. In Spain, all the goods have to have been shipped by the same exporter from the same country of origin. In general, because of the need to compare partial and global declarations, simplified procedures, despite their name, make for rather complex management and are also time consuming. 1.108. Even where the accounting and control obligations specified in the authorizations granted to traders turn out to be sufficiently restrictive, they are not always strictly enforced. In Germany, for example, the usual completeness checks were not carried out at all and the ex post facto documentary checks were carried out only after long delays. In Denmark, there is no real exploitation of risk analysis with regard to the value of goods. In the Netherlands and in France, the system of automatic computerized checks has not been adapted to the case of global declarations. Moreover, despite the fact that they would be well-suited to this end, computerized clearance systems generally do not cover simplified procedures. Conclusion 1.109. In order to ensure equal access to the simplified procedures, the practical procedures for granting access should be standardized at European level by abolishing certain rather unjustified national restrictions. Computer technology should be exploited as a means of improving customs checks. Finally, physical checks, on whose frequency, in principle, the risk of fraud depends, should be adapted to the particular case of these procedures which, it should be remembered, often involve the direct delivery of goods to the premises of the undertakings involved in the scheme. The customs value of perishable goods Objectives and principles of the scheme 1.110. The general principle of customs value as laid down under the GATT is that goods must be declared at their transaction value. However, a special scheme has had to be introduced with regard to perishable fruit and vegetables imported 'on consignment` (i.e. without a fixed sales price). This scheme is optional for importers. For this purpose, Commission Regulation (EEC) No 1577/81 () of 12 June 1981 set up a procedure for establishing standard average values free at Community frontier. 1.111. In the Common Customs Tariff, several of the products in question are taxed at duty rates of between 18 % and 25 %, which are among the highest in the Community. The total amount of duties collected can be estimated at around 354 Mio ECU. Commodities originating from the Maghreb (Algeria, Morocco, Tunisia) and Mashreq (Egypt, Jordan, Libya, Syria) countries, which are not dutiable, are outside the system as are Spanish and Portuguese fruit and vegetables, which were integrated into the single market as from 1 January 1993. Establishing values and the application of the scheme 1.112. Standard customs values are established once a fortnight for 64 products on the basis of the average unit prices of 19 marketing centres in the Community. The relevant information is collected by the national authorities on the basis of market price lists, auction prices or the prices of certain large wholesalers. As the list of commodities involved has become progressively longer (from 40 to 64 articles), a choice should be made between restricting the system only to widely sold products or to extending it to a wide variety of different ones. 1.113. In the Hamburg free zone, a local agreement allows a fruit-importers association to benefit from the advance fixing of standard values whilst at the same time being able to use current values instead where these have gone down in the meantime. The optional nature of the scheme 1.114. Pursuant to Commission Regulation (EEC) No 1577/81, the standard value scheme is optional. However, once the importers have made their choice, they are required to comply with a minimum validity period of one calendar year in order to limit their possibility of exploiting varying price levels. In fact, importers who go through an agent or have more than one firm can easily get round this measure. Agents can clear goods using standard or transaction values as they feel fit. In order to avoid this situation, there needs to be stricter observance of the principle whereby the scheme is authorized only in cases where it is necessary, i.e. for imports 'on consignment`, where there is no declared transaction value at the time of importation. Conclusion 1.115. Current procedures for establishing standard values, upon which the scheme is based, do not make it possible to establish really representative prices for import transactions. In order to achieve this, the list of marketing centres used should be kept up to date and the information gathered should be weighted in terms of the volume of goods imported. It would also be preferable to restrict the list of eligible products to commodities for which there is a sufficiently large flow of trade. 1.116. However, taking account of the changes in the conditions governing the taxation of fruit and vegetable imports into the Community, due in particular to the effects of the preferential agreements currently in force, it would be useful to reconsider whether these procedures ought not to be limited to a number of special cases, such as sales 'on consignment`, or even whether the scheme should be discontinued, so as to prevent importers from having a de facto possibility of choosing which value to declare. Reduced levies for the importation of cattle Objectives and principles of the scheme 1.117. The importing of young bovine animals, subject to reduced levies, originating in Hungary, Poland, Yugoslavia (until 15 November 1991) and Czechoslovakia (from 1 January 1992) enabled a quota of 198 000 and 214 500 head of cattle to be imported in 1991 and 1992 respectively. These quotas went mainly to Italy and Greece (194 220 head per year), where the Court's audit was carried out. 1.118. The reduction in the levy was 65 % or 75 % according to the weight and origin of the animals. The latter had to be fattened for a period of at least 120 days after import, otherwise an amount equivalent to the reduction granted would be recovered. The total of the amounts in question can be estimated at 53,5 Mio ECU per year. 1.119. The procedure provided for in Commission Regulation (EEC) No 612/77 of 24 March 1977 () requires importers to comply with various formalities. They must, for example, obtain import licences, supply the names of the places where the animals are to be fattened, fix marks on the animals and supply proof of having complied with their commitments. Finally, 10 % of the quota has to be reserved for traders who are new to the market. Implementation of the scheme 1.120. In Greece, the one-month deadline for supplying information about the place where the animals were to be fattened was not enforced, nor was the requirement that the animals should bear the importers' identification marks. 1.121. In Italy, the proof of compliance with the condition that the animals be fattened and not slaughtered for a period of 120 days after being imported took the form of certificates issued by the local authorities, which each adopt their own procedures. The lack of more exact instructions may put compliance with the eligibility conditions in jeopardy. In Greece, three cases were found in which guarantees had been released without the required proof being submitted. In neither Italy nor Greece were guarantees or parts of them forfeited because the requirements laid down in the regulations had not been complied with. 1.122. Finally, the quality of the information forwarded by Italy and Greece, with regard to the number and origin of the animals imported for each period, did not enable the Commission to manage the quotas properly. The calculation of import levies 1.123. Levies are calculated on the basis of the weight of the goods. In Italy, at the customs office visited, a weighing report was issued for each animal. However, the weight per animal was rounded off. In Greece, at the customs offices visited, the animals were weighed in groups rather than individually. Justification of the scheme 1.124. Schemes of this nature would appear to have little justification in view of the Community's public finances. Livestock requirements as regards young bovine animals are more than satisfied by Community supplies, as there is a surplus of 600 000 head. Reduced-levy imports amounting to one third of this surplus not only mean a decrease of some 53,5 Mio ECU in the own resources but also cause deferred supplementary expenditure, for example, for export refunds for live cattle (a total of 122 Mio ECU in 1992). Conclusion 1.125. The cumbersome procedures that were set up to manage the importing of the quotas in question were poorly complied with, without either national or Community control systems detecting these shortcomings. No supplementary control systems, based, for example, on the accounts of the undertakings concerned, were set up. The management and control systems of these specific schemes could usefully be reviewed. Imports of cattle under Community transit arrangements 1.126. A fraudulent trade in bovine animals and sheep originating in Poland was discovered in Germany in December 1990. Instead of paying the levies due at the frontier, the traders placed the goods under the Community transit procedure, whereby importers are allowed to pay the import duties after transportation, subject to these duties being covered by a bank guarantee. In fact, the guarantee required was lower than the amount of duty payable, which made it less expensive to leave the transit papers uncleared than to pay the duties in question. Specific checks were made at national level by the German authorities. 1.127. The Commission looked at this trade in 1991. Its reports contain 800 cases of non-clearance and the own resources at stake are estimated at about 15 Mio ECU. In December 1991 it sent a telex to the Member States suggesting that a comprehensive guarantee of at least 100 000 ECU should be required (50 000 ECU in certain cases). Commission Regulation (EEC) No 2560/92 of 2 September 1992 () made this measure compulsory. Thus, it took nearly two years, during which the same trade was able to grow in the other Member States, for an essential Regulation to be produced. 1.128. With regard to trade with EFTA countries, identical provisions were adopted in October 1992 and then replaced, as from 1 January 1993, by the old rules: i.e. the minimum level of guarantee is no longer fixed at 100 000 ECU. Transit operations carried out in EFTA countries are still subject to the risks that enabled the fraudulent trade described above to develop. FINES AND PENALTIES 1.129. The Court examined the penalties imposed by the Commission on undertakings that contravene the rules on free competition () . In 1992, 34,53 Mio ECU were collected and 258,84 Mio ECU held over as the result of Court cases (19 cases involving 105 undertakings). Since 1985, the recovery rate for fines has been 11,7 %. 1.130. The situation observed previously by the Court has hardly changed () . New delays of up to three months were observed in the notification of decisions and inconsistencies were found between decisions and notifications. In one case, the Commission favoured some debtors by spreading out their payment terms over four years and by granting interest rates for late payments of 8 % rather than the legal rate of 13,75 %. Delays were observed of up to 17 months for the issuing of recovery orders, or orders reducing or cancelling amounts outstanding. Finally, interest on late payments is always entered under the same Article of the budget as the principal. The Commission should therefore be more rigorous in complying with its own internal rules and in its management of fines imposed in the field of free competition. 1.131. In another case, on 27 February 1992 () the Court of First Instance ruled that the decision imposing fines totalling 23,5 Mio ECU was cancelled. Some of these fines had been paid beforehand and entered as budgetary revenue by the Commission. In order to refund them, the authorizing officer, on 9 October 1992, eight months after the Court's decision, drew up three payment orders for 7,9 Mio ECU, including 1,9 Mio ECU of interest on arrears that was granted even though this is not provided for in the regulations. As no budgetary funds were available, these payment orders were charged, outside the budget, against liquid assets. This procedure is irregular pursuant to the provisions of Articles 1 and 5 of the Financial Regulation and ought to have been refused by the Financial Controller (see paragraph 13.34 of this report). Moreover, the Commission was not able to regularize the situation because its successive proposals for inclusion in the budget did not produce successful results either at the Council on 15 December 1992 in the context of a supplementary and amending budget or at the Parliament on 25 January 1993 in the context of a transfer of appropriations. The Court therefore asks the Commission to indicate when this situation is likely to be regularized.>REFERENCE TO A FILM> CHAPTER 2 (*) The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) - Management and budgetary control >TABLE> (*) The Commission's replies are on page 270 BUDGETARY ASPECTS Evolution of the budget 2.1. Total appropriations made available for subsection B1 amounted initially to 36 022 Mio ECU. An amount of 35 022 Mio ECU concerned operational expenditure under titles B1-1 to B1-4 and 1 000 Mio ECU were entered as the monetary reserve under title B1-5. As a result of amending and supplementary budgets No 2 and 3 of 1992 and transfers to and from other sub-sections of the general budget final appropriations for the operational expenditure were much lower and amounted to 32 023,5 Mio ECU. 2.2. Against the initial budget the most important modifications were made in cereals (B1-10) -870 Mio ECU; wine (B1-16) -635 Mio ECU and milk (B1-20) -1603 Mio ECU. Financial information on the implementation of the EAGGF Guarantee Fund is presented in Tables 2.1 to 2.4. Accounting 2.3. European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) payments to Member States in the context of monthly advances are first registered in the computer system of the Commission's EAGGF directorate. The payment files are transferred to the Commission's financial controller for his approval after which the accounting officer charges the amounts to the accounts in the central accounting system of the Commission. 2.4. Due to a computer problem the approval of the financial controller and the booking to the accounts of the Member States' declarations for August, September and October 1992 were delayed considerably. Only at the end of January 1993 were they finally executed after the Court had contacted the Commission services because of the non-availability of the information in the accounts. Carry-overs 2.5. From 1991 to 1992 the Commission made non-automatic carry-overs under Article 7(1) (a) of the Financial Regulation of 166,0 Mio ECU in order to finance food aid for East European countries and the former Soviet Union (see paragraphs 2.71 to 2.109 below). Other carry-overs under Article 7(1) (b) of the Financial Regulation from 1991 to 1992 amounted to 24,1 Mio ECU of which 11,2 Mio ECU were finally spent. 2.6. At the end of the 1992 budget year the Commission carried over 50,7 Mio ECU under Article 7(1) (b) of the Financial Regulation. These carry-overs principally concern headings B1-1221 (schemes related to consumption of olive oil) 11,8 Mio ECU; B1-1890 (food aid for Eastern Europe) 17,3 Mio ECU and B1-3600 (measures to combat fraud) 15,9 Mio ECU. As in previous years the Commission also made non-automatic carry-overs under Article 7(1) (a) of the Financial Regulation totalling 175,5 Mio ECU for emergency aid to the countries of Central and Eastern Europe.>TABLE POSITION> >TABLE> >TABLE> >TABLE> Public storage 2.7. The total cost of public storage (technical costs, financial costs, gains and losses on sales, depreciation) in 1992 was 4 500 Mio ECU, which is slightly lower than in 1991 (4 877 Mio ECU). Of the 1992 total, depreciation for cereals and beefmeat was 2 115 Mio ECU and 1 747 Mio ECU respectively. 2.8. As Table 2.5. shows, the total value of the stocks at 30 September 1992 remained the same as in the previous year. Stocks of cereals increased by some 400 Mio ECU, whereas milk product stocks decreased by some 500 Mio ECU. The increase in cereals stock was due to a combination of high production in Member States and falling exports to Eastern Europe, where no funds were available to finance the purchase of cereals. 2.9. Stocks are valued by the Commission at estimated world market prices. In this context, for milk products, the price estimates are based on GATT minimum prices. For beef meat the estimates are based on prices realized on the world market for Community exports. The estimates for the cereals are based on information from the Chicago Exchange, the International Wheat Council and experts in cereals and traders. 2.10. In the course of its audit the Court asked to see the Commission's records of how the cereals prices were estimated. The Commission was unable to produce any.>TABLE> 2.11. Comparison of actual prices for milk products and cereals with the estimates for the years 1991, 1992 and 1993 revealed that the latter are consistently lower. For 1992 the differences varied between 20 % and 40 %. As these estimates are used for establishing the budget, this implies over-provision of budgetary appropriations. Furthermore it may generate negative expenditure. Budgetary discipline 2.12. In Council Decision 88/377/EEC of 24 June 1988 () concerning budgetary discipline, annual limits known as 'guidelines` for EAGGF expenditure were fixed. The guideline for 1992 was 35 039 Mio ECU. Against this background total commitments amounted to 31 118,3 Mio ECU which is 89 % of the maximum amount. By including new commitments made on non-automatic carry-overs from 1991 to 1992 the total commitments amounted to 31 275,7 Mio ECU. 2.13. The favourable outturn in 1992 was due to lower than estimated expenditure in the cereals, wine, milk and beef meat sectors. In regard to cereals, butter, beef and pork meat from the former German Democratic Republic, a reimbursement of 307 Mio ECU from Germany for exports, which was not properly chargeable to EAGGF-Guarantee but had been prefinanced by the Commission, contributed to the lower level of expenditure. Expenditure forecasting 2.14. The Court has commented in previous annual reports that the monitoring of the execution of the EAGGF-Guarantee section of the budget cannot function adequately as long as Member States' forecasts are not reliable. During 1991/92 the Commission made a major effort to improve the quality of Member States' forecasts through a seminar for the Member States and by computerizing part of the information flow between the Commission and the Member States. Although some of the new mechanisms will only start to have an effect on forecasts in 1993, some Member States have already managed to improve the quality of their 1992 forecasts. Graph 2.1 shows that the overall three months' forecasts in 1992 tended to come in line with the actual expenditure. 2.15. At the level of the specific markets, however, the differences between the three-month forecasts and outturn were still substantial. For two categories of products, cereals and oil and fat, for which these forecasts were mostly between 400 Mio ECU and 600 Mio ECU, actual expenditure often differed by some 150 Mio ECU. 2.16. Table 2.6 illustrates the substantial differences which can exist between Member States in any one period in regard to the reliability of their forecasts. Clearance of accounts 2.17. The clearance of accounts decision for the EAGGF-Guarantee year 1989 was taken in September 1992 () . The amount to be reimbursed to the Commission by all Member States totalled 964 Mio ECU. Out of this amount 536 Mio ECU concerned corrections for the milk superlevy in Italy and 168 Mio ECU in Spain. 2.18. Both countries had not fulfilled their obligation to implement the milk quota system. Italy had not assigned individual quotas to farmers or dairies nor had it established figures for milk production per farmer or per dairy. Therefore, it was not in a position to collect the superlevy. In regard to Spain, although it has assigned quotas to producers, the collection of the levy was not enforced. 2.19. It was agreed between the Member States concerned and the Commission services that these countries would make their reimbursements for 1989 in three instalments to be paid in January, February and March 1993. The Commission should ensure prompt payment of all outstanding amounts. However, only the first instalment (53,2 Mio ECU for Spain and 93,2 Mio ECU for Italy) was paid to the Commission in early 1993 and since then no further repayment has been registered. For the EAGGF-year 1993/94 the Council decided to increase the milk quotas for Spain, Italy and Greece by Council Regulation (EEC) 1560/93 of 14 June 1993 () . In view of the Council's decision the Commission decided on 28 July 1993 to reduce considerably the amounts to be paid by the Member States concerned in respect of 1989 by means of a modification () of the 1989 clearance decision which involved the overruling by the Commission on 27 September 1993 of the Financial Controller's refusal to approve the reduction for Italy. Clearly the Council regulation cannot be the basis for adjusting the amounts for previous years. The legality of the modification and its impact will therefore be carefully examined by the Court. Nomenclature 2.20. EAGGF-Guarantee expenditure is based on regulations directly applicable in the Member States and there is a legal obligation on the Community to finance it. It is against this background that the budget nomenclature includes a number of 'pour memoire` (p.m., i.e. token entries) items in order to provide the necessary flexibility in the case of unforeseen expenditure. These items cover: (a)possible payments for existing schemes for which an assessment of expected expenditure is not possible, for instance, in the case of old schemes which are being phased out; (b)new regulations proposed by the Commission not yet approved by the Council but which are likely to be approved during the budgetary year; (c)new policies which are being formulated but which have not yet been the subject of a formal draft regulation. 2.21. In the 1992 budget there are 51 p.m. items in the EAGGF budgetary nomenclature but often only a poor or no explanation is given for the existence of the item. For 12 of the p.m. items there is no legal or other justification written into the budget and no explanation is given by the budgetary authority for the implementation of these items. This is not compatible with general budgetary rules. 2.22. An example of a non-acceptable use of a p.m. item occurred in 1991 and 1992. Under chapter B1-18 'other plant sectors or products`, article 189 'other`, the Commission booked various expenditure for food aid for East European countries. Although these actions started in 1991 and will continue in 1993 there are no specific budget headings established for this action. The current practice can hardly be excused by claiming urgency for the measures because the same type of action is being carried out for the third consecutive year. The Court notes that, in the Preliminary Draft Budget for 1993, the Commission had proposed a distinct chapter for food aid, but that this proposal was rejected by the budgetary authority. 2.23. Certain budget items include 'negative` and 'positive` operations, for example the profits and losses on public storage for which the Member States declare the net value only. This leads to a lack of budgetary transparency. For such cases separate budget lines should be used and Member States should be instructed to declare income and expenditure separately. 2.24. Some budget items are mixed items under which the Commission books traditional 'Guarantee` expenditure as well as 'direct` expenditure. These budget lines are thus used for payments executed by the Member States during the period 16 October of the year 'n-1` to 15 October of the year 'n`, as well as for the expenditure directly executed by the Commission from January to 31 December of the year 'n`. Such a situation, by which the same budget line is used for recording expenditure, executed in different periods under different management systems, leads to a lack of budgetary transparency and complicates the management of the budget. Conclusion 2.25. The budget nomenclature for EAGGF-Guarantee expenditure requires urgent revision as follows: (a)p.m. items should be limited to cases where either there is an existing legal basis or where it is most likely that a new regulation will come into force in the budgetary year; (b)there should be no offset between income and expenditure; (c)there should be separate budget lines for expenditure through Member States' paying agencies and direct expenditure by the Commission; (d)for all new actions, not covered by existing headings, specific budget headings should be introduced, accompanied by adequate justifications. NATIONAL CONTROLS OVER EAGGF-GUARANTEE EXPENDITURE Introduction 2.26. The Court's programme of financial audit in Member States, which began in 1989, was continued in 1992 in France and Ireland. France accounted for 6 952 Mio ECU and Ireland for 1 452 Mio ECU, corresponding to 22 % and 4 % of all guarantee expenditure for 1992. The aim of the audit is to test the accuracy of the national declarations and to evaluate the national control systems over guarantee expenditure. The programme will be finished in 1993 with corresponding audits in Germany and Denmark. 2.27. The Commission has taken action to reorganize the clearance procedure taking into account the Court's previous audit work at paying agencies. The central feature of the new procedure is the reliance to be placed on controls and audits to be executed at Member State level. Consequently the organization and functioning of a number of paying agencies must be improved considerably. Controls over guarantee expenditure in France The paying agencies 2.28. In France, nine paying agencies, structured by market, are responsible for the administration of EAGGF-Guarantee expenditure and are coordinated by the 'Agence centrale des organismes d'intervention dans le secteur agricole` (ACOFA). Their status is that of public bodies, with representatives of the sectors concerned on the management board. Table 2.7 shows the structure of the existing paying agencies in France.>TABLE> 2.29. The Court audited five paying agencies which administer 85 % of all EAGGF guarantee expen- diture in France which were the 'Office national interprofessionnel des viandes de l'Ã©levage et de l'aviculture` (OFIVAL), the 'Office national interprofessionnel des cÃ©rÃ©ales` (ONIC), the 'Office national interprofessionnel du lait et des produits laitiers` (Onilait), the 'SociÃ©tÃ© interprofessionnelle des olÃ©agineux, protÃ©agineux et cultures textiles` (SIDO) and the 'Office national interprofessionnel des vins` (Onivins). All of them have delegated certain expenditures to other organizations which act as sub-paying agencies. These account for 26 % of expenditure of the five organizations audited. 2.30. As the EAGGF-Guarantee expenditure is outside the French national budgetary control procedures, there is no systematic control of paying agencies by an external audit body. While in 1992 the French Court of Auditors completed an audit of the paying agencies, this was the first national audit carried out in France on EAGGF-Guarantee expenditure. Organization and follow-up of control activities 2.31. The French system is relatively complex because of the distribution of functions, which may involve up to four or five different organizations or administrative departments for a single measure. The reason for this diversification in structure is not always apparent. The livestock premiums are a case in point, with the Treasury also acting as a paying agency for EAGGF-Guarantee. Two of the stock premiums are paid by Ofival, and the third, the suckler cow premium, is paid directly by the Treasury. A uniform system of administration would help to improve the follow-up of all the measures. 2.32. On-the-spot checks of aid applications are carried out in various ways, depending on the payment agencies and Community measures concerned, namely: (a)by the control departments of the paying agencies; (b)by regional departments of the paying agencies; (c)by organizations to which certain functions have been delegated; (d)by the 'Directions dÃ©partementales de l'agriculture et de la forÃat` (DDAF), which are answerable to the Ministry of Agriculture; (e)by officials of the Ministry for the Budget (customs, Directorate General for Taxation, Directorate General for Competition, Consumption and Fraud Prevention). 2.33. The absence of standard control units at local level, which is partly due to the diversity of the responsible organizations, makes it difficult to form an overall opinion on the efficiency of controls. The weaknesses and errors discovered during the audit of the five organizations illustrate that the complexity of the French system has attendant risks for Community funds. 2.34. The distribution of butter to organizations concerned with the socially disadvantaged, which is administered by Onilait, is another interesting example. Both the Ministry of Agriculture and the municipal authorities are involved in following up the use of the butter supplied to welfare organizations by 'SociÃ©tÃ© interprofessionnelle du lait et des produits laitiers` (Interlait). There is no coordinated system of scrutiny to check that the butter reaches its destination. 2.35. Onilait delegated to the 'Centre national pour l'amÃ©nagement des structures des exploitations agricoles` (Cnasea) the administration of the premium for abandonment of milk production. It is paid by Cnasea, primarily on the basis of a decision by staff of the local DDAF. Onilait does not, in fact, supervise Cnasea which, in turn, does not supervise the DDAF. 2.36. Furthermore at the DDAF at Rennes, one and the same official is responsible for examining aid applications, putting them forward for acceptance and then, at a later stage, deciding what controls should be carried out. This cumulation of functions is a risk to the security of the system. The on-the-spot controls by the DDAF should normally have taken place in the year in which production ceased, in 1986 or 1987, in accordance with the national instructions. In the area for which the DDAF Rennes is responsible they were not carried out until 1990. Out of a sample of 90 farmers, 83 were checked and the others were, apparently, absent when the auditor called. None of the organizations concerned took the initiative of completing the control programme. 2.37. ONIC's 'service d'appui et d'inspection` is responsible for coordinating and monitoring the audits which are to be carried out by the regional services. The service does not, however, have any information concerning the nature of the audits carried out (administrative controls, on-the-spot audits, further checks). There is no risk analysis and no overall knowledge of the possible shortcomings that are likely to occur in particular areas. 2.38. Seed aids are paid by the 'Groupement interprofessionnel de semences fourragÃ ̈res` (GNIS), under an agreement with ONIC. GNIS carries out controls through its regional offices, which are also responsible for seed certification. However, GNIS does not have any documentation regarding the global results of its controls. 2.39. In the case of olive oil, SIDO has a regional department in Marseille, which, in November 1991, discovered an irregularity in purchases of olive oil within the framework of consumption aid. The recipient was informed immediately, to enable him to determine the causes of the errors. However, the regional department did not pass on this information to the auditor who carried out his annual audit on the recipient's premises one month later. The auditor did not detect the error, although he did check all the invoices for purchases of oil by the recipient undertaking. SIDO did not take appropriate action when it found the error in question and, almost two years after the first error was committed, a reimbursement to EAGGF-Guarantee of some 0,23 Mio ECU is still outstanding. Furthermore SIDO did not add interest to the amount to be reimbursed by the recipient and no consideration was given to withdrawing the recipient's approval () . 2.40. Ofival assigned to 'SociÃ©tÃ© interprofessionnelle du bÃ©tail et des viandes` (SIBEV) responsibility for carrying out intervention in the form of public storage and SIBEV also provides the data for the public storage costs declaration. There are doubts as to the reliability of that data. There is, in fact, a discrepancy between the figures used for the end-of-March declaration of public storage costs (carcases, beef and veal) and the declaration dated 15 October 1992, which was for the same period (October 1991 to February 1992). Ofival declared for this period, in March 1992, 88 868,5 tonnes entered and in October 1992, 84 521,3 tonnes. Similarly for the quantities outwards, for the same period, 55 882,4 tonnes were declared at the end of March and 62 490,6 tonnes at 30 September 1992. 2.41. In the context of private storage for pigmeat, it was noted that there are very few surprise checks; Ofival's administrative conditions do not specify a minimum rate of surprise checks. Ofival's central office does not have a record of any such checks. On the other hand officials do attend stock counts systematically, but the value of the checks is limited, because they are carried out only at the storekeeper's request. Specific observations concerning the measures examined Export refunds 2.42. Most of the Onivins controls concern cross-checks to establish that the wine for which authorization is requested conforms to the analysis results stated by the exporter concerned, but the latter always choses the samples himself. 2.43. Checks on exporters' premises are very rare. Onivins' checks are not made on the batches under Customs' control ready for export: they take place before the goods go to Customs. Consequently there is no assurance that the batches checked are the batches actually exported. Furthermore, Onivins is not informed of the results of checks carried out by Customs. This lack of cooperation is detrimental to the administration of export refunds. 2.44. File processing needs to be improved. At the time of the Court's audit one and same person was responsible for examining files, calculating the aid due and issuing the request for authorization without any cross-check by another person. Furthermore, the date and signature of this official were nowhere on these files. Premium for the abandonment of vineyards 2.45. As there are no precise rules in either the Community () or the national regulations, the Onivins staff use varying methods to evaluate the yield of vineyards which are to be grubbed up. The Court noted significant differences in the yields that were adopted, depending on the calculation methods used by the Onivins experts. Onivins should adhere to a single calculation method because the amount of aid is determined in steps and a slight over-valuation of the yield can result in a significantly higher level of aid () . 2.46. The following system weaknesses underline the need for improved controls: (a)Onivins' auditors do not have up-to-date maps by which to check the plots concerned. The maps used often date from the 1950s and do not always show the true situation; (b)on the maps used, there is no official indication of the land area and ownership as a consequence of which they are of very limited value as a control instrument; (c)there is no security system, such as passwords, for accessing the computer files at Onivins' regional delegation. The same people are responsible for accessing the files for calculating the aid and for the transfer of the request to the central office for payment. In the absence of checks carried out by third persons there is a risk of unauthorized alterations. Ewe premium 2.47. The common market organization for sheep and goat meat () provides for a premium to be paid for ewes. This premium is differentiated according to the land classification. 2.48. There are three land classifications in France for this premium: Zone 0 for normal land, Zone 1 for hills and Zone 2 for mountains and Corsica. The first has a headage limit of 500 and the other two, 1000. Producers in zones 1 and 2 receive a supplementary premium. Producers based in zone 0 are entitled to the higher limit and the supplementary payment as long as transhumance is local practice and at least 90 % of the flock is grazed for a minimum period of 90 consecutive days in the other zones. The DDAFs must send a list of approved transhumants to Ofival. 2.49. Files in Marseille showed conflicting dates in some communes' certificates relating to transhumance and in other supporting documents. However there was no evidence of requests having been queried because of this situation which, at the very least, raises doubts as to whether the minimum period was always respected. The DDAF should improve administrative controls in this respect and ask for supplementary information in cases where differences of dates exist which may affect the eligibility of the request. 2.50. Under the scheme established by the 'Centre d'Ã©tude et de rÃ©alisations pastorales Alpes-MÃ©diterranÃ©e` (Cerpam) producers register sheep as grazing on mountain or on hillside pastures. The DDAF accepts without question all aid requests related to Cerpam grazing contracts and does not carry out controls on the spot. 2.51. A number of producers in Alpes-de-Haute-Provence (Zones 1 and 2) which is controlled by DDAF Digne, keep their animals in 'pension` during the winter time in the RhÃ ́ne valley (Zone 0). Most of them did not notify to DDAF the place where the animals were kept. These cases were not controlled on the spot because the animals were kept in other 'DÃ©partements` for which the controller of DDAF Digne believed that he was not responsible. In Digne the auditors were told that the other 'DÃ©partements` were informed about these cases, but no written evidence exists. The audit in Bouches-du-RhÃ ́ne (DDAF Marseille) showed that no controls were made for these cases concerning DDAF Digne. 2.52. The ewe premium is paid by Ofival, as is the special premium for male bovines, but it is the DDAF which authorize payment and carry out controls. The paying agent's role is thus confined to payment. Only after a certain amount of delay is Ofival informed of the amounts to be recovered as a follow-up to controls, but it does not systematically receive the reports compiled by the DDAF. But, on the other hand, Ofival checks the proper completion of all claims filled in by the producers which were already checked 100 % by the DDAF. Ofival's control over the payments would be strengthened if it redirected its resources away from a second claim form check towards closer scrutiny of the results of on-site inspections. Controls over guarantee expenditure in Ireland The paying agency 2.53. In contrast to France, Ireland has only one paying agency: the Department of Agriculture and Food (DAF). DAF is responsible for submitting the monthly declaration of expenditure and the annual declaration to the Commission. The Intervention Unit of the Department, which is concerned with EAGGF measures, contains three divisions: Public Buying-In, Export Refunds and Aids, Subsidies and Levies. There are offices of the DAF in all Irish counties which carry out inspection visits and send claims to the paying agency headquarters for payment. 2.54. The Office of the Comptroller and Auditor General (C& AG) has a unit of six auditors responsible for the audit of the DAF. Some 50 % of the unit's time is spent on EAGGF-related tasks. They audit systems and schemes at both the central and regional level. The C& AG does not issue a certificate in relation to EAGGF monies, which do not pass through the national accounting system (Appropriation Accounts). The declarations are not regarded as 'accounts` and are not comprehensively audited by the C& AG. Organisation and follow-up of controls 2.55. The County offices of the DAF are responsible for authorizing the payments of the ewe premium. No post payment checks are performed to ensure payments are correct. Printouts of payments, supplied by the computer division of the DAF, are retained in the County offices for consultation purposes only in the event of a payment query from a claimant. Specific observations on the measures examined Public storage 2.56. If Member States significantly overestimate the intake into public storage of eligible agricultural produce, the Member States themselves effectively have the benefit of advance financing. Such a case was noted in Ireland where 6 000 tonnes of bone-in beef, declared in October and November 1991 (book value 5,6 Mio ECU), had to be revised down to 3 215 tonnes in June 1992 (book value some 3 Mio ECU). This was partly offset by an underestimation of some 2 000 tonnes of boneless beef in the same period. Export refunds 2.57. Manual alterations by Customs officials of the export forms were found to be frequent. Some forms had been altered three or four times and in one case the whole form had been cancelled and then 'uncancelled` with the net weight being altered. Although Customs stamps were evident near the corrections, it was impossible to verify that all the changes were valid, or which was the final, attested declaration. They were nevertheless processed without query by the paying agency and the refunds were paid. 2.58. Laboratory analyses in Ireland of milk products for export refunds are not always in line with the Community's Agricultural Product Nomenclature (ERN) codes. For instance there is only one Irish tariff code for butter with up to 85 % fat content whereas the ERN code has 5 different groups for which refunds paid may vary from 132,32 ECU to 175 ECU per 100 kg. Laboratory analyses made in Ireland for such cases were clearly inadequate for export refunds purposes. The Irish authorities have indicated that measures are being taken to rectify this situation. 2.59. As at 13 October 1992 there existed 655 guarantees for some 43 Mio ECU which had been outstanding for more than two years. These related to expenditure where satisfactory evidence of export and/or import into a non-Member State had not been provided within the regulatory period. There are outstanding guarantees dating back to 1985. In the case of beef the amount outstanding (36 Mio ECU) represents more than 25 % of the value of the export refunds paid for that market in EAGGF year 1991. 2.60. In a milk product case a sample was taken for analysis by the State Chemist in 1990. The results were not communicated to the DAF and, quite correctly, the guarantee (some 650 000 ECU) was not released. However, the file contained no record of follow-up action by the Department since then. 2.61. One of the guarantees outstanding for milk products, constituted nearly 50 % of the total (3,1 Mio ECU). Proof of arrival of the product in Mexico had been awaiting verification by the Mexican authorities. This arrived in the Irish Department of Foreign Affairs in October 1991 but was only forwarded to the DAF on 27 August 1992. 2.62. For beef and cheese export refunds, proof of arrival in a particular non-Member State is required. This is normally provided and confirmed by that country's Customs authorities. Of the proofs of arrival examined by the Court relating to beef, no authenticated copies of the customs stamps of Zaire could be found at the DAF. In the case of an export of 747 tonnes to Morocco (Agadir) in December 1991 and of 302 tonnes to the Lebanon in November 1987 the authenticated Customs stamps maintained by DAF differed from the customs stamps supplied as evidence of arrival. In both cases the guarantees were released without further enquiry by the Irish authorities. Temporary suspension of milk production 2.63. The Commission organized a temporary suspension of part of the milk quota so that the quota actually available, calculated on the basis of the reference quantities in 1986/87 was reduced by 4,5 %. The EAGGF compensated the producers at a rate which in 1991/92 was 7 ECU per 100 kg of milk quota suspended. The audit revealed that the conversion rate used by the paying agency was not correct, resulting in an underpayment to the farmers of approximately 475 000 ECU. Accordingly, the Irish authorities corrected this underpayment in December 1992. Ewe premium 2.64. Article 6 of Commission Regulation (EEC) No 3007/84 of 26 October 1984 () as amended by Commission Regulation (EEC) No 1260/90 of 11 May 1990 () requires that, in cases where a decrease in the number of animals may be attributed to natural circumstances, the premium will be paid on the actual number found on inspection, provided that the flockowner notifies the authorities in writing within 10 days of becoming aware of the event. Where the difference between the actual number of eligible animals and the number declared is 10 % or less, the premium shall be paid in respect of the number of eligible animals, reduced by three times the percentage representing that difference, provided that no false declaration is involved. However, controls on the spot by the Court revealed cases where this rule was not applied correctly. Furthermore there is a risk that flockowners may claim for a higher number of sheep than they have and merely declare losses only when inspected. Under such circumstances and especially where a significant number/proportion of the flock is missing further proof should be sought. 2.65. There are particular problems relating to sheep movements across the border between Northern Ireland (UK) and Ireland. The retention period in Northern Ireland (UK) runs from 28 January whereas in Ireland it does not begin until 2 March. The same sheep could thus be presented in Northern Ireland (UK) where there is only a 25 % inspection level and no ear-notching and then be presented in Ireland, where there is 100 % inspection and ear-notching. The Irish authorities have instructed field staff, where an applicant has ties with farms in Northern Ireland (UK), to coincide their inspections with inspections by Northern Ireland (UK) authorities of that applicant's flock. Suspect flocks are also required to be given a surprise compliance inspection before the end of the relevant 100-day period. 2.66. For 1991, in the five counties in Ireland along the border with Northern Ireland (UK) some 720 000 sheep were claimed for and some 22 Mio ECU was paid in premiums. The auditors visited County Monaghan (one of these counties) but were unable to obtain evidence of compliance inspections carried out for that year. Two of the disallowed claims examined make reference to sheep being moved across the border from Northern Ireland (UK). 2.67. To safeguard against double payment there should be harmonization of the retention period and the introduction of a clearly identifiable marking/ear-punching system in Northern Ireland (UK). Furthermore, inspection procedures should be strengthened in areas where movement of sheep across the border could give rise to double claims. Conclusion 2.68. In France, the coordination and supervision of the regional organizations needs to be improved by the central paying agencies especially in the light of the new common agricultural policy with its inherent tendency towards further decentralization. In too many cases tasks are delegated by the central organizations without proper supervision and control of the regional organizations' implementation of the tasks entrusted to them. In Ireland the control of export refunds and related guarantees should be more vigorously pursued. 2.69. The problems encountered in Ireland and France in relation to the ewe premium measure confirm the Court's finding in the other Member States audited: that the measure is too complicated to be effectively managed and controlled () . 2.70. The complexity of administrative and control systems throughout the Community, as illustrated in this annual report in France and Ireland, and the weaknesses encountered have considerable consequences for the audit of the Community's revenue and expenditure. All Member States and the Commission should ensure that clear, coherent and effective administrative and control systems are in place. FOOD AID AND URGENT ACTIONS FOR EAST EUROPEAN COUNTRIES AND THE FORMER SOVIET UNION FINANCED BY EAGGF-GUARANTEE Introduction 2.71. Because the Food aid and urgent actions programme for East European countries and the former Soviet Union has been largely financed by the EAGGF Section of the budget the Court's audit of the activities of the Agriculture Directorate-General of the Commission necessarily included examination of the administration of this aid. The Court's findings in this context are set out in the following paragraphs. However, to get an overall view of the Commission's administration of the programme it is necessary to refer also to Chapter 11, paragraphs 11.53 to 11.63. 2.72. In 1992 544,5 Mio ECU of the EAGGF Guarantee Section were used to finance the programme. The financing and implementation of the relevant operations are summarized in Table 2.8. 2.73. In its Annual Report for 1991 the Court drew attention () to legislative oversights and the misuse by the Commission of the EAGGF-Guarantee budget in relation to the financing of food aid to East European countries and the former Soviet Union. In 1992 there were further breaches of budgetary rules in the implementation of aid for Eastern Europe. Financing 2.74. At the beginning of 1992, there were no budgetary appropriations available for these actions. In order to finance them, the Commission transferred appropriations of 175 Mio ECU from the wine chapter and 45 Mio ECU from the cereals chapter of the EAGGF budget and requested supplementary appropriations of 178 Mio ECU, which were finally granted on 25 September 1992. Thus, the total 1992 appropriations amounted to 398 Mio ECU.>TABLE> 2.75. In addition, the Commission made non-automatic carry-overs of 166 Mio ECU from 1991 to 1992. Of this, 100 Mio ECU were intended to finance a tranche of urgent action to Moscow and St Petersburg. Under no circumstances could the cost of this action, decided by the European Council of December 1991, have been related to the 1991 EAGGF-Guarantee year which ended on 15 October 1991. This carry-over was thus contrary to Article 7.3 of the Financial Regulation, in that it was, in effect, new expenditure which should have been charged directly to the 1992 budget. 2.76. Total appropriations thus made available during 1992 were 564 Mio ECU, which was 19,5 Mio ECU above the requirements of the relevant Council Regulations. Commitments of 359,4 Mio ECU were made during the year, which represented 63,7 % of available appropriations. 2.77. In order to avoid appropriations from 1991 being cancelled, expenditure (commitments and payments) of 21,8 Mio ECU for beef provided by Member States under Council Regulation (EEC) No 3767/91 of 19 December 1991 () was irregularly charged by the Commission against the appropriations carried over from 1991, instead of against appropriations of 1992. At the end of 1992 175,5 Mio ECU carried over to 1993 under Article 7(1)(a) of the Financial Regulation (non-automatic carry-overs) was consequently some 21 Mio ECU higher than it should have been. 2.78. At the end of 1991 the Commission instructed the French paying agency to declare 4 000 tonnes of beef with a value of Â± 5,6 Mio ECU as delivered to Bulgaria under Council Regulation (EEC) No 597/91 of 5 March 1991 () , even though the actual delivery took place in 1992. The aim of the Commission was to use 1991 appropriations which otherwise would have been cancelled. This was not good accounting practice. Accounting 2.79. During 1992 the Commission recorded both food and transport costs under one single budget item (B1-189). Since this expenditure is mainly of a humanitarian nature and includes cost elements irrelevant to the stabilization of the European agricultural markets (for example, transport costs), EAGGF-Guarantee is not the most appropriate part of the budget for it. Expenditure made by Member States The measures 2.80. In order to implement the conclusions of the European Council of 9 and 10 December 1991, it was decided to adopt emergency measures for the free supply to the populations of Moscow, St Petersburg and other cities of the former Soviet Union certain foodstuffs and agricultural products (Council Regulations (EEC) No 3767/91 of 19 December 1991 () and No 330/92 of 10 February 1992 () ). 2.81. Disbursements under the first Regulation (95 Mio ECU) was divided into two tranches of 10 Mio ECU and 85 Mio ECU which concerned the supply of butter, skimmed milk powder and beef from intervention storage. In accordance with Article 2(3) of Council Regulation (EEC) No 3767/91 the Commission instructed Member States to conduct direct agreement procedures in order to select transporters to convey the produce from intervention storage to Moscow or St Petersburg. 2.82. Expenditure under the second Regulation (100 Mio ECU) was funded from appropriations carried over from 1991 (see paragraph 2.75). The action included transport operations and also provided for the supply of products purchased on the market (baby food, white sugar and rapeseed oil). In these latter cases a tender procedure was initiated and the successful tenderer was contracted to buy the products, process them where necessary and deliver them to the designated destination. The transport operations from intervention storage were organized through direct agreement procedures. 2.83. Council Regulations (EEC) No 3860/91 of 23 December 1991 () and No 1567/92 of 15 June 1992 () adopted emergency measures for the free supply to the population of Albania of certain food products available as a result of intervention. The value of such actions was 35 Mio ECU and 45 Mio ECU respectively. 2.84. Contracts for the transport of bread-making wheat, flour and rice were awarded following invitation to tender. The contracts awarded for the transport of semolina, milk powder, butter and beef were made by direct agreement between the individual Member States intervention agencies and known transporters. 2.85. Council Regulation (EEC) No 2938/91 of 1 October 1991 () adopted an emergency measure for the free supply of up to 100 000 tonnes of bread-making wheat to the population of Albania. A tender procedure was established for the transport of the wheat from French intervention stores to Albania. 2.86. Council Regulations (EEC) No 3861/91 of 23 December 1991 () and No 2335/92 of 7 August 1992 () adopted emergency measures for the free supply to the populations of Estonia, Latvia and Lithuania of certain cereals from intervention. The measures amounted to 45 Mio ECU under each Regulation. 2.87. The contracts for the transport of the cereals from the intervention stores to the Baltic ports were awarded after invitation to tender. Audit scope 2.88. The execution of these operations, decided by the Council, was examined by the Court in five Member States (France, Germany, Ireland, Netherlands and Spain), which constituted more than 85 % of the commitments made by Member States in EAGGF year 1992. No expenditure in 1992 was declared by Member States in connection with ex-Yugoslavia. Observations Delivery delays 2.89. Delays of up to four weeks in excess of the deadlines set out in the Regulations and Commission Decisions occurred in operations to all destinations. In many cases this was due to congestion at destination. In other cases the delays could have been foreseen by the transporter (for example, the Commission refused to grant an extension to a French transporter who should have foreseen congestion at the port of loading). With the exception of Commission Regulation (EEC) No 944/92 of 14 April 1992 () (baby food), the legislation for the 1992 operations did not provide for sanctions or penalties for late arrival other than in relation to the release of securities according to Commission Regulation (EEC) No 2220/85. 2.90. The urgent nature of the actions necessitated a short timescale for operations. All five Member States mentioned that the deadlines set were often unrealistic. In many cases the Commission recognized that it had set very tight deadlines and accorded Member States delivery extensions of two weeks. However, certain Member States (Germany, Spain) unilaterally extended deadlines and included later dates in invitations to participate in direct agreement procedures. Thus the Commission was presented with a fait accompli. It is not acceptable that Member States should grant extensions to deadlines without prior Commission agreement. At the same time the Commission should take care not to set unachievable deadlines. 2.91. Deliveries of the first two tranches of aid to Moscow and St Petersburg (Decisions of 20 December 1991 and 10 January 1992) were completed by April 1992. Beef from France was delayed by three weeks because the Commission's Decision did not state where to deliver the produce. Moreover the French intervention agency could not obtain instructions from the Commission Delegation in Moscow regarding such deliveries. In addition, Member States were confused by the fact that many Commission services were involved in the administration of the aid. 2.92. Under Commission Regulation (EEC) No 1145/92 of 5 May 1992 () the Commission organized the supply and transport of 17 500 tonnes of rapeseed oil to Moscow and St Petersburg in May 1992. A further 3 000 tonnes was organized in June 1992. This operation encountered many difficulties and taking-over certificates were being issued as late as January 1993, six months after the deadline in the regulation. The companies involved reported to the Commission that there was very slow acceptance of the rapeseed oil in Moscow and St Peters- burg. Indeed, by 4 September 1992 only 8-10 % of the accepted rapeseed oil had been sold on to shops. Half of the foreseen purchasers had no need for such oil. Russia had asked for unspecified cooking oil, and the Commission decided upon rapeseed. Direct award of contracts 2.93. The Council Regulations allowed the use of the direct agreement procedure because of the urgency of the situation. Instructions to organize such procedures for transport operations were issued by means of Commission Decisions addressed to Member States. Addressing such Decisions to Spain (in respect of 4 000 tonnes of butter and 2 000 tonnes of milk powder) entailed transport costs up to three times as high as those for Germany and Belgium because of the distances to be travelled. Thus the allocation for the supply of products from Member States was based on considerations other than cost-effectiveness. 2.94. The direct agreement procedure specified that the supply contract should be awarded to the tenderer offering the most favourable terms in relation to the prices normally obtaining on the market. A paying agency in France partially rejected lower offers from a company from Italy on the grounds that it was not familiar with the transporter. This company was eventually awarded 3 000 tonnes out of a lot of 11 000 tonnes of beef to Albania. Although the company encountered difficulties during the operation, it exported the beef within the Commission deadlines. Nevertheless, the low offer of the same company for the next operation, along with that of another Italian company, were rejected and a third, higher French tender was accepted. Open tender 2.95. Under the open tender procedure tenderers submitted bids to a paying agency. These bids were communicated to the Commission, without the names of the tenderers. One tender concerned the supply of 5 000 tonnes of flour for Albania. The conditions for this tender stipulated that the wheat would have to be mobilized in France. The lowest bid was, however, rejected by the Commission on the basis that it was unrealistically low even though the wheat was to be collected in Calvados, France. The Commission provided no evidence that this bid did not comply with the requirements of the tender regulation. In the event, the tender was awarded to a company the offer of which was 6 % higher. A bid lower than the unsuccessful tenderer for a similar operation (but under the direct award procedure) had previously been accepted and the operation successfully carried out. 2.96. The non-selection of the lowest offers in the cases referred to in paragraphs 2.94 and 2.95 above led to an additional cost of 0,3 Mio ECU. 2.97. Considerable variations were noted between the successful bids for the transport of bread-making wheat from the French intervention store in Ghent (Belgium) to Albania. For example, in November 1991 a company submitted a bid of 34,43 ECU per tonne. This was the only bid received and was selected by the Commission. The same company again successfully bid 17,93 ECU per tonne in August 1992 for a similar operation. The French intervention agency could not explain the price discrepancy. Transport by air 2.98. Having awarded the contracts for the surface transport of 2 500 tonnes of butter and 1 000 tonnes of skimmed milk powder to Moscow and St Petersburg under Regulation (EEC) No 3767/91 () the German authorities then informed the successful bidders that 288 tonnes of those lots would be transported by air under a separate procedure. Thus the quantities already awarded to the successful bidders were reduced. Whereas 108 tonnes were transported free of charge by the German and Canadian Air Forces, the remaining 180 tonnes were transported by a commercial airtrans- port company and the costs were charged to the EAGGF. 2.99. The cost of these air deliveries was 1 667 DM/tonne compared to the cost of surface deliveries by the successful tenderers of between 297 and 345 DM/tonne. The total additional cost was thus some 100 000 ECU. The Commission Decision of 20 December 1991 which instructed Germany to adopt the direct award procedure was partially circumvented and a contract awarded to a company with no tender procedure at all. 2.100. Air transport should only be used either when surface access is impossible or in exceptional cases where the urgency demands earlier delivery. Air transport of the above deliveries was not considered justifiable by the NGOs in Moscow and St Petersburg (see also Chapter 11, paragraph 11.54). Decisions: Boneless beef 2.101. The Commission Decisions addressed to Den- mark, Ireland, the United Kingdom and Italy concerning the supply and transport of boneless beef to Moscow and St Petersburg (Regulation (EEC) No 3767/91 () ) did not stipulate the proportions of specific intervention cuts to be supplied. This has caused unnecessary problems between the Community and the beneficiaries. 2.102. The Irish authorities, for example, supplied, in accordance with the instructions by telephone from the Commission, an even spread across the range of intervention cuts. Some of the cuts, which naturally contain a high amount of fat, did not meet the expectation of the Russians who wanted, but did not specify, boneless beef for sale through retail outlets at a fixed price directly to the consumer. In the event, some of it had to be processed into sausages (See also Chapter 11, paragraph 11.56). 2.103. For future operations, Decisions communicated to Member States should follow Commission Regulation (EEC) No 676/90 of 20 March 1990 () on the sale of beef held by certain intervention agencies to Eastern Europe, which contained details of the cuts to be exported. Controls 2.104. The Commission arranged for controls of the products both before loading and on arrival. Transporters were paid according to the quantity of produce declared on the taking-over certificates issued in the beneficiary country. The transporters were not paid for any shortfall. However, the reliability of the taking-over certificates for the transport of cereals in bulk to Albania, Estonia and Latvia is doubtful. For Albania the taking-over certificates in respect of a total of 312 880 tonnes of bread-making wheat in bulk stated that, as no weighing facilities were available, a 'draft survey` had confirmed the weight of cereals arrived. The transporters were always paid 100 % in these cases. 2.105. In Estonia the taking over certificates for 60 000 tonnes of cereals confirmed 100 % arrival and stated that the weight was 'as per bill of lading`. In Latvia 25 000 tonnes of barley were also certified as 'according to the bill of lading`. However, there was no evidence in either case of any physical checks having been carried out. Direct expenditure by the Commission 2.106. Food aid operations to East European countries were mainly implemented by the Member States. The Commission also implemented some actions itself. The total amount committed in 1992 for direct actions by the Commission amounted to 86,4 Mio ECU (payments 67 Mio ECU). 2.107. The most important direct action was based on Council Regulation (EEC) No 2793/92 of 21 September 1992 () which allowed the final charge to be made to EAGGF-Guarantee of the cost of food aid to ex-Yugoslavia carried out since 16 October 1991. This action was executed by the Commission's Office for Emergency Humanitarian Aid (ECHO). The Commission charged expenditure of 49 Mio ECU, made by ECHO, to EAGGF-Guarantee. As these accounting transfers were not accompanied by cancellation of the original commitments of ECHO, commitments for the same expenditure existed at both the level of ECHO and in the EAGGF-Guarantee Section, contrary to the provisions of the Financial Regulation. Conclusion 2.108. In a number of cases expenditure has been charged to one or other part of the budget, according to the availability of appropriations alone, without taking into account the origin and nature of the expenditure (see paragraphs 2.74, 2.75, 2.77, 2.78 and 2.107). The method of providing appropriations by transfers and carry-overs from 1991 to 1992 and from 1992 to 1993 breaches budgetary rules (see paragraph 2.75). 2.109. The Court repeats the criticisms it made in the Annual Report 1991 (paragraph 2.48) to the effect that the EAGGF-Guarantee budget is inappropriate for such aid measures and that the administration of the aid was inadequate. Graph 2.1 - EAGGF-Guarantee 1992 >START OF GRAPHIC> Difference between forecast n P3 and expenditure Total expenditure EAGGF 1992 4 500,00 4 000,00 3 500,00 3 000,00 2 500,00 2 000,00 1 500,00 1 000,00 500,00 0,00 Month---- Forecast n P3 . . . . . + . . . . . Expenditure Source: Commission reports on budgetary discipline. November December January February March April May June July August September October Forecast/Expenditure (Mio ECU)>END OF GRAPHIC> >REFERENCE TO A FILM> >TABLE> > REFERENCE TO A FILM> CHAPTER 3 (*) The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) Organization and management of crop markets: rice and textile fibres >TABLE> (*) The Commission's replies are on page 275 INTRODUCTION 3.1. In 1992 the Court carried out audits of the rice market and of the textile fibre market comprising flax, hemp and cotton. Although the markets examined are quite different and none of them is affected by the Common Agricultural Policy reform, the following observations show the common problems of establishing the regularity of aid payments when they are based on areas planted in countries where no reliable land registers exist. The problems are given added urgency in view of the fact that aid payments under the reformed Common Agricultural Policy introduced in 1993 will largely depend on the crop area cultivated. RICE The Common Market Organization (CMO) 3.2. The Community produced on average over the last five years about 2 Mio tonnes of paddy rice annually, corresponding to about 1,3 Mio tonnes of wholly milled rice. Nearly 83 % of this production is the traditional Community round grain varieties which are used mainly in southern Europe. Although in each of the five marketing years from 1987/88 to 1991/92 the Community exported, on average, 275 000 tonnes equivalent of wholly milled rice, by 1991 stocks had built up to 193 126 tonnes. However, by May 1993 exports of intervention rice had reduced stocks to 2 788 tonnes. 3.3. Over the same five year period the Community imported each year an average of 328 000 tonnes equivalent of wholly milled long grain rice of the Indica type, which is in demand especially in northern Europe. It is therefore the Community's policy to develop production of this variety which at the moment covers only 40 % of the demand. 3.4. The Community's interventions in the rice market are based on Council Regulation (EEC) No 1418/76 () . This Regulation is modelled on the CMO for cereals as it existed before the Common Agricultural Policy reform. It introduces intervention prices for paddy rice, a target price for husked rice and public intervention storage. Threshold prices for husked, half and wholly milled long and round grain rice translate the 'Community preference` into practice and a sluice-gate system of import levies and export refunds protects the internal market from outside influences. 3.5. In 1978 the basic Regulation was supplemented by Council Regulation (EEC) No 594/78 () , introducing subsidized deliveries of Community grown rice to the French overseas department of Reunion. Another complement was added in 1987 by Council Regulations (EEC) No 1907/87 () and No 3878/87 () introducing a production aid for Indica-type rice. Budgetary incidence 3.6. Table 3.1 gives a break-down of expenditure in the rice market over the last five years which averaged 94 Mio ECU per year. Total expenditure and expenditure for individual items show rather large fluctuations from one year to another around an increasing trend. Expenditure on export refunds increased considerably in 1991 and 1992, where it represents over 82 % of total Community expenditure on rice. As the general control procedures for export refund payments have been examined separately by the Court () , this audit concentrated on the remaining items of expenditure in the rice market. Subsidies for supplies to Reunion 3.7. Rice constitutes a basic foodstuff for the French overseas department of Reunion with a per capita consumption considerably exceeding that of the Member States on the European continent. As Reunion itself does not produce rice the supply situation had to be improved. This was done by abolishing levies on imports of rice from third countries into Reunion and by introducing subsidies for supplies of Community grown rice to Reunion. The method for fixing the rate of aid was set out in Commission Regulation (EEC) No 1031/78 () . 3.8. Between 1987 and 1989 the export refund rate for milled rice dropped significantly from 300 to 180 ECU per tonne. During the same period, the rate of aid for deliveries of milled rice to Reunion was set at the same level as the agricultural levies charged on imports of rice into the Community. Therefore, it remained between 607 and 628 ECU per tonne, a relatively high level when compared to export refunds to other destinations. This gave a strong incentive to operators to send a total of 99 537 tonnes of milled rice to Reunion during the period 1986/87 to 1990/91. In 1989 alone, these deliveries of milled rice to Reunion amounted to 68 041 tonnes and outstripped the consumption capacity of its 500 000 inhabitants by 20 %, led to bottlenecks in storage and caused the local processing mills to fall idle. 3.9. The Court tried to reconcile the total quantities for which aid was claimed with the quantities which arrived in Reunion. According to the figures of the Italian, Spanish and French paying agencies, aid was paid on a total of 116 000 tonnes during the financial years 1987 to 1990 inclusive. Figures provided by the French customs services indicate on the contrary a total of only 99 537 tonnes imported from the Community into Reunion over a much longer period between 1 September 1986 and 31 August 1991. So far no attempts either by the Commission or by the Member States have been made to investigate the discrepancy of at least 16 463 tonnes. 3.10. The Commission reacted rather late to the expanding trade by reducing the advance fixing of the aid from 6 months to three days () . However, it was not until the end of the EAGGF financial year 1989 that the Commission changed the method of calculation of the subsidy. Under the terms of Council Regulation (EEC) No 1806/89 () , it is now based on the supply and prices on the Community market, the market requirements in Reunion and the rice prices on the world market () . This had the effect that the rate of aid was reduced to a level comparable to that of export refunds and expenditure on the aid dropped drastically in 1990 and even more so in 1991. In 1992 the Community spent on this budget item only 0,1 Mio ECU compared with 58 Mio ECU in 1989. Indica rice Production aid>TABLE> 3.11. Production aid for Indica rice was first introduced for rice sown during the 1987/88 marketing year. The figures available at the Commission for the areas sown with Indica rice compared to the total areas cultivated with rice in general, show that after a period of three years the scheme has had a limited influence. Only Spain and Greece devote a significant part of their rice-cultivated areas to the production of Indica rice and it was only in 1991 that there was a significant increase in the total area used for the production of this non-traditional variety. 3.12. The Community's biggest rice producer, Italy, still devotes only a modest proportion of its total area under rice to Indica. One of the reasons is that the Italian production of rice is traditionally concentrated in the north of the country where climatic conditions are less favourable for Indica rice. 3.13. The rate of the aid was set at 330 ECU per hectare for the first marketing year (1987/1988). Council Regulation (EEC) No 1911/87 () justified this level, which amounts to about 18 % of the intervention price, with the argument inter alia that these varieties have a lower yield than the traditional ones and that the aid should therefore compensate the farmer for the loss in income he would otherwise have. Although the aid was reduced in the following years, in the marketing year 1991/1992 it still represented about 10 % of the intervention price. 3.14. The data available in both the Commission and the Member States do not support the argument for such a high level of aid because of lower income for the farmers. Production costs of Indica rice are not significantly different from those of the traditional varieties. Prices quoted at the product exchange of Vercelli (the place set by the regulation for fixing the intervention price) even show a tendency to be slightly higher than those quoted for other varieties, and yields for production and milling are in total only about 5 % below those of traditional varieties. Control over cultivation declarations 3.15. Although there is a common regulation for the implementation of the aid scheme () , the Member States applied quite different criteria for settling discrepancies between the farmer's declaration of the area sown with Indica rice and the areas actually sown. 3.16. Italy and France paid the aid on the basis of a 100 % on-the-spot check of the area actually sown, with no regard whatsoever to the content of the farmer's declaration; Spain refused any payment when discrepancies occurred between the declaration and the results of the verification of the area sown, thus applying correctly the regulation which leaves no room for any tolerance and excludes the farmer from the benefit of the aid if his declaration is incorrect. Intervention storage 3.17. The harvests of paddy rice in 1990 and 1991 of 2,3 and 2,2 Mio tonnes respectively led to stocks of 96 000 tonnes in 1990 which increased to 190 000 tonnes in 1991. In 1990 these stocks were exclusively located in Italy. In 1991 Italy held about 85 % of the Community rice stocks. 3.18. At 1 September 1992 the stocks fell to 18 917 tonnes. This considerable decrease was, however, not caused by better prospects on the Community market, but by subsidized exports to third countries. 3.19. That same year, the production of Indica rice increased in Italy for the first time, yet this had the effect that the Italian intervention agency for rice had to buy into intervention about 9 000 tonnes, representing 8 % of Italy's harvest of Indica rice. The evolution of stocks of Indica rice should be monitored closely in order to avoid encouraging low quality production which, in the end, has no market. 3.20. Indeed the climate in northern Italy is not ideal for the Indica variety and considerable investment would be required for irrigation and other infrastructure in southern Italy where the climate is more suitable. This calls into question whether the cultivation of Japonica rice in Italy can be realistically converted to the cultivation of Indica rice unless new varieties are developed which are better adapted to climatic conditions while maintaining quality and the characteristics of Indica rice. However, it seems too early to draw final conclusions on the conditions under which Italian Indica rice may be marketed as Italy's Indica production has only recently increased. Conclusion 3.21. The discrepancy of 16 463 tonnes of milled rice between the books of the paying agencies in France, Italy and Spain and the figures of the French customs services in Reunion is not settled. The potential financial loss is 6,3 Mio ECU (see paragraph 3.9). 3.22. Furthermore, the late realignment of the rates of subsidy and export refund cost the Community at least 43 Mio ECU, i.e. the difference between the 73 Mio ECU paid for the deliveries to Reunion during this period and the 30 Mio ECU which exports at 'normal` rates would have cost (see paragraphs 3.8 and 3.9). 3.23. Taking into account the unavoidable imprecision of land measurement when not executed by professional land-surveyors, acceptable tolerances for discrepancies between the cultivation declaration and the area actually sown with Indica rice should be laid down by the regulations; sums unduly paid up to now should be recovered (see paragraph 3.16). 3.24. The yields, production costs and market prices of Indica rice when compared to those for Japonica rice do not justify maintenance of the high levels of aid once crop conversion has taken place. The Court therefore welcomes the cut in aid to 100 ECU per tonne which was introduced for the marketing year 1992/93. This level is more in line with the differences in yields noted (see paragraph 3.14). At present the whole of Spain, Greece, France, Italy and Portugal is designated for the production of Indica rice. Aid would be better targeted if a number of distinct production zones were set in each Member State where, given the climatic conditions, a production of high quality is possible from the Indica varieties available. SUPPORT MEASURES FOR TEXTILE FIBRE PLANTS Budgetary incidence>TABLE> 3.25. The Community supports the production of flax, hemp and cotton which are either traditional crops in certain parts of some Member States or, in the case of cotton, present alternatives to the production of crops in which the Community is more than self-sufficient. Cotton is far and away the most important crop in the CMO for textile fibre plants. Table 3.2 shows budgetary expenditure on these three products over the last five years. For all three crops expenditure shows rather abrupt variations from one year to the other. Flax and hemp The Common Market Organization (CMO) 3.26. The Community supported the production of fibre flax and fibre hemp with an average annual budget of 32 Mio ECU in the last five years. While the production of hemp is relatively unimportant (it is grown on only 4 500 hectares in France and Spain) the production of flax absorbs about 94 % of the Community fibre flax and hemp expenditure. For several years the production of fibre flax has exceeded demand, but from 1991 onwards the total area sown with this crop dropped from 79 000 to 55 100 hectares, of which 73 % was cultivated in France, 18 % in Belgium and the rest in the Netherlands and Germany. 3.27. The lack of demand for flax led to the build-up of stocks from 103 000 tonnes in 1988 to 151 000 tonnes in 1991. The quantities exported each year since 1988 have attained or exceeded the quantity exported in that year. The build-up of stocks is therefore due to the fact that demand from the Community's textile and paper industries has stagnated, with consumption averaging 65 000 tonnes. 3.28. The Community's interventions in the markets for fibre hemp and flax are based on Council Regulation (EEC) No 1308/70 () and were introduced with the particular objective of market stabilization and, in the case of flax, the rational disposal of production. The aid is paid on areas sown and harvested. Aid for private storage 3.29. Article 5 of the basic Regulation(12) provides for private storage aid for flax and hemp fibres when there is a temporary imbalance of the market. Council Regulation (EEC) No 1172/71 () and in particular Article 1 thereof specifies the variables to be taken into account when determining a temporary imbalance between supply and demand. 3.30. Stocks of fibre flax began to increase before 1988. In order to contend with the imbalance in the market the Commission introduced private storage aid for short flax fibres in March 1988 () and for long flax fibres in October 1990 () . The basic Regulation(12) provides the possibility of private storage aid for a temporary imbalance, yet in 1988 these stocks corresponded to one year's consumption and by 1991 to three years' consumption. 3.31. In October 1991 the Commission was concerned that the marketing of large quantities of fibre which had previously been stored for 8 to 10 months would seriously worsen the market. Thus Commission Regulation (EEC) No 2984/91 () extended the period of aid for up to a further 6 months to holders of fibres who had previously concluded a storage contract. 3.32. However, such structural increases in stocks cannot be effectively controlled by short-term private storage aid measures. The result is that the Community participates in the industries' storage costs without achieving the objective of a re-balanced market. Indeed it has taken five years to show any improvement in bringing production more into line with demand. Lack of independence of control 3.33. The French paying agency for flax and hemp, 'SociÃ©tÃ© Interprofessionnelle des OlÃ©agineux, ProtÃ©agineux et Cultures Textiles` (SIDO), has delegated the responsibility for control functions and preparation of payment files for flax to the 'ComitÃ© Interprofessionnel de la Production Agricole du Lin (Cipalin)` which represents farmers, cooperatives and private processors in the flax sector. Cipalin is also responsible for taking the fibres under control, i.e. checking the weight and quality of the fibres. It inspects stocks and monthly stock reports are sent to SIDO. However, as part of its commercial activities Cipalin provides warehouse storage and also has an interest in a storage aid beneficiary, SA Lin DÃ©veloppement. 3.34. In 1991 SA Lin DÃ©veloppement bought flax fibres and stored them in warehouses rented from Cipalin which had, in turn, rented them from a private flax processor. The storage contracts between the two companies were signed by the same person as chairman of both. Furthermore, fibre belonging to SA Lin DÃ©veloppement was taken under control by Cipalin by the same person who had bought them on behalf of SA Lin DÃ©veloppement. Six out of the 12 directors of Cipalin had received private storage aid as chairmen of co-operatives or owners of private companies following checks by Cipalin. There was no independent control, thus there is no assurance that the payments to SA Lin DÃ©veloppement of around 0,2 Mio ECU (1,7 Mio FF) and the companies represented by Cipalin directors totalling 1,1 Mio ECU (7,8 Mio FF) were correct. SIDO should have established independent controls. Promotion programme 3.35. Article 2 of the basic Regulation(12) provides for programmes to promote the use of fibre flax and derived products. Such programmes include information activities as well as research to improve flax products and to find new outlets. These measures are financed by withholding an amount of 10 % of the aid for fibre flax production. 3.36. The promotion programmes financed by the Community can be for one or more marketing years. The Commission monitors the programme, sometimes using external evaluation companies. One report covering a study made during the period 1989-91 commented favourably on the results and effects of the measures evaluated, i.e. festivals, exhibition stands at trade fairs and advertising campaigns but said that the short-term sales impact of promotional advertising should not be over-estimated. However, the promotion campaign which can no longer be considered short-term, has cost the Community 12,8 Mio ECU in the period 1988-92 and has not halted the continuing drop in demand. Multiple aid for flax and hemp 3.37. Council Regulation (EEC) No 569/76 () introduced aid for linseed used for the production of vegetable oil. The aid for these oil seeds should cover the difference between the guide price set by the Council and the world market price. The aid is paid on a per hectare basis for indicative yields for production zones. Linseed produces only oil seeds and receives a higher amount of aid per hectare. Fibre flax varieties which produce oil seeds at a lower yield receive approximately the same amount of aid per hectare when the aid for the seeds is combined with the aid for the fibres. For hemp seeds a similar system was introduced by Council Regulation (EEC) 3698/88 () . 3.38. Besides these two types of aid, flax and hemp receive aid under Council Regulation (EEC) No 2358/71 introducing a common market organization for certified seeds for sowing () . In Belgium and France 60 % and 20 % respectively of the area under flax is used for the production of certified seeds. 3.39. The aid for seeds for sowing is paid on application by the growers to the relevant paying agency, 'Office national interprofessionnel des cÃ©rÃ©ales` (ONIC) in France and Office Belge de l'Economie et de l'Agriculture (OBEA) in Belgium. Since these plants also produce fibre, aid is paid for this on application by the growers to the paying agency: OBEA in Belgium and Cipalin on behalf of SIDO in France. The Belgian paying agency automatically pays with the aid for fibre, the aid under the oil seeds scheme. In France, while there is no automatic payment, if a grower makes a claim for the oilseed aid it will be paid. 3.40. The aid for certified flax and hemp seeds is fixed on the same basis as other certified seeds, i.e. with the intention of ensuring on its own, a fair income for producers. Therefore, additional aid in order to achieve this objective should not be necessary. The amount of the additional aid paid on certified flax and hemp seeds in Belgium and France is estimated at 6,3 Mio ECU. Conclusion 3.41. The measures provided by the CMO for flax and hemp did not achieve the objective of stabilizing the market. While private storage prevented the surplus production of flax from reaching the market and undermining prices in the short term, a more active market management by the Commission was required in order to restore market balance (see paragraphs 3.26 to 3.32). Any additional stimulus to produce fibre flax and hemp should be avoided. The regulatory basis and the accumulation of aid for certified seeds with the production aid should therefore be reviewed. 3.42. The Commission should also review the control methods in the flax and hemp market in France. It is necessary to introduce there a system where controls are executed independently from the beneficiaries of the aid (see paragraphs 3.33 and 3.34). 3.43. The promotion programmes for flax costing 12,8 Mio ECU have to date been ineffective in significantly stimulating demand for this crop. The promotion scheme should therefore be reviewed and if no clear benefits at economic cost can be identified, it should be cancelled and the rate of aid cut by 10 % to reflect the deduction made for financing the measure (see paragraphs 3.35 and 3.36). Cotton 3.44. The audit of the support measures for cotton took place at Commission level, on the spot in Spain and Greece and included a documentary check of the implementation of the schemes in Italy. The mission to Greece was carried out as a joint audit with the Commission according to Article 85, third paragraph of the Financial Regulation. The Court appreciated the collaboration which its auditors got from the Commission's services and welcomes the Commission's decision to launch a fraud inquiry together with the Greek authorities, which aims to investigate the deviation between estimated and actual production for 1991-92. The Common Market Organization (CMO) 3.45. Cotton is a deficit product in the Community as its production covers only 20 to 30 % of the internal demand. The main producing Member States are Greece and Spain, but marginal quantities are produced in Italy. Raw cotton (unginned cotton) is harvested between the end of September and the beginning of January, and delivered to mills where the fibres are separated from the seeds by a mechanical process (ginning). The fibre (ginned cotton) is mainly used in the manufacture of textiles, and the seeds are used for extracting oil for human consumption. 3.46. The market support measures for cotton are based on Protocol No 4 of the Greek Act of Accession 1979 () . They include a production aid based on the quantity of unginned cotton payable to the ginning mills on condition that they have paid a minimum price to cotton producers () . The system was complemented by stabilizer mechanisms from July 1987 () . In addition there is an aid per hectare available for small cotton producers which was introduced from April 1990 () , in order to compensate small producers for the negative effects that the stabilizer system has on their incomes. 3.47. During the marketing year 1991/92, 719 449 tonnes of unginned cotton were produced in Greece and 279 575 tonnes in Spain. The Italian production has never exceeded 100 tonnes. During the same marketing year 83 527 producers were recorded in Greece and 12 081 in Spain; 77 % of the Greek producers and 52 % of the Spanish producers were considered to be small producers. Eighty-nine ginning mills operated in the Community. Production aid The application of the stabilizer system 3.48. Each year, based on the Commission's proposal, the Council fixes the guide price for a standard quality of unginned cotton. The minimum price to be paid by ginning mills to the producers is also fixed annually by the Council at about 5 % below the guide price. 3.49. The rate of the production aid is fixed by the Commission on a monthly basis at a level which should cover the difference between the lower world market price of unginned cotton and the guide price. The aid is granted to the ginning mills in order to enable them to pay the producers the minimum price and to produce cotton fibres from home grown cotton at a price comparable to the world market price of ginned cotton which enters the Community duty and levy free. Guide price, minimum price and aid rates are fixed for a maximum guaranteed quantity (MGQ), which is also set by the Council, taking into account the production of a certain reference period and the foreseeable demand. 3.50. The stabilizer mechanism, introduced in 1987, operated in two ways. Firstly an estimate was made of the production for the marketing year and if this exceeded the MGQ, the guide price, minimum price and rate of aid were reduced within certain limits. Secondly, once the actual production was known the calculation was repeated and any further necessary adjustment carried forward to the next marketing year. 3.51. However, this stabilizer mechanism did not achieve stability as the Council acknowledged in the preamble to its Regulation (EEC) No 1553/93 () introducing new stabilizer measures: 'whereas the current limit in the reduction of the norm price has not succeeded in preventing a substantial expansion of cotton growing in the Community...` 3.52. As can be seen in Graph 3.1, the guide price, the area sown and the budgetary expenditure show erratic movements for the period 1987 to 1992. However, production was not brought into line with the MGQ which was set at 752 000 tonnes for 1991/92. Although it decreased from its peak of 1 189 866 tonnes in 1988/89 to 999 024 tonnes in 1991/92 this latter level of production is still above that which existed before the introduction of stabilizers. 3.53. One of the reasons for the ineffectiveness of the original stabilizer system was the imprecision of estimates of production furnished by Member States. In order to estimate production the growers are obliged to lodge by 1 July an annual declaration of area sown with the competent paying agency. Member States shall verify the accuracy of these declarations on the basis of random inspections relating to not less than 5 % of the declarations and pass on this information to the Commission. Once the total area sown with cotton has been determined, the Commission, taking into account the yield forecast by the Member States, determines the estimated total production. 3.54. The procedures for checking about 100 000 producers' annual declarations of areas sown were unsatisfactory in Spain and in Greece. The absence of an up-to-date and complete land register prevents checks against holding references and thus renders the basis for production estimates unreliable. As Table No 3.3 shows, the deviation between estimated and actual production averaged 8,11 % during the period 1987 to 1992 with a maximum of 12,39 % in 1991-92. In addition, the impossibility of checking declarations against reliable land registers, in both countries, removes the possibility of detecting multiple declarations of the same land area which could be used to claim false deliveries of cotton. 3.55. In Greece, where the scheme is managed by the Hellenic Cotton Board (HCB) the whole control approach is inadequate and deviations between estimated and actual production were particularly high with an average of 10,55 % and a maximum of 14,94 % (93 537 tonnes) in 1991-92. Checks are merely documentary and areas are measured only in very exceptional cases. The Greek inspectors do not record the checks carried out nor prepare a summary of the results. Thus there is no evidence of any inspections and no possibility of supervising them. Furthermore, declarations of areas sown were found where dates and other relevant data had been altered without any justification being recorded. 3.56. In September 1992 () the Greek Ministries of National Economy, Finance and Agriculture introduced a new control procedure for yields of unginned cotton. The quantity for which aid may be granted is limited to the local average yield forecast by a special committee. But: (a)this procedure is not foreseen by the Community Regulations; it is in the nature of an average yield that many growers will be above this average; this will lead to a huge number of objections which will be very difficult to examine in a timely fashion as the decision requires a visit on the spot; in addition, estimated and actual yields could differ for justifiable reasons such as the weather; (b)it penalizes the producers twice by limiting the aid paid in the current year under the new rule and submitting them to further reductions in the following year when the deviation between the estimated production and the actual production will lead to a reduction of the minimum price. 3.57. Due to the failure of the stabilizer system new mechanisms have been introduced to be applied from the 1992/93 marketing year. The Council decided inter alia to limit the reduction of the aid for the 1992/93 marketing year to 15 % of the guide price. This has financial consequences for the Community budget. A further reduction in aid would have been due in 1992/93 under the previous stabilizer system to correct for an underestimate of production in 1991/92. However, due to the 15 % limit no subsequent adjustment was made for the 110 112 tonnes (12,39 %) underestimated. The additional expenditure involved is 67 Mio ECU in aid payments. The world market price 3.58. At least once a month the Commission fixes the rate of aid per 100 kg of unginned cotton, which should be the difference between the guide price and the world market price. Since there is no international trade in unginned cotton, a representative world market price does not exist. The Commission therefore calculates a notional price by combining the prices of the derived products (cotton fibre and seeds) and deducting the ginning costs. 3.59. Neither the regulations nor the Commission's internal instructions set out in detail how such a derived world market price should be determined. This discretion, in selecting the quotations of the international trade in ginned cotton, leaves the door open to setting unjustified margins. 3.60. The world market price of cotton seeds used in the calculation is itself calculated and takes into account the evolution of other competing oil seed prices. However, the information available is frequently out of date as it is no longer systematically collected for the oil seeds scheme. In addition, the costs of ginning are not based on the costs of each supplying third country, but only on the Spanish and Greek costs. Finally, the transport and unloading costs are not based on current and direct monitoring by the Commission but on only one item of information which was received from SENPA in 1990. Thus the rate of aid fixed by the Commission is based on a theoretical world market price, which itself is not firmly based. Taking unginned cotton under control 3.61. In order to receive the production aid and an advance payment, ginning mills have to lodge with the paying agency an application for supervised storage and a security equal to the amount of the advance when the unginned cotton enters the processing plants. The aid is granted on the adjusted weight of the unginned cotton which takes into account deviations from standard moisture content and impurities. Member States are obliged to establish control procedures which are focused on the reception and the physical analysis of the unginned cotton in order to ensure inter alia: (a)that the adjusted weight has been correctly calculated; (b)that the minimum price had been paid for the actual yield from ginning, fibre length and quality grade of the cotton. 3.62. In particular the system for establishing the correct quality related minimum price suffers from various weaknesses: (a)the fibre length can only be established in a reliable way by laboratory tests; as more than 275 000 lots of unginned cotton are delivered every marketing year, such tests cannot be carried out on all of them, thus leaving most of the lots to less reliable methods; (b)according to comparisons made by SENPA in its 1991 Annual Report for the cotton sector, 'standard` or 'neutral` ginning conditions cannot be reproduced in the laboratory; it is therefore not possible to correctly establish, in a laboratory, at the time of delivery the real industrial yield obtained by the ginning mill; (c)the quality grade of the raw cotton is very difficult to evaluate before ginning, as it depends on the ginning process; the commercial grades used worldwide (American standards) refer to ginned cotton and the standard quality grade in the Community Regulation is based on these standards for ginned cotton, although the aid is paid for unginned cotton; (d)Annex B of Commission Regulation (EEC) No 1201/89 refers to quality grades between 3 and 9, without indicating the quality differences between the grades; so the grading of the cotton is a theoretical and arbitrary exercise which assigns a grade to the unginned cotton based on the potential quality of the ginned cotton that could be obtained from it. 3.63. Article 12.5 of Regulation (EEC) No 1201/89 stipulates that the analysis of unginned cotton should be made in all Member States following a common method but that until this method is defined, the Member States may apply their own. The market organization was set up in 1981 yet the Commission has not defined a common method. As the national methods are significantly different, the cotton scheme is not uniformly applied in the Member States concerned and the quantity for which aid is granted and the minimum price are not established according to common criteria. 3.64. In Greece, the fibre length is determined by the HCB inspectors by looking at the unginned cotton. In Spain, where the scheme is controlled by the Servicio Nacional de Productos Agrarios (SENPA), it is provisionally fixed at 28 mm and 5 % of lots are sampled. At the end of the marketing year an adjustment is made for each ginning mill based on the average length found by analysis in the SENPA laboratory. 3.65. The Greek inspectors determine the yield essentially by using arbitrary criteria. In Spain, the yield is provisionally determined when it is taken under control by applying an empiric formula, and afterwards it is adjusted with the real yield obtained by each ginning mill. 3.66. In Greece the methods used for analysing unginned cotton do not comply with Regulation (EEC) No 1201/89 and do not ensure that the adjusted weight, on which the aid and the minimum price are based, are correctly calculated. Examples of the problems encountered are: (a)growers sell their cotton to intermediaries who deliver to the ginning mill but at the mill it is not possible to identify which cotton belongs to which grower; although sampling takes place these samples cannot be identified with the specific lots of individual growers, thus samples are not representative and the analysis process is meaningless; (b)the weighing scales used by HCB laboratories to determine the percentage of impurities had a precision of only 1 gramme, which is not enough to carry out this analysis properly; moreover, in the laboratories of Farsala and Levadia, the inspector determined the organic and inorganic impurities by sight only; (c)the moisture content is not determined when it is taken under control but some days later in the HCB provincial laboratory; since the moisture content can easily vary with temperature and external moisture this procedure does not ensure accuracy; in most of the laboratories the moisture content was not determined as an average of several moisture measurements of the samples, at Farsala only one measurement was taken and the cotton was measured while still inside the plastic bag; the correct measurement gave quite different results; (d)the weight of cotton taken under control - and for which the advance payment of the aid is granted - is not adjusted for moisture and impurities as is required by Article 9(6) of Regulation (EEC) No 1201/89. Eligibility of Greek cotton taken under control 3.67. In the 1991/92 marketing year the HCB took under control about 80 000 tonnes of cotton with high percentages of impurities (about 11 % of production). The following observations have been made: (a)the high content of organic impurities (up to 50 %), caused by the presence of many capsules and unripe seeds, indicates poor maturity; it is questionable whether such cotton complies with Regulation (EEC) No 2169/81, which requires that the cotton has to be mature; (b)it is also questionable whether this cotton was of sound, genuine and merchantable quality, as required by the Council regulations which fix the guide price every year; (c)the Greek authorities calculated the deduction of organic impurities using a mathematical formula which led to an overstated adjusted weight. Proof that all cotton has been ginned 3.68. In order to ensure that the total quantity of cotton which received Community aid has been ginned as required by Article 11 of Regulation (EEC) No 1201/89 stock checks are essential. However, the stock checks were unsatisfactory as Member States did not take into account the sub-products of cotton ginning: seeds, cake and waste material, which could have been used as an additional check on production. 3.69. In Greece supervision of stocks was particularly unsatisfactory. The provincial offices of the HCB do not carry out a full stock-taking at the ginning mills at the beginning of the marketing year, thus leaving the door open to irregularities and rendering any other stock checks worthless. Moreover, the inspectors do not control the real production and exit of seeds and, until the 1992/93 marketing year, the dispatch of bales of cotton fibre was not supervised. Finally, no overall stock check was performed when the ginning mill and the spinning mill were in the same premises. 3.70. It is technically and economically possible to transport raw cotton in lorries over distances of 500 km, as is done in Spain. Third producer countries are close enough to the Community (Greek) ginning mills to make imports commercially profitable. However, there was no check to detect third country unginned cotton entering the Community (e.g. by carrying out documentary and physical customs checks or by performing checks at the mills close to the border). Together with the weaknesses in the stock controls the lack of any control over the possible importation of unginned cotton constitutes a risk that aid has been paid on cotton grown outside the Community. Financing the Hellenic Cotton Board 3.71. In order to finance the expenditure of the Hellenic Cotton Board, Greek Law No 2040 of 23 April 1992 established two financial provisions: (a)according to Article 30(1) of this law, the ginning mills are obliged - before lodging the application for advance of aid - to pay to the HCB 1 % of the value of the cotton for which the advance is applied; thus more than 1 % of the aid is earmarked by the Greek Authorities to finance the activities of the HCB which is not foreseen by the Community regulations; (b)Article 30(2) of the same Greek Law sets a national duty of 1 % on the import of ginned cotton; this provision is against Article 5 of Protocol No 4 of the Greek Act of Accession, which prohibits any restrictive measure on the import of cotton from third countries, and contravenes both the Customs Union established by Title I, Chapter 1 of the Treaty Instituting the European Economic Community and Article 2(b) of Council Decision of 7 May 1985 on the Communities' system of own resources () . Scrutiny audit 3.72. In accordance with Council Regulation (EEC) No 4045/89 of 21 December 1989 () Member States are required to scrutinize the commercial documents of selected undertakings receiving or paying sums within the framework of the EAGGF-Guarantee Section. The enforcement of this measure was examined in Spain and Greece. 3.73. In Spain, a control carried out for the year 1990 revealed that cotton was delivered by a grower on behalf of another who had not submitted the annual declaration of area sown. According to Articles 8, 9 and 10 of Regulation (EEC) No 1201/89 this cotton did not qualify for aid; however, the National Authorities did not request the return of the amount of aid unduly paid (14 855 ECU). 3.74. In Greece, at the time of the audit the Directorate of the Ministry of Agriculture in charge of the scrutiny controls had only recruited 32 % of its full staff complement and had not issued written instructions to the inspectors. For 1989 payments there was no evidence that controls were carried out at all; for 1990, although the controls were compulsory for 40 ginning mills, only seven companies were actually inspected and for 1991 scrutiny should have been carried out at 31 mills whereas the Department had only planned scrutiny at 15 mills. Coverage was clearly inadequate. Aid for small cotton producers The administrative framework 3.75. According to Council Regulation (EEC) No 1152/90 aid for small cotton producers was initially applicable in the 1989/90, 1990/91 and 1991/92 marketing years. This period was extended to the 1995/96 marketing year by Council Regulation (EEC) No 2054/92 () . 3.76. The Community regulations define a small producer as a cotton grower who cultivates an area not exceeding 2,5 hectares, and who lodges the annual declaration of area sown. The Council Regulation fixed the rate of aid at 250 ECU/ha, and set a maximum guaranteed area of 73 093 ha. If this is exceeded the rate of aid is reduced proportionally. There is also a penalty if applications for aid are not eligible or incorrect. Member States are obliged to carry out random on-the-spot inspections and, when necessary, to impose the penalty. Effectiveness of the scheme 3.77. Since the scheme was introduced in 1989/90 the number of small producers increased from 53 218 to 72 356 and the area cultivated from 73 858 to 121 302 hectares. This is caused by large producers breaking up their holdings into smaller ones of less than 2,5 ha in order to qualify for the aid. This practice is confirmed by the increase in the number of growers who declared exactly 2,5 ha. At present neither Community nor national regulations deal with this problem. 3.78. As a consequence the maximum guaranteed area has been far exceeded and the stabilizer system has been applied. The aid per hectare has dropped 38 % from 247,38 ECU in 1989-90 to 153,04 in 1991-92 and the average aid received by the producers dropped 26 % from 343,30 ECU in 1989-90 to 252,55 ECU in 1991-92. 3.79. This calls into question the effectiveness of the scheme, as the aid is granted to producers for whom it was not conceived and the main objective of the scheme - to support the income of the small producers - has not been satisfactorily achieved. In addition, the splitting of holdings brings about further complications in checking declarations of area sown and yields. Implementation of the control system 3.80. The aid is paid provided that all the cotton has been harvested from the areas for which aid has been claimed. To verify this, Regulation (EEC) No 2048/90 () requires national authorities to carry out inspections on the spot, not later than six weeks after the aid applications are lodged. In order to organize random checks on-the-spot the aid applications have to be lodged after harvest but not later than 15 days after the entire crop is placed under supervision, otherwise the aid is reduced. 3.81. However, growers often deliver small quantities of unginned cotton at the very end of the marketing year. Therefore, a large number of aid applications are lodged in a short period causing serious organizational problems for the on-the-spot checks. Furthermore, the verification of the crop harvested is difficult because another crop is often planted on the same area immediately after the cotton harvest. As a result, the controls cannot be properly organized and growers who deliver a small quantity very late have a good chance of escaping the on-the-spot inspections. 3.82. In Alicante (Spain), SENPA did not select the applications for aid to be checked by random sampling and excluded from inspection all applications which entered before the second week in December or after the checks made in February. Furthermore, no account was taken of risk analysis in making selections. 3.83. In Greece, in the provinces of Larissa and Levadia, the aid applications for small cotton producers for 1991-92 did not even indicate the location of the plot. The weakness of the Greek control procedures is evidenced by the fact that although there is a huge number of small producers, since the scheme started, no application was found to be incorrect and no penalty has ever been imposed. Conclusion 3.84. The Common Market Organization, based on the support of the production of unginned cotton, has serious control problems, for example: (a)around 100 000 declarations of areas sown have to be checked every marketing year yet there are no complete and up-to-date land registers in the Member States concerned (see paragraph 3.54); (b)over 200 000 lots of cotton must be taken under control requiring a large number of inspectors (see paragraph 3.62); (c)the method of analysis is cumbersome and unsuitable for unginned cotton and the analytical checks required are impractical (see paragraphs 3.62 to 3.66); (d)detailed stock checks are required at each step of the production process (see paragraphs 3.68 to 3.70). 3.85. As a consequence its implementation in both Spain and Greece has proved to be both expensive and ineffective. Indeed in Greece the supervision system was totally unsatisfactory. Given this general weakness it is particularly regrettable that Greece has not fulfilled either its scrutiny duties under the Regulation (see paragraph 3.74). 3.86. The Greek authorities have however taken steps to check declarations by limiting aid to average yields, but this will prove to be both bureaucratic and difficult to apply, without significant positive results (see paragraph 3.56). 3.87. The method used by the Commission for establishing the world market price is unsatisfactory being based largely on hypothetical values. In particular, it involves the 'setting` of a world market price for unginned cotton, which is unlikely to reflect the real evolution of the world price, thus leading to incorrect levels of aid. Clear guidelines, more in tune with reality, should be laid down and adhered to (see paragraphs 3.58 to 3.60). 3.88. The original stabilizer system did not achieve its objective as laid down in Council Regulation (EEC) No 1964/87(22), i.e. to bring production down to the level of the MGQ. In addition, it led to sharp variations in the guide price and rates of aid from one year to the other. The new stabilizer system might indeed bring more stability but, in order to avoid sharp variations in the guide price and rates of aid, procedures must be improved for estimating production, with the aim of avoiding additional corrections to the rate of aid (see paragraph 3.51 and 3.57). 3.89. The Commission should re-examine the scheme and propose a different basis for the support of the market. The present aid for unginned cotton is unmanageable. Controls should be focused at the end of the ginning process on the ginned cotton produced with additional checks to safeguard payment of the minimum price. This would be easier to organize and less expensive than the present system. The problems of price fixing and control would be largely solved by such a system. The other possible alternative of a system based on a flat rate per hectare is inadvisable due to the serious weaknesses in the data available for control of the cultivated areas in Greece and in Spain. 3.90. The scheme granting aid to small cotton producers has not achieved its objectives. Some of the aid destined for genuine small producers has ended up in the hands of larger ones. The scheme is neither efficient, nor economical, nor controllable. The Court draws particular attention to the practice of producers splitting-up their holdings to irregularly obtain small producer aid (see paragraphs 3.75 to 3.83). Graph 3.1 - Evolution of the cotton market 1987-88=100 >START OF GRAPHIC> 145 135 125 115 105 95 85 75 1987/88 1988/89 1989/90 1990/91 1991/92 -- Area sown . . . . . Guide price adjusted . . Budgetary expenditure Source: Commission of the European Communities, DG VI/C/4, 'Situation du marchÃ© dans le secteur du coton`, VI/1715/92, Rev. 3 (PGRA/FR/1272), 8.12.1992. >END OF GRAPHIC> >REFERENCE TO A FILM> >TABLE> CHAPTER 4 (*) The sale of milk to children in schools >TABLE> (*) The Commission's replies are on page 282 INTRODUCTION 4.1. Council Regulation (EEC) No 1080/77 of 17 May 1977 () introduced Community aid for the sale of milk and dairy products at reduced prices to schoolchildren, with the intention of promoting the disposal of the products in question. These provisions were superseded by Council Regulation (EEC) No 1842/83 of 30 June 1983 () and Commission Regulation No 2167/83 of 28 July 1983 () . These constitute the basic texts of the legislation that is currently in force, supplemented by the Regulations that were published in 1990 and 1992 () . 4.2. According to the provisions in force at present, Community aid is equal to 125 % of the guide price for the milk, or 33,51 ECU per 100 kg of full-cream milk and 21,15 ECU for semi-skimmed milk. Normally it is granted at a rate of 0,25-litres of milk or milk equivalent per day and per pupil, in the form of milk, yoghurt and certain cheeses. Pupils and students attending an educational establishment, including kindergarten children but excluding university students, are entitled to receive this aid. Expenditure and finance 4.3. The appropriations for the measure in question were entered in Article B1-20161 of the 1992 budget, in the chapter devoted to Community EAGGF-Guarantee interventions in the milk and dairy products sector. 4.4. The first expenditure recorded, in 1978, amounted to 18,3 Mio ECU; it had already reached 68,6 Mio ECU by 1980 and rose to 232,7 Mio ECU in 1992 (cf. Table 4.1). Table 4.1 - School milk: expenditure per Member State and respective share in total expenditure >TABLE> >TABLE POSITION> <(BLK0)NOTES>Source: EAGGF financial reports, years 1980-92.</(BLK0)NOTES> 4.5. Article 9 of Commission Regulation No 2167/83 provided for school milk expenditure to be financed to the extent of 75 % of the cost from revenue from the co-responsibility levy set up by Council Regulation (EEC) No 1079/77 of 17 May 1977 () . The funds from this levy are intended to finance 10 specific measures aimed at enlarging the market for dairy products. The school milk measure alone swallows up a fifth of the revenue available (1 169,3 Mio ECU out of a total of 5 895,5 Mio ECU between 1977 and 1991). The objectives of the Court's enquiry 4.6. The aim of the Court's enquiry was to examine the effectiveness of Community expenditure by looking at the school milk programme's impact on schoolchildren and the effect of the measure's role as a means of promoting and encouraging the consumption of milk and dairy products. 4.7. It turned out that the Commission did not have any reliable information on or assessments of the measure's effectiveness, in particular with regard to the prices at which the products in question were being sold to beneficiaries and the number of schoolchildren actually benefiting from the aid. 4.8. With regard to the question of broadening the market for milk and dairy products, the information at the Commission's disposal only concerns the quantities of milk distributed: 289 610 tonnes in 1983/84, of which 81 % was full-cream milk, and 494 301 tonnes in 1990/91, of which 70 % was full-cream milk, or, in other words, 0,5 % of all milk collected in the Community (100 630 000 tonnes in 1990) () . 4.9. On-the-spot audits were therefore carried out in Denmark, Germany, Spain, France and Luxembourg on the premises of the administrative authorities responsible for managing the measure, dairies, suppliers of dairy products and schools, as well as among the schoolchildren themselves, in order to enable the Court to acquire concrete information on the practical implementation of the programme. The implementation of the measure in the Member States 4.10. In Germany, Spain and Luxembourg the suppliers are the main implementing agents of the measure. In France the subsidy is requested by educational establishments or the bodies that manage them, especially the local authorities. Denmark makes use of all the options. 4.11. In France almost 16 000 bodies take part in the school milk programme, which obliges the responsible departments to process about 46 000 payment applications a year. In Germany, Spain and Luxembourg the number of applications to be processed, which are submitted only by suppliers, is limited to the few dairies that distribute milk in the region concerned. 4.12. In all the Member States, children receive dairy products in more or less the same way. The distribution of milk in infant and primary schools, most usually in the form of 0,25-litre cartons, is organized class by class. In three of the Member States visited, namely Denmark, France and Luxembourg, milk is often distributed free thanks to a subsidy from the local authority. 4.13. Pupils attending secondary schools, from 12 to 19 years of age, no longer receive milk systematically in each class. They may buy the subsidized products in the school cafeteria, or from a vending machine. In many schools the subsidies are used by the canteens to purchase dairy products used in preparing meals. EVALUATION OF THE EFFECTIVENESS OF THE MEASURE 4.14. The effectiveness of the measure was assessed in the light of the objective assigned to it in Regulation (EEC) No 1079/77, which was intended to promote the expansion of the markets in dairy products. 4.15. Generally speaking, the school milk programme is seen mainly as a form of training, intended to enable children to acquire eating and drinking habits that will subsequently encourage the consumption of dairy products. 4.16. In addition to this objective, which was assigned to the programme in the Regulation, a supplementary social and health-orientated interpretation has grown up in the Member States, according to which the milk that is distributed to schoolchildren via the Community measure should contribute to improving their daily diet and help them fight off 'school fatigue` () . In fact, studies carried out in the Community have revealed dietary deficiencies in both adults and children that are linked to insufficient consumption of dairy products () . 4.17. The Commission's staff should have carried out periodic assessments of the measure, in order to measure the impact of the Community aid on the dairy products market. 4.18. This would have obliged the Member States and, consequently, the suppliers and other persons in the milk trade involved in the school milk regime, to quantify and assess what they were doing and guarantee concrete monitoring of the measure at pupil level. 4.19. As it happens, the enquiry highlighted the fact that there were no reliable indicators to enable the effectiveness of the measure to be demonstrated convincingly in terms of both the aspects discussed above. In the light of this finding, the following observations can be made. Data on the number of pupils actually benefiting from the measure 4.20. In its 17th communication to the Council, concerning the utilization of funds from the co-responsibility levy in the milk sector for the 1993/94 milk year () , the Commission gave the figure of 147 924 schools attended by some 36 398 000 schoolchildren, which represents some 10 % of the whole population of the Community. On this basis, the Commission concludes that 40,8 % of children up to the age of 19 were participating in the programme during 1990/91 (see Table 4.2). 4.21. These figures do not reflect the actual situation in the schools, because they generally refer to the number of schoolchildren potentially able to benefit from the measure on a school-by-school basis. In fact, though, if the 36 million pupils aged up to 19 taken as the reference population by the Commission had actually benefited from the school milk programme in the proportions laid down in the Regulation, the consumption of milk would have been four times greater, or about 1,9 million tonnes instead of the 500 000 tonnes () recorded. Moreover, it was observed in many schools that only a very small proportion of pupils actually drank their daily ration of milk. 4.22. Table 4.3 gives a more accurate estimate of this participation and of the actual number of beneficiaries. Out of the 35,5 million schoolchildren authorized to benefit from the aid, only 8,2 million, or 23,20 % of the pupils attending schools participating in the school milk programme, actually did so. This figure of 23,20 % was obtained by dividing the quantities of milk consumed by the schoolchildren in each Member State by an average number of schooldays and a ration of 0,25 litre per child and corresponds more closely to the situation that was observed on the spot during the Court's visits to schools in the Member States. If the quantities actually consumed are used, the participation of the whole population aged 19 and below is only 11,05 %, not the 40,8 % given by the Commission. Thus, for example, in France the percentage of pupils participating in the school milk programme is 11,14 % rather than 47,7 %; in Germany it is 13,22 % rather than 52,2 %, and in the United Kingdom it is 15,62 % rather than 53,3 %. School milk consumption patterns 4.23. The consumption of school milk differs greatly according to the type of school and the age group concerned. Teenagers (the 12-19 age range), who habitually consume the least milk, are also least affected by the Community measure, even though its objective indicates that they should be the school milk programme's most important target group. 4.24. The enquiries carried out on the spot in the Member States showed that, in schools for the 12-19 age group, the products in question were made available in a less systematic and organized fashion and, above all, at higher prices than at schools for younger pupils. Packaging and distribution costs do in fact increase the price of dairy products: these include expenditure for the purchase and upkeep of refrigerated vending equipment, for example, or the remuneration of the persons responsible for all the practical aspects of ordering and distributing the milk (the caretakers of middle and secondary schools or ancillary staff in, for example, Denmark, Germany and Luxembourg). Taken together, these factors limit the spread of the milk programme among teenage consumers. 4.25. Young children in nursery and primary schools, who generally consume milk, even outside school, either spontaneously or because their parents think it is good for them, participate in greater numbers in the school milk programme. Information on the prices of the products sold to schoolchildren 4.26. As early as its Annual Report concerning the financial year 1979 () , in the context of its evaluation of the effectiveness of the school milk programme, the Court made the following observation: 'The Commission needs to receive all the necessary information from the Member States at the end of each school year so that it can judge the effectiveness of the programme, the results and the cost of the operation. Only on these conditions will it be possible to take informed decisions on the programme`.>TABLE> 4.27. Article 10 of Regulation (EEC) No 2167/83 states that 'Member States shall take the necessary steps to ensure that the amount of the aid is reflected in the price paid by the beneficiary`. However, the Member States' supervision of this aspect of the question has turned out to be inadequate, especially where no regulated price ceiling system has been set up or no systematic checks have been made on the prices in question. 4.28. As a rule, the checks carried out by the Commission have not enabled it to take this aspect into account and its staff do not, therefore, have exact figures, by year and by Member State, on the prices of the products sold to schoolchildren and the impact of Community aid on price levels. 4.29. It is clear that the lower the price that the schoolchildren have to pay, the more the product becomes attractive to them, but from one Member State to another, and even within the same Member State, prices vary according to how the schools function and the way they are financed and, in particular, according to the prices set by suppliers. Thus, in Spain, for a litre of milk that is subsidized at a rate of 0,38 ECU, the prices paid by the pupils vary between 0,23 ECU and 0,39 ECU, according to whether the supplier charges 0,61 ECU or 0,77 ECU for the same litre of milk. 4.30. In the same way, in Denmark the price paid for a 0,25-litre carton of milk by the schools visited during the enquiry varied from 0,23 ECU to 0,28 ECU. In the case of 0,5-litre cartons there was an even larger difference, because prices varied from 0,35 ECU to 0,49 ECU according to the size of the distribution company. 4.31. The prices at which dairy products are sold to schoolchildren also vary according to whether the schools are primary or secondary, whether local subsidies are added to the Community aid programme and whether the dairy products are distributed by unpaid volunteers or not, in the classrooms, during break or in the cafeterias or canteens. Thus, in French schools, the price of a 0,25-litre carton of milk varies from 0,18 ECU to 0,24 ECU and is as high as to 0,45 ECU in automatic refrigerated milk-vending machines. In Luxembourg, the highest price paid by schoolchildren in the 1991/92 school year amounted to 0,20 ECU, whereas the same product was sold to consumers for 0,25 ECU in the shops. Chocolate-flavoured milk (0,25 litre) is sold in the shops for 0,40 ECU whereas the children can buy it for 0,27 ECU at school. 4.32. The prices of the dairy products themselves, as well as packaging and delivery and distribution costs, vary from one Member State to another. Furthermore, Community subsidies do not, at the same level, benefit all Community schoolchildren to the same extent. Practical problems with the implementation of the Regulations 4.33. The Commission was not able to assess the actual practical problems in the implementation of the school milk programme, or the effect of these problems on the price at which the milk is sold to schoolchildren. 4.34. The authorities responsible for education and school administration in the Member States are not involved in the implementation of the school milk programme and do not provide any financial, material or administrative support. 4.35. For this reason, in order for the milk to be distributed in schools, either the teachers or ancillary staff must be asked to volunteer to place orders, take deliveries, store and distribute the products and pay the invoices, or the person responsible must be paid for the extra work. Failing that, the measure cannot be applied, and this is one of the reasons why not all schools participate in the school milk programme. 4.36. The Commission was also not able to establish that there were practical difficulties in promoting certain of the dairy products that were eligible for aid. 4.37. In actual fact, products such as cheese cannot easily be distributed in schools, for storage and preservation reasons. This can only be done easily in the context of meals in canteens or purchases in school cafeterias during break. Consequently, in most Member States the range of dairy products offered is limited to the simplest form, that is to say, milk and a small amount of yoghurt, especially in the form of drinking yoghurt. Furthermore, it is very difficult to check the utilization of quantities of cheese and milk used in the preparation of meals and, as the amount of the subsidy is not quoted individually in the meal price paid by each child, it is also difficult to check the aid's actual effect on the prices paid by the schoolchildren. Similarly, it is not possible to check whether each child consumes, in his/her school meal, the equivalent of the authorized ration of 0,25 litre or 0,50 litre of milk in the form of cheese and yoghurt. Germany, for example, has preferred to take cheese off the school distribution programme solely because of supervision problems. 4.38. Awareness of dairy products in general therefore remains very limited: what is distributed and consumed is above all milk itself. However, this product, in its most simple liquid form, is the one that teenagers like least and they therefore, for the most part, consume no dairy products at school. For the 1990-1991 school year, 69,9 % of the range of products distributed was full-cream milk, 25,9 % was semi-skimmed milk and only 3,6 % was cheese. Measures in the context of the school milk programme to inform schoolchildren of the value of dairy products 4.39. The fact that the milk distribution programme has had little effect among teenagers can also be explained in terms of the weak 'brand image` of dairy products among young people and the lack of promotion campaigns. Schoolchildren do not systematically and concomitantly receive information on the importance and nutritional qualities of milk and dairy products. 4.40. More often than not, the milk programme is unfamiliar to all but the administrative bodies running it and the suppliers and schools directly benefiting from it - the former for the sales that it brings and the latter because of the budgetary relief that it may represent. The aspect of the programme that concerns the education of future consumers and increasing the consumption of dairy products is neglected. 4.41. Where regular milk promotion campaigns are carried out - which is moreover rarely done within the schools themselves - most of the time they are not associated with the school milk programme and they rarely take the form of accompanying measures. This robs the measure of most of its effectiveness. The practical and administrative complications of the programme 4.42. The school milk programme is a very complicated one to operate in the field, a fact which puts a lot of schools off participating in it. It requires special staff and involves administrative costs, which leads to an additional criticism from the point of view of the measure's effectiveness. 4.43. In fact, if the running and monitoring expenses that are paid for by the authorities of the Member States, the suppliers and the schools are also taken into consideration, the 'cost/effectiveness` ratio of the school milk programme vis-Ã -vis its results argues against maintaining it. This situation was observed in all the Member States. 4.44. This fact is due, in particular, to the number of checks required: checks on the quantities and types of products consumed; checks on the invoices; checks on the conversion of certain products such as cheeses into their milk equivalent; and the calculation of the subsidy in accordance with the various different products. All these operations take time and keep staff occupied, without, however, contributing to the effectiveness of the school milk programme itself. Moreover, the burden of these checks - mainly carried out on records but also on the spot - has not made it possible for the majority of the Member States to take a closer interest in other aspects such as the implementation and diffusion of the school milk programme on the ground (i.e. among the schoolchildren themselves), the programme's development, monitoring it over time, whether the programme's effects are increasing or stationary and the impact of the programme on the consumption of milk and dairy products. A consideration regarding the social aspects of the school milk programme 4.45. The social argument in favour of retaining the measure was put forward in those Member States (in particular, in Spain and France) where the programme had been presented as having the advantage of supplying economically poorly-off schoolchildren with a food ration that constituted a not insignificant contribution to the daily dietary balance of children from disadvantaged backgrounds. 4.46. However, the on-the-spot audits also showed that cut-price milk was not sold where it would have been most necessary for social reasons. This was either because the product was still too expensive for the poorest schoolchildren or because the schools in question were not served by suppliers because of transport costs and insufficient quantities. CONCLUSION 4.47. Given the results achieved, namely the limited numbers of schoolchildren actually benefiting, especially when compared with the number of participants in the programme indicated by the Commission (see paragraph 4.20), as well as the small quantities of milk consumed in the schools, it may be suggested that the school milk programme has not achieved its objective, and that the measure is likely to remain null and void in terms of effects unless the current arrangements for school milk are reformed and simplified. 4.48. As things stand at present, abolishing the measure would probably not have any noticeable economic impact in terms of the milk and dairy product markets, given that milk distributed under the programme represented only 0,5 % of total milk collected in the Community (cf. paragraph 4.8). 4.49. From information gathered in the Member States and, in particular, from people in the milk trade who are involved in the measure and from people responsible for schools, there is a definite attachment to the school milk programme on the part of all those involved in it, despite the fact that it is cumbersome to run and in spite of the practical difficulties involved in implementing and monitoring it. 4.50. However, if the programme is to be improved, the Court recommends: (a)simplifying the numerous monitoring procedures and strengthening the promotion and evaluation of the measure; (b)involving people in the milk trade more directly in the implementation of the programme and standardizing the management of aid by allowing for only one category of aid applicant (the suppliers), who would be made responsible for applying for aid; (c)eliminating the distribution of rations of more than 0,25 litre, which would also make controls easier because existing data on the quantities distributed show that actual milk consumption is below 0,25 litre per child; (d)selecting only the easiest types of dairy product to distribute and monitor as eligible products; (e)strengthening the provisions of Article 10 of Regulation (EEC) No 2167/83 and inviting the Member States to include, in their monitoring system, a maximum price mechanism like the one that has been introduced, with a certain degree of success, in Denmark, Luxembourg and Germany. This system, involving a maximum price to be paid by schoolchildren for subsidized products, should be organized by each Member State on the basis of domestic prices, the scholastic and administrative organization and the specific characteristics of each country. It should then be possible to ensure that the Community aid is properly passed on to the schoolchildren and to guarantee that the products are sold to children at prices that would give them the greatest possible access to the consumption of dairy products; (f)finally, accompanying the distribution of dairy products by specific information concerning the products themselves, in order to promote them and provide them with a 'brand image` which reflects the measure's objective and which will have a positive impact on the future consumption of dairy products.>TABLE> 33 CHAPTER 5 (*) Common policy on fisheries and the sea >TABLE> (*) The Commission's replies are on page 284 INTRODUCTORY REMARK 5.1. Table 5.1 shows, broken down by chapter, the appropriations available in 1992 and the use that was made of them. Observations concerning the legality and the regularity of the management of these appropriations are set out in Chapter 13 of this report, whilst this chapter deals, principally from the point of view of sound financial management, with expenditure relating to international fishing agreements. EXPENDITURE RELATING TO INTERNATIONAL FISHING AGREEMENTS Introduction General context of the Community fishing agreements 5.2. The 1982 United Nations Convention on the Law of the Sea sanctioned the establishment, for the benefit of inshore fishing States, of exclusive economic zones up to a maximum of 200 nautical miles. Although this convention yet has not officially come into force () , its provisions are widely accepted, with the result that 35 % of the world's ocean surface and more than 90 % of the world's fishing stocks are under the exclusive jurisdiction of riparian states. In this context, the Community has concluded a number of bilateral fishing agreements aimed at gaining access to the waters of non-member States, so that its fishing fleets will be able to pursue traditional fishing activities there. Access to non-Community waters is of great economic significance for Community fishermen: in fact, according to the Commission () , 25 % of catches made by Community vessels are made in these waters. 5.3. Most of the fishing agreements were drawn up in the form of framework agreements renewable by tacit consent. The financial and technical conditions governing fishing activities are contained in a protocol and an annex attached to the framework agreement: these conditions are reviewed from time to time. The procedure by which the agreements are concluded is based on Article 228 of the EEC Treaty, which empowers the Commission to negotiate the agreement and the Council to conclude it, after the European Parliament has been consulted. This procedure applies to the conclusion of any new agreement, as well as to the renewal of an agreement which has expired and to the revision of the annexes and protocols () . Financial and budgetary aspects of the fishing agreements 5.4. In accordance with a definition given by the Council, 'the so-called ''first generation`` fishery agreements are essentially trade agreements concluded with a third country to obtain fishing rights for Community vessels in the waters of that country, the Community paying in exchange financial compensation to that country.` () . The agreements generally provide for the payment of an all-inclusive sum of money, to be charged to the budget and to the Community shipowners. 5.5. As far as the Community budget is concerned, the sum charged to it usually covers a compensatory payment, a contribution to scientific programmes in the fisheries field and Community participation in the financing of study and training grants in the fisheries sector. The methods of payment are laid down in the financial protocols which form part of the agreements. The conditions for implementing the expenditure vary according to the type of payment. In the case of financial compensation, which is paid directly to the national Treasury of the non-member State concerned, payment is made in instalments: the due dates and the amounts of these instalments are stipulated in the protocols. The Community's financial contribution to a scientific programme is in principle paid to the Ministry for Fisheries, after the country concerned has submitted details of a valid scientific programme, where the agreement makes provision for this. Payments to fund study and training grants in the fisheries sector are in principle made directly to the training institutes.> TABLE POSITION> 5.6. The financial obligations on the Community shipowners include the payment of fees, the amount of which is determined according to the tonnage implemented, expressed in Gross Registered Tonnes (GRTs), or, in the case of tuna fishing, according to the quantities captured. Some agreements also make provision for the shipowners to defray the costs of carrying obligatory observers from the non-member State concerned. 5.7. In 1992, expenditure relating to international fishing agreements was met from budget heading B2-910 of the general budget of the European Communities. Total commitments for 1992 amounted to 213,6 Mio ECU and total payments to 208,2 Mio ECU. Table 5.2 shows the breakdown of these payments by recipient. 5.8. Table 5.3 shows that the appropriations for payments used for the fishing agreements during the period 1987-92 represent more than half of total payments used under the CFP during the same period. The subject of the Court's audit 5.9. In its annual reports on the financial years 1984, 1985, 1989 and 1990, the Court had commented on the regularity of the management of budgetary appropriations allocated to international fishing agreements. In 1992, the Court concentrated on attempting to establish what data available at the Commission justified the counterpart payments which had been negotiated. This examination was carried out in relation to six fishing agreements, selected on the basis of their financial importance, their economic interest and their geographical location. The agreements selected were those with Greenland, Madagascar, Morocco, Mauritania, Senegal and the Seychelles. All these agreements correspond to the Council definition quoted in paragraph 5.4 above. Main features of the fishing agreements examined 5.10. Table 5.4 shows, for each agreement examined, the period of application of both the last protocol to be concluded and the one before it, together with the compensatory payments and the fishing opportunities provided for. These items of information complete the list of references to the various agreements and protocols which appear in the comments set out in the following paragraphs.>TABLE> >TABLE> >TABLE POSITION> Comments on the economic aspects of the agreements and the implementation of them Senegal 5.11. The rate of utilization of the fishing rights (also referred to as 'fishing opportunities`) provided for by the protocol for the period 1990/92 varies according to the category of vessel concerned, but is, in most cases, well below the ceilings provided for. The average utilization rate of trawler fishing opportunities, expressed in GRTs, is about 45 % of the maximum limit available. As far as tuna boats are concerned, for which the fishing opportunities are expressed in terms of the number of vessels admitted into Senegalese waters, the Court noted maximum utilization of one category, the maximum number of boats admitted having been active throughout the duration of the agreement, but reduced and irregular utilization of the other two categories. 5.12. The low rate of utilization of the fishing opportunities offered with the 1990/92 protocol seems mainly due to an overestimation, when the protocol was being negotiated, of the number of requests for licences that could be expected. Bearing this situation in mind, the Commission, before negotiating the new protocol, asked the Member States for more precise estimates of the number and type of vessels that were interested in fishing in Senegalese waters. On the basis of these estimates, and bearing in mind the low rate of utilization that had been recorded for the protocol that was about to expire, the Commission proposed to the Senegalese authorities a reduction in fishing opportunities, together with a proportional reduction in the financial compensation. As this approach was rejected by the Senegalese authorities, the protocol was not renewed on expiration and the application of the fishing agreement was suspended as of 1 May 1992. Negotiations did, however, recommence on 29 September 1992 and resulted in the signing, on 1 October () , of a new protocol, provisionally applicable with effect from 2 October pending the procedures for its official entry into force being completed. The new protocol provides, on the one hand, for the total amount of trawler fishing opportunities to be maintained and for the total number of tuna boats allowed to fish in Senegalese waters to be reduced, and, on the other hand, for an increase in the financial compensation to be paid by the Community. From a strictly financial point of view, this protocol is not advantageous for the Community. In the explanatory memorandum to its draft Council Regulation on the official conclusion of the protocol () , the Commission does not indicate what reasons justify the outcome of the negotiations. 5.13. On the basis of the information available at the Commission, the total fees paid by the shipowners within the framework of the 1990/92 protocol may be estimated at 3,7 Mio ECU. The total 'price` paid for fishing rights in Senegalese waters for the period 1 May 1990-4 April 1992 is therefore 33,7 Mio ECU, 89 % of this cost being met from the Community budget. This disproportionate sharing of the financial burden arising from the fishing agreement may be explained by, among other things, the fact that the Community is paying for theoretical fishing opportunities which are excessive in relation to the activity of Community vessels, whilst the shipowners pay only for the rights they actually use. 5.14. If the cost of the fishing agreement with Senegal can be defined as being the total paid in compensation and fees, the benefit obtained from the agreement, on the other hand, is more difficult to estimate. Nonetheless, in view of the fact that the object of the agreement is the purchase of fishing rights, the value of the catches made can be considered to represent the gross profit from the enterprise. An exact calculation of this value would only be possible if the exact sale price of the catches made by each boat were known. These data are not, however, available. Nonetheless, on the basis of the catch declarations which the captains of the vessels have to make under the terms of the agreement, and on the basis of the average prices on the Community market, the Court estimates the value of the catches made within the framework of the 1990/92 protocol to have been around 50 Mio ECU for trawler fishing and 25 Mio ECU for tuna fishing. It is not possible to quantify the net profit made by the shipowners: this figure could only be determined on the basis of the exact running costs of the fleet operating within the framework of the protocol, and this information is not in the Court's possession. 5.15. The agreement in question can only be considered to be financially profitable for the Community on the assumption that the value of the catches is greater than the sum of the cost of the protocol and all the running costs borne by the owners of the vessels using the fishing licences. The information available does not offer any certainty that such an assumption is well founded. Mauritania 5.16. In exchange for a 39 % increase in the financial compensation paid and a doubling of the fees, the Commission, in the protocol for 1990-93, obtained a 6 % increase in fishing opportunities (expressed in GRTs) and the inclusion of a tuna boat category, which, combined with a reduction in the number of tuna boats in the existing category, brings the total number of tuna boats admitted into Mauritanian waters to 63, compared with 45 under the terms of the previous protocol. When considering this information, it must be borne in mind that the increase in fishing opportunities expressed in GRTs only relates to one category of vessel and was not used at all by the shipowners. The utilization of the fishing opportunities under the protocol as a whole varies according to the category of vessel, the average being about 50 % for the specialized fisheries and about 70 % for the tuna fisheries. In addition to the reasons already given in the case of Senegal, the reason for this under-utilization, according to documents in the possession of the Commission, could be the impoverishment of stocks of some demersal fish as a result of over-fishing. 5.17. The fees paid during the life of this protocol amounted to 10,48 Mio ECU in all. The total cost of the protocol was therefore 39,49 Mio ECU, 73 % of which was met from the Community budget. 5.18. Since, at the time of the Court's audit, the Commission had not yet processed the information contained in the catch declarations presented by the vessels operating within the framework of the protocol, it was not possible to estimate the value of the catches. Morocco 5.19. The level of utilization of fishing opportunities for the four years of the agreement that has just expired (1988-92) was on the whole good (an average of 86,96 %), with nonetheless a reduced level of utilization in the case of the following types of fishing: sponge fishing (no use); floating trawl (20,20 % on average); demersal trawl (65,05 %, due to a low rate of utilization during the final year of the agreement); seine fishing in the Northern zone (63,24 %, due to a reduced rate of utilization in the Mediterranean). Experimental prawn fishing, which was also under-used, was not included in 1992. In the new fishing agreement for 1992-96, sponge fishing was kept at the same level; opportunities for floating trawl and demersal trawl fishing, on the other hand, were substantially reduced. The opportunities for tuna fishing were used to the extent of about 97,50 %. Bearing in mind the criteria for the utilization of fishing opportunities, the increase in the number of tuna fishing vessels in the new agreement therefore appears justified. 5.20. The total amount paid by the shipowners in fees and other costs during the first agreement amounted to some 63 Mio ECU; this agreement will therefore have cost a total of 344,5 Mio ECU, 82 % of which will have been met from the Community budget. 5.21. The amount of the global financial compensation agreed in the new agreement was 45 % higher than the amount agreed in the previous agreement. This large increase cannot be justified by the resulting total level of fishing opportunities which, overall, have not increased in comparison with the previous agreement, nor by the direct profits gained from the agreement, i.e. the total value of the catches. The Commission carried out a partial analysis of these profits, limited to 1988/90, with a view to renogotiating the agreement. The results of its analysis did not provide any evidence to show that an increase in the amount of the financial compensation was economically justified. It is clear that the catch declarations were no longer used for the long-term monitoring of the economic advantages gained from the agreement. In view of the very considerable cost of the agreement to the Community budget, such monitoring would, however, be appropriate. Madagascar 5.22. In accordance with the provisions of the protocol for the period 21 May 1989 to 20 May 1992, the Community was allowed to grant 45 licences annually to sea-going freezer tuna boats. An average of 43 of these were actually granted, which represents a high rate of utilization of the fishing opportunities. The new protocol establishing fishing rights for the period 21 May 1992 to 20 May 1995 allows fishing by 42 freezer-tuna-purse-seiners and 8 surface longliners (new category). Of this total of 50 licences, 33 were granted in the first year of the new protocol. 5.23. The total financial compensation charged to the Community budget has fallen by a quarter in comparison with the previous protocol, i.e. 2 175 000 ECU as opposed to 2 900 000 ECU (this latter figure does not include 900 000 ECU provided for a prospecting campaign; the sum was never disbursed as the campaign was never carried out). This reduction in the financial compensation is due to a reduction in the expected volume of catches which, in the case of tuna boat agreements, is determined by the protocols. The reduction in question was made, according to the Commission () , on the basis of the average level of catches recorded in 1989/91. In the case of Madagascar, the compensatory amount was therefore fixed in the new protocol by taking into account the results of the application of the previous protocol. 5.24. The costs to be borne by the Community shipowners under the terms of the new protocol have been kept at 20 ECU per tonne of tuna fished, payable in the form of a non-recoverable lump-sum advance of 1 000 ECU per year and per tuna-purse-seiner, with the possibility of a supplement at the end of each fishing year. This lump-sum advance was fixed at 500 ECU per year in the case of surface longliners. If the catch volumes provided for in the previous protocol had been used fully, the cost of the protocol per tonne of tuna would have been shared out between the Community and the shipowners as follows: 80,6 ECU to be met from the Community budget and 20 ECU by the shipowners. Taking into account the actual catches declared for the 1989, 1990 and 1991 fishing years, however, it may be estimated that, for each tonne of tuna fished, the Community paid out about 178 ECU and the shipowners some 23 ECU. 5.25. On the basis of the catches declared for the 1989, 1990 and 1991 fishing years, the total value of the tuna fished during these three years may be estimated to be about 12 Mio ECU. The total amount paid by the Commission and the shipowners under the protocols applicable during those years was 3,1 Mio ECU. The Seychelles 5.26. In spite of the fact that the number of vessels operating under the agreement was gradually reduced during 1990-92 (40 vessels in 1990, 38 in 1991 and 34 in 1992), the new protocol, which has been provisionally in force with effect from 18 January 1993, maintains the same level of fishing opportunities, i.e. 40 vessels. 5.27. This protocol shows that the compensatory amount payable by the Commission corresponds to a catch weight of 46 000 tonnes per year. Should this quantity be exceeded, the compensatory amount is increased pro rata. Bearing in mind that the average annual catch for the years 1990-92 was about 34 000 tonnes and that any exceeding of the basic quantity meant a pro rata, unlimited increase in the compensatory amount, it is reasonable to wonder whether setting the compensatory amount according to the average catch for the three previous years would not have represented a more prudent use of Community funds. 5.28. As for each tuna-fishing agreement, the fees payable by the shipowners are fixed at 20 ECU per tonne of tuna caught. Dividing the total amount of annual compensation (3,3 Mio ECU) provided for in the previous protocol by the reference quantity of 46 000 tonnes gives a financial cost to the Community of 71,7 ECU per tonne of tuna fished. This sharing-out of the cost of the agreement may however be modified, to the disadvantage of the Community budget, if the number of vessels operating in the Seychelles' waters and the catches made fall short of the quantities provided for in the protocol. 5.29. In any case, the value of the catches made under this agreement, which may be estimated at a total of about 67 Mio ECU for the years 1990-92, would justify a more substantial contribution by the shipowners to the cost of the agreement. Greenland 5.30. A fishing agreement between the Community, on the one hand, and the Danish Government and the regional government of Greenland, on the other hand, has been in force since 1 February 1985, the date on which Greenland left the Community. 5.31. In terms of the quantities caught, the Court noted that the fishing opportunities available under the agreement had been under-used. For the years 1988-91, for example, the exploitation rate of the total of fishing quotas fixed was on average 20 %. Out of the eight species of fish concerned, only the fishing opportunities relating to cod and prawns were properly exploited. However, even the quotas available for these species were not fully used. The reason for that was allegedly the unfavourable biological situation of stocks in certain fishing zones. On the other hand, as far as redfish and black halibut are concerned, the utilization rate was only 7 % on average for these four years. The fishing opportunities for sea bass were scarcely used and the quotas for blue whiting and capelin were not used at all. 5.32. The fishing rights agreed in the 1990-94 protocol have been increased by 26 500 tonnes compared with the previous protocol (155 470 tonnes as opposed to 128 970 tonnes). The division of quotas is closer to shipowners' actual needs, but it may still be questioned whether it was necessary to include or retain fishing opportunities for fish stocks which have scarcely been used, or even not used at all. 5.33. The increase in the financial compensation is higher than the increase in the fishing opportunities. In fact, under the 1990-94 protocol, the financial compensation has increased by 30 % in relation to what had been paid under the terms of the 1985-89 protocol: more specifically, the new figure was 34 250 000 ECU per year, as opposed to 26 500 000 ECU per year under the first protocol, whilst the fishing rights were only increased by 17 %. As a result of an additional cod quota agreed in 1989 (+ 4 000 tonnes), the Community paid an extra 981 880 ECU, so that, as a result, the fishing agreement with Greenland cost a total of 27 481 880 ECU in 1989. A similar addition took place in 1990 for a cod quota of 7 000 tonnes, compared with an additional payment of 2 237 060 ECU and in 1991 for 3 000 extra tonnes of cod compared with a Community payment of 958 740 ECU, resulting in a total of 36 737 060 ECU being disbursed in 1990 and 35 208 740 ECU in 1991. In contrast to what was provided for regarding the granting of additional quotas, the fishing agreement stipulates that any reduction in the fishing agreement decided on by the Greenland authorities because of unfavourable biological circumstances shall not have any effect on the amount of financial compensation. In practice, Greenland compensated for such reductions by offering extra fishing opportunities for quotas which, in fact, were not being used, or were hardly being used, by Community shipowners. 5.34. In some cases, therefore, the Community pays for fishing opportunities which do not correspond to the stocks that actually exist and in other cases for quotas which are hardly used by Community shipowners. 5.35. As the costs of the fishing agreement with Greenland are met solely from the Community budget, the Community shipowners get nothing but pure profit, i.e. the value of the catches, from it. The high costs of this agreement nonetheless raise the question as to whether it might not be appropriate for the Community shipowners whose ships fish in the waters covered by the agreement to make a contribution. 5.36. On the basis of the data available when the audit was carried out, the Court estimates that the value of the catches made during 1988-91 could be about 37 Mio ECU for 1988, 45 Mio ECU for 1989, 67 Mio ECU for 1990 and 34 Mio ECU for 1991. 5.37. As the above figures show, the margin between the financial compensation, which in principle is fixed, and the value of the catches varies from year to year and it would be difficult to conclude that the profit earned from this agreement is always higher than its total costs. Comments on the administration of the agreements examined Financial compensation 5.38. In contrast to the other fishing agreements examined, in the case of Senegal there was a provision, in Article 9 of the agreement, which stated that 'the financial compensation will be used to finance projects and services relating to the rural domain and in particular to maritime fishing`. However, the implication of the protocols is that the financial compensation is paid into the account of the Treasurer General of Senegal, without being earmarked for any particular purpose. The Community is not informed of the use that is made by Senegal of the funds it receives by way of financial compensation. Following the Court's comments in its annual reports on the financial years 1984 and 1985, regarding the absence of any monitoring of the application of the clause concerning the use of funds paid as compensation, a clause which also appears in fishing agreements with other non-Member States, the Commission replied that the very nature of these agreements, involving payment for a service rendered by sovereign States, excluded any right to monitor the use that was subsequently made of monies disbursed by the Community. 5.39. Such an attitude in the administration of the fishing agreements confirms the fact that, for the Community, the justification of the so-called 'first generation' agreements can only be the economic advantage which it derives from them. Where an imbalance occurs, it will have to be taken into account when negotiating the new, so-called 'second generation' agreements (cf. footnote (4)) that any new contribution in terms of aid cannot simply be added on to the strictly commercial aspect of the previous agreement as this too will be up for rediscussion. Scientific programmes 5.40. In accordance with the agreements, funds paid out in support of scientific programmes are either destined for research centres which are already active and well known (Senegal) or are paid out as a financial contribution to specific programmes carried on by the States concerned. It was found that the information available on the use of these funds was very limited, except in the case of Senegal, which regularly informs the Commission about the activities of its oceanography research centre. The summary report on the use of funds provided for in the first protocol drawn up with Mauritania has not been submitted. None of the protocols concluded with Morocco and Madagascar make provision for any obligation to provide information, and in the case of the Seychelles the obligation to submit a summary report is only provided for with effect from 1993. The second protocol with Mauritania states that the Community's financial contribution is to be paid in support of scientific programmes which have been submitted to it and approved by it. The agreements with Morocco, Madagascar and the Seychelles do not contain any clause of this kind; nonetheless, as the Community payment concerns the financing of scientific programmes, it can only be correctly disbursed provided such programmes actually do exist. In the case of Madagascar the Commission did receive a draft programme, but the other two countries produced nothing. Study and vocational training grants 5.41. Sums disbursed in respect of study and training grants are intended to cover the tuition fees and living expenses of nationals of the non-Member State that is a party to the agreement who are studying specialized aspects of the maritime fisheries sector at institutes in the Community or in non-member States. 5.42. It was found that there was no follow-up by the Commission to ensure that the recipients of these grants were the people most likely to benefit from the training offered, that the academic results achieved were satisfactory and that these people contributed properly, subsequently, to the advancement of the maritime fishing sector in their country. Even allowing for the fact that precise and analytical information on the results of this expenditure is not available, the documents available in the Commission files give the impression that the failure rate of participants in technical training courses for the fisheries industry is often higher than the success rate. Observations relating specifically to the agreements with Morocco 5.43. Article 3 of the first agreement with Morocco provides for the possibility of Community financial support up to a maximum of 20 Mio ECU for specific measures in the fisheries sector (in particular, studies, the setting-up and development of joint enterprises and programmes aimed at increasing fish stocks). Although the Community fulfilled its obligations by paying over the amount stipulated, no report on the implementation of the measures has been forwarded by Morocco. Article 3 of the agreement does, however, contain such an obligation. 5.44. The Community financing of specific measures is also provided for in the new agreement, but there is no longer any mention of Morocco's obligation to submit a report. The Community has thus lost an opportunity to obtain information on the results of the use of the funds in question. 5.45. Under the terms of Article 5 of the agreement that is in force at present, the specific measures receiving financial support from the Community have to be approved by a mixed committee which is responsible for ensuring that the agreement is properly implemented. In September 1992 the Commission paid Morocco 7,6 Mio ECU, in spite of the fact that this mixed committee had not yet met. The payment in question was made without respecting the conditions set down in the agreement. 5.46. Community financial support for research programmes relating to fish stocks and for training in the field of maritime fishing is not subject to any condition requiring information to be provided on the use that has been made of the funds. The agreements do, however, provide for the Community funds to be paid to the Moroccan ministry for maritime fishing and the merchant navy, and this was done in the case of the first agreement. In contrast, under the second agreement, the Commission, at the request of the Moroccan authorities, paid these funds in 1992 (three payments totalling 5,5 Mio ECU) into an account with a French bank via a Moroccan bank which, on the Commission payment orders, is shown as recipient of the payments. This procedure makes it impossible to identify the final recipient of the amounts disbursed, which does not conform to the provisions of the agreement. Conclusion 5.47. The Court's examination of the six fishing agreements above leads to the conclusion that, with the exception of the agreements with Madagascar and the Seychelles, the Commission has negotiated, and the Council concluded, protocols entailing a systematic increase in the cost to be borne by the Community budget, and this increase is justified neither by the fishing rights obtained nor by the rate of utilization of those rights by Community vessels. Moreover, the Commission has not always produced precise and systematic comparative assessments of the value of the catches and the cost to the budget of the agreements. The global cost of these agreements is not shared between the Community and the shipowners in satisfactory proportions. 5.48. Part of the money paid by the Community is expressly intended to improve knowledge of fish stocks and to train specialized fisheries personnel. However, information on the use of this money is not available for all the countries concerned and there is no information whatsoever regarding the results of Community financial support for training specialized personnel. 5.49. The Court makes the following recommendations: (a)always to evaluate, when renewing fishing agreements or protocols, the actual use made of the fishing opportunities provided for in the agreements or protocols that are about to expire, reducing, where appropriate, the amount of financial compensation paid by the Community; (b)systematically to gather and process (with a view to establishing the value of the catches) information from the catch declarations presented by the captains of vessels operating under the agreements, with a view to arriving at a figure for the commercial profit deriving from the agreements; (c)to research a system to cover the costs of the agreements that would more directly involve the shipowners, for example in the form of a partial reimbursement of costs, in such a way as to lessen the burden on the Community budget and to link the cost of the agreements with the fishing activity actually carried on; (d)not to negotiate, when renewing protocols or fishing agreements, the payment of amounts intended for specific purposes without making certain of sources of information on the efficient use of the funds paid; (e)to carry out, where appropriate with the help of Commission Delegations in the countries concerned, an assessment of the contribution made to the development of the fisheries sector by the recipients of study or vocational training grants. CHAPTER 6 (*) Regional sector >TABLE> (*) The Commission's replies are on page 288 INTRODUCTION 6.1. This chapter summarizes in its first part the financial and budgetary data of the reform of the Structural Funds (SFs) in 1992. The second part of the chapter deals with the management of the operational programmes (OPs) financed within the framework of Objective No 1, which aims to promote the development and structural adjustment of regions whose development is lagging behind. The third part concerns the specific Community projects, also called non-quota programmes (NQ), which are required to make a contribution to solving regional problems relating to the implementation of Community policies. BUDGETARY AND FINANCIAL ASPECTS Management of the Structural Funds in 1992 6.2. Table 6.1 retraces the use that was made of the SFs' commitment and payment appropriations during 1992, whereas Table 6.2 shows, for the period 1989-92, the implementation of the Community Support Frameworks (CSFs) for Objective No 1. Table 6.3 gives an overview of outstanding commitments. On 31 December 1992, the commitments in question amounted to 12 758 Mio ECU, or 25 % of commitments entered into by the SFs during 1989-92. A complete evaluation of the outstanding commitments ought also to take account of those aid tranches that are still to be entered in the accounts, so as to cover the totality of the financing decided on by the Commission. The concentration of the Structural Funds 6.3. Article 12(2) of Council Regulation (EEC) No 2052/88 of 24 June 1988 () stipulates that the commitment appropriations for the SFs are to be doubled in real terms in 1993 by comparison with 1987. Table 6.3 () compares the actual and planned growth of the commitment appropriations for the SFs and shows that the aim of doubling the commitment appropriations for the SFs in real terms was achieved in 1993. 6.4. Specifically, for the regions covered by Objective No 1, Article 12(3) of Regulation (EEC) No 2052/88 stipulates that the SFs' commitment appropriations are to double in real terms with effect from 1992, using 1987 as the starting base. Paragraph 5 of this same Article stipulates that the European Regional Development Fund (ERDF) may devote roughly 80 % of its appropriations to Objective No 1. Table 6.3 gives the statistics available in this connection. However, the Commission's revenue and expenditure account does not give any breakdown of appropriations by objective as far as the Community initiatives are concerned. 6.5. The Commission's revenue and expenditure account does not contain any summary tables allowing the reader to check observance of the financial objectives established by Article 12 of Regulation (EEC) No 2052/88. The reports drawn up pursuant to Article 16 of Regulation (EEC) No 2052/88 only give partial information on this subject. In addition, these reports indicate that some progress has been made in concentrating the aid, but they do not make it possible to cross-check these statements with the budgetary and financial documentation. THE OPERATIONAL PROGRAMMES FOR OBJECTIVE No 1 6.6. At the end of 1992, the Commission decided on an ERDF contribution amounting to some 21 000 Mio ECU for approximately 230 OPs, distributed among seven Member States (Spain, France, Greece, Italy, Ireland, Portugal and the United Kingdom) () . 6.7. The Court selected a sample of 40 programmes and subjected them to a detailed examination as to their implementation as at 31 December 1992. This examination looked at the quality of the programming, progress achieved and the monitoring procedures. This sample represents approximately a third of the ERDF assistance envisaged in the CSFs for Objective No 1, and all the programmes selected were approved by the Commission during a period ranging from December 1989 to December 1990 () .>TABLE> >TABLE> Table 6.3 - Forecast and actual changes in commitment appropriations for the Structural Funds >TABLE> >TABLE> >TABLE> <(BLK0)NOTES>Sources: Budget, revenue and expenditure account and reports on the implementation of the Structural Funds.</(BLK0)NOTES> The quality of the programming Amending the programmes 6.8. Article 25(5) of Council Regulation (EEC) No 4253/88 of 19 December 1988 () provides that the Commission, in cooperation with the Member State, and after the Monitoring Committee (MC) has delivered its opinion, shall make any necessary adjustments to the volume of aid or conditions for granting it, as initially approved, and to the schedule of payments envisaged. Without affecting total Community aid to the OP, the Monitoring Committees are able to decide, by subprogramme or by annual tranche, any amendments that need to be made, up to a maximum of 20 % of the amount for the programme, or beyond that limit, provided the amendment is still less than 15 Mio ECU for the Objective No 1 programmes. 6.9. An examination of the sample shows that only 12 programmes out of the 40 had not been amended at 31 December 1992. As for the remaining 28 OPs, the number of amendments may be as high as five, as in the case of the operational programme on road development (Prodac-P), which was decided on 21 December 1989. Two of them (the Campania OP and the research I OP) may be considered to have been completely restructured financially; 14 underwent significant amendments and 12 minor amendments. Although more than half of the programmes in the sample were decided on during the second half of 1990, a substantial proportion of them (70 %) were subsequently amended. 6.10. The frequency and the scale of the amendments to the OPs are factors that do not argue in favour of the quality of the programming. The adjustments made, whilst making financial management more flexible, may also result in the initial objectives being lost sight of. In addition, they increase the difficulties of physical and financial monitoring. The Commission's documentation ought to show the effects of successive amendments on the initial programming. 6.11. The financial information available at the Commission for certain amendments is not very precise and is incomplete, especially as regards the definition and identification of the eligible expenditure. This situation often results in the eligible expenditure that is used as a basis for the commitments and payments being incorrectly calculated. The Financial Controller at the Commission was sometimes notified of the amended financing plans at a late stage (Ile de la RÃ©union-F and the programme to develop education in Portugal (Prodep-P)), and the Court only receives those in respect of which a Commission Decision has been taken. 6.12. In some cases, the Commission has accepted financing plans amended by the Monitoring Committees which went beyond the authorized threshold. For example, three of the five tranches of the transport OP (Northern Ireland-UK) were amended by more than 15 Mio ECU at 1989 prices. These amendments were in excess of 20 % of the total cost of the tranches concerned. A similar situation was observed for the telecommunications (I) OP. 6.13. Table 6.4 shows the extent of some amendments in terms of the reduction in the volume of the OPs and the eligible expenditure. The reduction in the latter is not always accompanied by a corresponding reduction in Community aid, which has the effect of increasing the rate of aid to the programmes thus reduced. For all those OPs for Greece, Ireland and Portugal which were examined, the average ERDF intervention rate in eligible expenditure increased, respectively, from 55 % to 58 %, from 60 % to 61 % and 53 % to 55 %. With regard to the OPs, this proportion increased from 56 % to 67 % in the case of the Central Macedonia (GR) OP and from 56 % to 69 % in the case of the Specific programme for the development of the autonomous region of the Azores (P). 6.14. But the principal effect of the amendments on the implementation of the aid results from the rescheduling of the annual tranches. The amendments to the OPs affect not only their volume and the structure of their financing but also the manner in which they are carried out. Most of the amendments made aim to reduce the amounts of expenditure planned for the initial tranches and to carry them over to later tranches. Postponing them in this way to the last years of implementation shows that the initial timetables were not established strictly enough and also involves the risk that a significant proportion of the measures will not be capable of being carried out entirely, or will only be carried out with some delay. Table 6.5 brings out the general nature of these reductions, which were, for France, 36 %, for Greece, 33 %, for Portugal, 46 % and for Northern Ireland (UK) 47 %. 6.15. The reduction of the initial tranches did not automatically result in the Commission's cutting back on commitments and corresponding payments. Any commitments and payments of advances which had already been carried out on the basis of the initial forecasts, and which were often higher than the figures resulting from the amended financing plans, were only corrected subsequently, by off-setting them against subsequent tranches. Table 6.6 shows, for a selection of OPs, the size of the amounts thus committed and paid out in excess as a result of changes to the financing plan. 6.16. This kind of procedure, which is not in accordance with the principle that forbids the offsetting of expenditure and revenue, has the effect of preventing the difficulties in the implementation of the OPs from being highlighted in the accounts. It also has the effect of artificially increasing the rate of utilization of the appropriations. By way of example, for the OPs shown in Table 6.6 the initial commitment forecasts amounted to 333,2 Mio ECU, of which 331,9 were carried out, equal to a rate of utilization of almost 100 %. The decommitments which ought to be carried out amount to 178 Mio ECU, which would bring the figure for commitments back down to 153,9 Mio ECU, or, in other words, an actual rate of utilization of 46 %. There is no doubt that off-setting commitments and payments that have proved to be in excess of needs is useful for flexibility of management. All the same, the various stages in these operations should be clearly reflected in the revenue and expenditure account so as to ensure transparency. 6.17. These amendments may also result in an increase in commitments and payments which is not justified in the light of the rate of realization. In the case of the Sicily (I) OP, an amendment made it possible to commit an amount corresponding to the total of the first two initial tranches of aid. In the case of the Prodep (P) OP, the transfer by the Commission, in 1990, of 53 Mio ECU of ERDF aid from the 1991 tranche to the 1990 tranche increased the commitments and payments, whereas the rate of execution of the operations did not justify this, and the national authorities had not been able to keep their side of the bargain. Table 6.4 - Amendments to the operational programmes: effects on the total cost and on eligible expenditure >TABLE> >TABLE> <(BLK0)NOTES>Source: The Commission's files. </(BLK0)NOTES> 6.18. Cases of reprogramming have sometimes had the result that the progress achieved with operations was almost entirely based on Community financing. Situations of this kind may be seen above all in the case of Portugal and, to a lesser extent, in Greece, Ireland and Northern Ireland (UK). In the case of the Macedonia-Thrace (GR) OP, ERDF payments under the first two tranches amount to 46,9 Mio ECU, well in excess of the eligible expenditure initially allocated for the same period, which was 24,7 Mio ECU. The same situation was observed in various OPs in Ireland, Portugal and Northern Ireland (UK). Content of the programmes 6.19. Other weaknesses in the content of the programmes examined concern the identification of eligible expenditure, the coordination of the measures and the preparation of certain operations. 6.20. The eligible expenditure is specified in the programmes and may consist of public sector or equivalent expenditure, and, in some situations, private expenditure. Diversity of this kind calls for clear identification criteria, particularly in the event that the amended measures in a given programme are governed by different eligibility criteria and intervention rates. In the case of the Calabria (I) OP, according to the Commission's decision the eligible amount is the total cost, an interpretation which the Commission used for the purpose of calculating the ERDF payments. However, an examination of the OP shows that, in the case of various subprogrammes, only public expenditure should be taken into consideration. That being so, the eligible expenditure was over-estimated by the Commission by more than 60 Mio ECU. A comparable situation may be seen in the case of the Attica (GR) OP, and in the case of the Ile de la RÃ©union (F) OP. 6.21. The inclusion in one OP (Ile de la RÃ©union (F) OP) of the conclusion of a measure financed previously by the SFs caused problems. The fact is that the decision concerning the OP indicated a prior date for the closure of the measure, taking account of any commitments in this respect entered into between this latter date and the date of the OP decision. This solution was not the most transparent one, either for the management of the OP or for the closure of the previous measure. It may also be observed that the Castilla-La-Mancha (E) OP includes a road-building project in the region of Madrid, which is not eligible for Objective 1, and that in the industrial development (Northern Ireland-UK) OP, a number of enterprises received payments of aid repeatedly. 6.22. The coordination of the instruments, an essential principle of the reform, is weak. The Sicily (I) OP, which was submitted in September 1990 and decided on in December of the same year and was considered to be a multi-fund operation, is made up of a programme belonging to the European Social Fund (ESF) that was decided on 20 November 1990, to which ERDF and EAGGF-Guidance Section aspects were added. The hasty nature of the operation has meant that it is not always possible to identify which expenditure relates to which of these Funds. In addition, the timetables laid down in the decision differ considerably from those set out in the annexed programme, which is an integral part of that decision. 6.23. In the case of the same OP, the Commission insisted on the creation of a research priority to be financed by the ERDF and the ESF. During the implementation of this priority, divergences which had appeared in the approach adopted by the two Funds aggravated the already existing development difficulties, and, at the end of 1992, no work had yet started on the priority. An amendment of the Corsica OP (F) was in part due to failure to take account, in the initial forecast, of agricultural expenditure, the compulsory nature of which had however been pointed out by the responsible Commission authority. In the case of the Castilla-La-Mancha (E) OP, companies involved in the processing of agricultural produce were receiving ERDF aid in the absence of any coordination with the criteria laid down by the EAGGF-Guidance. For this same OP, the Commission did not use the same conversion rate for converting pesetas into ECUs for the interventions carried out under the various Funds. 6.24. The situation is no better in the Member States. The implementation of the Salamanca and Zamora (E) OP, which is an 'integrated` programme, is characterized by an absence of integration of the resources, the only existing coordination being of an administrative nature. A similar situation exists in the case of the Industrial development (IRL) OP. In the case of the Sicily (I) OP, the regional department responsible for the management of the OP has the greatest difficulty in obtaining information on multiregional measures carried out on its territory but managed by other authorities. 6.25. Had the programming been better, certain modifications could have been avoided. In the Peloponnese (GR) OP, a harbour project was amended to take account of environmental aspects which should have been taken into consideration from the start, and a project to build a road was abandoned for the same reason. Such projects should not have been accepted for aid under this OP. The Tagus Valley (P) OP is for the improvement of already existing industrial areas, some of which are not officially industrial areas, and there were no checks, when the aid was granted, to ensure that Community and national standards were being observed. 6.26. The Tagus Valley (P) OP provides for the financing of a bridge on the river ZÃazere. This project, the actual cost of which is already in excess of forecasts, still requires, in order to become operational, considerable additional work, the financing of which is not covered by the programme. Its effectiveness is therefore likely to be extremely limited. In the same OP, one project provides for the extension of a water distribution network for six municipalities amounting to a total cost of 2 500 Mio ESC (about 14,2 Mio ECU). At present, the cost of carrying out the project is evaluated at 5 200 Mio ESC (about 29,5 Mio ECU), of which 2 400 Mio (about 13,6 Mio ECU) has already been allocated to only two of the municipalities. 6.27. The weaknesses in the programming sometimes result in the carrying out of projects which make only a limited contribution to the objectives of the OP. One of the measures of the Prodep (P) OP provided for the enlargement of the capacity of educational establishments throughout the national territory by the creation of 8 500 classrooms with the aim of providing classroom space for an additional 300 000 pupils. Of the 28 projects coming under this measure in the Lisbon area, nine are in fact for gymnasia. In the Agricultural Structures (GR) OP, the ERDF financed the construction of reservoirs, some of which may well remain unused for lack of distribution networks. The Industrial Development (Northern Ireland-UK) OP financed the creation of a postal centre which employs approximately 300 persons, but a number of these jobs are the result of relocation. 6.28. An ex ante evaluation should have been carried out, with a view to checking the consistency of the resources implemented with the results expected, and thus avoiding the need to make changes. In many cases, there are no quantified objectives. It is not a rare occurrence for the OPs themselves (Industrial development OP - Northern Ireland (UK)), or the evaluation reports (Tourism OP -(I)) to contain an admission of impotence as regards evaluation because of the absence of objectives and the heterogeneous nature of the measures. Progress made in the execution of the programmes 6.29. Commitments are made in annual tranches. Since 1991 a new tranche is committed when the two previous ones have been completed, respectively, to the extent of 40 % and 80 %, a procedure which thus makes it possible to manage three tranches of the commitments simultaneously. Moreover, as the programmes are drawn up at constant prices, the financial forecasts are indexed using a mechanism known as the 'deflator`. 6.30. Payments are made mainly using a system of advances, the first of which, equal to 50 % of the first tranche, is automatic. Regarding the second tranche, a similar advance is paid when the previous tranche has been 60 % carried out. For each subsequent tranche, the 50 % advance is paid if the two previous tranches have been 60 % and 100 % carried out. When the authority which is managing the programme certifies that half of the first advance of a tranche has been used up and that the measure is progressing satisfactorily, a second advance is paid out, and this may be as much as 30 % of the tranche. 6.31. Table 6.7 gives details, on the basis of the Member State certificates that were available on 31 December 1992, regarding the financial implementation of the OPs in the sample. At that point, one year from the final date for committing the programmes, the rate of execution of the eligible expenditure exceeded 50 % in the case of two Member States only, Ireland and Portugal, for which it was equal, respectively, to 54 % and 55 % of the initial forecast. The rate of execution of eligible expenditure is also shown in a favourable light by the reprogramming of the Greek OPs: compared with the initial forecasts, it is only equal to 39 %. In addition, it should be stressed that the rate of execution of OPs in France and Italy was low. 6.32. The rate of payment of Community aid is high, since it ranges from 64 % for Italy to 92 % for Ireland, which may be explained both by the system of advances and by the amendments to the OPs, which tended to concentrate expenditure to be carried out on the last years, without correcting the commitments and payments which had already been entered in the accounts on the basis of the initial forecasts. That being so, the ERDF payments cover a considerable proportion of the eligible expenditure declared by the Member States. In the case of Northern Ireland (UK) the rate of cover is greater than 90 %; in the case of the 40 OPs examined, it exceeds 80 % in 14 cases, of which six are in excess of 100 %. In the case of the Peloponnese (GR) OP, where the rate is equal to 101 %, the local managing authorities nevertheless complain about delays in the transmission of Community funds. A similar situation exists in Corsica (F), where the rate of cover is 93 %. Commitments 6.33. The OPs examined should have given rise to approximately 130 commitments of tranches, of which 120 were actually carried out. Amongst the 120 tranches committed, more than 20 % were committed after one year's delay. In the case of the Research (I) OP, only the automatic commitment of the initial tranche (1990) was carried out, because of the lower rate of execution of the measures. The tranches are generally disbursed over a period of three years. The number of tranches that were closed represented, at the end of 1992, approximately 45 % of tranches committed. 6.34. In the case of the amended OPs, the practice of off-setting between tranches means that the commitments entered in the accounts are not in accordance with the current financing plans. Moreover, in the case of more than half of them, they differ from what would result from the strict implementation of the commitment criteria defined by the Commission. The 1992 tranches of the Salamanca y Zamora (E) and Martinique (F) OPs, amounting respectively to 60,2 Mio ECU and 16,2 Mio ECU, had not been committed at the end of 1992, although the rates of execution of the programmes would have authorized commitments. 6.35. The 'deflator` mechanism proved difficult to apply and was only reluctantly accepted by certain Member States. The Spanish authorities were not in favour of applying the deflator to the interventions initially proposed: they would have preferred the additional resources generated by indexation to be used to finance new measures. This disagreement, which had not been settled at the end of 1992, led the Commission to oppose amendments submitted for Spanish OPs which did not take account of indexation (the Galicia OP). In the case of the Corsica (F) OP, the Commission accepted the use of the proceeds of the indexation for measures which were not initially planned. In the case of the Sicily (I) OP, a second amendment, decided by the Commission on 18 December 1992, created, within the framework of the ERDF and ESF sub-programme, measures entitled 'deflator reserve` which were not more specifically defined. In Greece a comparable operation was carried out at the CSF level. 6.36. The indexation of the OPs examined is often marked by mistakes and delays. In the case of the 1989 tranches of the Castilla-La-Mancha, Salamanca y Zamora (E) and Macedonia-Thrace (GR) OPs, mistakes resulted in overcommitments of, respectively, 1,8 Mio ECU, 1,9 Mio ECU and 1,4 Mio ECU. Commitments carried out under the deflator were completed one year later than planned, in some cases even two years later, in the case of the water resources (I) OP. Finally, it is difficult to ensure that indexation is, in fact, applied to initial forecasts established at constant prices and not at current prices. Payments 6.37. At the end of December 1991 the Commission prepared a form for requests for payment and expenditure certifications. This form required certification of public expenditure only, whereas, in some cases, eligible expenditure involves amounts of a different kind. At the end of 1992, the form, adapted where necessary, was still not being used systematically. Out of 40 requests for payment issued after 1 January 1992, six had been prepared according to alternative methods.>TABLE> 6.38. Out of a total of 80 applications and attestations examined, a third could not be considered to be precise examples of certification. Moreover, in 55 % of the cases, the period covered was not explicitly indicated. In 10 % of the cases, the annexes, breaking down year by year and for each of the sub-programmes the payments made by managing bodies to final beneficiaries, were not included and only in one case was it possible formally to deduce from the application that the aid had actually been paid. In the case of the Tourism (I) OP, the amount indicated in the certificate differed from that shown in the annexes. Sometimes, for one and the same OP, different dates are indicated for the beginning of eligibility (the Macedonia-Thrace and the Main Highways OPs (GR)). The adoption by the Member States of the specimen form proposed by the Commission has led to a more systematic presentation of the information needed. 6.39. In some cases (Abruzzo (I), Industrial Development Northern Ireland (UK)), the date on which the eligibility period starts as indicated in the certificate cannot be deduced either from the text of the decision or from that of the OP. In other cases the Member State mentions, by way of eligibility date, only that relating to the aid systems and the main projects. In some cases, lastly, this date is not given in the certificate (Campania (I)). 6.40. The first two advances may not exceed 80 % of the commitments carried out under the tranche. In some cases, this rate had been exceeded: it was 94 % for the commitment relating to the 1991 tranche of the Macedonia-Thrace (GR) OP. In other cases, the advance was less than 80 %. For example, the 1991 and 1992 tranches of the Transport (Northern Ireland-UK) OP had only been carried out up to respectively 72,5 % and 75 %. 6.41. As already indicated (paragraphs 6.8 to 6.18), amendments to the OPs examined affected the eligible expenditure, the commitments and the payments. The first tranche of the Research (I) OP amounted, according to the initial plan, to 66,8 Mio ECU and gave rise to an initial advance of 33,4 Mio ECU. After one amendment, the amount of this tranche was reduced to 36,1 Mio ECU and showed an excess payment, which was not corrected, of 15,4 Mio ECU. Similar situations exist in the Transport and Industrial Development OP (Northern Ireland-UK) for, respectively, 11 and 2 Mio ECU, Agricultural Structures (GR) for 3 Mio ECU, Campania, Water Resources and Tourism (I) for, respectively, 63 Mio ECU, 51 Mio ECU and 9 Mio ECU. Moreover, the significance of the declared expenditure is often not very clear. In a third of cases, the quality of the information was not adequate to establish whether the declared expenditure represented actual payments or not (Abruzzi (I) and Martinique (F) OPs). 6.42. Several managing authorities deduct taxes or other forms of payment, known as planning, inspection and settlement costs, from the payments which they carry out under the Structural Funds or other Community instruments. These deductions, which represent 3 to 4 % of the cost of the works, are supposed to pay for the normal administrative tasks concerned. In reply to an observation along these lines in the Court's 1991 report (paragraph 10.12), the Commission pointed out that it carried out inventories of all situations of this kind with a view to assessing their importance and legitimacy. The persistence of these deductions calls for a rapid decision. 6.43. The Commission has accepted as eligible expenditure on work carried out directly by municipalities, under conditions which made it difficult to ensure that the costs were actually justified (the Prodep and the Valley of the Tagus OPs). In another programme (Prodac-P), the eligible expenditure covered the purchase from a private company of management software, the development of which had already been financed by the Member State. For a project coming under the Prodep (P) OP, the cost of compulsory purchase operations represented 23 % of the total, whereas the limit normally established by the Commission is 10 %. Monitoring and execution of the programmes 6.44. Article 25(1) of Regulation (EEC) No 4253/88 provides that the Commission and the Member States are to carry out effective monitoring of the implementation of Fund aid. The monitoring is carried out by reports, random sample inspections and committees set up for this purpose. Physical and financial indicators are laid down to indicate the state of progress of the measure, progress made with management and any related problems. A system of monitoring is often needed to implement the provisions of the OPs. The Monitoring Committees 6.45. The powers of the Monitoring Committees are not uniformly defined. For example, the Galicia (E) OP states that the Monitoring Committee is to coordinate, check the conformity of the projects and carry out evaluation and monitoring, whereas in the case of the Martinique (F) OP, the decision does not mention any coordination tasks. The degree of detail is also different. Thus, neither the OP nor the Commission decision concerning Galicia give any details on the powers of the Monitoring Committee with regard to amendments or evaluation procedures, whereas these aspects are more detailed in the Martinique OP decision. The role of the Monitoring Committees also includes a degree of confusion of management and monitoring tasks. 6.46. Many Monitoring Committees monitor several programmes. In Spain, France and Italy they cover both the OPs and other Community measures. The volume of subjects to be dealt with and the short duration of the meetings, which moreover are not very frequent, mean that a satisfactory examination of the questions dealt with is not possible, all the more so as the preparatory documents are often short and are circulated late to the participants. This documentation most usually concentrates on financial implementation, mentions the physical indicators more rarely and even less frequently the socio-economic impact. This being so, the activity of the Monitoring Committees is most usually confined to commenting on this documentation and looking for ways of reprogramming so as to mobilize national and Community resources. 6.47. The system of monitoring, which the Court has already dealt with in connection with the Integrated Mediterranean Programmes (IMPs) in paragraphs 9.11 to 9.13 of its 1991 report, is still far from being fully operational. Similarly, there is little monitoring by physical indicators. These are loopholes in the activities of the Monitoring Committees, as such instruments ought to make it possible to evaluate the proper execution of the OPs and to make the necessary adjustments in the light of the objectives. Whilst it is useful that the Monitoring Committees should not leave financing proceeds unemployed, this concern is a limited one compared with the objective of guaranteeing that the aid is effective. The closure of the tranches and the implementation reports 6.48. The annual tranches cannot be closed until the Commission has received, from the authority responsible for managing an OP, an annual implementation report, the information in which must be backed up by a confirmation certificate issued by the Member State concerned. An examination of the operations for the closure of the tranches shows that this provision is not always observed. At the time of the audits there was no trace in the files held by the managing authority at the Commission of implementation reports for the Central Macedonia and Main highways OPs (GR). These reports are often submitted late and are of very unequal quality. The report concerning the 1990 tranche of the Martinique (F) OP was not submitted until December 1992, whilst the report for the 1991 tranche of the Rural development (IRL) OP was not submitted until February 1993. The report for the 1991 tranche of the Tourism (Northern Ireland-UK) OP was still not available in January 1993. 6.49. Approximately 45 implementation reports should have been supplied in June 1992 for the OPs examined. This obligation had been satisfied in only about 70 % of cases, and the deadlines laid down in the relative regulations had been observed in only one case in two, which delayed the payment of the balances owing on the tranches. For example, the request for payment of the balance of the first tranche of the Salamanca y Zamora (E) OP, which was received in September 1991, could only be acted upon in June 1992 because of the absence of an implementation report. In the case of the three French OPs, the unsatisfactory quality of the reports resulted in long delays in the examination of these documents by the Commission, and none of them had been considered acceptable by the end of 1992. 6.50. The reports provide information on the physical progress of the operations in only about 50 % of cases and mention is rarely made of the socio-economic impact. Generally they do not give any lists of completed projects which could be used to identify the amounts paid and the beneficiaries, and to evaluate the results achieved. The limited nature of these implementation reports as far as the physical progress and socio-economic impact are concerned results in part from delays in the development of indicators and the monitoring system. 6.51. In the reports for the Prodac (P) OP, the forecasts for physical implementation have been systematically adapted to reflect the level of achievement actually recorded. A similar situation may be seen in the case of the Industrial Development (IRL) OP. In other cases, the implementation reports are confined to a brief commentary on the financial tables annexed to the requests for payment. Thus, the last implementation report supplied for the Sicily (I) OP consists of only two pages of text with one financial table. Generally speaking, the annual reports do not provide the means for monitoring the implementation of the commitments relating to each of the annual tranches. The data supplied are cumulative and are not differentiated, they indicate an annual global volume of expenditure and it is not possible to check, on this basis, the progress achieved in the implementation of each tranche. Conclusion concerning the Objective No 1 operational programmes 6.52. The effort the Commission has made to mobilize the resources needed for the doubling of the Funds should be emphasized. Nevertheless, the Court has reservations about the conditions under which resources are transferred to the disadvantaged areas of the Community, which is why the Commission must ensure that the management principles established by the reform and the Financial Regulation are more strictly observed. In particular, it should adopt more precise instructions for the implementation of the regulations and thus ensure that the financial management is transparent. 6.53. The quality of the monitoring instruments used in the OPs and by the Monitoring Committees and in the implementation reports should be improved. The fact is that previous experience of programming has more than adequately demonstrated the need for strict monitoring. 6.54. Whilst the objective of doubling the Funds' appropriations has been achieved, the rate of execution of certified expenditure compared with forecasts is still low, at a distance of one year from the end of the commitment period (1993). The Commission should concentrate all its attention on the significant loopholes in the programming, the coordination and the evaluation of expenditure. These weaknesses often result in changes in the programmes which are such as to lessen their impact and mainly aim to concentrate the execution of the OPs around the end of the programming period, thereby obliging the Member States to provide a substantial part of their share of the financing in future financial years. 6.55. Mobilizing and transferring budgetary resources to disadvantaged regions constitutes a necessary, but not sufficient, condition for the success of the reform. The Commission should not only ensure that the budgetary appropriations are used up but should also check that the recipients use the appropriations in accordance with the Financial Regulation and that Community intervention in reducing differences in the degrees of development of the regions is effective. SPECIFIC COMMUNITY REGIONAL DEVELOPMENT MEASURES The specific nature of the measures 6.56. Council Regulation (EEC) No 214/79 of 6 February 1979 () introduced specific Community regional action measures known as 'non-quota measures` (NQs). Within this general framework, three series of regulations were adopted by the Council, in 1980 () , 1984 () and 1985 () . Since the end of 1985, as a result of the adoption by the Council of Regulations (EEC) Nos 1787/84 of 19 June 1984 () and 3634/84 of 17 December 1985 () , there is no longer any legal basis for new measures. TEXT CONTINUED UNDER DOC.NUM : 393Y1116(01).46.57. The NQs make a contribution to solving regional problems which are related to Community policies and introduce innovations in three main areas: by constituting an initial attempt at a programmed approach, by introducing the concept of endogenous potential and by being taken at the initiative of the Commission. 6.58. The objectives of the NQs are mainly the following: (a)to provide support to certain regions of France and Italy to help them to cope with the 1981 enlargement of the Community, along with certain regions of Greece in respect of the enlargement of 1986; (b)to develop new forms of economic activity in certain regions which are seriously affected by sectoral difficulties (steel-making, textiles, shipbuilding, fisheries and energy); (c)to improve, by cross-border measures, the situation of certain areas of Ireland and Northern Ireland. 6.59. The intervention areas for the NQs are proposed by the Commission on the basis of Community criteria laid down in the light of economic and social problems and needs. This approach has resulted in the definition of areas with very variable dimensions, some of which correspond to small areas equivalent to the NUTS 4 () , whereas others are made up of the regrouping of NUTS 3 areas (the Enlargement NQ) and even at the NUTS 2 level. 6.60. The regulations of 1984 and 1985 establish the duration of the NQs, specifying that they expire, respectively, on 31 March 1989 and 25 February 1991. The Commission informed the Member States that the final dates for the submission of applications for payment were, respectively, 31 March 1991 and 25 February 1993. Globally, Community participation under the whole of these NQs amounts, for the period 1981-91, to 1 088,1 Mio ECU. Financial implementation 6.61. The financial implementation as at 31 December 1992 of the 65 NQs decided between 1981 and 1989 is set out in Table 6.8. Compared with a forecast Community participation of 1 088,1 Mio ECU, commitments amounting to 965 Mio ECU, that is to say 89 %, were entered in the accounts, and payments to the Member States amounted to 904 Mio ECU, or 83 % of the total financing.>TABLE> 6.62. Out of the 65 measures, 48 were supposed to have reached the stage of a formal final payment request from the Member State before 31 March 1991. The remaining 17 measures were supposed to be covered by a final implementation report drawn up by the Member States and an application for the payment of the final balance to be sent to the Commission by 25 February 1993. The Shipbuilding in Palermo (I) measure was cancelled, whereas, out of a forecast ERDF contribution of 2 052 000 ECU, an initial payment of 97 339 ECU had already been made in January 1989. The official request for cancellation was, however, not made until 19 October 1992, or almost four years after the decision, and the necessary cancellations and recoveries were carried out in 1993. 6.63. The 48 NQs which were supposed to have reached the final payment stage by 31 March 1991 were receiving Community support of 944,1 Mio ECU. The amount of appropriations committed was 835 Mio ECU, or 88 %, and the Member States received 785 Mio ECU, or 94 % of appropriations committed. The amount of available appropriations is therefore 109 Mio ECU, to which 50 Mio ECU of appropriations committed but not yet disbursed must be added. Altogether, this makes almost 159 Mio ECU which will remain unused for the NQs and of which a part will remain available for the corresponding CSFs. 6.64. Out of these 48 measures, 28 are, de facto, not financially closed. Of the other 20 measures, 13 were complete and all the forecast commitments had been made. The remaining seven measures, although they had been declared completed, showed figures for commitments and payments that were lower than the overall financing provided for in the decisions. 6.65. Table 6.9 gives the situation in respect of these 48 measures. In the case of 14 of them, no request for final payment had been sent to the Commission, even though almost two years had elapsed since the final date for the submission of the application. Out of the 34 applications for final payment which had been submitted, 17 arrived after the deadline of 31 March 1991. In the case of 35 NQs, the final implementation report could not be found in the Commission's files, whereas it is a necessary document for the purpose of ensuring that the programme is being correctly executed and for verifying, consequently, that the payments made were justified. 6.66. Generally speaking, it must be observed that monitoring of these NQs by the Commission was mainly confined to the financial aspects. On 31 December 1992, the Commission had not set up any procedure for the clearance of files that were pending, even though a further 17 files were expiring on 25 February 1993. These 17 measures, which are indicated in Table 6.8, are receiving a forecast Community contribution of 144 Mio ECU, which, on 31 December 1992, had been 92 % committed, and of these appropriations committed, 90 % had been disbursed. 6.67. The 1980 regulations required the Member States, apart from paying the first advance, to certify to the Commission that the operations had actually been carried out and that detailed supporting documents existed. The 1984 and 1985 regulations amended these provisions, replacing the certificate by a statement of the total volume of expenditure carried out. In addition, the expected speeding-up of the implementation of these latter regulations on the execution of the measures did not take place. 6.68. In France, in the case of the 'Enlargement` measure (special programme for the South-West), the system of advances laid down in the regulation led the Commission to pay out 94 Mio ECU (652 861 000 FF). As the amount of eligible expenditure was only 940 300 000 FF in total, the corresponding Community contribution should be about 510 000 000 FF, that is to say the amount received in excess may be evaluated at 140 Mio FF (about 20 Mio ECU). The Commission must regularize the situation. 6.69. In Greece, for the 'Energy` measure, to which 20 Mio ECU had been allocated, advances amounting to 12 Mio ECU were paid out by the Commission. The total declared eligible expenditure by the Member State was 2 700 Mio DR (about 14 Mio ECU), and the Community contribution should therefore be about 8 Mio ECU. Greece thus received an excess payment of some 4 Mio ECU, which should be recovered. Implementation reports 6.70. The regulations state that the Member State must submit an annual implementation report to the Commission in order to give an account of the work completed during the previous year. This report is the only regulation document which allows the Commission to monitor, control and evaluate the implementation of the NQs. Its contents and its frequency are two vital factors for the monitoring of the measures. 6.71. An examination of the financial files and the documents giving an account of the implementation of the measure showed that the regulation provisions had not been applied strictly. This irregular situation showed no improvement over the situation observed in 1986 in a special Court report () . In some cases, the Commission paid out the final balance on the basis of the request for final payment and in the absence of the corresponding annual implementation report. This kind of practice is not consistent with the principles of sound financial management.>TABLE POSITION> The implementation of the regulations 6.72. During checks carried out on the premises of the national managing authorities responsible for the NQs, it was not easy to find complete and properly organized files. For the Enlargement (F) NQ, the consolidated version of the data concerning the financial implementation of the measures could not be verified. The national financial procedures often result in excessively long periods during which the Community funds are paid out to the final beneficiaries. In the United Kingdom, the periods within which Community funds are transmitted are, in some cases, 6 months, and sometimes even as long as 12 months. In France, ways of remedying the inconsistency of the national procedures with the constraints of the Community regulations and the way they are evolving are being investigated. Amendments to measures 6.73. Whilst the regulations provide for the possibility of amending measures, they do not specify the way this is to be done; nor has the Commission defined any procedures in this respect. Of the 65 NQs, more than 30 were the subject of an amendment request, generally consisting of transfers between measures without any formalized consultation procedure with the Commission. These transfers were often to the detriment of the support measures, technical assistance measures or sectoral analysis measures and were for the benefit of traditional aid measures to companies or infrastructure. 6.74. Sicily received three NQs for the restructuring of the textile and shipbuilding industries. These three measures provided for sectoral analyses designed to identify possible new growth areas for SMUs and aid for investment. The sectoral analyses, which were entrusted to the region, were very quickly abandoned in favour of co-financing of the aid system. 6.75. In Italy also, the Triest-Gorizia shipbuilding measure was the subject of a request for an amendment by the national authorities in July 1990 concerning the expenditure timetable. In fact, the aim was a complete reorganization of the measure. During the inter-departmental consultation, and in view of the scale of the amendments, the Financial Controller () questioned whether the initial programme had been properly studied in 1988. In spite of that, he accepted the new timetable in view of the fact that the NQs were coming to an end. 6.76. The result is not only difficulties in the management and monitoring at national and Community level, but also the near-impossibility of evaluating the impact of the measure, as the initial conditions had been amended. This loophole in the procedures makes itself felt at all stages in the implementation of the NQs. Checks by the Commission 6.77. In spite of the Commission's checks, numerous measures will have to be earmarked for recoveries during the closure operations. This is the case with the Steel-making in Lorraine and Nord-Pas-de-Calais (F) NQ, textiles in Lorraine (F), Shipbuilding at Palermo (I) and Energy (GR). 6.78. As the regulations bring in simultaneously different aid rates and eligibility bases, detailed checks on the eligible expenditure as at 31 March 1991 are essential. During the closure of the measures, a re-examination of previous payments should be carried out in order to ensure that the numerous amendments were properly taken into account in the calculation of the Community contribution. Only under these conditions may these measures be considered to have been correctly closed. Thus for example, out of the total of 48 NQs which were supposed to have reached the final payment stage by 31 March 1991, 32 are still open and the Commission will have to set up a closure operation for these files so as to recover any sums paid in excess, where appropriate. Eligibility of operations 6.79. In the NQs, certain Community interventions are intended for SMUs. However, the criteria defining this type of company are still not very well harmonized. Under the 'Enna textile` measure (I), aid was granted to a company manufacturing concrete pipes. This company was controlled by a large group specialized in civil engineering works which could not be considered to be an SMU. 6.80. In the 'Lorraine steel-making` measure (F), an amendment made it possible to grant a contribution to an investment of 720 Mio FF (about 100 Mio ECU) which was intended to create 1 600 jobs, of which 200 were to be permanent. Part of the ERDF aid of 20 Mio FF (about 2,9 Mio ECU) was used for services (films and staging work) which were not really part of the 'aid to SMUs` measure. 6.81. Articles 3 and 4 of Regulation (EEC) No 2617/80 specify that the measure is intended to improve the physical and social environment in the eligible areas so as to favour the setting-up of economic activities that will create new jobs, as well as the development of SMUs and the promotion of innovation. In Scotland, two projects received Community support of 544 784 UKL (about 0,4 Mio ECU) in spite of the fact that they did not satisfy the above criteria. 6.82. In Greece, in the Environment and desalination of sea water measure coming under the 'Enlargement` programme, four desalination centres were provided for, in addition to measures in favour of tourism, only two of which were built. One of these projects, located on the island of Mykonos, was not mentioned in the initial programme and this island is not eligible for measures in favour of tourism. This being so, the amount of expenditure incurred between 1984 and 1988, when Mykonos was included in the programme, must be deducted from the eligible expenditure declared by the Member State. 6.83. In Italy, for expenditure on aid for investment in SMUs, the validity of the data calls for some reservations, particularly as they concern to a considerable extent projects which have not been concluded, the conformity and the eligibility of which cannot be confirmed. The on-the-spot examination of payment lists for payments carried out in connection with aid to SMUs as part of the Textiles Enna and Palermo (I) NQ, shows that these lists, which were supposed to be used for preparing the applications for final payment, also contained payments prior to the period of eligibility of the measures as well as payments concerning companies which had gone bankrupt after receiving Community support. 6.84. In Greece, for the wind energy measure coming under the 'Energy` programme, the national authorities declared to the Commission a total amount of eligible expenditure of 1 118,5 Mio DR (about 5,1 Mio ECU). The authority responsible for the project was able to justify no more than an amount of 1 027,1 Mio DR (about 4,7 Mio ECU). This being so, 91,4 Mio DR (about 0,4 Mio ECU) must be deducted from the amount of eligible expenditure. Similarly, for the 'Steel-making in Lorraine` (F) measure, the eligible expenditure observed authorizes a Community contribution of only 27,3 Mio ECU, whereas the Member State has already received 27,6 Mio ECU. The difference (0,3 Mio ECU or 2 401 567 FF) must be recovered. Evaluation of measures 6.85. The NQ regulations provide for the quantification of the objectives, particularly in terms of jobs. An examination of the various programmes approved by the Commission reveals weaknesses in the ex ante evaluation, thereby making any a posteriori evaluation difficult to carry out. Moreover, there are few reports available which give data on jobs created or retained. These deficiencies make it difficult to evaluate the impact of the measures. 6.86. In the few cases where these data do exist, they are not backed up by any supporting documents. Thus, in the case of the 'Steel-making in Burgundy` (F) measure, the final report states, in the light of unspecified evidence, that, in accordance with the announced objectives, 6 000 jobs were created. At the same time a significant fall in the populations of the employment areas concerned has been observed, along with the persistence of unemployment. 6.87. Moreover, only the 'Enlargement` measure (F) made use - to the extent of 50 % - of the possibility offered in the regulations of receiving interest-rate subsidies. The low rate of use would merit an analysis designed to draw conclusions for any future regulation. 6.88. In the case of aid to SMUs in the 'Enlargement` and 'Enna and Palermo Textiles` (I) NQs, the on-the-spot checks showed that the payment applications concerned a large number of incomplete projects. The Commission must ensure that similar situations do not occur in other Member States given the number of measures which have not yet been closed almost two years after the final date for submission by the Member State of its final payment application. Conclusion concerning specific Community measures 6.89. The non-quota measures have made it possible to broaden the ERDF's field of activity by authorizing the programming of more diversified operations on more extensive eligible areas, thereby allowing larger advances to be granted to the Member States. This new approach has not been accompanied by a similar degree of attention to the implementation of the measures. 6.90. The lack of discipline in the preparation of the measures has resulted in delays and in numerous amendments to the timetable, as well as to content of the programme. The scale of these amendments has made any evaluation of the impact of the NQ measures difficult and, consequently, it is also difficult to check whether the objectives targeted have been achieved. 6.91. The NQ measures were slow to get off the ground, a fact which was observed by the Court as early as 1986; since then they have concluded in anonymity and lack of interest, even though they answer a genuine need for diversification of the ERDF. 6.92. The Commission must recover more than 25 Mio ECU, corresponding to advances for which the Member States have not been able to justify the utilization. It must also carry out a detailed examination of expenditure declared by the Member States in order to clear, in accordance with the regulations, the financial situation of those NQs which had expired by 31 March 1991. 6.93. The Commission should ensure that as much as possible is learned from this first programming experience, all the more so as numerous regions that benefit from the NQs are continuing to receive Community support via programmes which have been launched under the reform of the SFs.>TABLE POSITION> >TABLE> CHAPTER 7 (*) Expenditure in the field of social policy >TABLE> (*) The Commission's replies are on page 298 INTRODUCTION 7.1. This chapter describes the Court's inquiries and findings in relation to three elements of the EC's work in the field of social policy: (a)the effectiveness of the programmes directed towards Objective No 3 of the reform of the Structural Funds, i.e. measures to counter long-term unemployment among people over 25 years old; (b)the implementation of the complementary programme aimed at preserving employment in the new German Laender, focusing particularly on Saxony-Anhalt; (c)the impact of two relatively small programmes - Poverty III and Horizon - whose main objective is to find more effective ways of helping disadvantaged people to escape from the 'social and economic exclusion` with which unemployment is often closely linked. Implementation of the first two of these elements is largely the responsibility of the national or regional authorities in each Member State; Poverty III and Horizon, by contrast, assign a much stronger directing role to the Commission. EFFECTIVENESS OF STRUCTURAL FUND OBJECTIVE No 3 (TO COUNTER LONG-TERM UNEMPLOYMENT) Introduction 7.2. Table 7.1 shows the extent of long-term unemployment in the Community and, especially, the substantial number of people under 25 who have been unemployed for more than two years. 7.3. Objective No 3 is the subject of operational programmes (OPs) which were initially approved for the period 1990-93 for the Objective No 1 countries and regions and for the period 1990-92 in the case of the countries and regions not covered by Objective No 1 () . The levels of Community contribution for these two OP categories were respectively 65 % and 45 % of the eligible expenditure. Some of these OPs were also targeting the occupational integration of young people under the age of 25 (Objective No 4), but each OP differentiates between adults and young people in respect of the priorities selected in the Community Support Frameworks (CSFs) and the measures, number of beneficiaries, expenditure and funding. Table 7.2 shows the number of OPs, the number of beneficiaries and the European Social Fund (ESF) appropriations provided under the approval decisions which the Commission adopted in 1990. The Court's inquiry 7.4. The audit examined the objectives pursued, both nationally and at Community level, for the target group of long-term unemployed over the age of 25; the programmes, measures and operations whereby the objectives are to be achieved; the financial resources allocated to them by the national authorities; the quality of the programming, implementing, monitoring, control and evaluation systems - national as well as Community; the links between them; and, finally, the impact of the ESF contribution. There were audit visits to most Member States and a special questionnaire was officially used for the purpose. Execution of the OPs relating to Objective No 3 7.5. Table 7.2 describes the use of the appropriations available for Objective No 3 within the OP framework during the financial years 1990 and 1991 () . Overall, the level of utilization had improved (89 % in 1991 compared with 76 % in 1990); nevertheless, it continued to be low in some Member States (Germany, Greece and Italy) and for all the Member States, with the exception of France, the level of under-utilization for the whole period 1990-91 was higher. As the execution of the portion of mixed OP measures devoted to the occupational integration of young people seeking work did not produce sufficient improvement in the overall utilization of the funds allocated to these OPs, the Commission extended the duration of the majority of the OPs relating to Objective No 3 that came under CSF Objectives Nos 3 and 4. The Court doubts whether it will be possible to absorb the 1990 and 1991 carry-overs, as well as the 1993 budget appropriations for the new OPs, in 1993. Assessments in the sphere of Objective No 3 Aims 7.6. The Community regulations () provide for ex ante and ex post assessment of operations and enable the Commission to make a financial contribution to studies carried out on its initiative or on that of the Member States. The ex ante and ex post assessments are supposed to facilitate an appraisal of the effectiveness and impact of the co-financed measures in the light of the objectives of the reform, and the ex ante assessments are to be taken into account when the CSFs are being drawn up. Ex ante assessment 7.7. The number of ex ante assessments carried out in preparation for the CSFs is very low; in 1988-89, only Belgium made use of the technical assistance appropriations to carry out studies and assessments as part of the preparation of the plans leading up to the CSFs for Objectives Nos 3 and 4. On-going assessment () 7.8. In 1991 the Commission organized a series of on-going assessments of the operations relating to Objectives Nos 3 and 4 () . These assessments brought to light a situation of general malfunctioning, particularly in the case of the financial management associated with the execution of Objective No 3 () , and gave grounds for serious concern about the effectiveness of the approach adopted by the Commission, within the ESF framework, to counter long-term unemployment in the over-25 age group. The main arguments put forward were as follows: (a)defining an unemployed person, at Member State level, as someone who is 'registered as unemployed` or 'unemployed, receiving benefit and seeking work` may be too restrictive. This definition excludes people who are entitled to the minimum legal wage, those who are unemployed but are not receiving benefit and people who are involved in programmes designed to reduce unemployment; (b)the information available from research into the effectiveness of the various strategies for reducing unemployment provides no grounds for claiming that training - the main area of ESF intervention - really gives a better return than other types of intervention; it is in fact still more or less impossible to incorporate parameters such as cases of total waste of effort (in this case, placements that would have occurred anyway, without training) or substitution effects. Similarly any attempt to evaluate placements and jobs created always comes up against uncertainty as to the lasting nature of the jobs as well as substitution effects. In this sort of situation, priority should be given to the diversification and integration of the various strategies; (c)the ESF imposes strict conditions of eligibility, which handicap the groups that are most disadvantaged: for example, employers are not always prepared to offer permanent employment to the most disadvantaged members of society and promoters of vocational training tend to avoid engaging people from this category, in order to avoid losing subsidies when trainees drop out of courses. 7.9. These assessments ought to have resulted in 1992 in a fundamental discussion by the monitoring committees which are an important part of the partnership concept. All that actually happened was that the results were forwarded to the monitoring committees and, in a few cases, there was an exchange of views within the committees. Assessment within the framework of the ERGO action programme 7.10. Within the framework of the ERGO action programme () , a set of 116 projects to benefit the long-term unemployed were assessed. These projects were essentially locally-based, but they covered a wide range of measures () . The final report emphasized that this target group called for a specific integrated approach to reintegration within the framework of overall local economic development strategies. The projects to be assessed were selected without consulting ESF officials, the national bodies responsible for relations with the ESF or the OP managers, even though a fair number of the projects selected covered measures which qualified for ESF assistance. The results of the assessments were not discussed with the ESF and were not taken into account by the latter in the context of Objective No 3. Ex post assessment 7.11. The Commission does not expect that preparations for the launch of the 1990-92 CSFs and OPs ex post assessments will be completed until the first half of 1993. The aim of the technical assistance work associated with this stage - the Commission has financed the whole of the work at a global cost of 1,8 Mio ECU () - is to take stock - all-inclusively, for the first time ever - of the structures and methods that may be employed by each national or regional administration in order to carry out a survey. 7.12. This work also seeks to provide the indicators that are needed for assessment and monitoring, taking as a model the methodology for the ex post assessment of operational programmes financed partly by the ESF, which was devised by a group of experts at the Commission's invitation () . On this point it is worth remembering that CSF Objectives Nos 3 and 4 provided () that, within six months of the signature of a CSF, the Member States and the Commission were to consult together so as to lay down the assessment methods and the indicators to be used, as well as the timetable for implementing them. Monitoring 7.13. It was again noted that, with the exception of the United Kingdom, the Member States had been unable to develop a range of physical and financial indicators to provide effective monitoring () . In the other Member States monitoring is still, in essence, financial monitoring and is governed by the various deadlines for submitting applications for the first and second advances and the final payment, as well as the proposals for amendment of the OPs. Only the applications for annual final payments include information which calls for physical monitoring. For each measure, this information concerns the number of trainees, the levels of qualification at the beginning and end of the period of application of the measure and the duration, total cost, hourly trainee cost and national, private and Community finance. This information provides the only basis on which conclusions regarding effectiveness and efficiency may be drawn. The progress reports that accompany the applications for final payment do not normally include any information about the impact of the measures (number of placements or transfers to more advanced training, etc), even when such information is available in the Member States. Furthermore, the computer system which is to be provided at regional level by the Member States and for which the Commission is supplying technical assistance is still functioning only partially. Finally, the monitoring which the Member States establish for their own national measures could be used more extensively, to extend the monitoring of CSFs and OPs. Control Member States 7.14. The control and examination systems established in the Member States differ considerably from each other and exhibited various deficiencies: (a)in some cases, the certification of the payment applications forwarded to the Commission is based only on an examination of the documents relating to the payment applications submitted by those responsible for management of the OPs and the measures concerned, as well as a series of internal certificates. The people responsible for the certification do not, in every case, have the power to carry out their own checks and some are prevented by national legislation from initiating their own on-the-spot checks. Finally, the checks made by the authorities concerned with national expenditure do not necessarily relate to specifically ESF aspects; (b)several managers of OPs and operations employ only a rudimentary system for examining and checking the ESF element, which casts doubt on the certification of the payment applications concerned; (c)the large public vocational training organizations are seldom scrutinized for the ESF eligibility of their operations, even though they are usually answerable to their employment ministry; (d)the national and regional audit bodies are too rarely involved in the control of expenditure that is financed partly by the Community. Hitherto audits by them have been carried out independently of the control systems relating to ESF assistance, even though, in a few cases, they related to measures that were financed partly by the ESF. This applied particularly in the context of Objective No 3; (e)the examination and control systems concern only the information that is to be supplied to the Commission as part of the payment application framework and are not concerned with the effectiveness of the measures. The Commission 7.15. Twenty-three of the OPs relating to Objective No 3 were partially audited during 1992 as part of a programme established jointly by the ESF control unit and the Financial Controller. The audits focused mainly on the financial flows, the eligibility aspects and the operation of the associated examination and control systems. The sound financial management audits were primarily concerned with the management of the training courses, the quality of such courses, educational material and equipment. The effectiveness of the measures in terms of qualifications acquired, placements and transfers to other, more advanced courses was, in most cases, only a secondary audit objective. 7.16. Although the results of the Commission audits were sometimes discussed with the national administrations responsible for relations with the ESF departments, they were not discussed by the monitoring committees. The Commission should insist on the committees' being allowed to take them into account. Changes to the OPs 7.17. Changes to the OPs almost invariably relate to either under-utilization of the appropriations allocated to particular measures within an OP, or financial requirements which outstrip the appropriations allocated for other measures within the same OP. The reasons for these discrepancies, which are not always explained in the files, involve poor forecasting of the demand for training and employment grants and the associated costs, delays in execution, the abandonment of the proposed operations and budgetary limits on the national share of public finance. Although the ongoing assessments initiated by the Commission identify cases where measures are not very effective in terms of placements and transfers to other more advanced courses, only very rarely are changes to the OPs due to underlying considerations regarding the effectiveness or eligibility of the measures. CSFs and OPs in 1993 7.18. For the nine Member States which are not covered, or only partly covered, by Objective No 1, the Commission established new Objectives Nos 3 and 4 CSFs and OPs for 1993 only. The formulation of the 1993 CSFs was based on the 1993 plans submitted by the countries concerned, following the note for guidance produced by the Commission. The latter did not ask the Member States to indicate the degree of accuracy of the objectives, nor did it ask them to provide ex ante assessments. 7.19. Despite the changes that have occurred in recent years in long-term unemployment and at the level of young people seeking employment, the global amount for 1993 () was allocated between the Member States according to the ratios used for the 1990-92 CSFs, which were based on unemployment figures for 1986-88. The Commission should have used more up-to-date figures, which would have provided a different breakdown, of the sort shown in Table 7.3. 7.20. The new CSFs are either a straight extrapolation of previous CSFs, or they have undergone formal or easily implemented changes. 7.21. Each new 1993 OP replaces several 1990-92 OPs. This reduction simplifies the management required of the national and Community administrations, but, in spite of the vade-mecum on programming, the new OPs, like the old ones, do not have precise, attainable objectives at the operational programme level, nor are the sub-programmes or measures which make up each OP related. Effectiveness of European Social Fund aid>TABLE> 7.22. As the information which is available to the Commission regarding the socio-economic situations and policies of the Member States is not full enough for it to be able to give an opinion on the effectiveness of Objective No 3 - a shortcoming to which the Court referred in 1989 () - the Court was obliged to ask the national administrations concerned for this information. The object of this search for information was to determine - for each national measure in favour of the long-term employed over the age of 25, whether or not it is co-financed by the ESF, and for each financial year in the period 1990-92 - the number of long-term unemployed beneficiaries over the age of 25, the proportion of them who had found jobs or who had gone on to more advanced training courses and the cost to the public purse of the measures concerning these unemployed persons. 7.23. As in 1989, it proved difficult to assemble the information at Member State level, because information of this type is virtually never identified, even at regional level. Most of the measures are targeted on mixed groups of people and extracting the data concerning long-term unemployed over the age of 25 is often a hit-and-miss operation, if not almost impossible: (a)this was the case even in countries where the long-term unemployed actually constitute one of the groups targeted by employment and vocational training policies and, in some cases, are even the subject of specific policies; (b)in Spain and Greece, it was generally impossible to distinguish the long-term unemployed in the over-25 age group from other unemployed in the reintegration measures and hence to identify the expenditure in their favour; (c)Italy did not provide any information on the subject of measures for which the category of unemployed in question may be eligible. 7.24. At the end of 1992 the operational programme approach had not, therefore, resulted in the Member States clearly circumscribing the aid that was being channelled towards the over-25 group of long-term unemployed, which indicates that this target group has not really been the subject of a specific policy in most countries, so that the existence of Objective No 3 has not led to the development of national policies specifically in favour of the category of long-term unemployed who are over the age of 25. These people were usually included in measures which were targeting a wider public. 7.25. Tables 7.1 and 7.2 show that in 1990 and 1991 12 % and 16 % respectively of long-term unemployed over the age of 25 were reached by ESF assistance. 7.26. Its review of the national policies that are partly financed by the Community has led the Court to concur with the results of the ongoing assessments: namely that Community aid, which is governed by a whole series of criteria of eligibility and ineligibility, would be more effective if it were part of a global approach which groups various measures together, with the aim of preventing long-term unemployment and promoting the socio-economic integration of people who have been unemployed for a long time. Conclusions 7.27. In view of the deficiencies which it has uncovered, the Court recommends that the following measures be taken: (a)in order to evaluate the effectiveness of Community policy properly, the Commission should collaborate with the Member States to collect vital information on national policies that are affected by Community policy, and especially on the socio-economic situations referred to above, the objectives and results of the measures and the related expenditure and financing; (b)the Commission should define the objectives of the CSFs and OPs clearly; (c)clear links should be established between the assessment of operations, the monitoring of programmes and planning for future budgetary years; (d)the Community legislation should make it easier to give consideration to initiatives which are not now eligible, but which might help to attain the established objectives relating to long-term unemployment. MEASURES TO ASSIST EMPLOYMENT IN SAXONY-ANHALT Introduction Background 7.28. On 13 March 1991 the Commission approved a CSF () under which 3 000 Mio ECU of Structural Funds aid was made available to the five new German Laender and East Berlin for a period of three years (1991-93). The legal basis for this coordinated action is Council Regulations (EEC) No 3575/90 () of 4 December 1990, 2052/88 () of 24 June 1988, 4253/88 () and 4255/88 () , both of 19 December 1988. The Operational Programme (OP) was approved on 17 May 1991. The Social Fund element of the total amounts to 900 Mio ECU, of which 121 Mio ECU was allocated to Saxony-Anhalt to fund the development of human resources (in the context of Objectives Nos 3, 4 and 5) in accordance with the CSF () . 117 Mio ECU has been committed by the German authorities as the 50 % co-financed element, bringing the total aid to 238 Mio ECU. 7.29. In Saxony-Anhalt some 90 % of the Social Fund aid was devoted to so-called 'practical projects`, with the remainder being spent mainly on employment subsidies and on measures to help young unemployed people. The idea of the practical projects is to increase the productivity of the employees of the firms in the new Laender by training them on-the-job, so keeping the firms in business and averting the threat of unemployment. Employees are frequently trained in firms located outside the new Laender and such on-the-job training is often supplemented by theoretical courses at a training institute. The Court's inquiry 7.30. The project files of nine beneficiaries () have been examined at the Land Ministry of Employment and visits have been made to six of them. Regularity of the expenditure 7.31. Council Regulation (EEC) No 4255/88 of 19 December 1988 provides for the support of industrial training for people who work in small and medium-sized undertakings (SMUs), or who are threatened with unemployment by the impact of industrial restructuring. However, neither the CSF nor the OP provide specifically for on-the-job training for the generality of employees. In the domain of training on-the-job, express mention is only made of the trainers of employees. 7.32. By 1 October 1992 some 190 Mio ECU, 50 % of which from the ESF, had been allocated to projects mainly consisting of on-the-job training. 75 Mio ECU had already been paid without the approval of amendments to the CSF and the OP which would normally be necessary to regularize this expenditure. Moreover, two of the three CSF objectives have received less funding because of the priority given by Saxony-Anhalt to people already in work. While 32 % of the total was set aside for the long-term and the young unemployed, the amount allocated at 1 October 1992 was only 9 %. Projects Preparation 7.33. Because the CSF and OPs were approved before detailed planning could begin, Saxony Anhalt was only able to present projects for approval accounting for 11 % of the 1991 budget set by the Commission. This put considerable pressure on the new Ministry to accept projects. Projects were hastily drawn up and approved without detailed checking because of the lack both of experienced staff and of adequate statistical data. Control 7.34. Once projects had been approved by the Ministry, advances were paid out on the basis of claims by the beneficiaries. The checks of the claim details by the Ministry were not adequate and the Commission made no meaningful checks of its own. Contrary to the provisions of the 1988 Council Regulations, the Member State did not supply the data required for monitoring the financial execution of the programme to the Commission. At the time of the audit the Monitoring Committee responsible for the aid to the new Laender had chosen not to make any analyses of individual projects. Beneficiaries 7.35. Training projects are put forward to the Ministry by companies, groups of companies and training consultancies in Saxony-Anhalt, to whom the aid payments are subsequently made. Beneficiary A was allocated 23,1 Mio ECU (12 % of the total amount available) for 12 projects, each covering the period 1 April 1992 to 31 December 1992. The 12 projects are divided up among seven subsidiary companies in the A Group. Six of these companies are located in Saxony-Anhalt, while the parent company is in one of the former West German Laender. By the end of 1992 other beneficiaries examined had been allocated 10,4 Mio ECU, 5,6 % of the total. The Court's observations on the cost bases of projects Indicative amounts 7.36. Council Regulation (EEC) No 4255/88 requires the Commission to publish separate indicative costs for each Member State as an aid to project planning and execution. Although indicative costs were published for Germany in 1988, these have not been updated and no attempt has been made to use them for the new Laender. The advance payments to the Saxony-Anhalt beneficiaries were generally based on the companies' own full cost charge-out rates, including overheads. In the case of the A Group, the total amount claimed for salaries on the 12 projects was about 10 Mio ECU. Using current standard wage rates would have implied an advance payment of 5 Mio ECU, close to the actual costs on which the final settlement should be based. The estimated benefit in terms of bank interest during the project period is 150 000 ECU. Number of participants on training schemes 7.37. The A Group was not able to provide a complete staff list for those employed in Saxony-Anhalt at the time of the audit or the number of staff in post at the 12 training projects. Staff lists were provided for only four projects. All 150 names on the project 085 list also appeared among the 155 on the list for project 076 which was subsequently withdrawn. The absence of full information made it impossible to verify that only the staff of the six companies based in Saxony-Anhalt benefited from the Community aid. A press release issued by the Group counted about 1 000 staff. 350 of these work in the Group's headquarters in former West Germany, leaving 650 staff in Saxony-Anhalt. The Ministry nevertheless approved on-the-job training for 751 participants without asking for any supporting details about them. On-the-job training outside Saxony-Anhalt 7.38. Firm C, for example, sent 80 hairdressers to Hanover during an eight-month period and claimed 1,1 Mio ECU. The average time spent by each hairdresser in Hanover was four and a half months and the average cost 14 000 ECU. Three quarters of these costs were for travel and subsistence. The salaries claimed were all at points 10 and 11 on a 13-point scale. Had travel and subsistence been paid on the same basis as that established for Federal German officials, the total cost would have been 30 per cent lower. In the case of Firm F, 26 participants spent three months in Denmark at a cost for each participant of nearly 15 000 ECU, and 38 participants spent three months in Sweden at a cost of 17 500 ECU each. Subsistence alone amounted to three quarters of the total claim of 1,6 Mio ECU. Eligibility of payments 7.39. The day after the Court's visit to various companies in the A Group, the Group withdrew the two largest projects and requested that three others be extended beyond the agreed deadline of 31 December 1992. Out of the 471 participants remaining after the cancellation of the two projects 230 were not eligible for Community aid because their salary costs are met out of the receipts from works contracts. Thus the Group received an allocation of 1,8 Mio ECU to which it was not entitled. B, a training consultancy firm included in four projects, received the full salary of a project leader and 80 % of the salary of a secretary for these projects. During the same period full-time salaries were claimed a second time for both individuals on a project funded under Objective No 3 of the Social Fund in Hamburg. 7.40. The A Group claimed full salary costs for months when training took place for a few days only. An overpayment of 46 000 ECU was found in a sample of nine participants taken from projects 069 and 070. Both Group A and firm E claimed the salaries, board and lodging and in the case of Firm E, course fees, of managers who attended on-the-job training courses outside Saxony-Anhalt. Finally, Group A included the commission earned by sales people in its project costings. These costs should not have been met. 7.41. Expenditure on travel costs averaged over 10 % on the projects examined in Saxony-Anhalt, which would imply an allocation of 25 Mio ECU to travel costs if the same applied throughout Saxony-Anhalt. If the rates applicable to German civil servants in comparable grades had been used then the allocation on travel costs in Saxony-Anhalt would have been 40 % lower, implying an overall saving of 10 Mio ECU for the Land. 7.42. Group A was granted the allocation it claimed over six months for project staff travelling to and from the headquarters of the parent company. In interviews with a sample of staff it was disclosed that individuals rarely spent six months at the parent company, that when they travelled there they usually went together in company vehicles and that the money paid to the Group for travel expenses was not passed on to them. Overpayments amounting to 18 000 ECU were calculated in respect of the nine people sampled in projects 069 and 070. 7.43. Travel costs allocated to trainers were also excessively generous. Beneficiary I, for example, based its claims on an average of 3 000 km a month per trainer (and as high as 6 000 km for a single week in one case). Moreover, additional claims were made for travel by the same trainer to different seminars which took place in the same period. Some 15 000 ECU paid in respect of such journeys should be recovered. The hourly rates approved were frequently four times the average Federal civil service rates and in one case as high as 90 ECU. Technical assistance 7.44. The CSF provides for an additional amount equivalent to 5 % of total project expenditure to be paid for technical assistance. In Saxony-Anhalt these funds have been committed to one technical assistance company, company X. Although the Council Regulation requires all such contracts to be advertised, this was not done. Furthermore, in one case 64 months' worth of assistance was contracted and paid for in 1991, but only 38 months' was carried out: 120 000 ECU plus interest should be recovered. 7.45. Beneficiaries were also required by the Ministry to sign contracts with a second technical assistance company. Most beneficiaries signed contracts with technical assistance company Y. The contracts did not specify what assistance was to be supplied, but required each beneficiary to pay 3 % of its total allocation to company Y a fortnight after the receipt of its first advance from the Ministry. Company Y was established on 2 December 1991 as a dealer in machine tools just as the implementation of many projects began. The beneficiaries of Social Fund aid were not able to state what assistance the company provided. The Ministry regards the technical assistance as a control over the beneficiaries, but were unable to provide any reports or other reasons for considering that contracts between the beneficiaries and company Y serve this purpose. Payments should not be made for technical assistance out of project funds when there is separate provision for technical assistance which is additional to the OP allocation. 7.46. Based on its original allocation, the A Group should have paid 700 000 ECU to company Y once it received its first advance. The cancellation of two of its projects should entail the recovery of 130 000 ECU. However, there is no provision in the contract for repayments. Availability of supporting evidence 7.47. Group A provided little of the documentation necessary to support claims and payments: bank statements and indeed complete files were not available, vouchers had not been collected to support payments, some declarations were missing, and numerous errors of calculation had been made invariably in the Group's favour. Key administrative personnel at the parent company were absent on the occasions of the Court's two visits. 7.48. The few documents available showed that contrary to the provisions of the CSF, overtime payments were included in the project costings. The total annual cost for Christmas and holiday payments were included, although the training period was only 7 months at most. All payments to the manager and part-owner of one of the subsidiary companies were included in the project allocation. 7.49. Taking into account these and other observations, for the A Group as a whole it appears that only about 1 Mio ECU of the 1992 initial allocation of 23,1 Mio ECU can be justified. Conclusions and recommendations 7.50. It is clear that many of the Land's problems arose because the OP began in advance of any detailed planning. Deficiencies of staff and reliable information added to the difficulties, which were not resolved by the use of technical assistance companies. The Commission should have taken steps to remedy the deficiencies in the administration and control of the programme. 7.51. The Monitoring Committee has decided to examine whether the Court's observations were equally applicable in the other new Laender. Such an examination should also cover the situation in Saxony-Anhalt. 7.52. The Commission should examine the eligibility of projects and the legal basis of the funding of on-the-job training. Furthermore, it should review expenditure on technical assistance and insist that contracts with technical assistance firms specify the assistance to be supplied. Either payments should be made after the assistance has been provided or provision should be made for repayment if a project is cancelled. 7.53. Many of the problems described above arose from eagerness to obtain and allocate the funds available to Saxony-Anhalt. If such allocations are not based on plans consistent with the Council Regulations and if their execution cannot be supported by the appropriate documentation, then the beneficiaries are not entitled to the payment and recovery must be undertaken. As the Governments of the new Laender gain the necessary administrative strength and experience they should develop systems for the planning, management and control of CSF programmes which will ensure that EC funds made available to them are properly and effectively spent. COUNTERING SOCIAL AND ECONOMIC EXCLUSION Introduction 7.54. On 18 December 1990 () three initiatives in the field of human resources were adopted as part of a range implementing Community structural policy. Their purpose is to strengthen economic and social cohesion, to add a Community dimension to vocational training and employment promotion, to complement measures carried out in the context of the Structural Funds, particularly the European Social Fund, to promote a Community dimension to human resources activities by setting up transnational actions and to reinforce actions already taken in the framework of other Community programmes in the fields of training and socio-vocational rehabilitation. 7.55. New Opportunities for Women (NOW) aims to promote equal opportunities for women and has been examined by the Court in its previous annual report () . Euroform relates to new vocational qualifications in the Single Market. Horizon is designed to improve access to employment for disabled and disadvantaged persons and, together with the third medium-term Community action programme concerning the economic and social integration of the economically and socially less privileged groups in society (Poverty III), is the subject of this section. 7.56. Horizon is intended for people with serious disabilities, physical or mental, and for those unable to participate in normal social and economic life because of language difficulties or the lack of basic skills. The Horizon projects comprise certain operations - training, pre-training, guidance - which assist the less privileged directly, as well as other operations such as research or teacher exchanges which only assist excluded groups indirectly. 7.57. Initially the total contribution from the Structural Funds to the Horizon initiative amounted to 180 Mio ECU for the period 1990-93, of which 59 Mio ECU was for the disadvantaged and refugees. These amounts were increased to 305 Mio and 134 Mio ECU respectively as a result of an increase in the appropriations in the form of Horizon II. The distribution between Member States took into account the relative importance of the Objective No 1 regions and, without providing precise justification, allocated 37 % of the overall amount of Horizon I to disadvantaged people/refugees. The 'disadvantaged` element was shared out according to the percentages of disadvantaged people in each Member State, and that for refugees according to the foreign population in each Member State. 7.58. The measures in favour of the disadvantaged and refugees aim, through pilot projects, to improve understanding of long-term unemployment and social and economic deprivation among these groups and to facilitate the task of integrating them into society. The average cost - 430 000 ECU - of the 137 'disadvantaged` projects is in sharp contrast to the substantial funds available to some of the 24 'refugee` projects (for example, 18,3 Mio ECU for the operational programme in favour of Greek refugees). 7.59. The Poverty III programme was adopted by the Council on 18 July 1989 () for a proposed term of five years. It provided a grant of 55 Mio ECU for 39 pilot projects (now increased to 42 projects including those which involve the former GDR), of which 30 are pilot schemes (PS) and 12 innovatory measures (IM). The criteria on which the allocation between Member States was based are not very precise. Table 7.4 gives the amounts allocated to each Member State and to each project. PSs which, with the assistance of private or corporate partners and public authorities, intervene with the aim of alleviating various aspects of social exclusion must be sufficiently exemplary for them to be capable subsequently of being transferred to other bodies or of being enlarged. The IMs are generally taken charge of by non-governmental organizations and may concern only one aspect of exclusion. 7.60. The projects seek to counteract different causes of exclusion simultaneously (absence of: accommodation, training, access to different social services, etc) by providing the beneficiaries with several measures in which they are required to participate (training, pre-training, health care, etc) simultaneously. The objective of this programme is to produce novel organizational models and to develop preventive measures, instead of seeking to integrate the maximum possible number of socio-economically excluded people. 7.61. The Court has examined the management of Poverty III and Horizon ('disadvantaged` and 'refugee` elements) at central and regional level. Out of a total of some 180 projects, the Court visited 24, located in France, Greece and Portugal. Budgetary implementation>TABLE> 7.62. Table 7.5 traces the budgetary implementation of the programme to combat poverty and of the three Community initiatives NOW, Euroform and Horizon. Although Poverty is a five-year programme, it is funded by annual commitment appropriations, rather than a single commitment appropriation to cover the full amount of 55 Mio ECU adopted by the Community. There is only one budget heading (B2-1700) for the Community initiatives, and it does not, therefore, specify the allocation between the target groups - handicapped, disadvantaged and refugees - of the Horizon initiative. 7.63. The procedures for the budgetary execution of the initiatives vary: in some cases they follow the normal procedure of annual instalments; in others they follow a globalized procedure which covers a three-year period, with a single global commitment and three payments (50 %, 30 % and 20 %). Three aspects are worthy of being singled out: (a)Member States which had received a global commitment received a larger volume of funds, at an earlier date, than those which were subject to the annual commitment procedure (Portugal and the United Kingdom in the case of the disadvantaged programme and Greece for the refugee programme); (b)Member States which received their first advances from the global amount in December 1991 (Belgium (Flanders), Germany, Denmark, France, Italy and the Netherlands) did not benefit from the 6,72 % indexing which was added to the amounts allocated for the other Member States; (c)the accounts (Sincom) make no distinction between advances and final expenditure for a financial year, between annual and global advances or commitments. 7.64. It is difficult to evaluate the amount of technical assistance expenditure precisely. Whereas expenditure on the OPs - technical assistance (100 % financed from heading B2-1700) and the technical assistance office (100 % financed from heading B2-1820) - has been identified, the technical assistance expenditure included in the OP projects (50 % financed) cannot be clearly identified. The system established for Horizon 7.65. The administrative structure consists of a coordinating secretariat within DG V, a network of national coordinators for each initiative in each Member State, in addition to the staff responsible for the ESF projects, and a technical assistance office (TAO), which is responsible for coordinating operations. The TAO contract was awarded on 26 July 1991, following a favourable opinion from the Advisory Committee on Procurement and Contracts (ACPC), to the European economic interest grouping 'Management Initiative Development Activities` (MIDA). The group was formed specifically for this purpose by four firms [ENAIP (Italy), Infogroup (Greece), Owens Speidel International (Ireland) and Fondo Promocion Empleo (Spain)]. Examination of the files concerned showed that: (a)The MIDA tender should not have been allowed because, contrary to the conditions of tender, it contained neither the grouping's articles of association nor a detailed budget for each year; (b)ENAIP was acting simultaneously as judge and defendant, as it had undertaken to give an opinion to the Commission on the procedures for the award of the contract and the quality of the training which was receiving ESF assistance; (c)MIDA, which was newly-formed, was undeservedly awarded marks for its experience of working with the ESF. 7.66. The contract was for an initial period of 16 months from 1 September 1991, renewable annually. The value was 3,2 Mio ECU payable in four instalments: 30 % within 60 days of signing the contract, followed by 30 % and 20 % on presentation of the first and second three-monthly progress reports. The balance was to be paid on presentation of the 'annual` report as at 31 December 1992, together with the accounts. 7.67. The second payment was made prematurely on the basis of a 'Draft Progress Report` for the period of two months ending 31 October 1991, submitted to the Commission on 27 November 1991. This payment was therefore unjustified (964 823 ECU). The third payment (643 215 ECU) was made on the basis of an unsigned memorandum dated 14 April 1992 for the period 1 November 1991 to 31 January 1992. 7.68. MIDA's performance was found wanting in several important respects. It failed to maintain the required complement of qualified staff. Seminars and conferences it organized were unsatisfactory, and it required the Commission's help in tasks it should have performed unaided. Its work on information policy and the production of newsletters was unsatisfactory, and it never produced the database it was contracted to deliver in January 1992. It is questionable whether there was ever a justification for this separate database, since the information could have been collected using a modified version of the Commission's Eurada system, or from the relevant organisations in the member states. Finally, MIDA claimed 175 000 ECU for computer systems, whereas, in the view of DG V's control unit, a PC could perfectly well have been used, at a cost of 2 500 ECU. 7.69. In June 1992 DG XX checks at MIDA highlighted 'significant problems with the carrying-out of the contract`. After several rebuffs DG V's own control unit made a series of visits during September/October 1992 to both MIDA and its founding partners which provided little reassurance. 7.70. Despite these concerns, which were shared by the DG V coordinator, in December 1992 the Commission was still considering whether or not to renew the contract for 1993 for 2,5 Mio ECU. There were also signs of dissent within MIDA itself: on 26 November 1992 Infogroup requested an independent audit of MIDA and together with Owens Speidel withdrew from the consortium. Not until 15 February 1993 was MIDA informed that the contract would not be renewed. Unfortunately by this time MIDA had formally closed its Brussels office (12 February 1993) leaving in some doubt the question of recovery. 7.71. The final payment (643 215 ECU) has not been made. A clearance of accounts exercise will be undertaken by the control unit in order to determine the actual amount payable or whether recovery is due. The system established for Poverty III 7.72. An advisory committee of representatives of the Member States advises the Commission on the selection of projects. Parallel to this, the Commission has subcontracted the coordination and management of the projects to a technical assistance office, GEIE Animation et Recherche (GEIE A& R) in Lille, through which the funds for projects pass. In addition, the research and development units (RDU), consisting of one or two people for each Member State, provide backup for projects at local and national level and contribute to the European dimension of the programme. Annual contracts with the projects, with GEIE A& R, and the various RDUs define their respective rights and obligations. 7.73. Of the 55 Mio ECU earmarked for the programme, 13,95 Mio ECU are for project coordination, the RDUs and research, without taking into account the administrative costs of the actual projects.> TABLE POSITION> 7.74. Contracts with projects are concluded on a strictly annual basis, so that it is impossible for unused project appropriations to be carried forward to the next financial year, which means that the programme is automatically under-implemented as far as the projects are concerned: as of the end of the third contract period, the projects should have accounted for 21,4 Mio ECU, but had, in reality, used up only 18,9 Mio ECU, even though the actual expenditure for coordination and management (excluding the RDUs), exceeded the appropriations initially provided for (3,1 Mio ECU) by some 272 000 ECU (see Table 7.6), owing to the use of the investment income which, under the contracts, was available for the programme. 7.75. In the main, the GEIE met the requirements of the contract, which was renewed annually. Nevertheless: (a)The GEIE did not provide the bank guarantee corresponding to the amount of the first payment instalment because of the high cost, and the declaration from the bank to the effect that it would make payment only to authorized beneficiaries was only delivered in July 1992, following the Court's observation and in response to a request from the Commission. (b)The GEIE's balance sheet did not include cash in full (323 164 ECU for the third period and 209 856 ECU for the second period were not recorded). (c)The system for periodic requests from the GEIE to the Commission for funds and the system it itself used for making payment to projects meant that it always had a substantial amount of cash in hand, fluctuating between 1 and 4 Mio ECU. These sums yielded interest, only part of which was recorded in the income statement (168 892 ECU for the three periods instead of 607 312 ECU). (d)GEIE's income statements and the investment income were not taken into account when the Commission established the annual budgets: they were established on the basis of the funds allocated initially in 1989. Observations concerning the Horizon projects 7.76. Although the Member States submitted the operational programmes (OPs) covering the financial years 1991-93 in July 1991, the majority were not adopted by the Commission until December 1991, just in time for it to be able to commit the funds and pay the first automatic advance to the Member States. Then, in the three countries visited, there were long delays between the Commission's payments to the appropriate national authorities and the latters' payments to the projects. Finally, the accumulated delays in the adoption of the OPs, in notification of approval and in payments to the projects reduced the initially expected duration of some projects. 7.77. An ESF contribution of 18,3 Mio ECU spread over the financial years 1991-92, as well as an ERDF contribution of 11,7 Mio ECU, was provided for the programme for integrating ethnic Greeks returning to Greece from the former Soviet Union and Albania. The first ESF advance for the 1991 financial year amounted to 1,83 Mio ECU and was paid by the Commission to the Employment Department (OAED), on 6 April 1992, instead of to the National Foundation for the Reception and Integration of Refugees (NFRRRG), which had been set up at the end of 1990 to deal specifically with the problem of integrating Greek immigrants. The ERDF advance was, in fact, paid to the Foundation. It was found (end-September 1992) that the ESF advance had been in the OAED account since April 1992 without any action being taken by the latter organization. 7.78. In the case of disadvantaged groups, the Commission stipulates that pilot projects are to be developed jointly with foreign partners within the framework of transnational agreements. Since no model partnership agreement has yet been established, each project in this area has had to operate independently. On occasion, in France and Greece, the transnational aspect has taken the form of travel, subsistence and accommodation costs, without any concrete results. In Portugal there were two projects (DES 18 and P 50) where the transnational aspect simply took the form of payments to a few foreign training experts. 7.79. The transnational costs for certain French projects were met from the resources of the technical assistance OP which is 100 % financed by the Commission. Expenditure of a similar nature on other French projects was met from the resources of the OP projects and received a 50 % Commission contribution. As these are identical types of expenditure, the financing rules applied by the Commission should be the same. 7.80. The Commission had not yet carried out on-the-spot audits of Horizon projects in any of the countries visited by the Court. A list of cases in which promoters or intermediaries are involved in more than one project is an essential requirement, so that horizontal audits can be carried out, as that is the only way of detecting duplication of funding. The Commission does not have any up-to-date information to show the financial progress of projects. Such questions can be resolved only by specific examination of every project. 7.81. In contrast to the Poverty programme, managers of Horizon projects are not required to carry out an assessment of the measures for which they are responsible. Since project beneficiaries are not monitored, it is difficult to evaluate the true impact of the programme. Observations concerning Poverty III projects 7.82. Shortlisting of projects was carried out by the Member States, which were invited to submit a maximum of five pilot schemes and three innovatory measures to the Commission for the final selection. The Commission made the final selection with the advice of 10 or so experts after two-way discussions with the Member States. 7.83. In spite of the absence of a commitment to provide public financing, the Commission agreed to finance the EUREG Amo 5 project in Stuttgart, which was strongly recommended by the German authorities. 7.84. The objective of the Covilha pilot scheme (AM 23) in Portugal is the economic and social development of a mountain area threatened by the closure of a traditional textile industry coupled with the low productivity of subsistence agriculture. The project has experienced various difficulties, such as the absence of national co-funding in the first two periods and the difficulty of mobilizing the people concerned, especially in order to recruit a project leader. These problems contributed to the lack of results from the project. In view of the fact that some of them were predictable, the Court asked the reasons for selecting this project, which has already received 242 546 ECU of Community finance (first period: 174 195 ECU; second period: 10 849 ECU; third period: 57 502 ECU). The reply given was the government's wish for something to be done for a region in which there had been no previous development projects. 7.85. The Council decision provides for a maximum Community contribution of 55 % of the actual expenditure, within the limits of the assistance decided by the Commission. In the case of the poverty projects, therefore, half the funding must be provided by public, private or corporate partners. 7.86. In Greece, associations between private persons and public bodies are prohibited by law, as are payments by public bodies to private persons. Consequently most of the public share of the funding was provided in kind (provision of staff, premises and equipment), which meant that it was difficult to evaluate it in financial terms. In the absence of any cash contribution, projects have difficulty surviving and one (Salonica) was on the point of closure. 7.87. In Stuttgart, although the EUREG project was supported by the Federal authorities, it did not receive any funding from German public sources. At the Commission's request, when it became apparent that there was some doubt as to whether the co-funding was a reality, the Ministry responsible refused to express an opinion on the regularity of the financial package for the project, although it was aware of the problem. The project is now closed, as the Stuttgart director of prosecutions has initiated an inquiry on the grounds of fraud. 7.88. Under the terms of the contracts between GEIE and the Commission, the former is required, before making any payment to projects, to check that the beneficiaries have the necessary co-financing certificates. In the contracts which the GEIE concluded with projects, the conditions on which it made the Community payments were, firstly, provision of co-financing certificates (first period), then evidence of the payments made (second period) (bank documents). 7.89. Although, in view of the terms of the contracts, evidence of the materiality of the co-financing for the first two periods could be obtained only by on-the-spot examination, the GEIE did not begin to make such checks until the beginning of 1992. It was thus obliged to make some corrections to the accounts (which had already been closed) for certain projects, in which there were substantial amounts outstanding (645 000 ECU at 30 June 1990). Had thorough checks of this kind been made from the beginning, it would have been possible to discontinue Community financing of projects like EUREG (finance granted 588 713 ECU) which did not satisfy the requirements. 7.90. Irregularities which had been detected by neither GEIE nor the Commission were uncovered during the visits by the Court: both depreciation and rental had been charged for the same equipment on an ESF project and a poverty project in Greece; the purchase of equipment for one Portuguese project had been entered twice; there were exchange-rate errors; and expenditure was charged to the wrong period in order to circumvent the rule that unused appropriations may not be carried forward. Conclusions 7.91. One of the strengths of the Poverty programme was that it encouraged those Member States which had not yet done so to make provision for a real anti-poverty policy. In Portugal, participation in Community programmes led to the creation of a national programme administered by two organizations which were set up in 1990. Greece is looking at proposals to introduce a minimum starting wage. Attention has been drawn to the obstacles to the reintegration of disadvantaged people, as a result of which project administrators have put forward proposals for legislation to eliminate such hindrances. Nevertheless, the Commission must strengthen its controls on the accounts of the technical assistance office; just as in the case of the Horizon project, projects which have been closed or left in suspense must be terminated as quickly as possible and any funds paid in excess recovered. 7.92. The 'scientific` nature of the studies dealing with the phenomenon of exclusion has resulted in the selection of a few projects on the margins of traditional forms of exclusion, such as those concerning drug addicts or inmates of prisons, where the solutions required are radically different from those used in everyday cases of exclusion. 7.93. Implementation of the Horizon initiative led to the establishment of an unwieldy and expensive management system, part of which duplicated systems which were already in existence. The initiatives database, which was the main function of MIDA, was a complete failure. Nevertheless, MIDA received 2,5 Mio ECU. Fortunately MIDA was not charged with the management of the project funds and the direct consequences of its failure are limited to the Commission. It is doubtful whether there was ever a need for a TAO. 7.94. As was the case with NOW, the Horizon initiative is characterized by a significant delay in implementation. The Horizon projects are too scattered, too small and operate for too short a time - weaknesses which have already been pointed out in connection with the execution of the Poverty II programme. CONCLUDING REMARK 7.95. Although the activities are quite disparate in character, a number of common lessons emerge from the three inquiries: (a)the Commission has generally failed to ensure that clear and wherever possible quantified objectives are established before programmes are initiated, thus precluding any ready measurement of progress; (b)with the exception of Poverty III, the Commission has not attempted itself to monitor and control the implementation of the programmes in question. In the case of Horizon, the experience of sub-contracting supervision to a specially established agency has proved very unsuccessful; (c)there are a very large number of Community measures which exist alongside each other, targeting identical beneficiaries and pursuing the same types of activity. It is, therefore, imperative that a database be created, to detect cases of double funding; (d)no attempt has been made to adapt the objectives, regulations and management of schemes in the light of on-going experience. Thus, in particular, the lessons emerging from the Poverty III programme and its predecessors were ignored in setting up Horizon.>TABLE> >TABLE> Table 7.5 - Budgetary execution >TABLE> >TABLE> <(BLK0)NOTES>Source: Comptes pÃ©riodiques 1992. </(BLK0)NOTES> >REFERENCE TO A FILM> CHAPTER 8 (*) The European Agricultural Guidance and Guarantee Fund, Guidance Section >TABLE> (*) The Commission's replies are on page 308 Management and budgetary control INTRODUCTION 8.1. Expenditure on the EAGGF-Guidance Section during 1992 is set out in Table 8.1. Payments, which totalled 3 007 Mio ECU, represented some 20 % of all Structural Fund payments, while commitments, totalling 3 116 Mio ECU, represented some 21 % of all Structural Fund commitments. 8.2. The Court's audit during 1992 involved both a financial audit on a horizontal basis as well as an in-depth audit of a specific measure, notably the implementation of Council Regulation (EEC) No 1118/88 of 25 April 1988 () containing a programme for the promotion of agricultural development in certain regions of Spain. The principal findings for both audits are set out below. FINANCIAL AUDIT 8.3. The Court's 1992 financial audit concentrated on assessing on a horizontal basis the reliability of the administrative and control procedures in force and was carried out at the Commission and in Greece, Spain, Ireland, Italy and Portugal, which together accounted for 67 % of payments made in 1992. Results of the audit in the Member States 8.4. As the primary responsibility for the administration and control of EAGGF-Guidance schemes has been assigned to the designated authorities in the Member States, this phase of the audit had as its objective an assessment of the exercise of control by the responsible authorities over expenditure incurred and, in particular, an evaluation of the degree of reliance which can be placed on:>TABLE> (a)the certification of expenditure, which forms an essential basis for establishing the reliability of the Community's accounts; (b) the activities of the Monitoring Committees for operational programmes. 8.5. The audit revealed that only limited reliance can be placed on these certificates for a number of reasons: (a) the issuing of a certificate normally implies that it is preceded by adequate verification to ensure that what is being certified is correct: this essential requirement is frequently not met in the case of EAGGF-Guidance expenditure where too often the certificate is based primarily on returns received from regional authorities without adequate verification of their correctness; (b) in Member States with a high degree of decentralization the national authorities have neither the means nor the authority to verify the correctness of returns issued by regional authorities; (c) essential features of a reliable internal control system such as an adequate internal control function sometimes do not exist and, in other cases, the responsible bodies do not have the means to carry out their tasks in an adequate way. Control and certification procedures 8.6. In certain Member States visited - Greece, Ireland and Portugal - the centralized administrative structures result in responsibility for control and certification being entrusted to the same designated bodies. Although such arrangements should facilitate the implementation of an adequate internal control system, there are, none the less, inherent weaknesses in the certification procedures principally due to the lack of adequate independent a posteriori verifications. For example, such independent verifications are not carried out (Ireland), the level of checks is particularly low without any record of results (Greece), or the a posteriori verifications are made by the same services as those responsible for administering the scheme (Portugal). 8.7. Two of the Member States selected for the 1992 audit, Spain and Italy, have a particularly strong decentralization of competences to the regions. Yet the requisite certificates of expenditure are issued by the central authorities, whose verification powers are limited. Although provision has recently been made for independent bodies () to carry out a posteriori verifications, the levels of verification so far achieved are insignificant. 8.8. The establishment of certificates of expenditure by the designated authorities on the abovementioned bases renders them of little value for audit purposes. The activities of the Monitoring Committees 8.9. The primary objective of the Monitoring Committees is to ensure that available funds are fully utilized. In other words, they are 'expenditure driven` and they have neither the obligation nor the resources available to ensure that adequate internal control procedures exist. Furthermore, because of delays in establishing these committees, notably in Greece and Portugal, and the limited number and duration of meetings (on average one meeting of one day's duration for the established committees), the extent of their activities is particularly restricted. In the circumstances it is unlikely that the committees can do more than 'rubber stamp` the proposals of the administrators of the programmes. Controls operated by the Commission 8.10. For 1992 the Commission made some 1 200 individual payments, the bulk of which were for substantial amounts. The Court selected for testing a sample of payments made during 1992 representing in value terms approximately 55 % of total payments made. The audit of the selected payments gave rise to a series of technical observations which have been addressed to the Commission. 8.11. However, a number of important points of principle arose during the audit, the main ones being the following: (a) although effective control of expenditure requires on-the-spot visits to the Member States, the number of such visits is inadequate and is not yet based on risk analysis; as a consequence, certain Member States and certain measures of significant financial importance are not checked in any given year; (b) the Commission has not, to date, made full use of the possibilities provided for in the regulations () for receiving essential control data from the Member States, and certain Member States have been slow, or have failed, to provide all the requisite information; the Commission should insist on receiving, and should fully exploit, descriptions of the administrative systems in force as well as summary information on the number, purposes and results of control visits made by the Member States; (c) the very limited number of budget headings has a negative effect on budgetary transparency, which the reform programme was committed to improve; thus, as a number of regulations approved prior to the reform are no longer specifically mentioned, the expenditure arising is included under the general regulations forming the reform programme and there is no readily available summary of expenditure for each measure. Conclusion 8.12. The fact that regional authorities have responsibility for deciding, in consultation with the Commission, how Community and national funds should best be used is perfectly in accordance with the principle of subsidiarity as incorporated into the Treaty on European Union. However, the Commission still has responsibility for ensuring that Community funds are utilized within the agreed framework. With the means currently available to it the Commission is not in a position to assume this responsibility fully, although more active exploitation of the provisions of Community regulations would improve overall control. 8.13. It is essential to establish a more appropriate framework to ensure the correct utilization of EAGGF-Guidance funds. Regulation (EEC) No 1118/88: Common EAGGF-Guidance measure to encourage the development of agriculture in certain regions of Spain INTRODUCTION 8.14. Council Regulation (EEC) No 1118/88 () introduced an EAGGF-Guidance common measure, within the meaning of Article 6 of Council Regulation (EEC) No 729/70 () for which Article 18 of Council Regulation (EEC) No 797/85 () had provided the framework. This common measure aims to encourage the development of agriculture in certain regions of Spain. It provides for a set of measures (supply of electricity, supply of drinking water, rural roads, irrigation works, reparcelling of land, improvement of farmland, forestry, prevention of soil erosion, improvement of farm housing) to be financed under one or more programmes set up by the Spanish authorities. The estimated cost to be borne by the European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) was put at 420 Mio ECU over five years, with eligible expenditure being reimbursed at a rate of 50 % (except for irrigation works: 40 %). 8.15. The implementing programme submitted by the Spanish authorities on 18 July 1988 - for a total of 137 713 Mio PTA (884 Mio 'green` ECU) - was approved by Commission Decision 88/608/EEC of 24 November 1988 () , by which the Commission undertook to contribute 65 430 Mio PTA (420 Mio 'green` ECU) () to the cost of financing the programme. The programme applies to 95 areas divided up between Spain's 17 Autonomous Communities. 8.16. In order to examine the way in which this Regulation was being implemented, the Court carried out a number of audits in Spain in 1992, at central level and in three Autonomous Communities (Extremadura, Andalusia, the Basque Country). Audit enquiries were also made at the Commission. THE REGULATION AND THE REFORM OF THE STRUCTURAL FUNDS 8.17. Regulation (EEC) No 1118/88 was implemented in 1988, prior to the reform of the Structural Funds. The regulations relating to the reform make provision for the Regulation to be adapted to () or integrated into () the new provisions. The Spanish authorities did not wish to do so. This Regulation should therefore be classified as a transitional measure not affected by the reform, in accordance with Article 15(1) of Council Regulation (EEC) No 2052/88 on the tasks of the Structural Funds () . 8.18. The total estimated amount of EAGGF-Guidance aid, fixed at 420 Mio 'green` ECU in accordance with the various limits specified in Article 7(2) of the Regulation, represented a final amount of aid estimated at about 500 Mio 1988 budgetary ECU (contrary to what the Commission states in its reply, however, the costs were indeed fixed in 'green` ECU, as shown by certain official documents, for example COM(93) 27 final, page 4). Subsequently the Commission converted these 420 Mio 'green` ECU into 420 Mio constant 1989 budgetary ECU without any legal basis. This operation had the immediate effect of cutting the financing available to the Spanish programme. The EAGGF-Guidance had thus virtually financed 420 Mio ECU by the end of 1992, even though expenditure is still being incurred in Spain. As a result, the Spanish authorities will therefore have to cancel a number of planned operations or bear the cost of them themselves (see paragraph 8.36). 8.19. Furthermore, the Commission has divided this measure up into three parts (Objective 1 areas, Objective 5b areas and other areas) in accordance with Article 33(2) of Council Regulation (EEC) No 4253/88 laying down provisions for implementing Regulation (EEC) No 2052/88 () . The Commission has therefore incorporated into the Community support framework (CSF) for Spain relating to Objective 1 areas the estimated amounts concerning Regulation (EEC) No 1118/88 for the years 1989 to 1993. 8.20. By including the Commission's financial commitment for this Regulation (corresponding to the 'burden of the past`) in the Objective 1 CSF, the Commission has not only put a strain on the financing of the CSF, but has also caused a considerable reduction in the appropriations available for this Regulation. Since the operational programmes had absorbed part of the funding planned for the CSF, the amount available for the Regulation proved to be insufficient. As a result, there was a reduction of some 15 % (i.e. about 50 Mio ECU) in the Objective 1 areas. 8.21. Because part of the Regulation has been incorporated into the Objective 1 CSF, the latter contains identical measures repeated either in the context of this Regulation or in that of the operational programmes (OPs). These programmes apply to areas covering all or part of the areas to which the Regulation applies. In these overlapping areas, the two Community measures are therefore competing with one another, especially as the OPs receive higher rates of EAGGF-Guidance financing and in some cases enjoy less restrictive conditions. 8.22. Furthermore, from the budgetary point of view, the Commission has applied to the Regulation the provisions of Article 22 of Council Regulation (EEC) No 4253/88 and the provisions of Commission Regulation (EEC) No 1866/90 on arrangements for using the ecu for the purposes of the budgetary management of the Structural Funds () . Lastly, the Commission charged the expenditure incurred in the corresponding areas to the budget headings relating to Objectives 1 and 5b () . 8.23. The decisions taken by the Commission in application of Articles 22 and 33(2) of Regulation (EEC) No 4253/88, the consequences of which have been described in paragraphs 8.18 to 8.22, are irregular. Article 22 cannot be applied to a transitional measure and the sole purpose of Article 33 is to take account of previous EAGGF-Guidance measures in the areas concerned. Any financial impact on Regulation (EEC) No 1118/88 would be contrary to Article 15(1) of Council Regulation (EEC) No 2052/88, which stipulates that this Regulation must not affect multiannual operations approved by the Council or by the Commission on the basis of the existing rules governing the Structural Funds before adoption of this Regulation. IMPLEMENTATION OF THE REGULATION The Spanish implementing programme 8.24. The way in which the areas of application are selected and the appropriations are allocated to the Autonomous Communities does not reflect the priority needs stated in the Spanish implementing programme, but seems more to satisfy the concern that the effects of the Regulation be divided up fairly, in both geographical and financial terms. 8.25. The programme seems to be of an operational nature because of the precision of its forecasts with regard to the cost and the physical specifications for each measure (number of farms, villages, kilometers, hectares). But this precision is only superficial in so far as the costs for each measure correspond exactly to the maximum eligible amounts specified in Article 7(2) of the Regulation. The details for the physical work stem from the unit amounts fixed by the Regulation. The nature of the work to be financed, however, remains vague (see paragraph 8.31). 8.26. Two amendments to the programme were proposed to the Commission and approved by the decisions of 29 April 1991 and 21 April 1992 () in order to revise the aid limits for the individual measures, the total forecast cost of 420 Mio ECU being retained (see Table 8.2). It has therefore been possible to use the appropriations allocated to some measures which have not been implemented much to increase the funding available for public measures which are easier to execute (rural roads, for example), a fact which has fundamentally changed the original programme. 8.27. In fact, the aim in presenting a specific programme was basically to satisfy the formal requirements of the Regulation. The observations on the programme's implementation, set out below, clearly show that the value of this programme was purely theoretical (see in particular paragraphs 8.29 to 8.33, 8.40 to 8.44 and 8.49 to 8.52).>TABLE> 8.28. The Basque Country authorities have drawn up, and are implementing, a specific programme which they have not formally submitted to the Commission and had approved in accordance with the proper procedure. For some measures, it differs from the forecasts of the Spanish programme and introduces a new measure - the installation of telephones for farmers - which is not explicitly provided for by the Regulation () . The Commission at first refused to reimburse this expenditure, then accepted it as part of the improvement of agricultural infrastructure without consulting the Committee on Agricultural Structures and Rural Development (STAR). The decision to accept this expenditure is therefore a de facto recognition of the Basque programme. Moreover, some local authorities ('municipios`), included in the less-favoured areas of the Basque Country after 1988, have been added to the Regulation's eligible areas without the Commission having been being requested or notified of this. Financial implementation 8.29. Table 8.3 shows a summary of the expenditure incurred by the Spanish authorities as at 31 December 1991 () . There has been an overrun of about 52 % for rural roads in relation to the forecasts. Furthermore, if one adds to the expenditure for the 'rural roads` measure the expenditure of the same type included under other headings (irrigation, reparcelling of land, forestry), it amounts to more than 50 % of the total expenditure. Similarly, forestry work accounts for about 28 % of the total expenditure if expenditure of the same type entered under the operations to prevent soil erosion is included (see paragraph 8.41). These two types of work thus cover about 80 % of the programme's spending as against 40 % originally planned. 8.30. Table 8.4 highlights a number of divergences in the implementation of the planned measures. The measures relating to the supply of electricity, the supply of drinking water, the improvement of farmland and the improvement of farm housing have not been carried out in a number of Autonomous Communities and, by contrast, some measures (supply of electricity, supply of drinking water, rural roads) have been implemented even though they were not planned. The STAR Committee ought to have been consulted on these major changes to the programme, in accordance with Article 7(3) of the Regulation. Eligibility of expenditure 8.31. The Regulation is rather vague about the type of work or aid to be regarded as eligible. The Spanish programme has not defined the nature of the work to be carried out any more precisely. The Commission, by its Decision 88/608/EEC, gave its overall approval without making the specifications needed in order to define the eligibility limits, despite the fact that observations along these lines have already been made in two of the Court's Annual Reports () . It is not until on-the-spot audits are made that the Commission gives an opinion on what is or is not eligible. Several cases whose eligibility is questionable have, however, been found by the Court (see paragraphs 8.37 to 8.45) and submitted to the Commission. It is preferable for the eligibility conditions always to be specified right from the outset.>TABLE> 8.32. It is clear from the Community texts concerning this measure () that the eligible expenditure can relate only to work which has been started after the date on which the programme came into force, i.e. 1 May 1988. The checks made by the Court have shown, however, that many payments relating to 1988 in fact concern operations for which commitments were made and the work begun prior to 1 May 1988. The Spanish authorities have declared all the payments made after 1 May 1988 without making a distinction between work carried out as part of the programme and other work. This way of applying the regulations is irregular and renders all planning exercises pointless. Accounting management 8.33. A measure such as this presupposes that a specific accounting procedure is applied by a separate accounting department or that suitable codes are used in order to allow the operations financed by the EAGGF-Guidance to be monitored and checked. The conditions set out in Article 2 of Commission Decision 89/375/EEC of 30 May 1989 on applications for reimbursement () make it necessary, moreover, for there to be specific monitoring. But the authorities of the Autonomous Communities have not set up a separate form of accounting for this expenditure. Because spending relating to this Regulation is included in broader national operations, it usually proves impossible to verify the amounts and dates of payment on the basis of the supporting documents contained in the files. Applications for reimbursement 8.34. The lack of separate accounting for the operations has also led to errors when applications are made to the EAGGF-Guidance for reimbursement. Every year the Autonomous Communities' authorities select from their files certain payments which will be declared to the Ministry of Agriculture (MAPA) for the purposes of this application. Frequently, the amounts declared to the EAGGF-Guidance do not correspond to payments but to commitments or even financing estimates, which thus leads to mistakes being made in the amount and in some cases the year of the payment. Furthermore, operations relating to multiannual projects are sometimes declared for one year but not for the next, or, in cases of joint financing by the State and an Autonomous Community, one of the two financing operations is not submitted for reimbursement. There are therefore many corrections to these applications for reimbursement, which is a sign of unsatisfactory management of the files.>TABLE> 8.35. The costs of irrigation works which are of private interest are mainly borne by farmers. However, the Autonomous Communities advance all the expenditure and subsequently recoup the portion to be borne by the aid recipients by means of annual payments. The Court's enquiries have shown that the Spanish authorities have wrongly submitted an application for EAGGF-Guidance reimbursement for the total expenditure on irrigation (which the Commission has honoured), whereas they should have declared only the amount of public spending. 8.36. In 1992 the Spanish authorities limited their application for EAGGF-Guidance reimbursement for some measures in seven Autonomous Communities () , on the grounds that the appropriations allocated to these Communities had been used up. The initial regional distribution of the funding, fixed by the central Spanish authorities, has led to some Autonomous Communities not being able to have some expenditure reimbursed, even spending considered by the programme to be priority, and to other Autonomous Communities not being able to use up their allocated appropriations on the planned measures. Most of the Autonomous Communities, however, have not followed the initial financial plan (see paragraph 8.30 and Table 8.4) in order to compensate in part for the shortfalls in appropriations for some types of work. This situation clearly shows the dichotomy between priority needs and the fair distribution of appropriations that has been decided (see paragraph 8.24). IMPLEMENTATION OF THE MEASURES Rural roads 8.37. The enquiries made concerning rural roads projects have revealed that a rather broad and in some cases questionable interpretation is made of this type of work. In many cases, farm access roads were asphalted or concreted, work which is formally excluded by the Spanish programme () . The financing of this expenditure on road surfacing resulted in additional costs - 50 % of which were borne by the EAGGF-Guidance - and therefore amendments to the programme (see Tables 8.2 and 8.3). 8.38. Spending on the installation of telephones for farmers was also declared by the Basque Country as part of the improvement of the agricultural infrastructure. This expenditure, amounting to about 0,8 Mio ECU, cannot be regarded as eligible (see paragraph 8.28). Irrigation works 8.39. Provision is made for constructing new irrigation networks on condition that they are needed to channel production towards non-surplus products at Community level () . The Monitoring Committee must make a detailed examination to ensure that this condition is being complied with () . The minutes of this Committee's meetings, however, make no mention of any such examination, nor has scrutiny of the files always made it possible to ascertain whether this work is indispensable and whether production will thereby be channelled towards non-surplus products. Reparcelling of land 8.40. The spending on reparcelling declared to the EAGGF-Guidance mainly concerns related operations (97 %). The work chiefly involves tracks and roads. Some Autonomous Communities (Extremadura, Galicia, Cantabria, Madrid, Navarre, the Basque Country), moreover, submit only work of this type. This expenditure is not in keeping with the aim of the Regulation, which is to carry out new reparcelling projects, with related operations being financed only in cases where they complement the main work. Prevention of soil erosion 8.41. Article 2(4) of the Regulation, which relates to the prevention of soil erosion, provides for a number of small-scale works (such as the construction of small dams, dykes, retaining walls, windbreaks, banks). Most of the work declared under this measure, however, consists in large afforestation operations or work to improve deteriorated woodlands. Even though this work can also help to prevent soil erosion, the appropriations specifically provided for this measure have not been used in accordance with the Regulation's stipulations. Improvement of farmland 8.42. Very little use has been made of the measure for improving farmland because of the more favourable aid possibilities provided for by Regulation (EEC) No 797/85 and subsequently by Council Regulation (EEC) No 2328/91 of 15 July 1991 () and the fact that the authorities of the Autonomous Communities have not entered the corresponding appropriations in their budgets. Tables 8.2 and 8.3 clearly show that the appropriations for this measure have been used as a reserve for other measures. Forestry 8.43. What the measure means by 'forestry` (afforestation, improvement of deteriorated woodlands, other supporting measures) is not very exact. A wide variety of operations have been carried out under this heading, and in some cases their eligibility is questionable, especially where they involve normal work for the upkeep of forests (such as clearing around young trees in plantations which pre-date the Regulation, maintenance clearing work, clearing in preparation for cork harvesting). It is difficult, however, to class fire-protection work (clearing of fire-protection strips, annual fire-prevention contracts, preventive forest-clearing work) as operations to improve deteriorated woodlands. This work is even sometimes charged to the prevention of soil erosion. It should really come under Council Regulation (EEC) No 3529/86 of 17 November 1986 on protection of the Community's forests against fire () . The lack of separate accounting has made it impossible to verify whether expenditure of this type has been declared under the two Regulations in question. Lastly, the files contain no mention as to whether the maximum eligible amounts laid down in Article 7 of Regulation (EEC) No 1118/88 are being complied with () . Improvement of farm housing 8.44. The measure relating to the improvement of farm housing has been applied only in Extremadura and the Basque Country. The other Autonomous Communities have made no provision in their budgets for any appropriations for implementing this measure, despite the forecasts in the Spanish programme. In this case too, the planned Community appropriations have been used as a reserve for other measures in the same Autonomous Communities (see Tables 8.2 and 8.3). 8.45. Furthermore, in the Basque Country the aid was in some cases granted for new buildings (for example, a house not lived in by the aid recipient, an unfinished house being used as a barn, a house which can be regarded as a second home, and a house for a retired person). In Extremadura, the sole project consists of an estate of 30 houses built for seasonal workers. This type of aid is not in keeping with the aim of improvement as stipulated in the Regulation. ADMINISTRATIVE MANAGEMENT By the Commission 8.46. Prior to the reform of the Structural Funds, there was only one department of DG VI responsible for the management and control of the measures and the payment of EAGGF-Guidance aid. Since 1 January 1989, the task of monitoring this Regulation has been split up between the departments responsible for Objective 1 and Objective 5b, whilst the payments and checks have been entrusted to a third department. This complexity was needless, in view of the fact that this transitional measure was a single entity. By Spain 8.47. Annex I of Commission Decision 89/375/EEC requires that the competent authority submit to the Commission a declaration confirming that the Regulation has been complied with. This declaration has been submitted only by the MAPA. In view of the responsibilities conferred on the Autonomous Communities with regard to the implementation of this Regulation, it would have been preferable to require that a declaration be submitted by each of them. 8.48. The implementation of the measures in the Autonomous Communities has been subject to diverging interpretations of the regulations and has lacked harmonization because of the absence of any Commission document offering guidance and of any instructions by the MAPA. 8.49. The Court's enquiries have shown that the supporting documents are inadequate for the purposes of control of Community financing. The files examined had the following shortcomings: (a)some files have several reference numbers, some have none; (b)they seldom contain any study showing that the work is in keeping with the objectives of the Regulation and the Spanish programme and do not include any documents showing that the limits and conditions of the Regulation have been taken into account; (c)the files relating to the work bear no relation to the Regulation, save for a financial monitoring statement (which has proved inadequate for checking whether the eligibility conditions are being complied with). The work is in fact implemented as part of previous national programmes, according to the usual national management procedures; (d)the documents in support of the payments declared to the EAGGF-Guidance are either missing or are too global. 8.50. The aid recipients are seldom informed of the EEC's involvement in the financing of their project. They receive no documents showing them the amount of aid granted and where the appropriations come from. Furthermore, at the project sites there are rarely any signs indicating the origin of the aid or else only the aid from the Autonomous Communities is mentioned. This does not comply with the declaration presented to the Commission when the applications for reimbursement are made. Lastly, local technicians are seldom told about the Community financing and therefore do not have the opportunity to check whether the Regulation's conditions are being complied with. Monitoring 8.51. Article 8 of the Regulation stipulates that a Monitoring Committee should be set up 'to undertake effective implementation of the common measure`. This Committee is made up of only three Spanish representatives of the central administration and two Commission representatives for Objectives 1 and 5b. The authorities of the Autonomous Communities are not directly involved in the monitoring, even though they are a key element in the application of the Regulation. Moreover, the monitoring carried out by the monitoring committees for the regional OPs takes only marginal account of Regulation (EEC) No 1118/88; projects in areas not covered by the Objectives (about 11 %) are excluded from this monitoring. 8.52. An examination of the minutes of the Monitoring Committee's meetings has revealed that its main concern was to enable Community appropriations to be used up. The problems encountered in carrying out some measures, in particular the improvement of farmland, the improvement of farm housing and the supply of electricity, have not been sufficiently taken into account in order to try to achieve all the objectives laid down in the programme. The Monitoring Committee has thus endorsed transfers of appropriations from one measure to another within the Autonomous Communities and has taken decisions on questions of eligibility (the period, the nature of the work). The Court cannot find any legal basis for these decisions. The Commission ought to have consulted the STAR Committee. Control 8.53. The checks made by the MAPA and the Autonomous Communities relate essentially to the regularity of the expenditure of the national or regional budget; no specific on-the-spot checks relating to the eligibility conditions have been made (see paragraphs 8.33 and 8.49). 8.54. The checks made by the Commission on the applications for reimbursement could be only limited, given the global nature of the financial data contained in these applications. The verification as to whether the eligibility limits laid down in Article 7(2) of the Regulation were complied with cannot be regarded as satisfactory because of the lack of proper data on the physical work carried out (see paragraphs 8.31 and 8.32). 8.55. The audit performed by the Commission in Spain does not suffice to allow an assessment of the implementation of the various measures. The observations sent to the Spanish authorities following this audit did not help to improve the implementation of the Regulation and DG VI has not ascertained whether these observations have actually been taken into account. Evaluation 8.56. The Regulation does not expressly stipulate that an evaluation be made of the effects of this measure. However, the Commission was required to report to the Council on the progress of the common measure by the end of 1992 () . This report, which was sent to the Council on 4 February 1993, says in its conclusions that the Regulation was carried out according to the forecasts. This appraisal contradicts the actual content of the report. Furthermore, the Commission makes no comment on the checks carried out, the results obtained and the impact to be expected from such a measure. CONCLUSION 8.57. There have been a number of shortcomings in the implementation of the Regulation: (a)The programme has opted for fair distribution of the appropriations amongst the Autonomous Communities rather than distribution in accordance with the set priorities. (b)Most of the financing (about 80 %) has been devoted to work relating to rural roads and forestry, which means that the majority of the programme's objectives will not be achieved. (c)EAGGF-Guidance aid was considerably reduced following a Commission decision which was all the more questionable in so far as the Regulation, being a transitional measure, could not be financially affected by the reform of the Structural Funds. (d)The instructions for the Regulation's implementation were inadequate, as were the monitoring and the checks carried out by the Commission and the Spanish authorities. 8.58. Even though the implementation of this first Community measure in Spain encountered a number of difficulties, the Commission, in conjunction with all the Spanish authorities responsible, ought to have been able to achieve an implementation which complied better with the objectives of both the Regulation and the Spanish programme. CHAPTER 9 (*) Loans, borrowings and interest-rate subsidies >TABLE> (*) The Commission's replies are on page 316 INTRODUCTION 9.1. The Commission of the European Communities borrows to finance New Community Instrument (NCI) loans () , European Atomic Energy Community (Euratom) loans () and balance of payments (BP) loans () . It also borrows to finance loans made under the European Coal and Steel Community (ECSC) Treaty. The Court of Auditors produces a separate report () on the ECSC activities. The borrowing and lending operations concerning Central and Eastern Europe and the Commonwealth of Independent States (CIS) are dealt with in chapter 11. Tables 9.1 and 9.2 summarize the various borrowing and lending mechanisms and the changes in operations during the financial year 1992. OBSERVATIONS ON THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS FOR THE NCI, EURATOM AND BALANCE OF PAYMENTS MECHANISMS 9.2. The Court examined the NCI, Euratom and balance of payments balance sheets as at 31 December 1992, along with the revenue and expenditure accounts relating to these three mechanisms for the financial year 1992. In paragraph 12.3 of its annual report concerning the financial year 1991, the Court noted 'that the balance of payments banking transactions were carried out via bank accounts established for the NCI loan operations.... (and) that separate bank accounts should be established for each financial instrument`. In its reply to this comment, the Commission declared that 'new bank accounts have now been opened as required`. However, when carrying out checks relating to the financial year 1992, the Court found that, contrary to the Commission's claim in its reply, the problem was still there throughout the whole of the 1992 financial year.>TABLE> EUROPEAN MONETARY SYSTEM (EMS) INTEREST-RATE SUBSIDIES 9.3. Council Regulation No 1736/79 () and Council Decision 79/691/EEC () of 3 August 1979 provided for loans to be granted to Ireland and Italy from both the European Investment Bank's (EIB) own resources and the NCI to carry a 3 % per year interest-rate subsidy under the EMS financed by the EC budget. The amount of the loans to be subsidized was set at 5 000 Mio ECU for a period of five years, with an amount of 1 000 Mio ECU to be entered in the budget to cover the discounted value of these subsidies. Table 9.3 summarizes financial management information for the five-year duration of this measure, and shows that Italy received some 3 335,5 Mio ECU in Community loans and 669 Mio ECU in interest-rate subsidies, while Ireland received some 1 470 Mio ECU in Community loans and 331 Mio ECU in interest-rate subsidies. NEW TRIPARTITE AUDIT AGREEMENT 9.4. The level of outstanding loans (3 481,3 Mio ECU of NCI loans at 30 June 1992) and the budget disbursements of 1 000 Mio ECU concerning the interest-rate subsidy rendered necessary new audit arrangements to facilitate the Court's audit of NCI loans and related subsidies managed by the EIB. 9.5. In November 1992, new arrangements were agreed between the Commission, the EIB and the Court. The main improvements are:>TABLE> (a)arrangements for the auditing by the Court of operations financed by the EIB's own resources but covered by a general budget guarantee; (b)the establishment of a list of basic documents to be available at the Commission, which the Court considers to be the minimum information necessary to enable an audit to proceed; (c)the establishment of a procedure concerning the planning, preparation and organization of on-the-spot audits, which acknowledges that both the Court and the EIB's Audit Committee work as equal partners in coordinating these audits. 9.6. On-the-spot audits in 1992 were organized in accordance with the new arrangements. However, the Court takes the view that there were some practical difficulties in setting them up, especially as regards the question of programming the audit visits in such a way as to reconcile the Court's objectives and methods with those of the Audit Committee, which are distinctly different. AUDIT OF NCI LOANS AND INTEREST-RATE SUBSIDIES IN THE MEMBER STATES 9.7. During 1992, the Court carried out on-the-spot audits in Ireland and Italy with the EIB's Audit Committee. Financial information and implementation details concerning the four loan projects audited are recorded in Table 9.4. 9.8. For each project audited, the Court verified, by means of an examination of the files kept by the relevant Commission department, that the Commission's eligibility procedure for appraising and authorizing a loan operation had been applied, and had resulted in a positive decision. At that stage, the Court was, however, unable to ascertain project progress as the Commission's records did not contain annual project progress reports. Although these reports were eventually made available to the Court by the EIB, thus making it possible for the Court to examine them, the implication is that the Commission services did not have available this essential monitoring information concerning the implementation of the projects. Observations arising from on-the-spot audits Ireland 9.9. The first project reviewed aimed to reinforce the inadequate existing water supply and sewage disposal infrastructure in the Greater Dublin area and to meet the future industrial and urban needs of this area. 9.10. Implementation delays and cost increases began to be reported in the progress reports that were sent to the EIB as early as July 1979 (12 months after the loan was approved) and continued to be reported in each of the following years until 1984.>TABLE> 9.11. In November 1984 the project's technical description was amended so as to exclude four sub-projects with estimated costs of 7,8 Mio ECU from the original approved package of 26 works, in order that the overall project could be completed without further delay. The project was not, however, completed until 1986, at which point implementation delays amounted to four years and final costs had increased by 50 Mio ECU, representing a 57 % rise over the revised estimate. This increase in costs required additional financing, which was provided from the residue of the NCI loan, a European Regional Development Fund (ERDF) subvention and an increase in the State aid. 9.12. The second project reviewed aimed to construct 45 regional schemes to upgrade Ireland's water supply and sewage disposal infrastructure. The project, which was part of a nationwide works programme, was to assist the expansion of industrial, agricultural and tourist activity in the relevant regions and, at the same time, create 74 permanent jobs. 9.13. In this case too, implementation delays and cost increases were reported to the central authorities by those in the field at an early stage (June 1981) and continued to be reported in each of the following years, 1982, 1983 and 1984. 9.14. In November 1984 the project's technical description was amended to exclude 11 sub-projects with estimated costs of 20,2 Mio ECU from the original approved package of 45 works in order that the overall project could be completed without further delay. All the same, the project was not completed until 1986, when implementation delays amounted to two years and final costs had increased by 13 Mio ECU, representing a 29 % rise over the revised estimate. This variation in costs required additional financing which was mainly provided from the ERDF subvention. Conclusion from the audit of two projects - Ireland>TABLE> 9.15. The procedures established for monitoring annual progress indicated at an early stage that these two projects would suffer from delayed completion and cost increases. In the end, the projects could only be brought to completion by amending the technical descriptions to exclude several sub-projects. These excluded sub-projects were subsequently reintroduced and completed under other national schemes that were part-financed by additional EIB loans. This means, however, that the Community funds initially made available for this investment were ultimately used to less effect than originally assumed. The Commission services had not realized, through the annual progress reporting mechanism, that projects had encountered problems, or that decisions had been taken to amend their technical descriptions in order to finalize them. 9.16. The cost increases resulted from additional construction work necessary to overcome technical difficulties and delays in implementation during a period of rising inflation. The national authorities reported large differences between initial estimated costs and actual tender amounts, which indicated that project costs had started to increase before the actual work commenced. Furthermore, delays in the release - by the national authorities and through the national fund management system - of the EIB/NCI loan funds for the approved projects also contributed to the time and cost overruns, as without the necessary financial resources work could not be commenced or continued. 9.17. These projects have, however, contributed to the development of the water supply and sewage disposal infrastructure in Ireland in the context of the expansion of industrial, agricultural, tourist and urban activity. Nevertheless, time and cost overruns and project revisions resulted in increases of 25,1 Mio ECU in NCI loans and 20,1 Mio ECU in ERDF subventions. The Community authorities (the Commission and the EIB) should have realized what was happening through the annual reporting procedures, which would have enabled them to react promptly to those matters affecting the progress of projects, in particular those depending on the national fund management system. Finally, the creation of additional permanent jobs could not be verified because this matter was not addressed in the drafting of the project evaluation reports. Italy 9.18. The third project reviewed aimed to improve the supply of drinking water in Central Apulia by extending the Pertusillo aqueduct and improve its operating efficiency by the construction of works to both regulate the water flow and create additional water storage reservoirs. 9.19. Although the water supply scheme was functioning by mid-1984, overall project works were not completed until late 1986, a delay of more than four years. This delay resulted from modifications to the project's original description in order to overcome geological problems and the effects of the November 1980 earthquake, which had deprived the other parts of the main network of water. The overall financial consequence was a 33 % increase (85,6 Mio ECU) over estimated costs, which was financed by additional ERDF and State funds. 9.20. The Court's auditors compared figures set out in the independently certified statements of expenditure (collaudo) with financial information held by the Commission. This exercise could only be carried out with great difficulty, however, as neither the EIB nor the Commission had ever used these certificates as supporting documents for the purposes of their own controls on the beneficiaries. 9.21. Moreover, during the Court's on-the-spot audits it emerged that the sum included as the final cost of a sub-project in the EIB's evaluation report, namely 25 642 Mio LIT, was overstated by 4 464 Mio LIT, as a result of the inclusion of 939 Mio LIT of savings achieved compared with the expenditure forecasts and 3 524 Mio LIT of VAT. This indicates uncritical acceptance of a figure supplied by the beneficiary. 9.22. The fourth project reviewed aimed to improve the availability of natural gas in the EC and diversify energy supply sources by reducing oil imports, as well as to increase the supply of gas to the Mezzogiorno, thereby encouraging industrial development. This was to be achieved by the construction of a gas pipeline from Algeria to Italy. Construction was in ten sections, eight of which were part-financed by EIB/NCI loans. Of these, five also received EMS interest subsidies. 9.23. All in all, the project was completed in accordance with the original schedule, the longest delays incurred by some sections being 10 months. As the initial margin provided for price increases and technical contingencies was only partly used, final costs were 4 % lower than originally estimated. 9.24. It proved particularly difficult for the Court's auditors to assess the control measures that had been introduced in order to ensure the reliability of the actual costs declared by the beneficiary in respect of the project. This difficulty resulted above all from the absence, in those files that were accessible to the Court, of adequate evidence to suggest that any auditing had taken place. 9.25. Generally speaking, the Court considers that the accounting control measures that are to be applied in respect of beneficiaries of NCI loans and EMS interest rate subsidies need to be defined and rendered more formal in their division between the Commission and the EIB, so as to ensure that Community funds are correctly used and applied only to those purposes for which they have been granted. Conclusion from the audit of two projects - Italy 9.26. While both projects were completed as planned the scheme to improve the supply of drinking water experienced a delay of more than four years and a 33 % increase in costs which was partially covered by additional financing from the ERDF of 12,2 Mio ECU. Furthermore, the monitoring and evaluation procedures applied to these projects should have included more verifications to ensure that costs were accurately reported. CHAPTER 10 (*) Research >TABLE> (*) The Commission's replies are on page 318 INTRODUCTION 10.1. The Court's observations on research () are grouped under two distinct headings: (a)implementation of the budget and financial audit; (b)the framework programme. IMPLEMENTATION OF THE BUDGET AND FINANCIAL AUDIT Evolution and utilization of appropriations 10.2. Table 10.1 compares the 1992 budgetary appropriations for the headings falling within the domain of research. 10.3. The level of utilization of appropriations was generally satisfactory, although 102,0 Mio ECU of 1992 research and technological development payment appropriations were not used during the year and were carried forward to 1993. A further 41,6 Mio ECU of payment appropriations were cancelled. 343,7 Mio ECU of commitment appropriations were carried forward from 1991 in respect of research programmes in the third framework programme where delays had prevented implementation in 1991. Utilization of these appropriations in 1992 was high and, at the same time, utilization of final 1992 appropriations in these programmes reached 99,2 % on average. 10.4. As regards the Joint Research Centre (JRC), the Council Decision adopting the specific research programmes was not made until 29 April 1992 () . On the basis of advice from the Commission's legal service, and with the agreement of the Financial Controller, a pragmatic approach was adopted, whereby new activities were suspended until the legal base was received. 10.5. The utilization of commitment and payment appropriations by the JRC was 94 % and 96 % respectively, as compared with 91 % and 95 % in 1991. The main reason for non-utilization was that appropriations could not be used because insufficient income was received from work for third parties. In one case, a transfer of payment appropriations was approved, but that of the associated commitment appropriations was not: thus the payment appropriations (1,2 Mio ECU) could not be used. Financial audit Audit approach 10.6. The audit approach adopted in 1992 for the examination of research was substantially revised and extended in comparison with that of previous years. Thus the examination included, inter alia: (a)a review of the major systems and controls operating in the Directorates-General concerned that are designed to ensure the reliability of the accounts and the legality and regularity of the underlying transactions; (b)an examination of a statistically valid sample of transactions to test whether: (i)the above mentioned controls had indeed operated effectively, and (ii)whether the accounts were reliable and the underlying transactions legal and regular, (c)a review of the functioning and key features of the accounts on a test basis (transfers, dormant commitments, etc). Results of the audit 10.7. The details of the observations arising from this audit are set out in Chapter 13 of this report. A number of weaknesses in the operation of systems and errors or delays in accounting transactions were detected, particularly at DG XII. 10.8. In its annual report on the financial year 1991 () , the Court reported on the results of its examination of the administrative follow-up of contracts by Directorate-General XII. It concluded that there was a need to strengthen internal controls and that there should be a manual containing all current rules and instructions, so as to improve the follow-up of contracts. The results of the 1992 financial audit of research confirm the 1991 conclusions. THE FRAMEWORK PROGRAMME Introduction 10.9. As of 31 December 1992, the Community had already adopted three framework programmes:>TABLE> (a)the first framework programme, adopted in July 1983, long before the Single European Act, covered the period 1984-87 () ; (b)the second framework programme, adopted in September 1987, covered the period 1987-91 () ; (c)the third framework programme, adopted in April 1990, covers the period 1990-94 () . 10.10. The periods covered by these framework programmes overlap so as to provide continuity and follow-up in the programmes () . 10.11. At the end of the second framework programme (1987-91) and on the eve of the adoption of the fourth (which is to cover the period 1994-98), the Court thought that the time was right to examine the framework programme concept, as both a strategic programming aid and a financial planning instrument. The first three framework programmes Objectives and action to be taken 10.12. Article 130f of the Single European Act, which came into force in July 1987, specifically assigns two objectives to research and technological development policy: (a)to strengthen the scientific and technological basis of European industry, and (b)to develop its international competitiveness. 10.13. Articles 130f et seq. mention a number of activities to be launched in pursuit of these objectives and set out certain sub-objectives: (a)encouraging research and cooperation with undertakings, including small and medium-sized undertakings (SMUs), research centres and universities; (b)defining common standards, so as to enable companies to exploit the potential of the internal market to the full; (c)promoting cooperation with third countries and international organizations; (d)disseminating and exploiting the results of Community research activities; (e)stimulating the training and mobility of research workers in the Community. 10.14. These objectives and activities - in addition to the strengthening of economic and social cohesion, as provided for in Article 130a; regard for the principle of subsidiarity; the central, pre-eminent nature of the pre-competitive aspect in Community research and technological development activities - are mentioned in the preamble to the framework programme. Implementing procedures 10.15. According to Articles 130i et seq., the framework programme is to lay down the scientific and technical objectives for each theme or main line of activity, fix the amount of Community financial participation for each activity envisaged and set out detailed rules for financial participation by the Community. The framework programme thus makes it possible to define a strategy () and draw up a financing plan. 10.16. The Commission consults scientists and national experts in various committees and draws up a proposed framework programme, which is then submitted to the European Parliament and the Economic and Social Committee in a consultative procedure. The Council then adopts the framework programme, which is implemented by means of specific programmes. Each specific programme is the subject of a corresponding Council decision, which sets out the detailed rules for implementing the programme, fixes its duration and specifies the 'amount deemed necessary` for the execution of it. 10.17. The specific programmes are executed: (a)mainly by means of shared-cost research contracts - whereby the Community usually funds 50 % of the research costs - which are carried out by companies, universities and research institutes in the Member States ('indirect action`); (b)by means of research work carried out in the Community research centres ('direct action`); (c)by means of concerted action, in which case the Commission does not fund the research directly but does finance the costs of coordinating the work carried out by the Member States. Financial aspects 10.18. A comparison of the three framework programmes shows the following (Table 10.2): (a)The first framework programme (1984-87) was given total funding of 3 750 Mio ECU, with the emphasis on improving the management of energy resources (47 % of total funding) and promoting industrial competitiveness (28 %). (b)The second framework programme (1987-91) was centred on support for industry (58 %), whilst the proportion of research in the energy sector was reduced (22 %); the funding was 5 396 Mio ECU, but the Council decided that an amount of 863 Mio ECU (16 % of the appropriations), which subsequently became known as the 'overhang`, would not be entered in the budget until after 1991 () , after the end of the programme. Appropriations were thus adopted for each specific programme, although it was not possible for all of them to be committed. (c)The third framework programme (1990-94) brought with it a further shift in priorities: although industrial research was still important (53 %), research in the energy sector () continued to fall (16 %), in favour of the environment. It was possible for all the appropriations in the total funding of 6 600 Mio ECU to be committed during the period, including the additional finance () . The Court's observations The framework programme as a strategic programming aid Content 10.19. The three framework programmes together included all the Community's research and technological development activities, with the exception of:>TABLE> (a)'accompanying and support` activities for the framework programmes, even though they increased tenfold between 1989 and 1992 (230,1 Mio ECU compared with 23,9 Mio ECU, see Table 10.3) and some of them are more in the nature of independent programmes, without any basic legal document (high-definition television, action for technological development concerning the socio-economic integration of the handicapped and the elderly, scientific and technological cooperation with the countries of central and eastern Europe: the EAST, Copernicus and GREEN programmes); (b)various measures in support of competitiveness or demonstration projects: (i)'Thermie` () (350 Mio ECU for the period 1990-92); (ii)'Sprint` () (90 Mio ECU for the period 1989-93); (iii)'Impact` () (64 Mio ECU for the period 1991-94); (iv)certain demonstration projects in the field of the environment () (24 Mio ECU for the period 1987-91); (c)research in the ECSC field (123 Mio ECU in 1992). 10.20. The framework programmes thus do not provide a complete picture of the Community's research activities. Evaluations of the second framework programme 1987-91 10.21. In 1989, in accordance with the Council Decision () , the Commission commissioned a mid-term review of the second framework programme by a group of independent consultants () , which drew attention to the following weaknesses: (a)the considerable amount of time that elapsed between the framework programme proposal and the launch of the research projects; (b)the excessive dispersion in the themes: the research aid was not targeted sharply enough on the priority objectives; (c)the tendency to renew programmes more or less automatically: the Commission was too ready to prolong current programmes;>TABLE> (d)the lack of flexibility in the financial management: the rules for implementing the framework programme budget were too rigid; (e)lack of coordination: not enough attention was devoted to the coordination of national research policies. 10.22. In 1990, these weaknesses were confirmed by a further study by independent experts, which was concerned mainly with the administration of research activities () . Finally, in 1992, the Commission submitted a further evaluation of the second framework programme in 10 volumes () , together with a communication () . 10.23. This latter evaluation in 10 volumes, however, was a synthesis of various interim and final reports on the specific programmes by outside experts. Several important questions were not addressed. It did not examine the following, for example: (a)whether the measures laid down within each theme in the framework programme contributed towards the attainment of the objectives underlying the theme; (b)whether the second framework programme contributed towards the attainment of certain objectives laid down in Articles 130f to 130q of the Treaty and mentioned in the preamble to the Council Decision (development of international competitiveness, definition of common standards, the central and pre-eminent nature of the pre-competitive aspects, participation by SMUs). The compatibility of the various objectives was moreover not apparent. For example, the objective of improving industry's competitiveness by providing support for leading-edge technologies is one which is not necessarily compatible with the objective of strengthening infrastructure and enhancing scientific and technological potential in the least favoured regions. For any given project, undertakings try to achieve one or the other of the objectives. Finally, the objective of strengthening economic and social cohesion is better suited to certain Structural Fund programmes (Stride () , Valoren () , STAR () ); (c)whether the different procedures for financing research projects are adequate. For example, in the case of the second framework programme, where 85 % of the appropriations were earmarked for indirect action, 13 % for direct action and 2 % for concerted action, the question as to how far the distribution was appropriate has not been examined; how far it had been possible to employ the new financial packages (Eurotech Capital, Eurotech Insur) () or, even, the extent to which the level of the Community's financial contribution to the indirect action projects ought to be adjusted in terms of the proximity of the projects to the market are also questions that are still to be addressed; (d)whether the framework programme is sufficiently flexible. Even though, since the upheavals in the countries of central and eastern Europe, the Community has engaged in scientific cooperation outside the framework programme, the Commission has not examined the latter's flexibility; (e)and, finally, the question of how much stability the framework programme contributes to financial planning (see 10.33-10.39). 10.24. A study of these questions would certainly have made it possible to improve the way the framework programme functions, as the Court moreover indicated in its annual report on the financial year 1987 () . In this connection, it should be noted that subsequently the Committee on Scientific and Technical Research (CREST) and the European Parliament also carried out an evaluation of the framework programme. 1).6Weaknesses of the third framework programme 1990-94 10.25. The review of the third framework programme revealed, for the first year of full implementation, that the weaknesses pointed out in the second programme were still there. 10.26. For example, nine months elapsed between the date of the Commission's proposal and the date of the Council Decision on the third framework programme (compared with 15 months in the case of the second framework programme). As regards implementation of the programme, however, only 77,1 Mio ECU (1,2 % of the appropriations) had been disbursed by the end of 1991 and in the case of most of the measures envisaged there were certain research projects which had still not been given the go-ahead 20 months after the Council decision. Some of the programming difficulties had been underestimated. For example: (a)The time required for the decisions on some specific programmes was much longer than initially allowed for. One third of decisions were not taken until two years after the Council Decision on the framework programme. The average interval between the date of the Commission's proposal for a specific programme and the adoption of the relevant Council decision was more than 15 months (see Table 10.4). Moreover, the decisions concerning the Joint Research Centre () were not taken until April 1992. As the previous programmes had expired at the end of 1991, the Joint Research Centre's activities in the initial months of 1992 were carried out in conditions that made it difficult to ensure satisfactory management. (b)Lastly, the start of research work was sometimes delayed by administrative weaknesses. For this reason the consultants (see paragraph 10.22) criticized the complexity and bureaucratic nature of the management procedures. But it was one and a half years before the Commission began any administrative restructuring, the effectiveness of which is still to be seen. Moreover, the project selection procedure had to be modified, because it proved to be unsatisfactory. 10.27. Owing to these difficulties, the principle that the programmes should overlap in time (paragraph 10.10) did not function correctly in 1991, which interfered with the desired element of continuity. Consequently, although the funds allocated for research were increased, commitments in 1991 were down on 1990 (see Table 10.5). 10.28. Taken together, these delays jeopardize the effectiveness of Community efforts to increase the competitiveness of industry, especially in a sector which is naturally dynamic and innovative.> TABLE POSITION> 10.29. The reduction in the number of research topics (two units) and the number of specific programmes (half) from the second to the third framework programmes is more apparent than real, even though the Commission itself warned against excessive scattering of resources () . In fact, the only specific programmes that have been discontinued in the third programme are EURET () (research in the field of transport) and DOSES () (statistical expert systems). 10.30. The Commission has brought together a large number of measures within one specific programme. For example, there is no longer a specific programme for research into 'strategical analysis: evaluation and prospects` (the 'Monitor` programme (29) of the second framework programme). These activities now form part of the centralized activity of disseminating and utilizing results, but their purpose is different () . The object of the former activity is, in fact, to publicize and protect research results and to encourage the transfer of innovations, whereas the measures associated with the Monitor programme are to undertake general technological evaluation or to carry out surveys with the aim of identifying new social needs(31). 10.31. The financial management continues to be subject to a financial framework which is often not flexible enough for it to be possible to handle satisfactorily thousands of contracts with numerous contractors on a multiannual basis. Owing to the uncertainties associated with the adoption of the budget, the restrictions on carry-overs of appropriations and the complexity of the rules on mini-budgets and transfers, it has already been recommended that budget management should be contracted out. 10.32. The third framework programme does not provide for any initiative to promote coordination of the policies and programmes pursued at national level (Article 130h of the Treaty). The Commission itself has said that, for the Community, the fact that, 'Contrary to Treaty recommendations, Community research has developed without any coordination of initiatives taken by individual Member States` () was a major strategic error. This is all the more so as promotion of research by the Community remains at a modest level, since Community research expenditure accounts for only 4 % of the corresponding public expenditure (or 2 % of public and private expenditure) by the 12 Member States () . The framework programme as an instrument of financial planning 10.33. The framework programmes allocate a multiannual financial package to the various measures so as to give them financial stability and to enable the various European parties involved in research to programme their own initiatives better () . 10.34. Article 130p states that 'the amount of the Community's annual contributions shall be laid down under the budgetary procedure, without prejudice to other possible methods of Community financing`. Financial planning clearly cannot provide the desired degree of stability unless annual programming, in the form of the budgetary procedure, is an integral part of the multiannual planning logic of the framework programme. 10.35. Whilst Parliament is consulted on the subject of the framework programmes, it does not have any powers of joint decision. In contrast, it does have real power to influence decisions in the context of the annual budget procedure, especially where research expenditure is concerned. This inconsistency creates problems because the Council and the Parliament do, on occasion, have different points of view. In the case of the second and third framework programmes, for example, the Council regarded the amounts deemed necessary as ceilings, whereas Parliament did not. When exercising its budgetary powers, the Parliament in fact considers that it is bound only by the maximum rates laid down within the framework of the 'interinstitutional agreement on budgetary discipline and improvement of the budgetary procedure` () . In this way, the Parliament, when voting the 1991 budget, entered 40 Mio ECU more for the JOULE programme than the 'amount deemed necessary` laid down in the second programme. The result was that the budget and the framework programme, which are both binding, showed contradictory figures. Implementation of the second framework programme 10.36. The implementation of the framework programme was not without difficulties. In the 1991 budget, for example, there were significant discrepancies with regard to the framework programme () : (a)the 1991 budget reduced the 'overhang` (see paragraph 10.18(b)) from 863 Mio ECU to 273,8 Mio ECU, (b)and provided for the 'amount deemed necessary` to be exceeded by 70,3 Mio ECU. 10.37. The Commission in fact drew up its preliminary draft budget for 1991 on the basis of the framework programme and the Council did not make any major change to these figures when it established the draft budget. In the budget adopted by the Parliament, however, the funding for the framework programme exceeded by 600 Mio ECU the funding that had been proposed in the preliminary draft. As a result of this substantial increase in the appropriations for the 1991 financial year, the total 'amount deemed necessary` for the second framework programme (5 396 Mio ECU) was granted, except for 203,5 Mio ECU. The 1991 multiannual indicative schedule (Annex I to the budget), however, made provision for an overhang of 273,8 Mio ECU post-1991, thus producing a 70,3 Mio ECU over-run. As a consequence of this major anticipation of spending, the overhang that had been provided for initially (863 Mio ECU) was substantially reduced. 10.38. The Commission then tried to reduce the substantial discrepancies between the budget and the framework programme, at least in part. A Commission proposal () seeking to adjust the framework programme did not however result in any decision on the part of the Council. As a result, the discrepancies between the 1991 budget and the framework programme persisted, and it became clear, one year later, in the course of the budget procedure concerning the financial year 1992 that, in order to ensure consistency between the framework programme and the budget on a long-term basis, it would have been necessary to adjust the framework programme for each new budget. 10.39. In the case of the JOULE specific programme (122 Mio ECU) () concerning non-nuclear energy, as of 31 December 1990 there was, according to the second framework programme, a residue of 12 Mio ECU for 1991 and 1992, after which the 'amount deemed necessary` for this specific programme would be exhausted. The amount entered in the 1991 budget was, however, 50,9 Mio ECU and the multiannual schedule (Annex I to the budget) provided for a further 1,1 Mio ECU for 1992. During the financial year 1991, however, the Commission entered into commitments for 26,9 Mio ECU, which tallied with neither the framework programme, nor the budget. The multiannual schedules thus no longer formed the basis for implementation. Under these conditions it becomes extremely difficult to ensure optimum planning. 10.40. Table 10.6 shows the true situation with regard to the implementation of the second framework programme as of 31 December 1991. The table shows that the real overhang was 270,1 Mio ECU (compared with an expected 863 Mio ECU when the framework programme was adopted). The total 'amount deemed necessary` (5 396 Mio ECU) had, therefore, not been exceeded as of 31 December 1991, even though there was overspending on four specific programmes. 10.41. Table 10.6 concerns only commitments, owing to the fact that the Commission was unable - even at the end of the Court's audit in autumn 1992 - to provide an exact breakdown of payments effected between the first and second framework programmes. It is, therefore, impossible to establish what proportion of the funding for the second framework programme had not given rise to any payment as of 31 December 1991, which deprives the Commission of a factor that is important for its appraisal. The third framework programme 10.42. During the first two years, start-up problems with the third framework programme gave rise to substantial divergences from the forecasts. During 1990 no commitment of appropriations was entered into for this framework programme. For 1991, the budget provided 660,7 Mio ECU of commitment appropriations, whereas the commitments entered into amounted to only 296,4 Mio ECU (44,9 %). Part of the balance was carried forward to 1992 (343,7 Mio ECU), and part was cancelled (20,6 Mio ECU). For 1992, the initial budget provided commitment appropriations amounting to 2 059,5 Mio ECU; after several supplementary and amending budgets, this amount was subsequently reduced by 206 Mio ECU, to 1 853,5 Mio ECU. The 'amount deemed necessary` for the third framework programme for the period 1990-92 (2 500 Mio ECU) was not exceeded. By means of the cancellation already mentioned (20,6 Mio ECU), the Commission was able to avert the over-run that would have occurred had all the appropriations provided been used. 10.43. Even if the global amount for the period 1990-1992 was not exceeded, there are divergences between the framework programme estimates and those of the 1992 budget in the breakdown between the different spheres of activity, particularly as regards research themes Nos 1 (Information and communications technologies) and 6 (Human capital and mobility). The framework programme earmarked 974 Mio ECU for sphere of action No 1. Subject to the implementation of the 1992 budget, however, this amount should have been 1 103 Mio ECU (difference: 129 Mio ECU, or 13 %). In the case of sphere of action No 6, the framework programme provided for appropriations to the value of 227 Mio ECU, whereas the appropriations available within the framework of the 1992 budget amounted to only 124 Mio ECU (difference: 109 Mio ECU, or 49 %) () . The question, therefore, is to what extent and at what point these imbalances between the themes will be corrected. Conclusion 10.44. Although the three framework programmes have undoubtedly contributed to improving cohesion as regards research and technological development activities, there are nevertheless certain defects in the current procedures, which must be corrected: (a)The Community processes for taking decisions and implementing the specific programmes are too long. Owing to the amount of time which they take, the Community is running the risk, especially in the area of industrial research (where innovation is particularly rapid), of promoting projects which are no longer at the leading edge of technology, and of not augmenting the competitiveness of industry in the Community. (b)The dispersion of themes adopted, the tendency to renew themes that have already been selected, the lack of flexibility in financial management and the lack of coordination (weaknesses which the consultants also pointed out in the second programme) similarly affected the third framework programme during its initial stage. (c)Owing to the absence of evaluation by the Commission of certain questions concerning the framework programme (themes, financing procedures, objectives and their compatibility, flexibility - see paragraphs 10.13 - 10.25), it is not possible for the Community to take account of all the ways of improving the instruments with which it has been provided. 10.45. That is why the Commission ought to: (a)examine current procedures with a view to reducing the delays in the execution of specific programmes, and also examine what steps can be taken to palliate the other weaknesses pointed out by the consultants and confirmed by the Court; (b)study and put in place the procedures required to provide adequate financial monitoring and proper evaluation of the framework programmes.>TABLE> >TABLE> CHAPTER 11 (*) Cooperation with the countries of Central and Eastern Europe and the former Soviet Union >TABLE> (*) The Commission's replies are on page 322 INTRODUCTION Aid to the countries of Central and Eastern Europe (PHARE countries) 11.1. In 1992 Operation PHARE ('Pologne-Hongrie: Aide Ã  la Restructuration Economique`) () covered Bulgaria, Hungary, the former Czechoslovakia, Poland, Romania, the former Yugoslavia, Albania, Lithuania, Latvia and Estonia. PHARE aid to the former Yugoslavia was suspended from 1991 onwards, with the exception of humanitarian aid measures, which, in 1992, concerned Bosnia-Hercegovina and the former Yugoslav Republic of Macedonia. Slovenia was included in the PHARE programme as a beneficiary State with effect from August 1992. 11.2. Table 11.1 shows the total amount of aid granted by the Community from 1990 until 31 December 1992 under the PHARE programme. In addition to these PHARE interventions, there were also EAGGF-Guarantee food aid decisions, which in 1992 amounted to 85 Mio ECU for Albania and 45 Mio ECU for the three Baltic states, along with the humanitarian measures decided in 1992 in favour of the former Yugoslavia (72,5 Mio ECU charged to the EAGGF-Guarantee and 135,6 Mio ECU charged to the 'humanitarian aid` budget heading). These figures do not take any account of the effects of decisions taken in 1991. In order to obtain an overall view of the Commission's management of food aid to the countries of Central and Eastern Europe and the former Soviet Union the reader must also refer to Chapter 2 of this report. Aid to the former Soviet Union 11.3. The cooperation programme with the former Soviet Union () , which started in 1991 and is now known as the 'Technical Assistance to the Commonwealth of Independent States (TACIS)` programme, has, since 1992, continued with the former Soviet Union's successor States, including Georgia, these latter having taken on the former Soviet Union's obligations by signing the protocol of 11 February 1992.>TABLE> >TABLE> 11.4. Table 11.2 shows total aid granted in the form of donations to the former Soviet Republics under the TACIS programme. Differentiating between the management of TACIS and PHARE 11.5. Responsibility for managing Operation PHARE is shared between the Commission and the recipient State, whereas the implementation of TACIS is the sole responsibility of the Commission. The PHARE programmes are implemented by the competent national authority via a management unit which receives advances from and is accountable to the Commission. The TACIS programmes, on the other hand, are implemented through contracts which are administered and paid for directly by the Commission. Although the drawing-up of the TACIS programmes involves the national authorities of the recipient State, the responsibility for implementing them rests solely with the Commission in Brussels. Cooperation with the national audit authorities 11.6. The Court of Auditors has established relations with the supreme audit authorities of the countries of Central and Eastern Europe. The PHARE framework agreements concluded between the Communities and these countries provide that the recipient country is to assist the Community audit authorities in their work. In 1992, the Court of Auditors of the European Communities carried out audits with the assistance of the Hungarian and Polish supreme audit authorities (see paragraphs 11.27 and 11.75). OBSERVATIONS ON BUDGETARY MANAGEMENT Implementation of appropriations 11.7. Regarding the PHARE operational budget heading in the 1992 budget, the commitment appropriations (1 015,5 Mio ECU) and payment appropriations (434 Mio ECU) available after transfer were almost all authorized. 11.8. With regard to the TACIS operational budget heading, 445 Mio ECU of commitment appropriations and 195 Mio ECU of payment appropriations were entered in the supplementary and amending budget that was adopted on 1 April 1992. Under the Notenboom procedure, the commitment appropriations were reduced to 420 Mio ECU, which had been almost completely committed by the end of the 1992 financial year, including 382 Mio ECU (91 %) in December 1992, and the payment appropriations were reduced to 85 Mio ECU, of which only 32,1 Mio ECU had been authorized by 31 December 1992.>TABLE> 11.9. Tables 11.3 and 11.4 show the rates of utilization of commitment and payment appropriations in 1992. Implementation of payments 11.10. Nearly 30 % of the payments made against PHARE appropriations in 1992 were advances paid out to management units in the recipient States. Regarding the contracts it manages directly, at the end of 1992 the Commission was less and less able to carry out payments within 60 days of receipt of the contractors' invoices, as it is required to do under the terms of Article 102 of the 'General Conditions for CEC Public Service Contracts applicable in the PHARE Programme`. Settling advances 11.11. At the end of 1992, out of a cumulative total of 264,4 Mio ECU paid out by way of advances to the management units in the recipient States, only 28,5 Mio ECU had been settled. The Court's Annual Report on the financial year 1991 (paragraphs 14.13 and 14.14) pointed out that none of the advances paid out under the PHARE programme in 1990 or 1991 had been settled by the end of 1991, within the meaning of Article 111, sub-paragraph 7 of the Financial Regulation. 11.12. The provisions for the implementation of the PHARE system of advances (paragraph 3.3), adopted by the Commission on 7 August 1990, state that applications for subsequent advances must be accompanied by the audit report that was previously requested by the Commission. In fact, in 1992, advances (other than the first one) were paid out without such an audit report being drafted. Despite the fact that the Court's on-the-spot inquiries revealed non-eligible items of expenditure, there were no cases of financial adjustment on the Commission's part from the point of view of the eligibility of the expenditure declarations submitted by the management units. Mini-budgets>TABLE> 11.13. Even though there was a notable improvement in procedures, the implementation of the mini-budgets in 1992 continued to encounter problems, which had often been inherited from previous bad management (see the Court's Annual Report on the financial year 1991, paragraph 14.10). Thus, operational appropriations were used in 1992 to pay external staff working on the Commission's premises in Brussels or in one of the Delegations. NUCLEAR SAFETY (1) 11.14. At the end of the financial year 1992, despite the importance of nuclear safety both for the recipient countries and for the Member States, the Court was obliged to note that the Commission had still to equip itself with a real policy for interventions in the field in question. As a result, the Commission and the recipient countries are under the dominant influence of companies operating in the nuclear field. The TACIS programme on behalf of the nuclear sector 11.15. 53 Mio ECU in 1991 and 60 Mio ECU in 1992 were earmarked for nuclear safety. In addition to this, there were also 20 Mio ECU under the EEC contribution to the ISTC (International Science and Technology Centre). By 31 December 1992, out of this total of 133 Mio ECU, some 10 Mio ECU were covered by contract and only 0,6 Mio ECU had been disbursed. 11.16. The majority of these projects (25) were carried out in the Russian Federation. Some of them, especially in the field of training, are also open to participants from other republics of the former Soviet Union. Two projects concern the Ukraine and one Armenia; another four can be considered joint Russian/Ukrainian projects and another a joint Ukrainian/White Russian project. 11.17. The implementation of the projects was delayed, mainly because of the recipients' failure to collaborate with the Commission. Their failure to make important construction and operational plans available has made it impossible to prepare safety studies or carry out work on nuclear plants. Some contracts which have already been signed cannot be implemented as planned, but the Commission is committed to reimbursing the related expenses all the same.>TABLE> 11.18. Moreover, it was not until 27 November 1992 that the United States of America, Japan, the Russian Federation and Euratom and the EEC - the latter two acting jointly as one contracting party - signed an agreement setting up an International Science and Technology Centre () . This centre is intended to prevent nuclear energy specialists from the former Soviet Union who are threatened by unemployment from being enticed away by other States that are not considered to be very reliable. The appropriations for this programme were committed by the Commission in December 1992 and by the end of the first quarter of 1993 the Commission had not yet made any payments under the programme. This matter must be expedited without any further delay, failing which the results it aims to achieve will be jeopardized. The PHARE programme on behalf of the nuclear sector in Bulgaria 11.19. The programme concerning the nuclear safety of the Kozludy power station (BG-9110, 11,5 Mio ECU) was added at the last minute to the agenda of the PHARE Management Committee meeting in July 1991. Invitations to tender for general studies were issued in October 1991, but the first contracts were not signed until May 1992. 11.20. Moreover, a financing agreement under the 1991 PHARE programme (BG-9107), amounting to 10 Mio ECU and providing assistance towards the restructuring of the Bulgarian energy sector, including nuclear energy, was not signed until April 1992. The Commission's management 11.21. With regard to the field of nuclear safety, the Commission should try to concentrate its resources and intervene through a single channel. The fact of having to go through two different assistance programmes (PHARE and TACIS) represents an obstacle to this sort of approach. The appropriations that have been allocated for nuclear safety in Eastern Europe should be clearly identified as such in the budget. 11.22. At the end of 1992, the Commission had not yet drawn up, for its interventions in the nuclear field in the PHARE countries and the former Soviet Republics, a real framework for cooperation between the five Directorates-General concerned. A coordinated approach had not even been implemented within DG I between the PHARE and TACIS departments. 11.23. The Commission did not equip itself early enough with the means for carrying out adequately the task with which it had been entrusted, namely that of coordinating aid from the group of 24 OECD countries (G 24) for nuclear safety in the countries in question. In fact, the Commission only set up a coordination centre in 1993. In this same context, it will also have to arrange for the setting-up of an appropriate cooperation framework with the European Bank for Reconstruction and Development (EBRD), which has been entrusted by the group of the seven most industrialized countries (G-7) with the management of a multilateral fund intended to improve the safety of nuclear power stations in the countries concerned. 11.24. Given that the supervisory authority of the projects, as the Court observed in Russia, also manages military projects, the Commission should also take particular care to ensure that funds made available for the nuclear sector cannot be used for purposes other than those agreed under the terms of East-West cooperation. 11.25. The 'Energy` part of the TACIS programme, of which nuclear projects are a part, was decided on in 1991 for a total of 115 Mio ECU. It had hardly got off the ground in 1992, with payments at the end of the financial year representing only 1 % of the amount committed in 1991. The Commission, which, at the beginning of 1993, had, in this context, only granted contracts to Western firms, should do more to involve local operators. ENVIRONMENTAL PROTECTION IN THE PHARE PROGRAMME 11.26. Measures for the improvement of environmental protection in the PHARE programmes amounted, on 31 December 1992, to a total of 246,5 Mio ECU of commitments, and 60 Mio ECU of payments. The bilateral G-24 subsidies for the PHARE countries add up to 235 Mio ECU (commitments as at 30 June 1992). The objective of these PHARE programmes is also to bring the standards of these countries up to those of the European Community, as is explicitly stated in the European agreements. Nevertheless, these amounts represent only a fraction (generally between 5 and 15 %) of national environment budgets, and local needs, moreover, are decidedly higher than the budgets. That is why the role to be played by PHARE environment aid is, above all, that of a guide or catalyst. 11.27. In Romania, the Community's environment programmes had not, at the end of 1992, actually been utilized. Only 7 Mio ECU of the 20 Mio ECU allocated under PHARE for the 1990 environment programme for the former GDR had been used for the payment of advances by the Commission. The Court's observations on Bulgaria, Poland and Hungary are summarized below. With regard to the latter country, the Court's observations also include the findings of an audit carried out by the Hungarian supreme national audit authority. 11.28. The programmes have sometimes turned out to be incomplete, even in terms of the way they were conceived. For example, in Bulgaria the projects merely supply equipment for measuring pollution (air, water and radioactivity) and technical assistance to the Ministry of the Environment. Certain projects proposed, and rated as urgent by the recipient States, in particular the construction of sewage purification plants in highly polluted areas (the Black Sea, the Baltic, Warsaw, northern Budapest) were not included in PHARE because the Commission believes that projects of this sort are, by their very nature, 'bankable` and should therefore be funded not by PHARE but by loans from commercial banks. In Poland, unlike certain bilateral programmes, PHARE had, by the end of 1992, realized no pilot investment projects contributing immediately to the improvement of the environment. The feasibility studies financed by PHARE as a preparation for an investment of this type, had not, by the end of 1992, been backed up by World Bank, EBRD or European Investment Bank (EIB) loans. After three years' experience, the Commission at last agreed to implement some pilot investment projects in 1993. 11.29. Conversely, the Commission accepted from amongst the projects submitted by the recipient countries lower priority projects, such as, for example, the construction in Hungary of wildlife parks and reservations, including supplying equipment and even the building of a central management building (750 000 ECU). 11.30. The supplying of equipment in the context of PHARE projects is not always systematically backed up with the resources needed to enable the equipment in question to be used later on. Such resources are often too great a burden on the operational budgets of the bodies involved (National Institute for the Analysis of Air Pollution, etc.). The PHARE procedures do not provide for any coordination with national budgets to obtain commitments from the competent budgetary authorities of the recipient countries and make the indispensable supplementary resources available. 11.31. Certain PHARE projects which were under way, and upon which money had already been spent, were finally abandoned or suspended owing to the recipient State's failure to provide the necessary supplementary funds. Conversely, in one country (Hungary), the national ministry responsible formulated, at the Commission's behest, some 200 proposals at the beginning of 1991 for projects for which the country's various environmental authorities had applied for PHARE funding. During this period, the Commission changed the planning procedures for the programmes and, in the end, other projects were selected for the annual PHARE programme. By the end of 1992, none of the initial 200 projects had been implemented. This raises the question whether these projects were really a priority in the first place and it indicates poor definition of the recipient State's role in the planning of the environment programmes. The 'Regional Environment Centre` 11.32. The 'Regional Environment Centre` in Budapest is an organization founded by the United States, the Commission of the EC, other Western countries (some of which are members of the EC) and most of the PHARE countries. Its task, as expressed in its articles of association, is to promote information about the environment and environmental training, especially through the support of non-governmental organizations (NGOs) concerned with the environment. The Centre is financed by its Western members, a quarter of which are EC countries. At the end of 1992, the Commission had contributed 2 Mio ECU. 11.33. The way the Centre is supposed to operate has proved to be poorly defined. The national authorities of both the donor and the recipient States have no say in its management. Efforts have not been coordinated with the authorities responsible in the PHARE countries. Some projects, for example assistance in formulating environmental legislation, duplicate PHARE projects. Nearly 50 % of the projects that were funded are being carried out in the Centre's host country. The Commission ought to draw the necessary conclusions from a situation of which it was not in control at the end of 1992. PRIVATIZATION 11.34. In its Annual Report concerning the financial year 1991, the Court explained the Community's contribution to the privatization process in Poland, the former Czechoslovakia and Hungary. In 1992, it examined more specifically the PHARE programme's contribution to this process in Romania and Bulgaria and the TACIS programme's work in Russia. Romania 11.35. With the support of the PHARE programme, a new legal framework was created in Romania. The PHARE programme also assisted the national privatization agency. The process began in January 1992 with the privatization of a first batch of companies. In 1991 and 1992, the PHARE programme committed a total of around 77 Mio ECU for privatization, economic and financial restructuring and the development of small and medium-sized enterprises (SMEs). As for payments made, they amounted to around 9,1 Mio ECU at the end of 1992, 8,8 Mio ECU of which were disbursed in 1992 in the form of advances. 11.36. In the agricultural sector, some 10 million hectares of arable land have been distributed to around five million new owners. In 1991 the Community's involvement in this sector, with commitments amounting at the end of 1992 to 35 Mio ECU and payments to almost 31,4 Mio ECU, consisted chiefly of funding import programmes for agricultural and agro-industrial inputs. The privatization process was given special support in this sector in 1992. In order to give this process some impetus, the Romanian authorities are putting much faith in a reform of the agricultural banking sector, an area which had still not received adequate attention from the PHARE programme at the end of 1992. Bulgaria 11.37. Reforms aimed at economic restructuring and privatization had still only tentatively got under way in 1992 in this country. There was still not any legislation on bankruptcy, for example. Action proposed in this area by the Commission at the beginning of 1992 was considered premature by the Ministry of Finance. The national privatization agency was still not operational by autumn 1992. 11.38. An informal group made up of the Commission, the World Bank and the EBRD was set up in order to advise the Bulgarian authorities on privatization. At the end of 1992, excluding agriculture, PHARE commitments for economic and financial restructuring and privatization amounted to 52,5 Mio ECU, but payments made only totalled 14,4 Mio ECU, of which 12,1 Mio ECU were advances. 11.39. At the end of 1992, PHARE commitments to agriculture amounted to 51 Mio ECU and payments made totalled 30,7 Mio ECU, of which 15,2 Mio ECU were disbursed in 1992 in the form of advances. In this country too, PHARE's first interventions in agriculture were concentrated mainly on supplies, since privatization of this sector only really got under way in Bulgaria in 1992. 11.40. Bulgaria also began to give land back to its former owners. However, in order to obtain credit from banks, farmers generally use their land as security. In 1992, however, many of them were still not in possession of notarial deeds validating their title to the land, in spite of help from PHARE in this field. Russia 11.41. The development of the private sector is also provided for in the TACIS programme. Privatization is proceeding slowly in Russia. At the beginning of 1993, the Russian private sector produced less than 5 % of the gross national product. Barely 3 % of agricultural land is in private hands and, as before, the numerous collective farms are continuing to hamper private competition. The reform of agriculture and the food and consumer goods industries has still not got under way. 11.42. TACIS ought to concentrate more on the implementation of concrete pilot projects (e.g. in the field of the promotion of the private agricultural sector and, together with the EBRD, in the financial sector), which would then act as models for further developments. PHARE AND TACIS FUNDS ALLOCATED TO THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD) 11.43. According to the terms of the Bangkok Agreement of 15 October 1991, the Commission and the EBRD agree to cooperate when preparing investment projects. This resulted in the Commission placing 25 Mio ECU of PHARE appropriations and 15 Mio ECU of TACIS funds at the EBRD's disposal in 1992, for the hiring of consultants. This Community contribution represented 51 % of the subsidy commitments of which the EBRD had been notified by the end of 1992. Out of a total of 9,2 Mio ECU of Community subsidies received by 31 December 1992, the EBRD had made payments amounting to 3,7 Mio ECU. 11.44. At the beginning of 1993, the Court carried out an on-the-spot audit of Community funds at the EBRD. This audit demonstrated the potential benefits of cooperation between the Commission and the EBRD, particularly in the financial and privatization sectors. 11.45. However, cooperation between these two institutions experienced some difficulties in its initial stages in 1992, both when the Agreement itself was applied and when the application procedures were implemented. Thus, contrary to the Agreement's provisions, the Commission agreed to fund studies which did not lead to investment projects. Moreover, most of the 22 studies proposed by the EBRD and already fully funded by the Commission had not yet resulted in a loan being granted by the end of 1992. 11.46. The EBRD submitted numerous projects during the last quarter of 1992 so as to use up its allocation by the end of the year. In accordance with Article 6 of the Agreement, the management procedures laid down that the Commission should commit funds and make payment after the contract had been definitively approved and endorsed. The Commission modified this article at the end of 1992 so that funds could be committed as soon as a project had been 'pre-approved`. 11.47. The Commission financed some measures for which restricted invitations to tender had been issued in 1991 by the EBRD, to non-Community firms as well as Community ones, before the measures had been pre-approved by the Commission and even before the Bangkok Agreement had been signed. Regarding studies in the field of transport in the former Soviet Union, the EBRD issued an invitation to tender in 1991 without first consulting the Commission on the definition of the terms of reference and the choice of contractor, at the same time as the Commission was implementing a parallel transport programme in the context of the TACIS programme for 1991 costing 45,8 Mio ECU. Similarly, in 1992 the EBRD issued an invitation to tender for the 'Romanian technical assistance on financial restructuring` programme without liaising with the other funding organizations whereas, at the same time, both PHARE and the World Bank were particularly involved in restructuring the financial sector in Romania. 11.48. Moreover, the number of firms invited to tender is often very small and they often originate from a limited geographical area. Out of 29 contracts concluded in 1992 by the EBRD, in the context of the Bangkok Agreement, 14 were with firms from one Member State, even though the contractor's country of origin may be purely formal. For example, one contract was signed with a firm in Paris, the invoice was sent via its London head office and payment was made in US dollars to its parent company in New York. Moreover, in 1992 the EBRD accepted fees ranging from 900 to 2 500 ECU per person and per day for measures it was organizing in the financial sector and funded under the PHARE and TACIS programmes. 11.49. In addition, contracts concluded by the EBRD often do not specify the date the contractor signed and in some cases contracts were signed several months after the date on which payments began and sometimes after advances, which in some cases were not even mentioned in the contract, had been made. What is more, payments were made without the necessary supporting documents, indeed even in the absence of any supporting documents. 11.50. It was only in December 1992 that the Commission first requested the quarterly reports that the EBRD was supposed to submit to it for each measure. 11.51. In future, the Commission should adopt more appropriate and more effective procedures for dealing with operations it finances for the EBRD, without, however, departing from its managerial role, as described in Article 105, paragraph 3, of the Financial Regulation. Furthermore, it should regularly assess this cooperation and the work it finances for the EBRD, all the more so as the Community taxpayer's money is involved and it has been given on a non-repayable basis to an institution in which the Community and its Member States hold only 51 % of the shares. 11.52. In keeping with the Bangkok Agreement, the Commission should also develop and concentrate its cooperation with the EBRD in the financial and privatization fields, where the EBRD has its own fund of expertise. HUMANITARIAN AID Aid sometimes unsuitable 11.53. In the implementation of the emergency aid programme costing 200 Mio ECU for the people of Moscow and St Petersburg, which was decided on at the European Summit at Maastricht in December 1991, the Commission did not always select the means of transport, the delivery periods and the type of product that were most suited to local needs. 11.54. For example, the initial measures under the first tranche of emergency aid (Commission decision of 12 December 1991 to open an emergency heading for aid to the populations of Moscow and St Petersburg, for a maximum of 5 Mio ECU under Article B7-5000 of the 1992 budget (SEC(91) 2496)) were shipped by air. In the opinion of several NGOs working on the spot, the degree of urgency was not such as to justify transport by air - which is especially expensive - since the delivery periods by road for subsequent measures were only of between 7 and 12 days, depending on the EC city of departure. 11.55. Moreover, quantities of skimmed-milk powder delivered under Council Regulations (EEC) Nos 3767/91 of 19 December 1991 () (95 Mio ECU) and 330/92 of 10 February 1992 () (100 Mio ECU) decreeing the provision of emergency aid, were still stockpiled at Moscow (more than 3 000 tonnes) and St Petersburg (almost 6 000 tonnes, or almost a third of the total supplied) at the beginning of January 1993. At the beginning of 1992, the recipient dairies, which had not asked for this type of milk, had to wait for more fresh milk to be supplied by local producers so as to be able to add it to the powdered skimmed milk and obtain milk with sufficient fat content for the Russian consumer's taste. 11.56. Although it was sold at 50 % of the local market price, the beef and veal delivered by the Community was in relatively small demand and problems arose in Moscow and St Petersburg because of the vagueness of the Commission's mobilization decisions. Lots of meat which were not equal to the beneficiaries' expectations were sold to factories to be made into sausages in St Petersburg and Moscow, at a quarter or a fifth of the intended average selling price. 11.57. The Commission had asked only for bacteriological checks (cold-store checks), and not checks on the intrinsic quality of the meat. Furthermore, the inspection of the way aid was transported and stored was not organized in such a way as to ensure that goods for sale were not mistaken for the Community's food aid deliveries and thus paid for out of the Community's budget. 11.58. Problems with the meat supplied created a considerable shortage of available funds for the counterpart funds in comparison with estimates made (between 200 and 300 million roubles, or 1,6 to 2,4 Mio ECU, at the end of March 1992). 11.59. Nor did the Commission make provision for the repercussions of this type of food aid on local producers and agro-industries. Thus, a sizeable delivery of meat arrived in Moscow at the time of year when large numbers of cattle were being slaughtered in Russia. 11.60. Furthermore, the Commission organized the delivery of 9000 tonnes of meat to Albania under Council Regulation (EEC) No 1567/92 of July 1992, which provided for food aid worth 45 Mio ECU to Albania. Citing sanitary reasons, Albania initially refused to allow the first cargo of meat to be unloaded. The Albanian authorities had in fact learnt that before being delivered to them as food aid in October 1992, the first consignments (3 720 tonnes), originating from Community intervention stocks, had previously been shipped to Mexico, which had refused them entry upon arrival, in May 1992, supposedly on health grounds. After six months at sea, this meat was finally accepted by Albania at the end of October 1992. Degree of urgency not demonstrated 11.61. An emergency measure to provide agricultural produce to the people of Bulgaria and Romania was instituted by Council Regulation (EEC) No 597/91 () of 5 March 1991, but the implementing regulations were not adopted until 31 July 1991 and the produce was only delivered in the months that followed. 11.62. In the case of the PHARE programme of food aid for Romania, the Commission claimed on 2 January 1992 that the aid was urgently needed, because of the winter weather, but the produce was not delivered until the following summer and autumn. 11.63. Moreover, the responsible departments of the Bulgarian Ministry of Agriculture have stated that the food aid supplied to Bulgaria in 1991 was not necessary. This could explain the ease with which the Bulgarian operators were able to re-export the milk powder to Egypt (see the Court's Annual Report on the financial year 1991, paragraph 2.45). Furthermore, again in Bulgaria, maize was delivered at the beginning of 1991 as part of a 1990 PHARE programme of aid for the privatization of agriculture. 2 700 tonnes, mainly from the United States, were delivered at the beginning of 1991 and were paid for with Community funds. At the end of 1992 a third of this delivery had still not been sold. TRIANGULAR OPERATIONS 11.64. Funds from the PHARE programme were used to finance 'triangular operations`, whereby goods are delivered from one or more PHARE countries to another PHARE country. This type of operation, which excludes Community companies, is not provided for in the Basic Regulation (Council Regulation No 3906/89 of 18 December 1989), since Article 7 of this text opens the award procedure to all natural persons and legal entities resident in the Member States or the PHARE countries. In order to carry out these operations, the Commission systematically cited urgency as the justification for its using Article 116 of the Financial Regulation to derogate from the tender procedures normally applying. 11.65. At the beginning of November 1991, the Commission cited urgency as the reason for concluding contracts worth 10 Mio ECU for the supply of electricity to Bulgaria, following the shutdown for maintenance of the No 1 and No 2 units at the Kozludy power station. The Bulgarian authorities, however, did not sign the contracts for supplies of electricity from Poland and Romania until February/March 1992 and the electricity was not supplied until March/April 1992, by which time the winter was over. 11.66. Once again a degree of urgency which was not subsequently substantiated (see paragraph 11.62) was cited by the Commission when wheat was bought in the former Czechoslovakia, for around 10 Mio ECU, from PHARE funds, as part of the food aid provided for Romania. Using an enterprise located in the Community to act as intermediary for the delivery of the wheat did, however, enable the Commission to ensure that Community undertakings were not formally excluded. 11.67. Numerous problems were encountered when this operation was being carried out, from the tender procedure through to quality control. Furthermore, the price that was finally paid was increased by a further 0,5 Mio ECU because the wheat was accepted after the specified deadlines. 11.68. The Commission ought to adopt suitable provisions so as to establish an indisputable legal basis for triangular operations. COUNTERPART FUNDS 11.69. Table 11.5 shows the situation regarding decisions to set up counterpart funds as at 31 December 1992. When food aid is financed from the EAGGF Guarantee Section the Commission decides to create counterpart funds. Selling the produce, even at a low price, makes it easier to monitor distribution, as well as taking more account of the interests of local producers, and project financing. In 1992 the Court examined more particularly certain counterpart funds in the former USSR, Bulgaria, Romania and Poland.>TABLE> 11.70. Under Council Regulation (EEC) No 598/91 of 5 March 1991 () creating emergency aid in favour of the former Soviet Union up to a maximum of 250 Mio ECU, the sale of 10 000 tonnes of milk powder was supposed to generate counterpart funds with which to finance the transport of the aid within the former USSR. Following the political upheavals in that country in 1991, shipping companies, however, insisted on being paid in foreign currency, not in roubles. As for the counterpart funds that were supposed to be generated, at the end of 1992 the Commission still had no information as to what had become of the proceeds of the sale of the 10 000 tonnes of milk powder. 11.71. In Romania, for example, a protocol on the management and use of the counterpart funds was not signed until 20 months after the first decisions on the allocation of the aid. Furthermore, in Romania and Bulgaria the Commission did not conclude any agreement on the creation and use of the counterpart funds generated by the food aid that was financed by the Guarantee section of the EAGGF. 11.72. The Commission did not act in time to provide adequate monitoring of counterpart funds in these two countries. For example, no counterpart funds were created following the sale of 5 000 tonnes of olive oil in Romania. Some funds were used for unauthorized purposes, for example as working capital by an electricity company, or for buildings (Bulgaria). Other funds were not transferred to the management body set up to handle the counterpart funds (Bulgaria), or they were placed in a bank account on which no interest was paid (in Romania and Bulgaria). Although the protocol on the use and management of counterpart funds did provide for management procedures, notably as regards the selection of the economically most advantageous tenders, such procedures were not put in place. Moreover, in neither country did the authorities submit a global indicative programme for the use of the counterpart funds. 11.73. Because of the extremely high rates of inflation in these countries, the counterpart funds, which are denominated in the local currency, lose a great deal of their purchasing power if they are not put to use immediately. 11.74. The counterpart funds from the food aid to Poland represented the equivalent of 160 Mio ECU in the EC budget; this sum was collected and put to use without delay. The counterpart fund revenue is allocated to agriculture and rural development in Poland within a framework which was created for that purpose, namely the European Foundation for the development of Polish villages. The Commission participates in the management of the Foundation through a delegate on the board ((see the Court's Annual Reports on the financial years 1990 (paragraph 12.35) and 1991 (paragraph 14.58)). 11.75. During 1992 the Court carried out an on-the-spot audit, with the assistance of the Polish Court of Auditors. Two thirds of the Fund's activities were accounted for by subsidized modernization loans to farmers and processors of agricultural products. By agreement with the Foundation, the banks which distributed the loans received remuneration for the risk involved (equivalent to 27 % of the interest), as well as a commission on each case they handled. In fact, however, the banks allow the Fund to bear the risk and the burden of unpaid interest and pay to the Fund the interest due only in so far as they themselves receive interest. The amounts involved are quite considerable (6 Mio ECU), because a high proportion of farmers were insolvent at the end of 1992. 11.76. This difficult situation was attributable partly to a lack of information (markets, etc.) and management advice for the farmers and rural banks, which had to cope with a new instrument - loans for equipment. The PHARE programme for agriculture in Poland does include a technical assistance aspect which covers this, but it did not become effective until the autumn of 1992. 11.77. In November 1991 the Foundation used counterpart funds to acquire a building from the Polish government for 2 Mio ECU, with the aim of setting up an agro-industrial bank. It also had to pay a further amount, the equivalent of 800 000 ECU, in tax on the transaction in February 1992. The Commission says that it came to know of this through the European Communities Court of Auditors in July 1992. Estimates by the Foundation's managers indicate that the cost of renovating the building will exceed the acquisition cost. These acquisitions and tax payments are tantamount to payments to the national budget, pure and simple, and are not compatible with the prescribed objectives of the Community intervention. 11.78. In January 1993 the Commission was unable to give the Court any report on the implementation and appraisal of the counterpart funds in Albania, Bulgaria or Romania. The situation was the same for the counterpart funds generated in Poland during 1990, even though the Commission had promised a first report in 1991 ((see the Court's Annual Reports concerning the financial years 1990 (paragraph 12.37) and 1991 (paragraph 14.58)). 11.79. As the Court has already recommended, in its Annual Report on the financial year 1991, the procedures for selling the products, collecting and managing the funds and then using them should be set out in precise terms, at the latest before the goods are delivered, so as to avoid any delays in collecting and using the funds. It would then at least be possible to make optimum use of the counterpart funds generated by a particular measure for the economic restructuring of the recipient country. It would also be easier to monitor the way in which the funds are used and integrate that use directly with measures planned by other lenders, such as the International Monetary Fund (IMF), as was done in Albania. Tempus 11.80. Tempus (Trans-European mobility scheme for university studies), which forms part of the PHARE budget, is the Community's programme of aid for the reform of the higher education sector in the PHARE countries () . Total payments between 1990 and the end of 1992 amounted to the equivalent of 194 Mio ECU. The programme is implemented mainly through cooperation projects between places of higher education in the Community and the PHARE countries (joint European projects or 'JEPs`). 11.81. The Court's Annual Report concerning the 1991 financial year pointed out certain weaknesses in the Tempus programme, especially in the systems for drawing up and selecting the JEPs, which were not properly adapted to the national priorities of the country concerned. Projects were chosen with practically no real involvement of the educational authorities in the recipient country. The Court pointed out that economics and management studies, which were accorded top priority by the PHARE countries, as well as by the PHARE Regulation, which aims to develop the private sector, were relegated to second place in Tempus. Business participation in the JEPs was insignificant. The programme made very little contribution to the reform of the higher education sector. 11.82. In 1992, the Court carried out an audit of Tempus in Romania and followed it up with a visit to Bulgaria. In the two years 1991-92 and 1992-93 Romania had 94 projects to a value of 23 Mio ECU, while Bulgaria had 88 projects to a value of 13 Mio ECU. For these two countries the findings yielded by the audit were virtually the same as those set out in the Court's Annual Report on the financial year 1991 (paragraphs 14.66 to 14.78). The 1991-92 projects relating to economics and management represented only 23 % in the case of Bulgaria and 13 % in the case of Romania. Need for a reform of the Tempus system 11.83. It is thus clear that a reform of the programme management is needed and that there must be a system of short-listing of projects at national level in each country, before they are submitted to Brussels. It should, perhaps, be pointed out that under the present system, because of the attractiveness of Tempus for the universities selected, almost 90 % of the proposed projects are rejected by the Commission. The expert advice provided by the Commission would be more effective if the main effort was applied in each country at the initial short-listing stage, so as to draw up an annual national Tempus programme adapted to the needs and priorities of the country concerned. 11.84. Furthermore, it would also save a significant part of the considerable work involved in Brussels in going through files, 90 % of which are doomed to rejection. In view of its volume, the work in Brussels is contracted out to a private organization (the European Cooperation Fund, 'ECF`). The Court's Annual Report on the financial year 1991 (paragraphs 14.70 to 14.72) criticized the terms on which this subcontracting took place. Budgetary monitoring 11.85. As a result of the Court's observation in its Annual Report on the financial year 1991 (paragraph 14.69) regarding the absence within Tempus of a system of internal on-the-spot controls in the recipient universities, the Commission instituted a system of this kind at the end of 1992. 11.86. Office equipment and top-up payments of up to 50 % of the national salary were being financed by the ECF, in the Community's name and from the Community budget, for the Tempus offices in several PHARE countries. As a result of this practice, the staff concerned became dependent on the ECF, whereas their job is to represent the national point of view. 11.87. The salaries and fees paid to national teachers and experts within each JEP are sometimes out of all proportion to the national rates of pay. These abuses result from agreements entered into with the teachers participating in the project and cannot really be judged outside the national context. Organized transparency by Tempus within the national framework would be capable of preventing this type of phenomenon. PROJECT SELECTION AND CONTRACT PROCEDURES 11.88. The selection of projects within TACIS is not transparent for the market operators. It is not clear what factors are taken into consideration as the basis for the selection decision. Either no justifications are given or they are inadequate when they are given. 11.89. In cases where the Commission issues a restricted invitation to tender, the Commission ascertains which market operators are specialists for each of the project areas described in the PHARE or TACIS Regulation and lists them in a directory known as the 'long list`. On the basis of this directory, the Commission draws up for each project a 'short list` of the market operators specializing in that particular field. They are then invited to submit bids within the framework of a restricted invitation to tender, if their specialist knowledge is likely to be of use for a particular project. The Commission practice of including only one market operator from each country on the short list is suspect on technical grounds and infringes Article 59, in conjunction with Article 115(b), of the Financial Regulation. 11.90. The Court noted that some market operators were disadvantaged because of language restrictions. 11.91. There were irregularities in the distribution of food aid under the TACIS programme. The August issue of a periodical published by the Commission contained at least two references to contracts, with accurate details of the tenderers who were subsequently awarded contracts, at a time when the contract appraisal committee concerned had not yet taken its decision. 11.92. There was a possibility that external consultants might be involved with the same project several times at different stages of the procedure. Appropriate internal control measures should be introduced in order to prevent such conflicts of interest. 11.93. Not enough use is made of the specialist knowledge available within the Commission. Closer cooperation is called for in certain fields. 11.94. Some tasks at decision-taking level at the Commission are carried out by staff who have been appointed on temporary and short-term contracts, which is likely to jeopardize the continuity of the management. THE AID FRAMEWORK IN THE RECIPIENT COUNTRY Decentralization within PHARE 11.95. The procedures for paying advances to PHARE management units are hampered by being centralized at the Commission. Except for the initial advance, payment is subject to the Commission's approving the implementation reports and work programmes which the management unit submits to the Delegation. Apart from the latter, the procedures involve action by several central departments at the Commission. The total time that elapses between the receipt of the request at the Delegation and the arrival of the payment in the management unit's account is almost three months, and sometimes more than half a year. The Brussels staff are remote from local and national preoccupations and constraints, which gives rise to misunderstandings. They are often unaware of the decisions taken on the spot at the regular meetings of the management unit and the Delegation. Implementation reports are not standardized and, therefore, are not readily understood. 11.96. In the interest of clarity and accuracy, the rule applied by PHARE as regards bank accounts is that a separate account is to be kept for each financing agreement, each one formally representing a programme. The increasing number of bank accounts has not been kept properly under control by the central departments at the Commission and has led to numerous wrong entries. 11.97. The procedure followed by the management units in awarding contracts under PHARE is a second source of delay. Each unit sets up an appraisal committee which then studies the tenders. The Commission is represented on this committee by a member of the Delegation staff. The management unit frequently calls on additional technical advice from outside ('the counter-appraisal`), in the form of a specialist consultancy. The decision awarding the contract, the appraisal and the counter-appraisal and the contract signature are submitted to the Delegation for approval. The latter, in turn, often submits them to Brussels. The PHARE financial staff themselves calculated, by way of example, that by the time the Environment/Hungary/1990 programme (25 Mio ECU) has been completed, it will have required approval by the Commission on more than 1 200 occasions in all (invitations to tender, appraisals and contracts). In view of the technical expertise safeguards with which the management unit and the Delegation are surrounded, it seems clear that the latter should, without exception, be able to give approval directly, on the spot, for the appraisal of tenders and the award of contracts. 11.98. The PHARE management system, which the Commission considers to be decentralized, is now proving more unwieldy than the centralized management of TACIS. The Court must stress once again the need to modify the role of the Delegations. Participation of recipient States badly defined 11.99. Contrary to the basic PHARE Regulation, the Community continued in 1992 to bear the costs of the operating expenditure of numerous programmes, including Tempus, the salaries of national staff and in some cases the rental costs of the management units. Administrative work is contracted out and the costs of the contracts, like the contracts of local staff, are often charged to the heading 'Technical assistance`. These dubious practices vary, moreover, from one programme to the next. Need for joint financing of projects 11.100. This failure to provide the additional national resources for projects, and the way in which the Community bears the cost of national salaries, office equipment, acquisitions of premises and tax payments, are all signs that the PHARE programmes do not fit smoothly into the national measures and that there is a lack of coordination with the national budget. The Court's Annual Report concerning the financial year 1991 (paragraph 14.48) refers to the principle that the recipient State must share the financing of the various programmes. This principle not only needs to be included in the PHARE operation, but it must also be included specifically in the programme financing agreements. LOANS AND BORROWINGS Introduction 11.101. The Commission of the European Communities is empowered to contract borrowings to finance medium-term loans to Hungary () , the Czech Republic () , the Slovak Republic(11), Bulgaria () , Romania () and the former Soviet Union () and to provide a credit guarantee scheme for the former Soviet Union () . It is also empowered to contract borrowings under the ECSC Treaty () to finance industrial projects in favour of Hungary, Poland, the Czech Republic, the Slovak Republic, Bulgaria and Romania. In addition, the EIB is authorized to provide loans from its own resources to finance investment projects in certain PHARE countries. Table 11.6 provides a summary of the various Community borrowing and lending mechanisms. Table 11.7 sets out the loan ceilings approved and the amounts disbursed, together with the reference to the budget guarantee, broken down by instrument and by country. Budgetary guarantees in respect of Community borrowing and lending operations 11.102. In its Annual Report on the financial year 1991 (paragraph 12.10), the Court invited the Commission to consider establishing a special loan guarantee reserve to cover the risk borne by the Community budget, which has increased considerably since guarantees now concern an increasing number of non-Community countries and are for much larger amounts. At its meeting in Edinburgh in December 1992, the European Council decided to establish a Fund to cover expenditure incurred when the guarantees in the general budget for loans to non-member countries are activated. At the request of the Council, the Court gave an opinion () on the proposal for a Council Decision submitted by the Commission on 17 February 1993 with a view to creating this Guarantee Fund. Observations concerning Community medium-term financial assistance 11.103. In accordance with the abovementioned Council decisions, these balance of payments loans were made available in at least two instalments. The disbursement of the first instalment was conditional upon an arrangement with the IMF and the disbursement of the second instalment was conditional upon a positive assessment by the Commission of the conditions attached to the loan.>TABLE> 11.104. These conditions included quantified macro-economic performance criteria identical to those in the arrangements with the IMF, and structural adjustment criteria designed to evaluate progress with the implementation of structural policies, including the liberalization of foreign trade and prices, privatization, current account convertibility and financial sector reform. 11.105. The results of the Court's examination, which included an on-the-spot audit in the Czech and Slovak Republics, are set out in the following paragraphs. 11.106. The dissolution of the Czech and Slovak Federal Republic (CSFR) at the end of 1992 led to the creation of two new independent Republics. The assets and liabilities of the former CSFR, including the EC loan, were divided between the successor States in a ratio of 2 to 1, corresponding to the populations of the individual Republics. Accordingly, the existing loan contract no longer meets the new requirements of the current situation regarding the two new Republics, nor does it provide adequate security for the Community loan. The Court notes that the Commission is still seeking to conclude a satisfactory legal agreement concerning the continuation of the loan. 11.107. A review of the conditions attached to the loan contract as set out in the Memorandum of Understanding is carried out by the Commission before the disbursement of the second instalment. In the Court's view, in order to be effective, an assessment needs to be made not only prior to (ex-ante), but also after (ex-post) the disbursement of a Community medium-term loan. In this respect, a mechanism for assessing new macroeconomic and structural adjustment aspects should be implemented. The results of these assessments could thus be taken into account in a PHARE medium-term indicative programme with the aim of developing synergies within the Community-coordinated assistance. Review of the information 11.108. The recipient country has to provide on a regular basis all relevant information necessary to evaluate the progress of economic performance and reforms. The procedures laid down by the Commission for verifying the reliability of information should take into account the impact of statistical discrepancies. 11.109. Furthermore, full use should be made of the EC Delegations in Central and Eastern European countries to monitor the progress of economic transformation and compliance with the loan terms. Community assistance to the States of the former Soviet Union The medium-term credit guarantee scheme 11.110. This operation aimed to enable the former Soviet Union to import, on commercial terms, agricultural and food products from the Community and the countries of Central and Eastern Europe. The 500 Mio ECU guarantee covers 98 % of both the principal and the interest on loans made by a pool of commercial banks to the Vneshekonombank (VEB) of the former Soviet Union. Following the disintegration of the former Soviet Union, the Russian Federation became the sole beneficiary of the guarantee. 11.111. The payment of the first tranche of interest - some 10 Mio ECU due on 9 September 1992 - was not disbursed by the VEB until 24 September 1992. In the meantime, the general budget guarantee was activated and the amount of the first interest payment was paid by the EC Treasury to the bank consortium (see paragraph 13.37). Furthermore, the second tranche of interest - some 18,6 Mio ECU - was not paid on the due date of 9 March 1993 and the general budget guarantee has once again been activated. The medium-term loan facility to the former Soviet Union 11.112. The medium-term loan facility of 1 250 Mio ECU, which was due to be disbursed in tranches with attached conditions, aimed to allow the former Soviet Union to import food and agricultural products and medicines from both the Community and the countries of Central and Eastern Europe. Following the dissolution of the Soviet Union, the loan was transformed into 12 individual loans to the successor States, which were to be made available to the beneficiaries in one tranche without any prior economic conditions. 11.113. The disbursement of the EC loans was made legally conditional upon acceptance by the successor States of joint and several responsibility for the external debt of the former Soviet Union. At the end of 1992, only Uzbekistan and Azerbaijan had not signed this agreement, and they, consequently, did not receive any loans. On the same date 93,8 Mio ECU had been disbursed against this facility. Observations concerning Community-guaranteed loans from EIB own resources 11.114. In November 1989, the EIB's Board of Governors authorized the Bank to grant loans from its own resources for a total amount not exceeding 1 700 Mio ECU to finance investment projects in Poland and Hungary, to which Bulgaria, the former CSFR and Romania were added in 1991. All of these loan activities are covered by a guarantee from the Community budget () . 11.115. At the end of 1992, 18 investment projects, amounting to 840 Mio ECU, had been approved by the EIB's Board of Directors, but the total volume of disbursements was 140 Mio ECU. Observations concerning loans from ECSC resources 11.116. Despite the regional extension of the programme for industrial projects in November 1991 () concerning the granting of ECSC loans for a total of 200 Mio ECU and the improvement of the loan conditions, no contracts have been concluded with companies in the coal and steel sectors in Central and Eastern Europe. Observations concerning G-24 medium-term balance of payments assistance 11.117. Although not explicitly mentioned in the abovementioned Council decisions or in the common guidelines for G-24 coordinated exceptional balance of payments assistance to the Central and Eastern European countries, 50 % burden-sharing has always been applied in planning the assistance. The 50 % Community contribution towards the total effort is shown in Table 11.8, which indicates that the other G-24 members did not provide all their 50 % contribution. The Court therefore invites the Commission, as coordinator of the Group of Twenty-Four, to take the necessary measures to ensure that the 24 members all contribute their share () . COORDINATION BY THE COMMISSION 11.118. Following the decision taken at the Paris Summit on 15 July 1989, the Group of 24 OECD countries (G-24) made the Commission responsible for coordinating measures and for setting up a framework for the aid it had decided to award, which, on 31 December 1992, amounted to 37 787 Mio ECU in total for all measures, of which 23 078 Mio ECU was from the Community and its Member States. As part of its responsibilities, the Commission was also to ensure that the measures put into effect through the G-24 did not infringe certain voluntary restraint measures imposed by other international institutions such as the International Monetary Fund, for example by awarding subsidies or using counterpart funds. It is therefore up to the Commission to develop for each country a framework of G-24 macroeconomic assistance to coordinate balance-of-payments aid, bank lending (EIB, EBRD, World Bank) and subsidies. The need for coordination is particularly strong in the case of nuclear safety measures, including the multilateral G-7 Fund. CONCLUSION 11.119. Both the PHARE and the TACIS programmes represent for the recipient countries important programmes of aid for carrying through and consolidating political and economic changes. 11.120. By virtue of the partnership system under which it operates, the PHARE programme in particular is making a significant contribution towards bringing the European Community closer to the countries of Central and Eastern Europe. 11.121. Due to the difficult context, which varies from one recipient country to another, but also because the Commission procedures are over-centralized and in some cases unwieldy, the objectives defined by the Council of Ministers are being achieved very slowly and in different ways from one country to the next. 11.122. During the first three years finance was provided for a large number of studies carried out by Western consultancies, in some cases at considerable cost. The Commission, along with the recipient countries, should therefore now concentrate on putting the knowledge acquired into practice. It would be helpful if the Commission could, as far as possible, establish a link between the consultants' fees and the results obtained or expected. 11.123. Particular attention should, moreover, be paid to the coordination of these measures with the aid provided by EC Member States, the G-24 countries, the G-7 and other institutions like the World Bank, the IMF, the EIB and the EBRD. These various sources of aid must all complement each other in an appropriate manner, and at present there is no guarantee of that. 11.124. The field of nuclear safety calls for initiatives and proposals from the Commission. The latter needs to provide itself quickly with a clear policy, as well as efficient operational machinery and effective budgetary instruments, to enable it to deploy its technical skills. It should endeavour to become a valid associate for the private operators and for the governments which are responsible for the plants that are at risk. The resources earmarked for nuclear safety under the PHARE and TACIS programmes should be shown separately in the budget, in view of the specific, but related, nature of the measures required. 11.125. In its Annual Report on the financial year 1991 (paragraph 14.44), the Court observed that the Commission ought to increase substantially its contribution to the development of the private sector if it wished to achieve the objectives established by the PHARE decisions. That comment still holds good and the Commission should also, as far as possible, combine its contribution with the know-how available at the EIB and the EBRD. 11.126. In future, humanitarian aid should only be financed from the PHARE programme in cases of emergency, and in full knowledge of what is actually required. 11.127. As of the start of 1993, the Commission still did not have any clear idea of how the considerable volume of counterpart funds was being managed and used in Central and Eastern Europe. The form taken by cooperation varies from the obligatory Commission delegate on the board of the institution that has been set up specially to manage these funds, in one case, to an almost total ignorance of the funds in other cases. The Commission's negligent approach in this area has had a markedly adverse effect on the effectiveness of measures that were intended to contribute to the process of development in these countries. There is an urgent need for action by the Commission here. Table 11.8 - Support for the balances of payments of the countries of Central and Eastern Europe in 1992 >TABLE> >TABLE> <(BLK0)NOTES>Sources: Commission and Court of Auditors.</(BLK0)NOTES> 11.128. The Court included a number of recommendations for improving the implementation of the Tempus programme in its 1991 Annual Report (paragraphs 14.66 to 14.78). Audits by the Court in 1992 confirmed that, now that the programme has been operational for almost three years, basic reforms are needed within the system. 11.129. TACIS' current procedures for awarding contracts are not very transparent for market operators. The criteria which the Commission applies when including a market operator on the short-list need to be revised. 11.130. The Court wishes to emphasize once again the need to increase the role of the PHARE countries, including their financial contributions. The national budgets concerned must also include provision for the resources needed to continue the projects financed by PHARE at an early stage, which is rarely the case at present. 11.131. At the end of 1992, after three years of PHARE activity, the Commission had still not set up any appraisal system that would enable it to take proper account of the experience acquired so far. Similarly, as of February 1993, the Commission had still not produced, for 1991, the report on the implementation of cooperation measures which is required pursuant to Article 10 of the PHARE Regulation, Council Regulation (EEC) No 3906/89 of 18 December 1989. 11.132. With regard to the balance of payments loan to the former CSFR, the Commission ought to take the necessary contractual measures to meet the current situation regarding the two new Republics and to provide adequate security for the EC loan. 11.133. With regard to the coordination of the balance of payments assistance provided by the G-24, the Commission should take the necessary steps in order to ensure that 50 % burden-sharing is applied.>TABLE> >REFERENCE TO A FILM> CHAPTER 12 (*) Cooperation with developing and non-member countries >TABLE> (*) The Commission's replies are on page 335 INTRODUCTION 12.1. This chapter deals with the 'cooperation with developing and non-member countries` financed using appropriations from the Community budget, i.e. for the most part the appropriations relating to food aid for beneficiaries in developing countries, financial and technical cooperation with Asian and Latin American developing countries and some Mediterranean countries, joint financing of projects implemented by non-governmental organizations (NGOs) and some emergency aid. IMPLEMENTATION OF THE BUDGET 12.2. All the appropriations available and the way in which they have been used are summarized in Table 12.1. While the available commitment appropriations were adjusted closely to what was actually committed, there was a greater gap between availability and requirement with regard to payment appropriations, with utilization falling from 89,2 % in 1991 to 80,4 % in 1992. The reasons for this underutilization are varied, and often outside the immediate control of the Commission. In some cases, however, the underutilization was foreseeable: the amending and supplementary budget No 2 of 13 May 1992 provided 220,0 Mio ECU both in commitment and payment appropriations for the Special Food Aid Programme. It was evident on the basis of past experience that the payment appropriations would not all be needed in 1992, indeed the commitment raised in June 1992 gave a time limit of 31 December 1995 in accordance with Article 1 (7) of the financial regulation. At the end of 1992 payments (mostly in the form of advances) amounted to 136,5 Mio ECU. The surplus of payment appropriations over 1992 requirements enabled the Commission to carry over 70,1 Mio ECU to 1993, to supplement the inadequate level of payment appropriations provided for in the 1993 budget.>TABLE> 12.3. As in 1991 () , there was a heavy concentration of commitment and payment operations at the end of the financial year. It is preoccupying to see that for titles B7-3 and B7-4 (Cooperation with Asia and Latin America, and the non-member countries of the Mediterranean) payment operations with an accounting date of 31 December 1992 () amounted to more than 15 % in number and 20 % in value of total payments for the year. FOOD AID TO DEVELOPING COUNTRIES 12.4. In 1986 and 1987, following persistent criticism of the management of food aid from many quarters, including the Court of Auditors () , the Council and the Commission adopted new regulations () governing food aid policy and management. These continued a process whereby Community food aid operations were to become a real instrument of cooperation with the developing countries by promoting food security, raising nutritional standards, providing help in emergencies, contributing to balanced economic and social development, and supporting efforts by recipient countries to improve their own food production. 12.5. The new regulations broke the formal link between food aid management and the management of the common agricultural policy by omitting all reference to Article 43 of the Treaty, and by removing the previous requirement that products should be mobilized in accordance with the rules and procedures laid down under the common organization of agricultural markets. 12.6. This chapter responds to the European Parliament's request made in 1991 in its Decision giving discharge in relation to the 1989 accounts () , that the Court analyse the effects of the system for mobilizing food aid set up in 1987. It examines the Commission's programming of food aid operations and the new mobilization arrangements, in order to see whether food aid is mobilized, transported and distributed in a cost-effective manner, i.e. in good time, in the correct quantities, in conformity with quality requirements, and to the intended beneficiaries, and at least cost. It also examines the Commission's organization, procedures and systems, and resources. 12.7. The Court's enquiry included missions to Nicaragua, Bolivia, Ecuador, the Sudan and Pakistan, to the two main organizations through which indirect food aid is channelled, the World Food Programme (WFP) and EuronAid () and to a major supplier of direct food aid. It covered both normal and emergency operations. Budgetary analysis 12.8. Table 12.2 sets out the evolution and use of budgetary appropriations for food aid to developing countries between 1988 and 1992. In total, commitments have increased from 563,0 Mio ECU in 1988 to 800,6 Mio ECU in 1992, or 580 Mio ECU if the Special Food Aid Programme () is excluded. Over the same period, total payments increased from 577,0 Mio ECU to 618,1 Mio ECU, with a fall to 472,9 Mio ECU if the special programme is excluded. While total available appropriations for commitments have been fully utilized in almost all years, utilization of those for payments has exceeded 90 % only in 1991. The figures in Table 12.2 however do not present a complete picture. Article 203 of the Third, and Article 254 of the Fourth LomÃ© Conventions, concerning emergency humanitarian assistance, lead to expenditure from the EDFs on emergency food aid operations, by covering for example internal transport costs relating to emergency food aid financed from the general budget, and limited purchases of foodstuffs. In 1991 and 1992 this amounted to 5,3 Mio ECU and 12,7 Mio ECU respectively. 12.9. Apart from the amending and supplementary budgets of 1991 and 1992 for the special food aid programmes (7), the substantial variations between initial budget and final appropriations are almost entirely explained by numerous and often large transfers. The difficulties of estimating requirements well in advance, together with uncertainties concerning prices, etc., provide important explanations, but a contributory factor is the considerable delays in final invoices for indirect food aid operations coming through into the Community accounts. The decision of the budgetary authority to reduce the number of budget lines in 1993 should make the management of budgetary appropriations for food aid easier, and avoid some of the irregularities criticised by the Court in the past. It will be necessary for the Commission, however, to maintain analytical accounts in order to provide clear information on how the global sums voted have been utilized. 12.10. Table 12.2 shows that appropriations for skimmed milk powder (SMP) and butteroil have steadily declined in importance. This reflects in part the weakening of the role of food aid as a means of disposing of common agricultural policy surpluses and the need to utilize food aid funds more cost effectively by reducing the resources allocated to high cost dairy products and increasing those for lower cost vegetable oil and other products such as pulses. 12.11. The threefold increase in commitment appropriations for food aid transport over the period, and the very large positive transfers to this budget line that were needed in most years, is one of the main features of this period. Further consideration is given to this in paragraphs 12.57-12.62 below. Regulatory framework for food aid mobilization 12.12. The mobilization system that existed before the adoption of Commission Regulation (EEC) No 2200/87 of 8 July 1987 was characterised by a number of systematic weaknesses. The regulations were disparate, being product-based, and procedures were slow. The inadequate contractual links between the suppliers of food aid and the recipients led to unresolved conflicts, and the strict reference to international commercial delivery clauses (Incoterms), in particular CIF, was inappropriate given the administrative weakness of beneficiary countries. 12.13. Mobilization through the intervention agencies of Member States was unsatisfactory, with frequent disputes over the quality of the aid and its packaging, and delivery problems going as far as the complete disappearance of cargoes. The Commission did not exercise enough control over mobilization operations. 12.14. The aim of Regulation (EEC) No 2200/87 is to eliminate the abovementioned systematic weaknesses as follows: (a)by giving the fundamental role of overseer and supervisor of mobilization operations (centralisation of the bids submitted and control of mobilization) to the Commission's food aid unit; (b)by introducing a system for monitoring the quality and quantity of the products and the progress of transport operations. This system is entrusted to professional monitoring organizations, which are present during production, loading (and, where applicable, unloading) and at the warehouses at the goods' destinations; (c)by giving the successful contractor responsibility 'from start to finish` via the introduction of delivery terms () which differ from the Incoterms in that they imply, in particular, the transport of goods at the contractor's risk rather than at the consignee's; (d)by providing a better definition of the guarantees required from tenderers, both before and after the award of the contracts, with regard to the submission of tenders, the transportation of goods and where applicable, the payment of advances; (e)by introducing sanctions against contractors who do not comply with the provisions of the Regulations. Observations on the programming and mobilization of food aid Programming 12.15. The Commission relies to a great extent for its programming of food aid on data and information from the multilateral organizations such as the WFP, the World Bank, the Food and Agriculture Organization. It also coordinates closely with the major food aid donors, both at headquarters level and in the field. 12.16. Integrating food aid as an instrument into the Community's development programme for a developing country requires that there is close coordination between the food aid service and the geographical services, i.e., the desk officer and the delegation in the country concerned. With direct food aid such coordination exists, but the situation is less satisfactory for the approximately 50 % of food aid handled indirectly through international organizations and the NGOs. 12.17. For food aid handled by the WFP, the geographical staff are asked for their observations on WFP projects concerning their area, but they do not receive adequate feedback on the action taken in response to their remarks. For aid channelled through EuronAid to the NGOs, EuronAid puts together the requests of the NGOs and forwards them to the Commission. Although there are some omissions, the geographical desks and delegations are normally asked for observations, usually with a very short time (on average five days) within which to respond, and they do not receive any feedback. In programming the allocations of direct food aid for each country, the Commission is trying also to take into account indirect aid operations. Improvements in this exercise are possible and should be emphasized. This is essential if the objective of integrating food aid into the development assistance programme is to be achieved. 12.18. To avoid impractical or cost-ineffective conditions, the programming staff need to be more aware of the operational constraints on mobilization, and it is essential that the programming and mobilization staff liaise closely. There is scope for improvement in this regard. 12.19. The Commission needs to go further in its efforts to integrate food aid with other forms of development assistance, in the interests of food security. Pilot projects such as the Integrated Food Assisted Development Programme in Bangladesh should be extended, and more multiannual food aid programmes should be considered. 12.20. Further, existing projects and programmes should be kept under review to see whether they are fulfilling their objectives. The Commission has engaged technical assistance to evaluate a number of programmes, but more could be done through the delegations which are able to observe at close hand what is happening. In Pakistan and Sudan, the Court examined direct aid programmes which, despite being problematic and of doubtful value in food security terms, had continued essentially unquestioned for several years () . The Court has noted that the WFP is carrying out a major exercise to identify and terminate poor projects. The Commission should do the same. 12.21. The efficiency of the links between information from early warning systems, programming (including coordination with other donors and humanitarian organizations), decision making and mobilization is fundamental to an adequate response in emergencies. In this context, it is instructive to examine what happened with the Special Programmes in 1991 and 1992. 12.22. In both of these cases the early warning systems in place in some of the affected countries provided the first indications of serious crisis during the autumn of 1990 and 1991 respectively. This allowed allocation decisions to be taken within the framework of the resources remaining at the end of the respective budget years. This, together with normal food aid programmed for 1991 and 1992 meant that some food aid could be mobilized straight away. 12.23. In both years there was considerable knowledge available on the scale of the crisis, and it was clear that existing programmes would not be sufficient. It was not until the middle of May in both years, however that all the decisions were taken on the Special Programmes and their financing, including the need to modify the financial perspectives and adopt amending and supplementary budgets. Within the context of the normal Community decision-making procedures, the six weeks that elapsed between the Commission adopting its proposal to the Council, and the final Commission decision to implement the programme was a very short period. Nonetheless, it meant that, even with accelerated mobilization procedures, the bulk of the commodities did not arrive in their ports of unloading until October-November, after which it was distributed. 12.24. During the Court's mission to Sudan in November 1991, large quantities of food were still arriving in Port Sudan, and were being distributed to different parts of the country, some of which, such as Darfur, had received relatively little food earlier in the year because of the serious logistical problems and the lack of cooperation of the government authorities. This was almost 12 months after the failure of the harvest in large parts of the country. Had the new harvest been good all over the country, the cereals food aid in particular that remained to be delivered would have been disruptive to the market. 12.25. The major achievements of the Commission, together with the other agencies involved, in setting up and implementing these very large relief operations, frequently in extremely difficult logistical and political circumstances are fully recognised. In Sudan, while the initial predictions in late 1990 of hundreds of thousands of deaths were exaggerated, nonetheless the Special Food Aid Programme permitted an improvement in the overall nutritional status of the population in the worst affected areas. This notwithstanding, further improvements are needed, not just by the Commission but by the donors and agencies involved as a whole, in responding more quickly and more effectively to the information from the early warning systems. It should be noted in this context that if the foodstuffs have to be mobilized in and transported from Europe, there are limits to the improvements that can be expected in the timing of deliveries. Mobilization The monitoring of food aid operations 12.26. One of the main reasons for the progress achieved with the new mobilization system is the systematic supervision of operations by professional monitoring firms which are present at both ends of the operation - in both the Community and the recipient countries. Their monitoring activities consist not only of checks on quantity, quality and packaging, but also involve providing general back-up to mobilization operations and keeping the Commission systematically informed of their progress. 12.27. After an initial phase during which the monitoring system was entrusted first to three and then to five firms, from October 1992 onwards the Commission restructured it and, in particular, introduced a comprehensive system for computerizing the rates charged. This new system has made it possible to determine the exact amount of the additional costs resulting from the attitude adopted by some contractors, who spread out the production and packaging of the products in question over long periods and a large number of factories, according to their own whims. Moreover, further improvements have been made to existing procedures. 12.28. The reorganization of the rates charged has also given the Commission the opportunity to introduce 'Ã  la carte` monitoring, the cost of which is regularly assessed, by means of a cost/benefit analysis based on the circumstances and the difficulties of the operation in question, by the person responsible for each mobilization operation. Average expenditure for the monitoring of the 1989, 1990 and 1991 programmes was 4,2 Mio ECU. 12.29. The monitoring arrangements work most satisfactorily in relation to deliveries 'free-at-port-of-landing` and 'free-at-destination` since it is the set of checks at the point of delivery which establish the conformity or otherwise of the shipment. 'Free-at-port-of-shipment` operations, such as those awarded by the Commission to WFP and EuronAid, who then arrange the transport on CIF terms, provide for the last intervention of the monitors at the Community port, but the only control at destination is that of the insurance surveyors. These surveyors have a limited responsibility, unrelated to the monitoring provided for in the Commission regulation, to establish damages or losses for insurance purposes. There is, therefore, a need for a way to be found for the monitoring activity at destination to be extended to those shipments which currently escape it. 12.30. In general, the Court's audit visits confirmed that the Commission's management of the monitoring was of a satisfactory standard, and that this was backed up by strict surveillance of the monitors' activities in the recipient countries. Corrective measures were taken to improve the work of ineffective monitoring firms in certain recipient countries (the Sudan and Bolivia). Timing of mobilization 12.31. Mobilization of the aid begins after the Commission formally decides to grant a quantity of aid, on the basis of advice from the Food Aid Committee, and the recipient accepts the terms and conditions set out in the Official Letter. In 1992, more than 1 500 mobilizations were initiated. Normally only small quantities remain to be mobilized after the end of the year following that of the programme. 12.32. Generally speaking, the Commission is equipped with all the necessary information (from its own desk officers and the Delegations) for it to be able to mobilize aid at the best time of year by taking into account, among other things, the need to avoid disruptions in the local markets, in particular, at harvest time. Nevertheless, there may sometimes be constraints related to budgetary procedure, the availability of products on the Community market and other factors beyond the Commission's control. For example, excessive delays in the utilization by the Pakistan Ministry of Health of vegetable oil and skimmed milk powder granted under the 1988 programme meant that allocations of the same products, plus pulses, made in the 1989 programme were not mobilized until the end of 1991, with delivery in 1992 (see paragraph 12.40). No allocations were made to this beneficiary in 1990, 1991, or 1992. 12.33. As far as the respect of delivery deadlines is concerned, the procedures that result from Regulation (EEC) No 2200/87 generally function well in respect of direct food aid. For all shipments delivery deadlines are specified, with financial penalties (0,1 % of the tender value per day) for late delivery. Of such actions examined by the Court, the majority of suppliers respected the deadline, and those that were late were usually only so by a few days. Nonetheless, problems do arise. During its mission to Bolivia, the Court observed that two lots of SMP had been blocked in customs for several months. This was due to a misunderstanding of the instructions given by the supplier to the transport agents, and a failure to involve the monitoring company which could have avoided the blockage. If the mobilization staff concerned had been better versed in transport and forwarding procedures, and the practices of the ports concerned, they would have been able to take prompt remedial action. 12.34. For operations 'free-at-port-of-shipment`, which are the delivery clauses used generally by WFP and Euronaid, no delivery deadlines are fixed beyond the port of shipment, and the certificate of final conformity is established on the basis of controls carried out up to and including the port of shipment. The Commission is not in a position to penalise WFP or EuronAid for delayed delivery at destination, nor for missing quantities or products which deteriorate in quality after the certificate of final conformity has been given. Quality of food aid commodities and packaging 12.35. The inclusion in the mobilization regulation of specific provision for checks on quality of products and packaging by the inspection companies, together with the extension of the suppliers' responsibilities to the point of handover of the products in the beneficiary country, have resulted in a significant improvement in the quality of the products delivered. During the missions of the Court very few complaints were received about the quality of products, and there has been a noticeable reduction in losses due to damage. There are very few disputes between the Commission and the tendering companies concerning product quality. 12.36. Some problems were observed with regard to packaging, however, notably in respect of vegetable oil or butteroil, and the sacks for red beans from Argentina and beans from China in the context of triangular operations. Almost all consignments of vegetable oil and butteroil examined suffered losses and deterioration as the packaging, frequently five-litre cans with four cans per carton, was unable to withstand handling. Distribution to final beneficiaries 12.37. In the case of Sudan during the 1991 Special Programme for Africa, the scale of the distribution operation was so great, and the logistical and other constraints so large, that all the organizations involved (multilateral food aid and humanitarian organizations, bilateral donors, NGOs) formed a joint logistical structure in order to coordinate their efforts and maximize the efficiency of the distribution operation. This was a complex and difficult operation, rendered more so by constraints imposed by the Sudanese Government, including the requisitioning for its own purposes of significant parts of the private transport fleet that was needed to move the food from Port Sudan. 12.38. Despite the inevitable problems that arose with the operation, the overall result was impressive, with a flow of food being maintained first to the primary distribution centres, and then out to the villagers themselves, without intolerable breaks. The NGOs and international organizations monitored the final distribution to villagers effectively, and it can be concluded that they took all reasonable steps to ensure that the relief reached the intended beneficiaries. 12.39. Although for most of the normal food aid operations examined by the Court there was sufficient evidence to show that the food was reaching the intended beneficiaries, there were some exceptions. In Sudan, about 30 % of the 400 tonnes of butteroil and a similar proportion of the 1 200 tonnes of skimmed milk powder supplied for sale under the 1988 and 1989 programmes were sold to sweet and biscuit factories, destinations provided for neither in the Commission decisions nor in the Official Letters. In addition, reports indicated that these products found their way onto the black market. It was largely for these reasons that the Commission stopped the supply of these commodities. 12.40. In Pakistan the Ministry of Health did not have the capacity to manage adequately the distribution of vitaminised skimmed milk powder and butteroil to health facilities for incorporation in meals provided to patients. Distribution was slow and incomplete, and some SMP has had to be destroyed because of deterioration. 12.41. In Bolivia Community direct aid is channelled through Ofinaal, a central government organization created in 1983 to centralize the organization of the distribution of food aid supplied by international donors. Apart from weaknesses in the identification of priority needs, Ofinaal's accounting and monitoring procedures did not permit adequate assurance that the food reached the intended beneficiaries. Between 1989 and 1991, about 60 % of the Community aid channelled through Ofinaal was allocated to the 'ConfederaciÃ3n Nacional de Clubs de Madres de Bolivia` for free distribution to the most needy in the population. In the event, the 'ConfederaciÃ3n` sold the food at 50 % of its market value, with 50 % of the proceeds being donated to Ofinaal to cover administrative costs. Although the Commission, after receiving an evaluation report in 1990 and after the arrival of a technical assistant to Ofinaal in 1991, decided in 1991 to stop all distribution through the 'ConfederaciÃ3n`, information was available in 1989 which it should have known about and on which it could have acted. 12.42. Beneficiaries of indirect food aid are required to submit final distribution reports to the Commission showing the quantities distributed and the number of beneficiaries. The Commission's services should establish a procedure to evaluate them. Organizations used for channelling indirect aid 12.43. Approximately 50 % of annual food aid is not mobilized as far as its destination by the Commission. Instead, it is handed over, in a European port, to WFP or EuronAid (NGOs), which then ship the goods to the recipient areas. The Commission subsequently reimburses these organizations for the expenditure they have incurred as a result of the mobilization operations in question. World Food Programme (WFP) 12.44. Because of the position it occupies in the world of sea freight, WFP is heavily involved in grouping and makes considerable use of chartered vessels. It can therefore bring into play the possibilities for competition offered by the international market, which enables it to transport food aid on advantageous terms. Nonetheless, as noted in paragraphs 12.64-12.65, the practice whereby the Commission awards tenders on 'free-at-port-of-shipment` terms, and WFP then arranges the transport on CIF terms does not permit the Commission to obtain the most economic total price for the mobilization. The substitution of 'ex-works` for the Commission tender would be preferable (see paragraph 12.64). 12.45. The Court observed projects in Bolivia and Sudan where the WFP diverted the food to other projects or changed the conditions of use without obtaining the agreement of the Commission at any stage. The Commission should have a clear agreement with WFP similar to that which it is understood exists between WFP and the US Government, whereby all such changes must be agreed in advance. 12.46. Secondly, the Commission should ensure that it carries out systematically at WFP headquarters detailed follow-up of the utilisation of Community funds. Recently exercises of this nature have proved most useful both to the WFP and the Commission, and they should be continued on a regular basis, and preferably, with increased frequency. It is not feasible for the WFP to provide donor-specific reports on the utilization of their contributions, but the Commission can ensure adequate accountability by regular visits. EuronAid 12.47. EuronAid has developed its own shipping logistics, mainly using containers and based on the shipment of small cargoes for NGOs on cargo liners. Only recently have the large-scale humanitarian operations carried out by the Community led to the grouping of small cargoes and consequently to some development of the practice of chartering, but not to the same extent as WFP. 12.48. The organization of EuronAid's shipping logistics is focused too much on a limited number of lead-forwarders, each of whom is responsible for a network of transit agents in the ports of call, where the lead-forwarders themselves are not directly represented. This does not make it possible for competition between the transit agents at the ports of call to be fully brought to bear and constitutes a weakness of the system which prevents direct supervision by EuronAid. 12.49. Over several years, the level of advances from the Commission to EuronAid for mobilization purposes exceeded EuronAid's real needs, and on several occasions, most notably in 1991 when more than 10 Mio ECU was repaid in respect of the 1988 programmes, EuronAid has been required to return funds to the Commission. 12.50. In 1988, on the basis of a proposition from EuronAid the Commission services authorized the constitution of a 'mutual trust fund` into which the interest earned on funds advanced by the Commission for the programmes was paid instead of being reimbursed to the Commission. The balance on this fund increased from 0,65 Mio ECU in 1988 to 13,9 Mio ECU at 31 December 1992. The Commission services agreed that the funds should be used primarily for transport costs and purchase of food products for specific actions and prefinancing the normal indicative NGO programme, and secondarily to finance seminars. Prior authorization to use the funds was given by the Commission services frequently by telephone, sometimes without specifying the amount, and without any involvement of the Financial Controller. Until July 1992, no specific requirement was placed on EuronAid to provide the Commission with a detailed audited account of the fund. 12.51. In effect, the mutual trust fund is an irregular parallel fund operated entirely outside the budget and accounts of the Community. The Commission services have allowed a third party to manage financial assets of the Community outside the balance sheet and the purview of the budgetary authority. Not even the provisions of an imprest account designed to ensure proper safeguards for public funds have been applied in this case. This constitutes a serious contravention of the financial regulation, (notably Articles 1, 4, 5, 43-50) and its implementing rules (Title X, Title XVI). 12.52. During this period the Commission has not devoted sufficient resources to the task of checking EuronAid's operations and accounts and evaluating its real needs for advances. The steps taken by the Financial Controller in 1992 to spread the advances through the year is a step in the right direction, but a more thorough and regular process of clearing advances should be introduced as a matter of priority. The Commission should also examine whether the terms under which EuronAid operates are too generous. In 1992 its surplus on operations () was 107 % of its expenses (1991: 163 %). The annual surpluses are transferred to reserves, which amounted to 5,9 Mio ECU at 31 December 1992. Triangular Operations 12.53. The possibility to purchase food aid in the beneficiary country itself, or in another developing country, was first provided for in the 1982 framework regulation, and restated in the 1986 regulation. These operations, known as triangular operations, enable products adapted to the nutritional habits of the beneficiary population to be supplied, and, so long as the procurement is carried out in the country itself or its neighbours, can avoid the high costs and delays of transport from Europe. Article 3 of Council Regulation (EEC) No 3972/86 made explicit the role that triangular operations can play as an instrument of development, regional cooperation, and in reinforcing food security. 12.54. This notwithstanding, since 1986 the Commission has applied an informal rule of thumb that triangular operations should be up to 10 % of the total food aid budget, in effect preserving the role in the aid programme of food products mobilized in the Community markets. In recent years this percentage has been exceeded - in 1992 it was 17 % - largely because of the important part triangular operations have played in the Special Programmes. 12.55. There are a number of management difficulties with triangular operations. Firstly, appropriate food products are frequently not available in the region at the right time, so that products have to be purchased in other regions of the world, with correspondingly higher associated transport costs. Secondly, some quality problems were noted with the products and packaging, indicating the need for improved monitoring. Thirdly, the specific procurement and mobilization rules established in Regulation (EEC) No 2200/87 are not applied. 12.56. In order to improve the efficiency and effectiveness of triangular operations, therefore, the Commission should, together with other donors, seek to improve the information on available food products and their conditions of supply, and introduce specific mobilization and monitoring rules consistent with the provisions of Regulation (EEC) No 2200/87. Transport costs 12.57. The ratio of transport costs to the value of food aid products transported has increased from 28 % in 1988 to 48 % in 1991, and 41 % in 1992. Major reasons for this are the steep increases in maritime freight rates, the increased tendency to grant food aid deliveries on a 'free-at-destination` basis, and the increase in the number of food aid operations into areas of conflict where transport costs are very high. 12.58. However, during this period the management of this component of food aid costs was unsatisfactory. Firstly, prior to the introduction in 1988 of differentiated appropriations for food aid, some 69,8 Mio ECU of appropriations covering commitments on unsettled transport contracts were lost when they lapsed under the budgetary rules concerning non-differentiated appropriations. The 1990 and 1991 budgets did not contain sufficient appropriations for food aid transport to cover these commitments, so that when invoices were subsequently submitted, transfers of appropriations had to be made. Secondly, estimates of requirements were understated as a result of the lack of an adequate system permitting a contract-by-contract evaluation of likely outstanding claims. Thirdly, the transport commitments in relation to 'free-at-destination` deliveries involved paying real costs, and the Commission was effectively obliged to pay whatever was claimed by the organizations, so long as they had adequate documentary support. 12.59. The Commission has taken certain steps to reestablish control over transport costs. It now has a system for contract-by-contract evaluation of requirements. It has for some operations introduced ceilings on the overland transport costs that it will reimburse, and it has introduced time limits on the presentation of bills by contractors beyond which it will not pay. In 1992 no reinforcement was required of the commitment appropriations initially provided for in the budget. 12.60. The Commission does not, however, have the means at the moment to evaluate whether the rates it is paying for transport are reasonable or not. It does not have an adequate database against which it can check submissions. Its own 'in-house` information from tenders is insufficient, and is not systematically analysed. The databases of the WFP and EuronAid are not available at the moment in the Commission. In 1991/92 the Commission attempted to fill this gap by engaging a firm of consultants to develop a database. Unfortunately, the inadequacy of the methodology and results of this study were such that this was not achieved. 12.61. The Court has carried out its own evaluation of maritime transport costs paid by the Commission for direct and indirect food aid. Of the 2 705 lots mobilized between 1987 and 1992, 65 were comparable in terms of route, type of product, quantity, type of packaging, and mobilization period. All of these cases concern relatively small consignments transported by cargo liner. The main result of the analysis is that the lots of indirect aid mobilized through WFP and EuronAid tended to have higher maritime transport costs than the lots of food aid mobilized under direct aid conditions () . This may be attributed, firstly, to the higher costs associated with the 'free-at-port-of-shipment` delivery clause (see paragraph 12.64), and, secondly, to the more lax situation regarding penalties for late delivery (see paragraph 12.34), which reduces the incentive for rapid, and thus low cost, mobilization. 12.62. Evaluations such as the above are rendered difficult by the limitations of the available data and the lack of an adequate database. Nonetheless, it shows that such analyses are possible and that they can produce information of value to management. The Commission should take steps to improve the data and to establish a proper database incorporating WFP and EuronAid data. Improvement of the regulatory framework 12.63. Improvements in the regulatory framework will be necessary in order to reduce transport costs and improve the protection of aid recipients. 12.64. In particular, the replacement of the delivery term 'delivered at the port of shipment` (FOB Community port) by the term 'ex-(the contractor's) works` would make for substantial savings in transport expenditure in respect of the aid that is channelled through WFP and EuronAid. The use of the term FOB, involving a change of hands in a Community port, combines the highest overland transport costs with the highest port costs and serves to inflate the prices quoted by tenderers in their bids. The Commission itself admits that the cost/effectiveness ratio of FOB deliveries is lower than that of 'delivered at the discharge port` deliveries. It should be noted that a draft revised version of Regulation (EEC) No 2200/87, to which the Commission dedicated a considerable amount of effort over a period of more than two years but which has never been adopted, provided for the inclusion of an additional delivery clause 'ex works`. 12.65. This change would make it possible to set up a Community database on transport costs, as well as increasing competition if, for each mobilization of the (WFP/EuronAid) type, the Commission were to require both WFP/EuronAid recipients and tenderers to submit tenders for the shipment of the aid to its destination. 12.66. Finally, when the aid is shipped by WFP and EuronAid, the monitoring mechanism stops at the Community port of shipment. An extension of this mechanism to the ultimate destination would make it possible to monitor delivery times more effectively and ensure better protection of the goods, and hence of the interests of the ultimate beneficiaries of the aid. 12.67. The current legal framework for mobilization, which only takes into account relations between the Commission and the successful tenderers (Regulation (EEC) No 2200/87), should be completed in such a way as to include relations between the Commission and the recipient countries. In particular, there is a need, in the official letters, for a clarification of the notion of the recipient's taking charge of the aid, because this depends on the existence of port practices that often differ greatly from one destination port to another. Observations concerning the Commission's organization and management of food aid 12.68. The taking over by the Commission of responsibility for the mobilization of food aid involves the services concerned in an area of direct management requiring knowledge of the complex area of the logistics and practices of international transport of commodities. After having examined whether resources allocated, particularly staff, and the procedures and systems used correspond to requirements, the Court noted that there was currently a shortage of staff, particularly at higher levels, with experience in food aid mobilization, in part because of rapid turnover, notably since 1991, so that staff who had built up valuable experience have been replaced with others having little or none; that approximately 50 % of the staff are on temporary contracts; that instructions and training programmes are insufficient; and that, apart from posts which have been transferred to the newly created European Communities' Humanitarian Office (ECHO), a number of posts have been suppressed. The inadequate follow-up of the substantial budgetary resources devoted to indirect food aid, in particular that handled by EuronAid (see paragraph 12.52), results directly from the above weaknesses. 12.69. The delegations should play a greater role in the programming and mobilization of the food aid, and in monitoring its use. Further, the Court observed the very valuable role played by food aid coordinators engaged by the Commission in Bolivia and Sudan, where a close monitoring and/or coordination was needed to ensure that the Community food aid was used effectively. Food aid to Eastern and Central Europe, and emergency food aid 12.70. Since 1991 there have been two important developments in the organization of food aid programming and mobilization, concerning firstly the food aid to Eastern and Central Europe, and, secondly, emergency food aid and the creation of ECHO. 12.71. The Court has already, in the Annual Report on the financial year 1991, and in chapters 2 and 11 of this report, presented a number of criticisms of the way in which the food aid to Eastern and Central Europe was programmed and mobilized in 1991 and 1992. It considers that the Commission did not utilize the experience and expertise of the service specialised in food aid mobilization, and indeed adopted procedures which were similar to those applied to food aid to developing countries before the reforms of 1987, and which were deemed unsatisfactory. 12.72. From 1993 onwards any emergency food aid to Eastern and Central Europe will be implemented by ECHO. Established in April 1992 in order to improve the effectiveness and the profile of Community emergency humanitarian assistance to all third countries, including emergency food aid, by grouping together in a single specialized unit the various services of the Commission responsible for one aspect or another of humanitarian assistance, ECHO's precise responsibilities in the area of food aid mobilization are still being defined. 12.73. As paragraphs 12.21-12.25 show, emergency humanitarian assistance that goes beyond the immediate assistance given in response to a major unforeseen catastrophe needs to be planned and implemented with reference to its potential impact on the target population's longer term food security, as well as its ability to meet immediate needs. Council Regulation (EEC) No 3972/86 of 22 December 1986 places the provision of emergency food within the context of food security and food aid as an instrument of Community development policy. 12.74. In operational terms, normal food aid and emergency food aid, such as that for the Special Programmes in 1991 and 1992, are closely interlinked and need to be programmed and mobilized in a closely coordinated manner if they are to be effective. This was observed in Sudan in 1991. The reforms to the organization of food aid programming and mobilization in 1986 and 1987 sought to avoid fragmentation of responsibilities, and this has constituted an important improvement in the Community system. Very close coordination between the food aid service and ECHO will, therefore, be essential. CONCLUSION 12.75. In general terms, the reforms to the Community's food aid programme introduced by Regulation (EEC) No 3972/86 and the mobilization regulation of 1987 have improved its efficiency and effectiveness. The greater emphasis placed on food aid as an instrument of development cooperation is evident, though it needs further reinforcing at the programming level if the objectives of the 1986 regulation are to be met. 12.76. The revised system of mobilization has resulted in a more satisfactory allocation of responsibilities between suppliers and beneficiaries, and this, together with the monitoring arrangements, has led to a marked improvement in the quality of food aid delivered. The logic of 'end to end` supervision and control should, however, be extended to indirect food aid channelled by WFP and EuronAid. Also, the delivery stage 'ex-works` should be introduced in place of 'free-at-port-of-shipment` in order to reduce the cost of mobilizing, in particular, indirect food aid. 12.77. Although WFP and EuronAid are in general effective organizations in channelling Community food aid, the Commission needs to intensify its monitoring of operations handled by them. In particular, the Commission should devote more resources to checking EuronAid's activities, ensuring that the level and flow of advances is in line with real needs, and that Community funds (including interest) do not accumulate in EuronAid's accounts. The Commission should not allow EuronAid to continue to operate the irregular Mutual Trust Fund. 12.78. In order that the efficiency and effectiveness of triangular operations should be improved, better information on available food products and their conditions of supply are needed, and specific mobilization and monitoring rules should be introduced. 12.79. In light of the rapid increase in transport costs associated with food aid, the Commission needs to continue to tighten its management control over them. The introduction of more economic delivery clauses for indirect food aid would help, but particular attention should be paid to improving its information on transport costs and its analysis of that information. 12.80. Efficient management of food aid requires an efficient and coherent organization with experience and expertise in the logistics and practice of international commodity transport, as well as in food security and food aid as an instrument of development. The Commission has made progress here, but in 1992 several weaknesses were apparent which are prejudicial to the continued effective functioning of the programme. In particular, the benefits of the concentration of responsibility that have followed from the 1986-87 reforms should be maintained.>TABLE> CHAPTER 13 (*) Financial audit of the Commission's revenue, operating expenditure and accounting and of the consolidated accounts >TABLE> (*) The Commission's replies are on page 340 THE IMPLEMENTATION OF THE BUDGET IN 1992 The adoption and presentation of the budget 13.1. The 1992 budget was adopted on 18 December 1991 () . The amount of appropriations for commitment was fixed at 66 117,9 Mio ECU, whilst the amount of appropriations for payment was fixed at 62 827,6 Mio ECU. Following three supplementary and amending budgets () , the appropriations for commitment were finally reduced to 63 907,0 Mio ECU and the appropriations for payment to 61 096,8 Mio ECU. The true volume of budgetary authorizations was higher than these figures indicate: if negative revenue and expenditure (respectively 1 892,0 Mio ECU and 1 565,8 Mio ECU) are taken into account, the total volume of funds available for disbursement was, in fact, 64 554,6 Mio ECU. The percentages of commitments and payments in ecus 13.2. The proportion of Commission transactions expressed in ecus is now close to 100 % (85 % in 1990, 93 % in 1991 and 95 % in 1992). The main items which are not expressed in ecus are salaries, pensions and rents paid by the Commission. The proportion of payments settled in ecus is still relatively small (23 % in 1990, 30 % in 1991 and 37 % in 1992), but the volume has continued to rise fairly fast. Observance of the annuality rule Rates of utilization of the available appropriations 13.3. Using the data on which the Commission's revenue and expenditure account is based, the Court produced several diagrams, or 'graphic illustrations,` (Nos IV and V in particular) to show the changes in and use of the appropriations for the year. An analysis of the data for each major sector of activity appears as an introduction in the various specific chapters of this report. The Court has similarly assembled in Diagram VI the data concerning the implementation of the 1992 budget in the light of the 'financial perspective` () . The rates of implementation shown in the tables must be interpreted with care because, in some cases, the actual rate of implementation, as well as of payments to final beneficiaries, can prove to be distinctly different (see paragraph 6.16). For the third consecutive year, the value of the appropriations for payment which lapsed was in excess of 2 200 Mio ECU. Since the supplementary and amending budgets cut appropriations by some 1 700 Mio ECU and the carry-overs of appropriations to 1993 amounted to some 1 200 Mio ECU, the appropriations were over-estimated by more than 5 000 Mio ECU. This was almost entirely attributable to the Guarantee Section of the EAGGF, which accounted for 4 000 Mio ECU. Carry-overs of appropriations 13.4. The Commission carried over to 1992 693,0 Mio ECU of appropriations for commitment and 969,2 Mio ECU of appropriations for payment. The amounts carried over to 1993 were 495,4 Mio ECU and 1 175,5 Mio ECU respectively. 13.5. Regarding the differentiated appropriations, the carrying over of payment appropriations totalling 324,5 Mio ECU to 1993 was quasi-systematic, in spite of the fact that these were derogations from the annuality principle. Subsection B-6 (Research and technological development) illustrates, moreover, how, for the same budget headings, there was a succession of carry-overs, of which the first generated a surplus (17 Mio ECU in this particular case), which then went forward to the next carry-over. Finally, a sample check showed that some appropriations carried over were being used before the appropriations for the year had been exhausted. 13.6. In the area of non-differentiated appropriations, 77,1 Mio ECU were automatically carried over to 1992 under the heading of mini-budgets, even though the appropriations in question were funding numerous items of staff expenditure (auxiliaries, agency staff, experts, etc.), where carry-overs are not permitted. The same thing has occurred in 1993. 13.7. The non-automatic carrying over of non-differentiated appropriations may be proposed only for 'exceptional` reasons, in order to 'cope with compelling needs`. Nevertheless, at the end of 1992, 13,6 Mio ECU which had been carried over in this way remained unused. Moreover, proof of the compelling nature of the needs in question, as required by Article 7(3) of the Financial Regulation, was not entirely in evidence during the Court's ex post audit. Appropriations made available again or available for re-use 13.8. Commitment appropriations amounting to 291,0 Mio ECU were made available again in 1992. The amount made available again on the basis of the 1992 cancellations was 64,6 Mio ECU. 13.9. The necessity of making all these appropriations available again, something which is reserved for 'exceptional` cases, where it is 'essential`, has become less and less obvious as the years have gone by. Chapter B2-11 illustrates the situation for the amounts made available again in 1992. 138 443 ECU were made available again and ultimately not used. For such a small amount (0,2 % of the appropriations available under the chapter in question), the Commission should have adhered strictly to the annuality rule by allowing the cancelled appropriations to lapse. In the case especially of the amounts made available again in 1993, the justification for them was virtually non-existent and it was no longer possible to check that the Financial Regulation had been complied with. The reasons given did not show whether the criteria set out in the Regulation - which are very strict - had been met, nor, especially, did they demonstrate that it was essential for the programmes originally planned to be carried out and that no funds were available for the purpose in the current year's budget. 13.10. In the case of the Social Fund, the Commission allocates any commitments that have remained unused under previous annual instalments to subsequent annual instalments, but it does not follow the formal procedures for making the commitment appropriations available again. In the case of the European Regional Development Fund (ERDF), the numerous amendments to the financing plans approved by previous decisions did not result in any cancellations or recoveries, which is de facto tantamount to using previous appropriations without applying the procedures for making appropriations available again (in this connection, see paragraph 6.16 of this report). In 1992 the Commission also financed humanitarian aid to Bosnian refugees under the PHARE programme by using 30 Mio ECU which had been allocated to the 1990 programme for the financial sector in ex-Yugoslavia and had ultimately not been used, and without following the proper procedure for making the appropriations available again. In this instance, it is clear that the criteria for making appropriations available again could not have been satisfied, because there was no link between the programme initially planned and the programme which received the appropriations that were made available again. The Commission pleaded urgency and exceptional circumstances in order to justify this overriding of the Financial Regulation. 13.11. In 1992, and for the first time () , the Commission re-used, in accordance with Article 7(7) of the Financial Regulation, 115,4 Mio ECU of 1991 revenue from repaid advances. In 1993, the Commission decided to re-use 66,0 Mio ECU from the advances that had been recovered in 1992. 111,3 Mio ECU of the sums re-used in 1992 were allocated to heading B2-170 (ESF Community initiatives), which was irregular, since they had accrued under headings relating to different purposes. Of these payment appropriations, 38,8 Mio ECU ultimately remained unused. Conclusion regarding observance of the annuality rule 13.12. It is difficult to make management, auditing or computer provision for cases where the annuality rule is waived, as the regulations are not very consistent and are sometimes very particular (precise criteria, very specific exemptions) and sometimes very vague ('as a rule`, 'in principle`, 'in the light of requirements`, etc.). The difficulties and irregularities to which this gives rise confirm the Court's view, which it has stated in its Opinions on the Financial Regulation () , that the Community should simplify and clarify its financial legislation. Appropriations which remain unused at the year-end should be cancelled, thereby improving budgetary discipline. The budgetary authority should decide how the balance thus released is to be used during the following year. Observance of the principle of sound financial management 13.13. In view of its numerous previous observations questioning the Commission's observance of the principle of sound financial management, the Court studied the way in which this principle is applied during the drafting, implementation and monitoring of the budget. 13.14. Three amendments were introduced into the Financial Regulation in March 1990, in order to improve the framework within which the principles of sound financial management are implemented. Article 13 states: 'The Commission shall prepare a general introduction to the preliminary draft budget. This introduction shall contain in particular:... a description of the policies for which the appropriations are requested, taking account of the principles and requirements set out in Article 2... `. Article 2 provides that 'budget appropriations must be used in accordance with the principles of sound financial management, and in particular those of economy and cost-effectiveness. Quantified objectives must be identified and the progress of their realization monitored`. Finally, under Article 80, the Commission is required to preface the revenue and expenditure account with an analysis of the financial management and 'details on the realization of the principles and objectives as referred to in Article 2`. 13.15. In 1991, the Commission drew the authorizing officers' attention to the necessity of ensuring that appropriations were employed in a regular manner and made each Director-General personally answerable to the Members of the Commission for the implementation of the budget lines within his remit. The Commission also made its staff aware of the procedures to be followed in drawing up the budget. It analysed the methodology and organized training courses for the staff concerned. The results achieved in 1991, during the 1992 budgetary procedure, were limited. The budget statements made out by the authorizing officers do not, as a rule, justify their requests for appropriations in detail and omit, inter alia, to include an evaluation of cost-effectiveness and an identification of quantified objectives. 13.16. In 1992, by the time of the 1993 preliminary draft budget, in spite of some improvements, some or all of the following omissions were evident in too many cases: (a)analysis of the cost-effectiveness ratio; (b)identified alternatives to the proposed measures; (c)identification of quantified objectives; (d)definition of progress indicators. 13.17. This situation is illustrated by the following examples: (a)The Commission has exempted the EAGGF-Guarantee (37 000 Mio ECU) from the obligation to base its requests for appropriations on a cost-effectiveness analysis. In this area, however, which was completely reformed for reasons of cost-effectiveness, an annual review of the cost-effectiveness criteria for each intervention measure would seem to be an essential adjunct, in order to confirm, or possibly highlight the need for adjustment of, the new options which have been adopted for the common agricultural policy overall. (b)The budget statements for the Social Fund (one statement for one item only) and for Titles B2-5 (Other agricultural operations) and B7-6 (Cooperation with countries of Central and Eastern Europe and the independent States of the former Soviet Union) do not contain the information needed for the evaluation that is required. (c)At best, the statements are an aid to understanding how the appropriations have been calculated, but they do not indicate alternatives and do not give any indicators by which progress towards the attainment of objectives could be monitored and any reorientation assessed. 13.18. This state of affairs can be partly explained by the fact that the Commission, in the internal instructions, wished to ensure that the establishment of financial programming would not result in an increased administrative workload. There is also the fact that the authorizing officer frequently stated that the amount of appropriations to be provided was a purely political choice. 13.19. The Financial Controller is involved in evaluating the budget statements but hitherto he has, essentially, examined whether the authorizing officers' statements are complete or not, without stating the results of his previous analyses. The Commission should take more account of any previous control work carried out by its Financial Controller, as well as that of the external auditors and the discharge authority. 13.20. The almost total absence of quantified objectives and monitoring indicators during the budgetary planning stage makes it pointless to try to establish any generalized procedures for monitoring objectives. It is not surprising, therefore, that the Commission has not, so far, been able to satisfy the terms of Article 80 of the Financial Regulation, which requires it to produce an analysis of the action which it has taken in the area of sound financial management. The 1991 revenue and expenditure account does not contain anything on this subject, whilst that for 1992 explains the methodology for implementing the principle of sound financial management and the improvements to be made in that area, but it does not contain '... details on the realization of the principles and objectives... referred to in Article 2`. 13.21. In conclusion, the Commission is far from having established the sort of framework which would enable it to ensure that it can achieve the objectives referred to in Article 2 of the Financial Regulation. This is not, however, a reflection on the work that has been done so far. These observations should be construed as an invitation to the Commission to persevere and to achieve the substantial improvements in the decision-making, programming, monitoring and evaluation procedures which are essential if the objectives of sound financial management are to be realized and budgetary displine improved. The duties of authorizing officers, the accounting officer and the Financial Controller Delegation procedures 13.22. A proportion of the acts of delegation made out by the Commission in 1992 still did not provide the delegates and controllers with all the details (especially the maximum amounts) required for them to be able to exercise the authority delegated to them (no amounts entered, remarks such as 'nil`, 'unlimited`, 'no limit`, etc.). The Commission's intention of remedying these shortcomings (see the Commission's reply to paragraph 16.54 of the 1991 Annual Report) has not yet been put fully into effect. The Court had recommended that, in cases where the delegation granted was a broad one, the words 'the allocated appropriation` should be used. 13.23. The implementation of the rules concerning delegations, replacements and acting staff leaves much to be desired. In the area of cooperation with developing and other non-member countries, part of the appropriations for the ESF (Articles B2-130, B2-170, B2-182 and B2-190), research and the PHARE programme were committed and disbursed without any delegation. Subdelegations were given orally or were granted even though the Commission had not made specific provision for them. The amounts concerned are substantial, especially in the areas of food aid and non-governmental organizations (NGOs) (910,6 Mio ECU of commitments) and the measures associated with the Gulf crisis (16,3 Mio ECU of payments). Also in the area of cooperation with developing and other non-member countries, as well as the EAGGF Guidance Section, appropriations were committed or disbursed in spite of the fact that the documents did not contain any details by which to determine and check whether the person with responsibility in this area had been replaced in the correct hierarchical order. 13.24. The Commission has no up-to-date list of authorizing officers and their delegates and replacements, so that in 1992 it was impossible for it to say how many of its officials were empowered to handle Community appropriations and identify the cases where the acts of delegation were obsolete as a result of nomenclature or posting changes. 13.25. The authorizing officers, the accounting officer and the Financial Controller should subject acts of delegation to closer scrutiny and pay more attention to them. The authorization procedure 13.26. According to the information forwarded to the Court, there were five occasions in 1992 when the Financial Controller withheld approval and that refusal was not subsequently overruled. The Court's previous observations on the matter of financial control (paragraphs 1.44 to 1.47 of the Annual Report concerning the financial year 1990) were partly responsible for the European Parliament's postponement of the 1990 discharge decision on 8 April 1992 and, in particular, for its request that the Financial Controller should withhold his approval only in respect of operations which breached the Financial Regulation. In November 1992, the Parliament took note of a decision by the Commission on 1 April 1992 to curb the increase in the number of cases of a posteriori referral to the Financial Controller and gave a final discharge, noting 'that the Financial Controller will henceforward, as a rule, withhold his approval only in respect of commitment proposals not presented in advance, but will grant approval in exceptional cases where he judges, in all independence, that the reasons for a posteriori presentation were unavoidable`. 13.27. The aim of the above decision by the Commission is to provide a realistic control framework for a practice which may, in very exceptional circumstances, be justified on the grounds that it ensures the continuity of the Community's work in matters of vital importance. All the same, it remains a fact that the Financial Regulation provides no authorization for a posteriori approval, even under exceptional circumstances, and a fortiori not in the event of a posteriori presentation to the Financial Controller. 13.28. In 1992 the Financial Controller identified 123 cases of a posteriori presentation. On four occasions he refused to grant approval on the grounds that the matter presented a posteriori was not urgent. On the other occasions, however, he usually regularized the commitment proposals. 13.29. In the 119 other cases, the sample that was examined did not reveal any justification for waiving the principle of ex ante approval; it did, however, demonstrate the extent to which some authorizing officers fundamentally misunderstand the rules on ex ante referral. If the Commission wishes to ensure that its authorizing officers remain within the control guidelines, its Financial Controller must adopt an attitude of severity and follow up the warnings that he gives with his regularization approvals. The phenomenon is still observable in 1993 and would justify invoking the provisions on authorizing officers' liability to disciplinary action and payment of compensation. The Court also identified, in the course of its audits, a number of operations relating to various measures (social affairs, research, Task Force, human resources, development aid, PHARE and TACIS programmes) where approval had, in fact, been given a posteriori, although they did not appear on the Financial Controller's list. 13.30. Finally, in a different context, the Court noted that at least three operations had, in fact, been committed although no appropriations were available. Under Article 39 of the Financial Regulation this would have constituted grounds for withholding approval and there would have been no possibility of the refusal being overruled: (a)the payment of some 19 000 ECU by way of an extra-budgetary advance to enable the Euratom agency to pay its officials; (b)the vacating of the Berlaymont building began in May 1991, although no appropriations were available for the purpose. During an a posteriori appraisal of the terms of the operation, the Financial Controller recorded one interim financing through the Community budget, one special arrangement, one problem operation, one secret transfer, one a posteriori commitment, one case of spending in excess of available appropriations, etc. (see also paragraphs 17.5 to 17.19 of this report); (c)following a judgment by the Court of First Instance, fines were repaid directly, outside the budget, by withdrawal from the Community Treasury (see paragraph 1.131 of this report). OTHER OBSERVATIONS ON THE LEGALITY AND REGULARITY OF OPERATIONS PASSED TO THE ACCOUNTS DURING THE FINANCIAL YEAR Own resources The results of the Commission's checks 13.31. A recovery order, issued in 1989 because the validity of an agricultural prefixing certificate had been challenged, was waived without the relevant proposal for cancellation having been sent in advance to the Financial Controller for his approval and to the accounting officer for information, as provided for in Article 29 of the Financial Regulation. The balance of the EAGGF monetary reserve 13.32. The EAGGF monetary reserve is financed from the Community's own resources, calculated on the basis of the estimated gross national product (GNP) which, like the VAT source, is subject to further calculation to establish the balance due once the actual GNP is known. This balance is calculated without taking the EAGGF reserve into account; in 1991 this reserve was mobilized to the extent of 30 Mio ECU. The balances per Member State should have lain between P41 359 ECU for the United Kingdom and + 108 676 ECU for Germany. They would have totalled P1,3 Mio ECU and + 3,6 Mio ECU if the entire reserve had been called up. Resources and expenditure relating to lending and borrowing activities 13.33. The Community's guarantee to ensure the exportation of foodstuffs to the former Soviet Union (for some 500 Mio ECU) was activated in 1992. The Commission took over from the borrowing bank, which had not paid the interest due by the deadline. The Commission paid 98 % of the interest (10 Mio ECU) from its Treasury and charged it to an account outside the budget. Four days later, the debtor paid the interest that was due and the Commission credited this revenue to an extra-budgetary account. The operation was thus not entered in the budget, although there is a heading with a token entry for this purpose; as a result, it escaped the attention of the budgetary authority. Moreover, it was not until 1993, after receiving the interest in arrears (12 988 ECU) paid by the debtor, that the Commission, a posteriori, established the recovery order for this revenue. The EAGGF-Guarantee Section 13.34. Since 1989 the Court has audited the management and control of EAGGF-Guarantee expenditure in 10 Member States. The remaining two States (Germany and Denmark) will be audited in 1993. As can be seen from the Court's observations in its Annual Reports on the financial years 1990 and 1991, as well as in paragraphs 2.26 to 2.70 of this report, there are so many shortcomings at the national control level that the Court cannot state with any confidence that systems showing such weaknesses are capable of providing reliable data. Fisheries 13.35. In the case of two fisheries agreements (Guinea-Conakry and Mozambique) the financial implementation did not respect the annuality principle since some payments (3,5 Mio ECU) for 1993 had already been made by 31 December 1992. Unlike the other agreements that were renewed in 1992 (Angola, Guinea-Conakry, Madagascar and Mozambique), in the case of Morocco and Senegal the commitments entered in the accounts covered only the initial year's instalment provided for in the agreements (some 100 Mio ECU) and not the totality of the sums owing in respect of the multiannual agreements in question (in excess of 400 Mio ECU), as should have been the case, since these were differentiated appropriations. 13.36. In one Member State (I), the Court was informed by the administration - and was able to see for itself - that the recipient of assistance for an aquaculture project had obtained the first tranche of both the Community and national subsidy on the basis of false invoices. The national authority cancelled the national aid and initiated an enforced recovery procedure. Once it had been informed by the Court and the national authorities, the Commission, by virtue of Article 44 of the applicable Regulation (Council Regulation (EEC) No 4028/86 () of 18 December 1986), ought to have rescinded the Community aid (0,2 Mio ECU), decided on the refunding of the amount received and ensured that the decision was enforced - none of which things it did. The fact that the firm concerned lodged an appeal against the actions of the Member State in order to challenge the facts upon which the decision to revoke the national aid had been based is irrelevant to the case in point, since, regardless of the behaviour of the beneficiary, the withdrawal of the national aid, which was linked in the legislation to the Community aid, removed one of the conditions for the granting of the Community aid. 13.37. In another Member State (E), also for an aquaculture project, audits undertaken at the request of the Commission led the national authorities to recommend the recovery of Community aid (PTA 29,6 Mio, i.e. 0,2 Mio ECU) paid out on the basis of false invoices, but the Commission failed to act on this recommendation. The Structural Funds 13.38. In the fisheries sector, 13 of the 22 operational programmes approved in 1991-92 for the implementation of the Community support frameworks (CSFs) of Objective 5a include investments to be carried out in Objective 1 areas, particularly in the case of the United Kingdom. The payment of advances to the United Kingdom amounting to 499 996 ECU was incorrectly charged to item B2-1100 of Objective 1 because they related to England and Scotland, which, however, do not figure among the Objective 1 regions. 13.39. In accordance with Council Regulation (EEC) No 4253/88 () of 19 December 1988, a second advance is disbursed for an operational programme if the Member State has certified that half the first advance has been used by the final recipients and provided that the two advances do not together exceed 80 % of the value of the programme. In the case of 11 programmes concerning fisheries that were audited in nine Member States, these provisions were not respected in three cases, the second advance having been paid even though the national authorities had only certified the use of 43 % of the first advance (in two cases) and a second advance having been paid (in the third case), even though this payment took total disbursements beyond the 80 % threshold. Payments in excess of the threshold were also found in the Social Fund field. 13.40. Within the framework of the ERDF, the operational programmes for Objective 1 resulted in numerous amendments to the financial plans, which are referred to in paragraphs 6.8 to 6.18 of this report. These amendments were not systematically accompanied by the necessary adjustments (see paragraph 13.10). They therefore result in an artificial increase in the rate of utilization of budget appropriations, both commitment and payment appropriations, and make it difficult to assess the quantity of payment appropriations needed for future financial years. 13.41. At the end of 1992, in the EAGGF-Guidance sector, there were still 301 files, representing about 72 Mio ECU, which had not been closed and which concerned measures to implement Council Regulation No 355/77 of 15 February 1977. These files went back to before 1987, and, in some cases, right back to 1979. 13.42. Concerning the ESF, amendments to the financing plans concerning the operational programmes are arbitrarily calculated, as a result of an oversight in the legislation, at the ecu exchange rate ruling in August 1989, whereas the aid in question was disbursed at the ecu exchange rate of the month of receipt of the various declarations of expenditure, in accordance with Article 5(3) of Commission Regulation (EEC) No 1866/90 () of 2 July 1990. As a result, there are persistent discrepancies between the actual payments in ecus and the ecu amounts entered in the operational programmes. 13.43. In 1992, the Community support frameworks (CSFs) to be approved in 1993 concerning Objectives 3 and 4 did not include the Community initiatives relating to them, as provided for in Regulation (EEC) No 4253/88, which means that it is not possible to obtain a conspectus of all the resources granted for these objectives. 13.44. As regards the Social Fund, numerous problems were also found concerning eligibility and financial procedures when sampling checks were carried out on the premises of the administrators and operators concerned: (a)the total cost of training measures that were spread over two academic years was charged to the financial year during which the measures were approved; (b)the condition that unemployment must have lasted at least 12 months was not observed and expenditure was wrongly distributed between Objectives Nos 3 and 4 where measures concerned both adults and young people; (c)delay in the payment of national contributions for 1990 and 1991; (d)inadequate cover for eligible expenditure by national financing mechanisms; (e)the financial management of operational programmes was entrusted to a national administrator using data which differed from the Commission's, whence the excessive advances paid in respect of the 1991 and 1992 financial years; (f)requests for payment of balances gave numbers and cost of trainees assessed according to widely varying methods which were often far from realistic. The various measures 13.45. Thirteen commitment operations, for some 31 Mio ECU, out of the sample of 88 measures that were examined by the Court, did not contain any evidence on the basis of which to carry out an effective control of the operations in question on all the control levels (internal or external). 13.46. The Secretariat-General was mandated by the Commission to coordinate all subsidies granted by the Directorates-General or services - in particular so as to ensure that contracts were not drawn up in the form of a subsidy with a view to evading the obligation to issue invitations to tender, and also to ensure that different Commission services did not grant subsidies to the same recipient for the same purpose. The procedure for examining subsidies in use at the Secretariat-General is not sufficiently formalized. Of 26 subsidy files examined, totalling 5,3 Mio ECU, only three showed evidence of supervision. Routing these proposals for commitment through this department increases the number of administrative hurdles without strengthening the internal control of subsidies. 13.47. An advance of 5,2 Mio ECU was paid over as a subsidy under the 'Poverty III` programme without the contract having formally provided for this. The contract in question was for 10,7 Mio ECU and was preceded by a commitment for the same amount. A second contract for 11,2 Mio ECU was then drawn up by the authorizing officer for the same service without the first contract being cancelled and without the new contract being approved by the Financial Controller. As the second contract had been signed by both parties, the Commission was legally bound to the extent of 11,2 Mio ECU, whereas the financial commitment remained unchanged at 10,7 Mio ECU. Technological research and development 13.48. Apart from the Esprit programme, which has improved in this respect, Community research activities are still characterized by dormant commitments which cannot be rapidly settled using the procedures at present in place. Cooperation with the countries of Central and Eastern Europe and the former Soviet Union 13.49. Under the PHARE programme, on two occasions two commitments were approved and entered in the accounts for the same operation at the end of the financial year 1992, within the framework of the multidisciplinary PHARE programme, and for one intervention project of the European Bank for Reconstruction and Development (EBRD). An amount of 0,7 Mio ECU was thus committed in the accounts instead of 0,35 Mio ECU. 13.50. Pending recognition by the Council of Albania as a beneficiary of the PHARE programme, Regulation (EEC) No 2938/91 of 1 October 1991 () provided for the prefinancing from the EAGGF Guarantee Section appropriations for 1992 of the emergency measure to provide Albania with agricultural products, which was possible as of mid-October 1991, and for the recharging to the PHARE appropriations in 1992. The Commission, in order to complete this operation, had, to recharge to PHARE at the end of the 1992 financial year, a quantity of expenditure amounting to 8,7 Mio ECU. 13.51. At the beginning of 1992, the administration of technical assistance in the countries covered by PHARE and TACIS was entrusted to the Administration of Delegations and Press and Information Offices at DG IX (DAD) but, in the absence of a financial commitment concerning TACIS and power of signature for the administration of these appropriations, the DAD had, to prefinance up to November 1992, the expenditure from an extra-budgetary account (0,1 Mio ECU). Cooperation with the developing countries 13.52. Concerning the implementation of the appropriations under headings B-75 and B-76, 49 Mio ECU of expenditure initially charged to these headings for humanitarian assistance measures for ex-Yugoslavia were subsequently recharged to the EAGGF-Guarantee. As a result, the normal transfer procedure was evaded. In addition, the layout of the revenue and expenditure account was affected by this because, as the amount was charged to the EAGGF-Guarantee heading in the absence of any decommitment in the original heading, the budgetary execution gives a false picture of the situation regarding the appropriations actually committed. 13.53. Commitments of expenditure for an amount of 25,7 Mio ECU concerning measures coming under headings B7-3005, B7-3015 and B7-4085 ('EC Investment Partners`) were entered into without any adequate legal basis. Article 6(2) of Council Regulation (EEC) No 319/92 of 3 February 1992 specifies that the final financing decision is taken by the Commission, which checks that certain criteria that are set out in the Regulation have been satisfied. According to the Commission's Rules of Procedure, such decisions, which provide the necessary legal basis, may be taken either by all the Members together, by written procedure or by an enabling procedure. In the case in point, however, none of these procedures had been followed, as the commitment in respect of the item of expenditure in question had been based on the opinion of a Commission interdepartmental committee. This inadequacy of the legal basis of the commitments in question is the direct result of the confused understanding which the Commission departments have of the notions of the power to take decisions and the power to carry out expenditure, a comparison which is demonstrated in the very reply that the Commission has made to this criticism. According to Article 5(5) of the 'Internal Rules for the implementation of the budget`, the authorizing officer's power to enter into a commitment in respect of an item of expenditure is distinct from a decision, which is administrative in nature, to finance a given project, as that decision is established in Regulation (EEC) No 319/92. This very distinction has been made by, for example, the Court of Justice, in its ruling No 16/88 () . 13.54. Among the commitments still outstanding at the end of 1992 (2 133,8 Mio ECU), 838, totalling 286,2 Mio ECU, had not given rise to any payment since the beginning of 1991. These concerned principally cooperation with Asian countries, Latin American countries and the countries of the Mediterranean basin, as well as other cooperation measures. The oldest of these commitments related to measures predating 1988 which had come to an end and which were in need of a decommitment. The most recent concern projects which have been late in getting started. An examination of 178 of these commitments (124,2 Mio ECU) showed that: (a)90 (19,3 Mio ECU) should have been cancelled, including some to which the Court has already drawn attention; (b)39 others (25,5 Mio ECU) could not be cancelled because vital data were missing when the files were closed; (c)the Commission has not set up the procedure for the cancellation of dormant commitments which it announced in its reply to the Annual Report concerning the financial year 1990. OBSERVATIONS ON THE COMMUNITY'S FINANCIAL BALANCE SHEET 13.55. The procedure by which the Community balance sheet is consolidated presented the same imperfections as those found during previous financial years as far as the treatment of information concerning reciprocal interinstitutional accounts is concerned (see paragraphs 1.84 of the Court's 1990 Annual Report and 16.80 of the 1991 Annual Report). OBSERVATIONS ON THE KEEPING OF THE ACCOUNTS WHICH FEATURE IN THE COMMISSION'S BALANCE SHEET New balance sheet layout as regards bank balances 13.56. The previous system of accounting for bank transactions gave a balance sheet value which was equal to the bank statement balance plus some adjustments for Commission transactions. Any errors on the part of the bank were included in the balance. The generally accepted practice is to show a figure derived from the main ledger, not from the bank statements. This is what the new GB/GT (in French, 'gestion bancaire/gestion de trÃ©sorerie`) system does, but at the year-end the Commission reverted to using the bank statement figure by entering the difference under 'current operations`. This practice resulted in the assets side of the balance sheet being overstated due to the inclusion of a banking error of 100 Mio ECU. This change in presentation is not explained in the various relevant notes to the balance sheet and the comparative figures have not been adjusted. The note on the Treasury accounts, on the liabilities side of the balance sheet, is misleading as only 11,47 Mio ECU relate to overdrawn accounts out of a total of 1 419,61 Mio ECU. The year-end adjustment to bring in 'current operations` contained an error in the Italian Treasury balance, which means the assets side of the balance sheet is overstated by 700 000 Mio LIT (391,6 Mio ECU) and the liabilities side by a similar amount. The Treasury system 13.57. The Court carried out a detailed study of the way the Community institutions manage their bank accounts. Bank transactions carried out during 1990 and 1991 were examined in order to establish the path that they followed through the banking system (including accounts with national Treasuries and central banks). Information on terms, conditions and average balances was also collected. The following remarks concern the Commission's Treasury operations only, which account for the bulk of Community transactions in this respect. 13.58. The study has once again confirmed that certain facets of the existing system need to be improved: (a)payment orders entered in the accounts on an aggregate basis make it especially difficult to trace individual payments; (b)the audit trail is overcomplicated by the need to change references as a transaction goes through the system; (c)the management of bank assets is complex, with approximately 200 accounts held at 58 banks; (d)the Treasury section has no relevant and reliable forecasts from the authorizing officers of numbers of payments and currencies required - information which it needs to ensure optimum availability of bank funds; (e)the necessary hardware and software to manage the provisioning of accounts in a sophisticated way (e.g. ability to treat value dates properly) is lacking; (f)files concerning banking terms are not always kept up to date and in some cases the terms applying in practice do not conform to what is on file; (g)the lack of formalism with regard to the negotiation and renegotiation of banking terms renders the files concerned unreliable. 13.59. Many of these shortcomings should be addressed as part of two major developments in Treasury operations that were initiated in 1992: (a)a new approach to banking was implemented in three Member States (Denmark, France and Spain). The rest will follow in 1993. This new approach is based upon the idea that the main accounts will be held in local currency and ecus in each Member State (in addition to the accounts held with national Treasuries and central banks). These are the accounts in which the Commission will hold its balances. In addition, there will be transit accounts through which payments may be made but in which no money will be deposited. The banks were chosen after competitive tendering. This system simplifies the banking structure whilst standardizing and formalizing the negotiation procedure; (b)the replacement of the computer system for bank accounting with Sincom-GB/GT, which is dealt with in paragraphs 13.75 to 13.77. 13.60. The improvements that are likely to result from this new approach can only be assessed after it has been implemented. The accounts of the Karlsruhe JRC's Institute 13.61. The basis on which substantial assets are valued should be known by management and available to the Court for verification. Staff at the Institute failed to produce, during the course of the audit, documentary support for 13,6 Mio ECU relating to property assets in the balance sheet. 13.62. The balance sheet value of fissile materials contained two errors of calculation: (a)the conversion of the estimated value at average rather than year-end rates resulted in an overstatement of 795 268 ECU; (b)one amount in dollars (3,2 Mio USD) which was mistakenly converted using the DM rate (giving 1,7 Mio ECU instead of 2,6 Mio ECU) resulted in an understatement of 972 662 ECU. 13.63. Two of the JRC balance sheet items were overstated at the year-end due to the inclusion of the value of assets that had been removed from the assets register. The resulting overstated values were 3 193 063 ECU for 'Furniture and equipment' and 42 597 ECU for 'Transport equipment'. 13.64. The requirement to check the inventories against items actually held has not been complied with during the last five years. 13.65. Large transactions that belonged to 1992 were entered in the accounts in 1993. The effects on the balance sheet were as follows: (a)the bank account appeared to be overdrawn when in fact it was in credit; (b)deposits of 1,6 Mio ECU which matured in December were still shown in the balance sheets, whereas in fact they had been replaced by other deposits amounting to 1,3 Mio ECU; (c)the non-posting of a receipt from a debtor resulted in an overstatement of 187 300 ECU (39,6 % of total debtors shown) on both the assets and the liabilities side. 13.66. These items have an impact on the balance sheets of the JRC and the Commission and on the consolidated balance sheet. The note to the JRC's balance sheet attributing these problems to the fact that the computer system had been shut down from 23 December onwards does not explain why corrections were not made when the balance sheet was being prepared in January and February. 13.67. One of the signatories for banking transactions is neither an assistant accounting officer nor an imprest administrator, which is not in conformity with the provisions of the Financial Regulation regarding periods of absence. 13.68. The deposits mentioned in paragraph 13.71 (b) above should have been authorized by the Commission's accounting officer. The same situation was observed last year at the Petten Centre and the Commission replied on that occasion that cases of unauthorized deposits would not occur in future. REVIEW OF THE COMPUTERIZED ACCOUNTING SYSTEM (SINCOM) 13.69. The Court continued its appraisal of Sincom () as regards the entering in the budget of expenditure (Sincom CB/D), the bank and Treasury administration (Sincom GB/GT) and the decentralization operations. 13.70. As far as the strategic and annual planning is concerned, efforts have been made (separation of the teams responsible for exploiting and developing the system and the principal user departments). None the less, the procedures for checking the carrying out and monitoring of expenditure are still deficient. 13.71. As far as security is concerned, a global approach has been taken to the security of the application. A back-up plan (in the event of a breakdown in the Sincom service) has been developed. Security of access has still to be taken further in order to eliminate present weaknesses, in particular the management, at a single level, of various aspects: restriction of access, validation path, consultation capacities, etc. Sincom does not contain information on delegations and subdelegations given under the internal rules on the implementation of the budget. Finally, security is non-existent in some fields (decentralization of transfers of appropriations, production of lists, etc.) 13.72. There are not always adequate staff resources for data management and quality control. This leads to problems of internal consistency between the data or their structure, which is a particularly thorny problem in a context which involves the use of numerous interfaces. The specific internal control of Sincom CB/D 13.73. Initially, in the case of Sincom CB/D, the decentralization of electronic authorization was supposed to be completed by 1990. After the Court's audit, in 1991, the situation did not change significantly during 1992 () . A team was given the task, at the end of 1992, of implementing and following up the objectives with a view to achieving total decentralization at the end of 1993/beginning of 1994. The pursuit of this objective is a matter of great importance and should guarantee, among other things, a genuine separation of the duties of the authorizing officers from those of the accounting officer, checks on delegations and subdelegations of the power to sign and observance of the actual validation dates by the authorizing officers. 13.74. The weaknesses in some of the system's internal control procedures to which the Court drew attention in its previous appraisal still exist. The problem of availability checks has still not been solved in the case of negative appropriations, contrary to what the Commission claimed in its replies to the 1991 Annual Report. The control system for the observance of deadlines for implementing commitments, which was provided for in the Sincom planning, has still not been set up. In certain cases the system accepts and validates the recording of data in situations which do not meet the regulations (e.g. automatic carry-overs in the case of differentiated appropriations). The accounting officer continues to input the electronic validations for the authorizing officers, thereby violating the regulations on the separation of the duties of authorizing officers and accounting officers. The management of the existing interfaces both with the local systems and with the various Sincom modules is unsatisfactory and results in errors which sometimes remain uncorrected for a long time, the Sincom/Eurada link being one example. The closure operations are still not shown, as is demonstrated by the numerous unexplained discrepancies to be found in the revenue and expenditure account in relation to Sub-section B-8 (mini-budgets), between the commitments outstanding and the appropriations carried over. In the field of revenue allocated, the appropriations available in respect of carry-overs are increased, during the course of the financial year, by commitments outstanding from previous financial years and there is no way of distinguishing between the two. The specific internal control of Sincom GB/GT 13.75. Sincom GB/GT includes several specific software packages: 'SPOT` prepares the messages for the banks; 'ST400` carries out payments using the SWIFT network; and 'Nostro` carries out banking reconciliations. Another system manages the charging to the accounts. 13.76. An examination of these sub-systems reveals, to varying degrees, individual weaknesses which are due to the fact that these systems are so new. These problems are generally known to the Commission and are in the process of being solved. The internal controls set up were found to be well planned and seemed to be functioning correctly. However, the frequent absence of any visual record of the checks carried out (checking off, initialling, signing, production of lists, etc.) makes it difficult to be certain that those responsible are supervising the overall running of the system in a satisfactory manner. Finally, management of access to certain systems is not strict enough, as some staff have too wide a range of access. 13.77. The principal weaknesses observed in the operation of these sub-systems have had the following effects: (a)the sending by 'SPOT` of information relating to incomplete or incorrect payments, thus resulting in unreliable bank balances; (b)incomplete documentation on banking parameters produced by 'Nostro`; (c)delays in adjustments between Sincom GB/GT and the general accounts. Conclusion 13.78. Although the Commission has made efforts to improve both the general internal control of the computerized systems and the specific internal control of Sincom CB/D, as well as the setting-up of a system of banking management/Treasury management, which is in line with earlier recommendations made by the Court, the technical studies and the introduction of the improvements provided for are taking too much time or are still incomplete. The amount of decentralization, one of the initial reasons for Sincom, is still too limited and the number of authorizing officers who themselves enter commitment proposals and payment proposals into the accounting system is very small, thus preventing the internal control of the system from functioning at this level (delegation of powers, deadlines, etc.). 13.79. The limitations and the obsolescent nature of the software package used are reasons why the Sincom project should be reformulated. A more integrated approach is desirable in this phase. The Commission must now establish realistic objectives for itself. It should balance the diversity and specificity of the authorizing DGs, on the one hand, with the need for the DGs to accept common procedures as a result of the computerization of the accounting system. The Court considers that the current legislation and financial practices, which are very complex, are standing in the way of the controlled computerization of the budget and accounting management. Finally, a change of computer equipment would not, on its own, be enough to remedy the weaknesses of the internal control structure. CHAPTER 14 (*) The European Development Funds >TABLE> (*) The Commission's replies are on page 353 THE 1992 FINANCIAL AUDIT Implementation of the EDFs to 31 December 1992 Utilization of appropriations 14.1. Table 14.1 shows the implementation of the Fifth, Sixth and Seventh EDFs at 31 December 1992. For the three LomÃ© Conventions which are in operation, payments during the year amounted to 1 941,7 Mio ECU and new primary commitments () to 2 062,8 Mio ECU. The corresponding amounts for 1991 were 1 191,2 Mio ECU and 1 247,7 Mio ECU respectively. 14.2. Twelve years after coming into force, 87,4 % of the Fifth EDF has been disbursed. At the same stage of implementation, the disbursement rate for the Fourth EDF was 92,6 %. The Commission should proceed with the closure of the Fifth EDF in accordance with its commitment, as there are virtually no new operations to be recorded and it is an administrative burden. 14.3. In its seventh year of operation, disbursements from the Sixth EDF represented 63,5 % of resources, whereas those of the Fifth EDF accounted for 62,3 % at the same stage of implementation. Implementation of the Seventh EDF, which had been under way for 16 months, was high in the case of Stabex (47,6 %) () and the structural adjustment support (27 %). The indicative programmes, however, were still at the start-up stage. 14.4. Of the 914,8 Mio ECU disbursed in 1992 from the Sixth EDF, 14,2 Mio ECU related to funds for Fourth EDF projects which have not yet been closed. At the year-end, the sums still available under the Fourth EDF amounted to 98,1 Mio ECU. 14.5. As at 31 December 1992, the Commission suspended EDF aid to six ACP countries () , as a consequence of Community decisions that had been adopted within the political cooperation framework. These suspensions affected the rate at which appropriations were implemented. Furthermore, the problems arising in other countries, such as Liberia and Somalia, also slowed down the implementation of programmes () . Nevertheless, implementation rates for the various EDFs continued to show significant variations according to the ACP country concerned. Whilst the average implementation rates for programmable aid under the Fifth and Sixth EDFs were 85,4 % and 58,5 % respectively, there were substantial delays in implementing the aid granted to several countries, as Table 14.2 shows. Management of appropriations in 1992 Updating of allocations 14.6. The implementation of the EDFs is subject to the principle of prior approval, which in turn is determined by the availability of appropriations. For this reason the Financial Regulation requires the Financial Controller to review the availability of appropriations in advance of every transaction. The system cannot function properly unless the appropriation accounts are completely reliable, which is not the case at present. The computerized accounting application for the EDF (OLAS) () includes automatic checks on the availability of appropriations at the level of the financing agreements, but has no such checks at the level of financial instruments or the overall funding for the LomÃ© Conventions. Furthermore, the Financial Controller's approval is not required to establish whether movements of appropriations affecting the EDF chief authorizing officer's accounts are in order. For example, in 1992 the regional appropriations for the Sixth EDF were reduced from 1 048 Mio ECU to 932 Mio ECU, without any documents supporting the reduction. Consequently, at the year-end, the allocation was inexplicably 68 Mio ECU below the amount laid down in Article 112 of the Third LomÃ© Convention.>TABLE> 14.7. Although Article 192 of the Fourth LomÃ© Convention provides that interest earned by investment in the market of the sums equivalent to the annual Stabex instalments is to be credited to the Stabex resources, such interest received under the Seventh EDF (amounting to 17,8 Mio ECU for 1991 and 8,3 Mio ECU for 1992) was all credited to a Sixth EDF account. Given that the utilization of these funds was charged to the Seventh EDF, the Commission's Stabex accounts do not provide a true view of the operations that were carried out. At 31 December 1992 the allocation available for the Seventh EDF therefore appeared as 725 Mio ECU, whereas it should have been 750 Mio ECU. Finally, the Stabex allocations for the Fifth and Sixth EDFs, which ought to have been used up following payment of the transfers for the 1984 and 1989 implementation years respectively, still showed balances remaining of 3,17 Mio ECU and 29,65 Mio ECU at the end of 1992. 14.8. The Second and Third LomÃ© Conventions require that, upon expiry of the Conventions, appropriations not committed for emergency aid or aid for refugees are to be credited back to the assets of the Fund, unless otherwise decided by the ACP-EEC Council of Ministers. As the Council did not take a decision when the Fifth and Sixth EDFs expired, the appropriations in question must be credited back to the assets, which was still not the case as at the end of the financial year 1992. In the case of LomÃ© III the relevant amount was 7,3 Mio ECU, in addition to amounts remaining to be cancelled for operations which had been terminated or suspended (see paragraph 14.55). 14.9. As regards the interest-rate subsidies on loans made by the European Investment Bank (EIB), the internal financial agreements provide that any interest-rate subsidy appropriations remaining at the end of the five-year period covered by the Conventions are to be returned to the allocation for grants. At the end of 1992, despite the Court's previous observations () , the Commission had not made the necessary transfers in the accounts, thereby effectively blocking 49,2 Mio ECU. A further 20 Mio ECU, which was made available at the beginning of 1993 as part of the tidying-up operation prior to the closing of the Fifth EDF, should be added to this sum. Moreover, examination of the accounts also revealed the existence of cancellations pending on operations that had been charged to appropriations for the Sixth EDF. Thus, the EIB had informed the Commission of the existence of a remaining balance of some 5,6 Mio ECU on interest-rate subsidies of 26,2 Mio ECU, but the latter had not made the adjustment in its accounts. Sleeping commitments>TABLE> 14.10. At the end of the financial year 1992, the accounts for the three current EDFs showed that the primary commitments remaining to be paid amounted to 4 511 Mio ECU. A review of the operations with a positive balance which had not given rise to any movement in the accounts in the 18 months prior to the end of the financial year 1992 () resulted in three groups of operations for which further validity checks were desirable: (a)a first group of 83 primary commitments (172,9 Mio ECU) for which there were no secondary commitments; (b)a second group of 638 primary commitments (243,2 Mio ECU) had given rise to secondary commitments, but showed no movement during the period in question; (c)a third group of 1 218 secondary commitments amounting to 66,9 Mio ECU, for which no payments had arisen since June 1991. 14.11. The conclusions that were drawn following this review are summarized below: (a)many slow-moving transactions (for approximately 160 Mio ECU) concern operations managed by the EIB. They require a case-by-case analysis, as a significant volume of appropriations could be cancelled; (b)special loans amounting to 107 Mio ECU have not been used because the beneficiaries are reluctant to increase their indebtedness; (c)various programmes undertaken with Sudan and Ghana should be examined closely because of the ambiguous attitude of the beneficiaries; (d)for Burkina Faso, difficulties encountered in the clearing of advances paid are the cause of numerous delays in closing commitments; (e)there were many short-term studies which had been concluded, but for which the accounts had still not been closed. These cases should be systematically reviewed, as the files often show that the delegations have asked for these accounts to be closed; (f)lastly, commitments for several projects should be cancelled on account of events that have occurred during their implementation, such as, for example, disputes, suspensions, or overestimation of the original cost. These cases require timely and thorough examinations, in collaboration with the delegations concerned. The EDF financial statements 14.12. Partly as a result of observations made previously by the Court, the Commission has supplied additional details relating to certain operations (e.g. counterpart funds) and certain situations (humanitarian aid to Liberia and Somalia), together with the 1992 financial statements, thus improving the information value of its annual accounts. However, this move needs to be taken further, and, with this in mind, it would be useful to draw up the annual report on the management of financial and technical assistance () in conjunction with the year-end financial statements. Although the procedures underlying the preparation of these reports differ, the latter complement each other and can form the basis for high-quality financial information. Furthermore, the transparency of the EDF accounts would be considerably improved if these documents were to be presented in a format similar to that used for the 'financial report` on the implementation of the general budget. 14.13. Besides observations made elsewhere in this Chapter, the 1992 EDF financial statements prompt the following comments: (a)the balances on the suspense accounts continue to be high. They still stand at 83,7 Mio ECU for expenditure and 16,6 Mio ECU for revenue. In the case of the latter, the Financial Controller has suspended his approval; (b)the supplementary information provided regarding counterpart funds does not include any figures and is consequently of little use; (c)the import programmes now used frequently to implement macroeconomic instruments (Stabex, structural adjustment, Sysmin, indicative programmes) are not summarized in a manner that enables their scope to be assessed; (d)the presentation of various operations already pointed out by the Court () has not been changed (advances, guarantees received, revaluation of commitments, revenue to be collected, global authorizations); (e)several operations are mistakenly presented as available funds (683 000 ECU); the items in question are either funds to be collected (0,43 Mio ECU) or cases of failure to correct accounting errors properly (0,25 Mio ECU); (f)four paying agent accounts are overdrawn (5,6 Mio ECU), contrary to the provisions of Article 229(4) of the Third LomÃ© Convention and Article 319(5) of the Fourth LomÃ© Convention. One of these accounts (Uganda) has been overdrawn since November 1991, and the debt has gradually increased to 4,5 Mio ECU; by the end of the financial year, the corrective measures requested by the EDF accounting officer in August 1992 had not yet been implemented. Observations relating to management systems Operation of the OLAS accounting system 14.14. A review of the operation of the computerized EDF accounting system highlighted two shortcomings which should be remedied, as they weaken the internal control system. They concern the use of negative accounting entries and the procedure for corrections. 14.15. The OLAS system was designed to record standard accounting entries, in order to facilitate the user's task. Consequently, certain tasks, such as the cancellation of appropriations, can be carried out only by means of negative entries in the accounts. Such entries obscure the intrinsic logic of double-entry bookkeeping () and confuse analyses of the accounts. The computer procedures should therefore be amended, and the system of negative entries be replaced by a procedure for reversing entries, which should itself be subject to increased control. 14.16. Transactions are not recorded as final on the OLAS accounting system until all the authorizations required by the Financial Regulation have been received. It is nevertheless possible for an accounting entry to require correction, even though it has been finalized in principle (as it has gone through all the authorization stages). There were probably at least 1 600 such items in 1992. Not all of these operations were subject to prior approval by the EDF authorizing officer's department or the Financial Controller. As already noted in the context of the old EDF accounting system, corrections should be substantiated by clear supporting documents and should be subject to prior approval on the same terms as the initial wrong entry () . Granting of final discharge to the EDF accounting officer 14.17. In terms similar to those used in previous regulations, Article 43 of the Financial Regulation for the Seventh EDF requires the Commission to take a decision on the final discharge to be given to the EDF accounting officers within two years of the date on which the financial statements are submitted to the Council. The final discharge then frees the accounting officers from incurring any liability relating to payments and recoveries made by them, and also from their responsibility for any funds and other assets in their charge. The final discharge also enables the accounting officers, after they have terminated their appointments, to receive payment of the credit balances in the guarantee accounts which the Commission opens on their behalf in accordance with Article 41(4) of the Financial Regulation for the Seventh EDF. 14.18. In its Opinion concerning the draft Financial Regulation applicable to the Seventh EDF () , the Court considered that the procedure for granting final discharge required clarification, that intervention by the Financial Controller should be considered and the time-limits for granting a final discharge should be shortened. 14.19. In response to these recommendations, the procedure was not further defined. The EDF Financial Regulation contains no implementing procedures, nor have provisions concerning the final discharge been included in the manual of EDF financial procedures, and there is no specific procedure akin, for example, to the written procedure applied to the final discharge decision for the general budget. 14.20. In the case of the EDF, the Commission considers that the final discharge is an automatic consequence of the discharge given by the European Parliament () . This practice should be reconsidered, because the discharge takes place at the political level, whereas the final discharge is essentially an administrative act. The final discharge, however, should not be regarded as an automatic act, and should be based on a thorough review of the operations carried out by the accounting officer during the period in question. Such a review could be carried out by the Commission's Financial Controller. 14.21. The EDF accounting officer is shortly to join the Directorate-General for Budgets (DG XIX), and this could provide the occasion for improving the framework for the EDF final discharge procedure. As regards the recent past, since the previous EDF accounting officer left his post in September 1991, the Commission, after having obtained the discharge for the financial year 1991, should not grant a final discharge without further review. As at the end of 1992, various recoveries were, in fact, in progress as a result of duplicate payments and losses or misappropriation of funds which had their origins in financial years prior to 1992. Court access to accounting data 14.22. During the EDF financial audit for 1992, the provisional end-of-year accounts were not forwarded until 21 April 1993 and the Court was obliged to wait until 9 July 1993 for the final figures and the financial statements for the year () . This procedure did not comply with the regulations concerning the audit of the EDFs' accounts. 14.23. Ever since the OLAS application was put into service in September 1991, the Court has been requesting that it should be guaranteed direct access to the accounting records, as is the case for the general budget accounts (Sincom). The Commission argues that the application is not suited to this on account of its technical characteristics, and has to date failed to act on the Court's request. This situation has a serious effect on the effectiveness of the audit. Legality and regularity of operations relating to certain financial instruments 14.24. Each EDF financial instrument is governed by a special set of rules which add to or derogate from the general rules. The following paragraphs group together the principal observations arising from the review of operations in the financial year 1992. Stabex 14.25. The aim of Stabex is to guarantee the ACP States a certain level of stability in the earnings which they derive from exports of agricultural products. The first Financial Protocol to the Fourth LomÃ© Convention allocated an amount of 1 500 Mio ECU for this purpose, to be called up in five annual instalments. For the first two years of application (1990 and 1991), the resources available were not sufficient to meet all the requirements, mainly as a result of the fall in coffee and cocoa prices. Under these circumstances the Convention authorizes automatic advance use of 25 % of the following year's instalment (Article 194). In 1991, the 25 % advance was supplemented by an amount of 100 Mio ECU, but failed to cover the deficit of the system. In 1992, for the application year 1991, advance use of one quarter of the next year's instalment (1992) was insufficient, and the ACP-EEC Committee of Ambassadors authorized the exceptional draw-down of 12,5 % of the last two annual instalments (1993 and 1994) () . As with the transfer of 100 Mio ECU that was carried out in 1991 () , this decision to draw down funds is not in accordance with the provisions of the Fourth LomÃ© Convention, Article 194(1) of which limits the advance use to a maximum of 25 % of the following annual instalment, so as not to encumber the resources needed for subsequent years (Article 194(4)). 14.26. At the end of the second year's implementation of the Convention, 53,8 % of the Stabex resources had already been committed () , but it was possible to retain only about 40 % of the initial transfer bases (calculated in accordance with Article 197(3) of the Convention). The situation regarding the future financing of the system gives particular cause for concern, because a decision adopted by the ACP-EEC Council on 19 November 1991 abolished the obligation to replenish Stabex in the case of sums outstanding from previous EDFs. The potential resources were thus reduced by some 900 Mio ECU. The initial transfer bases for the ACP States for the application year 1992, which amount to some 750 Mio ECU, indicate that the available Stabex funds are still insufficient. 14.27. The Convention provides for a reduction in the bases for calculation of the transfer entitlements if it appears that the fall in export earnings is the result of trade-policy measures taken with the aim of restricting supply (Article 202), or significant changes in production, the export trend or demand in the Community (Article 203). 14.28. Extensive use of the possibilities available under Article 203 has led to substantial reductions in the transfer bases, amounting to some 394 Mio ECU for the years 1990 and 1991. Nevertheless, the procedure that was followed gave rise to two comments. Although, in principle, the reductions are to be made following a joint review by both the Commission and the ACP State, the files show that such reviews are usually limited or even non-existent, partly because the ACP States do not always follow the provisions of Article 209 of the Convention, which require them to send 'a substantial analysis` of the situation in the sectors affected by loss of earnings. The second observation concerns the 1991 coffee and cocoa transfers for the benefit of the Ivory Coast and Cameroon, where the Commission did not make any reduction in the transfer bases. In the case of the Ivory Coast () , a 22,8 % fall in marketed coffee production and the adoption of measures to induce farmers to change to other crops would have justified a reduction in the base. Had the approach adopted been similar to that applied to other countries, the result would have been a 41,5 Mio ECU reduction in the transfer base. In the case of Cameroon, the Commission did not reduce the transfer bases, despite a 25,8 % fall in cocoa production and a 22,2 % drop in the case of coffee, because it considered that the falls in production were the result of a policy of structural adjustment which was supported by the Community. The reduction in the bases could, however, have reached 45,6 Mio ECU. It could have been backed up by various objective reasons, which the Cameroon authorities themselves recognized, had the Commission not interpreted the provisions of Article 202 in a particularly restrictive way. These differences in treatment between ACP countries are apparently not justified by technical considerations. 14.29. At the end of 1992, payments executed by the EDF for LomÃ© IV Stabex amounted to 760,2 Mio ECU, or 86,9 % of the related primary commitments. This difference can be explained partly by the suspension of Community aid to three beneficiaries () , but also by the fact that eleven countries () had not as yet opened bank accounts in Europe to which transfers are to be paid under the terms of Article 211 of the Convention () . 14.30. The EDF deposits in bank accounts in Europe are only the first stage in the implementation of the aid. The funds cannot, in fact, be sent to an ACP State until the latter has concluded with the Community a 'framework of mutual obligations` stipulating how the funds transferred are to be used. As at 31 December 1992, only 20 of the 33 States receiving transfers for the 1990 application year had concluded such agreements, whilst no agreement had yet been signed for the 1991 application year. These delays in concluding the mutual obligation frameworks are in part due to the inadequacy of the 'substantial analyses` forwarded by many ACP countries. 14.31. In 1992, a transfer of 36,28 Mio ECU was paid in favour of Uganda. In 1981 this country had received an advance of 2 Mio ECU for a transfer to which it was not ultimately entitled. It was agreed at the time that the advance should not be repaid immediately, but that it would be deducted from the next transfer to which the country became entitled, which was not until 1992. Since the 2 Mio ECU was a cash advance, it should have been deducted from the final amount of the transfer, i.e. once all the reductions had been made. Instead of that, the Commission deducted the amount in question from the initial transfer base. The total reductions finally amounted to 71 % of the initial base, resulting in an overpayment of 1 298 287 ECU. This was contested by neither the Financial Controller nor the accounting officer. Nevertheless, the advance had remained outstanding on the EDF balance sheet for 11 years, and the clearance of it was an exceptional operation, which should have attracted the attention of the financial departments. It is now essential that the EDF chief authorizing officer take the necessary steps to recover the funds. 14.32. Despite the large size of the sums earmarked for Stabex, the central departments at the Commission have not established any procedures for monitoring the implementation of the mutual obligation frameworks. The EDF accounts are also deceptive, in that operations which in reality may still be under examination are shown as having been carried out. Thus, an enquiry among the delegations showed that, of the 760,2 Mio ECU paid under the Seventh EDF, at least 171,7 Mio ECU was still in accounts in Europe and at least 93,7 Mio ECU was still awaiting use in the ACP countries. 14.33. Article 171 of the Third LomÃ© Convention requires the countries which receive Stabex transfers to submit reports on their use of the funds () . The reports must be submitted within twelve months of the signing of the transfer agreements and can affect the release of subsequent transfers. At 31 December 1992, 13 countries () had received LomÃ© IV transfers for an amount of 431 Mio ECU, even though they had not submitted their reports on the use of the most recent LomÃ© III transfers. Structural adjustment support 14.34. The Fourth LomÃ© Convention deals specifically with the problem of the ACP countries' debt burden and the need to support their efforts towards economic and social restructuring () . The Financial Protocol concluded for the first five-year period of the Seventh EDF allocated 1 150 Mio ECU for structural adjustment. This allocation may be increased, firstly, by a fraction of the indicative programme resources from the Seventh EDF [Article 245(1)(b) of the Convention] and, secondly, on a case-by-case basis, by the resources that have remained unused from indicative programmes of previous EDFs [Article 240(2)(a)]. 14.35. The adjustment support takes the form of sectoral or general import programmes, which may be combined with technical assistance at the request of the ACP State. The import programmes generate counterpart funds which are used in a targeted way for the financing of local expenditure (Article 226). The expenditure is usually government expenditure, particularly in the health and education sectors, but also in sectors which are directly affected by the restructuring of public-sector undertakings. 14.36. At the end of 1992, the funds devoted to adjustment support since the Seventh EDF entered into force amounted to 494,5 Mio ECU () (total financing agreements), namely: (a)307,5 Mio ECU of adjustment support; (b)165,2 Mio ECU from the indicative programmes; (c)20,5 Mio ECU from resources available from the Sixth EDF; (d)1,3 Mio ECU from the unexpended balances of the Fourth EDF which have been transferred to the Sixth EDF. A single operation may be financed from several sources, resulting in a fragmentation of the accounting entries, thereby complicating the administrative follow-up, as well as the monitoring of the accounts. The payments executed by way of these programmes in 1992 amounted to 181,8 Mio ECU. 14.37. In practice, the import programmes take the form either of supply contracts under the traditional EDF procedures, or of remittances of foreign exchange to the central bank of the beneficiary country. Of the 26 LomÃ© IV programmes, five are supply contracts (55,4 Mio ECU) and 21 are currency programmes (437,8 Mio ECU). 14.38. Most of the payments made in 1992 concerned cash advances which were paid on special, separate accounts within the framework of foreign-exchange programmes in accordance with the provisions of Article 250(3) of the LomÃ© IV Convention. At the end of the financial year, these advances, which were in the process of being cleared, were nevertheless treated in the EDF accounts as expenditure which had been finally executed. In March 1993, when the accounts were examined, the central departments at the Commission did not know how the advances had actually been used, as they had not yet received the bank statements for the accounts to which the advances had been credited () . In this context, the ECU account opened by Sierra Leone with Barclays Bank, London, which contained an amount of 1,2 Mio ECU, was seized following a judgment by the High Court in London on 5 April 1993. These funds are therefore no longer available for EDF operations. The Commission should review its policy of early payments in the light of this case. 14.39. Payment of the second instalment of foreign-exchange programmes generally depends on whether the ACP State has complied with certain conditions which are set out in the financing agreements. These conditions concern, firstly, the submission of documentation guaranteeing the conformity of the imports carried out and, secondly, the implementation of specific measures within the framework of reform policies initiated by the recipient State. Review of the financing agreements showed that the conditions were in fact worded in such a way that it was possible to carry out a global appraisal of the implementation of them without any need to refer to precise quantified benchmarks and the specific measures did not always lend themselves to an unequivocal appraisal. 14.40. The examples which follow show the extent of the margin of discretion allowed when the second instalment of the programmes is released, even though it is the ultimate means of ensuring that the ACP State has actually honoured its commitment to reform: (a)in Mali, the second instalment (14 Mio ECU) was released despite the absence of the assessment provided for in the financing agreement; (b)in Zambia, the second instalment (16,6 Mio ECU) was released, although the rate of inflation and the increase in money supply (two essential elements of the programme of structural adjustment) were above the levels set out in the framework paper () which was to provide the guidelines for the programme of structural adjustment. Moreover, the protocol on the management of the counterpart funds had not been concluded; (c)in the Ivory Coast, the second instalment (5 Mio ECU) was released at the end of December 1992, even though some of the conditions in the financing agreement had not been met. Payment was made at the beginning of 1993; (d)in Burkina Faso, payment of the second instalment (5 Mio ECU) was made on the basis of a generally satisfactory appraisal of the implementation of the programme, although the appraisal of certain key elements of the macroeconomic framework and specific conditions concerning release of the funds was negative. 14.41. When the financing agreements for the second round of programmes for the structural adjustment facility are concluded, more attention should be paid to the question of whether it is possible to verify the terms on which the funds are released. In this context it would be preferable, in the interest of greater efficiency, for the conditions adopted to be less ambitious and to provide less opportunity for interpretation and discussion concerning compliance with them. 14.42. As is the case for all the other contracts agreed by the national authorizing officers, two contracts for oil imports were concluded without the Financial Controller's approval. Advances for a total of 11 Mio ECU were paid to oil companies under these contracts () . As pointed out already () , the prices invoiced were the prices on the date of delivery; advances as substantial as these are a benefit that is granted to suppliers without any tangible benefit to the EDF in return. The Commission should reconsider its policy on this point. Risk capital 14.43. Risk capital (see Table 14.3), which is managed by the EIB, can be raised in the form of holdings and loans on flexible repayment terms.>TABLE> 14.44. The EDF accounts still give a poor picture of the actual situation regarding risk-capital operations, as there continue to be considerable delays in recording the financing decisions taken by the EIB Board of Directors. Thus, at the end of 1992, decisions on six projects involving a total of 42 Mio ECU were not shown in the EDF primary commitments. 14.45. The secondary commitments ought to show the situation as to the legal undertakings entered into with regard to third parties as part of the projects. The Commission, however, often records the secondary risk-capital commitments later, for example when the first payments are made. Secondary risk-capital commitments ought to be entered in the accounts on the basis of the financing agreements made between the EIB and the aid recipients. This would mean that the practice in this field would once again be consistent with the other EDF instruments and would have the advantage of highlighting cases of a breakdown in communication in respect of accounting information between the EIB and the Commission. It would also ensure better monitoring by the Commission departments, which still very seldom have the financing agreements at their disposal, despite their importance in terms of management control. 14.46. Payments are made by the Commission on the basis of calls for funds by the EIB. Many payments are provisional and are subsequently adjusted once the actual rates of exchange for the operations have been determined. The Commission's monitoring of these adjustments is still hesitant because it lacks adequate information. This monitoring is all the more necessary in that most of the settlements result in repayments to the Commission. If it does not know which currencies are used for the payments, the Commission cannot check whether it has in fact received what it is due and entered it properly in the accounts. 14.47. Risk-capital operations usually come to an end when all the funds have been used up, but sometimes financing agreements are wholly or partly cancelled. Scrutiny of the operations of the Fifth EDF showed that the EIB had notified the Commission of the cancellation of seven agreements over a year ago without action being taken to update the year-end EDF accounts. There were 7 Mio ECU of such commitments requiring cancellation. 14.48. As regards the Sixth EDF, a comparison of the EIB's statements of operations and the EDF accounts at 31 December 1992 shows that the EDF accounts include a loan of 1,9 Mio ECU (made in 1987 for an oil-works in Madagascar) which does not appear in the EIB's statements. No payment has been charged since then to this project, which has probably been cancelled. Apart from this isolated case, there are 33 other risk-capital operations which have shown no accounting movements for more than 18 months. The balance on these operations totals 117,4 Mio ECU. Of these 33 operations, there have been no payments whatsoever since they were started for 14 of them (84 Mio ECU). The Commission departments have no analysis available of the reasons why these operations are blocked; in fact, operational reports have not been available to DG VIII since 1987. In this respect, the (1991) report on the financial management of the EDFs () , submitted in November 1992, makes no reference to these projects which are pending, despite the fact that it is supposed to draw attention to the main features of financial management. 14.49. For countries where the situation is troubled, the reasons for the freezing of the projects are fairly clear. For other countries () , one of the reasons for the blockage could be that the countries in question owe arrears to the EIB and the latter does not want its ratios of doubtful debts to increase. The Commission, acting on behalf of the Community, ought to examine the cases in question and decide whether the present procedures for implementing risk capital are the best suited to the situation of the ACP States. An examination of the financing agreements shows that risk capital is used far more in the form of loans on certain terms than in the form of holdings. Emergency and refugee aid 14.50. The Community contributes financially to aid measures made necessary by natural disasters or other extraordinary events. For ACP countries, the aid is drawn from EDF resources except where it involves food supplies () . It is part of the non-programmable assistance. The last two LomÃ© Conventions make a distinction between emergency aid and refugee aid, the latter being intended to meet post-emergency needs. Most of the emergency aid is channelled through international or non-governmental humanitarian aid organizations. At the end of 1992, the financial situation appeared as follows in the EDF accounts as shown in Table 14.4. 14.51. Up until April 1992, the funds earmarked for emergency aid and refugee aid were managed by DG VIII. In April 1992, the Commission set up a special office (ECHO) () responsible for mobilizing all the Community's emergency aid. Accounting follow-up of humanitarian aid operations 14.52. The setting-up of ECHO was not accompanied by a re-organization of the accounting side of the Commission's central departments. Thus, there is now an accounting function at ECHO which duplicates that of the EDF chief authorizing officer. This duplication further increases the delays in recording operations which were noted elsewhere. For Somalia, the secondary commitments shown in the EDF accounts at 31 December 1992 were thus 13,7 Mio ECU lower than those recorded by ECHO. The computer resources available to the Commission ought to make it possible to avoid both delays and duplication of work. 14.53. An examination of a sample of emergency aid and refugee aid operations has revealed serious delays at all stages of the accounting process. As regards commitments, for which recording times of more than 150 days were found, the accounts cannot be said to be at all up to date and they lose their information value. As regards payments, for which the periods of time needed for recording have reached as much as 129 days just within the Commission departments, the Commission's partners, whose financial resources are often small (NGOs), have to shoulder needless financial burdens. 14.54. Even though the funds reserved for humanitarian aid are limited, many cases have been found in which resources remained unnecessarily allocated to measures which had been finished or cancelled: (a)for 16 emergency aid primary commitments representing 13,65 Mio ECU at the outset, there had been no accounting movements for at least 18 months; at 31 December 1992 the balance outstanding on them was 2,94 Mio ECU. They included five contracts made in June 1991 for 1,2 Mio ECU and for which no payment had been made; (b)for 25 other emergency aid secondary commitments, the balances of which represented 5,35 Mio ECU, no payment had been recorded since at least June 1991. For 14 of them, representing 3,9 Mio ECU, no payment at all had been made. As regards operations having to be carried out in conditions which are sometimes difficult, the risk of complete or partial cancellation is high. It would thus be desirable for there to be closer monitoring of emergency aid commitments and for appropriations needlessly reserved to be quickly paid back into the main body of allocations corresponding to this type of operation, as stipulated by the provisions of Article 203(8) of the Third LomÃ© Convention. 14.55. The situation concerning refugee aid, although less serious, is similar to that of emergency aid. It appears that if the amounts for which there had been no accounting movements for 18 months could have been released, 8,6 Mio ECU and 3,3 Mio ECU could have been put back into the Sixth EDF allocations for emergency aid and refugee aid respectively, allocations which, according to the accounts at 31 December 1992, seemed exhausted. Some operations from the period from June 1991 to December 1992 are also candidates for release of appropriations. Aid to Somalia>TABLE> 14.56. In December 1991, the APC-EEC Committee of Ambassadors decided that countries which had not been able to ratify the Fourth LomÃ© Convention because of force majeure could continue to receive EDF emergency aid by making deductions from the unexpended balances of their previous indicative programmes, on the understanding that every effort would subsequently be made to replenish the said allocations. 14.57. According to the EDF accounts, the commitments for emergency aid for the financial year 1992 totalled 2,1 Mio ECU and 29,9 Mio ECU for the Sixth and Seventh EDFs respectively. However, to this must, be added 39 Mio ECU committed for Somalia and charged to the Sixth EDF indicative programme in accordance with the decision of December 1991 referred to in the previous paragraph. 14.58. The greater part of these commitments, i.e. 20 Mio ECU, concerns an exceptional operation. Following Resolution 775 of the United Nations Security Council, the Belgian Government made approximately 500 peace-keeping soldiers available to the Unusom force which was responsible for protecting convoys of humanitarian aid in Somalia. In September 1992, the Commission, regarding this as Community aid, proposed to the Council that a contribution to the costs of sending these troops be funded by the EDF. On 9 September 1992 the Council thus decided to provide a maximum amount of 27 Mio USD (i.e. 22,1 Mio ECU) for this operation. Several observations need to be made concerning this operation: (a)the amount authorized was 22,1 Mio ECU, but the Commission entered only 20 Mio ECU in the accounts and did not do so until 1993, although the decision was adopted in 1992; (b)even though the decision made provision for the operation to be monitored by the EDF Committee, the case had still not been referred to the latter by the end of April 1993; (c)at 31 December 1992, an exchange of correspondence (dated 22 January 1993) committed the Commission to contribute 7,5 Mio ECU (secondary commitment) to the Belgian Government. The expenditure covered was that of the period from 16 December 1992 to 16 March 1993, which corresponds roughly to that of the 'Operation Restore Hope` undertaken as a result of UN Security Council Resolution 794, with whose financing the Community did not wish to be associated. Sysmin 14.59. The Second LomÃ© Convention set up a financial instrument called Sysmin which was intended to give support to ACP States suffering decreasing revenue from the mining sector. At 31 December 1992, the overall financial situation of Sysmin since its inception was as shown in Table 14.5.>TABLE> 14.60. For lack of eligible projects, the degree of implementation of Sysmin still gives cause for concern as, after more than six years of operation, 162 Mio ECU (i.e. 39 %) of the resources devoted to it by the Sixth EDF have been allocated to Stabex and 106,7 Mio ECU, i.e. 42 % of the revised allocation (253 Mio ECU), remain unused. 14.61. In its discharge resolution for 1990, the European Parliament wanted Sysmin aid in favour of diversification measures to be increased () . Since the Fourth LomÃ© Convention has relaxed the eligibility criteria for diversification measures, consideration needs to be given to how these new criteria could best be applied for using up the unexpended balances of the previous Convention () . 14.62. Both the Second and the Third LomÃ© Conventions require that, upon expiry of the five-year period stipulated for each Convention, the ACP-EEC Council must decide how any unexpended balances of Sysmin are to be allocated. By the end of 1992, no reallocation decision had been made, even though the balances on the Fifth EDF were 25 Mio ECU and those on the Sixth EDF 106,7 Mio ECU. 14.63. Five of the eight Fifth EDF projects were completed. There were delays in closing three of them involving amounts totalling almost 16 Mio ECU. 14.64. Of the eight Sixth EDF projects, the operation agreed with Togo (15,7 Mio ECU) was suspended for technical and administrative reasons connected with the political situation. The project to assist Papua New Guinea (18 Mio ECU) had been discontinued on technical and administrative grounds. In Senegal and Guinea, the awarding of contracts was delayed by technical questions which had seriously affected the invitation to tender procedure. 14.65. For the Seventh EDF, a 60 Mio ECU general import programme had been decided as part of the diversification measures in Zambia. However, this programme was supposed in a very general manner to support the easing of trade restrictions and the development of the productive sector in such a way that, apart from its size, it had nothing to distinguish it from the financing mobilized as part of the support for structural adjustment (see paragraph 14.34). Furthermore, according to the financing proposal, the counterpart funds were supposed to be earmarked for financing the 'overall deficit of the Government`. Owing to the general nature of the planned operations and to the fact that they are diverse, the very broad interpretation given to the Sysmin diversification measures diverges from the provisions of Article 216 of the Fourth LomÃ© Convention. Thus, the Sysmin allocations become nothing more than additional resources for the system of support for structural adjustment and the instrument is tending to lose its purpose. Follow-up of recommendations accompanying the decisions granting discharge 14.66. Following the decisions granting discharge for the financial years 1990 and 1991, the Commission undertook to put certain measures into effect, in order to strengthen its financial management. Several of these were still pending at the end of 1992: (a)the programmed checks on the OLAS system had not all been formally documented and had not been notified to the Court, which is thus prevented from assessing the reliability of the accounting system; (b)the manual of financial and accounting procedures was circulated in limited numbers and was available only in French, even though English is the working language in many of the delegations; (c)the segregation of duties between the authorizing officer and accounting officer had not yet been implemented; (d)the delegations were still not fully staffed. Of 299 posts, 48 were unoccupied, 13 for political reasons or because of the unstable situation; (e)the 1992 accounts were not accompanied by a report on the measures taken in the light of the comments appearing in the decisions granting a discharge, as provided in Article 77(5) of the Financial Regulation for the Seventh EDF () . PROCEDURES FOR EVALUATION OF PROGRAMMES AND PROJECTS OF THE EUROPEAN DEVELOPMENT FUNDS 14.67. The Third LomÃ© Convention of 8 December 1984 stipulates, in Article 224, that projects and programmes be evaluated, on the one hand, during their implementation so that they can be reoriented if need be, and, on the other hand, after they have been completed, so that the lessons learnt can be applied to future operations () . Similarly, Article 193(2)(f) requires that the results of such evaluations be submitted to the ACP-EEC Council of Ministers in the context of its annual examination of financial and technical cooperation. 14.68. In the past, both the ACP-EEC Council of Ministers and the Council in its resolutions of November 1987, May 1989, May 1990 and May 1992 or the European Parliament () have asked the Commission to devote sufficient resources to evaluation operations in order to iron out the difficulties that arise in passing on to new operations the experience gained from completed programmes. 14.69. In order to do this, the Commission has set up, within its Directorate-General for Development (DG VIII), a unit that is specially responsible for evaluation () . Whereas in 1986 this Unit had only one member of staff, at the beginning of 1992 it had five permanent officials and two experts. This increase in staff is an indication of the importance that the Commission attaches to evaluation. 14.70. Until mid-1992, most of the Unit's work involved first and foremost the evaluation of specific sectors, geographical areas, themes and instruments. Secondly, it organized meetings between ACP and EEC experts, who examine the findings of recent evaluations and draw up 'basic principles` () . These form the guidelines which the ACP-EEC Council adopts as guidance for the implementation of development operations. Lastly, the Evaluation Unit was responsible for developing the methodological aspects of the implementation of development aid. In this respect, it has played a leading role since the end of 1992 in implementing the new 'integrated approach` to the management of projects and programmes, which aims, in particular, to enable the lessons learnt from previous operations () to be taken more into account. 14.71. In addition to the Evaluation Unit, the Commission departments have also carried out other evaluation work of a specific nature on individual programmes and projects. Some of these evaluations were sent to the EDF Committee for information. 14.72. As the evaluation process is an integral part of sound financial management, and because it provides better information as to the effects of public expenditure, the Court of Auditors undertook an examination of the procedures followed by the Community for assessing the results and the long-term impact of aid financed by the European Development Funds. In this respect, it is considering the presentation of a special report on the procedures for evaluating programmes and projects of the European Development Funds. This report would examine the way in which the EDF evaluation function is organized and would point out several aspects of this work which could be reoriented or strengthened. The initial conclusions of these enquiries indicate the need for: (a)measures to be taken at the highest level of the EDF to rationalize the decision-making process with regard to joint ACP-EEC evaluations; (b)closer attention to be paid to the projects carried out within the framework of the operations entrusted to the EIB; (c)the implementation of the Evaluation Unit's work programmes to be more systematically monitored and supported at the highest level of the Commission departments; (d)the practical procedures for drawing up and implementing the 'basic principles` to be revised; (e)the external evaluations to pay more attention to the role played by the Commission departments in drawing up and carrying out development projects; (f)the system of periodic internal evaluations, of which the delegations are the kingpin, to be better supervised; (g)an unequivocal policy to be followed with regard to the publication of evaluation reports so that the Community's work can be better understood by the public; (h)the Evaluation Unit to play a more important role in the process of drawing up new projects and to be more closely involved in the external and internal evaluations of projects.>REFERENCE TO A FILM> The Commission's replies to the observations on its revenue and operating appropriations and on the European Development Funds INTRODUCTION 1. The annual report of the Court is a vital instrument enabling the Commission to evaluate its work. The dialogue between the Commission and the Court which is part of the report procedure is seen by the Commission as essential for gauging progress in the quality of the management of Community finances and also for pinpointing any remaining deficiencies so that appropriate remedies can be applied. The Commission is glad that the Court found a number of improvements. The Court notes that the 1986 and 1987 reforms contributed substantially towards making the food aid programme effective as an instrument of development cooperation. It also notes that the three framework programmes have undeniably brought greater coherence to the research and technological development measures. It similarly recognizes that the PHARE and TACIS programmes have done a great deal in implementing and bolstering political and economic change in the recipient countries in spite of the shortcomings which were revealed when they were put into operation. 2. These improvements are a reflection of the Commission's efforts to enhance the quality of its management. This concern for improvement permeates all its administrative work, whether it be the modernization of the Sincom system, which now ensures reliable internal control of budget and cash accounting, the implementation of new programming tools such as the Phacsy system for financial monitoring of the programmes for the PHARE countries, or the enhancement of evaluation, for instance by establishing within the EDF a special unit responsible for this important aspect of monitoring Community policies. The Commission is also anxious to take more account of the cost-effectiveness of Community expenditure, as evidenced by the method applied in the preparation of the preliminary draft budget. The Court's comments, like the dialogue which the Commission holds with the other institutions, are very useful in this respect. They have enabled the Commission to improve its proposals when renewing legal bases (for example the 1993 reform of the Structural Funds, Memorandum of Understanding specifying the use of counterpart funds, etc.) or to clarify relationships between parties to contracts (e.g. Tempus programme). The Commission will pursue its initiatives in all areas where action is called for, including those relating to the monitoring, regulation and supervision of the Member States in fulfilling their obligations. This intention is confirmed by the undertakings made, on various points, in the replies to this annual report. However, implementation will depend on a number of factors. 3. The Commission would point out the limits to its action and the constraints imposed on it. These are particularly important at three levels: - When implementation of Community policies requires some action by the Member States (as, for example, in the case of the Structural Funds), or when the application of the rules is a matter for the national authorities (e.g. own resources), monitoring procedures at both national and Community level are inevitably affected. The Commission shares the opinion expressed several times by the Court in its report (in particular in the chapters on social affairs and EAGGF-Guarantee) on the need for the Member States to apply proper care when conducting the checks for which they are responsible. It finds it normal that the various levels of authority should be required to exercise greater responsibility. The Commission is glad to see that the Court allocates to each institution its appropriate share of the blame for the difficulties encountered in the implementation of some Community policies as when, for example, it criticizes the length of the decision-making procedure for the adoption of specific research programmes. - The objective difficulties linked to the political, economic or administrative situations of recipient countries of Community assistance should not be under-estimated. Local features do not always make it possible to find perfect solutions, despite the efforts deployed. Any criticism should take this into account, notably when it is levelled at humanitarian aid to the Eastern European countries, aid granted by the Structural Funds to the new Laender or by the EDF to developing countries. - Failures and errors decried by the Court are often rooted in the legal framework of the Community action. The Court also regularly condemns the unwieldiness inherent in the application of regulations. It should be borne in mind that this often stems from a long and difficult political process where negotiation and compromise are the rule. Any assessment of possible improvements should thus take this into account. The Commission is nevertheless aware of the need to simplify and rationalize existing rules. It assesses possible adjustments on a case-by-case basis so that the number involved does not make them counterproductive. 4. In implementing the budget the Commission must apply the guidelines and measures adopted by the Council and Parliament. The Commission cannot accept the observations and recommendations of the Court which directly challenge the political choices of the Community lawmaker; examples of such criticism concern the grounds for fisheries' agreements and the appraisal of the benefits for the Community, the number of research programmes under the third Framework Programme, the preparation of PHARE environment programmes, the priorities laid down for the use of PHARE appropriations or any departures from the principle of annuality. With regard to this last point, the Commission can see no need to call into question the 1988 reform regulations. These regulations meet not only the political requirements of the Member States and the European Parliament but also the imperatives inherent in the conditions for implementing the budget. The regulations took these two criteria into account, emphasizing clearly the need to respect the principle of annuality and simplifying the previous systems. It would hardly be wise to propose an amendment which disregards the practical and political circumstances behind the current system. 5. Lastly, the Commission acknowledges that it should take responsibility for the monitoring duties correlating to its management duties. However, it is becoming increasingly difficult to strike a balance between the two types of activities which are both expanding considerably at a time of general staff shortage. Alongside the marked increase in management duties (linked to the development of Community activities in the field of external relations) the Commission is having to undertake even more monitoring duties (control of own resources, the Structural Funds, EAGGF Guarantee expenditure and the fight against fraud). Moreover, the Commission must constantly satisfy the requirements arising from the Court's activities: besides the replies to the annual report, it also has to deal with large numbers of management letters, special reports and visits by the Court to its departments. Under the circumstances, determining the trade-off between implementing and monitoring is a delicate matter, especially as the outlook on the human resources front is still rather bleak. PART I CHAPTER 1 Own resources CALCULATION OF THE VAT BASE BY THE REVENUE METHOD 1.2. Some of the exceptions allowed under the sixth VAT Directive (Council Directive 77/388/EEC of 17 May 1977) were revoked by the 18th (89/465/EEC). Others will cease to apply when the relevant Commission proposal, presented on 22 July 1992, is adopted by the Council. In any case, infringement procedures are initiated against Member States which fail to observe Community VAT directives and they are asked to make adjustments if the infringement is found to have affected the calculation of the VAT base. 1.4. In most cases, Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 lays down legally binding rules: e.g. corrections for transactions carried out by flat-rate farmers and compensation for transactions referred to in Annexes E and F of the sixth VAT Directive. Only under truly exceptional circumstances may the Commission allow a Member State to diverge from the standard rules and use more precise data once it has checked that the result is acceptable from a financial point of view. Where infringements of Community legislation have an effect on the VAT resource, the Commission requests that the corrections or compensation be calculated using the most accurate data available. THE WEIGHTED AVERAGE RATE OF VAT The obligation to establish a WAR 1.7. In the case of Denmark, it would have been inappropriate to take account of the only zero-rated category of transactions (sales of newspapers) to calculate a weighted average rate when all other transactions are taxed at a single standard rate. Calculating the correction to revenue as if newspapers were taxed at the standard VAT rate is a straightforward, technical solution to the problem and is acceptable from the financial point of view. The VAT rates to be used for the calculation 1.8 1.10. The Court rightly points out that the VAT revenue for a given year contains elements from previous financial years such as refunds, adjustments for deductions already made or late payment of disputed claims. This is because the Member States are exempted, with the Commission's permission, from having to break down revenue according to the year in which the tax became chargeable since the VAT accounts, which are kept centrally in most Member States, do not take account of the year in which the chargeable event occurred, which may be some years prior to the year in which the tax was actually collected, particularly if the claim is disputed. 1.11. and 1.13. It is not usually possible to determine from taxpayers' returns what proportion of total VAT revenue from transactions subject to non-deductible VAT is accounted for by each VAT rate. The weighted average rate must therefore be calculated using statistics which, as the Court points out in paragraph 1.18, are not intended for tax purposes and which are ill-suited to the calculation of the weighted average rate. Consequently, the weighted average rate of VAT is calculated in a way which, though it may be methodologically correct, cannot produce an entirely accurate result because the figures used are approximations themselves. However, the regulations concerning the calculations and the methods used by the Member States (which have become increasingly refined with successive Commission inspection visits) aim to minimize the degree of uncertainty. 1.12. It is essential that each Member State should include all transactions subject to non-deductible VAT in the calculation to determine the weighted average rate. The reliability of the weighted average rate depends more on the inclusion of all such transactions and all the relevant rates than on the breakdown into statistical categories. 1.14. By and large, the inconsistencies concerning exempted sectors referred to by the Court relate to transactions or situations with a minimal impact on the VAT base in the Member States in question. The Commission has come to accept these inconsistencies, if only because eliminating them would impose on the Member States an unjustifiably heavy administrative burden, given the minimal impact it would have on the calculation of the weighted average rate. In taking this stance, the Commission is acting in accordance with the general principle of sound financial management set out in Article 6(3) of Regulation No 1553/89, under which the effort required to achieve a given objective must be proportionate to the likely benefits. 1.15. The Commission has already asked Ireland and the United Kingdom to examine the impact on the calculation of the weighted average rate of exempting certain small businesses. 1.16. All statistics are prepared using the information most appropriate to the legislation and the economic practices in the Member State in question. The sources of the data ESA national accounts and other sources 1.18. (a) Deductibility coefficients are taken from the input-output tables of countries such as France and Germany, which contain the ad hoc information. Such information is not available in Belgium and Greece, however. (b) The VAT base is broken down using the best information available. Furthermore, the breakdowns are checked during Commission inspections which involves comparing the figures supplied by the various Member States for the same breakdown operation. (c) The figures used to calculate on-farm consumption by flat-rate farmers and direct sales of their produce are estimates as the national accounts do not provide any ad hoc information. (d) Since national accounts are a statistical system designed to cover all economic transactions, in principle both items are covered. As indicated in paragraph 1.11, national accounts have to be used owing to the lack of tax data. 1.19. It is difficult to achieve a completely uniform method of estimating all ESA aggregates because each Member State has its own legislative and economic peculiarities. However, in accordance with the GNP Directive (Council Directive 89/130/EEC of 13 February 1989, the Commission is encouraging Member States to harmonize the way in which they calculate their GNP and the various individual elements which make up the overall figure. This should also make it easier to compare the way the weighted average rate of VAT is calculated. 1.21. The diversity of the methods used by the Member States does not mean that the results cannot be compared. Indeed, one of the aims of the Commission's control visits is to ensure that estimates are comparable - an objective which has largely been achieved. 1.22. Article 4(5) of Regulation No 1553/89 provides that, in the absence of ESA sources, certain elements in the weighted average rate may be calculated using any other appropriate source. 1.27. The Commission tries to ensure that the Member States use official, i.e. published statistics. However, if such statistics are not available or do not provide an adequate basis for calculating particular elements in the VAT base, then, as the Court itself points out, the Member States have no choice but to resort to ad hoc surveys, sometimes involving extra administrative expenditure. The Commission always checks that the methods used for these surveys are acceptable and that the results are compatible and consistent with the available statistics. Aggregates of the reference year 1.29. Portugal's request for permission to use the 1986 national accounts to calculate the weighted average rates for 1989 and 1990 was indeed submitted late. However, the Commission was unable to refuse the request because the 1986 accounts were the most recent available for Portugal. 1.30. The Court's observation is correct in that the Member States' national accounts are subject not only to special revisions every 10 to 15 years but also to the revisions requested by the Commission to correct the least accurate figures in the national GNP aggregate (see paragraph 1.90 of the Court report). 1.31. Articles 4(4) and 7(3) of Regulation No 1553/89 provide that the weighted average rate must be calculated using the national accounts for year n-2 and that the figures must be the most recent available when the statement of the VAT base for year n is drawn up. The weighted average rate should not therefore be revised to take account of subsequent corrections to the national accounts. This is intended to ensure that the weighted average rates for the national VAT bases should not be constantly subject to revision, particularly over a long period of time. Special revisions may be made to the national accounts every 10 to 15 years. 1.33. On 14 July 1993 the Commission did in fact alter the way in which the weighted average VAT rate was calculated to take account of the exceptional situation created by German unification. () Special territorial feature 1.34. At 28 February 1992, Portugal had already paid the Community ESC 2 412 594 000 (approximately ECU 13 million) of the VAT and GNP own resources it owed for 1988, 1989 and 1990 because Madeira and the Azores had not been taken into account. Changes in rates or in the tax treatment 1.35 1.36. Since all Member States round off to a complete month, the overall result is the same for all Member States. Checks on the weighted average rate 1.38. Although the situation has improved since the VAT own resource was first introduced, errors are still found by the Commission in the Member States' weighted average rate calculations. Sometimes the error is in the Commission's favour, sometimes it is not. For example, after checking the statements for 1989, the Commission made 21 corrections to the Member States' calculations, resulting in an overall reduction in the intermediate bases of ECU 5.475 million. 1.39. One of the functions of the controls carried out by the Commission teams, which usually include tax experts, is to check that the statements of the VAT base do in fact take account of changes in national VAT legislation. 1.41. The Commission has already examined the discrepancies between the theoretical VAT bases calculated using GNP statistics and the bases resulting from the national statements drawn up in accordance with Regulation No 1553/89. The conclusion reached was that the size of these discrepancies depends primarily on the proportion of VAT revenue actually collected and the extent to which the underground economy is taken into account in GNP figures. Another factor is whether the statements take account of compensations in the base which are disregarded in the GNP calculation. In any event, only if the net VAT revenue actually collected is used in the calculation (in accordance with Regulation No 1553/89) will the VAT own resource be truly tax-related, something which Parliament and the Council have always considered essential in order to establish a link between the European taxpayer and the financing of the Community budget. Conclusion regarding the weighted average rate 1.42 1.45. The Commission agrees with the Court's conclusions that the weighted average rate of VAT is indeed more of a statistical concept than a fiscal one and that its basic weakness lies in the inadequacy of the national accounts as a basis for breaking down consumption of goods and services between the different rates with any degree of accuracy. Notwithstanding these problems, the Commission is bound to implement the system chosen deliberately by the legislator. The Member States' calculations of the weighted average rates are extremely important and the Commission carries out checks on them as frequently and in as much detail as possible given the extreme complexity of the task and the limited number of highly qualified officials available to perform it. CORRECTIONS AND COMPENSATIONS Financial impact 1.46 1.47. In its controls the Commission carries out special checks on the information used by the Member States to calculate the corrections and compensations to which the Court refers in its report. There are technical and statistical problems with these calculations. While the cumulative effect of all the corrections and compensations is quite appreciable (whether positive or negative), the significance of each Member State's corrections and compensations varies greatly, as can be seen from Table 1.2 attached to the Court report. The Commission would draw attention to the fact that, since the VAT base is capped at 55 % of national GNP, a certain margin of error or inaccuracy in the calculations to determine the corrections and compensations has no effect on the VAT bases of countries whose base already easily exceeds the capping ceiling, such as Portugal, Luxembourg, Ireland and Greece, whose bases in 1991 were 70.3 %, 60.9 %, 60 % and 58.6 % of GNP respectively. However, the Commission has duly noted all the points made by the Court in paragraphs 1.48 to 1.73 of its report and will look into them with the national authorities during the next round of VAT base controls. The Commission's replies to specific points made by the Court are given below. 1.50. In the countries mentioned in the report (Germany and Ireland) freshwater fishing is a very marginal activity, and those involved in forestry in the Netherlands, Portugal and Ireland are not covered by the flat-rate scheme for farmers. However, as indicated above, the Commission will look into the issues raised by the Court during its next round of inspection visits. 1.53. The Commission spotted two errors in the figures for independent cattle production when it controlled Spain's VAT statement for 1991. It will duly check the new figures supplied by Spain for calculating the amount of compensation. Transactions of small undertakings Graduated tax relief 1.55. The basic problem raised by the Court concerning Germany was solved in April 1993 by using the new figures for the negative adjustment (DM 740 million as opposed to DM 2 713 million for 1987, DM 754 million instead of DM 2 777 million for 1988 and DM 763 million instead of DM 2 639 million for 1989). However, the Commission has prepared some comments of its own on certain technical aspects of Germany's new method, which still have to be settled. Undertakings with a turnover below ECU 10 000 1.58. (a) The Commission has already informed Spain that not including small businesses in certain autonomous regions is against its own interests. (b) The Commission will look into the inaccuracies highlighted by the Court in greater detail in the course of its next control visits. The Court's remark concerning Belgium is justified, but it must be borne in mind that the adjustment in question is very small and shrinking - from ECU 348 000 in 1989 to ECU 279 000 in 1991. The arrangement which made the adjustment necessary was in fact terminated in 1993. (c) With regard to Greece and Germany, the Commission examined the profit margins and persuaded Greece to increase the figure to a more realistic level. Germany's figure appears to be justified. (d) The input-output tables used are always the most recent ones available. (e) Taking account of the time-lag between returns and collection would be likely to make the correction calculations more inaccurate, not less. Undertakings with turnover in excess of ECU 10 000 1.61. A solution to the problem referred to by the Court has been found. 1.62. The Commission has been monitoring this problem for a number of years and, at each control, checks the reliability of the method and the data used by the United Kingdom. 1.63. With regard to Ireland, the Commission would point out that: - by failing to include in the compensation calculation figures from businesses which opt to pay VAT, Ireland pays more own resources than it would otherwise; - the figures used for the calculation in question relate to types of business which sell primarily to final consumers. Businesses in industries which sell primarily to taxable persons are not taken into account. The Commission has examined the matter and has come to the conclusion the method used by Ireland gives an acceptable result. Supplies of buildings and building land 1.65. The Commission cannot see why it should not allow compensation to be calculated using fiscal data (as it is in Greece and Portugal) since these figures are presumably more precise than macroeconomic data. Denmark has been using updated figures for the calculation since 1990. 1.66. The problem relating to the United Kingdom was resolved during the Commission's control visit in March 1993. The flaw in Greece's method of calculating the compensation has no effect on the size of the VAT base because the base is capped at 55 % of GNP. 1.67. The Commission has already informed Germany of the problem referred to by the Court and has entered a reservation on the calculations in question. Restrictions on the right to deduct VAT 1.70. The Commission is fully aware of the problem of old data being used in calculations, particularly by Belgium. The Commission has asked Belgium to revise the calculation for the correction in question. 1.71 1.72. Owing to a lack of sufficiently precise information, approximate estimates and assessments have to be used. However, the Commission does check during its inspection visits that the estimates are realistic and that any assessments made accurately reflect the tax situation - for example in the case of Spain's arrangements for taking account of the laws governing the taxation of taxi firms and the percentage of second-hand car sales. 1.73. It would clearly be desirable for a single uniform percentage to be used for the private use of company cars. However, differences between Member States regarding the availability of data, the relevant tax rules and consumption patterns make such a solution difficult to implement. Conclusion regarding corrections and compensations 1.75 1.78. The Commission would make the following comments: (a)It is important not to give the impression that all the corrections to the revenue figures and compensations in the base, which are necessary in order to ensure that each Member State's uniform VAT base is determined correctly, are unharmonized and imprecise and detract from the reliability of the bases. This is not the case, as the following points demonstrate: - more than half the value of all compensations and corrections are the result of accounting and territorial adjustments, for which there are harmonized calculation methods; - of the remainder, a number are calculated using reliable and precise figures so that the accuracy of the bases is not affected at all; - as regards the four main types of adjustment dealt with in paragraphs 1.46 to 1.74 of the Court's report, the anomalies and uncertainties observed relate to isolated figures used in the calculations in question, most of which are in fact reliable. (b)As the Court acknowledges, it is often essential, when calculating adjustments, to use macroeconomic figures, which are not really suited to achieving a high degree of accuracy. Estimates and extrapolations are also used and these are sometimes approximations. However, it would be wrong to conclude that a uniform method of calculation would solve the problem entirely. In its recent proposal for updating certain aspects of Regulation No 1553/89, the Commission proposed laying down common methods for the calculation of certain elements of VAT bases - methods which had in fact already been developed in the light of work done by the Advisory Committee on the Communities' Own Resources and the Commission's controls. However, these common methods still depend, from a technical point of view, on the data which can be produced at national level and which may still involve estimates and extrapolated values. Conclusion common to the weighted average rate and corrections and compensations 1.79. The Commission can only agree with the Court's remarks (paragraph 1.42 of the report) to the effect that the weighted average rate of VAT is more of a statistical than a fiscal concept, that its essential weakness lies in the limited possibilities for fiscal analysis provided by the national accounts (see paragraph 1.77 of the report) and that macroeconomic data as well as estimates and extrapolated values often have to be used to calculate corrections and compensations. It follows that some of the figures used for determining the weighted average rates and certain adjustments to revenue and bases cannot be calculated with complete accuracy, hence the existence of a margin of uncertainty. However, the Commission does not feel that this unavoidable state of affairs warrants the Court's conclusion that 'the degree of reliability` of the VAT base 'is still inadequate`. Such a conclusion would be justified only if it were theoretically possible to calculate a uniform VAT base with total accuracy for all Member States, which is not the case. The degree of reliability of the uniform base used to calculate the VAT own resources to be paid by each Member State must be assessed taking account of what is possible given the means for determining the various components of the uniform base provided by the legislator. As the Court pointed out, progress has been made and the figures are more comparable than they used to be. The Commission is of the view that significant, visible progress has been made in comparison with the first few years following introduction of the VAT own resource and that further progress will be forthcoming as a result of the work being done by the national authorities and the Commission inspections. The observations in the Court's report should also have a positive effect, as should the abolition, under the 18th VAT Directive, of certain exceptions authorized by the sixth Directive. In summary, the Commission feels that the uniform national bases are on the whole reliable despite the existence of a margin of uncertainty inherent in the method of calculating them. This margin of uncertainty affects only some of the figures in the calculations used to calculate the weighted average rate and certain adjustments. It has already been reduced and should continue to shrink, though it will not be completely eliminated. Furthermore, because of the capping rule, the margin of uncertainty has no actual effect on the VAT own resources paid by Member States whose base habitually exceeds 55 % of GNP (Greece, Ireland, Luxembourg and Portugal). GROSS NATIONAL PRODUCT The Commission's management Compilation and presentation of GNP 1.82. The heterogeneity of GNP compilations is due to differing statistical sources, reflecting differing realities. This, however, does not imply that the result of the compilations is heterogeneous as well. The GNP Directive was the most important and useful tool available to the Commission to detect possible deficiencies in some Member States and to initiate improvements. Therefore the conclusion is that the adoption and application of the GNP Directive resulted in an increased degree of reliability of the GNP data. 1.83. The ESA, like any other national accounts system, is a complete and consistent set of definitions and conventions conceived to provide comparable results in a world of changing realities. The strict rules of the system are not arbitrary at all or changeable at need, but fully comparable to rules set out in legal acts and tax laws. Since its approval, the Commission has carried out a continuous action with regard to the adoption of the ESA when transmitting national accounts data to Eurostat. In addition, some Member States have adopted the ESA definitions and conventions explicitly, whereas others have improved their national accounts systems in order to facilitate the transposition into ESA figures. All Member States, including Belgium and Greece, transmit their GNP according to the ESA definitions. The remark concerning respects in which national accounts explicitly diverge from the ESA were relevant when the report to the Council on implementation of the GNP Directive (SEC(92) 588 def.) was drawn up but the Member States in question have since made the necessary corrections to the definitions of the data they send. (a) In the case of Greece and Portugal, the investigations carried out by the Commission (Eurostat) immediately after approval of the GNP directive revealed the use of outdated information. The statistical institutes of both countries started a major revision procedure and undertook to provide revised figures in September 1993. (b) The 1991 GNP for Portugal was revised on a provisional basis to include the full economic territory following a Commission request. The Portuguese Statistical Institute also undertook to provide revised 1988-90 figures in September 1993. France will send the GNP figures relating to its overseas departments by 1 October 1993 in the GNP questionnaire. The list of sources and methods used to compile the data will be examined by the Committee in October. 1.84. At its June 1993 meeting the GNP Committee agreed, at the request of the Commission, to amend the GNP questionnaire in order to meet a formal point of criticism by the Court concerning the replacement of the concept of 'national final consumption` by 'consumption on the economic territory`. The Member States will produce a new questionnaire, incorporating the change, by 1 October 1993. The problem concerning the presentation of the results in terms of output, expenditure and income in the questionnaire is a technical one, and a solution is being sought. 1.85 1.88. Immediately after the adoption of the GNP Directive, the Commission (Eurostat) initiated action. A first round of discussions with the Member States, on the basis of summary inventories, revealed crucial deficiencies in a few countries. These countries asked for assistance to carry out a fundamental revision of their national accounts data. In parallel, work started on the transversal questions of the relevant economic territories, which resulted in the Commission Decision 91/450/EEC, Euratom. The most important piece of information for assessing in detail the comparability of GNP data, i.e. the inventories of the procedures and basic statistics used by the Member States, were provided mostly in the autumn of 1991. On this fundamental infrastructural basis, Eurostat was in a position to draw up country reports containing a critical assessment of the procedures and basic statistics used. These reports were discussed at the GNP Committee meetings in July and September 1992, and they enabled the Commission to notify points of reservation on a well-founded basis. In addition, they served to establish problem areas to be dealt with by the GNP Committee. In the mean time, the GNP Committee has already adopted solutions concerning taxes as well as subsidies at its June 1993 meeting. After several rounds of discussion, Eurostat will further present a proposal increasing the comparability of GNP data with regard to the so-called shadow economy before the end of this year. As a follow-up to the discussion on rents, i.e. especially imputing rents for owner-occupied dwellings, a task-force was created by the GNP Committee. It should be noted that both topics are not easily dealt with, either from a conceptual, or from a statistical point of view. Overall issuing of reserves in 1992 1.89 1.90. The presentation does not take into account the difference between the VAT and the GNP base. The VAT base is established on the basis of known final results, therefore changes should in general be rare. The GNP base is established, successively taking into account the increasing number of statistical sources available over time. The final GNP estimate for a given reporting year therefore can only be established after several rounds of (permanent) revision. To sum up, an overhasty notification of points of reservation during the four-year period is simply not necessary. 1.91. The general points of reservation in the first place show that thanks to the GNP Directive the GNP base is working well. As a result of pressure by the Commission, those Member States with crucial statistical deficiencies began to improve their GNP data. For the others, the critical analyses after having received the fundamental information on the procedures and basic statistics used (inventories), revealed certain problem areas possibly restricting the comparability of the GNP. The general points of reservation notified may be regarded as a precautionary measure (to quote the Court), intended to ensure that problem areas which may exist in principle in all countries are solved in a comparable and equitable way. In addition, the general points of reservation show that the Commission meets its obligations in a responsible way. 1.92. After initial discussions with the Greek and Portuguese Statistical Institute, it became obvious that the base years underlying their GNP figure are too old. These countries subsequently asked for assistance and started to revise their bases. The revised figures will be provided in September 1993. Since Eurostat was from the outset well aware of the deficiencies in detail, these were included under the country-specific points of reservation for Greece and Portugal. Germany in fact included an estimate concerning the new Laender from 3 October 1990 onwards when transmitting the GNP data in September 1992. It further undertook to provide a detailed inventory explaining the procedures and basic statistics used for this estimate before end 1993. On this basis, the question whether points of reservation are needed will be discussed again in September 1994 at the latest, i.e. before the end of the four-year deadline (see paragraphs 1.89-1.90). The operation of the system 1.97. The Commission does not share the opinion that 'the conclusions presented do not make it possible to form a clear opinion of the degree of reliability of the data currently supplied by the Member States`. In fact, thanks to the system implemented by the GNP Directive, the Commission (Eurostat) is in a good position to assess the comparability of the data and to evaluate the quality of the progress made by the statistical systems of the Member States in the field of national accounts. The representativity criterion can have two meanings from a statistical viewpoint: either it refers to the full coverage of all activities or, in the case of sample surveys, it concerns biased results. Since the first meaning is covered by the exhaustiveness criterion and the second is included under comparability (of basic statistics), a separate treatment of the representativeness criterion is not necessary. Assessment 1.98. The GNP Directive requires comparable GNP figures but not fully harmonized basic sources and methods. Given that economic realities differ from one country to another, this has to be reflected by differing sources and consequently methods. This, however, does not imply that the comparability of GNP bases differs as well. 1.99. Thanks to the GNP Directive and the pressure by the Commission, some Member States started a general revision procedure mainly to include more up-to-date basic sources in their GNP data. The deficiencies of those countries were included as points of reservation. The countries concerned undertook to provide the revised GNP figures before October 1993. 1.100. In accordance with Article 19 of Council Regulation No 1552/89, the Commission carries out control missions to the Member States. 1.101. The amendments for the United Kingdom and the Netherlands can be explained as follows: in the case of the United Kingdom, the amendment concerns the treatment of certain taxes on production: it has been made in order to respect ESA and in the case of the Netherlands the amendment is the result of a major revision which was carried out. Both amendments were either initiated or speeded up by the GNP Directive. 1.102. The statement that 'at the current stage the GNP tool is no more than an index-linked system that indicates, with some degree of probability the capacity of Member States to contribute` has to be corrected. First the use of differing sources and methods does not imply at all the non-comparability of the GNP data. Second, the most important tool to detect and abolish major deficiencies in a few Member States consisted in the GNP Directive. Third, the points of reservation notified avoid biased financial contributions. It seems further that this statement is caused by the underlying assumption presented in the last sentence, i.e. national accounts were not conceived for fiscal purposes. But even if this is true, this does not at all prevent the GNP from being compiled correctly. Conclusion 1.104. The Commission agrees with the first sentence, i.e. 'in view of the importance of the GNP in determining the Member States' contributions fairly, steps need to be taken to ensure that the tool in question is improved in terms of its most important aspects, in such a way as to bring it as close to reality as possible`, but definitely rejects the second sentence. From the beginning the Commission has met its obligations with regard to the GNP-Directive. As mentioned already the initial delays were due to the infrastructural basis needed, i.e. the inventories of procedures and basic sources used by the Member States. Apart from the Commission Decision 91/450/EEC concerning the economic territories, measures to be taken according to Article 6 of the GNP Directive have already been adopted in respect to the treatment of taxes and subsidies. Further, the items 'renting of dwellings`, 'agriculture` and 'transition from GDP to GNP` are under discussion. In addition, the Commission will present proposals concerning the shadow economy before the end of this year. TRADITIONAL OWN RESOURCES Simplified customs clearance procedures 1.105 1.109. Council Directive 90/504/EEC established the trader's right to use the simplified procedure for the release of goods into free circulation. Customs law does, however, impose very precise conditions on this right. For example the trader must provide a guarantee and agree to certain checks being carried out. Owing to their special sensitivity, agricultural products are excluded from the arrangements altogether. In accordance with customs law, the practical rules for implementing the procedure are drawn up by the relevant national authorities. There are as yet no uniform national implementing rules: - in four Member States, declarations can still be made only by customs agents - a state of affairs which has just been confirmed by the Council (contrary to the Commission's proposal); - administrative infrastructure varies from one Member State to the next: while some have tended, until now, to position their customs offices around the periphery of their territory, others have built up a network of offices all over the country. Sometimes, though not always, it depends on the industrialization of the various regions within a Member State; - some Member States have more advanced auditing techniques than others; - some customs administrations have invested in real-time customs clearance systems while others have concentrated on non-real-time systems; - some authorities have invested in computerized systems, to enhance real-time clearance, in which case simplified procedures based on period entries play a secondary role. All the above factors affect the way in which simplified procedures are used and explain why current regulations allow for a certain degree of 'flexibility`, which in turn means that not all traders enjoy the same rights as far as use of the simplified procedure is concerned. Furthermore, in a statement in the minutes, the Council - at Ireland's request - demanded that the increase in administrative costs due to implementation of Directive 90/504/EEC should not be out of proportion to the savings which might be made by importers. Progress in this field is dependent on gradual convergence of the Member States' administrative policies, which is unlikely in the near future. The Commission will, however, continue to put forward proposals aimed at speeding up the process and gradually reducing the differences between Member States so that, eventually, traders will receive the same, fair treatment throughout the Community. The customs value of perishable goods 1.110 1.116. Of the questions raised by the Court, the optional nature of the scheme causes the most concern. It would appear to be imperative to prevent 'importers from having a de facto possibility of choosing which value to declare`. As the Court points out in paragraph 1.117, the legislator is virtually powerless against well-organized importers who own a number of firms, with some opting for the standard-value system and others for the normal customs evaluation methods, or who use an agent. Such abuses of the system can only be stopped by eliminating one or other of the two options available - inevitably the standard-value system, since the normal evaluation methods are laid down by the GATT. The Court feels it would be useful to review whether these procedures ought not to be limited to a number of special cases, such as sales 'on consignment`. In theory, the system is already limited to special cases, but in practice but it is impossible to impose these restrictions because traders are free to choose the system which suits them best. Importers can quite easily produce a transaction value at the last minute (e.g. by selling goods from a customs warehouse to a company which puts it into free circulation) or transform a sale at a known price into a sale 'on consignment` (simply by failing to submit an invoice when the goods are declared). Limiting the scope in the manner suggested in paragraph 1.116 would not prevent 'importers from having a de facto possibility of choosing which value to declare`. The Commission is continuing its efforts to find an acceptable solution to the problem, in cooperation with the Customs Valuation Committee. All possibilities are being considered, including the one suggested by the Court. Reduced levies for the importation of cattle 1.123. and 1.125. Except in a few isolated and specific cases, neither the Combined Nomenclature (CN) nor the Community's general customs regulations lay down any rules about rounding figures off. The issue of the rounding-off of values affecting tariff classification was discussed at the 198th meeting of the Nomenclature Committee, at which it was apparent that the opinions of the various delegations differed. However, the Chairman took the view that an animal weighing 80.01 kg could not come under CN code 01029005. This view is shared by the Commission's Legal Service and most of the delegations. Given that the question of rounding off is relevant to all CN codes and there are many different types of limit value (oC, % vol, density, value in ecus, etc.) a general solution has to be found. The matter is currently being studied by the Commission and has been raised in the Customs Cooperation Council, the international body responsible for such matters. The Commission is of the opinion that the practices used by Italy and Greece in compiling the data they send in are not acceptable for the purposes of tariff classification. The Commission has contacted the two Member States in connection with this matter. Imports of cattle under Community transit arrangements 1.126 1.128. The fraud referred to in the report was detected during a Commission inspection visit to Frankfurt an der Oder from 3 to 7 December 1990. This visit confirmed the suspicion that live cattle had been fraudulently imported from Eastern Europe, but the scale of the fraud did not become apparent until some time after the inspection. Nevertheless, in March 1991, the Commission coordinated mutual assistance enquiries by the customs authorities in the Member States, carried out on-the-spot inspections in accordance with Regulation No 1552/89 and inspections in the countries of origin of the imported cattle in accordance with the 'mutual assistance` Regulation (No 1468/81). The findings of these inspections were made available to the Member States in question so that they could start proceedings with a view to recovering and making available the own resources evaded. The reason the relevant national authorities took so long to complete their investigations into the fraud cases is that, in order to be able to prosecute the perpetrators of fraud and eliminate fraud networks, the authorities have to apprehend offenders in the act, which is possible only once the findings of in-depth investigations have been cross-checked and analysed. However, the Commission decided to take immediate action and amend the provisions concerning guarantees for Community and common transit arrangements even before the findings of the investigations were known. An early information system was set up in September for transit operations starting at Germany's eastern border. All T1 transit documents for sensitive goods are now sent by the German administration through the SCENT system to the country of destination within the Community and the other Member States through which the goods will pass in transit. The Commission is also sent a copy. This system enables the authorities to monitor the operation and to intervene if the goods are not presented at the office of destination before the time-limit for the operation expires. The system, with some special arrangements, was extended to include Austria from April 1993. At the Community level, Regulation (EEC) No 2560/92 reinforcing the system of securities for Community transit was replaced by Regulation (EEC) No 3712/92 of 21 December 1992 with effect from 1 January 1993. It should be noted that the EFTA States most affected by the imports of live cattle are Austria and Switzerland. With regard to trade with the EFTA countries, draft decision 2/93 amending the convention on common transit and taking over most the provisions of Regulation No 3712/92, currently in force in the Community, is due to be adopted by the Joint Committee on common transit on 23 September 1993 in Oslo and may come into force on 15 October 1993. FINES AND PENALTIES 1.129. Under Article 6 of the 'internal procedure provisions concerning the collection of fines and penalty payments owed to the Commission under the EEC Treaty`, debtors who appeal against the Commission's decision to the Court of Justice have the option of providing a bank guarantee to cover both the principal and the interest for late payment. If this is done, recovery proceedings are suspended until a definitive ruling has been given on the case and the debt need not be paid immediately. Thus, when calculating the recovery rate, it is essential that fines actually due for payment be compared with the amount recovered, which, for 1992, gives the following results:>TABLE> Thus, if the context around the recovery of fines is taken into account, the recovery rate is 86,9 %, and not 11,7 % as the Court claims. 1.130. In the case cited by the Court, the Commission decided to reduce the interest rate to 8 % for two reasons: firstly, the debtor had recently taken over the companies in question and was not responsible for the fraud and, secondly, he had made a major commitment to promoting observance of the Community competition rules. Notification of the amount of the fine was given as soon as the Commission had taken its decision. The arrangements for payment of the fine and the interest rate required further clarification and notification of the relevant information was not given until three months later. Furthermore, since 1 January 1991, interest on late payments has been entered separately from the principal. 1.131. When the Court of First Instance cancelled the Commission's decision to fine a certain number of companies on procedural grounds, the Commission decided to appeal to the Court of Justice. The question then arose as to whether or not to reimburse the fines already paid pending the Court's decision and, if so, how to go about it. The Commission felt that, in view of its civil liability to the third parties in question, the fines had to be paid back. Any further delay in doing so would have led to a significant increase in the amount the Commission might have to pay in interest. In the absence of a budgetary structure to cover the sums to be refunded at once, it was decided that the principles of sound financial management and, in particular, economy (see Article 2 of the Financial Regulation) should prevail. The Commission therefore paid the refunds from its cash resources, while arranging to provide budgetary cover for the sums in question as soon as possible. The Commission therefore entered the amount in preliminary draft supplementary and amending budget No 4/92. When this budget was not adopted, the Commission followed the procedure agreed upon in informal discussions and proposed a transfer of funds to heading A 234. The transfer was approved by the Council on 21 December 1992, but Parliament, which was not able to examine it until 25 January 1993, took the view that the transfer could not be deemed to have been approved because the Council had made its decision before the prior consultation procedure had been completed. At this point, the Commission came to the conclusion that it would not be able to regularize the transactions using instruments relating to the 1992 financial year. Furthermore, in view of its appeal against the judgment of the Court of First Instance, the Commission decided to wait for a ruling by the Court of Justice before making budget provisions for the refunds made from its cash resources (which would have to be done only if the initial judgment was upheld). The Commission felt that the general principles of law and the case law of the Court suggested that interest on late payments would have to be paid, even if there were no regulation requiring it. Given the provisional nature of fines collected by the Community (where the debtor appeals against the Commission's decision), the Commission recently proposed an amendment to the Financial Regulation whereby fines would be credited to an extra-budgetary account until they definitively became Community property. CHAPTER 2 The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) - Management and budgetary control BUDGETARY ASPECTS Accounting 2.4. The Commission made every effort to resolve the technical difficulties which had caused a delay in booking, without awaiting the Court's comments. Despite the problems, the deadline of 31 January 1993 laid down in Article 101 of the Financial Regulation was fully complied with. Public storage 2.9 2.10. The Commission would point out that the the estimated selling value of stocks is established for the budget at the beginning of the year preceding the year concerned. To prepare its estimates of price trends, which can be no more than estimates, the Commission uses a certain number of parameters, both objective and subjective, which may include those mentioned by the Court in point 2.9. For example, to establish world cereal prices the Commission normally starts off with market quotations, such as those from the Chicago Exchange, and also information from commercial sources and prices used by our competitors and partners on the various markets. The information reflects production, consumption and international trading terms, including various factors known to be liable to influence these basic elements. When the Commission estimates future prices for cereals it takes as its basis current prices from market quotations including forward markets. The prices therefore reflect all known factors. However, forward rates only cover the following six months at most. The world cereals price for future years is difficult to estimate. It is constantly changing and is affected by all kinds of events, the extent of which cannot be assumed in advance. These include climatic conditions, new policies, the creditworthiness of importing countries, the availability of export credits, alternative products, plant health conditions, consumer choice and political upheavals. Even rumours can affect world prices. There is therefore no magic formula and future prices can be only a 'best guess`. 2.11. The European Council of 11-13 February 1988 instituted a systematic depreciation of new intervention stock purchases so as to avoid potential losses in the future when they were sold. This method of depreciating public intervention purchases ensures that the carry-over value at the end of the financial year respects the accounting rule that the balance-sheet value of stock should be its minimum value. If subsequently the market perks up a balance-sheet profit accrues. This has been the case for certain public stocks. Another accounting factor is the separate accounting of an export refund which has been granted; in such a case, the product sold from intervention is invoiced at its internal market price and the 'storage` account is credited with that sum. For these different reasons, selling price estimates established 18 months in advance can never accurately reflect the future situation. In any event, the depreciation system introduced in 1988 avoids the build-up of potential costs for selling stock which have to be financed during that year. Expenditure forecasting 2.14 2.15. Although the Commission shares the Court's opinion that the differences between forecasts established by Member States and outturns are too great, it should be noted that the differences found in the cereals and oilseeds sectors are not as substantial as those mentioned by the Court. The Member States make forecasts for a particular expenditure month three times. For example, the forecasts for April are transmitted for the first time with the declaration of expenditure for January, the second time with the February declaration and the third time with the March declaration. This means 36 forecasts for the 12 months of a budget year. In the cereals sector, four forecasts out of 36 recorded a difference of more then ECU 150 million in outturns while in the oilseeds sector the figure was seven out of 36. Clearance of accounts 2.19. The corrections imposed on Spain and Italy were provisional pending the outcome of enquiries into the effective application of the milk quota regime, and the Council's decision on an increase in quotas and on the financing of buy-up schemes. Given that the magnitude of the reimbursements to be made caused significant financial difficulties to both Member States, the collection of amounts, which may be subsequently repaid, was deferred. The Council's Decision was published in Regulation (EEC) No 1560/93 of 14 June 1993. On 28 July 1993, the Commission decided to take into account the increases in milk quotas granted by the Council to Spain, Italy and Greece for the 1993/94 marketing year when calculating the financial consequences under the clearance of accounts for previous years of their failure to apply the milk quota regime, and in particular to collect supplementary levies. Nomenclature 2.21. The p.m. items referred to by the Court where only a limited explanation is given in the remarks of the budget are mainly those included at the end of most chapters in order to cover unforeseeable, but possible, new expenditure arising from new measures which it is deemed necessary by the Commission and the Council to introduce in the course of the budget year in order to ensure the proper functioning of the sector concerned. The Commission will consider how to make that clearer in the remarks of future budgets. 2.22. In view of the fact that the initial budgets for 1991 and 1992 did not include an item or any appropriations for food aid operations to East European countries the Commission, with a view to transparency, charged this expenditure to Item B1-1890 (with the exception of certain expenditure on existing programmes) and asked the budgetary authority to carry over appropriations and make transfers to that item. 2.23. The items under which profits and losses on sales from public storage are booked reflect the result of the administration of public storage during the year in question. Since all these transactions are of the same character, booking to different items according to the monthly result would not give an overall view of that administration. 2.24. Transactions by the Member States are booked according to the special provisions laid down in Articles 98 to 103 of the Financial Regulation; payments made directly by the Commission are subject to the general provisions of the Regulation. However, the Commission is aware that that dual requirement is likely to complicate the administration of the budget. Conclusion 2.25. (a and (d) P.m. items are limited to the cases where either there is an existing legal basis or it is possible that new regulations will come into force in the budgetary year. The nature of agricultural production and trade means that a certain flexibility within budget chapters is necessary in order to adapt quickly to new situations and ensure cost effectiveness. (b) The Commission would refer to the reply given to point 2.23. (c) When implementing the budget the Commission makes a clear distinction between expenditure through Member States' paying agencies and direct expenditure by the Commission. NATIONAL CONTROLS OVER EAGGF-GUARANTEE EXPENDITURE Introduction 2.26. The Commission notes the Court's findings about national controls of EAGGF expenditure and will follow up these findings during its own audit exercises. 2.27. On 5 March 1993 the Commission adopted the guidelines proposed by a working group which included outside experts for the reform of the clearance procedure. These guidelines include a proposal that paying agencies be approved before being entitled to disburse guarantee funds. Improvements required to the organization and functioning of the paying agencies will be examined in this context, and taking into account the Commission's evaluation of the inspection procedures at present being undertaken with the assistance of external auditors. Legal texts will be proposed to the Council in the second half of 1993. Controls over guarantee expenditure in France 2.28 2.37. See 2.26. 2.39 2.70. The Court's findings largely confirm those of the clearance of accounts unit of the EAGGF, in particular concerning the accounting for beef stocks, export refunds and the ewe premium. The cases mentioned will be followed up within the EAGGF clearance of accounts procedure. FOOD AID AND URGENT ACTIONS FOR EAST EUROPEAN COUNTRIES AND THE FORMER SOVIET UNION FINANCED BY EAGGF-GUARANTEE Introduction 2.73. In its replies to the following points and in Chapter 11 the Commission will explain why it believes it has complied with budget rules in the case of food aid to Eastern Europe. Financing 2.75. The carry-over of ECU 100 million from the 1991 financial year to 1992 was in application of a decision taken by the Maastricht European Council in December 1991. The procedure followed does not contravene Article 7(3) of the Financial Regulation which permits carry-overs for exceptional reasons in order to cope with compelling needs which cannot be met by appropriations from the next financial year. 2.77. Council Regulations (EEC) Nos 3767/91 and 330/92 do not specify the appropriations to be used, i.e. the appropriations are not linked to a specific Regulation. The Commission therefore chose to utilize primarily the appropriations carried forward from 1991 to finance the expenditure in question and does not see any basis for the Court's claims of irregularities. 2.78. The actual time of delivery has never been a criterion for making a budgetary commitment. With regard to food aid intended for Bulgaria, the declaration of the product value was made in conformity with Commission decision C(91) 1656 final of 29 July 1991 which provides for declaration of the value once the tender for the quantity has been awarded and the Commission is no longer its legal owner. Accounting 2.79. See the reply to point 2.22. Expenditure made by Member States Observations Delivery delays 2.89. The penalties provided for in Commission Regulation (EEC) No 2220/85 are in some cases more severe than those provided for specifically in Commission Regulation (EEC) No 944/92 in relation to the supply of baby food to Moscow and St Petersburg. 2.90. The consequences in cases where Member States unilaterally extended delivery deadlines will be taken into account at the time of the clearance of accounts for 1992. 2.91. The Commission decision did not specify the precise places of delivery as there was a delay on the part of the Russian authorities in providing the relevant information. Notwithstanding this delay, it was necessary in view of the urgent situation to begin the operation at once, without specifying the final destination inside Moscow. This information, when available, was directly communicated from the Moscow Task Force to the French intervention agency. Direct award of contracts 2.93. Consideration of cost-effectiveness includes not only direct transport costs but also other matters such as levels, age and quality of stock. 2.94. The Member States did not have discretion with regard to whom the supply contracts under direct agreement procedures were awarded to as they were obliged to accept the tenderer offering the most favourable terms in relation to the prices normally obtaining on the market, i.e. the lowest offer. The consequences of non-compliance with the legal provisions in such cases are examined in the context of the clearance of accounts. Open tender 2.95. The lowest offer in this case was rejected on the grounds that it did not comply with the requirement of the tender regulation that the flour to be supplied should be mobilized on the French market. 2.97. The bid for the transport of bread-making wheat from the French intervention store in Ghent (Belgium) in November 1991 was relatively high at ECU 34.45 per tonne. However this was the first operation to Albania and the bid reflected the risks inherent in undertaking such an operation for the first time. Transport by air 2.99. The Commission would refer to the reply given to point 2.94. 2.100. Air transport was chosen for an initial and rapid delivery of a small percentage of the quantities delivered under Regulation (EEC) No 3767/91 to Moscow and St Petersburg. EC leaders considered a rapid operation of that type would have an important psychological effect on the people of Eastern and Western Europe. Decisions: boneless beef 2.101 2.102. The Commission has taken the necessary steps to ensure that future decisions concerning the supply of boneless beef will stipulate the proportions of specific intervention cuts to be supplied. Controls 2.104 2.105. The Commission is well aware of some control weaknesses in the beneficiary states, compared with Western European standards. Bearing in mind that these cases dealt with emergency food deliveries, the Commission accepted landing certificates and weight confirmations as they were usual in these sovereign states. Direct expenditure by the Commission 2.107. The budget commitments made by ECHO are global in nature (a total sum per country), which means that where the EAGGF shouldered certain food aid expenditure, ECHO was able, without introducing a cancellation, to continue to use the commitments for other food aid expenditure to the country concerned. The transfers to the EAGGF made under Regulation (EEC) No 2793/92 enabled ECHO to increase its aid to the former Yugoslavia, since the total sum of the budget commitments did not exceed the sum included in the various decisions in favour of that country. In any event, there has been no double commitment for the same expenditure. Conclusion 2.108. The financing of food aid operations in Eastern Europe from EAGGF-Guarantee and the related carry-over of appropriations from the 1991 to the 1992 financial year were in application of a decision taken by the Maastricht European Council in December 1991. The procedure followed does not contravene Article 7(3) of the Financial Regulation, which permits carry-overs 'for exceptional reasons in order to cope with compelling needs which cannot be met by appropriations from the next financial year`. In the judgment of the Commission, which proposed the carry-over, and of the budgetary authority which approved it, the funding in this way of urgently-needed food aid for Eastern Europe was the only possible response to this exceptional situation. Regarding the criticism of the financing out of 1991 appropriations of the food aid decided upon at Maastricht European Council, the Commission does not accept that it would have been appropriate for it and the budgetary authority, in these particular circumstances, to observe an orthodoxy even more constraining than the strict terms of the Financial Regulation. The procedures followed enabled the Community to make the urgent response expected of it in the face of exceptional circumstances, while ensuring full transparency, control and accountability. The Commission does not consider that the arguments advanced by the Court in the previous points concerning carry-overs from 1992 to 1993 amount to a breach of budgetary rules. 2.109. The Commission would refer to the replies given in the 1991 report. As regards the administration of the aid measures, the Commission would like to stress that there has been considerable improvement in the meantime. CHAPTER 3 The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee): Organization and management of crop markets: rice and textile fibres RICE Budgetary incidence 3.6. The increase in expenditure on refunds is due to exports from intervention stocks (71 000 t in 1990/91 and 83 000 t in 1991/92), which virtually eliminated these stocks. Subsidies for supplies to Reunion 3.8 3.10. The rules in force during the period studied by the Court provided for 'a subsidy ... equal to the levy in force for the product concerned.` (Article 11a of Regulation (EEC) No 1418/76). During the 1988/89 marketing year, the Commission discovered unforeseen developments in quantities despatched. It reacted during that year and the Council, on a proposal from the Commission, adopted Regulation (EEC) No 1806/89 to amend Article 11a of Regulation (EEC) No 1418/76. The amendment of the system was not simply a realignment of the subsidy rates, it amounted to a radical reform of the system. As a result of the amendment, the relevant expenditure has been drastically reduced. The Commission will investigate the discrepancy of 16 463 tonnes mentioned by the Court of Auditors. Indica rice Production aid 3.11 3.12. As the Court notes, Italy has had significant areas sown to Indica rice only since the sowing for the 1989 harvest. The problem consisted both in the availability of seed of the variety most in demand (Thaibonnet) and in the lack of varieties adapted to Italian climatic conditions. Currently, although the most used variety is still Thaibonnet, more than half of the varieties eligible for aid have been developed in the Italian production region and this will finally allow production to expand in that country. The success of Indica rice in Italy was confirmed during the 1992/93 marketing year: the harvest of about 162 000 tonnes of paddy rice was sold at an (average) price of about 4 % above the intervention buying-in price. 3.13 3.14. The aid amount initially set was based on the difference between the income from one hectare of Japonica and that from one hectare of Indica rice (the difference in per hectare yield and processing yield). However, Council Regulation (EEC) No 3878/87 on the production aid for certain varieties of rice specified that the objective of that measure was to be different: it was to encourage the cultivation of a type of rice in demand on the market. To encourage conversion to that variety, aid had to cover at least the loss of income vis-Ã -vis traditional varieties. Control over cultivation declarations 3.15 3.16. Producers are dissuaded from making fraudulent claims when a relatively low percentage of physical checks is linked with strict and heavy penalties, as in Spain. When all claims are checked as in France and Italy, and aid is paid only for the verified surface area, the dissuasive effect of high rates of penalties is no longer relevant. The Commission is examining possible changes in inspection procedures. Intervention storage 3.17 3.18. Intervention stocks built up during the 1989/90 and 1990/91 marketing years were sold under the terms of the legislation which provide for a system similar to that for rice exported from the free market. Thus, rice from public storage also receives a refund to bring it up to world market prices. 3.19. The buying into intervention of about 9 000 tonnes of Indica rice in Italy was carried out in July 1992, at the end of the 1991/92 marketing year. Throughout that year market prices for that variety had been on average 3 % above the buying-in price; however, at the end of the year the situation changed with the prospect of the new harvest for which the price was lower. Against this background, the Commission does not agree with the suggestion that low quality production is being encouraged. The Commission would like to add that Italian-produced Indica rice has been well received by the European industry. 3.20. In northern Italy the 1992 Indica harvest sold very well (around 100 000 tonnes of milled rice sold). Southern Italy as yet produces no rice. Conclusion 3.21. The Commission will investigate the discrepancy mentioned by the Court. 3.22. The subsidies paid during the period prior to reform of the system were those for which the amounts were to coincide with the levies applicable to the same type of rice (see reply to point 3.8). However, the Commission proposed to the Council changes to the system as soon as it became aware of the unforeseen developments. These took effect in 1989. 3.23. The Commission is examining possible changes in inspection procedures. 3.24. The Community deemed the aid justified because it encouraged production of a certain type of rice in demand on the market. The Commission does not see a need for further limitation of the production zones eligible for this aid. SUPPORT MEASURES FOR TEXTILE FIBRE PLANTS Flax and hemp The Common Market Organization (CMO) 3.26. In spring 1990 the situation on the flax fibre market had worsened but sowing had already taken place so production exceeded demand. The change came too late to cause a reduction in the Community area sown to the crop. As a result, the disequilibrium caused a major reduction in the area sown in 1991. The crisis proved longer-lasting and deeper than anticipated, with the result that the Community area sown to the crop in 1992 and 1993 was very low. The reduction in area coupled with an increase in activity in the flax industry has recently permitted a reduction in stocks and a better level of prices. 3.27. For decades the Community has been exporting large quantities of quality flax fibre to these areas of the world where there is a shortage and has been importing lower quality fibres of the type needed by its textile and paper industries. An abrupt change in the market in 1990 caused an increase in stocks of that product. Aid for private storage 3.30. See reply to points 3.26 and 3.27. 3.32. Private storage aid, which covers part of the costs incurred, is intended to restrict price reductions in the event of sale at a loss. It proved its effectiveness in the case in question for, by temporarily withdrawing certain quantities from the market, it slowed down the reduction in prices. Such a measure would not be effective if the disequilibrium was too great and continued for several years. The crisis lasted longer than expected, as noted in the reply to point 3.26, and the Commission considers that a new equilibrium is now appearing in this market. Lack of independence of control 3.33 3.34. The Commission is aware of the deficiencies in the flax and hemp sector; it therefore intends to carry out inspections in the years to come. It will write to the French authorities to obtain precise information on the cases in question. Promotion programme 3.36. A report is produced on the implementation of each programme. The conclusions of the reports are generally positive. Generic promotion needs a long-term activity to achieve the desired improvement and stability of the market. Therefore the short term approach by the Court seems only to reflect the general current recession throughout the textile sector. Moreover, research carried out in the field of non-woven products, e.g. geotextiles, composite materials and the elimination of impurities (mainly polypropylene) have resulted in industrial-scale testing and in some cases the opening-up of new markets. Market surveys have permitted a better definition of targets and an improvement in image (mainly by means of a new logo). With regard to promotion measures, it should be noted that flax is now better known by the general public than before, as the recent lift in demand on the world market appears to confirm. The fact that this has not prevented a temporary reduction in sales should not be made an excuse for discontinuing promotion. In fact, some would assert that a drop in sales is a reason for intensifying promotion efforts. Double aid for flax and hemp 3.37. Production aid for flax seed has been abolished with effect from the 1993/94 marketing year. It has been replaced by per hectare aid in the case of non-textile flax, similar to the aid for arable crops. For textile flax, per hectare aid has been increased to compensate producers for the abolition of seed-based aid. 3.38 3.40. The Commission would point out that this is a supplementary aid provided for in the rules governing seed production and granted only for certified seed so as to compensate in part for the extra cost involved in producing certified seed. Conclusion 3.41. When the Commission introduced the market organization for flax and hemp, it was aware that the flax market was volatile and that, in the absence of guaranteed markets and protection measures at the frontier, there was the risk of temporary disequilibrium in the market. Private storage aid is intended to restrict price reductions in the event of sale at a loss (see reply to point 3.32). With the exception of promotion and private storage measures the Commission does not manage the market actively. However, the disequilibrium in 1989 and 1990 caused a major reduction in area from 1991 on. It is anticipated that the fall in production will permit a market equilibrium to be re-established in the near future. As mentioned in the reply to points 3.38-3.40, the supplementary aid for certified seed production compensates for the much higher cost of producing flax seed than seed of other species (the reproduction rate for flax is of the order of 7 whereas for cereals it is of the order of 35). In addition, markets for flax seed are very restricted; without the supplementary aid seed production might die out and the entire production of flax would be dependent on countries outside the Community. 3.42. As mentioned in the reply to point 3.34, the Commission is planning inspections and will take the necessary measures. 3.43. The Commission is of the opinion that a long term stabilization of this market and of the demand for flax fibres can be achieved only by supporting generic promotion for these products. A short term assessment of such a campaign as done by the Court can be short-sighted, especially when the overall textile market is in a recession. As indicated in its reply to point 3.36, the Commission does not share the opinion that promotion has been ineffective and considers that it is too early to review the scheme. Cotton Production aid 3.51. It is the Commission's opinion that, although the stablilizer mechanism has not completely accomplished the desired objective, mainly because of the restriction on the abatement of aid (ceiling), it has significantly slowed the expansion in cotton production. 3.52. The stabilizer mechanism has two objectives: to stabilize budgetary expenditure by preventing too great an expansion of Community area sown to cotton. However, the amount of the aid also depends on the world price for cotton, on which the level of Community production has virtually no effect, and if the price is falling this will mean an additional burden on the budget. The stabilizer provides for an abatement in aid proportional to the extent to which production exceeds the maximum guaranteed quantity. Lastly, the Commission would point out that yield varies greatly from one year to the next and this has an effect on production levels. 3.54. Any substantial delay in making the estimate would have the disadvantages of adding to the difficulty of marketing the new harvest and, in some years, delaying the re-opening of ginning plants. The difference between estimated and actual production is generally relatively small, particularly bearing in mind that the estimates are made at the end of August so as to fix the reduction prior to 1 September for the harvest which starts in mid September and often takes a long time, and also that unanticipated weather conditions can affect the harvest. Apart from forecasts from the Member States, the Commission uses other sources of information to establish the production estimate. Production is estimated by multiplying the number of hectares by the estimated yield. A double counting of plots would increase estimated production, and therefore the abatement, at the expense of the producers. Nevertheless, remote sensing carried out in the major production regions has revealed only minor discrepancies compared with declared areas. 3.55. The findings of the Court coincide with those of the Commission (see also reply to points 3.66-3.69). 3.56. The Greek authorities explained to the Commission's inspectors on the spot that the yields allowed for each region do not correspond to the average for the region but to the average of the highest yields which the Greek authorities envisage in the region for the harvest in question. The result of this is that they envisage a large number of producers not reaching the fixed production threshold. Files consulted by the Commission confirm that the yields used are quite high. According to the Greek authorities' explanation to the Commission, if a producer exceeds the production threshold he may request an exemption for the yield allowed based on a confirmation by the Cotton Board of the actual production on his land. 3.57. As already explained in point 3.51, the Commission does not share the Court's simple view that the stabilizer system has been a 'failure`. Changes have gradually been introduced in order to improve the system. It is clear that the existence of a ceiling could give rise to additional expenditure. This is why the Commission has proposed a raising of the ceiling and of the maximum carry-over of the abatement. The Council has accepted the proposal but postponed its application to the 1994/95 marketing year. The world market price 3.58 3.59. The provisions relating to the recording of the world market price are detailed (see Regulations (EEC) Nos 1201/89 and 2169/81). To guarantee the proper administration of the market the Commission has a degree of discretion in assessing market factors. 3.60. Although it is true that the 'derived world market price` is a theoretical one, it nevertheless takes account of the daily trend in the world market price of fibres, which are the product of the first stage of processing this raw material. The quotations for the other oilseeds taken into account are the most recent available. Naturally, it would be preferable to set the aid on the basis of actual quotations for cotton seed but they are not available. The alternative would be to set a price for the fibre alone, but this would mean that the seeds factor would then be entirely ignored. The ginning costs to be taken into account are those which apply in the Community and not elsewhere, since the question is the competitiveness of Community cotton fibres compared to those from non-member countries. Information concerning transport and unloading costs is obtained from reliable sources. Taking unginned cotton under control 3.62. The Commission does not accept the weaknesses listed by the Court: (a) The fact that no systematic laboratory analysis of fibre length is done is not the reason why a particular lot cannot be classified. In addition, fibre length and unginned fibre content are virtually the same in a given production region, mainly because the varieties used have similar characteristics. (b) The differences between results obtained in the laboratory and those obtained by the industry are not significant. (c and (d) The differences in quality of unginned cotton have been evaluated in the producer Member States for several decades. These differences, which are established after consulting the producers' and ginners' trade organisations, guarantee payment of a price in keeping with the actual quality of the product delivered. 3.63 3.65. The Commission has studied jointly with the producer Member States the possibility of introducing a single analysis method. Given the slight differences between the results obtained by the various national methods and the technical complexity the Commission does not feel it appropriate to propose a uniform method at the present time. 3.66 3.69. In 1992 the Commission launched an inquiry into the Greek cotton market. As the inquiry was closely monitored by the Court of Auditors, which joined in some of the missions, the Commission welcomes the Court's conclusions. The objective of the inquiry was twofold: to detect possible fraud and to monitor the Greek control system. The Greek authorities have been instructed to continue the fraud inquiry and to recover sums unduly paid to particular producers and ginners. The Commission is closely following the progress of the Greek authorities. The Cotton Board's control system was monitored with the assistance of an independent external auditing firm. Following the audit, recommendations for improvement of the control system were made and transmitted to the Greek authorities at the end of 1992. The Commission is still (July 1993) waiting for the reaction of the Greek authorities to these recommendations. The financial consequences for Greece will be evaluated in the context of the clearance of accounts in the light of improvements in the Cotton Board's controls. Proof that all cotton has been ginned 3.70. The Commission has examined the problem of imported unginned cotton and has concluded that it is unlikely that ginned cotton has been imported from non-member countries in significant quantities so as to benefit improperly from Community aid. Naturally, the inspections of individual firms carried out by the Member States should detect this. Financing the Hellenic Cotton Board 3.71. (a) The levy in question has been examined by the Commission with a view to verifying its compatibility with Community law. (b) The compatibility of the national duty applicable in Greece to the import of ginned cotton with Community provisions will be the subject of an examination by the Commission departments concerned. The results of their inquiries will be passed to the Court as soon as they become available. Scrutiny audit 3.73. Information on the irregularity discovered by the Court has been requested from the Spanish authorities; the obligation to notify the Commission of the irregularity, based on Article 3 of Regulation (EEC) No 595/91, has also been mentioned. 3.74. The Commission would refer to the replies given to points 3.66-3.69. Aid for small cotton producers 3.75 3.79. As mentioned by the Court in point 3.78, the increase in the number of small producers has no impact on the level of the relevant budget expenditure. However, this fraudulent practice is at the expense of the 'true` small producers. The Commission shares the Court's concern and intends to seek improvements in the existing rules. Implementation of the control system 3.80 3.81. According to Article 8 of Regulation (EEC) No 1201/89 laying down rules implementing the system of aid for cotton, all cotton growers have to send an annual declaration of areas sown before 1 July. Article 2 of the Regulation mentioned by the Court stipulates that aid shall be granted only in respect of areas sown and harvested and tended in the normal way and in respect of which a declaration of areas sown has been made in accordance with Article 8 of Regulation (EEC) No 1201/89. The application referred to by the Court in point 3.80. is thus additional to the declaration of the areas sown. Article 12 of Regulation (EEC) No 1201/89 requires the Member States to verify the declarations of areas sown. Nevertheless, the Commission is prepared to examine whether the harvesting obligation could be abolished, as has been done under the new system for arable crops. 3.83. See replies to points 3.66-3.69. Conclusion 3.84. As it was aware of control problems, the Commission launched an enquiry into the major cotton markets. In view of the results of this enquiry the Commission is willing to seek an improvement. 3.85. The Commission has recommended improvements to the Greek control system to the Greek authorities. The financial consequences of the lack of control will be drawn in the context of the clearance of accounts (for details see the reply to points 3.66-3.69). 3.86. The Commission would refer to its reply to point 3.56. 3.87. The Community has chosen to link the guide price for cotton to unginned cotton, in order to ensure a fair income for farmers, as laid down in the Treaty. The aid is established taking into account the difference between the guide price and the world market price. However, as there is no world market price for unginned cotton a derived price has to be calculated. 3.88. The stabilizer for cotton has to a large extent succeeded in limiting production, and thus expenditure, by making producers jointly responsible for additional production. However, the Commission is constantly trying to improve the system. 3.89. The Commission takes note of the position expressed by the Court on the highly political question whether the present system should be maintained or whether national quotas should be introduced. 3.90. According to Article 5 of Regulation (EEC) No 2052/92, the Commission must re-examine the market support system for cotton before the 1996-97 marketing year. It will at that time give due consideration to the Court's remarks. 3.91. The Commission is fully aware of the problem concerning small cotton producers, and after an examination will consider appropriate action. CHAPTER 4 The sale of milk to children in schools The objectives of the Court's enquiry 4.7. The information on the implementation of the measure received by the Commission from the Member States is often incomplete or cannot be compared. When this legislation is next reviewed the Commission will propose provisions obliging the Member States to forward the necessary information. EVALUATION OF THE EFFECTIVENESS OF THE MEASURE 4.17 4.19. In order to be able to assess certain aspects of the programme, every year the Commission sends a questionnaire to each Member State, requesting information on the quantities of the various products distributed, the number of schoolchildren participating in the programme and the prices the children have to pay for the various products. There is often a considerable delay in sending replies to the questionnaire and the information given is either incomplete or cannot be compared. For example, half the replies provide no information on prices at all. Under such circumstances assessment as proposed by the Court has not been possible in practice. Therefore the Commission will propose provisions aimed at securing better information from the Member States when this scheme is next reviewed. Data on the number of pupils actually benefiting from the measure 4.20 4.22. Whilst the validity of the Court's analysis is recognised, it is difficult to quantify the actual participation of schoolchildren in the programme since some children take part irregularly or for only part of the school year. Furthermore, the distribution of milk products through meals served in school canteens makes it difficult to monitor the quantity of milk actually consumed and therefore the actual number of participants. Information on the prices of the products sold to schoolchildren 4.26. See the reply to points 4.17-4.19. 4.27 4.28. The Commission will examine to what extent the Court's observations can be incorporated into the legislation. 4.29 4.31. Obviously product prices vary from one Member State to another and within individual Member States, as is the case with all milk products on the market. However, price differences should not be too great and the Commission will consider ways of remedying this situation. 4.32. As the Court points out, the price of milk products sold to schoolchildren is influenced by a number of factors which are beyond the Commission's control, and rightly so: the packaging of the products, the organization of distribution, the financial contribution by national or local authorities, etc. In this respect the Commission thinks it essential not to impose detailed, uniform rules for the whole Community, a view endorsed by the Court at point 4.50(e). Practical problems with the implementation of the Regulations 4.33. Since 1983 the Commission has improved the scheme by a series of amendments to Regulation (EEC) No 2167/83. Discussion of each of these amendments with the Member States' experts in the Management Committee for Milk and Milk Products and the visits made as part of the clearance of accounts exercises have made it possible to identify the problems encountered in implementing the scheme. This is why the Commission has requested the Simplification Group, the so-called 'Lachaux Group`, to analyse the scheme in order to propose simplifications. 4.37. As the case of Germany illustrates, if a Member State considers that some provisions are difficult to implement or monitor, as for example the distribution of cheese or its sale in school canteens or restaurants, it may decide not to apply these options on its territory. However, the Commission will take account of these difficulties when the Regulations are next re-examined. Measures in the context of the school milk programme to inform schoolchildren of the value of dairy products 4.39 4.41. The Commission thinks the operators or the organizations in the Member States responsible for promoting and providing information on milk products are best placed to deal with the subsidized distribution of milk in schools. CONCLUSION 4.47 4.50. On the basis of the results for the two aspects whose effects are measurable, the Commission thinks the scheme has produced encouraging results: more than eight million schoolchildren consumed 450 million litres of milk or equivalent products. In the context of the abolition of the coresponsibility levy, which provided 75 % of the funding for the measure, the Commission also supports a global review of the scheme, reforming and simplifying the provisions on school milk. In this connection, the Commission will take account of the Court's recommendations and the proposals put forward by the Simplification Group, which has suggested paying the aid only to schools and therefore excluding the suppliers applying for this aid. CHAPTER 5 Common policy on fisheries and the sea EXPENDITURE RELATING TO INTERNATIONAL FISHING AGREEMENTS Introduction The purpose of the Court's audit 5.9. Essentially, the Court's remarks do not concern the management of appropriations but rather give an assessment of the advantages to be gained by the Community from the fisheries agreements. The assessment is based almost entirely on the estimated 'return` from the six agreements examined and this is limited to the value of the catches declared. This is not an adequate basis on which to examine the advantages to be gained by the Community from the agreements within the context of the common fisheries policy (CFP). In the first place, the fisheries agreements must be viewed in an industrial and social context within which there exists a structural problem of overcapitalization, that is to say, an overcapacity in terms of fishing possibilities (particularly in Community waters). Account must be taken of the considerable numbers of people who rely on fishing and associated activities. An essential role of these agreements is the maintenance of traditional fishing activities outside the Community's exclusive economic zone (EEZ). Adjustment or elimination of this overcapacity by other means would involve considerable social costs for the Member States and a significant Community contribution through the Structural Funds. It is difficult to estimate the cost taking all these factors into account. Another advantage accruing from these agreements stems from their link with other Community policies. It is true that the agreements involve financial compensation and that they are based on commercial principles, the Community buying the right to fish in exclusive zones (similar to a licence to prospect for minerals underground). This, however, does not imply that these agreements do not play a useful role in reinforcing or accompanying other Community policies. The Commission nevertheless shares the Court's desire to identify the advantages flowing from the payments made under the fisheries agreements and endeavours to do so. This cannot, however, be satisfactorily achieved by targeting just one aspect of general policy. Given the inherent difficulties in calculating opportunity costs, this can not give a complete picture. As far as possible this is taken into account during the negotiation of these agreements and is the subject of thoroughgoing discussions with the Budgetary Authority before the agreements are ratified. Comments on the economic aspects of the agreements and their implementation Senegal 5.12. The Commission does not agree with the Court that the low rate of utilization of the fishing opportunities for certain categories of fish is due to an overestimation of the number of potential applications for fishing opportunities when the protocol was being negotiated. The Commission opens negotiations on the basis of the specific number of applications for fishing opportunities confirmed by the Member States concerned. The Member States notify the applications from their shipowners, and these will in all probability become firm licence applications. The actual result of the negotiations depends on the attitude of the third country. The negotiating position is directly determined by the importance of the fishing zone concerned for the Community fleet. Faced with an absolute refusal by the Senegalese authorities to consider a reduction in the financial compensation and in view of the importance of the Senegalese EEZ to Community shipowners, the Commission accepted that the overall level of fishing opportunities should be maintained and that the different categories of fish should be redistributed at internal level in accordance with the demands of the Member States. The general basis for the protocol is widely discussed in Parliamentary and Council committees when the agreement is presented. Furthermore, Member States are fully involved during the whole course of the negotiations. 5.13. The Community pays for fishing rights expressed as fishing opportunities determined on the basis of the applications made by the Member States. The contribution paid by the shipowners is based on the actual utilization of those fishing opportunities and the shipowners' economic and financial position. 5.14 and 5.15. In assessing profitability, the Commission not only looks at the value of the catch but also takes account of other factors affecting the situation of the fishing fleet. Mauritania 5.18. With a view to the renewal of the protocol to the fisheries agreement for the period after 31 July 1993, the Commission looked at the catch declarations for the first two years of the existing protocol. On the basis of its findings and taking account of the rate of utilization under the previous protocol and the applications for fishing opportunities under the new protocol, the Community concluded a new protocol for the period 1 August 1993 to 31 July 1996 involving a reduction in the financial compensation paid by the Community from ECU 29.010 million to ECU 26 million over three years. Morocco 5.21. The increase in the financial compensation fixed in the agreement is in line with the objectives attained. The increase is justified in particular by: 1.The strengthening of the economic and political links between Morocco and the Community within the new partnership. 2.The volume of fishing opportunities (82 000 GRT/year for around 700 vessels from several Member States), which makes this fishing agreement the largest ever concluded by the Community. Moreover, the provisions on annual adjustments to the fishing opportunities (5 %) contained in the previous agreement have been deleted, providing an additional guarantee of the stability of fishing opportunities. It should also be noted that sponge fishing, which has been retained in the 1992/96 agreement, only accounts for 500 GRT out of the total of 82 000 GRT. 3.Improvement of fishing conditions (an improved definition of fishing opportunities, increased profitability and the variety of fisheries concerned). 4.The four-year duration of the agreement. This is the only fisheries agreement for such a period, giving the Community fleet stable fishing opportunities for a relatively long period. 5.The establishment of a Joint Scientific Committee responsible for planning research programmes on the state of stocks. It should be noted that the new provision introduced into the agreement (Article 15.2) lays down that the two parties are to meet when half the agreement has run to examine its implementation. They will review the fishing opportunities offered by Morocco to the Community in order to make any adjustments necessary for its subsequent implementation, particularly in view of the state of stocks. The Seychelles 5.27. Although it is true that the average annual catch for the years 1990 to 1992 was around 34 000 tonnes, this figure needs to be qualified. It is the result of abnormally low tonnages in 1990 (26 500 t) and 1991 (29 000 t) which are not in line with the long-term trend of around 45 000 tonnes per year. Moreover, during the final year of the protocol the actual catch increased to 46 500 t. The Community negotiator therefore had to take this clear and positive development as a basis for the calculation of the financial compensation. If he had acted otherwise he would not have gained the agreement of the Seychelles, depriving the Community tuna fleet of its principal zone of operation in the Indian Ocean and its base port (Victoria) for that whole area. It must be stressed that the financial compensation thus calculated covers not only the maintenance of fishing opportunities for 40 tuna seiners but also the introduction of small tuna liners and surface longliners. 5.29. In all the tuna agreements, the fee payable by the shipowners is fixed at ECU 20 per tonne. Given the difficulties owners of tuna fishing vessels are currently experiencing, due to the fall in the prices of various species of tuna on the international market, an increase in their financial burden could not be contemplated. Greenland 5.31. Any evaluation of the fisheries agreement with Greenland cannot be restricted to a simple financial analysis. The importance of the agreement with Greenland lies in the fact that it prevented a break-up of the common fisheries policy immediately after it had been established. Since the conclusion of the fisheries agreement with Greenland there has only been significant recruitment to the cod stock by two year classes which has produced satisfactory fishing conditions in the years 1989 to 1991. The redfish stocks which were normally exploited in a mixed fishery with cod have remained in a depleted state throughout the duration of the agreement. Some of the quotas in Greenland waters have on the other hand played an important role in establishing satisfactory fisheries arrangements with Norway. The capelin quota will constitute the Community's contribution under the fisheries agreement concluded with Iceland. 5.32. Under the terms of the agreement, there were only very limited possibilities for changing the quota composition when the second protocol was negotiated (Article 2.2.). A certain reduction in the redfish quota and an increase in the cod quotas were however achieved. The increase in the financial contribution reflected partly this change from redfish to cod and partly increases in prices for fish products over the duration of the first protocol. 5.33. As regards fishing opportunities obtained under the Greenland Agreement, it should be borne in mind that the Community, in addition to the quotas stipulated in the protocols, was entitled to be offered any supplementary catch possibilities exceeding Greenland's own needs. The Community had to pay for such preferential treatment and this also explains why the Community had to accept that the financial compensation agreed in the Fisheries Protocols had to remain fixed irrespective of utilization of the agreed quotas. 5.35. The fact that Community fishermen are not obliged to pay for licences when fishing in Greenland waters reflects the wish to create a regime for Community fishermen corresponding as closely as possible to the situation when Greenland was still part of the Community. It was therefore decided that the financial compensation would be paid by the Community in full. Scientific programmes 5.40. It is true that the provisions on the financing of the agreements vary significantly. Certain partners insisted on having the right to use this contribution howsoever they chose, stressing that it was part of the total price to be paid by the Community for the fishing opportunities obtained. Others agreed to supply specific information to the Commission. The Commission endeavours to obtain summary reports on the use of the contributions paid for scientific programmes. Study and vocational training grants 5.41 and 5.42. The Commission does not have the right to make a detailed examination of the suitability of candidates for the planned training. Furthermore, this is a difficult task for which the Commission is not equipped. It nevertheless applies certain rules of good management (for example, withdrawal of the grant after two failures) which have been accepted by certain partners. Others have asked for the contribution to the training programme be paid directly to them and left at their disposal. Observations relating specifically to the agreements with Morocco 5.43 and 5.44. The Community is regularly informed by Morocco of the utilization of the Community financial support for specific measures at meetings of the mixed committee. 5.45. Article 5 of the agreement must be read together with Article 2(2) of the protocol and the payment conditions agreed in the exchange of letters on the provisional application of the Agreement. The exchange of letters forming part of the agreement currently in force and accepted by the Council lays down that the financial compensation referred to in Articles 2 (without specifying paragraphs), 3(1) and 4(1) must be paid to Morocco before 31 October 1992 as the first annual tranche in order to ensure the continuation of fishing activities by Community vessels in Moroccan waters. It was therefore agreed that the payment of the first annual tranche would cover the actual financial compensation and the financial support for the specific measures and programmes. By letter dated 30 July 1992, the Ministry of Maritime Fishing and the Merchant Navy in Rabat notified its financial needs under the first annual tranche for specific measures and programmes. These amounted to ECU 7.6 million. This figure was taken as the basis for the first payment. At the first meeting of the Joint Committee under the new Agreement, held in Brussels on 28 and 29 January 1993, Morocco presented the measures and programmes to be implemented under Article 5 of the Agreement. The meeting had been postponed pending ratification of the Agreement in December 1992. 5.46. In this particular case, the Moroccan Foreign Ministry designated that the beneficiary of the sums to be paid would be the Treasury, the money to be paid into the account of a Moroccan bank held at a French bank. Conclusion 5.47. The Commission takes the view that the economic justification for a fisheries agreement is not based simply on the fishing opportunities obtained and their rate of utilization but also by socio-economic considerations specific to the Community fisheries sector. From 1991, the Commission made cost-benefit analyses based on the catch declarations so as to have information on which to make assessments for use in the renegotiation of the principal joint agreements (Guinea-Bissau, Guinea, Senegal, Mauritania). 5.49. (a) The Commission already bases its assessments on the actual utilization of fishing opportunities and the applications made by the Member States. (b) The Commission has been using the catch declarations presented by the captains of vessels for carrying out cost-benefit analyses since 1991. (c) The Court's suggestion would involve a significant change in the existing system of financial compensation paid by the Community and fees paid by shipowners. Given the serious difficulties the latter are currently experiencing, such a change cannot be envisaged in the near future. (d) The financial compensation is made available to the third countries concerned which use it according to their own priorities. The Commission endeavours to obtain information on the scientific programmes implemented. (e) The fisheries agreements, which are of a commercial nature, do not oblige the Commission to carry out such assessments. CHAPTER 6 Regional sector BUDGETARY AND FINANCIAL ASPECTS The concentration of the structural funds 6.4 6.5. The Commission considers that the reports drawn up pursuant to Article 16 of Regulation (EEC) No 2052/88 and other official publications such as COM(92) 84 final of 18 March 1992 (Community structural policies: assessment and outlook) contain all the information required to check observance of the financial provisions of Article 12 of that Regulation. In any case, that Article does not require the Community's accounts to include a breakdown of the Community initiatives by Objective. The Commission will consider how this information can be supplied in the future. THE OPERATIONAL PROGRAMMES FOR OBJECTIVE 1 The quality of the programming Amending the programmes 6.9. The Commission considers that the scope provided by the Regulations to amend programmes through partnership during implementation should be utilized whenever necessary so that they can reflect actual implementation and to make the overall management of part-financed operations more transparent. Programming is based on the information, particularly that concerning the development strategy to be followed and budgetary constraints, available when the programme is drawn up. It would be unrealistic to impose on implementation of the programmes rigidities which would impede the monitoring and completion of measures. 6.10. The amendments and adjustments made by the Commission through partnership with the Member State in order to correct any lack of clarity in the original programmes were designed to improve achievement of the objectives in conformity with the Regulations and other Community policies. Despite certain difficulties encountered in the system for financial monitoring and implementation, the Commission is thoroughly committed, through the partnership, to transparent management. The Commission considers that any effects of amendments to the original programmes are reflected in the documentation considered by the Monitoring Committees and in the annual reports. In any case, an amendment to the financial schedule of a programme does not necessarily entail a change to the objectives originally laid down. 6.11. Amendments to the OPs have not prevented the Commission from correctly carrying out the corresponding financial operations. The Commission's Financial Control is informed of all amendments to the OPs. The fact that this was done only some months later in the case of two programmes has no financial implications, since all proposed commitments are made by the authorizing officer and approved by Financial Control only on the basis of up to date financial tables. The procedure laid down between the Court and the Commission provides for the Court to receive the commitment documents and payment orders together with the supporting documents. 6.12. All amendments to the financial plans proposed by the Monitoring Committees are finally approved only after explicit or implicit approval by the Commission and the Member State. It is true that in the cases of the Transport (UK) OP and one instalment of the Telecommunications (I) OP, where the amendment amounted to some 22 %, the Commission did not formally adopt a decision amending the programmes. The situations described by the Court were formally regularized during 1993. 6.13. Where the financing plan for a programme is amended, the Commission adjusts the rate of Community assistance where so required by the conditions of implementation, but in most cases this remains well below the thresholds laid down by the rules. 6.14. The Commission considers that during implementation a programme may need to be adjusted to take account of how it is actually proceeding on the ground. Failure to adjust a financing plan could in certain cases lead to delays and jeopardize completion. The programmes financed by the ERDF in the Objective 1 regions concern multiannual measures (mainly for infrastructure) for which financial implementation stretches over five years for commitments and seven years for payments. Their nature is such that they require adjustment in terms of both physical implementation and their financial structure. Clearly, a programme involving the construction of infrastructure may have a very low level of expenditure in the beginning and require much greater sums in its last years of implementation. Hence, if the original timetable for financial implementation in the early years proves too optimistic, it is adjusted to reflect the actual state of implementation. 6.15 6.16. If, when the financing plan for a programme is being amended, the commitments or payments of advances already booked exceed the new amounts in the new plan, the Commission makes an adjustment to take account of the over-commitment or over-payment when the next proposal for a commitment or payment is made. The situation described by the Court is due to the switch of the Structural Funds from project-management to programme-management. An operational programme is a series of coordinated multiannual measures divided, for financing purposes, into instalments. Community advances are paid globally on the basis of the actual expenditure declared by the Member States in support of their applications for payment and not on the basis of every individual operation covered by the programme. However, if adjustments are later required as a result, for example, of failure to complete an operation or delay in doing so, the financing plan is adjusted to reflect expenditure actually incurred. This adjustment procedure simplifies the mechanism for managing appropriations without diminishing transparency. Introduction of a recovery order system at the level of the individual operations constituting a programme would introduce a degree of procedural complexity negating the flexibility required by the programme approach. 6.17. The Sicily (I) OP required amendment to reduce the 1990 instalment so that programming reflected implementation more closely. The programme was not approved until December 1990. In view of the need to ensure on-going finance and the level of expenditure, the Commission decided to amend the financing plan of the Prodep (P) OP to bring it into line with implementation of the operations being part-financed. 6.18. The Commission regards the situations described as normal features of the operation of the system of advances, which requires the amounts in the financing tables to be adjusted when the OPs are amended so that they reflect the level of actual expenditure. Where necessary, an adjustment is made later, as described in paragraphs 6.15 and 6.16. Content of the programmes 6.20. Article 7(2) of Regulation (EEC) No 4253/88 requires the Community's financial contribution to be fixed in terms either of the total eligible cost or of the total eligible public or similar expenditure. The nature of the measures to be undertaken under a programme is the criterion for selecting one or other of these options. The Calabria (I) OP contains a certain contradiction between the eligible amount laid down by the Commission decision and the one revealed by detailed examination of the OP. The Commission has noted the Court's comments and will take appropriate action. Both eligible expenditure and eligible public expenditure are specified in the Attica OP. Article 2 of the Decision concerning the Ile de la RÃ©union OP states that the rates of contribution from the Funds to the individual measures constituting this operational programme will be calculated on the basis of the total eligible cost. They are set out in the financing plan of the OP. 6.21. Article 4 of the Decision concerning the Ile de la RÃ©union (F) OP lays down the procedure for closing the earlier NPCI and integrating certain projects under it into the OP. The technical difficulties attendant upon this procedure did not prevent the Commission from making the appropriate financial regularization at the time. The Commission will check on the inclusion of a project not eligible under Objective 1 in the Castile-La Mancha OP. It should be noted that the programmes do not contain details of all the projects contributing to their implementation. The choice of operations to be part-financed within subprogrammes or categories of measure is up to the Member State, which is responsible for ensuring that the operations selected conform to the objectives of the OP in question. In the case of the Industrial Development (Northern Ireland - UK) OP, the Commission would stress that it is not unusual for a firm to receive more than one aid and there is nothing in the rules to prevent this. 6.22. The Commission believes that coordination between instruments can always be improved and adapted to the actual situation and it will continue to seek this goal as actively as possible. The differences in management procedures between the Regional Fund and the Social Fund mainly reflect the inherent differences between investments in projects over a given multiannual period (ERDF) and the financing of training measures carried out immediately (ESF). Hence the Social Fund programme for Sicily was approved in November 1990, only one month before approval of the multifund programme, to enable the ESF to take account of training activities. It is always possible to identify eligible expenditure part-financed by each Fund, either through the financing tables in force or through the declarations of expenditure certified by the Member State. Where there are discrepancies between the arrangements laid down in the proposed programme submitted by the Member State and the final Decision, the Commission considers only the financial tables annexed to the Decision to be valid. 6.23. Assistance for research in Sicily was intended to form part of an earlier agreement between the region and the Italian national research council. The measures are financed jointly by the ERDF and the ESF. The failure of the region and the national research council to agree severely delayed implementation of the research activities so that the programmed ESF resources had to be adjusted. Amendment of the Corsica OP was due in part to the need to increase the planned appropriations for measures for the processing and marketing of agricultural products, the importance of which for the local economy had not been fully appreciated. In the case of the Castile-La Mancha (E) OP, the Commission has pointed out to the Spanish authorities on a number of occasions that agri-foodstuffs industry projects financed under programmes receiving a contribution from the ERDF must respect the criteria laid down under the common agricultural policy. The arrangements for fixing the rate of the peseta in ecus are laid down by the rules, which the Commission applies. The conversion rates used depend on the date the application for aid was submitted. 6.24. The Commission has invited the Member States to submit multifund programmes financed from more than one Fund, covering the same area or sector and with a single monitoring procedure, while providing for separate financial management for the part of the programme financed by each Fund in order to simplify implementation. Earlier experience (IMPs and IDOs) had shown that an excessive overlapping of finance from various sources for the individual measures risked unduly complicating financial management. The main consideration is improving synergy between the various measures in a programme. The Commission wishes to bring together the financial resources of the various Structural Funds in pursuit of common objectives in order to generate the maximum possible synergy. Even though at national level this approach is primarily administrative, it is helpful and the Commission regrets that the authorities in certain Member States have not been willing to apply it more systematically. 6.25. Where a decision on projects is not taken until after a programme has been adopted, certain problems in correctly assessing their environmental impact may arise. Nevertheless, the Commission ensures that operations part-financed by the Funds respect environmental considerations. The case of the Peleponnese (GR) OP clearly demonstrates that the Commission uses the provisions of the Regulations, and particularly those relating to the adjustment of programmes, to correct points which could run counter to other Community policies. 6.26. It is not always possible to establish the precise cost of the various individual projects when programmes are being prepared. Lack of financial resources for the implementation of certain projects may arise at any point during the life of a programme. In such cases the Monitoring Committee for the programme concerned may propose an increase in the resources allocated to those projects so that the work can be finished. 6.27. In the case of Prodep (P), the Commission regards the gymnasia as making more viable the isolated classrooms which exist in a number of educational establishments in Portugal. Like music rooms or school laboratories, gymnasia are essential if the balance of facilities in schools located in regions whose development is lagging behind is to be restored. The Agricultural Structures OP (GR) covers the financing of reservoirs and distribution networks. The Commission, which is aware of the problem which has arisen in this case, is in touch with the Greek authorities in order to find a solution. 6.28. As the Commission has already stated in connection with other reports by the Court, no complete ex ante assessment was carried out. However, in the case of Objective 1, the ex ante assessment is constituted principally by the Commission looking at the development strategies of the eligible regions and conducting discussions and negotiations with the regional partners before the Community support frameworks are adopted and when operational programmes are amended and drawn up. Progress made in the implementation of the programmes 6.29 6.30. In accordance with Articles 20 and 21 of Council Regulation (EEC) No 4253/88, the Commission commits and pays financial advances as the operational programmes progress. This means that commitments and payments are linked to the progress of work on the ground. The Commission has adopted implementing procedures and laid down thresholds for the commitment and payment of budgetary resources. The implementation threshold of 40 % mentioned by the Court is used only very rarely and in very specific cases, mainly those indicated by the administrative requirements of the Member States. It should be noted that no payment arises from commitments proposed on the basis of the 40 % and 80 % thresholds. The Commission normally applies thresholds of 60 % and 100 %. It is very rare to find three open instalments. 6.31. Calculation of financial implementation as at 31 December 1992 on the basis of expenditure certificates available at that date leads in certain cases to an under-assessment of actual expenditure. A large number of certificates available in the Commission files at the end of 1992 cover expenditure only up to the date of submission of that certificate (often several months before the end of 1992). By contrast, analysis of the level of expenditure actually undertaken by the Member States on 31 December 1992 and submitted to meetings of the Monitoring Committees during the first half of 1993 gives the following rates of implementation of eligible expenditure under the Community support frameworks:>TABLE> The latest information suggests that the rate for Italy is about 40 %. Although the programming of commitments for most programmes ends at the end of 1993, expenditure may, in most cases, actually be undertaken until the end of 1995. The Commission's view is that, overall, implementation of the Objective 1 OPs at the end of 1992 was satisfactory. 6.32. The system of advances was introduced by the reform of the Structural Funds to ensure the part-financing of operations. In the past, Community aid was in fact the reimbursement of a portion of national expenditure, an arrangement which did not help it to make an extra contribution and considerably delayed the actual implementation of work. The change to a system of advances, which makes some of the Community aid available to the Member States when the programme is approved, has permitted greater flexibility in the management of operations. This has speeded up work on the ground, despite the start-up problems affecting certain programmes which proved particularly complex to implement. Commitments 6.33. Article 20(2) of Council Regulation (EEC) No 4253/88 states that 'Commitments in respect of operations to be carried out over a period of two or more years shall, as a general rule, be effected in annual instalments. The commitments in connection with the first annual instalment shall be made when the decision approving the operation is adopted by the Commission.` It is true that in the case of the group of programmes adopted by the Commission in 1990 (including the Research (I) OP), a year elapsed between the instalment corresponding to the 1989 instalment and the actual Community commitment. Article 20 of the Regulation also says that 'Commitments in connection with subsequent annual instalments shall be based on the financing plan for the operation concerned and on the progress made in implementing it.` In other words, the various instalments are committed and settled as implementation proceeds, irrespective of the calendar year of the programme. If there appears to be a substantial delay in implementation, the Commission, in agreement with the Monitoring Committee, amends the amount of expenditure actually implemented in the financing plan, so rescheduling each instalment and adapting it to the actual implementation of the operational programmes. 6.34. Management of the 1992 instalment of the Salamanca-Zamora OP demonstrates that, except when there are genuine grounds for doing so, the Commission makes a commitment only if the level of expenditure under the previous instalment has reached 60 % (and not 40 %). Hence the 1992 instalment of that programme was not committed because expenditure of the 1991 instalment had not reached 60 %. The 1992 instalment of the Martinique OP had not been committed by the end of 1992 because the financing plans were being amended. It was committed in 1993 when all the necessary agreements to the new plans had been secured. See also the Commission's comments on paragraphs 6.16 and 6.32. 6.35. The Commission acknowledges the complexity of the mechanism for indexing operational programmes to ensure that the funds available double in real terms. It adopted Regulation (EEC) No 1866/90 of 2 July 1990, which lays down the principle of constant prices in ecus in the financing tables attached to the CSFs and programmes, and, on 11 June 1991, arrangements for the financial implementation of assistance (SEC(91) 1007/4), to apply the annual price correcting index. It is true that the Spanish authorities are opposed to the system adopted by the Commission for applying the index to the Community support frameworks and forms of assistance but they have accepted the procedure the Commission has laid down. In certain cases, the Monitoring Committees have proposed using the funds generated by indexation to finance new measures under the programme in question. An example is the Monitoring Committee for the Sicily OP which proposed using part of the funds so generated to finance a new measure to assist craftsmen added to the programme in December 1992 and deferred its decision on the use of the remainder until a later date when the extra financing needs of the OP would be clearer. 6.36. The Commission considers that the method adopted in 1991 to index the financing plans for multiannual programmes has been applied correctly. Both cases referred to by the Court concern commitments made in 1990 in respect of instalments for 1989 which, because of an error in interpreting the method then in use, were implemented at 1990 prices. Once the method had been adopted, these commitments were corrected to obtain 1989 prices. Furthermore, the use for programming purposes of appropriations from the indexation of the Water Resources (I) OP was the subject of an agreement through partnership between the Commission and the appropriate national authorities. This programme was amended to take account of indexation in June 1992. Payments 6.37. The Commission's procedures for the financial implementation of assistance from the Funds adopted on 11 June 1991 require the statements of expenditure submitted in support of any application for payment to be broken down by accounting year and by subprogramme or category of measure and to show the total amount of expenditure and hence the connection between the indicative financing plan and the expenditure actually incurred. In order to facilitate application of this provision, the Commission sent the Member States a model form of application for payment and certification of expenditure which could be used if the body responsible for certification thought it appropriate. The only obligation on the Member States is to submit their applications for payment in accordance with these rules. The model form is merely a practical suggestion. All the information required for financial management is adequately presented in the applications for payment and certifications of expenditure. If they are not, the Commission requests the responsible authorities to provide further information before authorizing the financial operation in question. 6.38. All the situations described by the Court have been appropriately regularized. For example, the first declaration of expenditure for the Main Highways (GR) OP wrongly refers to expenditure incurred in 1989 and 1990. In a new declaration of expenditure, the Ministry of Economics and Finance subsequently corrected the date of eligibility and the amounts of expenditure declared. 6.39. Since the form was introduced, payment applications record the date of eligibility of the expenditure certified. In general, this date is, as required by Article 15(2) of Council Regulation (EEC) No 4253/88, that on which the Commission received the application for assistance from the Member State and is recorded in the preamble to each Commission decision approving an operational programme. If a programme includes a major project or an aid scheme, the date on which these measures become eligible is brought forward to six months before the Commission received the relevant application and is included in that form in the expenditure certificates submitted in support of the applications for payment. 6.40. Commitments are entered in the accounts in accordance with the rules laid down and the first two advances are authorized up to a maximum of 80 % of the instalment committed in accordance with the financing plan for the OP in force at the time the operations are authorized. 6.41. The Commission has already commented on the Court's remarks on this point under paragraphs 6.8 to 6.18. The Commission has experienced no major problems in interpreting the first payment declarations for the Abruzzi (I) and Martinique (F) OPs and carrying out the relevant financial operations. 6.42. The second paragraph of Article 21(3) of Regulation (EEC) No 4253/88 as amended in July 1993 states that payments must be made to final beneficiaries without any deduction or retention which could reduce the amount of financial assistance to which they are entitled. The Commission considers that this clarification should resolve the cases occurring in the Structural Funds sector. 6.43. In the case of the Vale do Tejo and Prodep (P) OPs, the Commission agreed to the national procedure for accounting for expenditure relating to projects carried out under direct management. The municipalities responsible for the management of projects chose to use the direct management procedure for a number of reasons: (a) the desire to speed up the physical and financial progress of small projects for which a tendering procedure would be too cumbersome, (b) private firms offered no prices or (c) certain projects abandoned by private firms had to be completed under direct management. It should be pointed that neither the supplier-developer resident in Portugal nor the Directorate-General for regional development were legally empowered to make the copyright vested in the firm owning the management software for CSF programmes in Portugal purchased by that Directorate-General available free of charge to the Prodac management committee. In any case, the Prodac eligible expenditure on developing the programme management informatics tool was reduced to ESC 2 million, including installation, technical assistance and training by the supplier-developer. The Commission regards 10 % as a reasonable limit for the cost of compulsory purchase operations but it may be exceeded in certain duly justified cases. Monitoring and implmentation of the programmes The Monitoring Committee 6.45. By its decisions of 5 December 1990 and 11 June 1991 the Commission defined the duties and responsibilities of the Monitoring Committees for the CSFs and operational programmes. These provisions apply to all the programmes approved, even those on which a decision was taken before they actually came into force, and all the Monitoring Committees are subject to the rules and procedures laid down in that way. 6.46. The work of the Committees is not confined to the, normally biannual, monthly meetings. Partnership, which is implemented through the Monitoring Committees, operates all the year round by means of a variety of contacts between the organizations responsible for programme implementation and the Commission. In most cases, these resolve the problems which would prevent adoption of a common position at the formal meetings of the Committees. These contacts simplify meetings and make them more effective in terms of the decisions to be taken. 6.47. The Commission acknowledges that the monitoring of operations through physical indicators should be improved. In order to extend the system of monitoring by indicators to all operations, the Commission is working closely with national authorities to define the range of monitoring indicators to be used for programmes to be decided on from 1994, based on the various types of operation to be part-financed. The closure of the instalments and the implementation reports 6.48. In accordance with the Regulations, payment of the balance of each instalment depends, inter alia, on submission to the Commission of an implementation report. That rule was respected in the cases referred to and the reports for the Central Macedonia and Main Highways (GR) OPs were sent to the Commission. However, the Commission has reminded national authorities on a number of occasions that they should submit reports in good time if payment of the balance is not to be delayed. The Commission has laid down no standards for the presentation of reports since this possibility is not envisaged by the current Regulations. However, since the report is the result of discussions within the Monitoring Committees on progress in the programmes, the Commission has advance knowledge of the main points which are to be included. Accordingly, when the Member States submit their programme implementation reports, the Commission is in a position to judge whether these points have been included and may give its agreement or refuse it, which entails retention of the corresponding payment. 6.49. The Court's comments on this point demonstrate that the Commission is applying the rules governing the payment of balances. Payment orders remain unimplemented until the Commission has received the reports and given its agreement on their content. 6.50. Most ERDF assistance in the Objective 1 regions concerns infrastructure constructed over a period of several years so that it is not always possible to give a list of completed projects in interim reports. In any case, the implementation report is not the only source of information on the progress of operations available to the Commission. Reports are the fruit of work carried out by the Commission in partnership with national authorities and form part of the current management of part-financed operations. This means that the Commission is informed of the state of progress of programmes, although it must be acknowledged that some reports submitted in support of payment applications give few details of the socio-economic impact of measures. 6.51. Reports should reflect the progress of work on the ground, irrespective of the annual instalments which have been committed as the programme advances. However, most annual reports and, in any case, the certificates presented in support of the payment applications give a breakdown of actual expenditure each year, so that the level of implementation of commitments can be checked. Conclusion concerning the Objective 1 operational programmes 6.52. The Commission believes that the Community funds for the Objective 1 regions are being managed in accordance with the rules laid down by the Financial Regulation and the Regulations on the reform of the Structural Funds. However, it is true that at the beginning of the period there were some problems concerning the start of the process, organization and interpretation. Accordingly, on 11 June 1991 the Commission adopted and sent to the Member States management guidelines (SEC(91) 1007/4) concerning in particular the system of advances, the annual application of indexation and the rules of operation and responsibilities of the Monitoring Committees. On that occasion, the Commission took a number of information measures (seminars on management and control, discussions within the Monitoring Committees, support missions) to ensure that the message was clearly heard by the authorities responsible for the financial management of programmes. 6.53. The Commission recognizes that the ex ante assessment of programmes and certain aspects of the management of the OPs require improvement. These include the general utilization of physical implementation indicators and the standardization of implementation reports so that they give a uniform picture of actual implementation. However, the Commission believes that the reform implemented since 1989 represents very substantial progress in the operation and management of Community funds in the Objective 1 regions and that the partnership achieved through the Monitoring Committees has proved indispensable for the improvement now visible in the measures being part-financed. 6.54. The Commission considers that, overall, the level of actual implementation at 31 December 1992 of expenditure planned under the Objective 1 CSFs was satisfactory. In any case, the Member States may continue expenditure on most of the Objective 1 programmes until the end of 1995, although most of them will be able to undertake all the expenditure planned well before that date. In the view of the Commission, the opportunity available under the Regulations to revise the financing plans for programmes may be used to cope with certain difficulties which arise during implementation of a programme. That revision makes the operation of programmes in difficulty more flexible by adapting their financial implementation to progress on the ground while retaining the original objectives. 6.55. The Commission agrees with the Court and will continue to do its utmost through partnership to ensure that Community action in this field is effective. SPECIFIC COMMUNITY REGIONAL DEVELOPMENT MEASURES Financial implementation 6.62 6.65. In agreement with the Member State, the Commission incorporated the Shipbuilding in Palermo (I) programme in the Community support framework. The financial operations (decommitment and recovery) relating to that programme were regularized following Italy's request for cancellation and the appropriations were allocated to the Sicily MOP. In view of the difficulties experienced in implementing the specific Community regional development measures created by their innovative nature at the time, the Commission regards as satisfactory a rate of implementation of commitments of about 88 %, of which 94 % were settled (measures for which the balance had been requested by 31 March 1991). It is true that for part of the programmes some Member States did not respect the deadline for submission of applications for final payment and in some cases the Commission has received no application for payment. 6.66. In the absence of specific rules on the management of non quota programmes, the Commission drew up details of how these programmes should be closed which it sent to the Member States in December 1989. It then applied them to the financial closure of measures. However, it recognizes that the nature of these programmes, the management difficulties experienced and the lack in certain Member States of an administrative structure which can cope with the programme approach mean that in some cases financial closure is proceeding slowly and with delays. 6.67 6.69. The Commission has taken note of the information provided by the Court and will make a financial adjustment when these measures are closed. Implementation reports 6.70 6.71. There is no regulatory requirement making the final payment subject to submission of the implementation report. However, the Commission considers it necessary to have quantitative and qualitative information about implementation of a programme before proceeding to closure. It has therefore always insisted to the Member States that the implementation report must be considered before the balance is paid. That is why the regulations on the review of the Funds make this requirement explicit. The implementation of the Regulations 6.72. The Commission shares the Court's concerns about delays in payments in certain Member States. Article 21(5) of Regulation (EEC) No 4253/88 as amended in July 1993 requires the Member States to forward advances and payments to the final beneficiaries as quickly as possible and, in general, within not more than three months of receipt of the appropriations by the Member State. Amendments to measures 6.73 6.75. The Council Regulations introducing specific Community regional development measures make no provision for the Commission to lay down formal procedures for amending the measures decided upon. The Commission has considered the amendments to programmes proposed by the Member States and taken the decisions required to ensure the sound management of the programmes. Any substantial transfers to direct aid for infrastructure or firms were made because the Commission found that other measures had a lower priority. 6.76. Problems in carrying out an ex post assessment of non quota measures do not arise from amendments to the programmes. The rules make no provision for the Commission to be associated with the devising and drawing up of programmes and there has been no discussion in partnership with the Member States on ways of quantifying the objectives to be achieved. The programme objectives were fixed in qualitative terms, which makes any attempt at a precise assessment of the socio-economic impact of a measure still more difficult. Checks by the Commission 6.77 6.78. Non quota operations are closed on the basis of certificates of expenditure submitted by the Member State with the application for final payment. At that point, the Commission undertakes the necessary calculations to determine the financial operations required (commitment, payment, decommitment or recovery). If an on-the-spot check reveals that there is no documentation to support the statement of expenditure or that it contains ineligible expenditure, the Commission asks the Member State for a new certificate and the corresponding financial operation is authorized at a later date. The number of on-the-spot checks which the Commission can undertake is obviously limited but it systematically pursues any irregularity which it detects and, in particular, makes any decommitment or recovery required. Eligibility of operations 6.79 6.83. The Regulations lay down the criteria for the selection of the operations to be financed. The national authorities select the recipient firms and send the Commission a list containing their names and legal forms and the total cost of national and Community part-financing. The Commission is not always able to tell whether a firm selected is really an independent small business or is linked to a larger grouping. In particular, the Commission ascertains the eligibility of projects and expenditure undertaken and financed under a programme by on-the-spot checks carried out mainly by itself or by the Member State's audit bodies. With regard to the environment and desalination of sea water measure under the Enlargement (GR) programme, Article 2 of Council Regulation (EEC) No 215/84 states that all the Greek islands are eligible apart from Salamina, Aiyina, Idhra and Speses. No other provision of either the Regulation or the programme, as amended in 1988, would permit Mykonos to be excluded from the area eligible under that programme. The Mykonos project is specifically mentioned in the amendments accepted by the Commission on 28 November 1988. However, the Commission will consider the Court's comment and take the most appropriate steps. 6.84. The Commission will undertake the financial regularization of all the cases referred to by the Court when the programmes are closed. Assessment of measures 6.85. The Commission has already commented on this point in its answers to Special Report No 2/86. The difficulty of quantifying objectives, particularly as regards employment, is typical of the operations to be assisted. Unlike investments in industrial equipment or infrastructure, where objectives are easier to quantify, special programmes provide incentives to set up a variety of new activities whose exact nature and economic and social impact are not fully known at the time they are launched. 6.86. The persistence of unemployment in a particular region does not in itself demonstrate that the Funds' operations have not had a beneficial effect on employment. 6.87. The Commission considers that, in certain cases, Community assistance should be available for interest-rate subsidies. However, it has noted that the Member States are reluctant to use this mechanisms and experience has shown that there are considerable practical obstacles to its use. 6.88. The Commission has noted the Court's recommendation. Conclusion concerning specific Community measures 6.89 6.93. Not without some difficulties, the Commission is continuing to apply the financial closure procedures for non quota measures in the light of the certificates of expenditure and the results of its on-the-spot checks. It will, in particular, make any recoveries necessary. While it is aware of the problems surrounding implementation of an operation to diversify ERDF assistance procedures, the Commission decided in 1979 to adopt a programme-based approach which was subsequently extended to Community programmes, national programmes of Community interest and the integrated Mediterranean programmes (IMPs) and finally adopted in the reform of the Structural Funds as the main form of assistance. Initial experience of specific measures has demonstrated the difficulties of this operation, particularly for national administrations which are used to a project-based approach. The Commission views the approach chosen as positive in that it enabled the regions to identify and subsequently correct implementation problems through the more rational approach of programme assistance, which is itself not without difficulties. CHAPTER 7 Expenditure in the field of social policy EFFECTIVENESS OF STRUCTURAL FUND OBJECTIVE No 3 (TO COUNTER LONG-TERM UNEMPLOYMENT) Execution of the OPs relating to Objective No 3 7.5. Germany's use of allocated funds in 1991 appears exceptionally low owing to the above-average rate recorded for the previous year. This situation is mainly to be explained by Germany's preoccupation with implementing the new programmes in the new Laender and by the difficulties encountered in adapting the existing structures. In Italy the improvement in the use of appropriations is bringing the country closer to the Community average except in those regions covered by Objective No 1, where shortcomings are still to be found in the technical instruction infrastructure responsible for implementing the measures concerned. Where Greece is concerned, the Commission recognizes the need for a greater qualitative and quantitative effort to bring the training on offer into line with demand. The adjustments and extensions of the OPs endorsed by the Commission must be seen, firstly, in the context of an overall approach based on activities tailored to the needs of target groups and, secondly, against the backcloth of a more difficult situation on the employment market. These adjustments were accepted by the Commission so that, given the need for sound financial management, the appropriations could be used in a manner consistent with the set objectives. In view of the needs encountered on the employment market which is going through a particularly difficult period - supplementary measures were taken (including the widening of eligibility for Objective No 3) to ensure that resources carried forward from previous years could be used up in 1993. Ex ante assessment 7.7. As the Commission pointed out in its replies to the 1991 Court report (paragraphs 6.50 to 6.54), the difficulties encountered in carrying out ex ante assessments can be attributed to the innovative nature of the exercise at Community level as well as to the limited time in which the Commission had to work out an agreed set of assessment methods. Ongoing assessment 7.8. Such assessments, which are carried out on the initiative of the Commission, effectively bring to light shortcomings which the Commission and the Member States have noted. The deliberations on this matter produced conclusions which have influenced the new regulations for the Structural Funds, especially the ESF. The Commission is proposing, for instance, that former Objectives 3 and 4 be merged to form a new Objective No 3 encompassing those who are excluded from the employment market so as to ensure a more consistent and operational approach to managing the various means of assistance. The Commission has the following observations to make on the main criticisms made by the Court: (a)The Commission acknowledges the fact that the texts of national legislation defining an unemployed person as 'registered as unemployed` or 'unemployed, receiving benefit and seeking work` may in some circumstances be too restrictive. (b)and (c) The Commission acknowledges the fact that reintegration of the unemployed into the employment market requires both vocational training measures and backup integration measures. Objective 3 of the new rules provides for measures such as preliminary training (including the upgrading of skills), guidance and counselling for disadvantaged groups as a way of tackling this problem. 7.9. In 1992, wide-ranging deliberations between partners were conducted under the aegis of the ESF through the medium of specially established structures such as partnership meetings and technical support groups. Those deliberations prompted a debate between the Commission, the Member States and the social partners, which served to clarify a number of issues and generated ideas for possible improvements (see paragraph 7.8). Further efforts have to be made to involve the monitoring committees in these deliberations. Assessment within the framework of the ERGO action programme 7.10. The ESF acts via the Community Support Frameworks (CSF) and the Operational Programmes whereas the ERGO Programme operates by means of smaller-scale individual projects. The experience of ERGO has been used for all ESF-led Community programmes. This approach must be continued systematically if the various forms of Community assistance are to create synergy. Ex post assessment 7.11 7.12. The joint deliberations conducted between the Commission and the Member States in order to define a method of assessment required a relatively short period of time but served to clarify thinking and increase awareness among those concerned. At all events, the method of assessment can be applied forthwith to CSFs coming to a close at the end of 1993. Monitoring 7.13. Given the difficulties encountered in assembling all the data relating to the non-financial aspects of vocational training measures, the Commission realizes that monitoring focuses primarily on financial aspects. The rules governing multiannual measures require the Member States to send progress reports to the Commission within six months of the end of each year. A final report is also sent to the Commission within six months of the completion of the assistance measures. These reports supplement the information contained in the final payment applications. The six months allowed for submission of the final payment application and the completion report is extremely short given all the stages between the end beneficiaries, the national administrative bodies and the Commission and, in some cases, makes it impossible to provide all the information concerning impact which forms part of the ex post assessment. As for the computer system, which the Commission supports through technical assistance programmes, the situation should be much the same across the regions in most of the Community States at the end of 1994. The Commission would also stress that the monitoring committees must make use of the data emanating from the monitoring systems. Control Member States 7.14. (a) The Commission accepts payment applications on the basis of supporting documents only where those documents are certified by the national authorities. In this connection, the Commission would refer to its efforts to increase awareness amongst the national civil services, as illustrated by the control handbook which it distributed in 1991 stressing the importance of thorough and effective control, not least with regard to the specific ESF aspects. (b) The Commission shares the Court's view. It intends to remind the Member States once again of the need to tighten their monitoring and control systems. (d) The Commission's correspondents are the relevant national civil service departments and their inspectorates. Those departments receive the Commission's annual auditing schedule, which enables them to plan their own auditing work and to take part in the Community inspection visits. The Commission is not authorized to have contacts with Member States' audit offices. Commission 7.15. The Commission's auditing methods are based on a systems audit of the managers as well as a sample audit of the end beneficiaries. The Commission realizes however that - owing to a lack of adequate resources - these samples are not always large enough for their results to be extrapolated to the operational programmes. The audits carried out while the operation is in progress serve to check aspects such as quality of the programme, teaching standards, interest of trainees. As for audits carried out upon completion of the measures, they regularly test the effectiveness of measures and the rate of trainee placements. They are carried out at the training bodies and, in come cases, may be supplemented by interviews with former trainees. 7.16. The Commission regularly sends its audit reports or their conclusions to the Member States so as to enable the national authorities, in the context of partnership, to take whatever measures are required. However, progress still has to be made as regards the monitoring committees' treatment of these reports. The Commission will impress on the chairmen of the monitoring committees the need to inform their committees of all important points arising from the Commission's inspections. Changes to the OPs 7.17. The financial changes to the OPs are made in the light not only of the practical extent to which measures have been implemented but also of their effectiveness, more particularly in terms of demand and the types of training required by the market. The monitoring committees, which meet regularly, examine the progress of measures and propose or, on a partnership basis, decide on appropriate changes. CSFs and OPs in 1993 7.18. The planning procedures for the formulation of CSFs and OPs for 1993 were those introduced by the 1988-89 reform. These procedures are laid down in a technical guide to the implementation of Objectives 3 and 4 for 1993 and in the handbook of 12 January 1990. These documents clarify the definition and structure of an operational programme in terms of subprogrammes, measures and projects as well as the standard content of an operational programme, i.e.: problem definition, objective of programme, expected impact, general description of measures, details of measures, estimated budget, monitoring, auditing and evaluation system. 7.19. The Commission decision is to be explained by the fact that the 1987-90 unemployment statistics did not suggest any need to alter these ratios. The deterioration of the employment situation did not begin to gather speed until 1991. 7.20. The CSFs and the plans for 1993 were formulated on the basis of the technical guide for the implementation of Objectives 3 and 4 for 1993 made available to the Member States in March 1993 after the ESF Committee had been consulted. 7.21. As stated in the reply to paragraph 7.18, the handbook of 12 January 1990 sets out not only the structure of an OP but also its standard content and objectives. It should be stressed that, as the programming period covered only 1993, the Commission deliberately strove to reduce the number of OPs as a way of simplifying procedures. Effectiveness of European Social Fund aid 7.22. The Commission has no shortage of macroeconomic data on the situation of the Member States and publishes annual reports analysing their economic situation (Annual economic report published in European Economy) and social situation (Employment in Europe). Furthermore, it presents the European Parliament and the Economic and Social Committee with the annual report provided for in Article 16 of Regulation (EEC) No 2052/88 on the implementation of the reform as well as the ESF report. 7.23. The Commission will urge the Member States, firstly, to make improvements which will help to identify as effectively as possible the beneficiaries of activities carried out under Objective No 3 and, secondly, to perfect the cost-centre accounting systems, making it possible to book costs by type of operation. 7.24. The Commission disagrees with the Court as regards the absence of specific policies for this target group at national level. In recent years the Member States have adopted laws, regulations and administrative rules by means of which they have implemented schemes to assist unemployed people over 25 years of age which take account of national, regional and local realities. 7.26. Regulation (EEC) No 4255/88 allows for the joint financing of vocational training measures and recruitment aid on the basis of criteria (concerning manpower and costs) intended to facilitate sound financial management. These criteria do not compromise the effectiveness of the measures taken by the Social Fund, even if the intention is to further enhance the efficiency of these measures by means of an overall approach leading to more consistent and operational management of the various means of assistance (see paragraph 7.8). Conclusions 7.27. (a) The Commission takes note of the Court's observations. It will ensure that measures are subjected to ex post assessment on the basis of the fullest possible data assembled by the Member States. (b) As stated in its reply to Chapter 6 of the Court's 1991 report, the standard structures of plans, CSFs and OPs - drawn up since the 1988-89 reform - specify the nature of the data required for the sound management, monitoring and assessment of assistance measures. (c) The Commission agrees with the Court's suggestions, which it is taking into account, moreover, in its new proposals for Community rules. (d) The proposed new European Social Fund regulation makes provision for extending the scope of the Fund within the framework of its terms of reference under the Treaty and for broadening the criteria for the eligibility of measures (see paragraphs 7.5 and 7.8). MEASURES TO ASSIST EMPLOYMENT IN SAXONY-ANHALT Introduction Regularity of the expenditure 7.31. The CSF sets out priorities regarding vocational training, especially in the field of the dissemination of new technology. These priorities implicitly include - in the specific situation of the region concerned - 'on-the-job` training. The OP also provides for the same type of training (see pages 11 to 16 of the OP). 7.32. Flexible procedures are essential for the implementation of the Structural Funds in the new Laender. This approach was decided on by the Commission in response to requests from the European Parliament () and put into effect in respect of the development plan, the CSF and the OP in accordance with Regulation (EEC) No 3575/90 (Article 2), which takes account of the exceptionally poor statistics available concerning the implementation of the assistance measures in the new Laender. Adjustments or changes adopted before the approval of projects would only have delayed the implementation of measures. Projects Control 7.34. In view of the particular socio-economic and administrative context of the new Laender, the establishment of structures capable of implementing the Community rules - relating to management, monitoring and inspection of assistance measures - will take time. The Commission realizes what efforts will be needed to strengthen the existing administrative structures. The Court's observations on the cost bases of projects Indicative amounts 7.36. As a rule, the approval of applications for assistance for each training measure takes place at Member State level on the basis of budgets presented by the end beneficiaries. In the new Laender, the Commission and the Member State had no reference parameters for the costs of vocational training. However, it should be borne in mind that the approval of appropriations is always conditional upon proper completion of the measures. Final payments have to be made in the light of the real costs of the measures. The final balance is paid in the light of the real costs relating to operations. The relevant authority becomes aware of any underspending of appropriations and the changes explaining it when the application for final payment is made. Unused amounts have to be repaid as soon as possible and, in the case in question, the legal provisions, which are adapted to the Laender, require the end beneficiaries to repay the unused amounts with interest. The Commission intends to ensure that these provisions are complied with. Number of participants on training schemes 7.37. The Commission will investigate the anomalies referred to by the Court and will make any necessary adjustments. On-the-job training outside Saxony-Anhalt 7.38. The Commission approves only the OPs. Responsibility for approving each training project within the OPs lies with the Member State, a matter about which the Commission is not kept informed. In the case in question, the cost per trainee is indeed very high. Nevertheless, it should be borne in mind that the amounts quoted by the Court refer to the application for assistance at project level. In the first case (Hanover), the foreseeable cost per hour/trainee is ECU 18, a substantial part of which relates to the headings 'accommodation` and 'travel`. It is therefore of capital importance to ascertain whether the training course did need to be organized outside the trainees' area of residence. The other case highlighted by the Court (Scandinavia) has to be examined according to the same criteria. The applications for final payments must therefore be checked for the real cost of the training measures before any final judgment can be made. Eligibility of payments 7.39. The Commission will examine the situation described by the Court on the basis of the 1992 application for final payment and take whatever steps are required. 7.40. The application for final payment must show only the real costs in respect of trainees and only during the training period. The amounts paid to sales people on training courses should not include any sales commissions. 7.42 7.43. The applications for final payments - which will be analysed by the Commission - must be drawn up in accordance with the rules of sound financial management, an aspect which will be verified by the Commission. As regards the staff costs referred to by the Court, these must be calculated in proportion to the actual time devoted to training measures and with reference to the validity of the criteria applied. The Commission will check compliance with these criteria. Technical assistance 7.44. Account has to be taken of the particular situation of the new Laender, especially the scarcity of consultancy services for firms compared with the scale of demand. The pressing nature of requirements and the need for rapid implementation of the assistance measures must also be taken into account. Even if they do not justify it, these facts explain the award of a contract to a non-profit-making concern without invitation to tender. Invitations to tender will be organized through the usual channels in future. As regards the example mentioned by the Court, the Commission will ascertain whether the costs of technical assistance claimed were actually disbursed. 7.45. Operators regularly use consultancy firms to help them in planning, managing or supervising the measures they take. However, the invoiced services have to be performed in full and prices have to correspond to market reality. On the basis of these criteria and in the light of applications for final payments and on-the-spot inspections, the Commission will examine the justification for the services performed by the consultancy firms. The Commission agrees with the Court's observation concerning technical assistance: such assistance must be placed at operators' disposal precisely when the assistance measures are implemented as stipulated moreover in Article 1(2)(a) and (b) of Regulation No 4255/88. 7.46. The Commission will check whether the application for final payment concerning Group A and company Y includes costs relating to unimplemented projects and, if so, will ensure that these unjustified costs are subtracted from the total amount claimed. Availability of supporting evidence 7.47 7.49. Applications for final payments have to be drawn up on the basis of supporting documents in accordance with national legislation and recorded in the accounts. The Commission will draw the attention of the Saxony-Anhalt authorities to the Court's conclusions so that the shortcomings can be remedied and unjustified claims avoided. The Commission will, at all events, carefully vet the validity of the applications submitted. Conclusions 7.50. In view of the special situation of the new Laender, fully effective administrative structures will take some time to establish. The technical assistance granted and the many seminars and training schemes already organized with Commission support will help to improve the system for managing and monitoring programmes. The Commission has already audited the OPs of three Laender as stated in the reply to paragraph 7.34. New audits are provided for in the 1993 schedule, notably in Saxony-Anhalt as stated in the reply to paragraph 7.34. 7.52. On-the-job training - if provided for in the operational programme and carried out as planned - is eligible. The services performed by the BAT are described in detail in the contract drawn up by the Member State. The contract stipulates that the funds must be used in accordance with Community rules in such a way that there is no question of claiming costs for services not performed. The Commission will, however, look into the various aspects reported by the Court. 7.53. Despite the exceptional situation of the regions concerned, the success of the Saxony-Anhalt authorities' approach to the employment market has demanded particularly strenuous efforts on the part of participants (civil servants, promoters, enterprises). Improvements should be noted after the technical assistance measures taken by the Commission. Nevertheless, all the necessary arrangements will be made for any recovery measures which may prove necessary in the light of the Commission's checks. COUNTERING SOCIAL AND ECONOMIC EXCLUSION Introduction 7.58. The 'refugees` OP is to be seen as an overall response to an acute problem faced by Greece, taking, as it does, the form of a number of subprogrammes and measures designed to ease the socio-professional integration of people of Greek origin from the former Soviet Union. Budgetary implementation 7.63. As regards the global commitment, note should be taken of the following: (a)As the Court points out, the globalized procedure may give rise to the payment of a higher first advance. However, this procedure makes payment of the second advance more difficult ('A second advance ... shall be made after the responsible body has certified that at least half of the first advance has been used up ...` () and provides for the balance to be paid after completion of the programme (i.e. after three years) rather than annually. (b)In the cases mentioned by the Court, it is impossible to apply the deflator. However, this is compensated for by the fact that the first advance is higher and received earlier. (c)With the Eurada figures it is possible to distinguish between advances and payments, annual commitments and global commitments. 7.64. The distinction between operational expenditure and technical assistance expenditure can be made provided that an operational programme and a technical assistance decision are approved separately and for each Member State. Nevertheless, the Commission realizes that it is sometimes difficult to identify what OP appropriations have been used for technical assistance. This is why its proposed new regulations no longer allow inclusion of technical assistance measures within OPs. The system established for Horizon 7.65. (a) The MIDA tender contained a provision stating that, if the tender was accepted, the consortium would be set up as a European economic interest grouping (EEIG). The articles of association could not therefore be available at the time of selection. The tender did, however, contain a budget. (b)Practical knowledge of the operations financed by the ESF was explicitly mentioned as a requirement in the specifications. It is for the Commission to decide on the arrangements for the allocation of financial assistance. (c)MIDA, as the sum of its four components, was awarded marks for its tender because of the partners' (and not only ENAIP's) experience with the ESF. 7.67 7.68. 7.69. The Commission is aware of the problem highlighted by the Court. Its repeated efforts to obtain improvements in the situation from MIDA have not produced the anticipated results. The Commission would stress, however, that in order to supervise the operation it carried out a cross-checking operation () with MIDA and its four founding partners. The errors revealed in the conclusions of the inspection reports as well as the absence of an evaluation report promoted the Commission not to renew the contract when it expired on 31 December 1992. As regards the ECU 175 000 claimed by MIDA and mentioned by the Court, the Commission would point out that this sum covers the entire computer environment necessary for the establishment of a database. It therefore relates not only to the purchase of a PC, which is but one of the many elements of an elaborate infrastructure. At all events, the gradual implementation of the national coordinators networks Euroform, NOW and Horizon will reduce the need to resort to technical assistance bureaux for the management of programmes introduced as Community initiatives. 7.70. The Commission decided not to renew the MIDA contract (see reply to paragraphs 7.67, 7.68 and 7.69). The file has not yet been closed and non-eligible amounts will be recovered in conjunction with the clearance of the accounts. The Commission is also currently looking into the procedure for repossessing assets from MIDA. 7.71. MIDA submitted an application for final payment accompanied by an implementation report. The Commission is currently examining the application in the light of the inspectors' conclusions. The database is now being moved to the Commission's premises. The system established for Poverty III 7.74. Contracts with projects are concluded on an annual basis because the appropriations allocated to the programme are also annual. The application of this rule (and therefore the fact that the projects cannot carry forward unused appropriations to the next financial year) results in underconsumption. The adoption of a multiannual budgetary programming system would make it possible to modulate appropriations in such a way as to take account of unforeseeable difficulties encountered in implementing projects and thereby limit underconsumption. However, such underconsumption is to be attributed not only to the application of the 'annuality` rule but also - and to a large extent - to the fact that some projects do not actually receive all the national, regional or local joint finance or do not receive it within the set deadlines, which causes them to delay or limit some of their activities and impels the Commission to make corresponding cuts in the amount of appropriations which can actually be paid to them. 7.75. (b) The cash data are available in the audit reports produced and submitted to the Court after the audit conducted by the Court in July 1992. (c) The amounts owed to projects were paid as soon as the administrative and financial files pertaining to them were deemed to comply with the rules of the programme. The GEIE A& R contract stipulates that any financial income generated by the management of subsidies remain available to the programme. This is what happened. After the first contract was completed, it was agreed the financial income generated during the term of a contract would be pumped into the budget for the following period so as to ensure the optimum programming of its use. Income generated during a given period is therefore entered in the accounts for the following period. (d) Even if the budgetary estimates for the successive GEIE A& R contracts were drawn up on the basis of the initial tender, the Commission does take account of income generated: on the one hand, the final payment in respect of the first contract was reduced in proportion to the income generated (in the case in question the income earned on the administration and organization account) and, on the other, the financial income is used by GEIE A& R, with the Commission's approval, for organizational activities. Financial income generated during the last period will be booked to the account for that period. In the light of the Court's observations, the Commission will adapt the GEIE A& R contract for that period by introducing a clause stipulating that unused financial income will be deducted from the fees outstanding. Observations concerning the Horizon projects 7.76. The programmes cover the period from July 1991 to the end of 1994 whereas some projects have a shorter lifespan. A number of projects have a lifespan of more than 12 months and are progressing normally despite the fact that they were relatively slow in taking off. As in the case of the other OPs, the Commission has agreed to extend the projects concerned by the Horizon OPs until the end of 1994, which should allow the projects to be properly completed. 7.77. When the decision concerning the 'refugees` OP was adopted, the National Foundation for the Reception and Integration of Greek Refugees (NFRRRG) had just been set up. Payments were therefore made to a body already in existence, namely the Employment Office (OAED). Since then, ESF assistance for the Greek 'refugees` OP has been paid by OAED to NFRRRG, which has carried out the planned activities. The delays referred to by the Commission at the meeting of the monitoring committee for this OP are now being made up. 7.78. It is impossible to predict the results of transnationality since the measures are still far from complete. The Commission stresses the difficulty posed by the implementation of transnational projects and recognizes that major efforts still have to be made in this area. Nevertheless, transnationality is a compulsory criterion for the eligibility of projects as this aspect is mentioned in the Commission's communication of 29 October 1990 on the three Community initiatives. Moreover, one aspect of the audit is to verify compliance with this criterion. 7.79. The technical assistance decisions relating to the preparatory phase of measures allow 100 % financing of the establishment of transnational partnerships of projects. 7.80. In the case of Horizon, it should be borne in mind that audits have already been carried out in France (December 1992), Spain and the Netherlands (January 1993) and the United Kingdom (March 1993). The Commission agrees with the Court that Community activities and programmes focusing on the same target group may, in some cases, lead to undesired overlapping. It will continue its efforts to rectify this situation by means of close coordination of the data already available within its departments and on-the-spot audits. Furthermore, in the framework of partnerships, the Member States will be urged to attend to this problem. As regards the Court's idea concerning the creation of a database, the Commission would point out that this goes well beyond the bounds of the social sector and would, at all events, have to be given thought by all the authorizing departments concerned with the granting of subsidies in one form or another. 7.81. An ex ante assessment has been carried out and an assessment of all activities will be made by the Commission in close collaboration with the Member States once the Community initiative programmes have been fully implemented. A monitoring committee has been set up for each initiative and each Member State. It meets at least once a year and monitors the progress of projects. The information at the Commission's disposal concerning projects carried out in connection with the initiatives is more comprehensive than the data it receives under the OP since, in the case of the former, it has information concerning the end beneficiaries. Observations concerning Poverty III projects 7.89. The scale of the co-financing problems became clear at the end of the first contractual period and the management arrangements were adapted accordingly. On-the-spot audits were carried out during the second contractual period (in respect of the first period) both by the Commission as part of its financial control inspections (three projects) and by GEIE A& R (accompanied by DG V staff) as part of the visits to explain the management rules. The Commission inspected all projects at least once in the first 18 months. 7.90. The irregularities found have been or are being rectified. It should be stressed that irregularities such as double financing by the ESF and the Poverty III programme can only be detected by means of on-the-spot audits. Conclusions 7.91. The Commission audits the accounts of the technical assistance bureau very carefully. The GEIE A& R accounts are inspected by an external auditor. Projects which have been terminated or suspended can only be wound up after some time has elapsed. In the case of the only project terminated (Stuttgart), it was felt preferable to await the results of the judicial inquiry, which is based on co-financing statements, before amounts paid can be recovered. In the case of suspended projects, the priority is to assist projects in difficulty rather than wind them up as soon as something goes wrong. 7.93. The system for the management of the programmes forming part of the CSF can hardly be called unwieldy and expensive. The Commission's aim with these programmes is to assist the Member States - particularly the administrative bodies in charge of setting up large-scale transnational operations in a field where they had little experience - and to meet the specific requirements of operations financed under the Structural Funds. In terms of the ratio between the total budget for financing measures and the cost of technical and management assistance, the Community Initiatives in the field of 'Human Resources` are no more costly than programmes forming part of the CSFs. As regards GEIE MIDA, the Commission considers it wrong to claim that the database was a complete failure as it is now being set up within the Commission's departments. In any case, the non-eligible amounts will be recovered as part of the accounts clearance procedure. 7.94. The Horizon initiative has been characterized by heavy consumption of commitment appropriations while, in the case of payment appropriations, the delays recorded are attributable to the fact that the initiative began behind schedule. However, these delays are now being resorbed. CONCLUDING REMARK 7.95. (a) The assistance measures relating to the OPs for Objective No 3 were approved in the light of the objectives defined in the social plans and the CSFs. As far as the Horizon programme is concerned, difficulties were encountered in carrying out the ex ante assessments because the approach was new and the time available to the Commission for implementing this initiative was extremely limited (see the Commission's replies to paragraph 8.45 of the Court's annual report for 1991). (b) As regards the OPs relating to Objective No 3, monitoring is the responsibility of the monitoring committees which meet at regular intervals and on which the Commission is systematically represented. Moreover, supervision of these OPs has been intensified from the point of view of both quality and quantity. Measures carried out under the Horizon initiative are monitored by a monitoring committee and by the Member State with the Commission represented as regards the various departments concerned. Furthermore, various audits have been and are being carried out on this programme at the level of either the technical asisstance bureau or the Member State. (c) See reply to paragraph 7.80. (d) The objectives, rules and management methods for Community programmes such as Poverty cannot be transposed to measures implemented under the Horizon initiative, which is subject to the rules governing the Structural Funds. Nevertheless, there is a potential for synergy between the various measures, which the Commission is particularly keen to exploit. CHAPTER 8 The European Agricultural Guidance and Guarantee Fund, Guidance Section Management and budgetary control INTRODUCTION FINANCIAL AUDIT Results of the audit in the Member States 8.5 (a, (b) The question of whether the national authorities do or do not have the means to verify the information supplied to them by the regions must be seen in relation to the certification of expenditure which they require from the regional authorities and the management and control procedures set up by the latter. In decentralized Member States the regions are responsible for most of the management and control of measures part-financed by the Community. (c) All the Member States mentioned by the Court have internal control bodies which are separate from the departments responsible for management. However, it is true in some cases that the number of checks carried out by those bodies is insufficient because of a lack of resources. Control and certification procedures 8.6. It is true that in Portugal the administrative departments also carry out checks (Ifadap), but the control bodies, which are independent from the administrative ones, also carry out a posteriori verifications (as in the case of the IGA and the IGF). In the case of Greece, the Ministry of Finance is also responsible for controls. In Ireland, where the administrative authorities are centralized, the internal audit unit is part of the State department which manages EAGGF Guidance Section measures. This unit is directly responsible to the highest ranking official in the department. In addition the Comptroller and Auditor General's office carries out accounting audits in all the ministries. This office is independent and the results of its checks are notified to the 'Oireachtas` (Governmental) Committee of Public Accounts, which in turn notifies them to the Dail (House of Representatives). It must be stressed that the control bodies in most of the Member States are independent of the administrative authorities, and carry out a posteriori verifications of national and Community expenditure. Moreover, at the level of the administration of measures, different checks are carried out by administrators and by regional and national inspectors. 8.7. Although neither of the bodies mentioned by the Court had carried out many checks, they have both gradually increased the number and scope of their checks in the intervening period. In any case, the checks carried out by the 'Intervencion Delegada en la Secretaria del Estado para las Comunidades Europeas` are by no means the only ones carried out by the 'Intervencion General del Estado` in connection with EAGGF Guidance Section operations. 8.8. The Commission takes the view that the Member States generally apply their auditing arrangements satisfactorily. However, there is room for improvement. The shortcomings noted over the years in connection with measures financed by the EAGGF Guidance Section are relatively minor. The Member States, who part-finance the measures, do not pay beneficiaries until work has been completed. The activities of the Monitoring Committees 8.9. Article 25 of Council Regulation (EEC) No 4253/88 and the administrative provisions adopted by the Commission concerning monitoring and assessment by the Monitoring Committees clearly define the powers and the tasks of the Monitoring Committees, namely to regularly monitor the implementation of programmes and to decide on any necessary adjustments, within the limits of their powers. It is not therefore surprising that the Committees should ensure that the funds are fully utilized. On the other hand, their role is not one of control. The task of ensuring that adequate internal control procedures are applied is the responsibility of the national/regional administrative authorities and the Commission. The duration of Monitoring Committee meetings depends on the work they are dealing with. However, it should be added that preparatory meetings are normally held prior to the plenary meetings. Analysis of the proposals is therefore carried out both before and during the meetings. The Monitoring Committees, through their involvement in the administration of the Structural Funds, embody the notion of partnership, which is, by virtue of its novelty in relation to the situation prior to the reform of the Funds, one of the essential elements of the reform. The experience gained since the reform by all those involved will make it possible to improve the system. Controls operated by the Commission 8.11. (a) The Commission has already been practising systems control in the Member States for a long time. It selects the subjects of its inspections on the basis of the variety of systems and measures and on its appraisal of the risks they represent. In view of the increase in the number of measures financed, the Commission, which is aware of the need to increase the effectiveness of its controls, has asked a specialized agency to draw up a control strategy, on the basis of an analysis of the risks of fraud and/or irregularities in connection with the measures financed by the EAGGF Guidance Section, and to ensure that the strategy is actually applied by drawing up an implementation programme. Once the results are available, the Commission will have an effective tool for defining controls. 8.11. (b) Implementation of Article 23(1) of Regulation (EEC) No 4253/88 has been hampered by the difficulty in defining detailed rules for its application. The amendment to the Regulation adopted on 20 July 1993 has solved this problem. The Commission can now make better use of the possibilities offered by Article 23 as amended. 8.11. (c) The Commission feels that budgetary transparency is adequate. Each budget heading specifies the Regulations which it finances. The limited number of budget headings does not affect the monitoring of financial implementation because the Commission's accountancy, managed using the Sincom system, provides all the necessary possibilities. The EAGGF Guidance Section uses the Sincom system in order to monitor the exact state of budgetary implementation of each Regulation, operational programme, Member State and Objective and to draw up various reports ensuring transparency. Conclusion 8.12. The Commission intends to adapt and improve its control methods and those of the Member States (see point 8.11(a)) in order to enhance their effectiveness. Regulation (EEC) No 1118/88: Common EAGGF Guidance Section measure to encourage the development of agriculture in certain regions of Spain INTRODUCTION 8.15. See point 8.19. THE REGULATION AND THE REFORM OF THE STRUCTURAL FUNDS 8.17. The Spanish authorities did not wish the procedures for implementing Regulation (EEC) No 1118/88 to be brought into line with the implementing provisions provided for in Regulation (EEC) No 4253/88. This is their right. Nevertheless, the measure is being implemented in the Objective 1 regions, the Objective 5(b) areas and certain other regions. It therefore had to be taken into account in the Community support frameworks for those Objectives so as to ensure the necessary coherence between this measure and the new operational programmes intended to supplement and extend it. Consequently, the measure has been integrated into the reform with regard to its impact on regional development under Objectives 1 and 5(b). Only the part implemented in the other regions can be considered 'transitional`. 8.18. Given that this measure has been integrated into the Community support frameworks concerned and that they provided for additional operations of the same type as those provided for in Regulation (EEC) No 1118/88, the Commission is at a loss to understand the Court's observation. 8.19. Pursuant to the Financial Regulation, and particularly Article 91 of the Commission Regulation laying down implementing rules for certain provisions of the Financial Regulation, the estimated costs have always been fixed in budget ecus, and not in green ecus. The Commission would also point out that Spain and the Commission agreed, in an exchange of letters within the framework of partnership, on a new allocation between the OPs and measures eligible for financing under Regulation (EEC) No 1118/88. On 18 December 1991 the Spanish authorities presented to the Commission a plan for the implementation of Regulation (EEC) No 1118/88 in Objective 1 regions which, since the eligibility ceilings laid down in Article 7 of that Regulation were not reached, made it possible to increase the resources available for the new measures. This proposal was approved after the STAR Committee had given a favourable opinion and the operational programmes for Objective 1 were approved on the basis of the new allocation between existing measures and new measures decided on within the framework of partnership. Therefore the Commission cannot accept the Court's observations (see point 8.37). 8.21. The amount allocated to the Spanish CSFs within the framework of partnership was established taking account of the financing requirements of Regulation (EEC) No 1118/88 from 1989 and requests for financing of the new operational programmes. If this had not been the case, a smaller amount would have been allocated to the CSFs because the Structural Funds' budget is restricted to the amount laid down in Article 12(2) of Regulation (EEC) No 2052/88. 8.22. Integration of measures under both Regulation (EEC) No 1118/88 and Regulation (EEC) No 4256/88 in the same CSFs ensures a consistent application of both legal bases. 8.23. Article 22 applies to all EAGGF Guidance Section measures for which there were no budgetary commitments in national currencies at the time of its entry into force. 8.24. The Commission Decisions referred to by the Court are in conformity with the rules. It was the Commission's duty to take account of all the financing involved for the Objectives concerned. Article 22 of Regulation (EEC) No 4253/88 and Regulation (EEC) No 1866/90 specify the use of the budget ecu, which applies to all measures. The use of the ecu has no financial implications for Regulation (EEC) No 1118/88. The Community's financial perspective requires the CSFs, which are implemented in budget ecus, to be strictly complied with. IMPLEMENTATION OF THE REGULATION The Spanish implementing programme 8.25. The Commission wishes to specify that the areas of application listed in the Annex to the Spanish programme are all located in less-favoured areas. The Spanish Government, in collaboration with the various regions, took account of additional selection criteria which are more selective than those in Regulation (EEC) No 1118/88 in order to concentrate assistance further. Recourse to this criterion does not contradict the priority needs stated in the Spanish programme. The appropriations were allocated among the different Autonomous Communities after prior concertation between the Communities and the national authorities. 8.26. In accordance with the rules in force, a programme approach (as opposed to an approach by individual project) has been adopted. The programming phase was therefore restricted to establishing the physical implementation objectives and the financial resources needed on the basis of the average costs known by the Spanish authorities which are in charge of almost all the projects. The ceilings laid down in Article 7(2) of Regulation (EEC) No 1118/88 were based on these unit costs, which were also used to calculate the cost of the different measures provided for in the programme. 8.27 8.28. It is very common for changes to be made to a programme which is intended to be indicative. Indicative programming is not imperative. The programme was drawn up in 1988 and involves a complex measure for the improvement of agricultural infrastructures over a five-year period during which Spanish farming has undergone the most sweeping changes in its history, with its full adjustment to the CAP alongside a collateral investment effort under Objectives 1 and 5(b). In anticipation of these circumstances, Regulation (EEC) No 1118/88 provides for the possibility of and a procedure for changes to the eligibility ceilings laid down in Article 7. The Monitoring Committee has studied the necessary adjustments each year. 8.29. There is no specific Basque programme as distinct from the national implementing programme. The Spanish national implementing programme is a summary document which includes various regional sections, which are more detailed and specify individual measures which are not necessarily included in the summary document. The Spanish national programme was discussed by the STAR Committee and approved by the Commission on 24 November 1988. The letter of the Regulation does not preclude the acceptance of expenditure incurred in the Basque Country for telephones for farmers, in so far as the list of eligible expenditure in Article 2 of the Regulation is not exhaustive. The Commission accepted the eligibility of this expenditure after assessing its economic utility in a rural area, in so far as there was a legal basis for so doing. Financial implementation 8.30. The forecasts for measures under the headings of rural roads, irrigation, reparcelling of land and forestry amounted to PTA 109,8 million as against the PTA 85,2 million spent at 31 December 1991, i.e. 78 % of the amount provided for in the programme. Expenditure on rural roads connected with other measures (irrigation, reparcelling, forestry) as well as the forestry work included in the operations to prevent soil erosion had already been provided for in the initial programme. 8.31. The STAR Committee was consulted on certain of the amendments mentioned by the Court before the Commission took any formal decision. In the case of the amendments concerning specific projects within one of the measures referred to in Article 2 of the Regulation, the Commission does not consider that it was legally necessary to consult the STAR Committee. Eligibility of expenditure 8.32. The Commission does not consider Article 2 of Regulation (EEC) No 1118/88 to be particularly vague. It is rare for the criteria of eligibility of expenditure undertaken on the basis of a common measure introduced by a Council Regulation to be defined in detail in the Regulation itself. The Spanish programme defines the work to be carried out and the aid to be regarded as eligible in sufficient detail. The Monitoring Committee, within the limits of its powers, has examined and decided on specific problems which could give rise to dispute. It is not possible to provide for all cases in advance, distinguishing between what is and is not eligible. The eligibility conditions are described in detail in the national implementing programme. 8.33. The decision approving the national programme was adopted on 24 November 1988. However, it provides for retroactive application from 1 May 1988 (Article 3 of Decision 88/608/EEC) to public expenditure by the Spanish Government in order to take account of measures under way which were already receiving State financing and which fitted perfectly within the framework of Regulation (EEC) No 1118/88. The Commission therefore disagrees with the Court's view that this way of applying the regulations is irregular. There was specific programming under this Regulation to take account of existing national programmes in so far as these programmes were drawn up to meet continuing needs. In the Commission's view, the Regulation allows for retroactivity with respect to expenditure. Accounting management 8.34. When the Commission carried out its audit it verified, on the basis of files kept by the regional authorities of Asturias and Castilla-Leon, that projects being financed could be identified and checked by means of the accountancy coding system used. However, since the nature of the measures being financed and the geographical area in which they are located are the same irrespective of the source of finding, the Commission drew the attention of the Spanish authorities to the potential danger of double financing and insisted that all projects financed under Regulation (EEC) No 1118/88 should therefore continue to be financed under that Regulation until their completion, while all projects financed under an operational programme should be kept separate from those financed under the common measure. Applications for reimbursement 8.35. The corrections to which the Court refers have generally been made on the initiative of the Spanish authorities and the Commission views them more as evidence of continuous and correct monitoring than as a sign of unsatisfactory management of the files. 8.36. As a result of the Court's observation, the Commission has asked the Member State to verify the files concerned. It will apply the correction to a later reimbursement. 8.37. The allocation of appropriations among the different regions was not unilaterally fixed by the Spanish authorities, but was negotiated between the central and regional authorities concerned. In this way an agreement was reached which none of the parties concerned wish to place in question. It is difficult to justify any proposal to change the amount allocated to each region when there is no risk that the appropriations will not have been utilized by the end of the period of application of the programme, particularly when one considers that the appropriations are part of the overall funding granted to each region within the framework of the reform of the Structural Funds. The danger that certain expenditure will not be reimbursed, and particularly the risk pointed out by the Court that appropriations will be lost, has not materialized to date. Within the limits laid down for each region, how appropriations are allocated to different measures can be changed in accordance with the objectives of a programming which is deliberately indicative rather than binding. Not only would the transfer of appropriations between regions violate the legitimate financing expectations of those regions whose funding was reduced, but it would also give rise to changes in the initial plan, something which the Court has criticized repeatedly. The fact that certain regions have absorbed their appropriations more quickly than others does not mean that the measures in question have priority over the same or other measures in different regions. IMPLEMENTATION OF THE MEASURES Rural roads 8.38. The financing of asphalt farm access roads falls fully within the scope of the national implementation programme. The Court refers to a sentence in the Spanish programme without taking account of the context in which it is situated and from which it is clear that this is a description of technical criteria normally used in road construction. However, in the specific case of the Basque Country to which the Court refers, those responsible at regional level considered the technical solution of asphalting to be best suited to local conditions (gradients, rainfall, etc.). 8.39. Telephones are part of the infrastructure requirements. The letter of the Regulation does not preclude this expenditure from being taken into account, in so far as the list of eligible expenditure in Article 2 is not exhaustive. Irrigation works 8.40. The collective irrigation projects were examined at preparatory technical meetings of the Monitoring Committees. In addition, these projects have all been presented within the framework of a general transformation plan kept at the Commission's disposal by the Spanish authorities. Reparcelling of land 8.41. Related operations represent almost all of the investment in all reparcelling projects and therefore also in those provided for in the programme. Regulation (EEC) No 1118/88 does not require the reparcelling projects presented to be new. Related operations are therefore not only eligible in the case of new reparcelling projects. Reparcelling operations consist of two parts: redistribution of land with a view to reducing the number of plots per holding (reparcelling proper) and provision of the infrastructure needed to farm the new holdings (related measures). The cost of the technical and legal components of the first part is very low in comparison to that of the second part, i.e. the provision of infrastructures. The latter part is absolutely essential to the reparcelling process and its financing is fully justified. Prevention of soil erosion 8.42. Article 2(4) of the Regulation provides for the measures cited by the Court, but also for forestry measures. Furthermore, the programme grants priority importance to these measures (second and third paragraphs on p. 61) in the prevention of soil erosion. Reafforestation can often be seen more as a measure to prevent soil erosion than as an afforestation operation. Forestry 8.44. The accounting code system used makes it possible to identify and verify the projects being financed, as ascertained by the Commission during its inspection visit in Spain. Improvement of farm housing 8.45. Only in Extramadura and the Basque Country was there any demand, and that very low, for application of this heading. In view of the lack of interest by potential beneficiaries and the financing requirements under other headings, the Spanish authorities proposed that the resources be transferred to other areas of assistance. The Commission and the STAR Committee acceded to this request. 8.46. The authorities responsible have informed us as follows: - In the first example, the owner is living in the new house. - In the case of the building to be used as a barn, the Basque authorities accept that the official responsible should have mentioned that the building was intended for a different use when certifying the completion of the work. - In the case of the new house, this is a residence for young farmers working together in greenhouses for intensive horticultural production. It cannot be regarded as a second home. - Lastly, in the case of the fourth file, the Basque authorities have pointed out that Regulation (EEC) No 1118/88 does not preclude retired persons, particularly those receiving agricultural social security (as in this case), from benefiting from this kind of aid. The Basque authorities state that 28 % of those running farms in the Basque Country are over 65. ADMINISTRATIVE MANAGEMENT By the Commission 8.47. The Commission takes the view that the administrative structure that it has chosen best suits its management requirements. By Spain 8.48 8.50. The Commission liaises with the central authorities. Although the Spanish state is highly regionalized, this does not exclude the possibility of real collaboration between the central and regional authorities, which is in any case formalized in the system of 'convenios` whereby an annual undertaking is signed by Madrid and the different regions for the implementation of Regulation (EEC) No 1118/88 (selection of projects and financial commitments by the parties involved), and monthly meetings are held between IRYDA, ICONA and the regional authorities with the sole objective of analysing the progress of projects financed under the Regulation. In the Commission's view, these meetings ensure satisfactory and harmonized coordination. For each project receiving aid under Regulation (EEC) No 1118/88 there is a technical file (containing documents like socioeconomic studies, justification of works, etc.) and the administrative dossier proper. The Commission would not fail to draw the attention of the Spanish authorities whenever necessary to any need to improve the supporting documentation required for control purposes. 8.51. The Commission has pointed out these shortcomings. The Spanish authorities have replied that the absence of signs mentioning the Community's contribution is due to ecological considerations (impact on the countryside). The Spanish authorities will be asked to make a further effort to ensure that beneficiaries and the wider public are better informed. Monitoring 8.52. The Spanish regions are very closely involved in the management of Regulation (EEC) No 1118/88 through the monthly meetings with the central authorities. There are also regional monitoring committees which meet to deal with specific questions. Projects in areas not covered by the Objectives are monitored as closely as projects in the other areas. The Commission's representatives on the Monitoring Committee are responsible for Objective 1 regions and non-Objective 1 areas (5(b) and other). 8.53. The Commission considers that it is not legally necessary to consult the STAR Committee on the amendments to which the Court refers. Control 8.54. The checks made by MAPA (Ministerio de Agricultura, Pesca y Alimentacion) relate to the regularity of both national and regional expenditure and Community expenditure. Consequently, as a result of the checks carried out by the central authorities, many applications for reimbursement sent by the regions are refused each year, as shown by the amounts involved in the various recovery operations. 8.55. The eligibility of each project was analysed at the monthly meetings of IRYDA (Instituto de Reforma y Desarrollo Agrario) and the departments of each Autonomous Community. Because of the nature of the measures concerned, it is very difficult to establish annual physical indicators. Full data will be sent by the Spanish authorities once implementation of the programme has been completed, and not at yearly intervals. At that time the Commission will be able to carry out a full verification of compliance with the physical limits laid down in Regulation (EEC) No 1118/88. 8.56. The Commission's checks must be carried out on the basis of a sample taken from all the projects under all the measures. The conclusions of the inspection visit are drawn up on the basis of the results obtained from verifying this sample. It is therefore clearly physically impossible to make an exhaustive check on all the measures which make up a programme. The Court is referred to the reply to point 8.11 with regard to the Commission's inspection method and the obstacles it encounters. During its inspection, the Commission also questioned the eligibility of certain expenditure. A letter of recommendation was sent to the Spanish authorities in order to improve the interpretation of the Community rules. Evaluation 8.57. The Court is correct in quoting the interim report on the progress of the measure which was sent to the Council on 4 February 1993. The Commission said what it felt it had to say at that stage. The full evaluation including the impact of the measure will only be possible once the measure has been completed (see point 8.34). CONCLUSION 8.58. (a) Implementation of the programme involves the participation of thousands of public and private players at local level. In such conditions, and in the context of a rural economy in full transition as a result of membership of the Community at the same time as administrative structures are becoming more decentralized, it is inconceivable that the programme could remain unchanged from 1988. It has therefore been adjusted to take account of these factors. 8.58. (b) Infrastructures (which concern not only roads but also electricity and water supply) and forestry initially accounted for 46 % of the programme. At the last amendment, these measures accounted for 57 % of the total. The share remaining for the other measures was therefore reduced from 54 % to 43 %. 8.58. (c) The amounts allocated to Spain for the implementation of Objectives 1 and 5(b) had to take account of the expenditure arising from the application of Regulation (EEC) No 1118/88 in the areas concerned. However, the overall amount originally allocated to Spain has not been reduced. The appropriations have not been cut, but have been allocated differently, as explained in point 8.21. 8.58. (d) The Commission considers that its implementation, monitoring and control have been carried out correctly. The inspection report shed light on certain shortcomings which the Spanish authorities have promised to rectify. 8.59. The objective of Regulation (EEC) No 1118/88 is to expedite agricultural development in certain regions of Spain and thereby to improve economic and social cohesion (Article 1). To attain this objective, the amendments to which the Court objects were considered necessary by the Monitoring Committee, were presented to and approved by the STAR Committee, and finally adopted by the Commission. The Commission believes, subject to the final results of the measure, that its progress to date is satisfactory and that it is well within the objectives of Regulation (EEC) No 1118/88 and the Spanish programme. CHAPTER 9 Loans, borrowings and interest-rate subsidies INTRODUCTION Observations on the balance sheets and revenue and expenditure accounts for the NCI, Euratom and balance of payments mechanisms 9.2. In the interests of administrative efficiency, which is a matter close to the Court's own heart (1982, 1984 and 1988 Annual Reports, Chapter 2), the Commission - wishing to avoid any unnecessary increase in the number of bank accounts - opens new accounts only when it deems them absolutely necessary. In 1992 the Commission opened only one new bank account to cover highly specific financial transactions carried out outside the Community to which a degree of risk attached. This account was used for the first instalment of the loans granted to the countries of the former USSR in April 1993. In order to comply with the wishes of the Court of Auditors, the Commission is prepared to open special bank accounts to show NCI and balance of payments operations separately from other operations carried out within the Communities. It should be noted, however, that financial operations under the balance of payments facility are very infrequent and that they are, of course, recorded quite separately in the Commission's accounts. Audit of NCI loans and interest-rate subsidies in Member States 9.8. and 9.15. In accordance with the Council Decision authorizing the NCI (1978), the mandate given to the Bank to grant loans was embodied in a Cooperation Agreement between the Commission and the Bank. This Agreement gives the Bank responsibility for administering and monitoring the loans and did not stipulate that annual progress reports on projects should be transmitted to the Commission. According to the subsequent versions of tripartite audit arrangements, progress reports for projects to be visited are to be made available on request. Moreover, the evaluation reports produced upon completion of NCI projects are regularly forwarded to the Commission by the Bank. Finally, all the analyses submitted to the Board of Directors are forwarded to the Commission by its representative on the Board. 9.10., 9.13, 9.19. In this type of project financing, forecast completion dates are often indicative and slippage of actual completion dates as compared with pre-established timetables are endemic. 9.11 and 9.17. As stated in the Evaluation Report, 95 % of the project was completed with an overall delay of 2Â1⁄2 years with respect to the initial completion forecast. There was no delay with respect to the revised forecast. 9.12. second sentence and 9.17. last sentence. The Bank's evaluation report does not deal with the creation of the 74 jobs planned in the project because job creation was not its main objective. In fact, these jobs were actually created, since they are technically necessary for operating the waste water treatment plant. 9.15. The Commission stresses that the projects were fully implemented after modification and, as the Court acknowledges in paragraph 9.17, have contributed to Community policy objectives. It is self-evident that cost estimates are always subject to uncertainty and variations from initial forecasts occur for a wide variety of reasons. 9.17. third sentence. The role of the Bank as mandataire has been referred to above. The Bank regularly indicates project delays in its annual progress reports and it takes restructuring action when necessary in consultation with the national authorities. Moreover, following consultations with the national authorities a system was introduced in 1983 whereby EIB-financed projects were, inter alia, assured of priority in allocation of budgetary funds, thus eliminating in the following years the causes of many of the delays experienced earlier. 9.20. The reference in paragraph 20 to use of collaudo certificates should be seen in the context of the fact that these were not complete records of investment cost but documents, drawn up by engineers to certify that the main works were correctly executed and to make proposals about payments due to contracting enterprises. As the Court rightly pointed out, these documents have therefore not been used for the control of these project costs. The only definitive and comprehensive source of cost statements for the project is the beneficiary's own records. 9.21. The procedure followed enables the final cost of the project to be determined with precision. The Bank's monitoring procedures adequately ensure that project costs are carefully controlled. 9.6., 9.24 and 9.25. The essential point made by the Court in these paragraphs is that the Bank does not carry out audits of its clients. The Bank monitors, and neither audits, nor claims to audit, its clients. During appraisal and follow-up the Bank ensures that beneficiaries keep proper records of costs, which is a contractual obligation. The Bank's mandate stemming from Article 5 of the Council Decision of 16 October 1978 (78/8/70 EEC) and confirmed by subsequent Cooperation Agreements, was to proceed to make the loans in question and administer them according to the criteria used for its own loans. The Bank faithfully observed this mandate. 9.25. The cooperation agreement between the Commission and the Bank allows both institutions to play their full roles in the lending policy process. The financing of projects nevertheless requires a degree of flexibility in applying the lending policy so that in practice the tasks of the Commission and the EIB can be carried out as efficiently as possible. 9.26. The Court has explained the technical reasons for the delay to the water supply project. Leaving aside the delay due to exceptional circumstances, the Court has had the opportunity to audit two projects which were exemplary from the technical and financial points of view. These audits revealed that the implementation of these projects met the desired objectives. CHAPTER 10 Research IMPLEMENTATION OF THE BUDGET AND FINANCIAL AUDIT Evolution and utilization of appropriations 10.2. Not all payment appropriations could be utilized owing to the delay in adopting some of the specific programmes (Human capital and mobility, Measurement and testing, Biotechnology), the deadlines set by the Council's work programme (Materials technology), and the length of time needed to finalize multiparty contracts (in which the number of participants is increasing steadily each year for most of the specific programmes of research and technological development (RTD)). 10.5. As indicated by the Court, the incomplete utilization of the appropriations earmarked for the JRC in 1992 was the result of the low level of work for third parties, resulting in the repayment of part of the funds initially advanced for these activities, and of the budgetary authority's decision to accept only part of the transfer of appropriations submitted to it, thus making it impossible to execute the remaining part. Financial audit Results of the audit 10.8. The difficulties encountered by DG XII in managing the third RTD framework programme were linked to the fact that, in contrast to the second framework programme, all the specific programmes have to be adopted and implemented at the same time. In addition, the current rules allow less flexibility, making efficient management difficult. For this reason the Commission plans to hold discussions with the Council and the European Parliament in the second half of 1993 to look for more appropriate management methods for the fourth framework programme. THE FIRST THREE FRAMEWORK PROGRAMMES Implementation 10.16. The Commission would have liked the Court to also examine the constraints linked to committee procedures. THE COURT'S OBSERVATIONS Content 10.19. (a) The accompanying and support activities (APAS) are one-off activities limited in time which fall within the Commission's budgetary implementation powers. In accordance with the provisions of the Treaty on European Union (Maastricht Treaty), the fourth framework programme will encompass all the Community's research, technological development and demonstration activities, including the accompanying and support activities. This means that international scientific cooperation will be programmed in future on a multiannual basis. The same will apply to other programmes such as Sprint. (b) The second and third framework programmes include support for demonstration activities which are designed to demonstrate the feasibility of the prototypes or procedures in question. Projects to demonstrate economic viability, on the other hand, were excluded from the scope of these two framework programmes, as support for them was provided under the sectoral policies for the specific field concerned (agriculture, energy, information, etc.). This was the result of an agreement between the Commission and the Council on the interpretation of the concept of demonstration as referred to in Article 130g(a), (b) and (c) of the Treaty (see point 199 of the Institutional Vade-mecum). (c) Research activities in the coal and steel sectors fall within the scope of the ECSC Treaty. Financial support is granted on the basis of a Commission decision within the section of the budget relating specifically to that Treaty. Evaluations of the second framework programme 1987-91 10.21. (a) The time which elapsed between the framework programme proposal and the launch of the research projects was due to the way in which the institutions operate (lengthy procedure for adoption of programmes by Council and European Parliament, consultation of various bodies), and to the constraints on the selection, organization and launch of the projects. In a bid to optimize cost effectiveness, the Commission scrutinizes research partners carefully and assesses their compatibility in order to achieve the kind of synergy which will enable the goals to be met in the best conditions possible. (b) The framework programmes focused in turn on energy (1984-87), information technology and industrial research (1987-91), and, in the case of the third framework programme, on life sciences and human resources (1990-94). This reflects the wish to maintain a certain diversity in a field where variety is frequently an asset. (c) Pre-competitive R& D activities achieve their full impact only after an average of 10 years. A five-year programme therefore has to reconcile continuity and new elements. As far as direct action programmes are concerned, which involve a wide diversity of participants, the length of the programmes is an important factor in their success. As regards RTD activities related to basic research, the multidisciplinary approach requires continuing support in order to obtain results, usually in the longer term. However, this does not rule out more rapid results being obtained, as in the case of biotechnology. (d) The rules governing the implementation for the framework programme come under the Financial Regulation. The legislative and budgetary authorities did not adopt all the Commission's proposals to make the provisions relating to RTD more flexible. (e) Starting at the preparation stage, the framework programme offers Member States the opportunity to assess the extent to which national and Community research efforts can interact and complement each other. However, coordination of national policies is one of the specific goals of the fourth framework programme, which aims to set up structures in which the Member States will have an important role to play, using concertation networks and consortia for integrated projects. Cooperation will be facilitated by the positive results of Community research as regards indicators of scientific performance (publications, citations) and the setting up of networks between the numerous public and private participants involved in these activities. 10.22. In accordance with the decision on the second framework programme, evaluations of each specific programme were also carried out by teams of independent experts. Similarly, studies relating to the impact of RTD on national scientific and technical activity were conducted, at the Commission's initiative, in collaboration with the national research bodies. 10.23. The Commission communication on the evaluation of the second framework programme contains an analytical section based on a large number of reports and impact studies conducted outside the Commission. The annex to the document also contains a sheet on each specific programme giving details of its particular features. The evaluation was carried out in strict accordance with the objectives laid down by the Council Decision of 28 September 1987 on the second framework programme. (a) The objectives underlying the themes of the framework programme were dealt with fully. Thus, the direct and indirect economic effects of the research programme on industrial and materials technologies were evaluated on the basis of a broad sample of industrial participants. (b) The evaluation report SEC(92) 675 concludes that the initial results of the second framework programme undoubtedly strengthened the scientific and technological base of European industry as regards both scientific activity and standards. This assessment was broadly echoed by the report forwarded to the Council by CREST (CREST 1212/1/92). Furthermore, there is no contradiction between the wish to make European industry more competitive and the cohesion principle, given that the participation of the less-favoured regions in research into leading-edge technologies also helps enhance their competitiveness. The evaluation carried out by a committee of independent experts in accordance with the programme decision found, moreover, that Community RTD activities had made a substantial contribution to establishing a research Community. Thus, for example, the efforts under the Stride and STAR programmes to improve research and telecommunications infrastructures in the less-favoured regions, the inadequacy of which acts as a brake on integration, are designed to get organizations in these regions - and especially SMEs - even more closely involved. (c) The weighting given to the various means of financing RTD (indirect/direct/concerted action) depends very largely on the type of research concerned and the organizations involved. Funds are allocated on the basis of requirements at the level of the specific programmes. The Community's financial contribution goes exclusively to precompetitive research projects. Projects with direct commercial implications come under the Eureka scheme, with which the Commission has close ties. For the fourth framework programme, the Commission is proposing the establishment of a fund for technological integration aimed at SMEs in particular. This will encompass a set of financing facilities for putting new technologies to work in companies. The fund will make available a whole range of instruments in addition to venture capital incentives (loan guarantees, interest-rate subsidies, technical and administrative assistance). It is designed to ensure that the resources committed by the financial intermediaries are mobilized to the full, respecting the particular situation of each country and using locally-based organizations. (d) The framework programme is a medium-term scientific and financial planning instrument, and the proposal for the fourth framework programme makes specific reference to the need for flexibility. This flexibility will also be reflected in the specific programmes in the fact that a proportion of the sums allocated is to be reserved for unsolicited proposals. (e) Until 1991, when there was a divergence of opinion on the interpretation of Article 130p, as pointed out by the Court in its observations (10.34-10.40), the framework programme contributed sufficient stability to financial planning. Weaknesses of the third framework programme 1990-94 10.26. (a) It is true, as Table 10.4 shows, that the time taken to adopt a legislative decision was longer than planned. This was due to the fact that the cooperation procedure did not adhere to the timetable initially proposed by the Commission, in spite of the fact that the latter forwarded all its proposals for specific programmes (including those concerning the JRC) within the deadlines agreed with the other institutions. The budgetary authority, moreover, had agreed to this timetable since the appropriations entered in the 1991 budget (reserve B-O-40) were, in line with the Commission's request, sufficient to enable the new specific programmes to be launched in step with the legislative procedure. (b) The Commission remedied certain administrative weaknesses by adopting a number of measures on 15 July 1991 - to which more were added in early 1993 - relating to the organization of its departments and designed to ensure more effective management. 10.28. The Commission has taken note of the Court's criticism of the time taken to implement programmes. However, this criticism is not applicable to Community industrial research activities, since programmes such as RACE were implemented barely seven months after the Council decision. Where the other programmes are concerned, the delays were due to the fact that the number of participants per contract increased between the second and third framework programmes. This made negotiation of the contracts more complicated and, as a result, somewhat lengthier. In any event, the effectiveness of the Commission's activities cannot be assessed solely on the basis of the financial support provided; account must also be taken of the transnational scientific cooperation which is established as soon as the call for proposals is published. 10.29. The number of research programmes was reduced by more than half between the second and third framework programmes. 10.30. The Monitor programme and the centralized activity of disseminating and utilizing results constitute two different programmes coming under separate budget headings. It goes without saying that the findings of one may benefit the other. 10.31. The Commission shares the Court's view as regards the lack of flexibility of the financial and legislative framework for research. It intends to make fresh suggestions in the context of its proposals on the management of the fourth framework programme. 10.32. The framework programme encourages coordination of national activities in the areas of research supported by the Community. The framework programme as such cannot provide for coordination initiatives outside this sphere. The Commission, particularly within CREST, has taken steps to promote such coordination in accordance with Article 130h of the Treaty. The framework programme as an instrument of financial planning 10.34 10.40 The difficulties encountered with the JOULE programme stem from the fact that, unlike in the Member States, the legislative and budgetary authorities are separate at Community level. The Commission stated its position on this subject in the context of the discharge of the 1991 budget. Implementation of the second framework programme 10.41. The difficulty in providing a breakdown of payments effected between the first and second framework programmes is due to the fact that the payment appropriations for both framework programmes were entered under the same budget heading. In order to improve budgetary transparency, the appropriations for the third framework programme have been entered under different headings from those for the second framework programme. The third framework programme 10.43. The first tranche of the third framework programme (1990/92) was implemented in accordance with the Decision on the framework programme. CONCLUSION 10.44. (a) Despite the cumbersome procedures involved, the evaluation and impact studies carried out show that the cooperation networks established by the framework programme, in which a wide variety of institutions engaged in basic research, technological and industrial research participate, have a measurable economic impact, and influence research in the Member States. (b) The tendency to renew themes reflects a renewal of the projects themselves, which develop as the research progresses. In its proposal for a fourth framework programme (COM(93) 276), the Commission places particular emphasis on the 'concentration` of research efforts and the need to coordinate national activities. (c) The second framework programme was analysed thoroughly, including by CREST and the European Parliament. In addition, studies concerning the impact on scientific and technical activity at national level were published for each Member State. 10.45. In the context of preparing the fourth framework programme the Commission has studied all the points raised by the Court in its final recommendations. CHAPTER 11 Cooperation with the Countries of Central and Eastern Europe and the former Soviet Union INTRODUCTION Aid to the former Soviet Union 11.3. The aid operation to the former Soviet Union did not start until the spring of 1992. While financing decisions had been taken in December 1991, the break-up of the Soviet Union at the end of 1991 led to unexpected problems and delays for the start-up of the programme. OBSERVATIONS ON BUDGETARY MANAGEMENT Payments 11.10. The difficulties encountered by the Commission in observing the 60-day deadline for the payment of invoices are due to the very sharp rise in the number of invoices dealt with. This is a result of the stepping-up of the PHARE programmes and also the implementation of the TACIS programme. The number of transactions recorded during the second half of 1992 is 2 154, as compared with 1 340 in the first half, i.e. an increase of 61 %. It is difficult to absorb growth on this scale, and the difficulties have been worsened by the poor quality of the payment files sent by contractors: documents which are not the originals, supporting documents missing, etc. Measures have since been taken to shorten the time taken and inform contractors of the form that payment files sent to the Commission should take. Settling advances 11.11. Following the remarks made by the Court in its 1991 report, the Commission has set up a system for monitoring programmes for operations carried out by management units in the beneficiary countries (Phacsy). The sum of ECU 28.5 million mentioned by the Court as having been settled by the end of 1992 corresponds to the payments made on the spot by the maangement units using the advances received from the Commission and justified to the Commission via Phacsy. The implementation of Phacsy in about two-thirds of the management units has made it possible to record up to 31 May of this year payments totalling ECU 81.8 million, out of a total of ECU 308.3 million paid in the form of advances. 11.12. The payments made are subject to an audit by the Commission resulting in audit reports. The audit reports produced up to mid-1993 made it possible to settle advances for a total of ECU 65.5 million. The fact that Phacsy will soon be used by all the management units and that the audits by independent outside firms will take a systematic form should make it exceptional for advances to be paid without audit reports on previous advances. NUCLEAR SAFETY 11.14. It is true that the launching of the TACIS nuclear safety programme has been slow. It was nevertheless when the 1992 action programme was prepared, following an important mission to Moscow in October 1992, that a proper policy for action in this sphere was established. In particular, the concept of assistance on site, which is now being implemented, has been developed. The TACIS nuclear safety programme 11.18. The ISTC Agreement has still not been ratified by Russia and so at the end of June of this year it had still not entered into force. The Centre is therefore not operational and it has not been possible for any payment to be made. The PHARE programme for the nuclear sector in Bulgaria 11.19. The financing memorandum for the nuclear safety programme was concluded in July 1991. The contracts relating to the most urgent part of the operation (housekeeping and management assistance) and covering more than 50 % of the total budget were concluded in October. Most of the contracts relating to the generic studies were indeed concluded approximately six months later for two reasons. In the first place it took some time to set up the tender in order to ensure that normal tendering conditions were applied. In the second place, after the tender was evaluated in January, the companies selected hesitated to sign the contracts because of the liability and the third party liability clause. They finally agreed on the compromise at the end of April. 11.20. The energy restructuring programme was negotiated with the Bulgarian authorities in the middle of 1991. The Commission has defined a common position with the international financial institutions, along the lines of the energy sector report to the World Bank, and has consistently presented this point of view to the Bulgarian authorities. The delay in the signature on the Bulgarian side is due to administrative difficulties, combined with changes in Government. The Commission's management 11.21. The fact that there are two budget headings for assistance for nuclear safety does not prevent coordination or effective implementation of programmes in this sector. 11.22. Since April of this year, PHARE and TACIS nuclear safety operations have been conducted under the supervision of a single unit (I/E/4). This unit works in close conjunction with the departments also concerned with the programming and implementation of the nuclear safety programmes. 11.23. An appropriate framework for cooperation between the G-24 and the EBRD Multilateral Fund was established when the rules for this Fund were adopted in February this year. 11.24. The Commission shares the Court's concern regarding the need to keep a strict check to ensure that its financing cannot be diverted for military purposes. 11.25. The Commission shares the Court's concern and is endeavouring to promote collaboration with local experts. For the implementation of projects under the 1991 TACIS programme-nuclear safety, the contracts concluded by the Community with its contractors systematically provide for the participation of local firms. ENVIRONMENTAL PROTECTION IN THE PHARE PROGRAMME 11.27. The first 1991 GTAF Environment Programme for Romania is well under way. Out of ECU 2.1 million, the sum of ECU 1.9 million has been contracted. The second 1992 Romanian Environment Programme has been delayed owing to a change in government in Romania at the end of last year and an associated change in environmental policy. With respect to the ex-GDR, the problem of slow disbursement is similar to those in the other PHARE countries with the added constraint that, after unification, the German Ministry of the Environment was reluctant to adopt the EC PHARE approach and procedures. 11.28. In 1989/90 when the PHARE Environment Programmes were first started they formed an emergency response. The projects and feasibility studies were of high priority and technically sound but it is accepted that owing to circumstances they were not always directly linked to the transition process towards a market economy and the development of associated environmental management capacities. With respect to the construction of water treatment works, it is a fact that for a small town one such system represents a major investment, costing millions of ecus, if it is to meet Community standards and could consume the whole PHARE environment budget for the country concerned. Only the international financing institutions (IFCs) have the necessary financial know-how and experience to carry out investment operations of this kind. That is why the Commission has financed various pre-investment studies on the environment under the Bangkok Agreement with the EBRD and is increasingly incorporating such studies in cooperation with the IFCs into the national programmes. 11.29. The project was specifically requested by the Government of Hungary as part of its Action Programme to Safeguard Man and the Biosphere. 11.31. The Commission has provided training and spare parts in order to facilitate the use of equipment and to ease the burden for the local operating budget. With respect to the 200 projects proposed by the Hungarian Government for financing in the 1991 Environment Programme, the Commission recongized that this uncoordinated 'project approach` was unacceptable and has now implemented a programme approach, which in Hungary has now taken the form of putting a proportion of the PHARE money into the existing Hungarian Environmental Protection Fund where, according to clearly defined criteria, it can be used to finance environmental protection measures.'Regional Environment Centre` 11.33. The Commission recognizes that there have been problems with the management of the Regional Environment Centre (REC) in Budapest. Notwithstanding the difficulties in solving these problems due to the complex political factors involved, the Commission took the lead in developing an acceptable solution to these problems. This was achieved by using consultants to assess the management and aims of the Centre and to suggest how it could be reorganized to provide a more balanced approach. The conclusions of the report recommended the introduction of: new budgetary procedures, a new charter, a new board of trustees, a new advisory board, a revised strategy and management structure and a new executive director and chairman. These recommendations have been adopted and are now in place and the Commission is confident that the REC now has a structure and staff that will enable it to fulfil its duties in an effective and responsible manner. PRIVATIZATION Russia 11.41 11.42. The strategy which the Commission is following in order to support the reforms does involve pilot projects, and the experience gained from these can be put to further use. This applies, for example, to the project for privatizing an industrial bakery in Tomsk. A full description was given of this project, when it had been completed, in a file which was available for consultation by any bakery seeking privatization. This strategy is obviously slower since the implementation of reforms on a large scale cannot take place before the pilot projects have yielded results. THE PHARE AND TACIS FUNDS ALLOCATED TO THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD) 11.45. It is difficult in some cases to determine precisely beforehand whether an operation will lead to EBRD capital projects. According to an evaluation report sent by the EBRD in December 1992, at least nine lending operations had followed a technical assistance operation financed under the Bangkok Agreement. Under this Agreement, the Commission has always made its financing subject to the existence of specific investment potential. 11.46. The prior approval of projects is a sufficiently precise and binding basis to allow a commitment to be made in accordance with Article 36 of the Financial Regulation, which states that 'all measures which may give rise to expenditure chargeable to the budget must be preceded by a proposal for commitment`. 11.47. The Commission clearly indicated to the EBRD that it was acting on its own responsibility, without any commitment on the part of the Commission, in the case of operations for which it had arranged an invitation to tender before preliminary approval of the project by the Commission, with non-Community firms included among the candidates in some cases. The EBRD had been informed that it might have to finance the operation from other sources in the event of the Commission's refusal. Only a few cases were involved; they had arisen in the early stages of collaboration between the two institutions and were already being dealt with. The coordination between the EBRD and the Commission and other funding agencies such as the World Bank has greatly improved since the early stages of implementation of the Bangkok Agreement. The operating machinery of the Bangkok Agreement has institutionalized this cooperation and helped to encourage the EBRD staff to pay attention to coordination. 11.48. The Commission has already raised with the EBRD the problems caused by the uneven geographical distribution of firms selected and the particularly high rates of certain fees agreed to by the EBRD. The EBRD has always stressed the qualitative aspect of its projects in order to justify the fees accepted, which are as a rule the result of an invitation to tender and which therefore reflect market conditions. It is still necessary to differentiate between cases, since market conditions can vary significantly from one sector to another. The EBRD seems willing to pay more attention to the price aspect in its evaluation of tenders. For its part, the Commission stressed that the EBRD should align more on the rates generally applied by the Commission. An exchange of information has also been introduced between the two institutions concerning rates in the various sectors. 11.49. The Commission has in fact had to remind the EBRD that the contract could not be signed until after duly notified acceptance by the Commission of the draft contract proposed, and that acceptance could not have retroactive effect. Other management shortcomings have also been pointed out. 11.51. For the continuation of the Bangkok Agreement, the Commission has proposed to the EBRD a series of improvements in the management of operations, which take account of the experience acquired. These improvements will concern improved coordination between task managers in the two institutions, more systematic participation of Commission staff in the choice of consultants, and selection criteria which encourage competition on prices. Evaluation will take place in the course of this year when a significant proportion of the studies have been completed. 11.52. The Commission decides on the financing of technical assistance operations proposed by the EBRD on the basis of a number of criteria, which include the potential for attracting investment, and compatibility with the criteria agreed between beneficiary countries and the Commission when PHARE and TACIS programming is done. The respective capacities of the two institutions in terms of professional know-how and management in the spheres concerned are also taken into account. HUMANITARIAN AID Aid sometimes unsuitable 11.53. The food aid programme for certain Russian towns adopted in December 1991 by the European Council in Maastricht was implemented in four successive stages: ECU 5 million, ECU 10 million, ECU 85 million, then ECU 100 million. This approach has enabled the Commission to take into account the requirements and absorption capacity of the towns concerned. On the basis of the evaluation by the Commission Delegation in Moscow, comprising an operational team of experts from the Member States and from three consultancies (EuroPA, SGS and GTZ), the Commission endeavoured to take account of local needs throughout the operation. The Member States were closely involved in its administration. 11.54. Humanitarian aid of ECU 5 million made it possible to cover the immediate requirements of the poorest sections of the population as regards food and medicines. In order rapidly to meet requirements identified locally, to guarantee as far as possibly the safety of the supplies (particularly in the case of sensitive products such as drugs or baby food), but also to demonstrate the European Community's support, some of the products were sent by air. The French, German and Luxembourg Governments bore the cost of most of the flights. This contribution from the Member States to the humanitarian operation concerned 580 tonnes of food (out of a total of 2 600 tonnes) and 151 tonnes of drugs (out of a total of 271 tonnes). With the aim of rationalizing deliveries but also reducing transport costs, an increasing amount was sent overland. 11.55. Following the express request of the Moscow and St Petersburg municipal authorities, the Commission mobilized large quantities of skimmed milk powder (SMP). Additional requests for this product were made by these cities because of its price (lower than whole milk powder) or its storage qualities. The Commission had taken care to establish with the local authorities the methods for using SMP. The memo signed on 31 December 1991 specified that the SMP would be allocated to the dairies designated by the municipal authorities. The dairies were required to pay the relevant sum into the counterpart funds within a fortnight. The Commission monitored the progress of the operations daily. Noticing that there was some delay in the use of the SMP, it exerted the necessary pressure on the local authorities in order to speed up consumption. These efforts were hindered by two factors, however: - the dilapidation and low productivity of the dairies; - the fact that the local authorities wanted to keep the SMP in stock for as long as possible in order to cope with possible shortages. Moscow's stock of SMP from the Community was not exhausted until the end of May. The Commission is examining the current state of stocks in St Petersburg with the municipal authorities. 11.56. It is the Russian authorities which requested the Commission to include in the list of products supplied as food aid boned beef and meat in carcase. The same authorities later decided to encourage the sale of meat of local origin. An additional memorandum concerning the marketing of the aid expressly provided for the possibility of selling certain quantities of meat to processing factories. These carcases obviously provided different cuts varying from fillet to thin flank. The cases of boned meat contained pieces of a different nature (corresponding to a cut-up carcase) but these were always in accordance with Community rules. The information supplied by the intervention agencies on the content of the cases was not consistent and this led to confusion. 11.57. The Commission has introduced very strict checks on the transport, storage and marketing of products. The intervention agencies have taken full responsibility for organizing transport. They were allowed to pay only for quantities delivered at their instigation. The Commission examined the intervention agencies' accounts halfway through the year in order to check that no costs had been wrongly borne by the Community budget. 11.58. The Commission arranged the aid operation quickly in response to the European Council's request. Products, the list of which had been drawn up with the beneficiaries, had to be transported as quickly as possible. The Commission asked the beneficiaries for precise information on local production, the quantities involved in commercial transactions, and the state of stocks. It proved impossible to determine the real situation from the replies received. Discussions arose about the negative effects which meat from the Community might have had on local production, but no justification could be given for alleging such effects. 11.60. The Albanian authorities refused to accept the first lot of the meat for fear of BSE infection. The meat came from both the Republic of Ireland and Northern Ireland and it was initially intended to be delivered to Mexico. For political reasons Mexico cancelled the order and the same cargo was rerouted to Albania. The Albanian authorities thought that the meat was of British origin and a BSE infection was the reason why the same lot was initially rejected in Mexico. After clarification of the real situation and following long negotiations with the Government of Albania the meat was finally accepted. Degree of urgency not demonstrated 11.62. An emergency was declared on 2 January 1992 because of the winter. The procedure was initiated immediately. The Financial Regulation imposed minimal constraints for the selection of the firms to supply the goods. The technical problems connected with the procedure slowed down the process of granting the aid. Despite the delays, the Romanian authorities kept stressing the need to supply the aid, for reasons dictated by the country's own social situation. 11.63. The agency for foreign assistance is the institution entrusted by the Government of Bulgaria to deal with humanitarian and food aid. The skimmed milk powder was delivered upon request of the agency. As soon as the Community's attention was drawn to the fact that milk powder had been re-exported from Bulgaria to Egypt a team was sent to both countries to investigate the facts. The product was traced in Egypt and it became clear that it was re-exported from Bulgaria. A strong letter was sent to the Government but no explanation has been received owing to constant changes in the institutions. Since then the Commission has decided not to send any more food aid to Bulgaria. The Government of Bulgaria also requested a special type of hybrid maize to be used for seeds which was not available on the Community markets and was paid for out of 1990 PHARE agricultural supply programme. By now it has been sold and the funds have been transferred to the counterpart funds. TRIANGULAR OPERATIONS 11.64. Triangular operations proved useful only in a few limited cases where they were used because of the urgent need for aid. The specific nature of the goods imported and the particular circumstances dictated the triangular nature of the operation. 11.65. The supply of electricity was indeed delayed for a short period. This was due mainly to the technical difficulties of managing a triangular electricity supply operation where arrangements had to be made with various countries to which the current had to be transported. 11.66. The purpose of PHARE is to help the Central and Eastern European countries to restructure their economies. If an operation to help Romania can also provide support for Czechoslovakia's economy, PHARE will meet its objective fully. Furthermore, if PHARE can use operators from Community countries to obtain supplies of products originating in the Community, it can also use them to obtain products originating in the Central and Eastern European countries. 11.67. The procedures laid down were observed, but they slowed down the progress of the entire operation and so the price had to be raised in line with market conditions. 11.68. The Commission considers that the PHARE Regulation and the Financial Regulation provide the necessary legal basis for triangular operations, since they are simply individual operations launched on a case-by-case basis depending on circumstances. The Commission has nevertheless noted the Court of Auditor's recommendation. COUNTERPART FUNDS 11.70. The Commission cannot fully endorse the Court's remark since it made sure that the counterpart funds had been established. According to the calculations made, the funds could have amounted to 595 million roubles (= ECU 4 800,00). The Commission did not succeed, however, in obtaining information from the Russian authorities concerning the amounts actually collected. Two visits were made to Moscow to check the administration of these funds, and it was found wanting. Account must nevertheless be taken of a number of constraints. First of all, the Memorandum of Understanding signed with the Soviet Union, on the basis of which the operation was launched, has not been formally recognized by the Russian Federation or by the other Republics established following the break-up of the Soviet Union. Major delays have occurred in the supply of products owing to the strained relations between Republics. Consequently, it would seem that money from products sold in the other Republics has not been channelled into the funds since the break-up of the Soviet Union. According to the replies received by the Commission, the Committee responsible for administering the funds was not given clear terms of reference by the Russian Government to enable it to make it compulsory for agencies reselling products to pay into counterpart funds. Furthermore, it did not provide the Commission with sufficient information on the administration of the funds. It was not possible for the funds to be used as planned for transport within the former Soviet Union, and so the Commission decided to finance this transport with foreign currency by using the ECU 250 million budget for product delivery. The Commission has contacted the Russian authorities on several occasions to point out all the problems noted in the audit reports and by the Delegation in Moscow, and has stressed the need to use these funds in accordance with the agreement, but no satisfactory reply has been received. 11.71. It is true that it proved difficult to reach early agreement on the management of counterpart funds from aid supplied from EAGGF resources. However, at the Commission's request, the Romanian authorities agreed before deliveries commenced that receipts would be deposited in a special account under joint Romanian/Commission control. These arrangements were verified by Commission inspection in mid-1990. It has now been decided, since the counterpart funds deriving from PHARE assistance have been the subject of separate management arrangements, to use these arrangements for funds generated by food aid financed by the EAGGF and so increase the efficiency of counterpart fund utilization. In Bulgaria, this relationship should have been more clearly established because the arrangements for PHARE counterpart funds had been concluded before the first arrivals of Community food aid. 11.72. The Commission has indeed met difficulties in the follow-up of the use and management of the counterpart funds. The Memoranda of Understanding designate the authorities in the beneficiary countries which are to manage the counterpart funds and report to the Commission. The Commission has repeatedly requested but never received the reports on the situation of the counterpart funds and a proposal for a programme for the use of the funds. It is unfortunate that, in spite of our agreement guiding these programmes, in some countries monitoring mechanisms instigated by the beneficiary countries have obviously been deficient. The Commission recognizes the seriousness of the situation and is placing more emphasis on the monitoring of the use and the management of the counterpart funds and is investigating the steps to be taken to improve the situation. 11.73. Although the Commission has frequently requested the beneficiary countries to supply the indicative programme for the use of the counterpart funds, on the basis of which the funds could be used quickly and on a coordinated basis, the Commission has not yet received any proposal concerning the governments' indicative programmes. 11.77. In summary, the building was acquired without prior agreement by the Commission. In response to Commission representations, the Board of the CPF has transferred the building at valuation to the Agro-Industry Bank (BRP). The value of the building is part of the agreed total of the Counterpart Fund's shareholding in BRP. 11.78. The Commission has repeatedly requested information on the counterpart funds from the beneficiary countries. To date, not all information requested has been received but the Commission expects to receive the information soon. The Commission expects to be able to forward the reports requested in this paragraph to the Court of Auditors. 11.79. The Commission now systematically concludes with all beneficiaries of food aid a Memorandum of Understanding stipulating the conditions of the collection, the management and the use of the products. These Memoranda of Understanding are fairly standardized, leaving sufficient flexibility to define a policy for the use of counterpart funds in line with the beneficiaries' most urgent needs. Tempus 11.81 11.82. The Court noted in the projects examined in 1992 in Romania and Bulgaria the same weaknesses in the drawing-up and selection of joint European projects as those it noted in 1991 when it conducted its survey in Poland and Hungary. These projects in the first academic year - like those examined by the Court in 1991 - represented Romania and Bulgaria's first experience in implementing Tempus and so were of the same experimental and educational nature for all parties. The relevant national authorities (the Ministry of Education and the Tempus national office) were involved in the selection of the Tempus projects. Industry is participating to an increasing degree in all the Central and Eastern European countries. This is also true in Romania and Bulgaria. The firms in these countries - which face great difficulties in adapting to the market economy - are gradually becoming aware of the benefits which they can derive from Tempus and they are participating to a greater extent as time goes by. There are now 17 Romanian firms and 19 Bulgarian firms taking part in projects selected in 1992. The Commission will ensure that economics and business management are given their rightful place in the programme. Need for a reform of the Tempus system 11.83 11.84. As part of the implementation of Tempus 1, the Commission has already started preparatory studies and discussions with a view to adapting the present selection system. These discussions are at present being held in conjunction with the Tempus Committee. The Court proposes that a system be set up for preselecting projects within each country before presentation to the Commission. The Commission takes the view that in countries where democracy has only very recently been established this kind of procedure could arouse mistrust regarding the choice made by the national authorities, whereas the presentation of all the projects to the Commission helps to make the operation more transparent. In order to respond, however, to the concern expressed by the Court in its 1991 annual report concerning a possible confusion of roles between manager and beneficiary of the programme, the Commission has decided to include the following clause in the contract for the provision of technical assistance for Tempus:'The Fund shall ensure that no applications from any of its members or any other organization contractually involved in technical assistance provided to the Commission shall be presented to the Commission for Tempus funding.` Budgetary monitoring 11.86. The sole purpose of the top-up payments received by those working in the national Tempus offices is to attract good-quality (particularly multilingual) staff, who might otherwise be drawn into more lucrative jobs. It is laid down in the work programme and the budget attached to the contract which the Commission signs with the European Cooperation Fund for the provision of technical assistance for Tempus that financial support should be given to the national Tempus offices. The top-up payments form part of this support and do not in any way depend on the European Cooperation Fund, which is only the channel through which they are made. 11.87. The salary levels of university teachers in Romania and Bulgaria are such that teachers frequently keep their workload in the university to a minimum in order to devote a large amount of time to other, better paid activities. This practice slows up Tempus activities, since a teacher fully engaged in a project loses some of his other income. In order to enable the programme to develop properly and to keep up the motivation of the teachers concerned, it was decided to specify in the contracts concluded with those responsible for joint European projects that financial compensation could be paid for teachers who devote a large part of their time to implementing a joint European project. The amount of this compensation may not, however, exceed 50 % of the local salaries paid by the universities. If abuses are detected in the financial reports on projects, reimbursement of the sums will be demanded immediately. PROJECT SELECTION AND CONTRACT PROCEDURES 11.88. Market operators can apply when projects are being selected, particularly via local authorities. The proposals are too numerous for them all to be financed, and so in line with the budget allocated to the TACIS programme, the Commission selects some in agreement with the beneficiary countries and on the basis of the priority sectors indicated in the TACIS Regulation and at the programming stage. The projects are put to the Management Committee for its opinion before the Commission decides whether to finance them. The financing decisions are regularly communicated to the press. 11.89. The main list kept by the Commission for PHARE and TACIS is simply a register of consultants. This register is never closed, but is available to project managers in the Commission and, under PHARE's decentralized management system, management bodies in the beneficiary countries. The short lists are drawn up by the Commission or by the body administering the PHARE programme with the Commission's agreement. The managers can choose the candidates for the short lists from the register, but also, for example, by publishing calls for expression of interest in order to establish special, detailed registers for certain sectors. The Commission, while bearing in mind the need to allow equal access to economic operators from all the Member States and wide-ranging participation, depending on the type and scale of the operation involved, draws up or approves the short lists in the light of qualifications and availability. It is perfectly possible for more than one firm of the same nationality to appear on the short lists. 11.90. The Commission tries as far as possible to avoid restrictions of this kind, but it must take into account the desiderata and working languages of the beneficiary institution, which must be able to communicate with the contractors. 11.91. The periodical mentioned firms which had designed projects in conjunction with the beneficiary institutions. These firms could not be sure that they would be chosen to implement these projects, since they had to compete with other firms in a restricted invitation to tender. There were instances in which one of these firms did win the contract as a result of the invitation to tender, and this created the false impression that it had been chosen in advance, which was not the case (see 11.92.). 11.92. Involving consultants at different stages of the same project does not automatically lead to conflicts of interest. The preparatory stage is in most cases separated from the implementation stage. It is clear that the experts who have prepared the project have certain advantages when they put in a tender for implementation, but there have been frequent instances of competitors winning the contract in such cases. The Commission tries in certain sensitive cases to have projects prepared by independent experts, but this cannot be a systematic policy as it would automatically rule out all the economic operators who had already established local contacts. 11.93. The Commission is developing cooperation between the DG which manages PHARE and TACIS and the other DGs in order to make use of their specialized know-how. Close links between DGs have been established, in areas such as energy, nuclear safety, environment, transport and human resources. 11.94. As the budget authority had authorized permanent posts, the Commission had planned to replace the temporary staff by officials in order to reduce the risk referred to by the Court. The 1993 budgetary constraints make it impossible to do so quickly. THE AID FRAMEWORK IN THE RECIPIENT COUNTRY Decentralization within PHARE 11.95. The Commission considers that implementation of the PHARE programme must be devolved more upon the beneficiary countries. This means that the Commission must keep a check on the use of Community funds, for which it is responsible vis-Ã -vis the budgetary authority. The Commission is at present examining ways of simplifying the procedures for paying advances and standardizing the information system for monitoring purposes. If the responsibilities of all those involved are clearly defined, this should speed up payments and will help to avoid misunderstandings which cannot be attributed to the distance of the Brussels staff or a lack of interest in local and national preoccupations and constraints. The Commission is fully aware of the preoccupations and requirements of the authorities in the beneficiary countries. The Delegations and the central departments in Brussels are in constant contact with representatives of these countries. 11.97. The Commission is also seeking ways of simplifying management units' procedure for awarding contracts. 11.98. The role of the Delegations in the context of the PHARE decentralized management system is also being analysed as part of the general simplification of procedures. Participation of recipient States badly defined 11.99. It is compatible with Article 6 of the PHARE basic Regulation to bear local expenditure connected with the creation of a management unit; under this Article this expenditure can be covered under certain conditions. () On the basis of the principle that the local costs should as far as possible be covered by the beneficiary, it has been necessary, in certain cases, to finance additional local staff in order to have the administrative staff needed in order to carry out the programme. Need for joint financing of projects 11.100. The multiannual programming exercise begun recently should make it easier to introduce into operation PHARE the principle that the beneficiary state should make a financial contribution. LOANS AND BORROWINGS Observations concerning Community medium-term financial assistance 11.106. Following an exchange of views within the G-24, and after consulting the Monetary Committee, the Commission is going to present to the Council a proposal for a decision to divide the loans granted to Czechoslovakia into two parts on the basis of the accepted ratio of 2/1. Transitional measures will be taken to ensure that, until the Council decision has been adopted and implemented, the obligations resulting from loans are met by the Czech and Slovak authorities. 11.107. An exchange of views is held within the joint committees set up under the association Agreements on the evaluation of the macro-financial situation of the economies of the Central and Eastern European countries receiving Community loans. This coordination helps to develop the necessary synergy between the various components of Community assistance. The subsequent evaluation, on the other hand, is done in the context of the annual report sent to the Council and Parliament. Review of the information 11.108. The Commission is aware of the need to improve the procedures for checking, in conjunction with the national authorities, the reliability of the information supplied. 11.109. The Commission agrees that the Delegations have an important role and intends to make full use of their know-how. Community assistance to the States of the former Soviet Union The medium-term credit guarantee scheme 11.111. The second interest tranche of around ECU 18.6 million was not paid by the due date of 9 March and the budget guarantee was again activated. Payment was finally made by Russia on 5 April along with the interest on arrears for late settlement last September. The medium-term loan facility to the former Soviet Union 11.113. By mid-April (the end of the initial drawing period for the majority of loans), disbursements stood at ECU 480 million or almost half the total amount of loans granted. Observations concerning loans from ECSC resources 11.116. Last year, no contracts for ECSC loans to businesses in Central and Eastern Europe were actually signed. However, contacts with coal and steel firms and national administrations did increase and the bases for industrial and commercial cooperation between the Community and these countries were clarified, particularly in light of the worsening economic climate and the universal need for major restructuring of coal and steel production. In this connection, a number of specific projects have been appraised by the Commission and preparations for one are already at the approval stage. Observations concerning G-24 medium-term balance of payments assistance 11.117. The Commission would remind those of the G-24 members who need reminding of their obligations. It would also point out, however, that the system of 50 % burden-sharing is not hard and fast but based on a case-by-case appreciation. This has led it on a number of occasions and after consultation of the Monetary Committee to disburse its share, which has not been matched by an equal contribution from other members. COORDINATION BY THE COMMISSION 11.118. The Commission agrees with the Court on the need for consistency between the various Community instruments and for close coordination with international financial organizations. With such consistency in mind, it intends to develop the macroeconomic framework of the PHARE programme. Similarly, it is making every effort to take account of programmes between the recipient countries, the IMF and the World Bank although it is sometimes difficult to make them dovetail perfectly with operations by all the G-24 countries. CONCLUSION 11.121. Although the principle of decentralized management has not always been used in PHARE, this is mainly because the programme lacks its own management capacities in the country or sector concerned or because the local Commission Delegation also lacks such capacities. The Commission, however, still stands by this principle and will apply it more systematically in the future as and when the situation in the relevant countries allows. For the TACIS Programme, too, decentralized implementation depends on the suitability of conditions in the recipient countries. As regards red tape, the Commission is bound by the procedures laid down in the PHARE and TACIS regulations and by the Commission's general Financial Regulation. It is true that such procedures are sometimes unwieldy and probably not well suited to aid requirements in most countries receiving PHARE and TACIS assistance. However, within these limits, the Commission has been keen to cut red tape and is continuing to develop more convenient mechanisms such as the multidisciplinary programme, the use of framework contracts, decentralized work programmes and contracts more open to change during implementation. Nevertheless, these attempts are meeting resistance from the Member States, which insist on compliance with detailed procedures, particularly in awarding contracts, doubtless because they are mindful of the share which could be enjoyed by businesses in their own countries. Such insistence by the Member States within the PHARE and TACIS Committees on a microeconomic approach oriented towards each individual project has prevented the Commission from making full use of those mechanisms which could make procedures easier. 11.122. The Commission agrees with the Court on the follow-up to studies and will be even more systematic in ensuring that any studies funded are translated into real projects, and so have a genuine impact. One of the increasingly common ways of achieving this is to encourage longer-term relations between the local recipient institution and the European contractor providing the consultancy work. Starting this year, this aspect has formed part of the evaluation criteria of invitations to tender. The financing of studies under the 'EBRD facility` (see points 11.45 and 11.52), which should lead to investments financed by the Bank, also works along the lines proposed by the Court. Similarly, the close cooperation being forged with the World Bank is leading to a division of labour in which the Commission finances the study and the Bank then provides the investment. As regards PHARE, the link between studies and investment can already be made more easily within a single programme. A number of PHARE programmes, particularly those dealing with privatization, SME and the environment, already earmark funds to support investment. The new PHARE guidelines, approved by the Council at the end of last year, also endorse this policy. 11.123. Within the G-24, the Commission constantly strives to coordinate its activities with the international financial institutions mentioned by the Court. Evidence of this is provided both by the complementary nature of its operations for Central and Eastern European countries in lending financial assistance to the balance of payments (coordinated with the IMF) and sectoral assistance (coordinated with the World Bank) and by its initiatives in organizing high-level G-24 meetings to look at, in close conjunction with the institutions mentioned, aid for specific countries (Albania meeting, July last year, Bulgaria and Roumania meeting, last May). 11.124. It is true that introducing and implementing a clear and viable nuclear safety policy has taken some time. However, since last autumn when the 1992 programme was presented, a genuine policy for action in this area has gradually been put into practice. The first results of this policy are now evident and are being recognized by the recipient countries. 11.125. Assistance for private sector development has been a central focus of the PHARE programme with more than ECU 440 million being provided for a wide range of activities such as privatization, restructuring, development of SME, export promotion, investment promotion, joint-ventures, training, as well as the supporting environment needed for the development of an indigenous private sector, for example, appropriate legislation, banking reform, accounting, standards, quality control. Close cooperation has been maintained with the EIB and EBRD in this respect. An agreement to this end is being finalized with the EIB and appropriate arrangements for cooperation have also been agreed with the EBRD. 11.126. As stated in the new Multi-Annual PHARE Guidelines, 1993-97, humanitarian aid should in principle become an increasingly subsidiary part of PHARE and should exclude in principle import programmes such as supply of agricultural inputs, medical products or food, which indirectly serve the purpose of balance of payments support. 11.127. Measures in the agreement protocols give responsibility for managing and using counterpart funds to the governments of the recipient countries on the basis of a programme setting out use and management arrangements which has to be approved by the Commission. As a general rule, these measures stipulate using the counterpart funds for the transition to a market economy and an open society. The funds may also go to support investment or welfare projects. However, the approach selected by each country has met with varying degrees of success. The Commission, in conjunction with the recipient authorities, is trying to take account of the difficulties encountered in a bid to improve its operations. 11.128. The Commission would draw the Court's attention to the fact that the Council adopted a new decision on Tempus for the years 1994-98 on 29 April. The decision gives more weight to dialogue with the authorities in the eligible countries in deciding national priorities. Increasingly, priorities should be varied from country to country, depending on the level of progress in each. They should also be in line with PHARE's general priorities and drawn up in a precise manner to avoid the problems caused by too many applications. Particular emphasis will be placed on the structural reform of higher education systems. 11.129. The short-list procedure has been adapted to the particular situation (see point 11.89). 11.130. Earmarking the funds from national budgets needed to cofinance PHARE projects should become easier with the multi-annual programming recently introduced by the Commission. 11.131. The Commission has developed an ongoing programme evaluation system which will come into operation after a trial phase with some programmes due to start shortly. An ex post evaluation has already been carried out on a number of completed programmes. The 1991 annual PHARE report was adopted on 10 May by the Commission, which is currently drafting the 1992 report. 11.132. As regards loans to the former CSFR, the Commission agrees that contractual measures must be taken. The relevant Commission initiatives are set out in point 11.106. 11.133. The Commission would point out that the principle of 50 % burden-sharing of the cost of balance of payments assistance to the countries of Central and Eastern Europe is not hard and fast (see point 11.117). CHAPTER 12 Cooperation with developing and non-member countries IMPLEMENTATION OF THE BUDGET 12.2. Concerning the utilization of payment appropriations, the Court refers specifically to ASB No 2 of 13 May 1992 concerning the financing of the 1992 Special Food Aid Programme. The Commission confirms that only part of the payment appropriation of ECU 220 million was used during 1992 and agrees with the Court that this was foreseeable on the basis of past experience. Accordingly, the Commission had requested a lower payment appropriation when proposing the Special Programme. However, the Budget Authority has decided to allocate the full amount of ECU 220 million in the ASB in order to avoid any possible delays in the relief operations during 1992 and early 1993 which could have occurred if payment credits were not immediately available. 12.3. What really needs to be done is to identify the reasons for the build-up of payments applications at the end of the year and take steps to prevent it. The Commission hopes that it has managed to tackle the internal causes by tightening up the programming of operations. But we should also look at external factors, the main one probably being the accounting cycle, i.e. the fact that companies want to boost invoicing before closing accounts at year's end. FOOD AID TO DEVELOPING COUNTRIES Budgetary analysis 12.9. The accounting system adopted for commitments and payments under Chapter B7-20 from the 1993 Budget onwards provides for precise information about the operations concerned. Observations on the programming and mobilization of food aid Programming 12.16. Food aid channelled through international and non-governmental organizations (indirect food aid) is programmed in close cooperation with the geographical units and Commission Delegations. Due to the great number and variety of these operations there may be cases which escape from this rule but they do certainly not harm the overall principle of integrating this part of the food aid programme as well into the Community's overall cooperation policy and programmes. 12.17. and 12.18. The Commission welcomes the Court's comments and will strive for introducing relevant improvements into the programming procedures. 12.19. The Commission considers the Ifadep programme in Bangladesh, prepared thoroughly by the Government, WFP and the Commission services, as a model which should be adapted and repeated wherever possible. The Ifadep programme will undergo regular and detailed evaluation the conclusions of which should help to prepare similar projects. The Commission further agrees with the Court that, as a general rule, multiannual food aid programmes should be given priority. However, adverse conditions in many countries make it necessary to assess any such project with greatest caution in order not to involve the Community in long-term commitments which could turn out to be politically unwelcome. 12.20. More frequent control and assessment missions carried out by Delegations and Headquarter staff as well as more widespread project evaluations should enable the Commission to better identify unsuccessful operations. Within the limits of its staff and credit facilities the Commission will try to step up its efforts in these domains. 12.21. to 12.25. In 1991 as well as in 1992 the Special Programmes were not the only source of relief to the countries hardest hit by drought and civil war. During the first six months of both years, and even several months before, huge allocations from the normal food aid programmes 1991 and 1992 were made to relief operations in these countries which kept the pipeline going until the deliveries from the Special Programmes arrived. In 1992 alone, the allocations under the normal food aid programme were 1 1/2 times those of the respective Special Programme. The Commission also wishes to point out that for reasons of well-known bottlenecks in the transport system of these countries (congested harbours and railways, etc.), due to the massive influx of aid from all donors and of commercial food imports, as well as limited distribution capacities of the local administrations and humanitarian organizations, it seemed unreasonable, counterproductive and wasteful to accelerate the relief operations at any price and without taking these constraints into account. The Commission has, by the way, tried to coordinate its relief operations as closely as possible with other major donors and aid agencies. The final result of these unprecedented international relief efforts to Africa, especially in 1992, was that widespread famine and death were avoided as well as large-scale losses of food and other relief goods. It shows that the operations were, in general, timely and well targeted. In order to unblock additional financial means for large scale relief operations even faster, whenever necessary, the Community has provided for a reserve of 209 MECU in the 1993 Budget. The Commission considers that appropriate reserves for this purpose should be included in the following Budgets as well. Mobilization The monitoring of food aid operations Timing of mobilization 12.29. and 12.34. EuronAid has recently adopted mobilization procedures which provide for improved monitoring of its shipping operations. Basically, however, the Commission does not agree with the Court's suggestion that it should extend its transport monitoring to the receiving end of WFP's and EuronAid's operations. These organizations have a record of good reliability and can therefore be entrusted with the full responsibility for their correct transporting and distributing of food aid. Quality of food aid commodities and packaging 12.36. Under the rough conditions in many developing countries, the transport and handling of goods can suffer considerable losses and food aid operations are unfortunately not exempt from this fate. However, the procurement procedures practised by the Commission ensure that losses of this kind have to be repaired by the supplier (who is normally insured against losses). Distribution to final beneficiaries 12.39. and 12.40. The misappropriations of food aid quoted by the Court have led to the suspension of direct food aid to the countries concerned. Since 1990, no direct food aid has been allocated to Sudan; in the case of Bangladesh the abovementioned Ifadep programme has been worked out and adopted with the purpose, amongst others, to improve the use of food aid for well defined objectives and target groups. 12.41. The Commission had reliable evidence of Ofinaal's mishandling of Community food aid only in 1990/91 after the placement of a Commission expert in the organization. Soon after, the Commission terminated the operations through the 'Confederacion Nacional de Clubs de Madres`. 12.42. The Food Aid Unit will strive for more systematically evaluating the final reports of food distributing agencies. However, it is not aware that existing deficiencies in this field have had negative consequences on the quality of the operations implemented through and by these organizations. Organizations used for channelling indirect aid World Food Programme (WFP) 12.44. see points 12.63. to 12.67. below. 12.45. Under the 'official letters` determining the conditions for Community food aid allocations, WFP is committed to seek the Commission's agreement in the case of diverting food aid to other than the initially agreed projects. The Commission will take steps to enforce this commitment more appropriately. 12.46. The Commission shares the Court's view on the usefulness of regular visits to the WHO. EuronAid 12.48. As mentioned above, EuronAid has recently adopted mobilization procedures which provide for improved monitoring of its shipping operations. Direct supervision of the operation by EuronAid is now ensured. 12.49. to 12.52. The Commission has proceeded recently to a thorough verification of the organization's financial position and its management of Community funds. On the basis of this the Commission will reduce EuronAid's liquidity position by a temporary suspension of advance payments. After the necessary liquidity position is reached, it will be regularly monitored and adapted on the basis of three-monthly expense forecasts delivered by the organization. The initial rationale for setting up the Fund was to grant EuronAid and the NGO operations a treatment similar to that given to international humanitarian organizations like WFP, UNHCR and others. All these organizations have to indicate in their financial accounts for Community funded operations the amount of interest accrued on advance payments. On their request, the Commission authorizes the organizations, as is the general practice of all donors, to spend the accrued interest on purposes in line with the objectives of the operations from the funding of which they were generated. In EuronAid's case, this procedure was implemented through a separate trust fund which provided for greater transparency. After the establishment of the Mutual Trust Fund, it was agreed between the Commission and EuronAid that its means should be used in the first place for prefinancing the NGO operations to which Community funds were allocated. In this period, for reasons of slow advance payments by the Commission, EuronAid's liquidity situation was very tight and the Trust Fund was a welcome and necessary instrument for speeding up the implementation of NGO food aid operations. However, the Commission acknowledges that due to the abovementioned excessive liquidity, a period of very high interest rates and good financial management by EuronAid, the Fund has reached unnecessary and unjustifiable proportions. The Commission will therefore instruct EuronAid to dissolve the Mutual Trust Fund as of 30 June 1993. Its net reserves will be recovered by the Commission. In future, the use of interest accruing from the abovementioned minimum liquidity reserves will be authorized by the Commission in line with the procedures applied to international organizations. As to EuronAid's own reserves (paragraph 12.50), the Commission considers their present size in line with the volume of the organization's operations and the corresponding commercial risks, as well as with its administrative costs especially for staff and social security. The Commission will monitor the reserve position very closely and take appropriate steps if any overfunding should occur, but, for the time being, is not considering a reduction in EuronAid's reserve position or its income from Community paid SLS-charges. Triangular operations 12.55. and 12.56. It is true that Regulation 2200/87 is not the juridical basis for procurement contracts in triangular operations. The reason for this is that its application and enforcement would be too difficult under the conditions given in most developing countries. However, the specific procurement contracts the Commission concludes in these cases with suppliers in developing countries adopt the main rules of Regulation 2200/87, i.e. the suppliers' responsibilities up to the agreed point of delivery, the monitoring by Commission designated monitors, the settlement of disputes in case of losses, sub-standard quality, delays, etc. More flexible rules are applied, in fact, in the fields of packaging and marking, as the standards applied to European suppliers are sometimes difficult to fulfil by traders in developing countries. The Commission is not aware that the contracts applied to triangular operations have systematically led to lower records in procurement or transport. The Commission welcomes the Court's suggestion to build up, together with other donors, a database on appropriate products and sources and conditions of supply in developing countries, and will take the necessary steps. Transport costs 12.58. and 12.59. The ECU 69,8 million in credits for outstanding transport commitments the Court refers to were not 'lost` but lapsed, according to the Financial Regulation. Consequently, these commitments had to be honoured by subsequent Budgets the transport credits of which had therefore to be reinforced by supplementary appropriations. From the 1992 Budget onwards the Food Aid Unit has adopted more accurate budget forecasts which will avoid similar problems in the future. This is true also for the evaluation of outstanding claims for which tighter conditions are introduced. Thirdly, the Commission is indeed obliged to pay the real transport costs claimed by the organizations. On the basis of previous experiences as well as critiques in the Court's 1987 report, the Commission had introduced this system as part of the 1986/87 reforms of the Community's food aid policy and management, in order to ensure safe and speedy delivery of food aid to the beneficiaries. Under the 1991 and 1992 Special Programmes ceilings for transport costs were negotiated. The Commission considers to extend this practice progressively to the normal food aid operations. 12.60. The Commission recognizes that for the time being it lacks a database or professionnal expertise which would allow for an in-depth analysis of submissions in the field of transport. At present, the submissions are evaluated by comparison with costs submitted or paid for transports under similar conditions. The Commission agrees with the Court that the study on transport costs carried out in 1991/92 was incomplete. However, its conclusions focused on weaknesses in the Community's food aid transport operations and indicated ways and means for improvements. It is therefore a valuable base for further reflexions and action in this domain. 12.62. The computerisation of the Food Aid Unit will now allow the building up of a proper transport database which will be linked to the respective databases of WFP and EuronAid. Improvement of the regulatory framework 12.63. to 12.67. Council Regulation 2200/87 is at present under re-examination. The objective is to improve rules and procedures for shipping and monitoring on the basis of past experience. Amongst others, terms for 'ex-works` delivery will be introduced (point. 12.62.). The revised regulation is expected to enter into force in early 1994. In this context the Commission wishes to explain that the 1990 draft for the modification of Regulation No 2200 was not brought to final adoption as it still needed further revision and as it did not seem appropriate to introduce new rules for mobilization, creating the inevitable running-in troubles, during the 1991/92 period when all efforts had to be concentrated on optimizing implementation of the Special Food Aid Programmes. Food aid to Eastern and Central Europe, and emergency food aid 12.71. One of the reasons for which the Commission set up ECHO was to overcome shortcomings in the mobilization of food aid. For its work in the developing countries ECHO will draw on the food aid unit's experience and expertise and will also take account of the Court's remarks in its 1991 annual report and in Chapters 2 to 11 of this report. 12.72. The Commission has decided that ECHO will take over all operations relating to humanitarian aid, namely emergency aid, food aid and aid for refugees and displaced persons. 12.74. Every effort is always made to ensure close coordination between ECHO and the food aid unit. CONCLUSION The Commission welcomes the Court's general conclusion that the reforms of 1986/87 have improved the efficiency and effectiveness of the Community's food aid programme. It is aware that there is room and need for further improvements, in particular in the fields of transport, monitoring and evaluation of the food aid operations, as well as in coordination of policies and programmes with other international donors and aid agencies. Although, under the prevailing staff and budgetary constraints, improvements can only be introduced step by step, the Commission will, on the basis of the Court's findings and its own inquiries and experiences, make every endeavour to make the Community's food aid programme an even more efficient instrument of its overall cooperation with developing countries. CHAPTER 13 Financial audit of the Commission's revenue, operating expenditure and accounting and of the consolidated accounts THE IMPLEMENTATION OF THE BUDGET IN 1992 Observance of the annuality rule Rates of utilization of the available appropriations 13.3. The initial EAGGF Guarantee budget was ECU 3 903 million higher than the appropriations used in 1992. The main reasons for this difference could not be foreseen when the initial budget was drawn up: the US dollar effect ( PECU 355 million), the favourable market situation for milk products, mainly because of the considerable and unforeseen fall in milk production in the five new Laender ( PECU 1 615 million), lower expenditure on export refunds for cereals as world prices picked up ( PECU 666 million), the large fall in production of fruit and vegetables and products of the vine-growing industry ( PECU 996 million) and the fact that Germany repaid the export refunds for abnormal stocks in the former GDR in 1992 instead of 1991 ( PECU 307 million). Carryovers of appropriations 13.5. The Commission endeavours to keep carryovers of payment appropriations to a minimum: the overall volume in 1992 was significantly lower than a few years ago. In using the appropriations carried over, the Commission endeavours to comply with Article 7(2)(b) of the Financial Regulation by giving priority to the appropriations for the current financial year and ensuring that the only exceptions are the result of management requirements. 13.6. As regards mini-budgets, the Commission has gradually implemented the recommendations made by the Court in its opinion of May 1991. In the 1992 budget the mini-budgets were still presented in a specific title (A4) and subsection (B8), with references to the administrative or operational headings in the same budget. Mini-budgets still survived for the Structural Funds and research. In 1992 most of the mini-budgets were thus still in a transitional phase pending final incorporation in Part A of the budget. This was completed in the 1993 budget. The Financial Regulation prohibits the carryover of 'appropriations relating to remunerations and allowances of members and staff of the institutions ...` (second subparagraph of Article 7(1)). In other words, appropriations cannot be carried over for the salaries of regular staff (such as auxiliaries). While it is true that appropriations for auxiliary staff were carried over to 1992, i.e. during the transitional phase of the minibudgets, measures were adopted from the beginning of 1992 to prevent such carryovers. A specific charging code (21) was set up for this purpose. 13.7. As regards the appropriations carried over from the previous year, the amount left unused breaks down into ECU 2.2 million committed but not paid (mainly appropriations for food aid to the former Soviet Union) and ECU 11.4 million which had not been committed in the following budget headings: (a)B4-3204: ECU 959 221 Since the Council's decision to set up a European Environment Agency the Commission has been waiting for a decision on where it is to be located. In the absence of a legal base, the only appropriations used in 1991 were to consolidate what had already been attained by safeguarding and updating the Corine information system and extending the Community report on the state of the environment to the rest of Europe. The carryover of ECU 2 286 000 in uncommitted 1991 appropriations to 1992 served the same purpose and was essential since Item B4-3101 had been allocated only a symbolic ECU 1 for 1992. The fact that ECU 959 221 was not used in 1992 was due to the limited possibilities for using these appropriations and the constraints of the Financial Regulation which states that appropriations carried over must be committed and paid in the same financial year (1992). (b)B1-1890: ECU 8 610 621 As it already stated in its reply to the previous annual report, the Commission considers that all emergency food aid measures for the countries of Eastern Europe and the former Soviet Union, and the implementation of these measures, are to be regarded as exceptional. (c)B4-3400: ECU 1 850 000 As the accompanying remarks show, the appropriation for Article B4-340 is intended 'to give immediate relief to disaster victims in the Community`. However, it is in the nature of a disaster that neither the date nor the scale can be predicted. The gesture of solidarity which the Community must display without delay to disaster victims must be commensurate with the circumstances. The appropriation for Item B4-3400 must therefore be able to provide an immediate response to requirements of varying intensity. This was the aim of the carryover mentioned by the Court. Past experience has shown that the need for transfers to provide additional appropriations for the heading in question at short notice could encounter problems of time limits or other difficulties. Appropriations made available again or available for reuse 13.9. Only Structural Fund appropriations were made available again in 1992 and 1993. The Commission considers that the 'programmes` referred to by the Financial Regulation correspond, in this field, to the Community support frameworks, which contain a set of measures to achieve precise objectives. They also provide a guarantee that funds can be made available to the Member States for attaining these objectives. Furthermore, the annual appropriations allocated are based on the schedules of payment which, by definition, do not provide for the financing of earlier operations which have not been implemented and for which the commitments have been cancelled. The Commission has therefore decided that only the appropriations relating to cancelled commitments under the Community support frameworks should be made available again in full and has not taken the same course with other cancelled commitments. At all events, the Commission will endeavour to improve the information given in support of this practice. 13.10. The Commission considers that, with a six-year planning exercise, some changes to financing plans are inevitable in the course of implementation. However, it would point out that these changes relate to forecasts and that, within the framework of the appropriations available and in accordance with the commitment decisions, these changes need not necessarily lead to the cancellation of commitments. For example, if, when the financing plan of an operational programme is changed, the commitments and/or payments of advances entered in the accounts exceed the amounts entered in the new plan, the Commission will offset this in the corresponding commitment proposal and/or future payment. This offsetting operation simplifies management procedures without affecting transparency. The establishment of a system of recovery orders for individual operations under a multiannual programme, as recommended by the Court, would make things so complicated that it would destroy the flexibility needed for the programme approach introduced by the reform of the Structural Funds. 13.11. The repaid advances referred to by the Court had been paid under the old Social Fund headings. Since the 1988 reform had reformulated its role and the framework for its assistance and overhauled the budgetary presentation of its appropriations, these headings no longer existed in 1992. Short of considering that this purely formal situation ruled out application of Article 7(7) of the Financial Regulation, the Commission considers that it was entitled to reuse the appropriations under new headings with a similar objective. Conclusion regarding observance of the annuality rule 13.12. The current rules, particularly as regards annuality, stemmed from the 1988 reform (see Regulation No 2049/88 of 24 June 1988) and formed part of the Delors I package. These provisions: - considerably tightened up the annuality rule (the previous arrangements were far more lax); - ensured the same treatment for all areas of the budget - the only difference remaining in the decision-making process for carryovers relates to the type of appropriation (differentiated or non-differentiated). Before the reform, treatment varied considerably and, to all intents and purposes, every major area (Regional Fund, EAGGF Guidance, research, etc.) had its own arrangements. The fact that the Commission takes a decision on the carryover of differentiated appropriations - as well as on restoring cancelled appropriations and the possible reuse of repaid advances - represents a step forward which it would be inappropriate to call into question. Basically, the 1988 reform clearly emphasized the principle of annuality, while simplifying the arrangements which had hitherto been in force. Admittedly, this reform was based on a number of political constraints which still apply and which are endorsed by most Member States and by Parliament. The Commission is therefore unable to agree with the Court's comment which appears to ignore both the political constraints and those inherent in the conditions of implementation. Observance of the principle of sound financial management 13.13 13.15. Since the Commission adopted the principle of financial programming on 16 January 1991 the financial statement, expanded to incorporate aspects of cost-effectiveness analysis, has two purposes: - to satisfy Article 3 of the Financial Regulation, which states that any proposal or communication by the Commission which may have budgetary consequences must include a financial statement; - to set out the grounds for the appropriations requested when drawing up the preliminary draft budget. This statement is sent to the budgetary authority as a working paper. In addition to the financial statements drawn up for the preliminary draft budget, the aspects of sound financial management are examined whenever any new operations are presented, to accompany the legal instrument on which Community action is based. This is particularly important for large-scale programmes for which the duration and the implementing and monitoring rules are laid down in a relatively detailed legal framework. 13.17 (a) The annual requests for EAGGF Guarantee Section appropriations are not supported by a financial statement but still have to be based on a cost-effectiveness assessment. This requirement formed part of the reform of the CAP. (b) The cost-effectiveness analysis for the Social Fund and for the policy of cooperation with the countries of Central and Eastern Europe is contained in the preparatory work for the Council's legal bases. (c) As stated at 13.13-13.15 and at (b) above, the aspects mentioned by the Court are not usually found in the financial statements for preparing the preliminary draft but in the statements drawn up for decisions establishing or changing a Community policy. 13.18. The Commission considers that financial programming (definition of objectives, choice of priorities, establishment of a timetable, adjustments in line with objectives, results and budgetary constraints) is, in accordance with the general principles of sound financial management, an everyday instrument for authorizing officers who, to make use of it, must take the necessary organizational measures. 13.19. A running-in period was necessary to satisfy the requirements of Article 2 of the Financial Regulation as regards quantified objectives and cost-effectiveness. The change was made in May 1990 and first applied to the 1992 budget year. Financial Control has checked a sample of financial statements, paying particular attention to the cost-effectiveness aspects for the preliminary draft budgets for 1992 and 1993 in order to ensure that the authorizing officer had correctly employed the cost-effectiveness approach when requesting appropriations. Financial Control then took account of the cost-effectiveness aspect during its controls in 1992. For the 1993 financial year, Financial Control will draw up a report giving details on the achievement of the principles and objectives referred to in Article 2 of the Financial Regulation on the basis of an analysis of a sample of budget headings. 13.20 13.21. The Commission is aware that improvements must be made to ensure stricter implementation of the principle of sound financial management. The corrective measures to improve the quality of the financial statements presented by authorizing officers (and the quality of budget implementation) must, for reasons of efficiency, relate to a limited number of budget headings. After examining the documentation provided by authorizing departments and the results of a number of controls of budget implementation, the Commission's financial departments selected a number of budget headings in which the cost-effectiveness aspect had not been sufficiently taken into account. This list includes two headings in Title B2-5, which was mentioned in paragraph 13.17 (b) of the Court's report. During the 1994 budgetary procedure the authorizing departments responsible for the headings selected were told of the need to improve the situation. The changes made will be examined when the preliminary draft budget for 1995 is drawn up. The budget allocations requested for the headings concerned could be questioned if the financial statements have not improved and if the results of the controls (during execution of the 1993 budget) were to show that the cost-effectiveness approach had not been applied satisfactorily when the operations were implemented. Focusing efforts on a limited number of specific headings should make it possible to develop a more systematic cost-effectiveness approach in carrying out Community operations. Delegation procedures 13.22. As a result of the Court's comments, and for the purpose of clarity and harmonization, the following entry has been made as a footnote on the subdelegation form: if there is no limit under the powers of subdelegation, 'the appropriation authorized` should be entered as the amount. Once all the DGs have received this new form, a check will be made to ensure that this is applied. 13.23. The Commission remedied the absence of delegation for the authorization of development aid by officially subdelegating powers at the start of 1993 in accordance with the rules of procedure. Even though powers were not delegated, this does not cast doubts on the payments already made. The Court's comments on the identification of an alternate in the case of the EAGGF Guidance Section relate to a payment order on which there was no indication that it had been signed by delegation. At all events, the Commission too feels that powers should not be subdelegated simply on the basis of oral authorization. In his absence, the duties of a designated official are carried out in accordance with Article 26 of the Commission's rules of procedure. The official who acts under Article 26 will be known to Financial Control and to the accounting officer since he is next in line to the authorizing officer or desk officer. Steps have been taken to ensure that the requirements of Article 5(13) of the Internal rules for the implementation of the general budget of the European Communities are observed. 13.24 13.25. Although the Commission does not have a centralized file of authorizing officers by delegation and subdelegation, the control units do update the documents. The absence of a centralized file does not jeopardize the smooth functioning of the subdelegation procedure. The departments of the Directorate-General for Budgets check whether the subdelegation of powers by various authorizing officers by delegation complies with the internal rules. If the acts of subdelegation satisfy the conditions laid down in the internal rules, they are sent to the Financial Controller and to the accounts departments. Furthermore, all these acts are sent periodically to the Court in accordance with Article 83(4) of the Financial Regulation. This means that the Court, the Financial Controller and the accounts department - i.e. all the bodies involved in the implementation of the budget and in budgetary control - are able to ascertain whether an official has the powers of an authorizing officer by subdelegation. In addition, if for a given heading the powers of an authorizing officer by subdelegation are further subdelegated to another member of staff, it is clearly indicated on the form that 'this subdelegation of powers cancels the previous subdelegation of powers to ...` (followed by the name of the member of staff whose subdelegated powers have been withdrawn). The Commission is planning to create a file under the Sincom system to provide the information requested by the Court. A study is now being conducted for this purpose. The file would then be updated whenever the various acts of subdelegation were received and would be adjusted every year in line with changes in nomenclature. As part of budget implementation under Sincom, the use of alternates could be organized in advance by granting an ad hoc 'user-id` to certain officials who might be called upon to exercise these powers. This system will thus create an additional automatic filter: no member of staff without the code of an authorizing officer by delegation or subdelegation or alternate will be able to carry out acts of budget implementation in Sincom. The authorization procedure 13.27. Articles 28, 38 and 47 of the Financial Regulation give a positive definition of the conditions certified by the approval of the Financial Controller. Article 39 also allows approval to be withheld but it does not make this compulsory. What is important, and what the Court has repeatedly mentioned, is that Financial Control has a margin of discretion because of its independence and its responsibilities since the first paragraph of Article 39 states that 'the financial controller may withhold his approval if he considers that the conditions laid down in Article 38(1) are not met`. As regards ex post presentation, see 13.28-13.29. 13.28 13.29. When judging cases of ex post presentation, the Financial Controller bases his opinion of each case on all the conditions which he is called on to certify. In forming his judgment in all independence, he must evaluate the importance of each condition, including the concept of sound financial management. Some unavoidable situations or special circumstances giving rise to ex post presentation do not justify the withholding of approval. The Financial Controller thus takes his decision on whether to grant or withhold approval only when he has full knowledge of the case. As regards liability to disciplinary action and payment of compensation, Article 76 of the Financial Regulation allows authorizing officers to be disciplined for serious misconduct under Article 22 of the Staff Regulations. Any disciplinary procedure initiated by the appointing authority is, however, independent of the procedure for the granting of approval by the Financial Controller. The Commission does not consider that measures of this type were merited by any cases in which approval was withheld in 1992. 13.30. As the Court mentions in its comments, cases (a) and (c) relate to non-budget operations. Neither the Financial Regulation nor the internal procedures call for a non-budget operation to be subject to the advance approval of the Financial Controller. If the Financial Controller initialled the transactions mentioned, this does not constitute approval but only a favourable opinion. Financial Control considered that the Commission should meet its obligations in these cases. As regards the removal from the Berlaymont (case b)), the Commission outlined the details of this operation in its reply to paragraphs 17.10 and 17.18. As for the specific comments concerning the availability of appropriations, the Financial Controller ascertained at the meetings of Parliament's Committee on Budgetary Control and the Council (Budget) in July 1991 that the necessary authorizations would be granted (supplementary and amending budget and transfers) to guarantee that the appropriations were available. OTHER OBSERVATIONS ON THE LEGALITY AND REGULARITY OF OPERATIONS PASSED TO THE ACCOUNTS DURING THE FINANCIAL YEAR Own resources The results of the Commission's checks 13.31. The Commission will ensure that the relevant rules are observed in future. The balance of the EAGGF monetary reserve 13.32. The balance of the GNP-based resource for 1991 was indeed calculated without account being taken of the ECU 30 million drawn from the EAGGF monetary reserve. The Commission will take the Court's comment into consideration when calculating the balances for financial years prior to 1992, as provided for in Article 10(8) of Regulation No 1552/89. Resources and expenditure relating to lending and borrowing activities 13.33. Under the Community guarantee for borrowing and lending operations the Commission is legally obliged to repay a debt should a debtor default. In the absence of budget appropriations, the corresponding expenditure is entered in a non-budget account of expenditure to be entered in the budget in accordance with Article 12(2), (3) and (4) of Council Regulation No 1552/89 of 29 May 1989. In the case referred to by the Court, the time limit for the Community to honour its undertaking was 10 days from the first request. This was too short to provide an allocation for the budget heading concerned by means of a transfer or supplementary and amending budget. At all events, the debtor paid the debt a few days after it fell due. Obviously, if Russia had not repaid its debt so quickly, a procedure for entering this expenditure in the budget would have been initiated and submitted to the budgetary authority. The Commission would point out that all cash operations (budget revenue and expenditure and non-budget operations) are recorded in specific accounts which provide the transparency required in this field. The fact that the recovery order for interest on late payment was drawn up ex post was due to a lack of precision about the procedures to be followed in relations with the bank responsible for administering the guaranteed loan. In future, a recovery order carrying a token entry will be issued when interest on late payment is to be recovered (the exact amount of the interest due from the defaulting debtor is not known until he has settled his debt). The EAGGF Guarantee Section 13.34. The Commission largely endorses the Court's comments to the effect that national controls are often unsatisfactory. However, the Commission does not remain inactive in situations of this type. First, the results of the clearance of the annual accounts clearly show that the Commission will recover its funds whenever there are shortcomings in management or control. Second, it has secured Council approval for a number of regulations tightening up the rules relating to controls, both as regards physical inspection and checks on documents. Finally, over the past few years, the Commission has stepped up its efforts to train national controllers and make them aware of the problem by organizing seminars and working parties. Fisheries 13.35. -The agreement with Guinea-Conakry covered the period 1 January 1992 to 31 December 1993 and was initialled on 11 December 1991. The first tranche of financial compensation was to be paid by 30 April 1992; the second year of the protocol began on 1 January 1993 and the second tranche was to be paid by this date. In practice, the two tranches of financial compensation had therefore to be paid in the same financial year. - The situation as regards Mozambique was the same as for Guinea-Conakry. - For Morocco and Senegal, the Commission committed the financial compensation annually and not in one instalment. The reason for this is that financial compensation depends on the possibilities of Community access to fishing grounds. These possibilities may vary from year to year. In some cases, the Commission has suspended financial compensation as it was unable to fish in the waters in question. 13.36. On 10 June 1992 the Italian ministry informed the Commission that a case of fraud had been detected in the invoices presented for the payment of assistance for an aquaculture project. In accordance with Article 44 of Council Regulation (EEC) No 4028/86 the Commission then suspended aid and initiated a recovery procedure in respect of the amount already paid in a letter sent to the recipient on 30 August 1992 (a copy was sent to the Member State). However, it suspended this procedure pending the outcome of the appeal lodged by the beneficiary. As the beneficiary has decided not to continue with his appeal, the Commission will, as soon as possible, complete the procedure which it had initiated. 13.37. The procedure for terminating this aid is under way. The Structural Funds 13.38. The Commission admits that the payment referred to was incorrectly charged. 13.39. In the two cases mentioned by the Court, the Commission can confirm that the Member State subsequently demonstrated that the 50 % threshold had been observed. In the case in which the Commission paid more than 80 %, the excess payment was due to a monitoring error. The Member State concerned has, however, confirmed that the payments had been made. Since then, it has also submitted a request for the balance, certifying that the projects have been completed and that the funds have been distributed between the final recipients. 13.40. The Commission maintains that the possibility offered by the rules to change the operational programmes should be used wherever necessary in order to adjust them to the conditions of implementation and make overall management of the cofinanced operations more transparent. The payment appropriations for each of the financial years are calculated on the basis of the commitments outstanding and the commitment appropriations proposed in the preliminary draft budget. For the Structural Funds, the payment appropriations required in subsequent years can be no more than a forecast in view of the multiannual nature of the operations financed: financial implementation depends on actual progress. 13.41. Between 1 January 1993 and 30 July 1993 a total of 73 of the 301 files were closed. These files related to specific capital projects in various agricultural sectors in the various Member States. The reasons for the delays in closing the files vary. For example: - The start of the work may be delayed for years as a result of administrative problems such as the failure to obtain planning permission because of environmental regulations. - When slaughterhouses are built or rebuilt, there may be a delay in closing the file if the veterinary certificate is not issued. - In Portugal, a number of files have been affected by the steep rise in the bank rate between planning and approval of the project. - In Spain the administrative procedure is very unwieldy and can easily take one year. - Similarly, the fact that a recipient has to provide further information often delays finalization. 13.42. Article 22 of Regulation No 4253/88 states that Commission decisions, commitments and payments in connection with the Structural Funds are to be denominated and carried out in ecus. The initial financing plans for the operational programmes denominated in national currency are therefore converted into ecus at the rate for the month in which the project is presented to the Commission. The practice noted by the Court in 1989 - using the August rate for all plans submitted that year - is a practical arrangement agreed with the Member States to apply a uniform rate in order to speed up the handling of the large number of projects presented. The same conversion rate was therefore used for any amendments. Payments and requests for the balance are entered in the accounts at the rate for the month of receipt, as provided for in Regulation (EEC) No 1866/90. It is therefore inevitable that there will be exchange rate differences between the date of the initial decision (including amendments) and the date on which requests for the balance are received and, depending on whether they result in a gain or a loss, are to the advantage or disadvantage of the Member State. 13.43. The Euroform, Now and Horizon initiatives were covered by a Commission communication adopted in December 1990. The operational programmes for the period 1991-93 were adopted in the course of 1991. Each of the Community initiatives has its own budget within the overall five-year (1989-93) allocation for the Structural Funds. The existence of a separate overall budget and of monitoring committees for each Community initiative means that the emphasis may be placed on measures of significant interest to the Community (in accordance with Article 11 of Regulation No 4253/88) while providing the same guarantees for monitoring and financial management as for the operational programmes within the Community support frameworks. In accordance with Article 11, the Commission has taken account of the separate overall budgets in drawing up the Community support frameworks for Objectives 3 and 4 for 1993 even though the Community initiative programmes are not formally incorporated in the Community support frameworks for those objectives in 1993. 13.44. (a) The Commission's controls have revealed the same thing, and corrective measures are now being introduced to ensure that the expenditure is charged to the two financial years concerned. (b) In the case of long-term unemployment, the period specified in Article 2 of Regulation No 4255/88 (more than 12 months, qualifying it for Objective 3) must be respected, except in cases in which the Commission has taken a decision to reduce this period. As regards expenditure, the cost of the measures must be correctly charged depending on the type of recipient. The Commission attaches special importance to this type of problem in its on-the-spot inspections. (c) The delays referred to have already been detected by the Social Fund departments during various control missions. The Commission takes note of the Court's finding and will examine the case or cases of delay and the consequences for the smooth running of its training measures. (d) The Commission is currently conducting a series of checks on additionality in connection with Objectives 3 and 4. These checks are intended to cover both national cofinancing and additionality and should be completed in the second half of 1993. (e) Within certain limits, the monitoring committees have the power to amend the financing plans for the operational programmes. However, to be official, the Member States must notify the Commission of these changes. In the case referred to, the Commission had not received a request from the Member State concerned to change the plan, leading to the situation described by the Court. The case has now been settled. (f) The requests for the balance must be based on the actual figures, the number of recipients and the costs. The Commission receives requests which have been duly certified by the national authorities and carries out controls on the spot to verify the information provided. If it discovers situations of the type mentioned by the Court, financial implementation of the programme cannot continue until the necessary corrections are made. The various measures 13.45. Some of the commitment operations mentioned relate to the extension or renewal of previous contracts for which the supporting documents are attached to the original contract. The Commission will ensure that the previous or current supporting documents are attached to the commitment proposals and that references are made to the supporting documents already supplied. 13.46. At present, the Secretariat-General carries out its coordinating role by consulting the other departments concerned on the subsidies which might lead to duplication. A data-processing system is also being developed to allow authorizing departments to check whether prospective recipients are already receiving a Commission subsidy for the same purpose. The Secretariat-General's coordinating role relates to those cases referred to it because of the specific risks which they entail. This explains why only three of the 26 cases controlled by the Court were submitted to it. At all events, under the coordinating role conferred on it by the Commission, the Secretariat-General does not have to examine all commitment proposals; as the Court notes, this would indeed increase the number of administrative hurdles. 13.47. In the case referred to by the Court the Commission did not pay a subsidy but, as stipulated in Article 4.2 of the contract, provided the contractor with the appropriations needed to pay the subsidies to be granted for this purpose. The contract thus states that the Commission must provide the contractor with the funds needed for payment. The maximum (and incorrect) estimate for these payments did indeed come to ECU 11,2 million. However, as this was merely an indication, the Commission is not obliged to pay the whole sum to the contractor, especially as payments are adjusted in line with the projects adopted by the Commission itself. Technological research and development 13.48. As regards the dormant commitments, the departments concerned have taken steps to speed up the procedures for cancelling the residual amounts for completed projects. Computerized monitoring of commitments which have not undergone any changes over a significant period has now been made the general rule. The closure of contracts is not always automatic. Possible differences with the contracting parties receiving the funds may emerge during controls of contract implementation. In these cases, the decision to cancel the commitment of the remaining balances is not taken immediately, pending final settlement. Cooperation with the countries of Central and Eastern Europe and the former Soviet Union 13.49. The duplicated commitment under the Bangkok Agreement was an isolated instance due to an oversight. When the commitment proposals were drawn up for the rest of the projects which had been approved, the fact that one of the contracts for this operation had already been received was overlooked. The second commitment of ECU 240 100 had already been corrected and cancelled in January. The other duplicated commitment of ECU 110 220 was under the normal Phare multidisciplinary programme and was also cancelled in January. 13.50. Albania became a beneficiary of the Phare programme on 23 December 1991; the aid initially financed by EAGGF Guarantee Section appropriations could then be charged to the Phare appropriations in 1992 as decided by the Council on 1 October 1991. Cooperation with developing countries 13.52. ECU 49 million for humanitarian aid for the former Yugoslavia was recharged in accordance with Regulation No 2793/92 which states in its recitals that 'the cost of food aid operations carried out in favour of the victims of the conflict in what was formerly Yugoslavia since 16 October 1991 should be, finally, charged to the appropriations of the EAGGF Guarantee Section`. This was not designed to evade the transfer procedure - that would have been pointless since sufficient funds were available in the headings concerned. 13.53. Article 11(4) of the Commission's rules of procedure and the implementing rules state that, in financial matters, it is the special provisions of the internal rules for the implementation of the budget which apply. Article 5.5 of these rules state that the power to commit expenditure means that the competent authorizing officer has the power to commit the institution contractually vis-Ã -vis a third party. As the commitment was made by the competent Director-General, the appropriate legal base has been respected. There is thus no foundation in the texts in force for the distinction which the Court makes between the power to take decisions and the power to carry out expenditure. 13.54. In 1992, 206 decommitments were made for a total of ECU 40 million for Chapters B7-30, 40 and 50. In the first six months of 1993, 180 decommitments were made for a total of ECU 10 million for the same chapters and a significant number (about 120) further decommitments are being prepared. This shows that constant attention is already being paid to the problem. Efforts are nevertheless being made to take account of the observations by the Court. OBSERVATIONS ON THE COMMUNITY'S FINANCIAL BALANCE SHEET 13.55. It is a constant concern of the institutions to have as much reciprocity as possible in the balances of the interinstitutional current accounts: a procedure has been in force for several years to ensure that an institution is immediately informed whenever another institution handles a reciprocal operation in which it is involved. Some difficulties arise because the institutions do not all close their accounts on the same date (the requirement under the Financial Regulation that the other institutions send their final accounts to the Commission by 1 March might even have the effect of extending the period between the closure of their accounts and those of the Commission). After the other institutions have closed their accounts, the Commission still has to enter them in its ledgers. These operations cannot then be entered in the accounts by the other institutions and thus constitute an unreconciled balance when cancelling out the reciprocal accounts prior to consolidation. OBSERVATION ON THE KEEPING OF THE ACCOUNTS WHICH FEATURE IN THE COMMISSION'S BALANCE SHEET New balance sheet layout as regards bank balances 13.56. The 1992 financial year in which the Sincom GB/GT system was introduced was a year of transition. That is why the Commission again showed the balances entered in its banking accounts and, in doing this, incorporated an error of ECU 100 million. This error did indeed appear in the balance sheet for the year but the underlying entries were not affected. At all events, for the 1993 financial year, the Commission will present the bank balances on the basis of the balances entered in its own bookkeeping as recommeneded by the Court. The Treasury system 13.58 13.60. As the Court itself notes at 13.60, 'two major developments in Treasury operations... were initiated in 1992`. These were: - the introduction of a new network of commercial banks in the Member States between July 1992 and April 1993 following a call for tender relating to banking terms; - replacement of the manual system for its banking accounts and cash management by a computer system interfacing with the budget accounts (Sincom CB/D) and linked automatically with the banks through the SWIFT network. These developments remedy most of the shortcomings mentioned. However, in reply to the specific problems raised by the Court, it should be pointed out that: (a) The payment orders entered in the accounts on an aggregate basis are those sent outside the Sincom GB/GT system. The number of these orders has dropped sharply in 1993. In time, only the payments sent by electronic files - the details of which will be easily accessible - should still be entered on an aggregate basis. (b) In GB/GT the same reference is used in all the programmes. It is also commmunicated to the final recipient. (c) The GB/GT computer system and the new banking terms obtained as a result of the abovementioned tendering procedure rationalize and simplify bank management. However, the number of accounts should not change even if the overall balance held with the commercial banks is to drop considerably. The number of accounts is due to the different purposes they fulfil. (d and (e) The Commission's cash-flow policy is to keep in the commercial bank network only those funds which it needs for budget implementation. The Commission considers that the estimates for determining the amount required are reliable since they are based on an analysis of payment orders. A longer-term forecasting system forms part of the medium-term GB/GT project. (f and (g) An invitation to tender was issued to promote competition on banking terms (see above); this resulted in standard contracts and terms. This system has simplified control 'while standardizing and formalizing the negotiating procedure`, as the Court states at 13.59 (a). The accounts of the Karlsruhe Joint Research Centre Institute 13.61. At the time of the inventory audit, the Institute of Transuranium Elements was unable to produce all the supporting documents in connection with the entry of the buildings in the inventory and in the balance sheet. This state of affairs is known within the Institute. When the Institute was first set up, management was centralized at Euratom in Brussels. Locally, there was only an embryonic administration responsible for day-to-day matters. The Commission will in future endeavour to apply the inventory procedures correctly. 13.62 13.63. The errors of calculation noted in the Karlsruhe JRC accounts are not disputed. The necessary corrections have been made. 13.64. The Commission will undertake the necessary checks. 13.65 13.66. The Commission endorses the Court's comments on the closure of the banking accounts at the end of the year as regards the consolidated accounts (paragraph 13.57), according to which 'the generally accepted practice is to show a figure derived from the main ledger, not from the bank statements`. As the Commission states in its reply to paragraph 13.56, it intends to follow this approach in future and will record in the year-end accounts the entries in its own banking accounts and not the bank statements themselves. Under this method, it is quite possible that the balance recorded in the Commission's banking accounts is negative, even if its bank balance is in credit as it ought to be. It is normal for operations dealt with by the bank to be received and recorded in the Commission's banking accounts after a period which might sometimes amount to several days. As regards entries after the end of the financial year of revenue actually collected in the final days of that year, the Commission will ensure that there is a consistent approach for both the consolidated balance sheet and those of the research centres. 13.67. To remedy this situation, it is proposed that this official be transferred from the first to the second group and that a new first group be formed consisting of the accounting officer and the imprest administrator. Steps will be taken to change the specimen signatures in the bank. 13.68. The deposits mentioned relate to the interest on current account balances in ecus and DM at the Baden-Wuerttembergische Bank. This is merely an infringement of the accounting officer's internal instructions that balances on the Commission's accounts should be kept in a current account with the maximum interest rate possible. In this specific case, the only account offering appropriate interest had the legal form of a deposit account. Furthermore, the case involved earmarked revenue from work performed for outside bodies and not the Commission's normal funds referred to in the accounting officer's internal instructions. REVIEW OF THE COMPUTERIZED ACCOUNTING SYSTEM (SINCOM) 13.71. As part of decentralization, the act of delegation and subdelegation of powers of signature are entered in Sincom: the restrictions they lay down are taken as a basis for controlling access to validate transactions by the authorizing officer. Studies into the security of the system were carried out in 1992 and early 1993: the Commission is well aware of the anomalies noted by the Court and plans to remedy them when planning future operations. 13.72. A quality control group was set up from the second half of 1992. In addition, an internal reorganization of the information technology section from 1 September 1993 means that it is possible to assign the equivalent of 1.5 persons full time to this problem, which should help resolve it. The specific internal control of Sincom CB/D 13.73. It was difficult to complete decentralization before the budget accounts (Sincom CB/D) and the cashflow (Sincom GB/GT) were modernized. The decentralization process did, however, start in early 1993 with the Commission's preparatory activities - testing of pilot projects followed by development of a general plan for decentralization. At all events, the Commission endorses the Court's opinion on the importance of this measure for increasing the security of the system as regards validation of signatures of authorization, control, validation of the accounts and the separation of duties between authorizing officers, the financial controller and the accounting officer. 13.74. In 1992 the Commission adopted rules to control the use of negative appropriations more effectively: the headings concerned are no longer automatically unlocked as was previously the case. Procedural measures have also been taken to authorize the transfer of appropriations from these headings only if funds are actually available. In 1992 the Commission set up a structure to check that the time limits for completing commitments were met: a deadline has been set for all the commitments in the accounts. Implementation reports and early warning lists have been developed and will be used in the course of 1993. There is no foundation for the accusation that Sincom validated the recording of data not consistent with the rules, such as the automatic carryover of differentiated appropriations. This was not an error in the computer system but an error which occurred when data from the Sibeca (JRC) system were transferred manually to the Sincom system. The error resulted from confusion between 'appropriations committed` and 'carryover of commitment appropriations`. However, this error did not have any consequences since the system does not allow the use of amounts which have been entered incorrectly. The mistake was corrected as soon as it was detected. After a number of pilot projects, in 1993 the Commission began a general programme for the decentralization of the input of commitment and payment operations by authorizing departments. This operation should be completed in the course of 1994. Rules have been adopted in connection with authorization so that the subdelegation of the powers of signature under Article 22 of the Financial Regulation will cover both handwritten signatures on paper documents and electronic signatures in the computer system. The management of interfaces between the local management systems and Sincom was consolidated in 1992, leading to the issue of an updated version of the Sincom CB/D interfaces reference manual (including GB/GT). In addition, a new function under which the local systems are informed of the results of Sincom's treatment of the data transmitted through the electronic despatch of a response file on treatment of the IN interface was defined in 1992 and set up in 1993. It will therefore be possible for local operators to reprocess the errors detected without delay. As regards earmarked revenue, the distinction between outstanding commitments from previous years and commitments for the current year covered by carryovers is recorded in the accounts. The information is thus available for both individual commitments and the revenue and expenditure account. Admittedly in Sincom the breakdown is found only for individual commitments. The specific internal control of Sincom GB/GT 13.76. Sincom provides for a number of automatic checks for consistency between the various subsystems. Visualization is not possible in this case. One of the objectives is to reduce the number of manual operations and controls. Manual controls now take place only where automatic checks are not possible or have not yet been introduced; however, signatures are visible in these circumstances. Even though certain officials have access to the various items of software in the performance of their duties, the internal rules ensuring the separation of duties also guarantee that the possibilities of access are not too extensive. 13.77. The problems mentioned by the Court are now being resolved under the Sincom GB/GT project. (a) A new system for controlling bank balances was introduced in the first half of 1993. (b) In the Commission's view, the Nostro system is functioning correctly. (c) As regards the delays in adjustments between GB/GT and the general accounts, the establishment of an interface will eliminate most of the manual reconciliation and reduce the backlog. Conclusion 13.78 13.79. The Commission considers that most of the main objectives of the Sincom system have been achieved even though improvements are constantly being introduced, as in any developing system. At all events, decentralization could not take place until the improvements made in 1992 to allow the launch of the Sincom GB/GT project had taken effect. Decentralization took a significant step forward in the first half of 1993. This decentralization will also allow separation of the duties of authorizing officer and accounting officer and the internal controls of the acts of delegation desired by the Court. Unlike the Court, the Commission considers that the objectives of the Sincom CB/D and GB/GT projects were realistic, as the results show. Howxever, it is reviewing the second stage of Sincom and will discuss further integration of the system. As it stated in its reply to paragraph 16.116 of the 1991 report, the Commission feels that 'the system has to adapt to changing financial legislation rather than the other way round`. The accounting system must be designed to satisfy the requirements of budget implementation, i.e. it must, in particular, take account of the rules. However, legislation may also be simplified, as is demonstrated by the harmonization of the provisions for carrying over and restoring unused appropriations. Finally, the Commission shares the Court's opinion that 'a change of computer equipment would not be enough to remedy the weaknesses of the internal control structure`. Nevertheless, the Commission considers that the security aspects introduced - or on the point of being introduced - considerably improve the security of the accounting system. CHAPTER 14 The European Development Funds FINANCIAL AUDIT Implementation of the EDFs to 31 December 1992 Utilization of appropriations 14.2. The works in preparation for the closure of the fifth EDF are well under way. The immediate priority is the closure of primary and secondary commitments. When the number of active projects falls within reasonable limits, the fifth EDF will be closed. 14.4. The Commission has given priority to the utilization of these balances in making commitments, whenever possible, in conjunction with resources available under the seventh EDF. 14.5. These temporary suspension measures have no effect on emergency or humanitarian aid. Furthermore, ongoing projects have been maintained throughout, except in those cases where conditions were so unsafe that it was impossible to continue. Management of appropriations in 1992 Updating of allocations 14.6. OLAS includes an automatic system for blocking appropriations within allocations. This system went into operation in May 1992. The Financial Controller vouches for the availability of appropriations by approving financing proposals and commitments to incur expenditure. These indicate the allocation of the expenditure and therefore enable verification of the availability of appropriations. Work is currently in progress on an automatic system for blocking movements of appropriations from one allocation to another. EDF funds from the instruments for subventions, special loans and risk capital to an amount of 932 million ECU have so far been set aside for regional cooperation. The EIB has provided a further 21 million ECU from its own resources. The Commission is confident that the target of 1 000 million ECU for regional cooperation stipulated in the LomÃ© III Convention will be reached. 14.7. The Commission intends transferring the interest received under the seventh EDF, but credited to a sixth EDF account, from the sixth to the seventh EDF. The balance of ECU 3,17 million shown in respect of LomÃ© II does not correspond to unexpended balances from Stabex transfers as such, but rather to the balance of appropriations committed for projects financed out of Stabex funds which have not yet been closed. The unexpended balance of ECU 29,65 million in respect of LomÃ© III includes a sum of ECU 26,2 million representing Stabex interest, most of which was entered in 1992. Decisions will be taken on the allocation of this amount. A large part of this total will be transferred to LomÃ© IV. 14.8. The unexpended balances of the fifth EDF will be paid back to the assets before the Fund is closed. The Commission will make a decision on the unexpended balances of the sixth EDF at the earliest opportunity. 14.9. As not all the projects involving interest-rate subsidies were closed, it was not possible to carry out this operation before the end of the 1992 financial year. The total unexpended balance of ECU 26,2 million (including OCTs) in respect of LomÃ© II was converted into grants in April 1993. Sleeping commitments 14.10. The Commission is concerned by the phenomenon of sleeping projects, but the figures advanced by the Court should be interpreted in a way which recognizes its inevitability in many cases, notably the political situation in many countries, and administrative delays in the ACP States. Instructions are given to delegations at regular intervals to review the possibility of closing primary and secondary commitments. A period of grace has nevertheless to be allowed to ensure that all payments have been made, all advances recovered and all claims settled. For supply contracts, the secondary commitment should remain open for more than one year after the provisional acceptance while the supplier guarantees remain valid; thus the significance of the 18-month period taken by the Court should be seen in this context. A part of the outstanding secondary commitments referred to Article 14.10(c) can be explained by this practice. The closure of primary commitments (projects) requires in addition a formal request from the national authorizing officer to do so. In any case, the Commission has to maintain a balance between premature closure of projects, which involves reopening them if late expenditure is subsequently found to be necessary, and blocking appropriations unneces- sarily by long delays in closure. The Commission is examining the logic necessary and the technical feasibility for creating an automatic alert system which will filter those projects necessarily inactive and identify those where action is necessary. 14.11 (a) See reply to paragraph 14.49. (b) Special loans while increasing debt stock are 85 % grant equivalent and therefore improve the overall loan portfolio conditions. The explanation for a high proportion of inactive loan finance is rather that projects often comprise a mixture of loan and grant finance; logically the recipient will allow the loan portion to sleep until the grant is fully used. This problem is eliminated in LomÃ© IV which is all grant finance. (c to (f) The development of an alert system (see 14.10) will improve follow-up and accelerate a closure programme. The EDF financial statements 14.12. The Commission will give positive consideration to the Court's suggestion. 14.13 (a) The value of items in suspense accounts at the end of the year 1992 is equivalent to 4,4 % of payments made during the year. This represents a reduction of this indicator by more than 50 % compared with 1991. Similarly, outstanding revenue has been reduced from 35,2 million ECU to 16,6 million ECU; This work will be continued in order to regularize the outstanding amounts. (b) The financial data are still being audited and will be supplied with the 1993 administrative accounts. (c) Summary tables for all instruments are already available and various combinations to illustrate specific facets of EDF operations are envisaged. (d) Advances are systematically noted in the individual project records to clear or, if necessary, to recover; The Commission's delegations secure the correct monitoring of guarantees; The Commission will examine the desirability and technical feasibility of creating a computerized evaluation system of the current value of contracts placed within commitments; Instructions are that outstanding receipts are to be registered separately and regular follow-up by the authorizing officer or the accounting officer as appropriate is to be conducted; The introduction of a system to register global authorizations will be examined. (f) As far as the accounts of three paying agents are concerned (Tanzania, Nigeria and Vanuatu), the overdraft is simply the result of the delay between the transfer by the Commission departments concerned and the credit advice to the paying agent's account. The ACP bank took it upon itself to make the outstanding payments even before recording the transfer. In the case of Uganda, the Commission has implemented a regularization procedure and has devised a new and safer financing system which involves, inter alia, a confirmation from the paying agent after each transfer before another is made. Observations concerning the management system Operation of the OLAS accounting system 14.14 14.15. The accounting practice referred to by the Court has existed since the start of the EDFs and OLAS has simply adopted the same principle. This accounting practice is capable of providing reliable accounting data. 14.16. This automatic single-approval transfer programme only applies to movements that originated in OLAS and allows payments to be transferred from one commitment to another. These modifications are recorded by the OLAS system which produces a journal of all final transactions including the corrections. Regarding the involvement of Financial Control, substantial modifications to transactions that have already been approved by Financial Control must of course be resubmitted for its approval. However, corrections of a purely factual nature do not require Financial Control's prior approval. Grant of final discharge to the EDF accounting officer 14.17 14.21. The Commission agrees with the Court that a formal procedure for the quitus by the Commission of the EDF accounting officers should be established. The Commission is presently reviewing the procedures for the quitus of the accounting officers regarding the general budget in connection with the Court's recent audit of the quitus procedure in the Community Institutions. A coherent approach will be applied to the quitus for the EDF accounting officers. Court access to accounting data 14.22. The accounts containing all financial movements of the financial year 1992 and the balance sheets were made available as soon as the approval of the Commission's competent services had been obtained. Translation difficulties contributed to the late presentation of the official adopted accounts. 14.23. Electronic data media containing all definitive financial movements of OLAS are made available to the Court at three-month intervals. The Commission intends to give the Court access with due regard to all relevant provisions concerning the security of the system and data protection, i.e. essentially along the same lines as its access to Sincom for the general budget. A special programme to grant access according to the elements as mentioned above is under construction. Legality and regularity of the operations relating to certain financial instruments Stabex 14.25 14.26. The decisions challenged by the Court of Auditors here were taken by the Member States and put to the Committee of ACP/EEC Ambassadors acting under powers duly delegated by the ACP/EEC Council of Ministers. The Commission considers this procedure to be in accordance with the LomÃ© Convention. 14.28. On the subject of the 1991 coffee transfer for the benefit of CÃ ́te d'Ivoire, the Commission based its enquiry on the issue of statistics and this led to an ECU 34,8 million reduction in the transfer base. The Commission does not believe that it could have brought about the same level of reduction by conducting its enquiry otherwise. As far as Cameroon is concerned, it is correct that the Commission has not reduced the transfer bases for coffee and cocoa because the falls in production were the result of a policy of structural adjustment which was supported by the Commission. The Commission considers that it is wrong to punish a country for embarking on a pro- gramme of reforms while at the same time supporting that programme. 14.31. The Commission will take the necessary steps to recover the sum of ECU 1 298 287 that was overpaid. 14.32. The Commission does not consider it necessary to introduce a procedure for monitoring the implementation of the mutual obligation frameworks in its central departments. In the Commission's opinion, the delegations alone are in a position to check whether the ACP countries have carried out the operations under the frameworks for ensuring that the transfers are made. 14.33. The Commission is in the process of chasing up those ACP countries which have still not submitted their reports on the use of transfers under LomÃ© III. Structural adjustment support 14.35. Structural adjustment support is, first and foremost, a balance of payments aid, which helps a State to strike the balance between its currency resources and its expenditure, i.e. to be in a position not only to pay for its imports of goods and services, but also to honour its foreign debt commitments and rebuild its exchange reserves to a reasonable level. Community aid therefore comes within the scope of a balanced financial framework and a unique national macroeconomic context. The formation of counterpart funds is one of the consequences of the instruments used to generate foreign exchange, i.e. the import programmes. In practice the Commission uses these counterpart funds as a powerful lever for channelling public expenditure, especially into the priority social sectors and for the maintenance of basic infrastructure as part of a voluntary restructuring exercise involving the whole of the public and related sectors. 14.36. To make the way the accounts are presented clearer, the Commission intends adding a key to help identify projects by financing decision. 14.38. Firstly, on the subject of a balance of payments aid, expenditure is incurred on disbursement, when there is an increase in a country's exchange reserves, i.e. when the central bank receives currency under a foreign exchange programme or when goods come into the country without currency leaving via the central bank, in the case of a direct procurement import programme, for example. The Commission only uses Article 250 (cash advances and separate accounting) when there is a substantial risk of bad management by the central bank. The Sierra Leone case (in 1993) is a special case and the Commission departments are examining ways of preventing similar cases from happening again. 14.39. Conditions for structural adjustment support (SAS): (1)at the macroeconomic level, it involves global appraisal of the programme; (2)at the level of specific, largely sectoral measures, it involves conditions for suspending SAS; (3)at the financial, accounting and administrative level, it involves verifying correct implementation in accordance with procedures established in conjunction with the recipient State in relation to currency and counterpart funds. While it is possible to use precise, quantified benchmarks, in particular at the second level, where conditions relating to suspension of aid or a reduction in the number of conditions are involved, we must nevertheless avoid running the risk of being too rigid and thereby causing blockages which would actually penalize the sectors that were meant to be supported. At the first level the need is to have more subjective conditions allowing for discretion to appraise the programme design, so that if necessary aid might be suspended to a country which was following the conditions to the letter but not respecting the substance, thus minimizing the danger of inconsistency with the general framework and its principal elements. This does not necessarily mean that all the measures in the Policy Framework Paper have to be followed equally strictly as far as their timetable or contents (often imprecise) are concerned. Finally, it should be noted that there can only be one national structural adjustment programme and, in most cases, this implies an agreement with the IMF and/or World Bank and consistency in the conditions. 14.40 (a) As a result of this error, a special procedure has been set up for the Commission departments to follow. (b) The second instalment was released after consultation with the donors, who resumed payments in any case following the adoption by the government of a schedule of corrective measures, relating in particular to the money supply. In this country, it was thought that the SPA guidelines on the use of counterpart funds could replace a protocol of agreement on counterpart funds. These counterpart funds have been included in the implementation of the national budget in an approved budgetary framework. We are currently trying to draw the lessons from this experience. (c) Even if the government's willingness to restore competitiveness is genuine, it is not the responsibility of the government of CÃ ́te d'Ivoire to take certain decisions on its own (e.g. fixed parity for the franc area). This comes under the level of the overall macroeconomic conditions. The specific conditions have been complied with because the Commission's evaluation of operating methods relates to the budget as a whole, including investment from national resources. The delays in implementing the budget alone can be ascribed to liquidity problems and not to the government's failure to give it priority. In any case, the delays had a relatively minor effect on the target sectors for Community aid. The World Bank itself expressed its total satisfaction with the implementation of the sectoral policies, although other factors related to macroeconomic matters (see ref. to franc area above) succeeded in delaying payment. (d) The only general conditions that were not fulfilled are either the result of delays in payment by donors (increasing the deficit and clearing arrears) or only involve delays in implementing measures without adversely affecting the basis of the programme. The other specific conditions were fulfilled in a satisfactory manner. 14.41. See reply to paragraph 14.39. 14.42. In the case of EDF operations, drafts of contracts cannot be systematically submitted for Financial Control's prior approval, as the Court itself has stated in its Annual Report concerning the 1989 financial year () . These contracts are made by the national authorizing officers on the basis of financing agreements covered by commitments of funds which have been previously approved by the Financial Controller. Furthermore, the Commission feels its position was fully justified. It turned out at the invitation to tender stage that the tenders for a smaller advance were dearer than the prices obtained for the tenders which included an advance of 60 %. In economic terms, this difference corresponds to the bank interest rates. However, as the price obtained determines the price of petrol at the pump, the Commission accepted the recipient State's offer to pay the 60 % advance. Risk capital 14.44. The EIB Board of Directors only took its decision in December 1992. The Commission only received notification in early March 1993. The internal procedures regarding the registration of decisions taken by the EIB have been revised during 1993 in order to secure the timely processing of the corresponding primary commitment in the EDF central accounts. The delay of the past has been eliminated in the first semester of 1993. 14.45. Regarding financing contracts for risk-capital operations, the Commission has received the loan contract at the same time as the borrower since the beginning of 1992. As regards the registration of secondary commitment the Commission will in future open such commitments on the basis of the financing contracts concluded between the EIB and the beneficiary as proposed by the Court. 14.46. The Commission has all the information it requires at its disposal in order to carry out the monitoring and adjustment of movements in the rate of the ecu and currency equivalents. As regards currency equivalents, in future the Bank will confirm the exchange rates it has obtained for each operation. 14.47. The closure of the commitments corresponding to the seven agreements is in process. 14.48 (a) One of the three commitments related to the loan (Huileries de Sambava - Madagascar) has been closed, the closure of the remaining two commitments will be effected in 1993. (b) Notification of risk-capital operations is carried out when the project is approved by the EIB Board of Directors. There can be a maximum of 12 months between that date and the date of signing of the loan contract. Bearing in mind the contractual obligations and the conditions of payment that the borrower must fulfil before presenting his first request for funds, the fact that a period of time, perhaps as much as 18 months, should elapse, seems reasonable. If these deadlines are exceeded, the Commission has to take measures. (c) Every year, the Bank sends three different but complementary types of report containing all the information on projects financed with risk capital (Art. 193/325 LomÃ© Conventions, report Art. 29/33 Internal Agreements and annual project summary sheets). In future these operational reports will be available in DG VIII. 14.49 (a) On the subject of suspension of payments in connection with the outstanding payments situation, the EIB has set some very clear internal provisions on the issue of loans from own resources and on risk-capital operations. These provisions do not apply either of necessity or in their totality to all operations in a single country, the basic criterion for any suspension measure being the identity of the borrower (the State itself or any other legal person). Since any suspension of payment will result in difficulties in the implementation of projects, this measure, in view of its seriousness, should only be taken with caution and should not therefore be automatic, particularly in the case of projects carried out with private capital guaranteed by private institutions, i.e. in which the State has no involvement in the financial arrangements. On the issue of blockage of payments from special loans, the decision is the responsibility of the Commission. Moreover, the Bank regularly informs the Commission and the Member States (on a monthly basis at meetings of the EDF and Article 28 Committees or whenever a bond is called) of the situation regarding countries in arrears with their payments. (b) One of the priorities referred to in LomÃ© IV is support for the private sector. The Bank is pursuing that goal by granting aid from risk capital. At the current stage, it is difficult to assess the number of operations in which risk capital is used in the form of loans and those in which it is in the form of holdings - in fact, the latter are largely financed by means of global loans. It is generally accepted that holdings are one of the preferred ways of encouraging and promoting the private sector. Emergency and refugee aid Accounting monitoring of humanitarian aid operations 14.52. The Commission is examining technical solutions for the elimination of the existing duplication of efforts in the authorizing officer's unit and ECHO and thus avoiding unnecessary delay of financial transactions related to the EDF emergency aid programme. This will be done maintaining unique and united EDF central accounts and treasury. 14.53. Particular circumstances during 1992 may have caused cases of abnormal delay, but the Commission strives to treat emergency aid actions with adequate priority. 14.54 14.55. See reply to paragraph 14.11(c) to (f). Aid to Somalia 14.58. On 9 September 1992 the Council authorized the Commission to support the operations of the United Nations in Somalia up to a limit of USD 27 million, to be financed from remainders from the indicative pro- grammes for Somalia under LomÃ© II and LomÃ© III. (a) On the basis of the above authorization the Commission took on 22 September 1992 a financing decision of 20 million ECU for the protection of humanitarian actions within Somalia. It is true that, due to administrative delay, the above decision was not reflected in the EDF accounts until 18 January 1993. (b) The Commission has informed the Committee verbally on a regular basis about the progress of implementation up to mid-1993, and will continue to do so also in writing. (c) The first instalment of 7,5 million ECU was pledged in January 1993 in accordance with the terms of the authorizations and it was covered by the financing decision dated 22 September, approved by Financial Control on 16 September 1992. Sysmin 14.60. The performance or efficiency of Sysmin should not be judged on the basis of the state of commitments alone. This facility is non-programmable and should be considered as a short-term instrument. 14.61 14.62. The Commission is currently examining a proposal for the use or transfer of unexpended balances from the second and third LomÃ© Conventions. 14.65. If this support from Sysmin would not have been given to Zambia, the economy as a whole would have collapsed and the diversification process would have received a setback. The mechanisms employed were necessarily harmonized with the specific phase of Zambia's adjustment pro- gramme, and to promote development of the private sector. This precluded specific financing of selected operators which would have represented a return to the interventionist approach discouraged by the adjustment programme. With respect to the use of counterpart funds the financing proposal defines that these will contribute to decreasing the budget deficit, 'thus permitting an equivalent increase in the credit availability in the banking system to be allocated to the private sector`. The Commission considers it to be the optimum contribution to the diversification process aimed at under Sysmin operations. Follow-up of the recommendations accompanying the decisions granting discharge 14.66 (a) The operational analysis sent when OLAS was launched contained the essential details of the programmed checks. The information required by the Court will be provided through its access to OLAS, which will probably be granted at the end of 1993. (b) The manual of financial procedures is intended to be an evolving document which is continually being revised to take account of any changes. After it was first sent to the departments and delegations in June 1992, a 'trial` period of six months was granted for the submission of observations and comments. A third version has been at the drafting stage since March 1993. This version will be translated into English and sent to all officials, including those in the delegations. (c) The transfer of the EDF Accounting Officer to DG XIX will be effected shortly. (e) In accordance with point 17 of Parliament's comments accompanying the 1990 decision granting discharge for the fourth, fifth and sixth EDFs, the Commission included descriptions of the measures it had taken to follow up the discharge in its report on the general budget. This report was sent to the budgetary authority at the end of April 1993 as an annex to the 1992 administrative accounts, in application of Article 89(5) of the Financial Regulation. PROCEDURES FOR EVALUATING THE PROGRAMMES AND PROJECTS OF THE EUROPEAN DEVELOPMENT FUNDS 14.69. As of 1 June 1993, this unit consisted of 10 officials (6 A and 4 C) and 5 experts (4 A and 1 C). The increase in staff is only an indication of the new policy on evaluation introduced towards the middle of 1992. 14.70. Since the middle of 1992, the Evaluation Unit has had full responsibility for evaluation work. It is the department responsible for all associated evaluations which are intended to reorient projects or change the objectives and for those evaluations involving reallocation of finances. For all other mid-term reviews, the Evaluation Unit is an associated department. 14.71. The Evaluation Unit has had responsibility for evaluations 'on projects` since 1992. 14.72 (a) The Commission has noted the Court's recommendation in relation to the policy on joint evaluations. (b) In cases where there is a point of mutual interest in evaluations organized by the Evaluation Unit, the Commission and the EIB enjoy close collaboration at sectoral level. (c) As far as the new instructions relating to evaluation are concerned, all evaluation reports must be covered by a document known as an 'End of evaluation report`, which summarizes the main conclusions and recommendations of the evaluation exercise. This report is systematically distributed to the Director-General, management and departments concerned. The Unit's annual working plan has now become a three-year rolling plan approved by the Directors-General concerned (DG VIII and DG I). (d) The Commission shares the Court's opinion on the need for improvements in the implementation of the 'basic principles`. The aim of the current discussions on the system of periodic monitoring and the efforts being made to ensure a greater retrospective effect for the results of evaluation work is to bring about improvements. (e) The Commission departments' approach to evaluations is based on the viability of operations, the interests of target groups, consistency of the objectives with each other and with the problem needing a solution. Institu- tional and organizational aspects of the project and the procedures involved also need to be examined. However, evaluation of the role played by the Commission departments is a matter for the Commission's own inspection departments. (f) The Commission departments revised the system's structure and implementation procedures in 1993. A computer application called Picsem has been specially devised for this purpose and the system of periodic reports has been restarted on instructions from the Director-General. The Evaluation Unit is also looking into the introduction of a more effective and reliable monitoring system together with other evaluation departments in the Member States. (g) As regards information for public consumption, the work of the Evaluation Unit, in line with Commission policy, is completely open. Generally speaking, all its reports are available for consultation other than in very exceptional cases where it is necessary to protect the rights of a private person, an institution or a government. In accordance with the new policy, the results of evaluation work will be distributed widely for the information of the general public. (h) The Commission departments agree with the Court's opinion on the need to involve Commission officials in evaluation work as much as possible. The Commission opted for this approach in its new policy and this is the main reason for the increase in the Evaluation Unit's staff. The necessary resources, especially in relation to missions, will have to be adjusted accordingly.PART II OBSERVATIONS ON THE OPERATING APPROPRIATIONS OF THE INSTITUTIONS AND ORGANIZATIONS OF THE EUROPEAN COMMUNITIES>TABLE> CHAPTER 15 (*) Parliament >TABLE> (*) The Institution's replies are on page 364 INTRODUCTION 15.1. The Court of Auditors has carried out its annual audit of the European Parliament's budgetary and general accounts, along with an analysis of action taken in response to the observations made by the Court in previous financial years and to the undertakings entered into by Parliament in its replies to those observations. OBSERVANCE OF THE FINANCIAL REGULATION 15.2. Certain observations contained in previous reports, especially with regard to compliance with the Financial Regulation, are still relevant. In particular, the Court draws attention to the fact that the number of cases in which decisions by the Financial Controller to withhold approval were overruled is still high. Absence of prior commitments 15.3. The Court has already drawn attention to the same situation, in its Annual Report for the financial year 1987 (21 overrulings concerning expenditure totalling 1,05 Mio ECU () ). In those cases too the most frequent reason given by the Financial Controller for withholding approval was the absence of a prior proposal for a commitment. In its reply to that Report, Parliament had said that its authorizing officers had been reminded on several occasions of the need to ensure scrupulous adherence to the rules and that, furthermore, administrative measures had been taken in the sectors concerned in order to ensure that the Financial Controller would not be obliged to withhold approval. An analysis of the decisions to overrule the Financial Controller that were taken in 1992, and in particular those detailed in paragraphs 15.7 to 15.9 below, shows, however, that the state of affairs described in 1987 is broadly speaking identical to the one obtaining now. 15.4. In 1992, Parliament's President decided to overrule the Financial Controller in 11 cases in which he had withheld his approval, concerning expenditure totalling 2,7 Mio ECU. In 10 of these cases, approval had been withheld, among other reasons, because of non-compliance with Article 36 of the Financial Regulation, which requires prior submission of a formal proprosal for commitment of expenditure. Although approval had been withheld for perfectly justifiable reasons, the President nevertheless considered it necessary to overrule the Financial Controller in view of Parliament's legal obligations towards third parties. 15.5. In this connection the Court must reiterate the principle that requires any measure that is likely to result in an item of expenditure chargeable to the budget to be subject to a prior proposal for a commitment by the competent authorizing officer (Article 36 of the Financial Regulation) and to receive the prior approval of the Financial Controller (Articles 37 and 38 of the Financial Regulation). Only after the Financial Controller's approval has been given is the authorizing officer justified in entering into a commitment vis-Ã -vis third parties that is binding on the institution, and providing, obviously, that he also abides by the principles of economy and cost-effectiveness laid down in Article 2 of the Financial Regulation. In the Court's opinion, however, it is not possible to derogate from Articles 36 to 38 of the Financial Regulation merely by invoking the principles of sound financial management (Article 2), which would otherwise allow the authorizing officers to act without any evidence of availability of appropriations and in the absence of any prior check as to the regularity and conformity of the expenditure with regard to the applicable regulations (Article 38). 15.6. Parliament's administration should carry out a thorough re-examination so as to establish why cases of this kind have continued to occur, and should then take the necessary remedial steps. The Court would point out that the Financial Regulation lays down, in Article 73, that authorizing officers shall render themselves liable to disciplinary action and, where appropriate, to payment of compensation in cases where they do not comply with the Financial Regulation. Consultancy services relating to a property development project 15.7. Some overrulings concerned the consultation by the Parliament of external experts in connection with a property development project. If, as Parliament claims, it was not possible in these cases to assess the extent of the financial requirements from the beginning, that does not justify the fact that subsequently, and for several months, the authorizing officers allowed the works to continue without being able to keep the burgeoning costs of the operations properly under control. Full observance of the Financial Regulation, which presupposes proper planning, organization and control by all levels of authority concerned, would have ensured sound financial management without preventing the works from following a normal course. The cases concerned are the following: (a)The conclusion of a contract for legal advice. The service originally envisaged was very limited: the initial commitment, which was directly negotiated, amounted to 7 244 ECU. Thereafter, the legal firm continued to respond to requests for advice coming not only from the department of the authorizing officer responsible but also from other authorities within the institution, and even from other outside consultants, as a result of which the amount due had reached 100 000 ECU by 31 December 1991, without any prior commitment having been made. In order to settle this bill, Parliament had to overrule the Financial Controller's refusal to grant approval. It is worth noting that the recitals to the decision to overrule the Financial Controller mention the fact that the additional services in question had been provided without the authorizing officer's knowledge. (b)Services rendered by technical consultants. The contract with this consultancy provided for fees of 71 600 ECU, representing some 200 man-days a year, for 'monitoring and supervising the execution of the project`. However, by the end of the first six months of 1992 the firm had already worked more than 1 500 man-days. In mid-1992, the Financial Controller refused to approve a commitment to cover expenditure ex post totalling 1,9 Mio ECU, which considerably exceeded the original estimate. Once again, Parliament's President, by overruling the Financial Controller, decided to sanction an obvious infringement of the Financial Regulation. (c)Provision of financial advice. The firm in question was first consulted in July 1991 for a fee equivalent to 11 000 ECU. The first overruling was made at the end of 1991 in order to pay fees amounting to 534 680 ECU which had been incurred without any prior commitment. A second commitment, which was raised in March 1992 in respect of fees amounting to 260 000 ECU, proved in the event to concern work costing 520 000 ECU. The budgetary appropriations originally provided for in 1992 had been exceeded, so it was decided to overrule the Financial Controller a second time after the necessary appropriations had been transferred to the budget item in question. The payment thus made included, inter alia, the fees (36 630 ECU) of a legal firm which had been consulted at the financial consultancy's own initiative 'to act on behalf of the European Parliament`. 15.8. These three cases have certain features in common, even though they come under the jurisdiction of different authorizing officers. In all three cases, the initial commitment was for a task and an amount which were relatively modest. Thus, in two cases ((a) and (c)) a contract was signed without the issue of an invitation to tender and without the Advisory Committee on Procurement and Contracts (CCPC) being consulted beforehand, as is required when contracts worth more than 35 000 ECU are to be awarded. These modest initial commitments were then followed by additional services, the scale of which was out of all proportion to the original commitment made. 15.9. These cases represent serious and repeated infringements of the Financial Regulation by senior authorizing officers. Moreover, these latter did not retain full control, on behalf of the institution, of decisions taken in connection with the services required, those providing the services being apparently free to decide the extent of their work and even of their powers. The Court also wishes to stress that it is up to the authorizing officer to ensure that he is in a position to observe the procedures laid down in the Financial Regulation whilst it is up to the institution to ensure that the framework within which the authorizing officer operates is such as to allow observance of the principle. Situations of the kind observed by the Court are totally unacceptable and the Court expects the Parliament to take steps to ensure that in future the regulations at present in force concerning the provision of services are complied with. INVENTORY OF MOVABLE PROPERTY 15.10. Contrary to the relevant provision of Article 78 of the detailed rules governing the implementation of the Financial Regulation, Parliament did not conclude its inventory check for the three-year period 1986-88 until 1992, whereas the resultant inventory statement should, in fact, have been completed by the beginning of 1989. This statement, which was issued on 7 February 1992, cites 3 932 items of a value greater than 150 ECU (with a total value of 4,2 Mio ECU) which were entered in the inventory but could not be located. The latest inventory check, for the three-year period 1989-91, shows the same management weaknesses: late completion (at the end of 1992), and 8 381 items with a value greater than 150 ECU (total value: 8,2 Mio ECU) which were in the inventory but could not be located. 15.11. The reliability of the inventory should thus be treated with caution. Apart from the missing items, the inventory check revealed the existence of items which had no serial number, either because they had not been entered in the inventory when purchased or because the tag with the serial number had been removed. Furthermore, some items were entered in the inventory during the inventory check, on the basis of estimated values. It therefore follows that the figure for movable property notified to the Accountant to enable him to draw up the balance sheet was incorrect, so that the latter document does not reflect the actual state of affairs. 15.12. In paragraph 18.11 of its reply to the Annual Report on the financial year 1991, Parliament said that it intended to issue an invitation to tender asking external consultancies to bid for the contract to examine the current state of the institution's inventory and make the necessary recommendations. By the beginning of the financial year 1993, no invitation to tender had been issued. Generally speaking, the human and technical resources required are not yet in place and the instructions needed to ensure sound financial management have not yet been issued. This being so, immediate action should be taken to remedy the persistent weaknesses in inventory management.REPLIES OF THE PARLIAMENT INTRODUCION In its observations concerning the financial year 1992, the Court addresses two specific issues, i.e. the application of the Financial Regulation and the decisions to overrule refusals of approval in respect of the specific problem of services connected with the Brussels building project and the inventory of movable property. APPLICATION OF THE FINANCIAL REGULATION Any specific reply concerning the circumstances surrounding refusals of approval and overrulings thereof should be prefaced by a restatement of the following observations as an initial response to the Court's observations that there are still too many overrulings of the Financial Controller's refusals of approval: - Although it is true that 11 overrulings may still be regarded as excessive, it should nonetheless be pointed out that, since the financial year 1987 when 21 such decisions were taken, the number of decisions to overrulings has fallen constantly while, at the same time, the number of commitments of expenditure has increased from about 4 000 to about 6 000 per year; - the financial year 1992 was 'special` to some extent as regards overrulings concerning the particular circumstances under which expenditure was committed for contracts for financial, technical and legal experts recruited by the European Parliament in connection with the construction of the Brussels building project. These three cases are moreover being examined separately by the Court, which will be given specific and appropriate answers; - Parliament, and in particular its President, is aware that it is essential to improve procedures so as to avoid overrulings. Each overruling has consistently involved specific recommendations from the President to the authorizing officers concerned with a view to introducing preventive procedures for the future. For instance, with regard to the three cases concerning property experts, this is illustrated by the fact that the President asked the Committee on Budgetary Control for a detailed report containing clear and precise measures for the future. On the basis of that report (by Mr Tomlinson, 15 December 1992), the position concerning property experts has been completely regularized for the future. More generally, other measures also of considerable importance were taken in 1992 to improve the situation such as: - elaborate training geared to authorizing officers in particular, involving specific seminars and the publication of a handbook for them; - the posting of budgetary and accounting procedure specialists to certain services where such staff were lacking, with a view to better management and greater compliance with the provisions of the Financial Regulation; - making authorizing officers more aware of the possibility that they are personally financially liable. A report along these lines has been expressly requested from the Committee on Budgetary Control and is in preparation. INVENTORY OF MOVABLE PROPERTY In this area, too, Parliament has taken special measures which should be spelled out before any more detailed information is provided. For example, not only has a task force been set up to deal with this area, but an outside consultant has been recruited too, for the introduction of a new inventory control system with a view to finding a solution for the major inventory-related drawbacks of dispersal between three working places. I - APPLICATION OF THE FINANCIAL REGULATION A - Absence of prior commitments (paragraphs 15.3., 15.4., 15.5. and 15.6. of the Court's observations) Apart from the specific cases of overrulings in connection with three property-related matters, failure to comply with Article 36 of the Financial Regulation, which requires prior submission of a proposal for commitment of expenditure, was the main ground for the other eight refusals of approval by the financial controller. In respect of all of these cases where refusal of approval was warranted, the decision to overrule was also warranted. Refusal of approval does not necessarily signal poor financial management. In actual fact, refusals of approval and of overrulings fall into three categories: (1)Firstly, there are those cases resulting from poor management by the authorizing officer: between five and 10 cases per year out of about 6 000 commitments of expenditure. For 1992, the refusals of approval concerning the meeting of the Committee on Transport in Copenhagen (91/8), the meeting of the Left Unity Group in Vougliameni (91/9) and STOA (91/14) fall into this category. As regards the last instance in particular, the President of Parliament, before overruling the Financial Controller's refusal of approval, asked the Committee on Budgetary Control for a detailed report on the new internal procedures introduced within STOA and DG IV to regularize matters for the future. That report by Mr Tomlinson was delivered during the financial year, the main improvement being the posting to DG IV of an official specializing in budgetary and financial management problems. Under the terms of the Financial Regulation, authorizing officers are liable to disciplinary action and, where appropriate, to the payment of compensation and the competent authorities will not hesitate to apply the provisions concerning these penalties where there are grounds for so doing, even if Parliament were to be the only institution to apply those articles of the Financial Regulation. To ensure that authorizing officers can actually discharge their responsibilities, however, certain conditions must be met too. With that aim in view, professional training of authorizing officers in the management of appropriations is a matter of constant concern for the Administration of the European Parliament. A handbook intended as a practical management tool for authorizing officers is in preparation. In addition, authorizing officers in important positions now have at their disposal a management service comprising officials specializing in budget implementation. Obviously, these measures cannot produce the desired effect overnight; but there is every reason to believe that the number of refusals of approval and overrulings resulting from management shortcomings will eventually fall. (2)In addition, there are cases - not many - where the rules in force lend themselves to varying interpretations, e.g. the refusal of approval concerning temporary daily subsistence allowances (92/5). (3)Lastly, there are cases where the Financial Controller is right to refuse approval but the authorizing officer cannot be taken to task for poor management, provided that he was unable to submit a prior commitment, e.g. Refusals of Approval Nos 91/1 (Brussels telephone bills), 92/12 (maintenance contract for facilities in IPE III) and 92/11 (Ernst & Young). In all the above cases, the notion of obligation towards third parties should also be borne in mind; an overruling represents a solution which enables possible court action to be avoided. B - Services rendered with regard to a property project (paragraphs 15.7., 15.8. and 15.9 of the Court's observations) The Court's assertion at the start of paragraph 15.7. takes no account of realities: if Parliament had taken a purely formalistic attitude, it would have had to suspend the use of services by outside consultants, which, given the circumstances at the time, would have been irresponsible. Parliament, faced with the choice between strict compliance with Article 36 of the Financial Regulation and the prime requirement of the Financial Regulation to ensure sound financial management, rightly gave priority to compliance with that principle. Any other stance would have been too costly. Right from the outset, Parliament has acknowledged the problems referred to by the Court of Auditors. In view of the urgency and complexity of the operation, and also in view of the lack of appropriate expertise within Parliament's Secretariat, the only possible solution was to recruit outside consultants as soon as possible, and the authorizing officers concerned were unable to determine precisely either the scope or the duration of those consultants' services. In accordance with its decision of 18 July 1991, the Bureau had directed the Working Party on Property Policy to consider the technical, financial and legal aspects in greater detail, with a view to a lease with option to purchase. The Bureau asked the WPPP to step up its work with a view to finalizing a lease by the end of October 1991. Acting on the recommendation of the Working Party on Property Policy, the Bureau of the European Parliament agreed at its meeting of 29 September 1992 to retain the outside consultants (Van Ommeslaghe for the legal aspects, Heidemij for the technical aspects, and Ernst & Young for the financial aspects) in order to protect Parliament's interests. The overrulings referred to by the Court of Auditors, at (a), (b) and (c), all of which moreover have the same features in common, must be viewed in the light of these consideration. (1)In accordance with the brief given to it under the Bureau decision of 18 July 1991, the Working Party on Property Policy called on the services of the Van Ommeslaghe law firm so that Parliament could benefit from its expertise during the negotiations with SEL, which were to culminate in the framework lease signed on 8 January 1992. Given the urgency involved, it was not possible to abide by the usual procedures under the Financial Regulation and, in keeping with the opinion of the Committee on Budgetary Control, the President was obliged to overrule a refusal of approval by the Financial Controller. (2)It is true that, for the technical superintendence of the construction work, the contract with Heidemij provided for fees amounting to ECU 71 600 for 200 man-days of services. However, Heidemij did not take up its duties until after the long lease conferring a right in rem was signed with SEL; and it was not until an initial inspection had been carried out that the size of the team required (3 100 man-days to carry out the assignment) could be determined, as a result of which there was an overrun on the original estimate. As the President's overruling indicates, the authorizing officer did not have at his disposal, when the 1992 budget was established, the necessary information to assess the scope of the services which Heidemij would have to provide. Continuation of the assignment was amply warranted by the nature of the building defects and the lack of compliance with the technical specifications of the framework lease. Suspension of the assignment would have been prejudicial to Parliament's interests, the safeguarding of those interests having been deemed to take priority. The contract with Heidemij was terminated after completion of building D1, and a fresh invitation to tender was issued at the start of 1993. (3)Ernst & Young had been recruited in July 1991, following a restricted invitation to tender, as consultant on the financial aspects of the draft framework lease with SEL. On the basis of the brief given by the Bureau at its meeting of 18 July 1991, Parliament continued to collaborate with that firm in order to secure the best possible financial terms during the negotiations with SEL on the framework lease, which was signed on 8 January 1992. Given the importance and complexity of the questions concerning the financing of the building complex, it would have been inconceivable not to continue that collaboration. It would doubtless not have been commensurate with the requirements of sound management of public monies to give up the assistance of that outside consultant at what was a crucial stage in the negotiations. Ernst & Young was recruited again, following a restricted invitation to tender issued in February 1992, to assist Parliament in exploring the capital market for the most advantageous long-term financing arrangements, pursuant to Annex 8 of the framework lease of 8 January 1992, within a period of six months from the signing of the lease, i.e. by 8 July 1992 at the latest. At the outset, it was not possible to assess the actual scope of the duties involved in seeking the best financial terms for Parliament, as a result of which there was an overrun of ECU 260 000 on the original estimate in respect of Ernst & Young's services. The competent authorities of the European Parliament approved the requisite transfers of appropriations. The overrulings must be judged in the light of the need for additional services by that consultant. The complexity of the work which Ernst & Young had to carry out, pursuant to Annex 8 of the framework lease, obliged that firm to call on the assistance of a legal adviser. Under the circumstances, the European Parliament takes the view that it is normal for that advisor's fees to be charged to it. Ernst & Young's services concerning the financing of the project have enabled Parliament to make significant savings. Upon completion of those services, the contract was not renewed on 31 March 1992. A fresh invitation to tender is currently under way for financial experts in connection with buildings D2 and D3. In addition, the Court of Auditors does not appear to have taken account in its observations on this building project of the exceptional nature of the operations to bring the ESL building complex into service. While it is true that certain aspects of the decisions were not strictly in line with the provisions of the Financial Regulation, they were commensurate overall, given the decision to occupy these buildings in Brussels, with the more important requirement that public monies must be managed responsibly. Parliament has acted in accordance with the Bureau decisions referred to in paragraph 1536 and with the conclusions contained in the report by the Committee on Budgetary Control to the President that outside consultants should be retained until 30 June 1993, or until the date on which building D1 was accepted and that, after that point, the normal procedure for invitations to tender, laid down in Article 57 of the Financial Regulation, should be followed until acceptance of building D3 (report by Mr Tomlinson of 15 December 1992). Accordingly, the relevant rules are now being applied again by Parliament. C - Final provisions Merely recording the number of overrulings does not make it possible to show why those decisions were taken and even less to put forward remedies. The dialogue which takes place each year between the Court and the European Parliament when the former's observations are considered would become more thorough-going and, above all, would become more effective if the circumstances which led to refusals of approval and to overrulings were properly analysed. Parliament, for its part, is prepared to go down this road, since it is concerned to move more into line with the primary objective of the Financial Regulation, which is to ensure responsible management of public monies. Accordingly, the annual report would have a greater impact and the role of the Court of Auditors would be strengthened in the process. II - Inventory of movable property (paragraphs 15.10., 15.11. and 15.12. of the Court's observations) The 1988 three-yearly inventory operation was closed in February 1992. The 1991 inventory control was completed in December 1992. Parliament is therefore now gradually making inroads into its backlog and is attempting to conform to the provisions of Article 65, second paragraph, of the Financial Regulation and with Article 78 of the implementing rules. The European Parliament will make sure that the next three-yearly inventory control, i.e. for 1994, can be completed by 31 December 1994. The European Parliament is currently updating inventory control procedures. New inventory rules, drafted by a task force, should come into use during the second half of 1993. An advanced marking and identification system (bar code system) will be introduced in 1995. Introduction of a property management inventory system will begin in 1966. Major efforts have been made by Parliament to locate, identify and re-register unregistered items of property. Parliament's balance sheet will reflect the true value of this property as regularization of the inventory proceeds. In June 1993, the European Parliament issued an invitation to tender in order to select a firm of outside consultants. After considering the qualifications and experience of 56 bidders, 23 firms were selected, who were invited to submit their proposals by 27 August 1993 for revision of the inventory. The successful bidder should begin work on 3 November 1993 and submit his final report on 28 February 1994. That report is to contain (a) all facts ascertained during examination of the inventory and the conclusions to be drawn from this, (b) proposals for improvements and modifications for the following three years, and (c) a summary of future options for the introduction of a comprehensive system for inventoriable-property management. During the 1991 and 1992 operations, inventory structures were considerably strengthened by recruiting permanent staff and by taking on teams of auxiliaries at the three working places. Consequently, Parliament is about to eliminate the inventory management shortcomings referred to in the Court of Auditors' report. CHAPTER 16 (*) Council >TABLE> (*) The Institution's replies are on page 371 BUDGETARY AND GENERAL ACCOUNTING Commitments 16.1. The 'monthly statement of commitments` produced by the accounts department is not checked by the authorizing officers, who, in any case, do not give the Accountant express confirmation of the accuracy of the data contained in the monthly statement. As a result, unauthorized commitments may remain uncancelled for some time without being identifiable as such. It appears that the authorizing officers need to confirm explicitly the regularity of the situation concerned, so as to confirm that they have executed the controls needed to detect and, where possible, avoid any such errors concerning commitments. 16.2. It is possible for unauthorized commitments to be entered in the accounts by unauthorized persons using terminals connected to the network which have been momentarily left unsupervised by their users. Separation of duties 16.3. Contrary to the principle of the separation of incompatible duties, which is the basis of Article 21 of the Financial Regulation and Article 4a of the detailed rules for the implementation of the Financial Regulation, the Head of the accounting division is both an authorizing officer and the person authorized to operate the institution's bank accounts. The Court has already drawn attention to this irregularity, in paragraph 2.55(i) of its Annual Report on the financial year 1988. The Court is of the opinion that this is still an irregularity, even if Article 4a does not state explicity the hierarchical ranking of the second authorized signatory. Observance of the annual nature of the budget 16.4. In 1992, certain items of expenditure (overtime and termination allowances) were effected and brought to account in the general accounts in the absence of sufficient available budgetary appropriations for that financial year. The expenditure in question was subsequently charged to the 1993 budget (a total of 0,1 Mio ECU). In other cases (official travel expenses and expenditure on interpretation and formal and other meetings of delegates), the appropriations carried over to 1993 being insufficient to meet the expenses they concerned, the latter were also settled out of 1993 appropriations (a total of 8,5 Mio ECU). It should be stressed that 90 % (7,8 Mio ECU) of this amount concerned interpretation expenses and that this situation recurs systematically each financial year. In future the Council should avoid infringing the principle of the annual nature of the budget in this way, primarily by improving its financial forecasts and by monitoring more effectively the appropriations in question and any carry-overs thereof. FINANCIAL AUDIT 16.5. As regards the question of checking commitments submitted to him for approval, the Financial Controller is not in a position to check the availability of appropriations on a real-time basis (Article 38(1)b) of the Financial Regulation). The only piece of financial information at his disposal is the 'statement of commitments`, which is forwarded to him at the end of each week by the accounts department. 16.6. When granting his approval, the Financial Controller bases his decision in practice on the logic and the proper functioning of the computerized accounting system, as well as on the presumption that the authorizing officers and the Accountant are complying with the procedures in force. This however is not enough. The Financial Controller should take a more active and conspicuous part in the process of internal control. 16.7. In particular, the Financial Controller, who does not at present have direct access to the Council's computerized accounting system, ought to be in a position to check, at any time, whether commitments and payments are being accurately recorded (Articles 20 and 30 of the detailed rules for the implementation of the Financial Regulation). 16.8. As regards the question of evaluating the soundness of the financial management, the Financial Controller should in particular make use in future of the option open to him under Article 11 of the detailed rules for the implementation of the Financial Regulation of submitting reports to the institution at any time and on any subject which has financial implications. 16.9. Given the situation described in paragraphs 16.5 to 16.8 above and the weaknesses listed in this report, the Council should review the current situation, specifically clarifying the Financial Controller's powers so as to remove any ambiguity as far as his duties are concerned. INVENTORY 16.10. None of the procedures governing fixed assets is subject to clear and periodically updated internal rules. 16.11. According to Article 78 of the detailed rules for the implementation of the Financial Regulation, each institution is required to verify that its inventory records correspond to the facts. Although several inventories of individual sectors have been checked and a new system is currently being installed, the Council office services department has not carried out any general inventory verification since 1969. Such an infringement of Article 65 (2) of the Financial Regulation means that: (a)items may go missing, be discarded, be lost or be stolen without this being discovered; (b)the relevant items in the balance sheets for the years from 1969 to 1992 (the total value of which is 23,5 Mio ECU) cannot be relied upon. 16.12. The division of responsibilities with regard to inventories between the office services department and the 'New Technologies` division is not clearly defined. There should be more coordination between these two departments and an adequate number of staff should be assigned to the maintenance of the inventory. TRAVEL EXPENSES 16.13. The rules currently in force covering the reimbursement of travel expenses incurred by Community officials and national experts who attend Council meetings provide for: (a)the reimbursement of delegates' expenses to accounts held by their various national ministries, based on lists of expenditure submitted by those ministries; (b)direct reimbursement to those delegates who sign a form certifying 'on their honour` that they have not applied to have their travel expenses reimbursed by any other authority or by a Community institution or body. 16.14. The practice of using figures provided by government ministries, or in declarations by the persons concerned, as a basis for validating travel expense claims does not conform to the provisions of the Financial Regulation, as, in the first case, the list of expenses sent by the ministries is not accompanied by the tickets and, in the second case, copies of the tickets are made but they are not certified as true and valid copies. 16.15. In view of the size of the budgetary amounts in question (in 1992, 7 515 people were reimbursed for 31 619 journeys made at a total cost of 17,6 Mio ECU), the Court has already pointed out () the need for stricter checks of expenditure incurred when there is no proof (in the form of an air, rail or other ticket) that a journey has been made. In this connection, it was also noted, in the past, that a considerable number of delegates taking part in Council meetings also attended meetings of the Commission's various committees, whence the need for a means of checking travel expenses at the interinstitutional level. In its reply () , the General Secretariat of the Council stated its willingness to look at the matter once more. Meanwhile, however, the situation five years later has remained unchanged and expenditure has almost doubled (9,4 Mio ECU in 1987).REPLIES OF THE COUNCIL BUDGET AND GENERAL ACCOUNTS Commitments 16.1. After checking the 'monthly accounts situation` with the aid of data contained in their PCs, the authorizing officers will communicate the result to the accounting officer. 16.2. As a consequence of this comment, the officials concerned have made the PCs inaccessible. Separation of functions 16.3. The Council has re-examined this comment already made in a previous report; it is not convinced that an authorizing officer's having the second signature on bank documents constitutes an operation contrary to the principle of the separation of certain functions laid down in Article 21 of the Financial Regulation. However, the Council envisages implementing the Court of Auditors' request as soon as resources permit. Respecting the annual nature of the budget 16.4. (a)For overtime and early retirement allowances, the inadequacy of appropriations was noted on 30 December 1992 during the global calculation relating to back-pay from 1 July to 31 December 1992 for the implementation of Regulation No 3761/92. At that time it was no longer possible to suspend the payment or to request an increase in the budget lines concerned. The balance not covered by 1992 budget resources has had to be carried over to the 1993 budget. (b)Mission expenses It must be recognized that the carry-over of appropriations to 1993 was not adequate to allow mission expenses to be charged to the budget, and the overrun has had to be carried over to the 1993 budget appropriations. The Council will take measures to respond to the comments of the Court of Auditors on respecting the principle of annual budget renewals. (c)Interpreting costs The Court rightly finds that the principle of the annual nature of the budget has been infringed. In order to act on the Court's audit and to counteract this situation, a better system of forecasting has been set up, allowing a more rapid invoicing of expenditure. (d)Expenditure on delegates' meetings The reimbursement of expenses during the financial year following that during which they were incurred has been done in accordance with the fourth subparagraph of Article 6 of the Financial Regulation. FINANCIAL CONTROL 16.5 16.7. The Council finds that the Financial Controller is carrying out his tasks adequately, including in the area of certifying availability of appropriations. It is ensuring that the Financial Controller has all necessary information to that effect. 16.8. The Financial Controller of the Council will use the facility provided for by the Financial Regulation to draw up a report, when he deems this necessary. 16.9. The Council finds that the Financial Controller exercises his powers within the framework of applicable legislation and that there is no need to review the definition of his tasks. INVENTORY 16.10 16.12. Internal rules are in the process of being made on procedures relating to fixed assets. These rules will, inter alia, define a clear and precise allocation of powers between the general internal services and the Information Technologies Division in order to ensure efficient coordination in the future. 16.11. A comprehensive inventory of moveable and immovable property, in accordance with Article 65 of the Financial Regulation and Article 78 of the implementing rules, was begun in the second half of 1992. The inventory has been completed for the Guimard, Joseph II, Joseph III and Nerviens buildings; currently the inventory of the FrÃ ̈re Orban building is being carried out. The whole operation should be completed in 1994, which should enable any necessary adjustments and rationalizations to be made before the move to the new building. The relevant departments intend to carry out regular checks in future. TRAVEL EXPENSES 16.14. Photocopies of tickets attached to travel expenses declaration forms by the Secretariat are certified copies of the originals. Ministers' statements are originals. 16.15. The persons concerned must moreover certify that they are not applying for reimbursement for the same expenses to another authority, or in particular, to another Institution or body of the European Communities. The Council also envisages setting up an arrangement for stamping the supporting documents attached to applications for travel expense reimbursement. CHAPTER 17 (*) Commission > TABLE POSITION> (*) The Institution's replies are on page 380 Financial audit of basic salaries 17.1. An audit of staff expenditure charged to Article A-1100 of the Commission's budget (Basic salaries) was carried out by examining the administrative systems for the management and calculation of the remunerations of officials and temporary staff who are paid via the 'PAIE` computer application. 17.2. A total of approximately 14 000 Commission officials and temporary staff accounted for salary expenditure amounting to 620 Mio ECU for the financial year 1992. The expenditure in question represents 52 % of total expenditure under heading A-1 of the Commission's budget (Expenditure relating to persons working with the institution). The audit showed that the accounts gave a true and fair view of the expenditure incurred for the financial year in question. 17.3. Nevertheless, regarding the legality and regularity of this expenditure, it should also be pointed out that the Commission has always followed the practice in respect of temporary staff who are appointed officials after passing a competition of grading them in the same step as they had reached at the end of their career as temporary members of staff, i.e. often exceeding the 48-month maximum seniority limit laid down in Article 32 of the Staff Regulations. Even allowing for the fact that for a time the interpretation of the provision in question was open to debate, the matter was settled as long ago as 1985 by the Court of Justice (see, in particular, case 134/84, judgment of 4 July 1985), which ruled that periods spent working as a temporary member of staff in an institution are subject, like all qualifications and professional experience, to the provisions of Article 32 of the Staff Regulations. Such periods are therefore subject to the same upper limit where seniority premiums are concerned, namely 48 months for grades D4 to A5. Only on 21 December 1992 did the Council adopt an amendment to the Staff Regulations authorizing the practice mentioned above. 17.4. With regard to those of the Commission's staff who are based in Brussels, verification of the input of data into the computer application (Sysper) which covers data on the staff is not adequate. In fact the checks by the departments responsible for staff administration decisions are not carried out systematically, but at random and by the same member of staff who was responsible for the input of the data. Moreover, the 'Remunerations` department does not receive copies of decisions, contracts or amendments on a regular basis and is thus only in a position to make the necessary reconciliations in a limited number of cases. As data are input into PAIE on the basis of Sysper's accepted input report, it is essential that checks carried out on the files which make up Sysper's database should be systematic and well organized. Expenditure incurred in moving staff out of the Berlaymont building INTRODUCTION Subject of the audit 17.5. At its meeting of 29 May 1991, the Commission decided to vacate the Berlaymont building and to relocate its departments and infrastructure by the end of 1991. The resultant expenditure was audited by the Court. MOVING STAFF OUT OF THE BERLAYMONT BUILDING The decision to vacate the building 17.6. The Berlaymont was vacated as a matter of urgency and the necessary appropriations were not included in the original budget for the financial year 1991. It should be noted that the criterion of urgency has very often been cited as a reason for departing from the usual procedures for awarding contracts for the works and supplies necessitated by such a move. 17.7. In this connection, however, it should be remembered that the Commission had been expressing doubts about the Berlaymont's safety for about 10 years prior to moving out. This should have ensured that any subsequent move, and the financial consequences resulting therefrom, were organized and planned in the context of the buildings policy that has been adopted by the Commission and the other institutions in Brussels. Alternative buildings 17.8. On the basis of the agreement signed on 25 November 1991 by the Belgian State ('RÃ©gie des BÃ¢timents`) and the Commission, 10 alternative buildings with a surface area (200 106 m2) equivalent to the Berlaymont's (194 073 m2) were made available to the Commission by the Belgian authorities. 17.9. The Commission, as the 'occupant` of buildings rented directly by the RÃ©gie des BÃ¢timents, received a guarantee that it would be able to occupy the buildings in question for a period of nine years. It would be responsible only for taxes and charges and for the usual maintenance expenses, the contract for the rent of the Berlaymont (which amounted to 11,5 Mio ECU in 1991) remaining valid until it expires in April 1994. 17.10. According to Article 11 of the aforementioned agreement, however, a separate specific agreement, to be signed before the lease on the Berlaymont expires on 30 April 1994, was to determine the procedures concerning any decision the Commission might take to move out of all or part of the buildings during the life of the lease, the conditions for a possible return to a 'new` Berlaymont and the intervening period between the end of the current lease on the Berlaymont and the date on which any 'new` Berlaymont became available. Managing the move 17.11. In order to supervise the move from the Berlaymont, a 'Steering Committee` made up of senior Commission officials was set up, with various units of DG IX (Personnel and Administration) being responsible for implementation. The Commission also used the services of outside firms (of architects and quantity surveyors) in connection with various fitting-out works. 17.12. The Commission's decision to continue paying only the rent due on the Berlaymont to the RÃ©gie des BÃ¢timents is not in itself a guarantee of the budgetary neutrality of the operation for the Commission. By occupying the 10 alternative buildings, the Commission has, in fact, incurred considerable extra non-rental standing costs (service charges, caretaking and maintenance). FINANCIAL ASPECTS OF THE MOVE Estimated cost of the move 17.13. According to a Commission working paper drawn up for the budgetary authority (October 1991), the additional net cost incurred by moving out of the Berlaymont was estimated to be 150,27 Mio ECU for the period 1991-96. Total expenditure to be incurred in the financial year 1991 totalled 89,5 Mio ECU, 51,3 Mio ECU of which was charged to the Community budget and 38,2 Mio ECU of which (notably for fitting-out work and rents) was borne by the Belgian State, although no reference is made to such an apportionment of the costs in the aforementioned agreement (paragraph 17.8). 17.14. Moreover, this apportionment of the costs is not definitive, since the Council has reserved the right to decide the total and definitive contribution that the Kingdom of Belgium will be required to make in order to fulfil its various responsibilities as the owner (statement taken from the Minutes of the Council meeting held on 25 July 1991). Funding the move 17.15. Since the appropriations needed to cover the expenditure had not been provided for in the 1991 budget, the Commission had to finance the move by transferring appropriations. Given the urgency of the move, the budgetary authority agreed, in July 1991, to provide advance financing of 40 Mio ECU, which was later refunded in November 1991 when a supplementary and amending budget (SAB No 1) was adopted. 17.16. Since the actual cost of the move borne by the Commission was 51,3 Mio ECU, the budgetary items in question had to be supplemented by several transfers of appropriations within part A of the budget. 17.17. As regards the expenditure to be borne by the Belgian State, the audit uncovered no information on the criteria used to decide on the division of expenditure incurred by the move from the Berlaymont between the Commission (51,3 Mio ECU) and the Belgian government (38,2 Mio ECU). In this connection, it should also be noted that, in the meantime, the Commission has itself paid certain sums which, according to the information available, should have been paid by the Belgian State. The expenditure in question concerned, in particular, removal work costing 1 Mio ECU. This expenditure was not reimbursed by the Belgian State until the beginning of 1993. Moreover, other expenditure on telecommunications works costing an estimated 5,9 Mio ECU was directly met by the Belgian State and the Commission was merely informed that bills amounting to that sum had been paid. CURRENT SITUATION AS REGARDS THE BERLAYMONT BUILDING 17.18. During the financial year 1992, the Commission continued to work on the fitting-out projects that had been planned in the context of the move from the Berlaymont. This work, which concerns several buildings, has not, however, been completed. In particular, the kitchen, the logistical services buildings and the storage areas are still to be built. This complex, at a total cost to the Commission of 5,8 Mio ECU, will be located on land made available to the Commission by the Belgian government, which subsequently assigned the construction of the complex to the RÃ©gie des BÃ¢timents. At the beginning of 1993, building work had still not started. In the meantime, the kitchen in the Berlaymont remained in continuous use throughout 1992. 17.19. It seems desirable, in view of the cost of the work thus far undertaken, for the Commission to take a definitive decision at once as to where it intends to rehouse its staff, even though the lease on the Berlaymont does not expire until April 1994. In particular, the Commission should reach a decision as soon as possible, in consultation with the budgetary authority and the Belgian Government, which is the lessor of the Berlaymont and the alternative buildings, about whether it intends to return to the 'new` Berlaymont. The Community presence at the 1992 Olympic Games INTRODUCTION 17.20. This section deals with observations on the appropriations entered under item A-3051: 'Community presence at the 1992 Olympic Games at Albertville and Barcelona` in the 1990 (0,5 Mio ECU), 1991 (5 Mio ECU) and 1992 (7 Mio ECU) budgets, as well as the appropriations entered under item B3-303: 'General communication work` in the 1992 budget, 2,1 Mio ECU of which were used for measures during the Olympic Games. A total of 14,6 Mio ECU of appropriations were concerned. The administration of these measures was entrusted to the Secretariat-General of the Commission. PRESENCE AT THE OPENING CEREMONIES 17.21. The agreements between the Commission and the 'ComitÃ© d'Organisation des Jeux Olympiques d'hiver d'Albertville et de la Savoie 1992` (COJO) and the 'ComitÃ© Organizador Olimpico Barcelona '92` (COOB), envisaged, in return for financial contributions of 4 and 6 Mio ECU respectively: (a)the presentation, in sound and vision, of the European Community during the opening ceremonies in accordance with detailed scenarios; (b)the technical and organizational support, on a paying basis, of the communication and information programme. 17.22. In its appraisal of the Community presence at the ceremony in Albertville, the Commission concluded that the part of the spectacle dedicated to the Community had been a success as far as the communication of the Community message was concerned. This assessment, however, can be seen to be excessive, given that the time during which information which obviously referred to the Community was transmitted was minimal when compared with the length of the ceremony. In this connection, it should be pointed out that the Commission's financial contributions represented 33 % (Albertville) and 45 % (Barcelona) of the budgets for the ceremonies. The Commission's appraisal does not mention another inherent weakness in the Community presence at the opening ceremony. The fact is that, as the Olympic Charter does not permit any overtly political demonstration, the visual presence of the Commmunity could only be a symbolic one and the impact of that presence depended on the good-will of television commentators. It should be noted, in this context, that the Commission did not have the planned independent quantitative evaluation of the results of the Community presence carried out. COMMUNICATION AND INFORMATION PROGRAMME Awarding of the contract 17.23. In accordance with Article 60 of the Financial Regulation, the awarding of the contract for the communication and information programme to project the Community's image was submitted, following a restricted invitation to tender, to the Commission's ACPC for its opinion. On 15 July 1991, the ACPC gave an opinion in favour of the awarding of a contract to a large advertising agency. The contracts concluded with the agency on 5 August and 10 August 1992 were for a total of 4,1 Mio ECU. 17.24. Whereas the four other firms who submitted tenders were not informed of the Commission's intention to carry out an information and public relations campaign until 16 April 1991, and were only invited to tender on 23 May 1991, with a deadline for their tenders within 19 calendar days of that date, the successful agency had known of the Commission's strategy since December 1990 and it was aware of the budget allocation (6 February 1991) and the text of the invitation to tender before the other tenderers. Moreover, the agency in question had submitted its campaign to various Commission departments before the invitation to tender was published. No mention of these contacts was made in the ACPC report (Article 62 of the detailed rules for the implementation of the Financial Regulation). Execution of the contract TEXT CONTINUED UNDER DOC.NUM : 393Y1116(01).1617.25. The communication and public relations programme shown in the annex to the contract initially signed with the advertising agency provided for some 46 separate measures. For each measure a technical specification had been laid down, breaking down the exact expenditure and taking as its basis a very precise work plan for each activity, with an assessment of the fees and the production costs per measure. As the programme progressed, some of these activities were abandoned (more than 25 % of activities with a contract value of more than 500 000 ECU) and in other cases the planned expenditure was significantly exceeded (the VIP programme, for example: actual expenditure in excess of 300 000 ECU, as against budget provisions for 96 800 ECU) and an activity which had not been planned was carried out. Independently of the programme it actually carried out, the agency requested and received fees of 856 000 ECU and 'coordination of production` costs of more than 123 000 ECU. The initial contract was not amended to reflect these significant changes in the services required of the contractor. Financial management 17.26. As of 31 December 1992, the agency had received 3,9 Mio ECU. Only one outstanding amount of 200 000 ECU, corresponding to the final tranche of the third contract, had still to be paid. Of this sum of 3,9 Mio ECU, only 2,47 Mio ECU had been properly substantiated by the submission of invoices. The 1,43 Mio ECU paid without proper justification corresponded to payments on account made following the signing of the contracts. The supporting documents presented by the agency were always used to make further payments, instead of for the purpose of regularizing the payments on account. More than five months after the end of the summer Olympic Games (in January 1993), the reports and final statements had not yet been drawn up. As for the outstanding amount of 200 000 ECU, it was not regularized until 22 August 1993. 17.27. Each contract was signed subject to the condition that a letter giving a bank guarantee for the implementation of the contract would be subsequently submitted. The guarantee letters covered a period concluding one month after the contractual end of the agreement between the Commission and the agency. As a result, the last bank guarantee terminated on 30 October 1992 without the Commission having been able to use it, even though the amount of 1,43 Mio ECU had still not been properly substantiated. CONCLUSION 17.28. As the projects became more advanced, the programme for the Community's participation in the Olympic Games, as originally conceived, proved not to be totally appropriate. The idea of dual loyalty on the part of the athletes and of using the Community flag when the medals were being awarded came to nothing when some of the national Olympic Committees refused to participate. The Community message, aimed at projecting the idea of the Community as the host of the Games, failed because the International Olympic Committee, in accordance with the Olympic Charter, appoints not a country, but a city or, in exceptional circumstances, a region, to host the Games. 17.29. As far as the communication and information programme is concerned, the audit revealed irregularities in the way the contract had been awarded and weaknesses in the operational and financial administration. Expenditure of Commission Delegations in non-Member States. INTRODUCTION 17.30. During the financial year 1990 the Court of Auditors carried out an examination of the administration of the expenditure of the Commission's external Delegations, particularly in relation to the imprest accounts, staff management and the management of the logistical infrastructure () . 17.31. In the resolution annexed to the discharge decision () , the discharge authority, for its part, asked the Court of Auditors to submit an evaluation report concerning the setting-up and the administration of these Delegations in non-Member States. 17.32. What follows is a description of the situation observed at the end of 1992 regarding the administration of delegations located outside the Community, together with expenditure on the press and information offices established within the Community. Both are administered jointly with the Delegations by the Commission's Administration of Delegations and Offices (DAD). BUDGET APPROPRIATIONS CONCERNED 17.33. Appropriations amounting to 159,7 Mio ECU were entered under Title A-6 of Part A of the Commission's budget for the financial year 1992. For the Commission's press and information offices within the Community, which are administered by the DAD, appropriations amounting to 14,7 Mio ECU are included among the general operating appropriations of the Commission (Part A of the budget). CHANGES IN THE ADMINISTRATION OF DELEGATIONS AND OFFICES Revision of the Financial Regulation 17.34. In April 1990 a number of amendments to the Financial Regulation came into force, in particular Title X on 'Special provisions applicable to the administration of the appropriations for staff outside the Community and the corresponding administrative operations.` 17.35. The new Article 123 in this Title stipulates that the Commission is to adopt implementing rules relating, in particular, to the awarding of contracts, the keeping of inventories, the system of accounts and the imprest accounts. 17.36. A draft regulation concerning the implementing procedures for the Financial Regulation was adopted in February 1991 by the Commission and sent to the European Parliament and to the Council under the consultation procedure and to the other institutions for their opinions. Whilst Parliament expressed its opinion on the draft at the end of 1991, the Council has not yet responded to the request for a consultation. So far, the Commission has been unable formally to adopt these implementing procedures; nonetheless, the rules concerning Article 123 are already being followed. 17.37. Title X of the Financial Regulation and the draft implementing procedures relating to it are also being applied in relation to imprest accounts and inventories for the administration of Commission Offices in the Community. As things stand at present, the Commission should nonetheless decide formally to apply the provisions in question to its Offices, since they are officially subject to the general provisions of the Financial Regulation. Restructuring of the staff management unit of the DAD 17.38. A restructuring of this division was carried out by the creation of two separate departments, known as 'Determination of rights` and 'Financial rights`, in such a way as to separate the duties concerned and ensure effective internal controls. All future instructions for computer input will have to be made in writing and signed by the authority responsible. Development of the 'Paie hors CommunautÃ©` application 17.39. In parallel with the restructuring of the personnel management unit, a significant improvement was made in the functioning of the PAIE application by carrying out the main adjustments to the programming that had been requested. 17.40. The results of a financial audit of the basic salaries of officials and temporary staff employed outside the Community (51 % of the Title VI expenditure) carried out in the meantime also show the legality and regularity of this expenditure. Regularization of the situation of local staff 17.41. At the beginning of 1992 a task force was charged with drawing up legislation fixing the special conditions of employment of local staff working for the various Delegations, in application of the framework legislation setting down the conditions of employment of these Commission staff. 17.42. At the end of 1992 some 30 regulations were ready, so that the local staff could be placed administratively under a new system (classification, or reclassification, according to the new salary scales), and some 80 other draft regulations are currently the subject of consultation procedures, their final adoption being scheduled for 1993. Transfer of the assets of the former European Cooperation Agency (ECA) - Property and inventory 17.43. This transfer has been completed, the Commission having formally taken over all the former ECA's leases. As far as the inventories are concerned, the new Article 123 of the Financial Regulation now provides for them to be kept at the Delegations. Once they have been brought up to date, the Delegations' inventories are centralized in Brussels by the DAD. OBSERVATIONS NOT YET IMPLEMENTED 17.44. In some areas, nonetheless, the situation is not yet satisfactory and an effort should be made to ensure that the rules in force are properly applied. The points raised in the Court's previous report () which are still to be resolved are the following: (a)The designation of the Appointing Authority for the application of Annex X of the Staff Regulations. At the beginning of 1993, the Commission had not yet delegated the powers pertaining to the rights conferred by Annex X of the Staff Regulations, which has been in force since October 1987. The restructuring of the services that was decided upon and the transfer of the DAD to the Directorate General for external relations policy (DG I A) should allow the above-mentioned delegation of powers to be made in the very near future. (b)Advances on travelling expenses. In March 1991, as usual, the Commission automatically paid the staff concerned advances of 90 % against their travelling expenses (398 cases amounting to a total 2,2 Mio ECU). As in previous years, regularization of the amounts of the advances was significantly delayed. Thus, in September 1992 68 cases were still to be examined and 66 others had to be re-examined. This situation recurs regularly, regardless of the fact that the provisions in force provide for advances to be paid only in response to a request accompanied by an estimate and for an amount up to 90 % of the foreseeable reimbursement. It should also be remembered that if the travel tickets are not submitted the amounts advanced must be recovered six months after the date on which the advances were paid (Article 9 (2) of the internal rules). (c)The installation allowance and official accommodation. The Court recommended that, given that delegation officials receive both an installation allowance and free furnished accommodation provided by the Commission, the latter ought to examine whether a rewording of the Staff Regulations might not be necessary so as to abolish or modify the installation allowance in the case of staff benefiting from official accommodation. This approach was shared by the budgetary authority. Nonetheless, the Commission insists on retaining a system which, quite clearly, is not consistent with the principles of sound financial management. (d)Recruitment of local staff. The Court criticized the fact that the recruitment of and the grading or fixing of salaries for these staff was carried out by the DAD in Brussels on the basis of proposals from the Heads of Delegations, without the DAD being supplied with the necessary supporting documents, and, in particular, documents certifying the candidates' level of education and professional experience. This situation lasted until December 1992, when the Commission adopted a decision delegating the powers of the Authority authorized to conclude contracts of employment (AACCE) to the Heads of Delegations, who are now authorized to conclude contracts on the spot. However, this decision is not such as to ensure that the Financial Controller, who is called upon to approve the AACCE's decisions, is provided with adequate facts in Brussels with which to assess each case. This same observation applies to the practices of the Commission Offices in the Community. (e)Property policy. In 1992 the DAD drew up a document called 'the DAD's property policy - achievements and plans for the future`. This document, however, does not yet represent an overall philosophy for property acquisition policy, which could be submitted to the budgetary authority and could lead to a systematic exploration of the markets in order to arrive at a definition of regional or local purchasing policy. (f)The car pool and the transport allowance. The situation regarding the car pool has not changed significantly since 1990. In addition, despite the fact that work has been going on for more than five years to draw up rules for the application of Article 19 of Annex X of the Staff Regulations (kilometre allowance), no concrete result has yet been achieved. However, the implementation of this article would enable the Commission to define actual motorcar requirements more accurately, at least in certain situations.REPLIES OF THE COMMISSION Financial audit of basic salaries 17.3. The Commission has always thought it right that the career development of temporary staff should not be interrupted by their appointment as officials. The grading criteria adopted by the Commission in 1973 and 1983 included an article to the effect that when a temporary staff member was made an official in the same career bracket he kept the seniority he had acquired. There have been various rulings since 1985 on the grading of temporary staff on their appointment as officials, leading the Commission to introduce a proposal for a revision of the Staff Regulations expressly allowing them to keep the seniority acquired. Work on this revision began in 1986 and it was finally adopted by the Council in December 1992. 17.4. One of the objectives of the new computer application (PAIE) now being developed is to avoid the need to enter data twice by creating a PAIE/Sysper interface which would release resources for systematic checking of data entered into Sysper; this would be based on supporting documents and would be carried out by a different member of staff from the one originally responsible for data entry. Expenditure incurred in moving staff out of the Berlaymont building Alternative buildings 17.10. and 17.19. The Commission and Belgian State negotiating teams agreed to renew the lease on the Berlaymont for three years until April 1997 (to be extended automatically each year). An additional lease was signed on 1 June 1993. Costs 17.12. The overheads incurred in occupying the alternative buildings (building managers, messengers, cleaning, security, etc.) are estimated at approximately ECU 5 million for 1993 and have been entered by the Commission in subsequent preliminary draft budgets. Funding the move 17.17. The Commission programmed expenditure totalling ECU 89,5 million for 1991, ECU 51,3 million of which was charged to the Commission budget and ECU 38,2 million plus a flat ECU 1 million for removal expenses to the Belgian State (giving a total of ECU 39,2 million). The Belgian State agreed to bear the following costs: (a)Rental of new buildings: 100 %. The Commission will continue to pay the 'political` rent for the Berlaymont. Since the present lease expires on 30 April 1994, a supplement extending it until 30 April 1997 (renewable) was signed on 1 June 1993. The extra rental borne by the Belgian State in 1991 was ECU 7,8 million. (b)A budget for each alternative building to cover basic alterations was drawn up and paid for by the Belgian State, the total cost being ECU 24,451 million. (c)The Belgian State also paid a flat ECU 1 million in respect of the removal proper. The Commission paid this initially (1991 budget year) but the bills were subsequently presented to the Belgian State and the amount was repaid at the beginning of 1993. (d)The Belgian State, via the RTT, also bore the infrastructural costs of new telephone lines and certain other related costs (ECU 5,9 million). Agreement on points A and B was reached at the very beginning of negotiations but for the other two it was only reached during the course of the move. Regarding point C, the Commission paid the bills and claimed the costs back afterwards. Regarding point D, the Commission did not pay for any of the work carried out by the RTT (now Belgacom) and amounting to ECU 5,9 million. All the other costs are borne by the Commission. CURRENT SITUATION AS REGARDS THE BERLAYMONT BUILDING 17.18. The agreement on the construction of the central kitchen was agreed by all parties and work began in April 1993. With regard to storage areas (Berlaymont basements), the Commission is currently studying the proposals submitted by the Belgian State. The Community presence at the 1992 Olympic Games PRESENCE AT THE OPENING CEREMONIES 17.22. The Commission does not agree with either of the Court's criticisms concerning the Community presence at the opening ceremonies of the Barcelona and Albertville Games as it considers them to be based largely on subjective considerations. - With regard to the time dedicated to the Community during the ceremonies, the 'ComitÃ© d'organisation des Jeux olympiques d'Albertville` (COJO) and the 'ComitÃ© organizador olimpico Barcelona` (COOB) fully respected their undertakings under the contracts and supplementary contracts concluded with the Community. The Court's view that 'the time during which information which obviously referred to the Community was transmitted was minimal` is a purely subjective one. Broadcasting time should not be compared with the length of the whole ceremony but only with the 'free` part which was not governed by International Olympic Committee protocol and which took up less than half the ceremony. Collaboration with the television producer on Olympic channel coverage of the ceremony, especially the scenes relating to the European Community, ensured that the parts of the show dedicated to the Community were broadcast on television. Since there was just the one channel broadcasting the ceremonies, these pictures were seen all over the world. In pointing out that 'the Commission's financial contributions represented 33 % (Albertville) and 45 % (Barcelona) of the budgets for the ceremonies`, the Court ignores the fact that in return for its contribution to the Organizing Committees, the Community obtained permission to be associated with the Games in various ways and on terms which are specified in the annex to the supplement to the relevant contracts. Some aspects of the association were directly linked to the Community presence at the ceremonies (such as including European flags among all the national flags at the stadium), while others involved the Commission's information and communication programme (provision of space at the press centre and of an exhibition area at the Olympic site, inclusion of the Community message in the official publications of the Organizing Committees, etc.). It is difficult to put a figure on the value of most of these since similar privileges were not granted to any commercial sponsor. It is incorrect to suggest that no plans had been made for the Community to be present at the closing ceremonies. The agreement with the COOB clearly states that at least three minutes of the closing ceremony would be devoted to a sound and visual presentation of the Community. Under the COJO contract the Community presence at the closing ceremony for the Winter Games was marked by the inclusion of the European flag among all the national and Olympic flags on display. - As far as the Community's visual presence being only symbolic is concerned, the Commission considers this a plus. The symbols used to signify the Community presence - the European flag and anthem - were ideally suited to a major public event broadcast to millions of viewers and were seen during the artistic part of the ceremony which had the most impact on spectators and viewers. The Commission cannot be criticized for the fact that the Community's message during the ceremonies depended on the goodwill of the commentators. After all, the press is free in a democracy. It is true that, thanks to the notes prepared by the Commission explaining the symbolism behind the European scenes and providing information on the Community, TV commentators from all the Member States were well briefed and most of them referred to the Community during the scenes dedicated to the Community, its Member States, its flag, anthem and so on. Nor should it be forgotten that at the opening ceremony for the Albertville Games, there was live commentary in French and English and the commentators clearly referred to the Community's participation. Since the commentary was part and parcel of the show, it was broadcast by all the television channels. Incidentally, the Commission has had an evaluation carried out by an independent body (Sofres) of all the Community's activities during the Winter and Summer Olympic Games. This type of evaluation was thought to be more useful than a simple quantitative one restricted to the Community presence at the ceremonies. Furthermore, according to a study carried out in accordance with the guidelines of the Public Relations Society of America on the impact the message had on the public, each ecu invested by the Community in the ceremony generated publicity worth 10 times as much. To obtain the equivalent impact through advertising would have cost a lot more. COMMUNICATION AND INFORMATION PROGRAMME Awarding of the contract 17.23 17.24. The Commission's previous contacts with the successful agency had nothing to do with the award of the contract in question. The Commission had merely been seeking assistance during its preliminary negotiations with the Organizing Committees. Four communication specialists had been requested to submit proposals and were interviewed by the Commission following which a specialist sports marketing agency was selected. Two consultancy contracts were concluded with the agency in March and June 1991 for the Albertville and Barcelona Games respectively. As regards the award of the contract for the organization of the communication and information campaign itself, this was submitted to the ACPC for its opinion after a two-stage tendering procedure. In the first stage a letter dated 16 April 1991 was sent to 22 advertising agencies asking them to send the Commission by 6 May a paper outlining ideas for a general communication strategy. On the basis of the replies received, five agencies were invited to put in bids proper. The specifications, which were prepared in May, were sent off on 23 May and bids had to be in by 11 June, when the agencies were also asked to present their ideas to the Commission in Brussels. After these five agencies had presented their bids, the members of the awarding committee engaged in a wide-ranging discussion of the type of strategy (which differed from one bid to another) to select, as can be seen from the record of the meeting and the related notes. As regards the communication and information campaign, the agency finally selected was therefore in exactly the same position as the other firms who submitted tenders and had no undue advantages over its competitors. In particular it did not receive the text of the invitation to tender before the other tenderers. The fact that under its consultancy contract it had presented proposals for communication operations was not a decisive factor in the Commission's decision to award it the contract. The ACPC was fully aware of the situation when it opined in favour of the proposal to select the agency in question for the organization of the information and public relations campaign for the Winter and Summer Olympic Games. Execution of the contract 17.25. The Commission voluntarily dropped some of the smaller, less important measures (such as the organization of a prizegiving ceremony at the Seville Expo, creation of a database on athletes, distribution of a press kit, presentation of a personalized diploma to each Community athlete, gifts for the closing ceremony, bouquets of flowers for the winners, etc.) in order to concentrate on the major operations, some of which were new (Athletes' Guide, preparation of a publicity clip and a film for high-definition television) while others were extensions of existing plans (publicity measures, promotion of HDTV, bartering with television channels, relations with the press, etc.). These operations were fewer in number but had a greater impact on the media and the public. The revised programme was thus an improvement on the original one. Since most of the new measures were large and complex, they required more work from the agency, which is why the Commission did not renegotiate the fees for each one as this would have added to the costs - not because there were so many of them but because they were so complex. As for the 'coordination of production` costs which were entered separately on each invoice, they accounted for about 15 % of total production costs, which is in line with the average in the sector. Financial management 17.26. Payments to the agency, whether on account or for successive tranches, were always made in accordance with the terms of the contracts. The procedure for making payments on account was laid down in the three contracts (i.e. there was no requirement to present supporting documents at the payments stage) and was scrupulously followed; subsequent tranches and outstanding balances were only paid after presentation of the relevant invoices and supporting documents. The final statements were drawn up and settled after all supporting documents had been presented, including those relating to payments on account (totalling ECU 1.43 million) and to the ECU 200 000 balance on the last contract. The late payment of the balance was fully justified by the Commission's concern to conduct a thorough check of all the supporting documents. The Agency had also sent the Commission in October 1992 a detailed report on all the operations carried out both at Albertville and Barcelona and during the period between the two Games. 17.27. As mentioned in the reply to paragraph 17.26, all supporting documents, including those relating to payments on account (ECU 1.43 million) were presented by the contractor. The Commission therefore had no need to call on the bank guarantee. CONCLUSION 17.28. The measures were all directed at the three priority targets set: - a Community presence at the opening and closing ceremonies; - the promotion of new technologies, especially HDTV; - a global communication strategy. The Commission had to adapt its programme because of the difficulty during the sporting events of identifying athletes as being from the Community. Nonetheless, at the opening and closing ceremonies various choreographic symbols were used to illustrate the idea of dual loyalty. As for the idea of the Community as the host of the Games, this was not in conflict with the Olympic Charter. In fact, the Community had the agreement of the International Olympic Committee to disseminate the campaign's slogan and signature tune - 'A thousand faces, a single force` and 'More is possible when you pursue the same idea`. 17.29. As can be seen from the replies to the preceding paragraphs, there were no irregularities in the award of the contract. Expenditure of Commission delegations in non-member States CHANGES IN THE ADMINISTRATION OF DELEGATIONS AND OFFICES Revision of the Financial Regulation 17.37. The Commission plans to follow up the Court's recommendation that the special provisions under Title X of the Financial Regulation should be formally extended to its Offices in the Community in its third set of amendments to the Financial Regulation. OBSERVATIONS NOT YET FOLLOWED UP 17.44. (a)Designation of the appointing authority for the application of Annex X of the Staff Regulations When the responsibilities of the new Members of the Commission were being allocated, it was decided to restructure the external relations departments. The DAD became Directorate E (Personnel, Administration and Communications Matters for Delegations) in the Directorate-General for External Political Relations (DG I A), which was set up at the beginning of 1993; the Directorate has been given enlarged powers to deal with the Community's external representation. The designation of the appointing authority and the delegation of powers for the application of Annex X to the Staff Regulations are covered in the amendments to the regulations now being drawn up following the restructuring. (b)Advances on annual travelling expenses It should be remembered that officials may travel at any time during the year. Since many of them choose the fourth quarter, the files and supporting documents do not arrive for regularization until the end of the year, and sometimes not until the following year. The Commission plans to address the problem by drawing up special implementing provisions for the external delegations in respect of the application of Article 8 of Annex VII to the Staff Regulations. (c)Installation and accommodation allowance On consideration of the matter, the Commission does not for the moment intend to propose any change to the Staff Regulations. The purpose of the installation allowance is not to reimburse any specific itemized expenditure. It is paid to an official who has had to change residence to comply with the obligations imposed by Article 20 of the Staff Regulations. The installation allowance is payable in any situation where some expense has been incurred. The fact that furnished accommodation has been provided by the Commission and the transport of personal effects reimbursed does not mean that the actual cost does not vary considerably from one official to another. It is these expenses that the installation allowance is intended to cover which is why the Staff Regulations specify a lump sum. According to the Court of Justice, 'the specific and characteristic purpose of an installation allowance is to enable the official to bear, in addition to removal expenses, the inevitable expenses incurred through integrating in new surroundings for an indeterminate but substantial period of time` (Judgment of 7 November 1978, Verhaaf v Commission). The strict application of Article 5 of Annex VII to the Staff Regulations to officials covered by Annex X to the Staff Regulations (officials serving in a third country) was discussed by the Council in October 1987 and in Council Regulation No 3019 of 5 October 1987, it clearly expressed its wishes in respect of the payment of this allowance under the new system. (d)Personnel files of local staff As part of its efforts to decentralize and to simplify procedures, the Commission is currently finalizing a Vademecum which will include details of documents to be held by delegations and required by headquarters for the purposes of sound administrative and financial management. As regards the Offices in the Community, they have been instructed that personnel files transmitted to Brussels for financial control purposes should contain all relevant documents for assessing the educational background and professional experience of the candidates. (e)Property policy'The DAD's property policy - achievements and plans for the future` (1992) discusses how to implement a uniform property policy outside the Community. The document highlights a number of problems and difficulties standing in the way of an overall philosophy of property acquisition of the kind recommended by the Court of Auditors. Leaving aside these difficulties, the fact still remains that the socioeconomic situation and the property market in each country is different, which makes it that much more difficult to harmonize property policy. The Commission is currently revising the document in an effort to define a coherent property policy for outside the Community (definition of requirements, budgetary resources, purchasing methods) and hopes to have it ready by the end of 1993. (f)Transport allowance There is such variety in transport networks, means of communication, weather and safety conditions in the hundred-plus countries in which the Commission has delegations, that, at least for the present, Article 19 of Annex X to the Staff Regulations is only rarely applicable. In developing countries, it is virtually out of the question to expect officials to use their private vehicles for professional purposes: conditions are such that cars are quickly damaged or written off and the expense of maintenance or replacement would be too great. In terms of individual safety, all sorts of problems would arise from private cars lacking the right equipment and from the absence of a professional driver with knowledge of the country, its customs and languages; finally, there is the serious matter of personal and vehicle insurance which in these countries is often expensive and does not cover all the risks. In other countries, the use of officials' private vehicles cannot be justified systematically because there are other modern, reliable types of transport available. Moreover, the Commission can scarcely oblige its officials to use their private vehicles for work purposes. Nonetheless, the Commission is looking into the possibility of setting mileage allowances in certain situations yet to be defined. CHAPTER 18 Court of Auditors The external auditor's certificate as to the regularity and fairness of the revenue and expenditure account and balance sheet as at 31 December 1992, as well as his report on the system of internal control and the soundness of the financial management of the Court of Auditors, were both published in OJ C 274, 12.10.1993. CHAPTER 19 (*) Economic and Social Committee >TABLE> (*) The Institution's replies are on page 389 INTRODUCTION 19.1. During the 1992 financial year, the Court continued its examination of the Economic and Social Committee's (ESC) general and budget accounting. The emphasis was on evaluating the ESC's internal control, the main observations concerning which are to be found below. GENERAL AND BUDGET ACCOUNTING General comments 19.2. Certain problems are still to be met with as far as entering transactions in the accounts is concerned. These problems seem to be the consequence of the present state of the ESC's data-processing systems, which do not offer the option of real-time entering of transactions in the accounts. In particular, the authorizing officers cannot yet make use of a computerized accounting application when preparing proposals for commitment and payment orders. The Court recommends the connection of the authorizing officers' terminals to the network as rapidly as possible so as to make it possible for them to enter expenditure in the accounts immediately. Commitments 19.3. At the ESC, it is the Financial Controller who carries out the initial encoding of commitments approved, using his own computer system which simultaneously enters the data in the institution's accounting system. The Accountant then confirms the data that have already been encoded by the Financial Controller. This procedure is not in conformity with the provisions of the Financial Regulation, which provides for a complete separation of duties between the authorizing officer, the Financial Controller and the Accountant (Article 21, fourth indent, of the Financial Regulation), in that the Accountant bears sole responsibility for recording approved proposals for commitment (Article 29 of the detailed rules for implementation - OJ C 330, 15 December 1992, paragraphs 22.4 to 22.7). Payments 19.4. In spite of the comments made by the Court in its annual report concerning the financial year 1991 (OJ C 330, 15 December 1992, paragraph 22.8), payments are still being recorded after the orders for transfer to the bank have been received, i.e. on average 2 or 3 days after the payment has actually been made. During certain critical periods, at the close of the financial year or during holiday periods, for example, there may be up to 20 or even 30 days' delay. 19.5. However, the Financial Regulation and normal accounting principles stipulate that payments must be recorded in the accounts immediately and without delay. The practice followed by the ESC does not conform with Articles 20, 29 and 30 of the rules for implementation, which stipulate that the accounts must be constantly updated, or with Article 51 of the Financial Regulation, which obliges the Accountant to check the availability of funds for each payment. Revenue 19.6. There has been no improvement in this area, in spite of the promises made by the ESC. In fact: (a)recovery orders are not pre-numbered; (b)there is no certainty that all claims have been identified (entry in the accounts and recovery after approval), in spite of the provisions of Article 28 of the Financial Regulation; (c)recovery orders, in violation of the first indent of the same Article, are drawn up by the authorizing officer and approved by the Financial Controller only after the sums owing have been collected; (d)due to the failure of some authorizing officers to give any indication of the due date on the recovery orders, the accountant is unable to ensure that the rights of the institution are being protected (Article 29 of the Financial Regulation). MEMBERS' ALLOWANCES 19.7. On the basis of an internal ruling, allowances are always paid to Members, as a matter of priority, in cash, even though Article 53 of the Financial Regulation stipulates that such payments shall, as a general rule, be made through a bank account or a post office giro account. For this reason, the relevant payment order is not signed by the authorizing officer and the Financial Controller until after the payment has been effected (either the same day or the following day). CASH BALANCE 19.8. The BFR ledger is not updated daily but approximately once a week. However, in view of the number of movements and the amounts kept, the BFR cash balance should be calculated daily. Balances in other currencies should be calculated on the last working day of each week. INVENTORY 19.9. Article 65 of the Financial Regulation, second indent, stipulates that 'each institution shall carry out its own inspection to ascertain that entries in the inventory correspond to the facts`. Furthermore, Article 78 of the rules for implementation stipulates that 'this check shall be carried out within the framework of a three-yearly programme on objects with a purchase value equal to or in excess of 150 ECU`. 19.10. A check of the fixed assets showed that the ESC had not carried out any inventory checks for some years. The amount shown on the 1992 balance sheet (4 404 823 ECU) is derived exclusively from the accounts and is not an indication of conformity between the accounting data and the actual assets. 19.11. As far as smaller assets, such as stationery and office equipment, are concerned, the amount shown in the balance sheet as at 31 December 1991 (69 849 ECU) was determined after a physical check had been carried out. However, the company responsible for the operation did not formalize its work by drafting inventory lists, but confined itself to giving the accounts department an overall amount. As a result, it has not been possible to check these data. 19.12. In spite of the instructions given by the Commission concerning measures to harmonize the rules for the presentation of the balance sheet, the ESC has not included in its balance sheet the value of operating equipment, thus underestimating the assets. The value of this equipment must be included in the balance sheet for 31 December 1993. CONCLUSION 19.13. In spite of a definite improvement in comparison with the financial year 1991, the ESC needs to persevere with its efforts to abide more closely by the provisions of the Financial Regulation of the European Communities.REPLIES OF THE ECONOMIC AND SOCIAL COMMITTEE 19.2. The BS2000 section of the ESC's Informatics Department is sounding off the study of an application which would enable authorizing officers, by using the Word Perfect software on their stand-alone MS-DOS PCs, to create their working documents for 'proposed commitment` and 'payment order` and to send them by file transfer to the central BS2000 computer. This application should be brought into operation in the last quarter of 1993. Once the new application is in operation, the Finance Department will be able, after checking, to recycle the data sent by the authorizing officers by electronic mail, and will have to confirm them before entering them in the accounts. 19.3. The Economic and Social Committee keeps only one set of accounts. The database for the ESC's accounting (budgetary and non-budget accounts) is kept only by, and under the responsibility of, the ESC accounting officer. For reasons of internal organization, the ESC has set up a database confined to budgetary accounts for the Financial Controller. As emphasized above with reference to point 19.2., the new application will enable authorizing officers to carry out the initial encoding by creating their electronic working documents for 'proposed commitments`. The proposed commitments, signed by the authorizing officers and endorsed by the Financial Controller, will be checked and confirmed by the Finance Department, before they are entered in the accounting ledgers. 19.4 and 19.5. From 1 June 1993, the Economic and Social Committee has changed the internal routing for circulation of payment orders. Since that date, payment orders, duly signed by the authorizing officer and the Financial Controller, are sent directly to the Accounts Unit of the Finance Department to prepare the accounting entries and store the data in the computer system. They are then transmitted to the unit responsible for payments, and return, after payment, to the Accounts Unit for recording in the ledgers. This change in the circuit shortens the time-lag between executing and entering payments and makes it easier to keep track of the availability of funds. In this connection, it should be remembered that since November 1992 the ESC has been keeping a separate record (outside the accounts) of its funds in Belgian francs. 19.6. The Economic and Social Committee is studying the setting up of a revenue registration system broadly based on the system used by the Council. 19.7. The Court of Auditors' observations relate to the following facts: - most of the payments are made in cash; - payments are made before the issue of the payment order and its approval by the Financial Controller. To reply to the first observation: the Economic and Social Committee has contacted two banks with a view to analysing other modes of payment. To reply to the second observation: the Finance Department is studying ways of setting up an imprest system. At all events, the rules on travel costs and allowances for meeting and travel days are to be reviewed by the Council shortly. 19.8. The Economic and Social Committee will ensure that the Belgian Francs ledger is updated daily. 19.9 and 19.10. The ESC has taken full note of the Court of Auditors' observations on the inventory. The situation is currently being rectified, but it will take many months to secure a complete updating. 19.11. It is planned to computerize the management of stocks of stationery and office equipment from 1994 onwards; this will make it possible to provide the inventory lists called for by the Court of Auditors. 19.12. The value of operating equipment was entered in the accounts in April 1993. CHAPTER 20 (*) European Schools >TABLE> (*) The Institution's replies are on page 391 INTRODUCTION 20.1. For the financial year 1992, the total budget for the nine schools and the Office of the Representative of the Board of Governors of the European Schools was 121,4 Mio ECU and was financed by: a Community subsidy (81,4 Mio ECU, i.e. 67 % of the total); contributions from the Member States paid in the form of national salaries for teachers on secondment (25,6 Mio ECU i.e. 21 % of the total); a subsidy from the European Patent Office (7 Mio ECU i.e. 5,8 % of the total); other revenue from the schools, in particular school fees. On-the-spot audits were carried out in three schools. The checks covered the sum of 29,7 Mio ECU. SALARIES OF TEACHERS ON SECONDMENT 20.2. The on-the-spot audits revealed in particular the incomplete state of the staff files, failure formally to establish pecuniary rights and errors in the application of the rules concerning grants, allowances and other payments. The accuracy of the calculations of the amounts owing to teachers is dependent in particular on the initiative and specialist knowledge of the staff responsible for administering salaries. 20.3. The national legislation in the 12 Member States with regard to salaries, taxes and social security charges for teachers on secondment is subject to constant change. This is why the calculation of salaries on the basis of different national situations sometimes differs from one school to another. In order to standardize the application of the staff rules of employment and ensure that specialized staff have the necessary knowledge, the administration of the salaries of teachers on secondment should be centralized at the Office of the Representative of the Board of Governors of the European Schools. SEVERANCE GRANTS 20.4. In its Annual Report on the accounts of the European Schools for 1991, the Court criticized three decisions to overrule the Financial Controller's refusal to approve the calculation of the severance grant for Italian teachers, more particularly in relation to the inclusion of the 'indennitÃ  integrativa speciale` in the national basic salary when calculating the grant as a function of the difference between the national basic salary and the Community basic salary. Article 21 of the Staff Regulations for teachers was thus amended at the meeting of the Board of Governors on 26 and 27 January 1993, with the following phrase being added: 'The term ''national basic salary`` shall refer to the national basic salary plus cost of living allowances even where the latter are established separately.` 20.5. At the same time, the Board of Governors none the less adopted an additional note stating that 'this legal interpretation is only applicable as of 1 February 1993 and for any period of employment beyond this date`. This note in fact maintains unjustified advantages in the calculation of the severance grant for a number of years to come.REPLIES OF THE COMMISSION SALARIES OF TEACHERS ON SECONDMENT 20.2. As the Commission stated in answer to the Court's observations on 1991, the staff file of every teacher is being reorganized in the light of the rules adopted by the Representative of the Board of Governors; all Directors were reminded of these by note dated 9 July 1992. Following the establishment of Persee, the computerized staff management system, in 1993, the determination and recording of all teachers' pay can be harmonized, in cooperation with the authorizing officer and the Financial Controller. The Decision taken by the Board of Governors on 27/28 April 1993 to establish a post of delegated Financial Controller with effect from 1 January 1994 will further enhance the possibilities for central supervision of the new rules. 20.3. The European Schools system is based on a balance between two principles - centralization as the indispensable source of unity (central bodies set the legal basis and general orientation and coordinate and supervise local units), and decentralization as the indispensable basis for autonomy and sound local management (each School is responsible for running its own affairs and managing teachers' salaries) (see Article 8 of the General Rules and Articles 11 and 19 of the Financial Regulation). The new measures mentioned in the answer to paragraph 20.2 (Persee and the delegated Financial Controller) will help to improve salaries management and to ensure that salaries are set on a uniform basis in all the Schools. The Representative's staff will remind all Schools of the need to abide by the salary calculation formula in the light of national circumstances, in accordance with the Manual of accounting and administrative procedures issued in 1984. The Manual has been revised on a number of occasions in the light of changes in national provisions, but a further revision is now necessary on several points, and the Representative's Office will launch it at the earliest opportunity. SEVERANCE GRANTS 20.4 20.5. In compliance with the principle of legitimate expectations, the Decision by the Board of Governors (26/27 January 1993) to give a legal 'interpretation` of the concept of the 'national basic salary` diverging from practice hitherto (which was different but not unlawful) sought to refrain from raising question marks about legal situations that predated it and were held to be wholly within the law. To preserve such situations the Board decided in express terms that the new interpretation would be applicable only from 1 February and only to periods of secondment occurring thereafter; the effect is that when Italian teachers seconded to the Schools return to Italy, their severance grant will be calculated on the old basis for the period up to 31 January 1993 and on the new basis for periods commencing on 1 February 1993. () Opinion No 1/89, OJ C 7a, 20.3.89. () Annex I - Reports and opinions adopted by the Court of Auditors during the last five years. () OJ C 274, 24.10.1988, paragraph 2.7, 2.8(a), 2.8(f), 2.14 and 2.17 (d). () Article 10(4) of Council Regulation (EEC, Euratom) No 1552/89 of 29.5.1989, OJ L 155, 7.6.1989, p. 1. () OJ L 155, 7.6.1989, p. 9. () Article 3(2) of Council Regulation (EEC, Euratom) No 1553/89 of 29.5.1989, OJ L 155, 7.6.1989, p. 9. () Statements entered in the Council's Minutes of 29.5.1989 re Articles 3 and 4. () Categories listed in Article 4(2) of Council Regulation (EEC, Euratom) No 1553/89. () OJ L 145, 13.6.1977, p. 1. () Second Commission report on the implementation of Council Regulation (ECSC, EEC, Euratom) No 2892/77 of 19.12.1977, COM(88) 99 final of 9.3.1988. () Article 13(2) of Council Regulation (EEC, Euratom) No 1553/89. () OJ L 155, 7.6.1989, p. 1. () The revenue method makes it possible to reconcile the Member States' VAT statements, with a two-year gap, in order to compare the net revenue collected which is referred to in the statement for the year n P2 (and the harmonized basis of assessment resulting from it) with the statistical data relating to the year n P2 and used for calculating the WAR for the year n. () Data relating to all the Member States except for Denmark, which does not calculate a WAR, see paragraph 1.7. () Article 25 of the Sixth Council Directive. () Article 5 of Council Regulation (EEC, Euratom) No 1553/89. () Annex C to the Sixth Council Directive. () See Article 24 of the Sixth Council Directive. () Article 2(3) of Council Regulation (EEC, Euratom) No 1553/89. () Point 16 of Annex F to the Sixth Council Directive. () Article 17(6) of the Sixth Council Directive. () Article 6(4) of Council Regulation (EEC, Euratom) No 1553/89. () Capping is the operation whereby a Member State's VAT basis of assessment is reduced to 55 % of its GNP, where the latter figure is lower (see Article 2 of Council Decision 88/376/EEC, Euratom of 24.6.1988). () Annual Report of the Court of Auditors concerning the financial year 1991, paragraphs 1.119 to 1.131, OJ C 330, 15.12.1992. () Council Directive 89/130/EEC, Euratom of 13.2.1989 on the harmonization of the compilation of gross national product at market prices, OJ L 49, 21.2.1989, p. 26. () Annual Report of the Court concerning the financial year 1991, paragraphs 1.99 to 1.102, OJ C 330, 15.12.1992. () Report on the implementation of Council Directive 89/130/EEC, Euratom of 13.2.1989 on the harmonization of the compilation of gross national product at market prices, Doc. SEC(92) 588 final. () Commission Regulation (EEC) No 1577/81 of 12.6.1981 establishing a system of simplified procedures for the determination of the customs value of certain perishable goods, OJ L 154, 13.6.1981, p. 26. () OJ L 77, 24.3.1977. () OJ L 257, 3.9.1992, p. 5. () Articles 3, 79, 85 and 86 of the Treaty and implementing Regulations, Council Regulation No 11 of 27.6.1960, OJ 52, 16.8.1960; Council Regulation (EEC) No 4064/89 of 21.12.1989, OJ L 395, 30.12.1989. () Annual Report of the Court of Auditors concerning the financial year 1990, paragraphs 2.75 to 2.78, OJ C 324, 13.12.1991. () Judgment in Cases T 79/89 ff - PVC. () OJ L 185 of 15.7.1988, p. 29. () Commission Decision 92/491/EEC of 23 September 1992 (OJ L 298 of 14.10.1992, p. 23). () OJ L 154 of 25.6.1993, p. 30. () Commission Decision 93/524/EEC of 27 September 1993 (OJ L 252 of 9.10.1993, p. 27). () Article 12, paragraphs 3, 5 and 6 of Commission Regulation (EEC) No 2677/85 of 24 September 1985 (OJ L 254 of 25.9.1985, p. 5), amended by Commission Regulation (EEC) No 571/91 of 8 March 1991 (OJ L 63 of 9.3.1991, p. 19). () Council Regulation (EEC) No 1442/88 of 24 May 1988 (OJ L 132 of 28.5.1988, p. 3) and Commission Regulation (EEC) No 2729/88 of 31 August 1988 (OJ L 241 of 1.9.1988, p. 108). () For example, a change in yield from less than 90 hectolitres per hectare to more than that level results in a 36 % increase in the amount of aid, from 5 250 to 7 150 ECU/ha. () Council Regulation (EEC) No 3013/89 of 25 September 1989 (OJ L 289 of 7.10.1989, p.1). () OJ L 283 of 27.10.1984, p. 28. () OJ L 124 of 15.5.1990, p. 15. () Annual Report 1991, paragraphs 3.30-3.32 (OJ C 330 of 15.12.1992). () OJ C 330 of 15.12.1992, paragraphs 2.16-2.56. () OJ L 356 of 24.12.1991, p. 21. () OJ L 67 of 14.3.1991, p. 17. () OJ L 356 of 24.12.1991, p. 21. () OJ L 36 of 13.2.1992, p. 1. () OJ L 362 of 31.12.1991, p. 85. () OJ L 166 of 20.6.1992, p. 1. () OJ L 280 of 8.10.1991, p. 4. () OJ L 362 of 31.12.1991, p. 87. () OJ L 227 of 11.8.1992, p. 2. () OJ L 101 of 15.4.1992, p. 44. () OJ L 121 of 6.5.1992, p. 7. () OJ L 356 of 24.12.1991, p. 21. () OJ L 356 of 24.12.1991, p. 21. () OJ L 75 of 21.3.1990, p. 8. () OJ L 282 of 26.9.1992, p. 1. () OJ L 166 of 25.6.1976, p. 1. () OJ L 82 of 29.3.1978, p. 10. () OJ L 182 of 3.7.1987, p. 51. () OJ L 365 of 24.12.1987, p. 3. () Special Report of the Court of Auditors No 2/90, OJ C 133 of 31.5.1990. () OJ L 132 of 20.5.1978, p. 72. () Commission Regulation (EEC) No 1315/89 of 12 May 1989, OJ L 131 of 13.5.1989, p. 48. () OJ L 177 of 24.6.1989, p.1. () Commission Regulation (EEC) No 2692/89 of 6 September 1989, OJ L 261 of 7.9.1989, p. 8. () OJ L 182 of 3.7.1987, p. 56. () Commission Regulation (EEC) No 675/88 of 15 March 1988, OJ L 70 of 16.3.1988, p. 12. () OJ L 146 of 4.7.1970, p.1. () OJ L 123 of 5.6.1971, p.7. () Commission Regulation (EEC) No 870/88 of 30 March 1988, OJ L 87 of 31.3.1988, p.71. () Commission Regulation (EEC) No 2885/90 of 5 October 1990, OJ L 276 of 6.10.1990, p.16. () OJ L 284 of 12.10.1991, p.14. () OJ L 67 of 15.3.1976, p. 29. () OJ L 325 of 29.11.1988, p. 2. () OJ L 246 of 5.11.1971, p. 1. () OJ L 291 of 19.11.1979, p. 17. () The general rules for this aid were introduced by Council Regulation (EEC) No 2169/81 of 27 July 1981; OJ L 211 of 31.7.1981, p 2. The detailed rules were initially laid down by Commission Regulation (EEC) No 2081/83 of 26 July 1983, OJ L 203 of 27.7.1983, p. 17, which was replaced by Commission Regulation (EEC) No 1201/89 of 3 May 1989, OJ L 123 of 4.5.1989, p.23. () Council Regulation (EEC) No 1964/87 of 2 July 1987, OJ L 184 of 3.7.1987, p. 14. () Council Regulation (EEC) No 1152/90 of 27 April 1990, OJ L 116 of 8.5.1990, p. 1. () OJ L 154 of 25 June 1993, p.21. () Decision No 27243 of 2 September 1992. () OJ L 128 of 14.5.1985, p. 15. () OJ L 388 of 30.12.89, p. 18. () OJ L 215 of 30.7.92, p. 13. () OJ L 187 of 19.7.1990, p. 29. () OJ L 131, 26.5.1977, p. 8. () OJ L 183, 7.7.1983, p. 1. () OJ L 206, 30.7.1983, p. 75. () Commission Regulation (EEC) No 1548/90, OJ L 146, 6.6.1990, p. 7; Commission Regulation (EEC) No 2571/90, OJ L 243, 5.9.1990, p. 17; Commission Regulation (EEC) No 706/92, OJ L 75, 20.3.1992, p. 31. () OJ L 131, 26.5.1977, p. 6. () Source: Eurostat - quarterly statistics on animal production, issue No 4/1992 - ISSN 0250 - 6580. () Order of 5 April 1991 of the Agriculture and Fisheries Authorities of the autonomous region of Valencia. Annex II to this local legislation expressly states that the main objective of this additional consumption of milk by pupils is to reduce the phenomenon of 'school fatigue`. The Order of 23 September 1988 of the Agriculture Authority of the autonomous region of Galicia, p. 4227 of the local Official Journal. It is stated that the school milk programme, as part of the promotion of the consumption of foodstuffs, is a measure designed to encourage consumers to develop healthy and lasting eating habits and that the programme emphasizes the nutritional value of pasteurized milk, consumption of which by schoolchildren is thus encouraged. () Studies by CIDIL, France, Paris conference, 15 May 1991. 'L'alimentation des jeunes en milieu scolaire`. Livre blanc sur les produits laitiers en restauration scolaire et universitaire - Dossier: 'Sous-consommation des produits laitiers`. () SEC 92 2097 final. () Figure calculated on the assumption that the 36 million children from 0 to 19 years of age, consumed 0,25 litre of milk during 212 school days. See notes 1-4 above. () OJ C 342, 31.12.1980, p. 71. () Although it has already been signed by more than 100 States, the required minimum of ratification instruments (60) has not so far been filed with the United Nations. The Community and all the Member States, with the exception of the United Kingdom and Germany, have signed the agreement. However, it has not been ratified by any of the signatories. () Doc SEC (91) 1826. () During the negotiations, the Commission is assisted in its task by the Council, via a consultative committee of Member States. Once the partners come to an agreement on a draft text, the Commission initials the document and reports back to the Council. A Council Decision then approves the agreement on a provisional basis. This decision provides for the provisional implementation of the agreement, pending its definitive conclusion. After consultation of the European Parliament, the Council approves the agreement definitively via a Regulation. () Cf. reply to Written Question No 3521/92 (OJ C 106, 16.4.1993, p. 47). The text continues: 'The so-called ''second generation`` agreements, on the other hand, while still based on commercial concepts, introduce the aspect of cooperation in fisheries with the partner country by providing for the creation of joint ventures and joint enterprises and the establishment of undertakings in the partner country`. () Council Decision 92/560/EEC of 27 November 1992 (OJ L 359, 9.12.92). () Doc. COM (92) 449 final. () Doc. COM (92) 308 final. () OJ L 185, 15.7.1988, p. 9. () Not all of the data set out in this section take account of those amounts provided for the new German Laender. () In the case of the new Laender the finance is provided under Council Regulation (EEC) No 3575/90 of 3 December 1990 (OJ L 353, 17.12.1990, p. 19) and not included in the reform allocations. () For the sake of clarity of presentation, all data are given, where possible, in current ecus, unless otherwise stated. () OJ L 374, 31.12.1988, p. 1. (1) For all operational programmes in the Member State listed in the sample. (2) Amounts are shown as 1989 prices. () OJ L 35, 9.2.1979, p. 1. () Council regulations (EEC) Nos 2615/80 to 2619/80 of 16 October 1980 - OJ L 271, 15.10.1980, p. 1. () Council regulations (EEC) Nos 214/84 to 219/84 of 18 January 1984 - OJ L 27, 31.1.1984, p. 1. () Council regulations (EEC) Nos 3635/85 to 3638/85 of 17 December 1985 - OJ L 350, 27.12.1985, p. 8. () OJ L 169, 28.6.1984, p. 1. () OJ L 350, 27.12.1985, p. 6. This regulation enabled Greece to qualify for the 'Enlargement` NQ measure. () NUTS: Nomenclature des UnitÃ©s Territoriales Statistiques (Nomenclature of Territorial Units for Statistical Purposes). () Special Court Report No 2/86 of 20 October 1986. OJ C 262, 20.10.1986. () Note No 6283/90 of 17.10.1990 from the Financial Controller. () The Commission approved the new Community support frameworks (CSF) for ESF action for the non-objective countries and regions, in 1993, by way of Objectives Nos 3 and 4 in these countries and regions, on 5 November 1992; the CSF for the Objective 1 countries and regions were approved in 1989 for the period 1990-93. () The 1992 financial year cannot be closed until the applications for final payments for that year have been processed. The final date for submission of these applications to the Commission is 30 June 1993. () Council Regulation (EEC) No 2052/88 of 24 June 1988, on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, Article 6, OJ L 185, 15.7.1988. Council Regulation (EEC) No 4253/88 of 19 December 1988, laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments, Article 26, OJ L 374, 31.12.1988. Council Regulation (EEC) No 4255/88 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards the ESF, Article 1(2)(b), OJ L 374, 31.12.1988. () In progress. () As these assessments were carried out in 1991 it was not possible to use them in establishing the OP and CSF, unlike the other assessments mentioned; instead they form part of the revision and adjustment stage of the CSF and the OP. () Certain malfunctions are associated with Objectives Nos 3 and 4 together. () From the Greek word for 'work`. () 'ERGO programme (Phase One) Final Report`, CEI Consultants Ltd and PA Cambridge Economic Consultants Ltd, April 1992. () DG V-D-1 working document dated 20 November 1992, Ex post assessment of the OP and CSF - Objectives Nos 3 and 4, Preparatory operations. () Report compiled by Jordi Planas and Maribel Garcia of Institut de CiÃ ̈nces de l'EducaciÃ3 at the Independent University of Barcelona, Bellaterra, October 1991. () Section 44 of the implementing provisions chapter of CSF Objectives Nos 3 and 4. () The indicators are provided for in Article 25(2) of Council Regulation (EEC) No 4253/88. Paragraph 6.43 of the Court of Auditors' Annual Report concerning the financial year 1991. () The proposed global amount available rose from 1 855 Mio ECU in March 1992 to 2 117 Mio ECU in October 1992, at the time of the decisions on the 1993 CSFs. () Annual report of the Court concerning the financial year 1989, OJ C 313, 12.12.1990, paragraph 8.49, p. 151. () Community support framework for the regions of Berlin-East, Mecklenburg-West Pomerania, Brandenburg, Saxony-Anhalt, Thuringia and Saxony, 1991-93. () OJ L 353, 17.12.1990, pp. 19/20. () OJ L 185, 15.7.1988, pp. 9-20. () OJ L 374, 31.12.1988, pp. 1-14. () OJ L 374, 31.12.1988, pp. 21-24. () Objective No 2 - assistance to people who are unemployed or at risk of becoming unemployed as a result of the restructuring of the economy. Objective No 4 - combating long term unemployment. Objective No 5 - the professional integration of young people. () Company Asanitary, electrical and heating installations Btraining consultancy Chairdressing Dpump machinery Edetergents Ffurniture G, H, Iorganisation of training courses. () OJ C 327, 29.12.1990, p. 9. () OJ C 330, 15.12.1992, paragraphs 8.34-8.38. () OJ L 224, 2.8.1989, p. 10. (1)Request to carry appropriations over from 1992 to 1993 [SEC(93) 228 final]. () OJ L 107, 28.4.1988, p. 3. () In Spain a new organization (IntervenciÃ3n Delegada en la Secretaria del Estado para las Comunidades Economicas Europeas) commenced operations during 1992 but carried out few controls; in Italy the Fondo di Rotazione - a service of the Ministry of the Treasury - commenced operations during 1991 but only for a limited number of measures. () The principal provisions are contained in Article 23 of Council Regulation (EEC) No 4253/88 (OJ L 374, 31.12.1988, p. 1) which requires Member States: -to verify on a regular basis that operations financed by the Community have been properly carried out; -to prevent and take action against irregularities; -to recover any amounts lost as a result of an irregularity or negligence. Furthermore, Member States are obliged to inform the Commission of the measures taken for those purposes and to make available to the Commission any appropriate national control reports. () Council Regulation (EEC) No 1118/88 of 25.4.1988, OJ L 107, 28.4.1988, p. 3. () Council Regulation (EEC) No 729/70 of 21.4.1970, OJ L 94, 28.4.1970, p. 13. () Council Regulation (EEC) No 797/85 of 12.3.1985, OJ L 93, 30.3.1985, p. 1. () OJ L 334, 6.12.1988, p. 29. () Article 2(1) of Regulation (EEC) No 1676/85 (OJ L 164, 24.6.1985, p. 1) states that in legal instruments relating to the common agricultural policy, the agricultural conversion rates shall apply for the conversion into the national currency of a Member State of amounts expressed in ecus. The terms 'green` rate and 'green` ecu are thus commonly used. The rate of 155,786 PTA for 1 green ecu in 1988 was applied for converting the amounts expressed in ecus in Regulation No 1118/88. The 420 Mio ECU correspond to the total amount of the financing limits for each measure. () Article 1(3) of Regulation (EEC) No 4256/88. () Article 33(3) of Regulation (EEC) No 4253/88, OJ L 374, 31.12.1988, p. 1. () Council Regulation (EEC) No 2052/88 of 24.6.1988, OJ L 185, 15.7.1988, p. 9. () Council Regulation (EEC) No 4253/88 of 19.12.1988, OJ L 374, 31.12.1988, p. 1. () Commission Regulation (EEC) No 1866/90 of 2.7.1990, OJ L 170, 3.7.1990, p. 36. () In its Annual Report for the financial year 1991, the Court challenged the interpretation given by the Commission to Article 12(3) of Regulation (EEC) No 2052/88. () Not published in the OJ. () Article 1(3) of the Regulation stipulates that the measures must be set out in a programme, and Article 4 of the Regulation requires that this programme be approved by the Commission. () The Spanish expenditure for 1992 was not yet known at the time this report was being drafted. () Annual Report of the Court concerning the financial year 1986, paragraphs 7.6, 7.11 and 7.12 and the Annual Report of the Court concerning the financial year 1989, paragraph 6.90. () Regulation (EEC) No 1118/88, Article 1(3); Decision 88/608/EEC, Article 3; Decision 89/375/EEC (declaration provided for in Annex I). () OJ L 175, 22.6.1989, p. 1. () Andalusia: prevention of soil erosion; Aragon: irrigation works; Asturias: reparcelling of land, forestry; Community of Valencia: irrigation works; Murcia: reparcelling of land, forestry; Navarre: forestry; the Basque Country: supply of electricity and drinking water, roads, telephones, reparcelling of land, prevention of soil erosion, forestry. () 'En los caminos de acceso a las explotaciones no se utiliza la capa de rodadura`, p. 48, third paragraph (translation: 'farm-access roads shall not be asphalted`). () Regulation (EEC) No 1118/88, Article 2(2). () See Commission Decision 88/608/EEC, Article 1(2), third indent. () OJ L 218, 6.8.1991, p. 1. () OJ L 326, 21.11.1986, p. 5. () Afforestation: 2 300/ha maximum; improvement of woodlands: 2 000/ha maximum. () Article 6(2) of Regulation (EEC) No 1118/88. See in particular paragraphs IV.2 and VI.1 of this Report. () Council Decision 78/870/EEC of 16 October 1978 (OJ L 298, 25.10.1978). Council Decision 82/169/EEC of 15 March 1982 (OJ L 78, 24.3.1982). Council Decision 83/200/EEC of 19 April 1983 (OJ L 112, 28.4.1983). Council Decision 87/182/EEC of 9 March 1987 (OJ L 71, 14.3.1987). () Council Decision 77/270/Euratom of 29 March 1977 (OJ L 88, 6.4.1977). () Council regulation (EEC) No 397/75 of 17 February 1975 (OJ L 46, 20.2.1975). () Disseminated as an annex to the ECSC annual report (1992). () Council Regulation (EEC) No 1736/79 of 3 August 1979 (OJ L 200, 8.8.1979). () Council Decision 79/691/EEC of 3 August 1979 (OJ L 200, 8.8.1979). () Article A-300 Euratom subsidy for the operation of the Supply Agency. Chapter B4-10: Energy policy. Chapter B4-20: Euratom Nuclear Safeguards. Item B5-4040: Community contribution to the Eureka secretariat. Title B5-5: Innovation and the information market. Section B6: Research and technological development. Subsection B8: Mini-budgets related to the above. () OJ L 141, 23.5.1992. () OJ C330, 15.12.92, paragraphs 13.48-13.54. () Council resolution of 25.7.1983 concerning framework programmes for Community research and development and demonstration programmes and concerning the first framework programme, 1984-87, OJ C 208, 4.8.1983, p. 1. () Council Decision No 87/516/Euratom, EEC of 28.9.1987 concerning the framework programme for Community research and development programmes in the field of technology (1987-91), OJ L 302, 24.10.1987, p. 1 and OJ L 89, 6.4.1988, p. 35. () Council Decision No 90/221/Euratom, EEC of 23.4.1990 concerning the framework programme for Community research and development programmes in the field of technology (1990-94), OJ L 117, 8.5.1990, p. 28 and OJ L 69, 20.3.93, p. 43. () Eurotec 11-90, p. 3, Commission of the European Communities. () As the Council stated in its resolution concerning the first framework programme, 'the... strategy in the field of science or technology shall be defined in framework programmes...`. OJ C 208, 4.8.1983, p. 2. () See decision concerning the second framework programme, 12th recital, and Article 1(3), paragraph 3, OJ L 302, 24.10.1983, p. 2. () The energy sector has other programmes which do not appear in the framework programme, e.g. the 'Thermie` programme. () An additional 900 Mio ECU was allocated in March 1993, OJ L 69, 20.3.1993, p. 43. () OJ L 185, 17.7.1990, p. 1. () OJ L 112, 25.4.1989, p. 12. () OJ L 377, 31.12.1991, p. 41. () OJ L 207, 27.7.1987, p. 8. () See Council Decision No 87/516/Euratom, EEC concerning the second framework programme, penultimate recital, OJ L 302, 24.10.1987, p. 3. () The report of the framework programme review board, Brussels, June 1989, internal Commission document. () Study of the administration of research activities, 1990, internal Commission document. () Second Framework Programme for Research and Technological Development (1987-91), Evaluations and Reviews, Commission of the European Communities. () Commission Communication, Evaluation of the second framework programme in the field of research and technological development, SEC (92) 675 final. () Science and technology for innovation and regional development in Europe, OJ C 196, 4.8.1990. () Utilization of energy potential, OJ L 305, 31.10.1986. () Advanced telecommunications services for the European regions, OJ L 305, 31.10.1986. () 'Eurotech Capital` is to encourage the financing of transnational high-technology projects, giving priority to those carried out by innovative small and medium-sized enterprises. 'Eurotech Insur` is to promote the supply of and demand for innovative insurance policies designed to cover part of the possible losses from investments in high-technology projects situated at a stage prior to the market-introduction stage (see items B5-330 and B5-331 of the 1992 budget). () Annual report of the Court of Auditors concerning the financial year 1987, OJ C 316, 12.12.1988, paragraph 8.15. () OJ L 141, 23.5.1992, pp. 11 and 20. () 'Research after Maastricht: an assessment, a strategy`; Communication from the Commission to the Council and the European Parliament, SEC(92) 682 Final, point 92. () OJ L 8, 11.1.1991, p. 16. () OJ L 200, 13.7.1989. () OJ L 141, 23.5.1992. () 'From the Single Act to Maastricht and beyond: the means to match our ambitions`, Commission Communication COM(92) 2000 final. () 'Forschungs- und Technologiefoerderung der EG`, special edition for the new Federal Laender, November 1990, Commission of the European Communities, p. 7. () 'La politique de recherche et de dÃ©veloppement technologique de la CommunautÃ© europÃ©enne.` European documentation, Office for Official Publications of the European Communities, p. 23. () OJ L 185, 15.7.1988, p. 33. () Report on the implementation of the 1987-91 framework programme, July 1992, Commission internal document. () OJ C 53, 28.2.1991, p. 77. () OJ L 98, 11.4.1989, p. 13. () See P.C. 1990-94, report on implementation as of 31.12.1991, 30.6.1992, Commission internal document. () Council Regulation (EEC) No 3906/89 of 18 December 1989 (OJ L 375, 23.12.1989, p. 11), as amended by Council Regulation (EEC) No 2698/90 of 17 September 1990 (OJ L 257, 21.9.1990, p. 1), Council Regulation (EC) No 3800/91 of 23 December 1991 (OJ L 357, 28.12.1991, p. 10) and Council Regulation (EEC) No 2334/92 of 7 August 1992 (OJ L 227, 11.8.1992, p. 1). () Council Regulation (EEC, Euratom) No 2157/91 of 15 July 1991 (OJ L 201, 24.7.1991, p. 2). () OJ L 409, 31.12.1992, p. 1. () OJ L 356, 24.12.1991, p. 21. () OJ L 36, 13.2.1992, p. 1. () OJ L 67, 14.3.1991, p. 17. () OJ L 67, 14.3.1991, p. 19. () Council Decision 90/233/EEC of 7 May 1990, OJ L 131, 23.5.1990. () Council Decision 90/83/EEC of 22 February 1990 (OJ L 58, 7.3.1990); Council Decision 90/681/EEC of 21 December 1990 (OJ L 375, 31.12.1990); Council Decision 91/310/EEC of 24 June 1991 (OJ L 174, 3.7.1991). () Council Decision 91/106/EEC of 25 February 1991 (OJ L 56, 2.3.1991). () Council Decision 91/311/EEC of 24 June 1991 (OJ L 174, 3.7.1991); Council Decision 92/511/EEC of 19 October 1992. () Council Decision 91/384/EEC of 22 July 1991 (OJ L 208, 30.7.1991); Council Decision 92/551/EEC of 3 December 1992 (OJ L 353, 3.12.1992). () Council Decision 91/658/EEC of 16 December 1991 (OJ L 362, 31.12.1991). () Council Regulation (EEC) No 559/91 of 5 March 1991 (OJ L 67, 14.3.1991). () Commission Decision 90/134/EEC of 5 March 1990 and Council Assent No 7/90 of 7/8 May 1990 concerning the granting of ECSC loans for industrial projects in Hungary and Poland (SEC(90) 410 final, dated 8 March 1990) and Council Assent No 28/91 of 11 November 1991 concerning the extension of these loans to the Czech Republic, the Slovak Republic, Bulgaria and Romania for a total of 200 Mio ECU (OJ C 304, 23.11.1991). () Court Opinion No 3/93, OJ C 170, 16.6.1993. () Council Decision 90/62/EEC of 12 February 1990 (OJ L 42, 16.2.1990). Council Decision 91/252/EEC of 14 May 1991 (OJ L 123, 18.5.1991). () Commission Decision 90/134/EEC of 5 March 1990 and Council Assent No 7/90 of 7/8 May 1990 concerning the granting of ECSC loans for industrial projects in Hungary and Poland (SEC(90) 410 final, dated 8 March 1990) and Council Assent No 28/91 of 11 November 1991 concerning the extension of these loans to the Czech Republic, the Slovak Republic, Bulgaria and Romania for a total of 200 Mio ECU (OJ C 304, 23.11.1991). () Council Regulation (EEC) No 1969/88 of 24 June 1988, SEC(91) 1090 final of 6 June 1991 - Doc II/056/91 of 14.6.1991. () OJ C 330, 15.12.1992, paragraph 15.3. () Operations entered in the accounts between 31 December 1992 and 15 January 1993 in accordance with Article 6 of the Financial Regulation. () In particular, Special Report of the Court of Auditors No 1/87, OJ C 219, 17.8.1987. () Council Regulation (EEC) No 3972/86 of 22.12.1986, OJ L 370, 30.12.1986, Commission Regulation (EEC) No 2200/87 of 8.7.1987, OJ L 204, 25.7.1987. () OJ L 146, 11.6.1991, paragraph 60. () EuronAid is a non-profit making association of non-governmental organizations (NGOs) and is an intermediary between the Commission and the NGOs for the requesting, allocating and mobilizing of food aid to people in need financed by the Commission and distributed locally by NGOs, or their local counterparts. () Special Food Aid Programme 1992: 220 Mio ECU was included in the 1992 budget by Amending and Supplementary Budget No 2 of 13.5.1992 to help offset the impact of famine in Africa, and certain countries of Asia and Latin America. () Free-at-port-of-shipment, free-at-port-of-landing, free-at-destination. () In the case of Sudan, the Commission stopped the butteroil and SMP components after the 1989 programme because of their doubtful value, and in 1990 suspended deliveries of wheatflour because of the unacceptable exchange rate applied for the constitution of counterpart funds. It was not until 1992 that it was finally decided to cancel the wheatflour component as direct aid. () Including interest on own funds. () This includes food aid channelled through international organizations other than WFP and EuronAid, which is mobilized on the same terms as direct aid. () OJ L 26, 3.2.1992. () OJ L 142, 25.5.1992, OJ L 174, 29.6.1992 and OJ L 349, 30.11.1992. () In so far as the aim of the perspective is to provide a framework for the budgetary procedure, the implementation figures used are the figures for transactions which are directly linked to the 1992 budget appropriations (utilization of the 1992 appropriations in 1992, allocation of appropriations still unused: carry-over to 1993 or cancellations), rather than for operations carried out during the financial year 1992 (use of 1992 appropriations, appropriations carried over from 1991 and appropriations made available again in 1992). () SEC(92) 266 final/2, 25.2.1992. () Court Opinion No 1/89 of 9.2.1989, OJ C 72, 20.3.1989. () OJ L 376, 31.12.1986, p. 7. () OJ L 374, 31.12.1988, p. 1. () OJ L 170, 3.7.1990, p. 36. () OJ L 280, 8.10.1991, p. 4. () The Court argues as follows: 'Even though an individual measure may almost inevitably entail the commitment of expenditure, the two must be distinguished - particularly since the power to adopt the administrative decision and the power to commit the expenditure may be entrusted, within the internal organization of each institution, to different officials` (paragraph 17 of the Court of Justice ruling, Case 16/88 Commission v Council). () See the Annual Report of the Court of Auditors concerning the financial year 1991, paragraphs 16.100 to 16.116. () See the Annual Report of the Court of Auditors concerning the financial year 1991, paragraphs 16.112 to 16.114. () In the EDF accounts the primary commitments correspond to the financing decisions, whereas the secondary commitments relate to the contracts concluded with third parties. () See paragraph 14.29. () Equatorial Guinea; Haiti; Malawi; Sudan; Togo; Zaire. () At 31 December 1992, five countries had still not agreed an indicative programme for the Seventh EDF: Haiti, Liberia, Somalia, Sudan and Zaire. () On-Line Accounting System. () Annual Report of the Court of Auditors concerning the financial year 1991, paragraph 17.11, OJ C 330, 15.12.1992. () A similar review of operations was carried out for the financial year 1990: Annual Report of the Court of Auditors, paragraphs 14.10 and 14.11, OJ C 324, 13.12.1991. () Article 193(7) of the Third LomÃ© Convention; Article 327(1) of the Fourth LomÃ© Convention. () Annual Report of the Court of Auditors concerning the financial year 1991, paragraph 17.14, OJ C 330, 15.12.1992. () Article 36 of the Financial Regulation of the Seventh EDF, OJ L 266, 21.9.1991. () Annual Report of the Court of Auditors concerning the financial year 1989, paragraphs 13.24 and 13.25, OJ C 313, 12.12.1990. () Opinion No 1/91, OJ C 113, 29.4.1991. () Article 33(3) of the Internal Agreement on the financing and administration of Community aid under the Fourth ACP-EEC Convention, OJ L 229, 17.8.1991. () Article 71 of the Financial Regulation of the Seventh EDF stipulates that the Commission must forward the EDF financial statements to the Court of Auditors not later than 1 May, OJ L 266, 21.9.1991. () Decision of 16.7.1992. () Annual Report of the Court of Auditors concerning the financial year 1991, paragraph 17.17, OJ C 330, 15.12.1992. () The interest credited to Stabex in accordance with the provisions of Article 192 of the Fourth LomÃ© Convention brought the allocation to 1 626,1 Mio ECU. () The first country to benefit from Stabex under LomÃ© III and LomÃ© IV. () Haiti: 17 Mio ECU; Malawi: 4,2 Mio ECU; Sudan: 63,9 Mio ECU. () Comoros, Guinea-Bissau, Kiribati, Lesotho, Madagascar, Mali, Solomon Islands, Tonga, Tuvalu, Vanuatu, Western Samoa. () The accounts must be interest-bearing accounts which are subject to joint authorization by the national authorizing officer and the Commission delegate. () Similar provisions appear in Article 212 of the Fourth LomÃ© Convention. () Benin, Burundi, Comoros, Ivory Coast, Ethiopia, Gambia, Kenya, Malawi, Rwanda, Tanzania, Tonga, Togo, Vanuatu. () Articles 239 to 250 of the Convention and Article 20 of the Internal Agreement on the financing and administration of aid from the Seventh EDF concern this problem. () Excluding a 60 Mio ECU programme for road repair and rebuilding works in Senegal, which was included in the same financing agreement as the general import programme. () The enquiry which was carried out among the delegations (see paragraph 14.32) indicated that there were ECU accounts for 20 Mio ECU, in addition to the amounts held by Zaire, Cameroon and Tanzania, which have not replied, where the programmes amounted to 73,5 Mio ECU. () Policy Framework Paper. () 7/ACP-GM-002 and 003: 4 Mio ECU with an advance of 60 %; 7/ACP-DO-004 and 005: 21,86 Mio ECU with an advance of 40 %. () Annual Report of the Court of Auditors concerning the financial year 1989, paragraph 13.34, OJ C 313, 12.12.1990. () This report satisfies the requirements of Article 193(7) of the Third LomÃ© Convention. () Congo and Zaire in particular. () In respect of food aid, see the observations in Chapter 12 of this Annual Report. () European Community Humanitarian Assistance Office. () OJ L 127, 13.5.1992. () In particular by making use of the provisions of Article 23(2) of the Third LomÃ© Convention. () Financial Regulation of 29.7.1991, OJ L 266, 21.9.1991. () Similar provisions are made in Articles 320 to 323 of the Fourth LomÃ© Convention. () European Parliament Resolution of 13.4.1989 (paragraphs 25 to 28) accompanying the decision granting discharge for the financial year 1987, OJ L 247, 23.8.1989. () This unit, in conjunction with DG I, also evaluates aid to non-ACP third countries. () The drawing-up of basic principles is one of the tasks entrusted to the ACP-EEC Committee by Article 193(2)(e) of the Third LomÃ© Convention. () The integrated approach retains some key elements likely to offer a better guarantee of success for development projects and their viability prospects; these elements must be taken into consideration at each stage of the projects' progress (preparation, monitoring, evaluation). () Commission Decision of 14 July 1993 laying down detailed rules for determining the weighted average rate of VAT to be used in Germany for the calculation of the VAT own resources bases for 1991 to 1994 (OJ L 209, 20.8.1993, p. 34). () Meeting of Parliament's Committee on Social Affairs on 27 June 1990. () Article 21(3) of Regulation No 4253/88. () Inspections by DG XX in April and June 1992. DG V inspections in August and September 1992. () Article 6(2): 'Maintenance and operating costs may be covered for training and research programmes and for other projects; however, for the latter such costs may be covered only in the start-up stage and shall be degressive.` () See point 13.7 of the Annual Report, OJ C 313, 12.12.1990, p. 201. () OJ C 316, 12.12.1988, paragraphs 2.31 to 2.33. () OJ C 316, 12.12.1988, paragraphs 10.81 to 10.84. () OJ C 316, 12.12.1988, p. 292. () OJ C 234, 13.12.1991, paragraphs 17.1 to 17.25. () OJ L 19, 28.1.1993, paragraph 72. () OJ C 234, 13.12.1991, paragraphs 17.1 to 17.25.