# EUR-Lex - 31998Y1117(01) - EN

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# 31998Y1117(01)

**Annual Report concerning the financial year 1997, together with the institutions' replies - Report on activities financed from the general budget and on the activities of the sixth and seventh European Development Funds **

*
Official Journal C 349 , 17/11/1998 P. 0001 - 0230 *

ANNUAL REPORT concerning the financial year 1997 (98/C 349/01)

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.

Bernhard FRIEDMANN (President)

John WIGGINS

Giorgio CLEMENTE

Barry DESMOND

Patrick EVERARD

Armindo de Jesus de SOUSA RIBEIRO

Antoni CASTELLS

Jan O. KARLSSON

Hubert WEBER

Aunus SALMI

Jørgen MOHR

Kalliopi NIKOLAOU

François COLLING

Maarten B. ENGWIRDA

Jean-François BERNICOT

CONTENTS

Page

General introduction 5

REPORT ON ACTIVITIES FINANCED FROM THE GENERAL BUDGET

Part I - Observations concerning the general budget

Chapter 1 - Own resources 7

Chapter 2 - The common agricultural policy 21

Chapter 3 - Structural measures 59

Chapter 4 - Internal policies 76

Chapter 5 - External aid 87

Chapter 6 - Administrative expenditure 108

Chapter 7 - Financial instruments and banking activities 110

Part II - Statement of assurance concerning activities financed from the general budget

Chapter 8 - The statement of assurance and supporting information 119

REPORT ON THE ACTIVITIES OF THE SIXTH AND SEVENTH EUROPEAN DEVELOPMENT FUNDS

Part I - Observations concerning activities under the sixth and seventh European Development Funds 149

Part II - The statement of assurance and supporting information concerning the sixth and seventh European Development Funds 161

ANNEXES

Annex I - Financial information on the general budget and the sixth and seventh European Development Funds (1*) I

Annex II - Reports and opinions adopted by the Court during the last five years XLI

THE INSTITUTIONS' REPLIES

REPORT ON ACTIVITIES FINANCED FROM THE GENERAL BUDGET

Page

Part I - Observations concerning the general budget

Chapter 1 - Own resources 18

Chapter 2 - The common agricultural policy 50

Chapter 3 - Structural measures 71

Chapter 4 - Internal policies 83

Chapter 5 - External aid 100

Chapter 7 - Financial instruments and banking activities 117

Part II - Statement of assurance concerning activities financed from the general budget

Chapter 8 - The statement of assurance and supporting information 139

REPORT ON THE ACTIVITIES OF THE SIXTH AND SEVENTH EUROPEAN DEVELOPMENT FUNDS

Part I - Observations concerning activities under the sixth and seventh European Development Funds 157

Part II - The statement of assurance and supporting information concerning the sixth and seventh European Development Funds 171

GENERAL INTRODUCTION

1. This annual report of the Court of Auditors sets out the results of its audits of the implementation of the general budget of the European Union and of the use made of Community funds through financial instruments and banking activities. It draws the attention of the institutions and the citizens of Europe to numerous important problems which the Commission and the authorities concerned in the Member States ought to set about solving. The report is an important component of the discharge procedure. The discharge is granted by the European Parliament, on the recommendations of the Council. The Commission gives an account of the steps it has taken to respond to the observations set out in the European Parliament's resolutions accompanying the discharge decisions for the general budget, the ECSC and the EDF and to the comments accompanying the Council's recommendations.

2. The observations set out in the report arise from the Court's audit of revenue and expenditure, including its audit from the point of view of sound financial management. These observations are followed by the statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying the general budget, and the related observations, which the Court submits to the European Parliament and the Council.

3. The contents of the annual report on the financial year 1997 differ from those of previous reports. The fact is that, over the years, the dimensions of the Court's annual report have expanded to the point of making the drafting and finalising of it unpracticable within reasonable time limits. Since the Treaty on European Union, moreover, the discharge procedure also applies to special reports. The Court has therefore decided to publish most of its audit findings in special reports, which also has the advantage of allowing it to spread its work out more evenly over the year. Thus, rather than enumerating detailed results of various audits, each chapter contains general observations and a summary of the conclusions of audits which have been adopted in the form of special reports during the period that has elapsed since the publication of the previous annual report.

4. The Court's external auditor's certificate in respect of the regularity and fairness of the revenue and expenditure account and of the financial balance sheet drawn up on 31 December 1997, and its report on the Court of Auditors' system of internal controls and sound financial management were published in OJ C 318, 15.10.1998.

5. The report on the European Development Funds and the related statement of assurance are presented separately after the report on the general budget.

Report on activities financed from the general budget

PART I Observations concerning the general budget

CHAPTER 1 (2*) Own resources

1.0. CONTENTS Paragraph reference

General introduction 1.1

Implementation of the budget 1.2

Traditional own resources 1.3 - 1.24

Financial management 1.3 - 1.9

Weaknesses in the internal control procedures for accounts kept by the Member States 1.4 - 1.5

Audit of the summary accounts drawn up by the Member States 1.6 - 1.7

Conclusion 1.8 - 1.9

Audit of the use of risk analysis techniques in customs control and the clearance of goods 1.10 - 1.24

Introduction 1.10 - 1.16

The Court's enquiry 1.17

Conclusion 1.18 - 1.24

Own resources deriving from VAT and the GNP 1.25 - 1.36

The system of resources based on VAT and the GNP 1.25 - 1.29

The VAT system in intra-Community trade 1.30 - 1.36

GENERAL INTRODUCTION

1.1. The Court's review of traditional own resources concentrated on the financial management by the Commission and the Member States in establishing and recovering Community entitlements and also examined the use of risk analysis techniques in Customs control. The observations concerning the latter have been published in greater detail in a special report (3). In the case of the resources accruing from value added tax (VAT) and gross national product (GNP), the Court particularly examined the nature and implications of the system for handling these resources, which provide approximately 80% of the Community budget, and also analysed various aspects of the potential losses that could occur in this area in connection with the system of VAT on intra-Community trade. The Court's observations on the above points are summarised in this chapter and are also the subject of two special reports (4).

IMPLEMENTATION OF THE BUDGET

1.2. Table 1.1 gives an overview of Community revenue for 1997 and Figure 1.1 shows that:

(a) the actual revenue for 1997 was 80 547,7 Mio ECU, or 97,8% of the revenue provided for in the final budget, and was 1,3% lower than the 1996 figure (81 275,1 Mio ECU);

(b) net traditional own resources, less collection costs of 1 574,7 Mio ECU, amounted to 14 172,3 Mio ECU, which was 17,6% of total actual revenue; these resources, which were 4,3% higher than in 1996, comprised:

- customs duties to a total of 13 607,7 Mio ECU gross, or 86,4% of gross traditional own resources (15 747,0 Mio ECU) (5),

- agricultural levies of 1 025,2 Mio ECU gross, or 6,5% of gross traditional own resources,

- sugar and isoglucose levies amounting to 1 114,0 Mio ECU gross, or 7,1% of gross traditional own resources;

(c) after taking account of balances and adjustments (- 567,5 Mio ECU), the VAT-based own resources amounted to 34 351,5 Mio ECU (6), or 42,6% of total actual revenue; the actual revenue from this resource was 6% less than in 1996 (36 535 Mio ECU);

(d) after taking account of balances and adjustments (- 544,9 Mio ECU) the GNP resource amounted to 26 891,7 Mio ECU (7)(including reserves of 286,9 Mio ECU), which was 33,4% of total actual revenue; this resource was 27,7% higher than the previous year (21 085 Mio ECU); the increase in the additional resources was to balance the decrease in last year's surplus and the negative adjustments and balances from previous years;

(e) the surplus available from the previous year (4 384,0 Mio ECU) and miscellaneous revenue (813,5 Mio ECU) accounted for 6,4% of total actual revenue, a decrease of 51,3% on 1996.

TRADITIONAL OWN RESOURCES

Financial management

1.3. The Court's observations are based on systems analysis, analytical reviews, tests of the procedures for centralising traditional own resources in order to make them available to the Commission and tests on sample transactions selected in the Member States.

Weaknesses in the internal control procedures for accounts kept by the Member States

1.4. In the annual report concerning the financial year 1995 the Court noted that before 1989 one Member State 'made available to the Commission all established amounts, including amounts that had not been recovered. On 1 January 1989, the amounts made available to the Commission that had been established and not recovered totalled 93,8 Mio ECU. Although this sum was not repaid with a view to being entered in a separate account, the Commission did not object to the national authorities deducting from current established amounts the amounts they had written off. Neither the Commission nor the national authorities has set up a monitoring system so as to make it possible to ascertain the cumulative total of these deductions` (8). The Court reviewed the deductions in question that have been made by the national authorities since 1989. The review showed that in the period between January 1989 and June 1997 an excess of 5,944 Mio ECU was deducted from the amount made available to the Commission. The Commission should take the necessary action to remedy the situation.

1.5. In another Member State, on 16 July 1996 the customs authorities deducted 5,67 Mio ECU, relating to four import declarations, from the separate accounts in order to transfer them to the accounts provided for in Article 6.2 (a) of Council Regulation No 1552/89 (9) so that this amount could be made available to the Commission. However, the 5,67 Mio ECU so deducted were made available in March 1997, instead of in September 1996. The result was a six-month delay in making these own resources available to the Commission.

Audit of the summary annual accounts drawn up by the Member States

1.6. As regards own resources the Court has regularly commented in its annual reports on delays in making the traditional own resources available, sums lost when debts lapse as a result of the three-year limitation, errors and irregularities in the establishment of customs duties on goods subject to customs preference and suspension schemes, as well as errors and omissions in incorporating Community regulations into national instructions. These comments are representative of the various types of recurrent irregularity that can be found in the information in support of the Statement of Assurance and which affect the sums entered in the accounts kept by Member States. The audit of the last financial year again revealed losses of own resources resulting from the same types of irregularity. In four Member States, for example, there were delays in making established entitlements available. In the sample of reviewed transactions the total amount of established entitlements was 7,3 Mio ECU and the delays ranged from one to six months. Under Article 11 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (10) the Member State concerned should have paid interest on the sums in question as a penalty for the delays in making the resources available.

1.7. Following the adoption of Council Regulation (EEC, Euratom) No 1355/96 of 8 July 1996 (11) amending Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989, the summary annual account drawn up by each Member State in accordance with Article 7 of that Regulation may not be corrected after 31 December of the third year after the end of a given financial year. The Commission has also published a proposal (12) which would amend Article 17 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 so that unrecovered amounts would be removed from the separate account at the latest at the end of the five-year period defined in the proposal.

Conclusion

1.8. The two amendments of Regulation (EEC, Euratom) No 1552/89 (see paragraph 1.7) ought to mean that, as with the procedures introduced as part of the procedure for the clearance of the agricultural expenditure accounts, the Commission is required, before the deadlines mentioned in paragraph 1.7, to audit the summary annual account presented by each Member State, or, at least, to have the accounts in question certified in accordance with the rules on the auditing of accounts.

1.9. In order to eliminate repeated irregularities, the Commission should also improve collaboration between itself and the Member States as regards the management and control of traditional own resources.

Audit of the use of risk analysis techniques in customs control and the clearance of goods (13)Introduction

1.10. Responsibility for the collection of traditional own resources (in 1997, 14 200 Mio ECU or approximately 17,7 % of the total Community budget) is devolved to the Member States.

1.11. The completion of the single market on 1 January 1993 was accompanied by the entry into force of the consolidated Community customs legislation. The consolidated legislation was intended to guarantee a uniform application of customs legislation throughout the Community. This, and subsequent amending legislation, lays down in specific terms the nature of the controls to be exercised by the customs authorities to protect the Community's financial interests.

1.12. The Ecofin Council approved, on 23 November 1992, the use of risk analysis to target financial controls. It asked the Commission to adopt, before the end of 1993, measures to introduce the principle of targeted-risk audits to all sectors subject to controls.

1.13. Subsequent Community Customs legislation only provides for the use of risk analysis techniques in the control of goods imported under simplified customs procedures by air or by sea (14). There is one additional legislative imperative on customs authorities to use risk analysis techniques in determining how and where to exercise their control mandates: Decision No 210/97/EC of the European Parliament and of the Council of 19 December 1996 adopting an action programme for customs in the Community (Customs 2000) (15)1.14. A number of documents adopted by the European Parliament, the Council or the Commission stress the need for using state-of-the-art customs techniques and more effective working methods such as information technology, risk analysis and targeted control using risk profiles, common and coordinated risk management policy, and advanced auditing systems. These institutions insist on the requirement that national customs services act as if they were one, and have invited Member States to cooperate closely and to coordinate their efforts with a view to attaining these common objectives.

1.15. The Commission notes that there is a lack of homogeneity in the inspection techniques from one Member State to another and expresses its belief that the development of risk analysis methods will remedy this state of affairs. Under the Customs 2000 programme it hopes to draw up Community-wide 'risk profiles`. For some customs regimes it will ask Member States to make systematic use of risk analysis methods in their control measures by implementing the guidelines issued on risk analysis to be used across the Community.

1.16. Non-binding guidelines, developed by the Commission with the cooperation of Member States, were definitively issued to Member States in October 1997. These guidelines are to be implemented on a pilot basis by the end of December 2000.

The Court's enquiry

1.17. The Court's enquiry carried out in eight Member States (Belgium, Denmark, Germany, Spain, France, Italy, the Netherlands and the United Kingdom) focused on the use of risk analysis in customs controls exercised in the physical inspection of goods and documentary checking of import declarations which affect the Community's own resources. The enquiry examined the controlling and coordinating role of the different services within the Commission. It also sought to focus in the Member States on the management and effectiveness of the techniques employed, the use to which sources of intelligence are put and the extent of feedback mechanisms in place. Where formal risk analysis techniques were not in use, the enquiry attempted to assess the effectiveness of alternative methods of protecting the Community's financial interests.

Conclusion

1.18. The aspirations of the European Parliament, the Council, the Commission and the Member States - namely, that the customs services of the Community will act as if they were one by taking coordinated action to achieve equivalent results in the Community customs territory, by the effective, efficient and homogenous application of Community rules - are far from having been achieved.

1.19. While there is a widespread willingness to further the use of risk analysis in the customs services, the lack of coordination, in particular in the determination of risky goods and circumstances, renders ineffectual a good deal of the control work being undertaken at local level.

1.20. There was sufficient evidence to confirm that much information on areas of risk is being passed on to the front line of the customs services. However, in the absence of really effective analysis of the potential effect of these risks for the individual frontier posts, the availability of this large mass of information does nothing to improve the direction of the control effort available.

1.21. In all the Member States visited, customs clearance systems have some filtering capability to determine according to pre-set risk profiles whether selected declarations are subjected to physical or documentary control. However, the effectiveness and efficiency of these filter systems is lessened by the lack of coordinated transnational profiles, the absence of real analysis of risks in many areas, the absence of feedback on the results of controls, the inadequacies of certain computer systems and, in some instances, the lack of understanding of the purposes and objectives of a targeting system.

1.22. There are as many manifestations of risk analysis methodologies as Member States visited on this enquiry. While there may be common agreement on the need for a risk methodology and while the Commission's guidelines give a good road-map for its implementation, present trends indicate an uncoordinated and uneven application of Community legislation.

1.23. Five years after the coming into being of the single market, and after six years of operation of the Matthaeus Programme (16), a greater amount of cohesion would be expected from the training and exchange programmes initiated. Alternatively, some integration of customs administrations by creating common specialized units or services at Community level e.g. planning and control activities, may improve coordination among Member States.

1.24. There is still a considerable amount of work to be done to ensure there is an effective, efficient and homogenous risk analysis system in operation in all the Member States. The Commission should initiate adequate regulatory measures and take the appropriate management decisions to improve the efficiency of the use of risk analysis throughout the Community.

OWN RESOURCES DERIVING FROM VAT AND THE GNP

The system of resources based on VAT and the GNP

1.25. Even though this system of Community financing has been reorganised on three occasions in the past 10 years, it poses problems of consistency and transparency and is also affected by operational problems. Despite the importance of statistical data in determining the assessment base, there is still no provision for measuring the quality of the data.

1.26. The manner in which this system of financing has developed has increased the role of the GNP, which also determines the maximum amount of the budgetary resources. A new system of integrated economic accounts (European system of integrated accounts (ESA), 1995 version) for calculating the GNP has been adopted by the Council and will be applied from 1999. However, the old ESA (1979 version) will still apply for the financing of the Community budget. The changes that the new ESA is expected to bring about are, however, important, both at the methodological level and from the viewpoint of more accurate comparison between Member States. The fact that the best economic aggregates available are not taken into account and that there is no means of measuring quality distorts the measurement of the Member States' contributive capacity.

1.27. Loss of tax revenue may affect not only GNP resources but also those based on VAT, especially as the GNP takes insufficient account of the 'black economy`. Although the extent to which the national accounts are full and complete will only be known at the end of 1998 (17), the magnitude of this loss when evaluated in the light of those accounts is nevertheless considerable. It is indicative of a much broader phenomenon that affects all taxation. An indirect calculation of the discrepancy between VAT collected and theoretical VAT for nine Member States revealed an average annual difference of 70 000 Mio ECU (1991-93). Comparison with a similar exercise carried out 10 years ago shows that the discrepancy has more than doubled.

1.28. The existence of a revenue correction that currently applies to one Member State only, but could be extended to several others, is a further anomaly in the system. The idea underlying this correction, namely the notion that the benefit that a Member State derives from its membership of the European Union can be quantified by balancing the amount it pays to the budget against the payments it receives from the Community, is questionable. A study carried out for the Court shows that the multiplier effect of an identical amount of Community expenditure may be very different from one Member State to another. It therefore follows that the impact of Community financing cannot simply be condensed into records of financial flows. As the Fontainebleau European Council pointed out, any readjustment must be achieved through expenditure policy, notably at the time when the budget is being adopted.

1.29. In conclusion, now that European Union enlargement is a definite prospect there is all the more need to give serious thought to the system of financing. The aims of any financing system must be spelt out clearly, and the nature of the resources selected and the means of collecting and controlling them must be mutually compatible.

The VAT system in intra-Community trade

1.30. The present transitional VAT arrangements for intra-Community trade were introduced on 1 January 1993, when the single market came into being and controls at the Union's internal borders were abolished. VAT is no longer paid at the time goods are imported, but at a later stage, on the evidence of periodic declarations by the taxpayer. In spite of the introduction of an a posteriori system of information exchange (VIES), the potential for fraud has thus been increased.

1.31. In the Member States the fight against fraud is usually synonymous with an absence of any integrated strategy and the risk that priority will be given to the national framework, which may result in a dispersal of effort and inefficient use of available resources. Differences between the national definitions of fraud and, therefore, between the penalties applied, may undermine their deterrent effect. Differences in the legal and administrative frameworks are further risk factors that can be fraudulently exploited.

1.32. The instruments for cooperation between Member States are not fully utilised. The slowness of the procedures and, sometimes, even the ignorance of existing instruments, especially at the level of local administrations, frequently provide the explanation for this under-utilisation.

1.33. The Commission's role is essentially limited to promoting exchanges of experience between national departments. It has not yet been able to identify the shortcomings of national systems in fighting fraud or to recommend solutions to the Member States concerned.

1.34. In the absence of a viable alternative, the current 'transitional` system will remain in place for several more years. Substantial improvements appear unlikely in the absence of a clear determination to give priority to fighting fraud in intra-Community trade.

1.35. The Member States and the Commission should set up systems that will enable them to measure the scale of anti-fraud measures more accurately and, above all, to evaluate periodically the effectiveness and the results of their controls and of the Community mechanisms.

1.36. Harmonising the performance of the national administrations is another area in which urgent action is needed. In this context harmonisation of national administrations' control methods and strategies would make it possible to fight an increasingly multinational phenomenon more effectively.

REPLIES OF THE COMMISSION

TRADITIONAL OWN RESOURCES

Weaknesses in the internal control procedures for accounts kept by the Member States

1.4. As it pointed out in its replies to the annual report concerning the financial year 1995, the Commission did not object to the deduction from current established entitlements of amounts from the period before 1 January 1989 considered irrecoverable. The Commission is continuing to monitor this affair and has asked the Member State concerned to confirm the data on which the facts noted by the Court are based. As soon as this information is received, the Member State will be asked, if necessary, to make the corrections and pay the interest due for late payment.

1.5. As soon as it had been informed of the Court's finding in April 1997, the Commission requested that 184 876 ECU be paid as late interest; the sum was paid in September of the same year.

Audit of the summary annual accounts drawn up by the Member States

1.6. The sum of 7.3 Mio ECU mentioned by the Court concerns irregularities caused by the incorrect application of Community legislation by four Member States. The Commission has now contacted the Member States concerned in order to remedy the situation and, if necessary, it will ask for interest to be paid as a penalty for the delays.

Conclusion

1.8. The procedure for implementing the budget in respect of revenue is significantly different from the procedure in respect of expenditure since it involves millions of underlying transactions and reflects the application of particularly complex legislation. In the third phase of the SEM 2000 initiative, the Commission examined the possibility of introducing a system of clearance of accounts for revenue operations of the kind used for agricultural expenditure. However, it concluded that it was impossible to pursue that idea any further owing to the particular nature of procedures on the revenue side. Nevertheless, it was felt that the financial interests of the European Union could better be defended if existing Community provisions were strengthened, and in particular those provisions governing the write-off by Member States of irrecoverable debts. This led the Commission in July 1997 to propose a new writing-off procedure whereby all Member States, after a certain time has elapsed, will be called on to account for their actions, in particular where sums have not been recovered, by being obliged to report cases which exceed a given threshold.

Regarding the reliability of the accounts presented by the Member States, it must be emphasised that the Commission's control activities in the area of own resources are equivalent, given the available resources, to verification of the kind which would be at the basis of any certification procedure. Moreover, in some Member States, own resources accounts may also be checked by the national audit offices. While it is true that an overall appraisal of all own resources accounts kept by the Member States cannot be made on the basis of the Commission's controls, because of their limited coverage, these controls are nevertheless effective and often result in significant financial corrections.

Audit of the use of risk analysis techniques in customs control and the clearance of goods

Introduction

1.11. While it is true that Member States have a general duty to carry out controls, it is also clear that they have the opportunity to assess the way in which controls are carried out in general and in specific cases.

1.12 1.13. The Customs 2000 decision defines the institutional environment within which national customs administrations are required to work. The decision's objective is to find the right balance between the respective roles of the Community institutions and the Member States and to maintain this balance while accepting the concept of unity in partnership. The Commission will shortly be presenting a first report on the implementation and impact of the Customs 2000 programme to the European Parliament and the Council.

Although in 1992 the Council (Ecofin) stressed the importance of risk analysis methods in financial controls, the framework for customs matters was set by the Customs 2000 decision in 1996. This decision covers all customs legislation, so that it is no longer necessary, although it is not ruled out, to insert references to such methods into the code. Regarding modern control methods, the Customs 2000 decision leaves no doubt as to the Commission's role: it is one of 'supporting` or 'encouraging` actions which it is the responsibility of the Member States to define and implement (first sentence of Article 9).

1.14 1.16. Within its scope for action as it is laid down, the Commission drew up guidelines for compiling risk profiles in 1997.

Drawing up these guidelines is the way to 'encourage` a process of convergence of working methods, which, as the Court noted in the factual section of its special report, is a matter for the future. The working methods practised in the Member States are still determined to a large extent by other factors, such as the way departments are organised, staff training, the availability of resources or the extent to which procedures are computerised.

Conclusion

1.19. Conditions ought to be most favourable for the achievement of closer coordination once customs procedures are computerised. The speed at which individual Member States are progressing on this front differs somewhat. The development of transnational customs procedures such as the NCTS (new com-puterised transit system), should contribute to the desired coordination, provided a goods identification system based on a classification code is adopted.

1.20. The intensive and unstructured transmission of all kinds of information to the outlying customs offices is admittedly a problem of method which must be looked at and solved. This matter could be addressed in future by the appropriate bodies whose task it is to implement the Customs 2000 decision.

1.21 1.22. The divergence of the control systems in the different Member States and absence of transnational structures is explained by the fact that the customs union is not administered by a single customs authority. This situation is reflected in the approach to the problem taken by the Customs 2000 decision of the European Parliament and of the Council (see 1.12 and 1.13 above).

A pilot project involving six Member States which is currently being implemented under the above decision should eliminate some of the differences in working methods.

1.23. The training programmes and exchanges of officials, such as those covered by the Matthaeus programme, promote a general openness of mind and convergence of behaviour. Furthermore, the implementation of a Community training policy in the customs field and of common core training (see Article 14 of the Customs 2000 decision), and the networking of national customs schools in the Member States provide an instrument which will be used, among other things, to ensure greater uniformity of national working methods. In the long run, this should also contribute to the harmonisation of methods, even if at present they are largely determined by a series of other factors (see paragraphs 1.14 to 1.16 above).

Creating specialised units at Community level would make sense only if they had an operational function. Such a function would doubtless mean the existence of a structure specific to a single system of customs administration, a concept which clearly goes beyond the objective of the management instrument based on partnership as recommended in Customs 2000.

However, it is conceivable that the Member States could set up between themselves a structure responsible for this operational function.

1.24. The Commission's actions take shape within the framework set by the Customs 2000 decision, which does not lay down a basis for general regulatory intervention in the area of how controls are carried out by the customs authorities in the Member States.

OWN RESOURCES DERIVING FROM VAT AND THE GNP

The system of resources based on VAT and the GNP

1.25. The Commission considers that research on the evaluation of the quality of macroeconomic aggregates is not entirely satisfactory, and partly in response to this it has launched a research project on an analysis and evaluation of the quality of national accounts aggregates. Two studies have been commissioned by Eurostat in this area, one conducted by the National Statistical Office of Italy (ISTAT) and one by the UK Office of National Statistics (ONS). The results of the former will be available in 1998; the results of the latter will be available in 1999.

1.26. The Commission fully agrees with the Court's criticism of maintaining, for budgetary purposes, the old ESA (1979 version). GNP calculated by the new ESA (1995 version) would give a better measurement of Member States' contributive capacity. The Commission views the situation with regret and has already expressed its position on this matter.

1.27. As pointed out by the Court, VAT fraud is only one aspect of a phenomenon which affects the whole area of taxation as well as all other kinds of statutory contributions and charges.

However, given the mechanism for paying by instalment which is part of the VAT system, this tax contains an intrinsic control element, which distinguishes it from other taxes. Regarding VAT, the Commission has already taken and will take in the future all appropriate measures in order to enable it to cooperate effectively with the Member States in the fight against VAT fraud.

1.28. The Commission also considers that the correction mechanism currently applied to one Member State only is an anomaly. It also agrees with the other comments made in this paragraph by the Court.

1.29. The Commission has already begun to reflect on the Union's system of financing; it will be taking the Court's observations into consideration.

The VAT system in intra-Community trade

1.31 1.36. The Commission shares the Court's view that it has a responsibility to identify the shortcomings of national systems in the fight against fraud and to suggest adequate remedies to the Member States. The Commission agrees that reinforcement of national control strategies with integrated risk analysis is necessary to make the fight against fraud successful and that it is necessary to improve the tools for administrative cooperation, which at present are underutilised.

The Commission is clear, however, that the chances of the Member States adopting its recommendations depend entirely on their real added value. The complexity of collection and control procedures in force in Member States, with different legal and administrative systems, should not be underestimated. Until recently the Commission did not have sufficient experience to make such a profound evaluation and recommendations as proposed by the Court. The experience built up over previous years now makes it possible for the Commission to assume the responsibilities the Court identifies. The third report under Article 12 of Regulation (EEC, Euratom) No 1553/89 already makes a number of recommendations for control and anti-fraud cooperation strategies.

The Commission agrees with the Court that it is necessary to put in place a system which continuously measures the efficiency of Member States' collection and control of VAT. The Commission will therefore undertake action to analyse and evaluate the control situation of each Member State in order to comply with the recommendations of the Court. The intention is that the Commission should be able to come up with more incisive proposals in the framework of the fourth Article 12 report and of the third report under Article 14 of Regulation (EEC) No 218/92.

Figure 1.1 - Financing of the Community budget

>START OF GRAPHIC>

Budget financing 1996-97 (Mio ECU)

VAT resources

GNP resources

Traditional own resources

Surplus from the preceding financial year

Miscellaneous revenue

NB:

(x %; y %)

x %: proportion of financing for 1997 budget;

y %: variations 1997 relative to 1996.

Traditional own resources 1996-97 (Mio ECU)

Customs duties

Sugar and isoglucose levies

Agricultural duties

Collection costs

NB:

(x %) - x %: proportion of traditional own resources.

Sources:

1997 budget and revenue and expenditure accounts 1996 and 1997.

>END OF GRAPHIC>

>REFERENCE TO A FILM>

>TABLE>

CHAPTER 2 (18*) The common agricultural policy

2.0. CONTENTS Paragraph reference

Introduction 2.1

TITLE I - Budgetary management 2.2 - 2.25

Implementation of the budget 2.2 - 2.23

Appropriations for the financial year 2.2 - 2.10

Advances 2.11

Accounting for expenditure 2.12

Expenditure and negative amounts 2.13 - 2.16

Direct expenditure 2.17 - 2.18

How agricultural expenditure is incurred 2.19 - 2.22

Trends 1993-97 2.23

Computerised management systems 2.24 - 2.25

TITLE II - Durum wheat 2.26 - 2.54

Introduction 2.26 - 2.29

Evolution of the aid scheme 2.30 - 2.49

Aid per tonne 2.30 - 2.33

The 1976 reform 2.34 - 2.40

The MacSharry reform of 1992 2.41 - 2.46

The 1997 adaptation 2.47 - 2.49

Economic evolution of durum wheat since the 1992 reform 2.50 - 2.52

Conclusion 2.53 - 2.54

TITLE III - Summaries of Court special reports concerning the EAGGF and fisheries policy adopted since the publication of the last annual report 2.55 - 2.92

Special Report No 2/98 on the clearance of accounts for the financial year 1993 2.55 - 2.57

Special Report No 21/98 on the accreditation and certification procedure as applied to the 1996 clearance of accounts 2.58 - 2.65

Special Report No 4/98 on the importation at reduced rate of levy into the Community and disposal of New Zealand milk products and Swiss cheese 2.66 - 2.69

Special Report No 19/98 on Community financing of certain measures taken as a result of the BSE crisis 2.70 - 2.81

Special Report No 18/98 on Community measures to encourage the creation of joint enterprises in the fisheries sector 2.82 - 2.86

Special Report No 20/98 on the audit of physical checks of agricultural products receiving export refunds 2.87 - 2.92

INTRODUCTION

2.1. This chapter deals with the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF) and with the expenditure charged to Chapter B2-51. It consists of three titles: Title I covers the budgetary management of the financial year 1997, including observations on the examination of the implementation of the budget for the financial year 1997 and on the computer systems used to manage agricultural expenditure; Title II deals with durum wheat and Title III contains a summary of the Court special reports on the EAGGF that have been adopted since the publication of the last annual report.

TITLE I - BUDGETARY MANAGEMENT

IMPLEMENTATION OF THE BUDGET

Appropriations for the financial year

2.2. The initial appropriations for the EAGGF Guarantee Section (sub-section B1) for the financial year 1997 (19) came to 41 233 Mio ECU, of which 500 Mio ECU were for the monetary reserve.

2.3. Supplementary and amending budget No 1/97 (20) did not concern appropriations entered under sub-section B1 (see Table 2.1). However, a number of transfers between items (1 327,4 Mio ECU), articles (1 212,2 Mio ECU), and chapters (2 320 Mio ECU) occurred during the financial year (see Table 2.2). These amendments totalled 4 859,6 Mio ECU, which represents 11,8 % of the initial budget.

2.4. The total appropriations (not including the monetary reserve) under sub-section B1, before and after these amendments (40 733 and 40 709 Mio ECU respectively), remained below the amount (41 805 Mio ECU) budgeted for in the agricultural guideline (21) (see Table 2.1).

2.5. Although the implementation of the budget respected the upper limit established by the agricultural guideline, there were nevertheless major amendments to the initial sums allocated and the extent to which the budget was implemented varied from case to case.

2.6. 40 423,1 Mio ECU were spent under sub-section B1 (see Table 2.1) and expenditure overall was kept below the appropriations finally made available (\ 0,7 %). The monetary reserve was not used. However, for 24 budget items, spread over almost all the budget, the implementation rate was less than 50 % of the initial appropriations and the total under-spending reached 973,5 Mio ECU.

2.7. Conversely, for 13 budget items the level of implementation was over 150 % of the initial appropriations; in total this over-implementation came to 2 061,8 Mio ECU. Thus, for item B1-2320, 'Exceptional market support measures`, expenditure (407 Mio ECU) was equal to 41 times the initial allocation. For item B1-1052, 'Aid for producers of soya beans, colza seed and sunflower seed`, expenditure exceeded the initial allocation of 1 276,1 Mio ECU by 1 136 Mio ECU.

2.8. Finally, 27 budget headings initially awarded a 'p.m.`, or token entry, (to cover the main storage costs) received allocations via transfers (162,1 Mio ECU).

2.9. The expenditure is listed by type and Member State in Tables 2.3 and 2.4. A summary of the EAGGF-Guarantee accounts is presented in Table 2.5.

2.10. On 31 December 1996, i.e. two and a half months after the beginning of the EAGGF 1997 financial year, approximately half the expenditure for the financial year (20 700,0 Mio ECU) had already been committed and disbursed. Of this amount, 13 821,8 Mio ECU, representing 66,8 % of the expenditure for the financial year, concerned eight measures linked to arable crops, set-aside land, olive oil and the suckler cow premium.

Advances

2.11. The Court detected no anomalies in the procedure for determining the advances paid to Member States. However, it is difficult to verify the Commission's decisions on the basis of the accounting documents alone: examination of the authorising officer's files is essential as they are the only source of the necessary data. The financial regulation (22) in fact, exempts commitments for advances from the checks usually made by the Financial Controller. Furthermore, the management of advances, which is not included in the AGREX system (see paragraph 2.24), continues to be cumbersome. Finally, because 13 Member States do not send the necessary data electronically, they have to be recorded in the computer manually.

Accounting for expenditure

2.12. The financial regulation (23) stipulates that the commitments in respect of expenditure declared by the Member States shall be entered into within two months following receipt of the statements submitted by the Member States. This time limit is never respected: as an annual average, the commitments are registered 17 days late, which hinders the use of the Sincom accounting system to monitor agricultural expenditure. These delays are attributable in particular to the time taken up by the various operations to verify and authorise the expenditure required by the legislation, and also to the procedures associated with transferring appropriations.

Expenditure and negative amounts

2.13. The practice of making so-called negative expenditure and the numerous corrections make a very detailed analysis of the accounts necessary in order to be able to interpret them correctly. Thus, the accounts for subsection B1 (40 674,9 Mio ECU) include 4 329,6 Mio ECU of negative entries which are not recorded in accordance with generally accepted accounting principles and which it is very difficult to reconstruct (see Table 2.6).

2.14. Because of the legal framework and the declaration process (and in particular because of the fact that the amounts declared by the Member States are global amounts) it is not possible to arrive at a concrete evaluation of these negative entries, which include:

(a) corrections made to statements, at the initiative of the Member States or the Commission;

(b) recoveries of sums paid out without justification;

(c) revenue items, incorrectly termed 'negative` expenditure, such as the supplementary milk levy (440,7 Mio ECU in 1997);

(d) the consequences of the clearance decisions in respect of the financial years 1993 and 1996 (996,8 Mio ECU in 1997).

2.15. The Commission should ensure that the legal requirements, which allow expenditure to be refused if certain time limits have passed, are not evaded by applicants submitting corrected versions of earlier statements for expenses which have already been refused.

2.16. The budget headings to which 'negative` expenditure is charged - i.e. credited - in the budget are not always covered by specific budget estimates and are only given a token entry. In the light of the amounts available, the Commission withdraws appropriations from these headings in order to make transfers to other headings (641,8 Mio ECU in 1997). This concept of 'negative` expenditure, however, does not figure in the financial regulation, as the Court has already pointed out in its Opinion No 4/97 on the amendment of the financial regulation (24). Furthermore, the procedure used for topping up budget headings, resulting from an appropriation of revenue, is contrary to the budgetary principles laid down in the financial regulation and does not make for the necessary budgetary transparency.

Direct expenditure

2.17. Certain areas of expenditure (the agricultural survey, financial control and preventive actions, etc.) do not follow the usual declaration process as they are generally co-financed by the Member States and coordinated by the Commission. The commitments and payments for the financial year 1997 related to such areas of expenditure amounted to 528,5 Mio ECU and 215,6 Mio ECU respectively (see Table 2.7).

2.18. The Court's audit at the Commission of a representative sample (40 commitments and 40 payments corresponding, respectively, to 75 Mio ECU and 30 Mio ECU) of a few Articles (B1-360, B2-510, B2-512, B2-513, B2-517 et B2-518) showed that the follow-up of this expenditure is not sufficiently rigorous, which confirms the Court's previous observations (25). Of the 80 operations examined, 80 % could not be considered to conform to the regulations (failure to observe time limits for the procedures to obtain Community finance and for the submission of the implementation reports) and thus constitute formal errors for the statement of assurance (see paragraphs 8.49-8.50). Furthermore, as the legal requirements are not very binding, the Commission does not always have sufficient supporting documents to justify this expenditure and show that the actions undertaken achieved their objectives. The Commission should therefore improve its follow-up of this expenditure.

How agricultural expenditure is incurred

2.19. The EAGGF Guarantee section accounts for the financial year 1997 include both 'direct` expenditure by the Commission and, also, expenditure by the Member States between 16 October 1996 and 15 October 1997. The Member States declare the latter expenditure according to a sub-nomenclature for implementation that relates to a particular regulatory framework and/or marketing year.

2.20. However, almost 20 % of the amounts committed during 1997 cannot be related, using the AGREX computer system and the existing sub-nomenclature, to any particular marketing or financial year (this is true in particular of accompanying measures amounting to 2 064,8 Mio ECU, milk products, at 1 878,1 Mio ECU, beef, at 1 809,4 Mio ECU, and fruit and vegetables, at 550,2 Mio ECU). Especially when aid is paid in several instalments, the declaration process does not always provide information with which to check which instalment is which and does not ensure observance of the principle of annuality. It is, however, essential to be able to compare actual expenditure with the estimated cost of each measure in order to keep expenditure under control.

2.21. Finally, over 3 300 Mio ECU concerns expenditure arising from decisions taken during the 1995 marketing year or earlier. For one and the same measure, the entries in the accounts often concern amounts disbursed under three or more successive marketing years. Included among these expenses are export refunds, the potential financial cost of which could be assessed at the time of export.

2.22. Commission Regulation (EC) No 296/96 (26) created machinery for limiting the acceptance of expenditure declared by Member States in respect of previous financial years. Approximately 60 % of expenditure declared in 1997 was thus examined by the Commission (24 056,9 Mio ECU). The expenditure that was declared late amounted to approximately 668 Mio ECU. After applying a provision allowing a delay for 4 % of the expenditure already accepted, a Commission report (27) revealed that the strict application of the rules would have led to the rejection, at the end of August 1997, of 129,1 Mio ECU of expenditure. In the end the Commission refused only 25 Mio ECU, by using its discretionary powers.

Trends 1993-97

2.23. An examination of the EAGGF Guarantee section budget and its implementation over the period 1993-97 (see Table 2.8) shows that:

(a) while the agricultural guideline increased by only 14 %, expenditure increased by 6 290 Mio ECU (18,9 %) compared with 29 % for the budget overall. Most of this increase was accounted for by 'Arable crops`, 'Beef`, and 'Accompanying measures`; conversely, expenditure on 'Milk products` decreased sharply;

(b) the budget has been in constant surplus since 1994, even if this surplus has decreased from 9,3 % to 0,7 %;

(c) the discrepancies per heading, between forecast and implementation, decreased slightly in 1997 compared with 1996 but still remain above those for 1993.

COMPUTERISED MANAGEMENT SYSTEMS

2.24. EAGGF Guarantee Section expenditure is accounted for using two computer systems: the AGREX system, managed by Unit G2 of DG VI, which dates from 1988, and the Sincom system established in 1990 and managed by DG XIX. Comparative checks carried out on the data in these two systems confirmed their consistency and therefore the reliability of the accounts. Nevertheless, the current organisation is not satisfactory. The problems are that

(a) the two systems cannot communicate and the data they contain cannot be transferred between systems (in particular because one system uses national currency and the other ECU);

(b) AGREX has a number of shortcomings:

- it is technically out of date, difficult to check, and has become extremely complex as a result of the constant updates which have proved necessary to adapt it to a regulatory framework which has changed greatly since 1988

- it is used exclusively by one Unit within DG VI and is not sufficiently used as an alarm system

- the absence of any accounting terminology means that authorising officer's decisions cannot be fully clarified

- lastly, it cannot cope with dates starting from the year 2000

(c) the official Sincom accounting system does not offer facilities sufficiently tailored to the EAGGF's specific regulatory framework. The imminent introduction of a new accounting system (Sincom 2) will not change this situation at all.

2.25. The Commission should therefore acquire an integrated computer system which will allow the authorising officer, the Financial Controller and the accountant all to use it, will be compatible and will communicate easily with Sincom 2 and give all users access to its data.

TITLE II - DURUM WHEAT

INTRODUCTION

2.26. Durum wheat is a special type of wheat with hard, vitreous, translucent grains, principally used for human consumption as pasta, groats and semolina. In 1996, durum wheat accounted for 8,7 Mio tonnes (4,2 % of the Community's total cereal production, rice excluded (28)). The main producer countries are Italy which accounts for more than half of total production, Greece, Spain and France. The Community is the largest producer, its production being 25 % of the world market.

2.27. From the outset (1967) (29), when Italy produced about 90 % of Community durum wheat, it was included in the common market organisation (CMO) for cereals. Table 2.9 shows that aid for durum wheat has considerably increased since then. Concerned about this development, the Court reported on durum wheat in 1989 (30), when the special aid was 365 Mio ECU and some 400 Mio ECU was spent on export refunds and intervention.

2.28. In 1993, total support for durum wheat stood at 830 Mio ECU (excluding some 14 Mio ECU of revenue from sales of previously depreciated stocks) and in 1997 at 1 743,4 Mio ECU distributed between Germany, Greece, Spain, France, Italy, Austria, Portugal and the UK (see Table 2.10). Durum wheat is one of the most subsidised products in the Community with subsidies amounting to 182 ECU/tonne in 1996 that is 113 % of its production value.

2.29. The Court has reviewed the market management at Community level for the purpose of:

(a) analysing the reasons for the major increase in expenditure, while production did not show such huge increases;

(b) examining to what extent the level of aid is consistent with the objectives for supporting the production of durum wheat.

EVOLUTION OF THE AID SCHEME

Aid per tonne

2.30. From the very beginning, durum wheat was treated differently from other cereals in that a double support system was set up. As for other cereals, the Council fixed annually target (31) and intervention prices (32) for durum wheat. The ratio between the intervention price for durum wheat and that for common wheat should reflect their price ratio on the world market. This ratio was fixed at 120 % and led to an intervention price for durum wheat of 110,24 units of account (UA) per tonne.

2.31. In 1967, the intervention price for durum wheat was considered to be too low to guarantee sufficient income to farmers, owing to the small size of most of the farms and the low yield in the main production regions. Therefore, in addition to price support, a special aid to producers was introduced for each tonne of durum wheat harvested. This aid covered the difference between the intervention price and a higher 'minimum guaranteed price` determined in the marketing centre of the region with the largest surplus of durum wheat (at that time Palermo in Italy).

2.32. In 1974 the Commission wanted to create a unique system in order to simplify administration and control. High prices on the world market allowed the intervention price to be increased and thus the special aid could have been abolished. The Council accepted the increase of the intervention price, but kept the aid as well, though at a lower level. In total, producers' receipts were increased by 27 % with the intervention price increasing by 48,73 UA/tonne, while the aid was only reduced by 7,23 UA/tonne (see Table 2.11). The durum wheat intervention price rose to 163 % of that for common wheat thus losing touch with the world market. When the market prices went down again, intervention prices were left at their high level.

2.33. Since the regulation did not limit the granting of aid to traditional production zones, the attractiveness of the support scheme led to an extension of durum wheat production into northern areas where, moreover, higher yields and good quality were achieved.

The 1976 reform

2.34. In 1976/77 (33) an attempt was made to correct this development by transforming the aid per tonne into an area aid per hectare and by limiting its application to a set number of 'traditional` zones or regions. However, criteria by which a 'zone` could be considered traditional were not prescribed.

2.35. In addition, by including disadvantaged agricultural zones (34) among the 'traditional production regions` listed in an annex to the new regulation, a social and structural objective was introduced to the scheme. This objective, however, was never made explicit in a regulation, nor was it ever specified how it should be taken into account when determining the aid rate.

2.36. The consequence of the modifications was that both intervention price and aid rate became subject to a compromise at Council level each year rather than resulting from a precise calculation based on criteria reflecting the objectives set. Intervention prices for durum wheat increased faster than those for common wheat and aid rates increased as well. Table 2.12 shows that by 1985/86 the ratio of the intervention price for durum wheat to that of common wheat had risen from 162 % in 1975/76 to 174 %. The intervention price for durum wheat was then 312,08 ECU/tonne and the aid 101,31 ECU/hectare.

2.37. Furthermore, the number of regions eligible for aid continued to increase. Although not specified in the regulation, the criterion applied in practice for determining traditional production regions was originally that the production of durum wheat had to be more than 50 % of total cereal production in this region. With the entry of Greece, Spain and Portugal into the Community this unwritten criterion diminished progressively. When Greece joined the Community this threshold was sharply reduced to 8 %, and with the accession of Spain and Portugal to 1,5 %.

2.38. Thus the 1976 reform failed to limit the support of durum wheat to traditional zones. The intervention price was set so high that the production of durum wheat became attractive even without aid. The higher yields obtained in 'northern` Member States more than compensated farmers for the lack of aid. For example, in 1985, the average yield reached in Germany was 5,8 tonnes/ha compared to 1,94 tonnes/ha in Greece (see Table 2.13).In 1981/82, the Community became self-sufficient in durum wheat and production rose to 221,6 % of internal demand in 1991/92 (see Table 2.14).

2.39. By the end of the 1980s, the Community was faced with increasing expenditure for cereals in general, caused by structural surpluses. The intervention price of common wheat was therefore frozen and the intervention price for durum wheat was progressively decreased with the objective of bringing the durum/common wheat relationship down. However, in 1992/93 the intervention price was still 135 % of that for common wheat.

2.40. The decrease in the intervention price from 312 ECU in 1985/86 to 221 ECU in 1992/93 was accompanied by an increase in area aid from 101,31 ECU to 181,88 ECU during the same period (see Table 2.12). The increase in aid offset on average, half of the decrease of the intervention price (35). Because of high levels of export refunds and increasing intervention stocks, total budgetary expenditure rose steadily from 1986 reaching 1 337,8 Mio ECU in 1992.

The MacSharry reform of 1992

2.41. With the entry into force of Regulation (EEC) No 1765/92 of 30 June 1992 (36) establishing a new support system for the producers of certain arable crops, all institutional cereals prices were put at the same level. Producers of durum wheat outside traditional production zones receive the basic compensatory payment for cereals and those within traditional zones receive a supplementary area-based special aid. The aims of the new support system are:

(a) to discourage the production of durum wheat outside the traditional zones, and

(b) to compensate durum wheat producers for the loss in income due to the alignment of the institutional price of durum wheat on the prices of other cereals.

2.42. In line with the compensation objective, the amount of the special aid was determined on the basis of the 1991/92 support, when the scheme had long since lost touch with the initial economic objective (see paragraph 2.30). The relation between the intervention prices for durum and common wheat no longer reflected that on the world market (see Table 2.15). The new special aid which no longer took this relationship into account was set at 297 ECU/hectare for the marketing year 1993/94. In 1995 after the decrease of the 'green` rate by 20,6 %, the aid increased correspondingly to 358,6 ECU/hectare, remaining constant in national currency and thus having no budgetary impact.

2.43. The full amount of the special aid was granted from the first year of the reform. There was no transitional period with a three-step progressive application of the aid rate, as was applied to the basic compensatory payment.

2.44. The scheme increased the area of the traditional regions eligible for the special aid in respect of Greece (Thrace), and Spain (the Autonomous Region of Navarre and the Provinces of Salamanca, Toledo and Zamora).

2.45. The special aid payment was based on 'individual rights` recorded in official registers. The individual rights are expressed in hectares and represent the maximum area eligible for each beneficiary. They are fixed as being the highest number of hectares which were sown with durum wheat and eligible for the aid during one of the four reference marketing years (1988/89 to 1991/92) which the producer could choose.

2.46. After the introduction of the reform the following modifications were made, leading each time to an increase in area and expenditure:

(a) the 1992/93 marketing year was added as a fifth reference year for Spain but with a national upper limit of 570 000 ha; it is worthwhile to note that before Spain's accession to the EC only some 150 000 ha were cultivated with durum wheat;

(b) the marketing years from 1988/89 to 1990/91 were added as reference years for Portugal but with a national upper limit of 35 000 ha;

(c) the Umbrian region (Italy) was accepted as a traditional production zone with an upper limit of 5000 ha;

(d) the French departments of the Ardèche, the Drôme and the Midi-Pyrénées region were also recognised as traditional production regions with an upper limit of 63 355 ha.

(e) zones were established 'where durum wheat production is well established`, with a specific, reduced rate of aid: France and Austria thus obtained respectively 50 000 and 5 000 ha; the aid amounts to 138,9 ECU/ha.

The 1997 adaptation

2.47. In 1996, the Commission made a proposal to convert the 'individual rights` into maximum guaranteed areas (MGA) (37). It was only after more than a year's discussion, in October 1997, that an agreement was reached at the Council (38). The MGAs will apply from the marketing year 1999/2000.

2.48. The MGAs proposed by the Commission were increased by 4 % and the special aid for traditional zones was reduced by 4 % (for more details see Table 2.16). A further traditional zone for Austria was accepted and further non-traditional zones were created for Germany, the United Kingdom, Italy and Spain. The reduction of the aid rate represents a pure compensation of the increase in the MGAs rather than being based on a precise determination of the need for aid and, again, no precise criteria were given for justifying the selection of a region within the MGAs as 'traditional` or as a region where durum wheat production is well established.

2.49. The modifications of 1997 were retained in the Commission's proposals made in Agenda 2000 (39).

ECONOMIC EVOLUTION OF DURUM WHEAT SINCE THE 1992 REFORM

2.50. In the period since Spain and Portugal joined the Community, durum wheat production grew from 7,2 Mio tonnes in 1986 to its historical peak of 11,2 Mio tonnes in 1991 (see Tables 2.9 and 2.17). In 1992, it fell to 9 Mio tonnes. Since the MacSharry reform, it has fluctuated between 7 and 8,5 Mio tonnes. Leaving aside the record harvests of 1991 and 1992, on average, there has been an increase of about 1 Mio tonnes in annual production since the reform.

2.51. For the years 1991/92, the record production was accompanied by the largest area sown. The announcement of the reform might have contributed to this extension.

2.52. Table 2.14 shows that internal consumption of durum wheat has increased since the MacSharry reform. This together with tight world markets for cereals in the 1992-95 period permitted not only the absorption of increasing production but also the liquidation of existing stocks. In 1995/1996 there was a shortfall of EC supply. The rise in consumption of durum wheat has been accompanied by the virtual disappearance of the 35 % market price differential over common wheat in the years before the MacSharry reform (see Table 2.18).

CONCLUSION

2.53. Although the special subsidy for durum wheat was originally based on actual production and on a defined price differential between durum and common wheat, this arrangement was soon replaced by a different system in which the intervention price for durum wheat and the rate of area aid in respect of its cultivation were settled by negotiation rather than by reference to objective factors. During the later 1980s about half the impact on growers' minimum returns from reductions in the intervention price for durum wheat was offset by increases in the area aid. At the time of the MacSharry reform in 1992 the halving of the intervention price was fully compensated by increases in the rate of area aid. Since the mid 1980s an increasing part of producers' total returns has come through area aid payments falling on the EU budget rather than from market sales, resulting in continuously increasing EU expenditure. Although the sale of surplus stocks during the period of world shortage of cereals interrupted this trend in 1993-94, it has subsequently resumed. Area aid accounts for well over half of aggregate returns to durum wheat producers.

2.54. There is no clear justification for the special treatment of durum wheat producers. In the case of other arable crops, area aid payments are adjusted to reflect the average relative yields of different crops (e.g. maize and oilseeds). If assistance to durum wheat producers were to be set with the same philosophy as for maize and oilseeds, the current rate per hectare would fall by about 30 % to 250 ECU from 1995/96 onwards (see Table 2.19). Had this approach been followed from 1993 onwards, expenditure from the EU budget would have been reduced by more than 3 000 Mio ECU for the four-year period 1994-97.

TITLE III - SUMMARIES OF COURT SPECIAL REPORTS CONCERNING THE EAGGF AND FISHERIES POLICY ADOPTED SINCE THE PUBLICATION OF THE LAST ANNUAL REPORT

SPECIAL REPORT No 2/98 ON THE CLEARANCE OF ACCOUNTS FOR THE FINANCIAL YEAR 1993 (40)2.55. Council Regulation (EEC) No 729/70 (41) stipulates that the Commission must clear expenditure declared by the Member States before the end of the year following the financial year in question. In 1997, the Commission took two decisions (42) on the clearance of the accounts relating to the expenditure for the financial year 1993 (which require corrections of 647,8 Mio ECU to this expenditure). These decisions were therefore taken in 1997, three years late.

2.56. In its Special Report No 2/98 (43) on the clearance of the accounts for the financial year 1993, the Court criticised in particular certain inconsistencies in the approach or the corrections decided upon (insufficient cover of the measures or the Member States; absence of clear criteria for the choice of the levels of the flat-rate correction; different treatment of comparable situations; reduction of the corrections for future improvements to the systems; postponement of the recovery of ineligible expenditure).

2.57. The accounts for the financial year 1995 are still awaiting clearance. As from financial year 1996, following the modifications made by Council Regulation (EC) No 1287/97 of 22 May 1995 (44) and Commission Regulation (EC) No 1663/95 of 7 July 1995 (45), a different procedure applies. In 1997, the Commission took two decisions (46) concerning the clearance of the accounts relating to the expenditure for the financial year 1996.

SPECIAL REPORT No 21/98 ON THE ACCREDITATION AND CERTIFICATION PROCEDURE AS APPLIED TO THE 1996 CLEARANCE OF ACCOUNTS (47)2.58. New procedures were applicable for the first time to the accreditation of paying agencies and the clearance of accounts concerning EAGGF-Guarantee expenditure for the budget year 1996. The Court reviewed and evaluated the work carried out by the Commission's services and checked whether the new rules had been applied properly. The new procedures should not be evaluated only on its results for the first year, taking into account the efforts made in the meantime by the Commission and Member States to improve the situation.

98Y1117(01).1

2.59. Although Member States were required to accredit their paying agencies by 16 October 1995, at the beginning of the 1996 financial year only 50 out of 66 paying agencies had been accredited. 90 paying agencies were finally accredited in 1997, some of them being responsible for very little expenditure. Greater efforts should be made by some Member States to limit the number of paying agencies.

2.60. The Court's audit in 1997 revealed weaknesses at many of the paying agencies visited. Weaknesses in internal control, lack of security for EDP systems and shortcomings in the monitoring of delegated services by the paying agencies, as well as in the accounting, were identified, shortcomings that should have led the Member States concerned to take appropriate action.

2.61. Certified accounts were supposed to be forwarded by 10 February 1997, but in many cases the Commission found that the certified accounts were submitted late or were unsatisfactory. Two Member States (United Kingdom and Greece) did not present any certified account on time. In the case of Spain the certifying body did not manage to express an opinion concerning most expenditure incurred at regional level on time, and it was later audited by private external auditors.

2.62. To assist certifying bodies with their work the Commission made guidelines concerning certification of the accounts available to the certifying bodies, but that was done too late (in September 1996, when most of their audit work should have commenced). If they had been communicated in time, a number of misunderstandings and delays could have been avoided.

2.63. Because of the weaknesses and delays in some Member States, the clearance decision of 5 May 1997, which should have been taken by 30 April 1997, according to the regulation, covered only 33 % of the expenditure. The rest was cleared under the decision of 30 July 1997, after supplementary auditing work had been carried out by the various certifying bodies.

2.64. In the end all of the certified accounts were cleared by the Commission, in spite of the varying quality of the accounts presented. However, in this decision, the Commission did not take into account most of the qualifications in the certificates totalling a minimum of 43,3 Mio ECU. Furthermore financial corrections of 77,3 Mio ECU previously made by the Commission's finance division in the context of its daily management of EAGGF- Guarantee expenditure were reduced to 55,1 Mio ECU in the clearance decision.

2.65. The decisions of clearance of accounts taken by the Commission on 1996 expenditures do not prevent the Commission from disallowing amounts at a later date on the basis of subsequent compliance audits. Appropriate internal-control procedures at the Commission must ensure that corrections are adequately documented and that weaknesses identified will be systematically followed up during the subsequent compliance audit.

SPECIAL REPORT No 4/98 ON THE IMPORTATION AT REDUCED RATE OF LEVY INTO THE COMMUNITY AND DISPOSAL OF NEW ZEALAND MILK PRODUCTS AND SWISS CHEESE (48)2.66. Following the United Kingdom's accession to the EEC, quotas were introduced for the importation of New Zealand butter and cheese at reduced rates of levy, subject to special criteria being met, notably as regards their fat content. Reduced import levies also exist for Swiss cheese, for which the European Union has traditionally provided the largest market. The audit revealed major weaknesses in the control arrangements intended to ensure compliance with the conditions for eligibility. The Commission and the British customs authorities relied unreservedly on the import certificates (IMA1) issued by the New Zealand bodies concerned, which failed to honour some of their obligations. Under these circumstances, there can be no assurance that the terms and conditions stipulated in respect of importation at reduced rates of levy have ever been respected. The observed failure to abide by the quotas and quota criteria, in particular the fat content, has resulted in failure to collect own resources amounting to approximately 410 Mio ECU, some 118 Mio ECU of which is recoverable, the remainder being out of time.

2.67. The observed failure to abide by the quota quantity limits, quota eligibility criteria and licensing requirements has resulted in underpayments of own resources estimated by UK customs in July 1998 to exceed 400 Mio ECU. On that date, UK customs, also taking into account matters not covered by the Court's report, had issued recovery orders for some 226 Mio ECU.

2.68. With regard to imports of Swiss cheese, enquiries made at the Court's suggestion by the French and Italian authorities and independent bodies in Germany have revealed serious irregularities. The Council has since amended the rules concerning imports of Swiss cheese and the Swiss authorities' authorisation to issue IMA1 certificates for imports at reduced rates of levy has been cancelled.

2.69. The Court calls upon the Commission to take appropriate action to recover the amounts involved and to cancel the New Zealand organisation's authorisation to issue IMA1 certificates. In addition, the applicable rules should be clarified, the regulatory framework should be strengthened and the number of controls on imports at reduced rates of levy should be increased. Lastly, the validity of the system involving IMA1 certificates for imports at reduced rates of levy should also be reviewed.

SPECIAL REPORT No 19/98 ON COMMUNITY FINANCING OF CERTAIN MEASURES TAKEN AS A RESULT OF THE BSE CRISIS (49)Introduction

2.70. Regulations were adopted by the Council to finance, out of the EAGGF, specific measures to deal with the 1996 BSE crisis. They provided for the swift transfer of 1996 and 1997 EU budget funds to the Member States, allowing them a wide range of choices for the implementation of those measures. About 25 % (550 Mio ECU) of the total amount (2 149 Mio ECU) was made available to the United Kingdom for the over 30 months scheme (OTMS) and selective cull scheme (SCS), the rest being distributed to all Member States, roughly in accordance with the size of their national bovine herds. The Council's declared aim was to act quickly to protect human and animal health and to support beef producers. At the time, the latter were already facing an imbalanced market which was near the peak of its production cycle.

2.71. In this report, the Court examines the measures taken to eliminate certain cattle/beef deemed to pose a risk to public health and those taken to support producers and limit production with a focus on Community expenditure.

Elimination measures

2.72. These measures are, for the most part, veterinary in nature (normally co-financed at 50 %) but have nevertheless been co-financed by the Community at 70 % and charged to market support under the European Agricultural Guarantee Fund.

2.73. Concerning the implementation of the elimination schemes considerable weaknesses were found:

(a) the OTMS, created serious logistical problems for the United Kingdom; cross checks for duplicate claims were not performed; as a result of the failure to ensure a complete audit trail there was no guarantee that all animals claimed for were disposed of in the manner prescribed by the regulations;

(b) the decision of the Belgian authorities to take the option not to slaughter and destroy calves imported from the United Kingdom reduced the impact of the measure to restore consumer confidence in beef. Although all such calves were slaughtered in France and the Netherlands there is no evidence that all carcasses were properly disposed of;

(c) the deadline set by the Commission for the repurchase of former intervention beef in the United Kingdom was not compatible with the objective of buying back meat that might have come from animals aged over 30 months at the time of slaughter;

(d) some scientific research suggests that to the United Kingdom's selective cull scheme will have only a marginal effect on the eradication of BSE; it has not been possible to trace 65 000 of the animals concerned, all of which were born before July 1993.

Market measures

2.74. The proposals put forward by the Commission prior to the adoption of Council Regulation No 1357/96 provide exclusively for top-up payments to producers within the framework of the eligibility for the beef special premium and suckler cow premium. The decision taken by the Council to also grant lump sums to Member States enabled them to extend the aid to other categories of producer. Council Regulation No 2443/96 went even further in this direction in that it allocated 500 Mio ECU to Member States on the basis of the size of their national beef herd and allowed them to compensate producers in respect of animals not normally entitled to premiums and for which no reliable databases exist. Groups of producers who derive their principal income from sources other than beef production, notably from milk and veal production, also received Community support.

2.75. The degree of flexibility allowed to Member States resulted in substantial variations in the level of compensation paid for the same category of animals. To the extent that recoveries fall short it may not be possible to pay in full all producers whose entitlement to premiums in respect of the calendar year 1996 relates to more animals than in 1995.

2.76. Concerning the measures taken to control production, the calf processing scheme can be justified on economic grounds, whereas some 40 % of the expenditure incurred under the early marketing premium scheme constitutes a gratuitous payment to producers. Whilst it is too soon for the effects of the calf processing scheme to be felt, the impact of the early marketing premium on red meat production is limited and has been achieved at a high cost.

Conclusion

2.77. The degree to which the Community budget should bear the financial costs of such emergencies merits further consideration, given the quasi-veterinary nature of many of the measures taken in such circumstances.

2.78. The failure adequately to monitor the feed ban in the UK meant that a large number of animals which developed BSE (36 000) were born after the ban had been introduced. Different approaches were adopted with regard to the culling of BSE infected herds and the slaughter of British calves which were exported before the export ban.

2.79. The controls performed by the clearance of accounts unit focused primarily on the United Kingdom and payments made under Council Regulation (EC) No 1357/96. In addition, numerous visits by the Commission's veterinary officers were made to the Member States. Nevertheless, there was a lack of rigour and consistency in the implementation of measures within and between Member States, in areas such as the slaughter of British calves exported before the ban, the repurchase of ex-intervention beef, cull schemes, compensation to farmers under Regulation (EC) No 2443/96, and the calf schemes.

2.80. The inconsistencies in approach undermined the measures taken to compensate farmers equitably. This was due primarily to the fact that the two main measures (Council Regulations (EC) No 1357/96 and No 2443/96) enabled Member States to make payments not linked to the traditional beef special and suckler cow premium schemes and therefore outside the scope of IACS controls.

2.81. The occurrence of BSE and its aftermath have underlined the urgent need for the EU to design and to adopt a strategy (i.e. an action plan) to deal, in a coordinated, effective and timely manner with this kind of crisis.

SPECIAL REPORT No 18/98 ON COMMUNITY MEASURES TO ENCOURAGE THE CREATION OF JOINT ENTERPRISES IN THE FISHERIES SECTOR (50)2.82. The joint enterprise scheme was introduced in 1990 by the Council to contribute towards the reduction of the Community fishing fleet, total capacity of which amounted to 2,3 million tonnes at the time, by helping to seek viable alternatives for the affected fishing vessels. To date, 188 projects have been approved resulting in the removal from the Community fishing register of 290 vessels representing a capacity of 113 710 tonnes, at a cost of 298 Mio ECU.

2.83. Implementation of the scheme has been characterised by the following failures:

(a) aid has been miscalculated because vessels have been measured according to different methods;

(b) deadlines for carrying out repairs and adaptations were not established in the decisions approving the aid;

(c) aid was approved for vessels which were not active and were therefore ineligible;

(d) Community aid previously paid for the construction or modernisation of the vessels included in the joint enterprises was not always recovered as required, due either to the refusal of the Member State to apply the provisions of the regulations or to weaknesses in the monitoring procedures;

(e) in certain cases, the viability of the joint enterprise projects was not supported by adequate agreements between the partners;

(f) aid was paid in respect of vessels sunk without investigation, either by the Member States or the Commission, of the circumstances surrounding the accidents; despite the non-compliance by the beneficiaries with their obligations, no procedure has been launched with a view to recovering or canceling the aid;

(g) Community aid for joint enterprise projects is equivalent to twice the aid for the export of the vessel concerned. Therefore, the fulfilment by the beneficiaries of their obligations to keep the vessels in activity and to supply fish to the EU market for a minimum time period should have been secured by appropriate guarantees.

2.84. To sum up, the audit revealed that more rigorous management of the scheme by the Commission and the Member States is necessary to ensure sound financial management.

2.85. The Commission should review its monitoring and control procedures and proceed to the recovery of misused EU grants.

2.86. Concerning the effectiveness of the measure it was noted that:

(a) of the overall reduction of the fleet capacity since the measure was adopted, one third (113 710 tonnes) can be attributed to the measure. However, it has had practically no effect on the overall fishing activity in Community waters as evidenced by the stability in annual fish landings;

(b) about 90 % of the vessels relating to the projects examined were already fishing in third-country waters; nevertheless, the consequences of redeployment for the international fisheries agreements (IFAs) negotiated by the EU were not evaluated.

SPECIAL REPORT No 20/98 ON THE AUDIT OF PHYSICAL CHECKS OF AGRICULTURAL PRODUCTS RECEIVING EXPORT REFUNDS (51) (52)Context of the audit

2.87. In the 1996 EAGGF year, export refunds paid to exporters of agricultural products to compensate them for the difference between the internal EU price and the lower world market price amounted to some 5 600 Mio ECU (13 % of EU expenditure on agriculture). Their rates of export refund vary according to the nature of the products concerned and are applied to the quantities exported. Though financed by the EU budget, Member States are responsible both for making the payments and for carrying out the checks to confirm the legality and regularity of export refunds.

2.88. Member States' customs authorities are faced with the difficult problem of protecting the EU budget by means of physical checks without creating undue obstacles to the flow of trade. In the 1996 EAGGF year and across the whole of the EU, Member States' customs authorities carried out 100 000 physical checks in implementation of the 5 % minimum rate of physical verification fixed by the legislation. A substantial proportion of these laboratory tests were also compulsory. The administrative costs of these checks both to customs authorities and to traders are significant. It is therefore imperative that checks are well targeted and effectively executed. In 1994, Regulation No 386/90 was amended principally to introduce the possibility of risk analysis for the selection of consignments for physical checks. The Court's audit in Member States concentrated on the use of risk analysis and the evaluation of the effectiveness of procedures for the selection of consignments for physical checks.

Main observations

2.89. In the general context, physical checks are an essential tool for customs services, but, depending upon the measure, they may not always be the most effective and appropriate method of control. Because risk analysis is not obligatory and is insufficently defined by regulation there are considerable differences between Member States in the procedures for selection of consignments for physical control. Optimum use of risk analysis is hampered by the mandatory requirement set out in the legislation to carry out fixed rates of physical control at every customs office and by inadequate information databases in Member States. There has been no evaluation of the effectiveness of the procedures for selection of consignments for control either by Member States or the Commission. There is a lack of coordination of the a posteriori controls carried out by the Member States under Regulation (EEC) No 4045/89.

Main recommendations

2.90. The Commission should consider creating a legal framework which provides for a balanced combination of physical controls (at the point of export) and a posteriori controls.

2.91. Member States should be encouraged to place more emphasis on the quality and effectiveness of physical checks rather than just ensuring that the rates of checking fixed by regulation are met. To improve the effectiveness of the procedures for the selection of consignments for physical check, the Commission is encouraged to consider a number of recommendations. Above all the Court suggests that the use of risk analysis by Member States should be made obligatory. The legislative requirements relating to physical checks should be made more flexible whilst at the same time making Member States more accountable for the effectiveness of those checks.

2.92. In more general terms, risk analysis is an effective resource management tool. To limit it to export refunds is too restrictive. To manage effectively their resources Member States need a broader legislative framework for risk analysis which would permit them not just to target transactions within measures but to allocate resources to measures on the basis of the comparative risks to the EU budget.

REPLIES OF THE COMMISSION

TITLE I - BUDGETARY MANAGEMENT

IMPLEMENTATION OF THE BUDGET

Appropriations for the financial year

2.5 2.8. The Court draws attention to the gaps between forecast and actual expenditure on agriculture. The Commission would stress the difficulties of forecasting agricultural expenditure; a problem to which the Court itself drew attention in its annual report for 1996 (OJ C 348, 18.11.1997, point 2.15, p. 58).

The Commission has, however, noted that the forecasts relating to direct aid, which accounts for a large part of agricultural expenditure, have improved substantially. By contrast, the situation with regard to market intervention measures is less clear-cut, since the factors on which the forecast is based (production, world prices, etc.) are very variable. In order to improve forecasts, Parliament and the Council have agreed that the Commission can present a letter of amendment up to 31 October to incorporate the latest movements on agricultural markets. Furthermore, the Commission has incorporated into its forecasts in the PDB for 1999 the results of a study by an outside expert whose statistical analysis of past data revealed systematic bias in some lines of the agriculture budget.

The differences between forecasts and out-turn in 1997 were subjected to a detailed analysis, the results of which were published by the Commission in the Revenue and expenditure account and financial balance sheet for the 1997 budget (Volume I, Section 2 'Analysis of financial management`, SEC(98) 519, pp. 29-135).

With regard to the sectors specifically referred to in point 2.7, the Commission would point out that:

- Overconsumption at item B1-2320 reflects the market measures taken to combat the outbreak of swine fever and, in particular, the compensation, of which the EAGGF Guarantee Section pays 70 %, paid to producers for loss of income caused by the slaughter of healthy animals in protection and surveillance zones. The extent of this outbreak was not foreseen when the budget was drawn up.

- In the case of item 1052 'Aid for producers of soya beans, colza seed and sunflower seed`, appropri-ations were exceeded because of the payment of advances for 1997, for which the budgetary authority had entered no appropriations in accordance with the Commission's proposal to carry over these advances to 1998. However, the Council followed Parliament's opinion and took no decision on this proposal. Accordingly, the advances (1 313 Mio ECU) were paid from the 1997 budget.

Advances

2.11. The notification referred to in Article 3(3) and (4) of Regulation (EC) No 296/96 includes the supporting documents required to determine the advances. That notification, to be sent by the 10th of each month, concerns expenditure by chapter paid during the previous month. This amounts to some 25 to 30 items of information per Member State.

However, in accordance with the decision on budgetary discipline of 31 October 1994, the Commission looks at the circumstances in which payments have been made, and in particular their compliance with the rules and time limits for payment. Commitment of doubtful expenditure or expenditure outside the time limits is suspended until it is justified by the Member State. When that justification has been considered, a decision is taken either finally to accept the expenditure or to refuse it totally or in part and so to reduce future payments to the Member State accordingly.

Adjustments and improvements to the system to enable basic data to be entered by computer and automatically transmitted to Sincom are being developed and should come into operation in 1999.

Accounting for expenditure

2.12. As stated in the previous point, the introduction of budgetary discipline has considerably increased the checks on expenditure under the EAGGF Guarantee Section, requiring detailed examination of several hundred budget lines every month. These more extensive checks are one of the factors which explain the delays to which the Court refers; they are exacerbated by the procedures associated with the transfer of appropri-ations. Although the Commission does not deny the importance of compliance with the deadlines for the charging of expenditure, the Commission regards prior checks on EAGGF expenditure as an essential condition for the sound financial management of Community funds while respecting the prerogatives of the budgetary authority.

The monitoring of agricultural expenditure under the early warning system is not based on accounting data. For month n it is based on the notifications of expenditure by chapter in that month sent on the 10th of month n + 1 and the detailed declarations for month n - 1 sent on the 20th of month n. Entry in the accounts for month n takes place during month n + 3, which is too late for proper monitoring.

Negative expenditure and amounts

2.13 2.14. The declarations of expenditure use a very detailed nomenclature. This has permitted the reconstitution for 1997 of negative accounting entries totalling 1 720,77 Mio ECU (out of the 4 329,6 Mio ECU referred to by the Court). These relate to the categories of expenditure referred to in subparagraphs (b) (recoveries of sums paid out without justification), (c) (negative expenditure) and (d) (clearance of accounts). The difference of 2 608,83 Mio ECU reflects the corrections made to the declarations of expenditure as a result of errors in charging by the Member States. Making the correction gives rise to two accounting entries, one negative, reducing expenditure under the budget line wrongly used, and one positive, increasing by the same amount expenditure under the line which should have been used. These entries are the only way of correcting the errors in charging.

With regard to the remarks on revenue items in point (c), in the Court's view incorrectly termed negative expenditure, the Commission would point out that this term is in accordance with the Union's agricultural and budgetary rules. In any case, in a working document on the recasting of the financial regulation the Commission has suggested how negative amounts should be entered in the budget (Commission working paper of 22 July 1998, SEC(98) 1228 final, pp. 19-21). In the months to come, this working document will provide an opportunity to look at this question as a whole.

In this connection, it should be remembered that most of what is called negative expenditure concerns the recovery of amounts already paid from EAGGF Guarantee Section appropriations.

In the case of recoveries following the discovery of irregularities or fraud and those resulting from the clearance of accounts, a payment had obviously been made in earlier months or years, otherwise there would have been nothing to recover.

In the case of profits on sales from public storage, the recovery either concerns expenditure on the depreciation of stock during an earlier year or is the consequence of an accounting entry to determine the value to be entered in the accounts for the line for expenditure on the needy in the Community. In any case, since the entries are made during the same month, this operation results in no movement of funds.

In the case of the milk levy, the overproduction which is the reason for these revenues entails extra expenditure in the sector.

2.15. The complexity of agricultural support measures is demonstrated by the number of sub-items (about 1 700) that the Member States have used each month for their declarations of expenditure to the EAGGF. This inevitably means that there may be errors in charging expenditure, which is first declared under certain lines and then corrected to others.

The Commission monitors these corrections carefully, particularly when they concern the overrunning of deadlines, since they may conceal an attempt to escape corrections through charging to another sub-item with a later deadline. Article 4 of Regulation (EC) No 296/96 requires these corrections to be subjected to thorough checks under the clearance of accounts procedure and, perhaps, under the conformity procedure to ensure that they are well-founded.

2.16. A forecast is made in the budget in respect of some lines which may give rise to negative expenditure. These include:

- clearance expenditure;

- storage costs;

- the co-responsability levy in the milk sector. It is true that, until 1998, it was difficult to make any forecast other than full compliance with milk quotas, resulting in a token entry, since the forecast was made before the beginning of the milk year. Since 1998, now that the Commission is authorised to produce a letter of amendment up to 30 October, it is possible to have a better idea of likely milk production since half the milk year has already elapsed.

Since other lines concern recoveries following the discovery of irregularities or fraud (all of items B190), no forecast can be made in the budget so they have a token entry. This is because it is difficult to know in which sector fraud may be detected and how much it will amount to.

The Commission therefore considers that a token entry does not necessarily mean that no forecast has been made. With regard, for example, to expenditure on storage, the assumptions made about stocks (opening stocks, purchases, sales, etc.) result in some cases in insignificant expenditure giving rise to a token entry.

Direct expenditure

2.17 2.18. The replies to the comments made may be found in the statement of assurance 1997.

Operative event for agricultural expenditure

2.19 2.21. The detailed nomenclature is an evolving instrument subject to constant revision to take account of management problems and the monitoring of agricultural measures while also having to pay attention to the aim of simplification and the administrative burden which its management imposes on the Member States.

The budget forecasts which provide a basis for the entry of the appropriations for a particular year take account of the staging of payments for various types of aid and the detailed nomenclature is determined in a way which allows this staging to be monitored. If some expenditure cannot be allocated to a specific marketing or financial year, this is because the rules or the management of the measure in question do not require this level of detail (e.g. the supporting measures referred to by the Court).

In the case of refunds, the assessment of the financial burden as advocated by the Court, to be determined at the point of export, could lead to incorrect results. In several sectors, advances may be paid without it being known at the point of export whether the operator intends to benefit from them or not.

2.22. Account should be taken of the fact that, of the 668 Mio ECU referred to by the Court as the total expenditure paid late during the year in question, some 385 Mio ECU was paid after the deadline because the Commission required checks on certain measures which went well beyond the figure of 5 % laid down by Community rules (on average 25 %) and which justified acceptance of the whole of this expenditure.

After Article 4 of Regulation (EC) No 296/96 had been strictly applied to the remaining 283 Mio ECU, it was found that the Commission had discretion over only 129 Mio ECU. Examination of the supporting documents submitted by the Member States resulted in the refusal of 25 Mio ECU under the procedure for advances, an amount which may be revised when the accounts are cleared.

Article 13 of the agreement on budgetary discipline states that advances may be reduced only where there has been a clear breach of the rules or improper use of Community funds. Since the reductions made to advances are not subject to the clearance procedures (conciliation body etc.), they must be limited to what is revealed by an initial examination of the documents provided by the Member States. More detailed analysis of the reasons justifying the delays cannot take place until the clearance of accounts and/or conformity checks.

Trends 1993-97

2.23 (a). It is true that expenditure increased more rapidly in 1993-97 than the agricultural guideline. This trend, which the Commission predicted, was the result of the gradual introduction of the reform of the CAP in 1992, which particularly affected the three sectors referred to by the Court.

(b) and (c). The Commission would point out that the EAGGF Guarantee Section budget is a forecast; actual implementation depends on market developments and the rules in force. In practice, it is to be expected that at the end of the year some items will show under-consumption and others overconsumption. The Commission would refer to its answer to a similar criticism by the Court in its annual report for 1996 (point 2.15(c) and (d) and point 2.18; OJ C 348, 18.11.1997, pp. 62 and 63).

It should, however, be noted that the underconsumption of appropriations has diminished sharply in recent years, falling from 2 346 Mio ECU in 1995 to 1 359 Mio ECU in 1996 and to 382 Mio ECU in 1997.

COMPUTERISED MANAGEMENT SYSTEMS

2.24 2.25. In the first place, it should be noted that the AGREX computer system was not designed as an accounting system but solely as a management and checking system. That is why it does not have the features required of an accounting system.

While it is true that the Sincom system contains only figures in ecus, the AGREX system contains the information in national currencies linked with the conversion rate so that the information can be obtained in ecus. It is not a question of reliability but of links between the two systems.

The problem concerning the year 2000 has already been looked into and solved as far as the AGREX system is concerned. The Commission has taken the necessary steps to revise the entries in that system in the light of new requirements.

The introduction of the new Sincom2 application includes provision of an interface between the AGREX local management system and SI2, the module which deals with the authorising officer's validation. The rest of the validation procedure, by the financial controller and accounting officer, will take place within Sincom2.

Negative commitments and payments will be dealt with within Sincom2 as operations to forecast debts and issue recovery orders.

The Commission has taken note of the Court's comments and suggestions, which it will take into account when introducing an integrated system for the budgetary and financial management of the EAGGF Guarantee Section.

TITLE II - DURUM WHEAT

CONCLUSION

2.54. There is no alternative to the cultivation of durum wheat in the large production areas in the Community affected by the reform. Because of the very low yields from this crop, specific aid for the sector had to be added to the intervention price, which was considered too low to ensure that producers had an appropriate level of income.

The current situation over durum wheat is the historical consequence of the events correctly described by the Court. The result of these events is, at the moment, a set of arrangements deriving from a political decision by the Council, and supported by Parliament, which the Commission has decided not to tackle in its Agenda 2000 proposals.

TITLE III - SUMMARY OF THE SPECIAL REPORTS CONCERNING THE EAGGF AND FISHERIES POLICY ADOPTED SINCE THE LAST ANNUAL REPORT

The Commission has provided full replies to each of the special reports referred to below. For a fuller exposition of the arguments put forward by the Commission, the reader is referred to the replies published in the Official Journals of the European Communities which contain these reports.

SPECIAL REPORT No 2/98 ON THE CLEARANCE OF ACCOUNTS FOR THE FINANCIAL YEAR 1993

2.55. The delay is due to the fact that work on the clearance of accounts has to comply with many procedures, including the gathering of all the information from the Member States and giving them an opportunity to refer matters to the conciliation body. The reform of the clearance of accounts from 1996 should resolve this problem.

2.56. The Commission does everything possible to treat the Member States fairly. To that end, the guidelines on flat-rate corrections have been revised, mainly by laying down clear criteria for them. The choice of measures to be checked is based on a prior risk analysis, since not all the measures can be checked every year. The Commission will not in future be reducing the financial corrections because of improvements which the Member States have meanwhile introduced into their systems.

SPECIAL REPORT No 21/98 ON THE ACCREDITATION AND CERTIFICATION PROCEDURE AS APPLIED TO THE 1996 CLEARANCE OF ACCOUNTS

2.58. The very considerable efforts deployed by all concerned with the new procedures in the Member States, and by the Commission, bore fruit in 1997, when virtually all paying agencies were fully accredited, all accounts and reports were received in good time, and all accounts cleared within the time limit. In 1998, the Commission is continuing to give the highest priority to ensuring the continued success of the reform, in the expectation that the improved controls will result in a high level of compliance with Community rules, and in as low a rate of irregularity as can be expected in the complex environment of the CAP.

The reformed procedure requires each paying agency to assume full responsibility for the payments it makes and to ensure that claims are properly checked before authorisation. If for reasons peculiar to the Member State concerned, a paying agency cannot fulfil this responsibility for any category of expenditure, then the department which can fulfil it must be designated as a paying agency, and must meet the accreditation criteria. As a result of the reform, the checking structures in each Member State are less fragmented and far more transparent, and the responsibilities of each department concerned are now clearly defined. This does not mean that there is no further scope for reduction in the number of paying agencies, and the Commission will encourage Member States to keep to the lowest possible number.

The Commission insists that the certification bodies follow up in their subsequent year's audit report the corrective measures required of each paying agency, and if a risk of loss to the fund persists, it will take an appropriate decision under the compliance procedure. In the audits of the 1997 accounts, many of the weaknesses were found to have been remedied.

The Member States greatly improved their compliance with the legal requirements under the procedure for clearing the 1997 financial year, and the accounts of virtually all the paying agencies were cleared within the time limits. The guidelines to which the Court refers were discussed with representatives of each Member State in September 1996, in reasonably good time to assist the auditors. The Commission's close monitoring of the accreditation procedures had until then prevented attention being devoted to the certification procedure.

Failures found in respect of the accreditation criteria do not, in themselves, prevent the Commission from clearing the paying agencies' accounts. Deadlines must be set for each paying agency concerned to take corrective measures, any irregularities occasioned by the failures must be recovered, and any financial consequences will be drawn in a later compliance decision under Article 5(2)(c) of Regulation (EEC) No 729/70. The Member States continually present new information which leads to adjustments in the amounts of correction applied at each stage of the various procedures.

The Commission closely monitors the effectiveness of the corrective measures required of each paying agency, and the recovery of any undue payments occasioned by weaknesses. If a risk of loss to the fund persists, it will take an appropriate decision under the compliance procedure. Many of the weaknesses have been remedied.

SPECIAL REPORT NO 4/98 ON THE IMPORTATION INTO THE COMMUNITY AT REDUCED RATE OF LEVY AND DISPOSAL OF NEW ZEALAND MILK PRODUCTS AND SWISS CHEESE

2.67. The trade arrangement with New Zealand is one of many preferential schemes and customs checks can only be selective. The United Kingdom uses various risk-analysis techniques to target checks. These were regular imports of what had been duty-free goods involving only two companies which were considered to be compliant by the UK authorities. Therefore these imports were considered low risk.

The Commission also has some monitoring and inspection responsibilities for the relief. Since the resources available are limited, the Commission too uses risk-analysis techniques to decide priorities. The importance of the arrangement to the New Zealand dairy industry together with the close cooperation of the New Zealand Government with the Commission all indicated compliance.

The applicability of the fat-content rule remains the subject of court proceedings. While reserving its position regarding the past, New Zealand asked for technical talks to establish the testing and sampling methods, on a mutually agreed basis, in order to demonstrate compliance in this regard. Those technical talks have been concluded successfully, and the Commission is pre-paring the technical regulation to implement those conclusions.

Since the first notification of the Court's findings, the Commission has been monitoring the establishment of debts as a result of the investigations made by the UK authorities. These investigations are continuing. The debts so far established total 226 Mio ECU, although this figure includes amounts arising from issues not covered in the report. It should also be noted that all the debts established so far are the subject of legal appeal proceedings.

Although from a legal standpoint (still subject to Court findings) it could be considered that the uncollected amounts are a loss of own resources, it was never anticipated that these amounts would accrue to the Community budget. Recovery of the outstanding debts would amount to an economic sanction, as, unlike breaches in the quantitative limit, the amounts involved do not accurately reflect either a loss of anticipated own resources or any potential benefit that might have accrued to the importers.

2.68. The cases of Swiss cheese imports referred to by the Court have all been examined by the Member States involved. The Commission is monitoring the subsequent recovery action.

2.69. The Commission will continue to monitor the recovery action undertaken in the United Kingdom. Should it prove necessary, an appropriate proposal regarding the issuing agency will be considered when all the facts are available.

A technical regulation regarding testing and sampling methods will ensure more accurate checks in future, in particular regarding butterfat.

Given the number of such arrangements, the Commission cannot possibly conduct in-depth examinations of all these arrangements itself. (The Commission has the resources to make around 25 visits during a year, covering both customs arrangements and financial and accounting mechanisms.) Although the own resources inspection programme for 1998 also includes preferential systems, it cannot cover all the specific arrangements. The Commission will, however, ask the Member States which have the primary responsibility to control these arrangements to give priority to such systems when undertaking their own examinations.

SPECIAL REPORT No 19/98 ON COMMUNITY FINANCING OF CERTAIN MEASURES TAKEN AS A RESULT OF THE BSE CRISIS

Elimination measures

The Commission does not agree with the Court about the 'quasi-veterinary` nature of the measures. Both the nature of these measures and the percentage of the Community contribution to them were laid down by the Council at its extraordinary meeting early in April 1996. The rate of part-finance is normal for market measures (70 %, the same as that used on many occasions in the pigmeat sector).

(a) Corrections for the over 30 months scheme (OTMS) are envisaged under the clearance of accounts procedure as a result of the weaknesses detected by the Commission during the seven missions conducted to evaluate the implementation and application of this scheme.

(b) The Commission considers that, until a full assessment of the measure is available, it cannot be proven that failure to apply the measure in Belgium has made it less effective in terms of restoring the confidence of consumers in France and the Netherlands.

(c) The short period for payments allowed by the rules was fixed deliberately in view of those at whom the measure was aimed and the need to send a clear message to consumers in order to increase the effectiveness of the measure while also avoiding fraud.

(d) It should be noted that most of the 65 000 untraceable cattle in the United Kingdom originate in the 1989/90 'voluntary` cohort. When this cohort was included in the selective cull, it was recognised that many of the animals would be untraceable because the necessary (national or Community) legislation on tracing did not exist at that time. It should, however, be noted that no untraced animals from the selective cull could legally enter the human or animal food chains because they would all be over 30 months old, and would be destroyed under the OTMS.

Market measures

The Commission considers that the Council deliberately allowed greater flexibility to take account of the different situations across the Member States, producers and consumers. This meant that different amounts were paid to different beneficiaries. It should also be noted that milk producers and those raising calves also suffered losses as a result of the BSE crisis. The important point in this operation was that each Member State should adopt the most effective solutions to deal with the difficulties it was facing, without distorting competition.

The Commission recalls that the seriousness of the crisis, probably the greatest ever known in the beef/veal sector, required urgent measures and that the recovery of payments wrongly made was absolutely essential if compensation was to be granted fairly.

The Commission considers that the two measures concerning young calves should be seen as part of a single package since politically neither measure could be adopted without the other. Their effectiveness should therefore also be judged jointly.

The Commission is closely following the recovery of amounts wrongly paid through the clearance procedure.

Conclusion

The nature of the measures was clearly specified by the Council when they were introduced in April 1996. The percentage part-financed is therefore normal for market measures.

There was no legal basis for the Commission to monitor the UK meat and bonemeal ban in 1988/89, which was the most sensitive period for any spread of BSE outside the UK. In fact, the Commission warned of the possible risk in the standing veterinary committee and advised other Member States, in the absence of a Community legal basis, to take their own measures.

The Commission must emphasise that if the Member States have not implemented the BSE measures in accordance with the regulations, consequences will be drawn during the clearance of accounts. As was pointed out in the reply to paragraph 4.75 of the Court's annual report for the 1996 financial year, and has been stressed in the replies to previous paragraphs of this report, the Commission has undertaken numerous missions to a majority of Member States to evaluate the implementation of Regulations (EC) Nos 1357/96 and 2443/96 (supplementary payments to bovine producers), the calf processing scheme and the early-marketing premium.

The desire to enable the Member States to exercise a degree of subsidiarity in no way undermined the checks carried out under the IACS. Rather it enabled the Member States to use the most effective means of achieving the goals of this aid scheme. The Commission considers that, although checks under the IACS were not carried out for the measures under Regulations (EC) Nos 1357/96 and 2443/96 by all Member States, it has been possible to check the measures by other means, for example where payments were made on the basis of animal sickness insurance (Germany) or accompanying measures claims (Austria).

The Community already has the legal basis to deal with outbreaks of animal diseases, including those which affect humans. In the case of transmissible spongiform encephalopathies, a specific regulation of the Council and Parliament is being prepared which will replace most of the current safeguard measures. Furthermore, in the priorities for the 1999 preliminary draft budget, the Commission announced that it would launch a debate on how to make the various parties involved in combating outbreaks of disease, the producers, the Member States and the Union, more responsible. Consideration has not yet begun and it is premature to state that an insurance fund should be set up.

SPECIAL REPORT No 18/98 CONCERNING COMMUNITY MEASURES TO ENCOURAGE THE CREATION OF JOINT ENTERPRISES IN THE FISHERIES SECTOR

Most of the shortcomings and weaknesses detected in the application of the rules were described in a report made by the Directorate-General for Fisheries in 1995. The Commission has taken appropriate steps to find a solution to these problems.

The Commission would stress that, despite the problems encountered in implementing the measure, joint enterprises have proved a very useful means of coping with the difficulties encountered by the Community fleets during the 1990s by helping to:

- reduce the capacity of the Community fleet by one third of the total reduction achieved between 1991 and 1997, as stated by the Court of Auditors;

- resolve the problem of Community shipowners who had difficulties in securing access to the resources of non-member countries;

- consolidate stable and lasting cooperation between the Community and the countries with which it has fisheries relations;

- safeguard, at least to some degree, the jobs on vessels transferred and in related activities;

- supply the Community market, so reducing dependence on outside suppliers.

In view of their contribution to the structural adjustment of fisheries capacity in the European Union, the establishment of joint enterprises will appear again in the new regulation on the FIFG. The Commission has accordingly begun an assessment of the whole of this measure, including the joint enterprises financed under the agreement with Argentina.

A joint approach will be followed to ensure cohesion and complementarity with the policy on fisheries agreements. Joint enterprises are a means of developing the fisheries sector in non-member countries with which the Community has concluded an agreement. A fisheries agreement provides a suitable legal framework for the monitoring of projects and the work of joint enterprises.

Preparation of the new regulation on the FIFG provides the Commission with an opportunity to improve the rules regarding:

- the conditions to be met when the joint enterprise is established,

- the guarantees required from the beneficiary with regard to the Community premium,

- the arrangements for checks and monitoring.

Under the current rules, the Commission has reminded the Member States of their obligations with regard to the management and monitoring of joint enterprise projects. It has also taken a number of steps to improve monitoring by its staff (creation of a data base, checks on national methods of measuring, more checks).

With regard to the cases mentioned by the Court, the Commission will carry out all the checks needed on differences in the tonnage of vessels, aid for construction and modernisation, amendments to joint enterprise projects and cases of shipwreck. Where necessary, the Commission will recover amounts wrongly paid.

SPECIAL REPORT NO 20/98 ON THE AUDIT OF PHYSICAL CHECKS OF AGRICULTURAL PRODUCTS RECEIVING EXPORT REFUNDS

Main observations

2.89. The Commission considers that rates of control should continue to be fixed by regulation, even when Member States use risk analysis. A minimum rate of 2 % for the physical control of each product has been adopted in order to ensure that a representative number of all exports is checked. Each customs office is required to check at least 5 % of all exports, so a proper application of risk analysis leads each office to check 2 % of low-risk products, and a considerably higher percentage of high-risk products.

Member States have a general requirement to detect and prevent fraud, so the regulations governing physical checks do not preclude other checks which are effective in particular circumstances. There is co-ordination between customs offices and the services responsible for a posteriori controls, and the Commission constantly strives to improve this. The Court suggests means of providing the information necessary for an evaluation of the selection procedures. The Commission will consider the suggested means, seeking to avoid any disproportionate administrative burden on Member States.

Main recommendations

2.90 2.91. The Commission considers that a reasonable balance between the different controls cannot be achieved by legislation alone. The Commission is concerned that existing legislation is properly implemented by all Member States, who are already fully accountable for the effectiveness of their checks. It will examine all the Court's recommendations, in particular that of making obligatory the modulation of control percentages according to the risk each product presents, and that of the recording of risk factors.

2.92. The Commission agrees that the technique of risk analysis should be applied under all control systems, and will continue to explore means of extending its use. Legislative frameworks should be envisaged in a prudent manner, as risk analysis must always include elements of flexibility, to take into account different conditions and to maintain a level of unpredictability in the selection of operations for control.

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CHAPTER 3 (53*) Structural measures

3.0. CONTENTS Paragraph reference

Introduction 3.1 - 3.2

Implementation of the budget 3.3 - 3.9

The number of programmes 3.10 - 3.15

Programming difficulties 3.16 - 3.23

Financial planning 3.24 - 3.34

Monitoring and controls 3.35 - 3.41

Evaluation 3.42 - 3.47

The principle of additionality 3.48 - 3.53

Equality of opportunities for men and women 3.54 - 3.57

INTRODUCTION

3.1. This chapter deals with the management and control systems of the Structural Funds and certain categories of expenditure, viewed mainly in the light of the observations made by the Court in the following special reports:

- Special Report No 14/98 on the closure of the forms of ERDF assistance (54);

- Special Report No 12/98 on the implementation of the operational programmes relating to the promotion of rural development in the Objective 5b areas (55);

- Special Report No 16/98 on the implementation of appropriations for structural operations for the programming period 1994-99 (56);

- Special Report No 15/98 concerning the assessment of Structural Fund interventions for the 1989-93 and 1994-99 periods (57);

- Special Report No 22/98 on the implementation of measures designed to promote equality of opportunities for men and women (58);

3.2. The management of the Structural Funds is governed by the major reform principles decided upon in 1988 and reinforced in 1993. The Funds' activities have meanwhile progressed considerably, both in terms of the financing operations implemented and from the point of view of organisation and procedures. A huge effort has been made by the Commission and the Member States to ensure the mobilisation of aid, sound management, the monitoring and control of the operations and the development of assessment methods. The observations made in this Chapter highlight a number of points which should still be improved in order to increase the efficiency of management and the impact of measures in terms of Community policies.

IMPLEMENTATION OF THE BUDGET

3.3. Subsection B2 of the budget is devoted to structural operations, structural and cohesion expenditure, to expenditure for the financial mechanism relating to the European Economic Area, to other agricultural and regional operations and also to measures concerning transport, fisheries and the sea.

3.4. The final appropriations available for this subsection, in the budget for the 1997 financial year, including payments and utilisation of reserves, totalled 31 745 Mio ECU in commitments and 26 644 Mio ECU in payments, i.e. an increase of approximately 8 % and 2,5 % respectively compared with the corresponding amounts for 1996.

3.5. Table 3.1 shows the implementation of the appropriations according to the various Funds or other areas of activity. For the Commission's accounts, the rate of implementation is high as, overall, it comes to 95,6 % for commitment appropriations and 98,6 % for payment appropriations. For the payment appropriations of the four Funds, the rate of implementation is practically 100 %. In fact, in spite of the transfers made during the financial year, which increased the payment appropriations for the Financial Instrument for Fisheries Guidance (FIFG: + 120 Mio ECU or 33 %) and for the European Regional Development Fund (ERDF: + 400 Mio ECU or 3,6 %), a large number of the requests for payment from the Structural Funds were still outstanding at the end of the financial year and could not be implemented for lack of available appropriations. The amount in question can be estimated at 1 500 Mio ECU at least, which includes 300 Mio ECU for the ERDF and 1 100 Mio ECU for the European Social Fund (ESF).

3.6. In the case of the latter Fund, payments which have been carried over from 1997 to January 1998 account for more than 15 % of the payment appropriations for 1998 and one can foresee that this situation will lead to considerable deficits which will have to be covered in 1998 and 1999, the last two financial years of the programming period.

3.7. The bulk of the payments, i.e. 20 875 Mio ECU (79 %), concern measures in connection with the Community support frameworks (CSFs) for the 1994-99 programming period. The situation of these measures is detailed in Table 3.2 which shows, by Member State and Fund, the provisions of funds for the whole period and also the commitments and payments up to the end of the financial year 1997.

3.8. It should be recalled that, according to the terms of the provisions in force (59) governing measures lasting two years or more, the commitments entered in the budget accounts are only the annual instalments which have already been implemented, or are in the process of being implemented, for the programmes approved. In contrast, no commitment is entered for the annual instalments of those programmes which are not yet being implemented. The revenue and expenditure account for the financial year, taken together with the balance sheet as at 31 December 1997 (60), shows a potential debt situation equal to the aid for which provision was made but which was not committed and amounting to 65 616 Mio ECU for the Structural Funds and 5 988 Mio ECU for the Cohesion Fund (on this point, see Chapter 8 of this report, paragraphs 8.57 - 8.58).

3.9. Some of the payments for the financial year (1 065 Mio ECU, i.e. 4 %) concern the preceding programming period (1989-93) and a total of 26 Mio ECU was paid in 1997 for individual projects approved prior to the 1988 reform. As at 31 December 1997, a total of 323 Mio ECU in commitments was still oustanding for projects adopted prior to the reform while, for the 1989-93 period, commitments outstanding totalled 3 134 Mio ECU, of which 2 067 Mio ECU was for the ERDF, 663 Mio ECU for the ESF and 404 Mio ECU for the Guidance Section of the European Agricultural Guidance and Guarantee Fund (EAGGF-Guidance).

THE NUMBER OF PROGRAMMES

3.10. For all four Structural Funds for the period 1994-99, resources were set at 149 818 Mio ECU, at 1994 prices (61). They were increased by 4 747 Mio ECU, at 1995 prices (62), following the accession of the three new Member States.

3.11. Of these amounts, 90 % is earmarked for the achievement of the seven objectives set out in the regulation defining the tasks of the Funds (63), 9 % is for Community initiatives, i.e. measures proposed by the Member States on the initiative of the Commission, while the balance is devoted to studies and pilot projects.

3.12. For the achievement of these objectives, as for the Community initiatives, and leaving aside 'large projects` and 'global subsidies`, the provisions in force set out an implementation procedure by Community support framework (CSF) and operational programme (OP). To speed up and simplify the procedure, a single programming document (SPD) may be drawn up, which replaces the other two. In fact, for the 1994-99 period, Community support frameworks were drawn up by country for most of the financing operations in the Objective 1 areas while, for the other areas, the programming took the form of SPDs. For all the objectives of the Structural Funds, and without taking the Community initiatives into account, 238 OPs and 223 SPDs had been approved by the end of the 1996 financial year for the 1994-99 programming period.

3.13. For the same programming period and on the basis of the percentages shown in paragraph 3.11, the resources to be allocated to the Community initiatives came to 14 471 Mio ECU at 1997 prices. This is earmarked for 430 OPs, which reveals a relatively wide spread in the programming with, on average, a little more than 33 Mio ECU in Community aid per OP. Table 3.3 shows a breakdown of the expenditure in respect of the Community initiatives for the financial years 1994 to 1997, while Table 3.4 is a summary of payments relating to the Structural Funds during the last ten financial years.

3.14. Those operations relating to the 1989-93 period which have not yet been closed can be added to the various programmes indicated above, since the system involves the simultaneous management, over several financial years, of the completion of one programming period and the implementation of the following period. The number of these operations for all the Structural Funds is not known precisely but for the ERDF, which represents the majority, the Court estimated that, on 31 December 1997, it must have been 539 OPs or other operations. The difficulties inherent in the closure of the ERDF programmes are analysed in the special report which the Court devoted to the subject (64).

3.15. Based on this, the number of programming documents which the Commission's departments were required to manage in 1997 for the Structural Funds was estimated to be at least 1 500. Growth on this scale in the number of programmes involves a considerable volume of procedural and administrative work, both for the Commission and for the Member States. This is all the harder to justify in view of the fact that, in many cases, the amounts involved are small and could be pooled for a larger scale intervention which would simplify the management of documents and allow better monitoring of the implementation of the measures.

PROGRAMMING DIFFICULTIES

3.16. Programming represented the main change introduced by the 1988 reform in the way in which the Structural Funds are managed. In contrast to the previous system of granting aid by project, it allowed a considerably larger volume of aid to be mobilised. Nevertheless, as the Court underlined in its special report on the implementation of appropriations for structural measures (65), the drawing up and implementation of the programmes are still difficult, in particular from the point of view of the division of duties, the coordination of methods and approaches, adherence to estimates and, most important, keeping to deadlines. Similar findings were formulated in the special report which the Court devoted specifically to aid under the Guidance Section of EAGGF in the Objective No 5b areas (66).

3.17. Community action is intended to be a means of supporting or focusing corresponding national measures. It takes the form of close cooperation, called 'the partnership`, between the Commission, the Member State and the authorities or bodies which the Member State appoints at national, regional or local level. The partnership concentrates on the preparation, financing, ex ante evaluation, monitoring and ex post evaluation of the measures (67).

3.18. The general idea is that the Community examines the plans and other programming documents, adopts implementing measures to ensure that Community action helps to achieve the Funds' objectives and provides added value for the national initiatives. In contrast, the management, properly speaking, of the programmes and, in particular, the approval and implementation of the projects, are the responsibility of the Member States, with the exception of the activities of the monitoring committees and Community audits.

3.19. The procedures and instruments which are supposed to give concrete form to this division of duties still lack precise contours. The many programme proposals submitted to the Commission reveal greatly varying degrees of preparation and their examination by the departments responsible is often only relatively effective. There is little to reveal how Community action is integrated into the structural development measures adopted for the benefit of a region or to guarantee added value both in terms of quantity and quality.

3.20. The 1988 reform of the Funds had the merit of placing the emphasis on the necessity of coordinating all the operations and of a more global approach. Nevertheless, the combined effects of various measures in the same region are often little known and the aid provided from the Community budget tends to be considered independently of the other national or regional assistance. Greater progress must be made in the areas of organisation and the supply of information so that specific forms of aid achieve maximum structural impact.

3.21. The coordination of the various forms of financial support also poses problems. In spite of the emphasis placed on this in the regulations, little progress has been made towards improving aid, loan and guarantee arrangements. Efforts have been made to diversify in the course of previous financial years in terms of developing financial engineering but this often runs into procedural difficulties or difficulties in preparation on the part of the departments concerned and it requires, in order to be effective, real supporting measures.

3.22. The programmes consist of measures and define a certain number of guidelines or actions but their impact on the guidance of the operations and the selection of projects must be improved.

3.23. There are criteria for identifying the projects which are most effective and, therefore, to be given priority over all the eligible projects in each measure, but the criteria are not laid down in the programmes and are left to the discretion of the national or regional authorities. Often they have not been clearly formulated by these authorities either. Apart from contributing to the transparency of the implementation of the measures, clear selection criteria are also needed in order to ensure that viable projects, and those most effective in terms of the objectives pursued, are chosen.

FINANCIAL PLANNING

3.24. In practice, financial planning is the essential ingredient of programming. It consists of the division on the basis of estimates of the total budget for the programme into annual instalments by measure and activity. Such a structure serves as the basis for the payment of the aid with the commitment and payment operations carried out according to the amounts stipulated for the annual instalments.

3.25. Planning is often unrealistic, particularly for investments in multi-annual projects, for, drawn up according to the provisions of the financial perspectives which are intended to guarantee a certain linear development in budgetary allocations, it does not take into account the complications usually encountered at the beginning and end of the programming period.

3.26. Furthermore, in practice, the majority of States and regions are not in a position to develop a programme, select the projects and implement them within the usual deadlines of Community programming. Various methods are used to get around this difficulty.

3.27. Certain States and regions which programme, in the main, new operations and, therefore, must organise more extensive start-up procedures, request extensions to the deadlines and implement the measures with considerable delays in comparison with the original estimates. Other States and regions transfer investments which are already in the process of being implemented into the programme and this speeds up the rate of utilisation of Community finance but may reduce the impact of the programme as far as its guidance and the selection of operations are concerned. In the one case as in the other, management usually involves various alterations to the content of the measures and the re-allocation of provisions, even retroactively, which allows the implementation level of financing to be maintained but can be detrimental to the coordination of the measures.

3.28. For programmes lasting two years or more, the commitments are entered in the budget accounts by annual instalment and in compliance with certain thresholds. The commitment covering instalment n+1 cannot, in principle, be entered unless a required percentage of the instalment n-1 has already been paid. Within each commitment, aid payments mainly take the form of advances. Normally only the final balance of 20 % of each instalment is pre-financed by the Member State, but in practice this balance is itself usually covered by the advance on the following instalment.

3.29. Such a system of annual instalments allows a certain regularity in the payment of aid to be achieved and ensures there is a link between annual financial implementation at Community level and the level of expenditure at national or regional level. The Court has, nevertheless, underlined the imperfect and exceptional nature of this system compared with normal accounting standards.

3.30. In fact, as already pointed out in paragraph 3.8, those annual instalments which have still to be mobilised, although they represent legal obligations, do not appear in the accounts. As for payments, the accounting system in force allows no reliable distinction between those made as advances and those which are final.

3.31. The legislation in force (68) lays down that the payment of funds to the final beneficiaries should be effected as rapidly as possible and, as a general rule, not more than three months after receipt of the appropriations by the Member State. In practice this deadline is often very difficult to observe, given the length of certain financial flows and the necessity (for which the regulation provides) of ascertaining whether all the conditions have been fulfilled before payment is made.

3.32. The financing plans may be amended by transferring part of the provisions to another annual instalment or another sub-programme. The amendment, which can be decided by the monitoring committee in agreement with the representatives of the responsible authorities in the Member State and of the Commission, may not exceed 30 % of the total cost or of the Community contribution, but this percentage may, however, be increased if the amendment does not exceed a volume of 20 Mio ECU. In addition to these rates and amounts, amendments are always possible by means of the adoption of a revised financing plan.

3.33. In practice, the amendments made are large. They tend to increase the provisions for the final years of programming in order to compensate for delays in the first years and to raise the provisions for traditional measures to the detriment of more innovative measures, which are more difficult to implement.

3.34. Moreover, the financing plans are subject to a complex method of indexation. The additional resources created in this way must be calculated, at the beginning of each year at the latest, by the Commission's departments and may give rise, at the monitoring committee's proposal, to an increase in aid for certain forms of operation or to the financing of new measures. This method involves complex procedures which it would be advantageous to simplify and, in practice, it makes the acquisition of information on the state of progress of the financing plans appreciably more complicated.

MONITORING AND CONTROLS

3.35. The provisions in force (69) stipulate that the Commission and the Member States, within the framework of their partnership, shall ensure effective monitoring of the implementation of the aid at the level of the Community support frameworks and specific measures. Committees have been created for this purpose and, apart from sample checks, monitoring is mainly carried out on the basis of physical and financial indicators and of annual reports drawn up by the authority designated for this purpose by the Member State.

3.36. The work of the monitoring committees differs greatly from one programme to the next but, in general, its potential has been little used. The intervals between meetings are too long and the composition of the committees is often unfavourable to efficient work and genuine coordination. Monitoring concentrates, above all, on the financial progress aspects with no real consideration of possible improvements at the level of programme preparation, the choice of projects and optimum use of funds in terms of structural impact. Even at the level of financial progress, the necessary corrective amendments are sometimes only made after long delays.

3.37. The quality of the annual progress reports, the submission of which is a precondition for the payment of the balance of each annual instalment of the commitment, has to be further improved. The contents are often limited to general financial information, which is not very suitable for analysis and often cannot even be compared with other documents because of discrepancies between the dates on which they were drawn up. A certain amount of progress has been achieved for the ERDF with the production of a standardised document, the use of which remains voluntary, but numerous reports offer little information on the achievement of the physical indicators and of the desired impact. Furthermore, it should be noted that, under the legislation in force, the closure of a programme does not imply that all the investments have been completed, as many projects will still be in the process of being implemented.

3.38. With regard to financial controls, it is, first of all, the Member States that are responsible for verifying the implementation of the measures, preventing irregularities, taking corrective action if irregularities do occur and initiating any recovery of funds. The Member States must inform the Commission of the measures taken to achieve these ends and, in particular, send it a description of the control and management systems. They must also make available all the relevant national reports concerning the audit of the measures set out in the programmes and measures and inform the Commission of progress on any administrative or legal action that is being taken.

3.39. To date, the implementation of these provisions has proved inadequate and inefficient. The Commission adopted, on 11 July 1994, a regulation concerning irregularities and the recovery of amounts paid erroneously within the framework of the financing of structural policy. It sought to define in detail some of the minimum requirements which the financial controls must meet in order to achieve an acceptable standard throughout the Community. In addition, it adopted, on 15 October 1997, a regulation setting out the rules of implementation for financial control by Member States of operations co-financed by the Structural Funds. The first reports by the Member States on the implementation of this regulation are to be submitted in 1998.

3.40. The Community departments also carry out checks, by sampling and in particular on the spot, on measures financed by the Structural Funds and on the management and control systems. The scope of this audit is, however, greatly reduced by the absence of an information system for the projects or other measures financed. It is true that the management of the projects is the responsibility of the national and regional authorities but it is, nonetheless, true that more precise and easily accessible information on the projects financed is indispensable to the efficient organisation of the controls. This alone can give the inspections a more purposeful and less arbitrary character, can permit collation and analysis of the data concerning the various fields of intervention, the follow-up of certain problematic aspects such as the relocation of companies or the privatisation of infrastructure and, generally speaking, increase the effectiveness of the audits both from the point of view of the regularity of expenditure and of the results obtained.

3.41. A large number of inaccuracies and irregularities occur in the declarations of expenditure, which reduces their reliability. Increased attention should be given to certain problems concerning the ineligibility of expenditure, such as the indirect costs for measures involving training. The audits conducted by Member States and by the Commission should be better coordinated and both should, in addition, be improved in the ways mentioned in the previous paragraph.

EVALUATION

3.42. Evaluation is an instrument which is indispensable for the sound management of the Structural Funds, because it allows the objectives pursued to be compared with the results obtained. Provision is made for evaluation at three stages (ex ante, intermediate, ex post) and at three levels: for every programme or other form of intervention, for every Community support framework and for all the structural measures as a whole.

3.43. The process has developed considerably in the last few years. For the 1994-99 period, of the 461 OPs and SPDs in existence (see paragraph 3.12), 389 were the subject of an intermediate evaluation. Approximately 250 of these evaluations had already been submitted to the monitoring committees in 1997. This is a process which cuts across the periods, for reasons relating to deadlines, as the final observations for one period cannot be taken into account for the preparation of the subsequent period but, at best, for mid-term corrections or for a subsequent period.

3.44. The Court's special report concerning evaluation (70) shows that the latter needs to be consolidated, i.e. rationalised, by means of an improved methodological framework, by increasing the reliability of the indicators and by giving greater consideration to the results. One particular difficulty exists in respect of the evaluations for Objective 2; the statistical information does not always correspond to the areas eligible for operations. Similarly, splitting up the areas, for example into a region and its main town, generally entails distortions which diminish the significance of the statistical data.

3.45. The terms of reference provided for the evaluators should include definitions of a certain number of indicators or other features by which the structural policies can be assessed. Such indicators would have to be scrutinised at a later date in order to ensure that the studies are relevant, coherent and comparable and other factors would, obviously, be used to complement the examination. It is also necessary to ensure the greatest possible independence of those carrying out evaluations and, to this end, they should be appointed when the programmes are approved.

3.46. Assessment of the effects of, and the value added by, Community action depends to a large extent on the existence of a development strategy at programme level. Too many programmes do not include an adequate operational distinction between the development strategy followed and those aspects of implementation which can be adapted to suit the circumstances.

3.47. A fundamental distinction must be drawn between the short-term effects of the operations, on demand in particular, and more long-term adjustments, and supply in particular. The programming of structural development must aim to ensure that these effects are permanent and avoid excessive dependence in respect of demand and of aid which could remain indispensable in the long term. However, as long-term effects are less obvious within a single programming period, there is a general tendency to concentrate attention on the short-term effects, which is not without its risks.

THE PRINCIPLE OF ADDITIONALITY

3.48. The Structural Fund appropriations allocated in each Member State to each of the objectives may not replace public (or similar) structural expenditure by the Member State in in the whole of the territory eligible under the same objective (71).

3.49. This principle ensures that the Fund's resources do not merely serve to replace national structural aid. To this end, the Member State must, for each objective, in all the areas concerned, maintain its structural expenditure at least at the same level as during the preceding programming period. The methods of verifying additionality are set out in the CSFs and SPDs, which define what financial information is to be forwarded by the Member States so that the trend of the expenditure to which additionality applies can be monitored.

3.50. As in the case of evaluation, Objective 2 presents special difficulties, primarily because of the fragmentation of the areas. As the Commission noted during preparation of the programmes for 1994-96, verification of additionality is very difficult here by reason 'of the number and (of) the dispersion of the areas involved, of the administrative organisation of each one and the concrete difficulties experienced by some Member States in supplying the required financial information` (72) and also because of the nature of the measures implemented.

3.51. For Objective 1, an examination of the files showed that, for several countries, the tables and other financial information forwarded to the Commission every year, as stipulated in the CSFs and SPDs, were incomplete and, in one case, had not even been forwarded.

3.52. In spite of the experience gathered in the 1989-93 period, when verification of compliance with additionality was subject to numerous practical difficulties, methodological problems still exist and the Commission should take appropriate initiatives to resolve them. Progress is necessary, for example, in respect of the content of the tables, non-budgetary expenditure, the breakdown of the expenditure by year, the aggregation of data, the statistical sources, the exchange rates or the treatment of privatisations. However, some authorities consider that they are not obliged to forward information broken down by year, since additionality must be applied for the whole of the programming period; others only submitted information of a mainly provisional nature.

3.53. Moreover, few analyses of the information submitted were found in the files examined, particularly concerning the viability of the data forwarded, which was often difficult to check in the absence of regional accounting data. The very provisional information forwarded in respect of 1997 shows, however, that in the case of some countries, it will be very difficult to comply with the principle of additionality for the 1994-99 period unless there is a considerable increase in the relevant public expenditure.

EQUALITY OF OPPORTUNITIES FOR MEN AND WOMEN

3.54. Several structural measures are intended to promote equality of opportunities for men and women and to combat the specific disadvantages with which the latter are confronted on the labour market. The more specific aim of these measures is to reduce the differences existing, in respect of employment, between men and women and to improve measures in favour of children and the elderly who are often deemed to be a woman's responsibility

3.55. At the request of the European Parliament, the Court drafted a special report on this subject (73). It examines especially the training and other measures implemented by the Community in this field within the framework of the ESF and of the Community initiative 'Employment - NOW (new opportunities for women)` and the Community programme of measures for equality of opportunities (1996-2000).

3.56. As regards the implementation of the measures examined, the report underlines both the necessity of an improved operational approach to this problem through enhanced coordination and the absence of effective evaluation of the projects, both ex ante and ex post, in order to ensure that the results obtained are adequate relative to the expected results. Communications and a guide were drawn up by the Commission in 1996 and 1997 respectively, in order to ensure that equality of opportunities was taken into consideration in the Community's various policy fields and operations, but their use should be developed further.

3.57. The NOW Community initiative provides for a transnational dimension with the aim of promoting exchanges of experience. The importance of this dimension, its nature and the minimum space it must be allotted in the projects has, however, not been defined. In general, transnational partnership is not sufficiently considered as such in the financing decisions for the projects, with each country approving the project for its own territory independently of the partnership. Countries which provide a minimum percentage of the expenditure for the transnational dimension are rare.

REPLIES OF THE COMMISSION

INTRODUCTION

3.1 3.2. The Commission has made a detailed reply to the Court's observations in the five special reports which form the background to the present chapter.

The Commission welcomes the Court's acknowledgement of the major efforts which have been made to ensure effective use of the Structural Funds. The Commission is constantly striving, within the limits of its powers and resources, to reduce as far as possible the incidence of weaknesses in Structural Funds management. Based on the Court's observations over the years and its own experience, it has, for example, recently adopted new measures in the areas of eligibility definition and financial control. It has also recently proposed, for the next programming period starting in the year 2000, a major overall reform of the rules, designed to decentralise and simplify operations and clarify the respective responsibilities of Member States and the Commission. These new regulations should have a marked positive impact on the quality of Structural Funds operations, but this will also continue to depend crucially on commitment and efficiency within the Member States.

IMPLEMENTATION OF THE BUDGET

3.5. The volume of payment appropriations which the budgetary authority finally entered in the Community budget was smaller than that proposed by the Commission. The budgetary authority did not authorise a transfer of payment appropriations towards the end of 1997.

3.6. Certain payment requests presented at the end of 1997 could not be met until January 1998. The programming of Structural Funds operations, which is by definition based on estimates of future requirements, and the difficulties of forecasting requirements which depend on requests from the Member States are thus compounded by the unpredictability of the budgetary procedure.

3.9. The Commission is closing the pre-1994 projects and programmes as rapidly as its limited human resources and the quality of Member State documentation permit. A large number of further projects and programmes have been closed since the end of 1997.

THE NUMBER OF PROGRAMMES

3.13. The Commission agrees that there have been too many individual Community initiative programmes. It has proposed that there should be a much smaller number of such initiatives in the future and expects that there will also be a much smaller number of programmes.

3.14. The overlapping of financial operations relating to successive programming periods is inevitable.

The following are the main reasons why a significant number of pre-1994 operations remain open: Member State final reports of insufficient quality, non-presentation by Member States of other information necessary for the closure of many programmes, extension of closure date for a number of programmes for justified reasons, shortage of human resources in the Commission and in the Member States. The number of open projects and programmes is nevertheless falling rapidly. In the area of the ERDF for example, and in the first six months of 1998, 48 further projects and 75 further programmes were closed and the total volume of outstanding commitments was reduced by 220 Mio ECU.

3.15. The Commission is aware of the difficulties associated with the large number of programming documents involving small amounts in some cases. This is why in the proposals for regulations for the new programming period the Commission proposes limiting the number of operations and in general implementing them in the form of an integrated measure by region, making more general use of SDPs in the context of certain priority objectives and incorporating the large projects and global subsidies in other forms of assistance.

PROGRAMMING DIFFICULTIES

3.16. This demonstrates the need for close cooperation between Community and national institutions as regards both preparatory procedures (adoption of regulations, identification of eligible areas, distribution of appropriations, introduction and approval of programmes) and the implementation of programmes. With respect to the latter aspect, the Commission proposes reinforcing effectiveness for the next programming period, both by a clearer separation of tasks - the Commission will approve the strategic priorities while programme management will be further decentralised - and by enhanced partnership with partners involved in the development plan from the outset.

3.17. The Commission agrees with the Court that the separation of tasks is not clear enough. It would like the tasks of the partners involved to be specified more clearly at every stage of the Funds' operation. Proposals to this effect (see reply at 3.16) are included in the proposals for new regulations. The Commission agrees with the Court that some of the programmes proposed by the national authorities are not of a sufficiently high standard. Following the partnership negotiations, however, documents meeting the standard required by the regulations have eventually been adopted, although this often took some time.

3.20. This underlines how important it is that Member States comply with Article 32 of the coordination regulation concerning information and publicising aid measures co-financed by the Structural Funds. In the proposal for a new horizontal regulation, the Commission proposes specifying more precisely the responsibility of the management authority in this area.

The Commission, for its part, also makes a continuous major effort to explain how the structural policy and its instruments function.

3.21. The Commission acknowledges the need for greater complementarity and coordination of the various structural instruments at Community level. Experience under the current regulations has shown that there are difficulties inherent in reconciling the programme approach of the Commission with the project-based system of the European Investment Bank, but useful experience has been acquired in the EIB/Cohesion Fund joint evaluation of projects. The Commission and the Bank are already examining how, at an operational level, this procedure could be developed or applied more widely. In the context of Agenda 2000 and the revision of the current Structural Funds regulations and procedures for the period after 1999, the Commission will examine the use of different financial assistance instruments, with particular attention to the idea that, in the future, financial support should strike a better balance between grant aid and other types of funding, such as loans (with or without interest subsidies), loan guarantees or equity participation, depending on the nature of the investment. Attention is being focused on how the grant aid element of Structural Funds interventions might be partly replaced, or used to lever better other (e.g. private) resources, to reduce the burden on the Community budget but still achieve the cohesion impact desired.

3.22 3.23. The Commission recalls that on the basis of the established eligibility criteria the selection of projects/operations and their management is and must remain the responsibility of each Member State. The Commission agrees with the Court that clear selection criteria are necessary and has reminded the authorities managing the programmes that formal criteria for each programme must be established.

FINANCIAL PLANNING

3.25. The division of the total budget for the programme into annual instalments can only serve as a guide for the remaining years. This is due to the multiannual nature of programming and the current financial management system. In addition, the budgetary authority produces a financial perspective as a reference framework for the establishment of annual budgets, which must therefore be reflected in one way or another in the programming of the Structural Funds.

3.26 3.27. The difficulties referred to by the Court are mainly due to delays in the preparatory procedures (adoption of regulations, identification of eligible areas, distribution of appropriations, introduction and approval of programmes). This gives rise to a cumulative effect which cannot easily be recovered and has repercussions throughout the life of a programme. This clearly demonstrates the need for close cooperation between the Community and national institutions involved in the preparatory stages. Nevertheless, in general the programmes (which necessarily have to be modified in view of their size and multiannual nature) progress normally, which is clear from the fact that the level of outstanding commitments (the difference between Community commitments and payments) is normal.

3.30. It is true that the Structural Funds accounts do not show amounts not committed. However, when calculating off balance sheet commitments, the Commission considers that the total amount provided for CSFs and CIs for the 1994-99 programming period, as decided at Edinburgh, should be the reference used to determine future commitments: this is an expenditure target fixed by the Community. For the sake of prudential accounting, the Commission shows the difference between this amount and the appropriations committed at the end of 1997 as a potential liability.

3.33. Programme modifications are inevitable; the Commission seeks to ensure that they do not fundamentally affect the objectives of the programme concerned.

3.34. Although the method of indexation was simplified for 1994-99 compared with the previous period, it is still too complex when applied. The Commission has therefore proposed that for the new programming period CSFs, SDPs and CIs should be adopted at current prices.

MONITORING AND CONTROLS

3.36. The monitoring committees are organised and chaired by the Member States and consequently their operating methods are bound to vary.

The Commission has proposed that in future decisions concerning the implementation should be decentralised and that partnership should be extended to regional and local authorities, economic and social partners and other bodies concerned. In this context the monitoring committees' work should focus more closely on the qualitative aspects of projects, and amendment procedures should become much simpler.

3.37. The Commission agrees that the quality of annual reports requires further improvement and that more attention needs to be paid to forwarding them to the Commission punctually.

3.38 3.40. In addition to the measures described at 3.39, the Commission has now proposed, for the next programming period, clarification and strengthening of the arrangements for financial control.

Information about the physical and financial aspects of jointly financed projects is available in the Member States, and Commission departments have access to complete lists of projects from which they select the sample they wish to check. The Commission has launched an audit trail study to enable it to trace the progress of appropriations from the Commission to the economic agents on the spot. However, the central purpose of the Commission's on-the-spot checks is more general: to advise those concerned in the Member States on Community rules and procedures, to examine the nature and quality of the overall financial management and control systems in place in the Member States, etc. Information on such matters as delocalisation of companies or privatisation of infrastructures is best obtained by methods other than on-the-spot checks.

3.41. The Commission agrees that Member States' declarations of expenditure may contain elements which are ineligible. The adoption in 1997 of 22 eligibility data-sheets and of Regulation (EC) No 2064/97 should improve the situation. Data-sheet No 5 lays down the rules to follow to calculate the indirect costs of training measures. For the next programming period the Commission has proposed that eligible expenditure should be defined by national rules except where the Commission establishes common rules.

The Commission and the Member States are currently making a major effort to improve the coordination of their on-the-spot checks, and formal agreements on cooperation on the subject of control have been signed with 13 Member States. Regulation (EC) No 2064/97 strengthens this coordination requirement.

EVALUATION

3.44. With respect to methodology, between now and the autumn the Commission plans to publish all the work carried out under MEANS (multiannual programme to analyse and propose evaluation methods) in order to ensure greater harmonisation of the evaluation process in the Union. This will cover:

- description of specifications and the methods for ex ante, intermediate or ex post evaluation;

- presentation of various methods of evaluation found in current literature and the conditions of use;

- analysis of systems of indicators by area of intervention;

- harmonisation of concepts and list of suggested indicators;

- methodology and organisation of subject-based evaluations;

- multilingual glossary of the main concepts of evaluation;

- presentation of the most innovative national or Community experiences.

The small size of Objective 2 areas is indeed a constraint for impact evaluation. To some extent the Eurostat surveys on industrial statistics make it possible to reconcile the geographical coverage of areas with the available statistics.

3.45. As stated at 3.44, the Commission plans to propose indicative lists of indicators. Because of the variety of areas, a flexible approach is needed to select the most appropriate indicators. Regarding the independence of the evaluators, it would be best achieved by selecting evaluators who are not nationals of the country in question. Some monitoring committees have adopted this practice but there are obvious difficulties which block the use of this method.

3.47. The Court rightly notes the importance of taking account of the supply effects (in the long term) in comparison with the short-term demand effects. The econometric models used by the Commission or the Member States are increasingly taking these aspects into account. It cannot be denied, however, that there are limits to the accurate measurement of all the effects, not all of which have yet been eliminated.

THE PRINCIPLE OF ADDITIONALITY

3.50. The Commission agrees that the small size of regions eligible for Objective 2 (and Objective 5b) assistance and the fact that a given statistical region may contain both Objective 2 and Objective 5b areas create major methodological problems for the verification of additionality. In view of these difficulties, the Commission has proposed for the next programming period to verify additionality for the new Objectives 2 and 3 taken together on the basis of expenditure on active labour market policy at the national level. It has also proposed making compliance with the additionality requirements one of the criteria for allocation of the performance reserve.

3.51. It is correct that there have been significant delays by some Member States in the submission of data on the ongoing verification of additionality in Objective 1 regions and, in one case, no data at all have been submitted. However, such delays are generally administrative in nature and do not imply that additionality is not being respected on the ground.

3.52 3.53. It is necessary to distinguish clearly two points addressed by the Court in these paragraphs: on the one hand, methodological and analytical issues relating to the details of the data submitted and, on the other hand, real failure to achieve national development-related spending of a given level.

Regarding methodological and analytical issues, each of the questions raised by the Court has indeed arisen. It should be emphasised, however, that the problems are more limited than might appear, as only a few Member States are concerned by these points. The Commission will continue its efforts to resolve such problems in cooperation with these Member States, while recognising that the aim cannot be to impose uniform public financial procedures across the Member States, a task for which it has no mandate.

As is indicated by the Court, the data available so far would suggest that a number of Member States may well be unable to maintain average spending at the required level during the entire programming period. In these cases, Member States tend to apply the exemptions of Article 9(2) of the Structural Funds coordination regulation.

EQUAL OF OPPORTUNITIES FOR MEN AND WOMEN

3.56. Coordination in the area of equal opportunities is well established within the Commission through the inter-service group on equal opportunities and the group of gender mainstreaming officials. The exchange of information with Member States is secured through the Advisory Committee on Equal Opportunities for Women and men.

Mid-term evaluations of the NOW Community initiative were carried out and their findings were included in time for the selection of the second instalment of projects.

The use of communications and of a guide issued by the Commission in 1996 and 1997 must be considered a success. The close involvement of all Commission services and the high-level commitment of the Commission will ensure that the incorporation of equal opportunities into all Community policies and activities continues to progress.

3.57. While transnationality is an essential condition for participation in the programme, it is for each Member State as part of its selection process to ensure that the agreed budget for the project makes sufficient provision for the transnational activities proposed. Each partnership is encouraged to devise a work programme for transnational cooperation, and to establish the responsibilities of the individual projects for the elements of this work programme. The Commission will step up its efforts to have this practice applied in all the Member States. It would, however, point out that each partner in receipt of co-financing must report on the physical and financial completion of its share of the project to the national authority which selected it.

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CHAPTER 4 (74*) Internal policies

4.0. CONTENTS Paragraph reference

Introduction 4.1

Implementation of the budget 4.2 - 4.5

Audits carried out by the Court in specific fields 4.6 - 4.29

Information and communication 4.7 - 4.11

Action to combat water pollution 4.12 - 4.19

Renewable energy sources 4.20 - 4.29

INTRODUCTION

4.1. Since 1993 the internal policies have been grouped under a single heading (No 3) in the financial perspective. Even though their common objective is, in the main, to speed up completion of the single market, they form a very diverse group and cover the major part of four subsections of the budget:

(a) measures relating to education, vocational training and youth, culture and audiovisual media, information and various social measures (Subsection B3),

(b) measures concerning energy policy, control of nuclear safety and the environment (Subsection B4),

(c) measures linked to the development of the internal market (Subsection B5),

(d) measures intended to improve the competitiveness of Community industry through research and technological development (Subsection B6).

IMPLEMENTATION OF THE BUDGET

4.2. Table 4.1 below shows the utilisation of the appropriations available in 1997.

4.3. The total amount of commitment appropriations available was 10 % more than for the financial year 1996. This increase mainly concerned the B6 research and technological development subsection, where total appropriations for 1997 rose from 3 315 Mio ECU to 3 741 Mio ECU, while appropriations for the other subsections fell slightly. Overall, the rate of implementation was high, reaching 95% for commitment appropriations. As far as payments are concerned, the volume of appropriations available in 1997 was slightly higher than in 1996. The rate of implementation was higher than that of the previous financial year, rising to 93 %, as against 86 %.

4.4. This appreciable increase in the rate of implementation of the payment appropriations may be explained, in part, by the practice followed by DG XII, in particular, which, contrary to the financial regulation (75), pays an initial advance even before the contracts in question have been signed by all the contracting parties (76).

4.5. The intensity of the checks carried out by the Commission departments should have an impact on the quality of the implementation of the budget. The figures in Tables 4.3a) and 4.3b) show an increase in the intensity of the controls carried out by the Commission departments.

AUDITS CARRIED OUT BY THE COURT IN SPECIFIC FIELDS

4.6. During the financial year 1997, the Court conducted in-depth audits in three specific internal-policy fields, namely:

(a) the Commission's information and communication policy (77),

(b) the policy for combating water pollution (78),

(c) the policy on renewable energy (79).

Information and communication

4.7. The subject of the audit was the EU information policy as implemented in the Member States, mainly by the Commission offices. The audit covered a sample of 100 information projects checked at the Commission and in five Member States.

4.8. There is insufficient definition of objectives to be achieved through the funding of measures/projects from budget line B3-300 and, in practical terms, some projects which had no demonstrable link with information policy activities have benefited from financial support. Commission offices should be directed towards a Community-wide coherent information policy which leads to equal treatment of similar projects.

4.9. The implementation of the Commission's information measures as stipulated in the annual work programmes of DG X failed to standardise:

(a) the application procedure;

(b) the project selection procedure;

(c) the extent of the Community contribution;

(d) the budget line to be charged;

(e) the eligibility of expenditure incurred.

4.10. In order both to simplify the management procedures and to guarantee transparency and equal treatment of final beneficiaries, the Commission should:

(a) increase the use of calls for proposals in the selection of final beneficiaries;

(b) establish a standard financial form defining the categories of eligible expenditure, which can be used by the beneficiary as the basis for making the final report;

(c) fix a single rate of financial contribution for projects based on a unified calculation basis, with the sole exception of information networks funded through a lump-sum grant;

(d) limit the percentage of the initial advance to a prudent level not higher than 40 % of the amount of the financial contribution approved;

(e) fix a maximum level of the overhead costs as a proportion of the total costs.

4.11. The Commission offices should play a leading role in both the financing of permanent networks and the Prince information activities. For these purposes the Commission should establish a policy and financial planning framework in order to define the overall objectives of information policy, the management systems and the indicative funds available, including a distribution among objectives of those funds. In this context, DG X must reinforce its internal coordination role in order to ensure an improvement in the Commission's information and communication activities.

Action to combat water pollution

4.12. Since 1973 the Council of the European Union has adopted some 20 directives on water, including the directive on urban waste water treatment (UWWT). Considerable financial resources have been allocated to this problem area: 7 500 Mio ECU, around 7 % of all Structural Funds expenditure, has been specifically allocated to the problem of water quality. Approximately 40 000 sewage stations are to be constructed or renovated by the year 2005 in order to meet the requirements of this directive. The cost of implementing this directive alone is significant for both the Community and national budgets and is very difficult to estimate. A study has shown that the cost in nine Member States could reach 200 000 Mio ECU at May 1995 prices (80). The directives on the protection of water against nitrate pollution from agricultural sources and on the protection of the environment and the soil in particular when sewage sludge is used in agriculture were included in the inquiry, because of their impact on water quality.

4.13. The Court's audit focused on the implementation of the relevant directives and on the achievement of EU policies concerning water treatment facilities. Sixty-seven projects in seven Member States were audited for that purpose.

4.14. Both the Commission and almost all Member States had problems with the transposition of the above directives into national law (81). In a number of cases the Commission had to take legal action against the Member States. Since Member States are also late in forwarding various reports required by Community legislation, the Commission is deprived of vital data which it requires in order to evaluate financial and managerial policy in this area. This problem is exacerbated by inconsistent terminology and the lack of specialist and standardised data and appropriate indicators.

4.15. The delays in the transposition and implementation of the directives have meant that a number of the new projects constructed in the meantime do not comply with the requirements of the UWWT directive. In addition to the problems concerning planning and project management, construction problems have resulted in cost increases. Moreover, failure to construct and/or technically improve the treatment plants in order to produce treated sludge, as provided by the sludge directive, means that there is an increased risk of water pollution, since untreated sludge may well be spread in ill-protected sites, or dumped in the area.

4.16. Effective implementation of the nitrates directive was held back by, amongst other things, bad agricultural practices and inconsistent Community funding.

4.17. The design and types of project that are funded under the Envireg programme (which was not carried out satisfactorily) do not always meet anti-pollution requirements.

4.18. When financing sewage plants, the Commission has not taken sufficient account of the need to ensure that the level of charges is set so as to give the right price signal to induce people to avoid pollution, rather than simply being set so as to recover some proportion of the operating and/or capital costs.

4.19. In conclusion, it is possible that the objectives of the fifth action programme for the environment as regards water will not be achieved by the year 2000, because of the problems outlined above. In order to redress the current situation the Commission and the Member States should undertake significant action well in advance of the deadlines specified in the implementing directives.

Renewable energy sources

4.20. The Court's audit focused on the evaluation of the JOULE-Thermie and Altener programmes and the project management structures. Nineteen contractors in six Member States participating in 30 projects concerning the Renewable Energy Sources (RES) part of the JOULE-Thermie programme were audited, while the audit of the Altener programme was based upon file-reviews.

4.21. A general conclusion as to the success or failure of the RES programmes cannot be reached because the overall objectives were not sufficiently precise for them to be used as benchmarks against which the actual outcome of the programmes can be assessed.

4.22. Despite Council decisions to merge the programmes, neither the selection nor the project management procedures have been harmonised. The gap between R & D and demonstration projects still exists.

4.23. Six of the 13 audited Thermie demonstration projects lack a major innovative aspect. They had only a limited European dimension and their funding structure did not meet the requirement of balanced participation of partners.

4.24. The information systems used in DGs XII and XVII are such that data on costs of the management of the programmes or the costs of the selection and management of the projects are neither collected nor evaluated.

4.25. In DG XII more than 50 % of the posts financed through the budget appropriations for JOULE-Thermie were occupied by staff working on tasks outside the JOULE-Thermie programme.

4.26. Proper scientific and financial management, monitoring and control of all projects are not guaranteed (82). The Commission should increase the number of audits carried out at contractors.

4.27. There are a large number of problems with cost claims in JOULE and Thermie. The Commission should consider introducing a policy whereby contractors provide a certificate from an external audit firm to confirm the accuracy of the cost claims, where the latter exceed a certain amount. Audit fees could then be accepted as an eligible project expense.

4.28. Especially in the case of smaller contracts the Commission could consider a different funding procedure, such as using a simplified contract and intro-ducing flat rates for overheads.

4.29. Coordination between all Commission departments involved in RES projects should be strengthened. The lack of a comprehensive inventory of all Community-supported RES projects is an obstacle to efficient coordination between programmes and departments.

REPLIES OF THE COMMISSION

IMPLEMENTATION OF THE BUDGET

4.4. The Commission feels that the practice referred to by the Court is consistent with the financial regulation. It pays the coordinator after he and the Commission have signed the contract and after having sent a letter accompanied by the requisite legal guarantees.

AUDITS CARRIED OUT BY THE COURT IN SPECIFIC FIELDS

Information and communication

4.7. Since DG X was reorganised on 1 August 1997, the offices of the European Union in the Member States have been known as 'representations`.

4.8. The general objectives of the information and communication policy have been set out by the Commission in seven communications:

- SEC(93) 916/9: 'The Commission's information and communication policy: a new approach`

- SEC(93) 1248/3: 'The Commission's information and communication policy: implementation of information plans`

- SEC(94) 80/4: 'The Commission offices - next stage`

- SEC(94) 82/4: 'The Commission's information and communication policy: provision of information for non-member countries`

- SEC(94) 488: 'The Commission's information and communication policy: policy on relays and networks`

- (SEC(94) 1106: 'Commission communication to the budgetary authority on legal bases and maximum amounts`

- COM(98) 39: 'Communication from the Commission on the information strategy for the euro`The Commission set out the objectives in the communications it issued during the report period.

Directorate-General X sets out the annual objectives for its own activities. Appropriations are approved on the basis of a draft annual programme submitted by the units and representations and reflect Commission priorities very closely. The Commission agrees that the annual objectives should be set out in more detail.

Eligibility criteria for projects have already been specified in its grants' vade-mecum which came into force on 1 January 1998.

Thanks to these, action by representations is part of a comprehensive policy. Nevertheless, each representation must take into account the specific sensitivity and requirements of each Member State.

4.9. DG X standardised points a, b, c and e by issuing a grants' vade-mecum in 1997 with effect from 1 January 1998. The choice of budget heading (point d) depends on the budget voted and accompanying comments.

4.10. All the Court's comments on transparency and procedures have been acted on by the Commission since DG X's grants' vade-mecum came into force on 1 January 1998.

4.11. The representations already play an essential role in the implementation of the relay networks and the Prince programme (coordination of activities in the field, management of information for the relays, monitoring of Prince agreements with the Member States). For the sake of efficient management, in particular during the start-up period of these two projects, the Commission preferred to keep management of the appropriations at central level at that stage.

There is a body of rules governing information and communication projects. It has been the subject of several communications (six between 1993 and 1997 and one in 1998). The Commission intends to boost implementation of the planned measures and where necessary, to lay down new ones. DG X has set itself annual objectives, financial ones included, and it has already significantly stepped up coordination between directorates-general, as recommended by the Court, by establishing an annual integrated programme of Commission information projects.

Action to combat water pollution

4.14. Whilst it might be true that the terminology of early Community water legislation of the 1970s and 1980s shows some inconsistency, this is not the case for the 1991 Council directives on urban waste water treatment and nitrates from agriculture. In addition, the Commission has made every endeavour to provide for consistency of terminology within the whole range of Community water legislation when developing and negotiating the water framework directive. The texts on the water framework directive show the success of this endeavour.

4.15. Member States were required to bring into force national legislation to implement the directive by 30 June 1993 and implementation programmes by 31 December 1993, while the deadline for commitments for the 198993 programmes was 31 December 1993. At the time, a number of the projects already being implemented could not be modified. However, information obtained from Member States shows that a number of the projects in question are being modified to comply with the directive.

4.16. Bad agricultural practices are still occurring because there is not yet sufficient implementation of the nitrates directive which intends to establish good agricultural practices where it is estimated as necessary by the Member State. The main reason for the delay in implementation is that many Member States have failed to respect their obligations with respect to this directive.

The main source of funding for environmental actions is provided by the Member States; it is a matter of subsidiarity. The nitrates directive is a mandatory regulation with binding objectives but which leaves to the Member States the choice of appropriate instruments; no funding is foreseen to achieve these community obligations, in compliance with the polluter pays principle. So one cannot speak about inconsistency. However, some EU instruments may finance actions contributing to the solution of pollution problems caused by nitrates from agricultural sources.

4.17. Within the objectives set for the Envireg programme, there was scope for projects that did not directly respond to anti-pollution requirements (e.g. land use studies or measures to protect flora and fauna). However, the majority of projects funded were sewage schemes, drainage schemes and waste water treatment plants, all clearly aiming at reducing pollution.

The innovative nature of some of the actions undertaken also led to difficulties in implementing the programme. After some initial problems, environmental issues dealt with under Envireg became more fully integrated into national development plans and could be 'mainstreamed` under Community support frameworks and single programming documents in the period 1994-99. Information from the Member States indicates that the projects funded through Envireg which do not meet the requirements of the directive are being upgraded so as to comply.

4.18. One of the objectives in the proposal for a framework directive on water (proposal presented by the Commission (COM(97) 49, 26 February 1997, amended by COM(97) 614, 26 November 1997) is to introduce a fee to recover all service costs, such as water supplies, collection and treatment of waste water while making rational and careful use of natural resources.

4.19. Much work still remains to be done, in particular, the development of a strategy for the planning and integrated management of water resources, taking into account both quantitative and qualitative factors. It is true that many Member States leave a lot to be desired with regard to the application of directives. However, they have established major investment programmes in order to meet the objectives of these directives and thus bring about a substantial improvement in the quality of water.

These measures are also amplified by wider application of the polluter pays principle as proposed by the Commission (Commission proposal COM(97) 49, 26 February 1997, amended by COM(97) 614, 26 November 1997).

Renewable energy sources

4.21. RTD projects are evaluated in the light of a certain number of criteria, in particular how they conform to programme perspectives and objectives. Programmes are also monitored and evaluated every five years as a matter of routine. Here, the Commission is helped by independent experts who bring their expertise and neutrality to the exercises. When the Commission proposes new framework programmes and specific programmes, it takes these evaluations into account.

4.22. The Commission recognises that there is scope for further coordination between the JOULE and Thermie elements of the programme. However, the Commission views the problem of integration as something that requires a novel problem solving approach. In its plans for the fifth framework programme, the Commission centres the research and development in the domain of non-nuclear energy along two key actions in which upstream and downstream developments are articulated towards the resolution of a combined set of problems. The harmonisation of the management procedures has been a permanent preoccupation of the Commission services during all the preparatory work on the fifth framework programme.

4.23. The Commission does not share the views of the Court as concerns the lack of innovation of some of the audited projects. It draws the attention of the Court to the fact that the innovative application of mature technologies, these days, is also considered as being an important technology innovation in itself. Moreover, the compliance of the selected actions with the aims and objectives of the programme - in which innovation is a prime criterion - have been checked by recognised independent experts in the field, technical Commission staff and representatives of the Member States.

4.24. In the case of each specific RTD programme, the legislative authority adopts a maximum percentage as a guide for administrative expenditure. The Commission carries out tight controls to ensure that the programmes are managed within these percentages. Studies by external experts have shown that management costs for Community RTD projects were lower than those for several projects carried out in the Member States.

The Commission is required to closely monitor the cost of all the programmes, including costs arising from the selection and evaluation of projects. The reduction of management costs to a specific amount per project, as the Court does, does not reflect the will of the legislative authority. The Commission is in no way bound to keep separate accounts per project. Moreover, separate accounts are not an efficient instrument for measuring the quality of programme management.

4.25. In order to apply a policy designed to ensure the smooth operation of the horizontal services of the Directorate-General, a number of regular staff paid from item B6-7151 (non-nuclear energy or JOULE/Thermie) in DG XII have been assigned to these services. Moreover, following redeployment and internal moves, regular staff working for other programmes are paid from JOULE and, to offset this, staff assigned to the JOULE programme are paid from other programmes. This situation will be remedied with a view to the launching of the fifth framework programme in 1999.

4.26. The Commission puts the emphasis on the scientific and financial management of RTD projects, including on-the-spot inspections. It will soon be introducing a new audit strategy based on risk analysis and it launched an invitation to tender for the selection of external auditors on 27 May 1998.

Extra staff to manage and supervise contracts awarded under JOULE have been recruited as quickly as possible in compliance with procedures; steps to select 11 cluster coordinators per contract procedure were taken as promptly as possible.

4.27 4.28. The points raised by the Court relating to personal expenses and overheads are being discussed by the various working parties preparing the fifth framework programme. On the basis of past experience of research contracts, these working parties aim to apply management and control procedures to the full under the next framework programme.

Regarding the actual contracts, the aim of work now proceeding within the Commission is to clarify contractual provisions while complying with the legislative texts which lay down the principles to be followed. For example, the proposals relating to the new rules governing participation and dissemination provide for the possibility of applying flat rates to overheads.

The Court's suggestion that external audit firms audit the costs presented by contractors is interesting. It will be studied, among other methods, by the ad hoc working party preparing the fifth framework programme.

The Commission is studying various ways of simplifying 'small contracts`:

- the use of flat-rate contracts for financial contributions of less than 100 000 ECU is an option to be looked into;

- the various working parties preparing the fifth framework programme are also examining the use of flat rates for overheads.

4.29. Coordination between Commission departments involved in the financing of RTD and demonstration projects already exists in the form of interdepartmental consultation. Coordination will be intensified under the fifth framework programme.

The Commission would also point to the new measures for monitoring and disseminating information provided for in the White Paper on renewable sources of energy.

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CHAPTER 5 (83*) External aid

5.0. CONTENTS Paragraph reference

Introduction 5.1 - 5.4

Trend regarding the utilisation of appropriations in 1997 5.5 - 5.11

Drawing-up of budgets 5.12 - 5.18

Implementation mechanisms 5.19 - 5.33

The management of external actions 5.19

Planning, programming, strategy 5.20 - 5.22

Implementation systems 5.23 - 5.27

Staff and resources 5.28 - 5.31

Monitoring and evaluation 5.32 - 5.33

Measures taken by the Commission to overcome the difficulties in using its external aid 5.34 - 5.44

Technical and administrative support for programmes (STAP) 5.35 - 5.41

Reorganisation of departments 5.42 - 5.44

INTRODUCTION

5.1. This chapter is devoted to the implementation of external aid within the meaning of headings 4 and 6 (84) of the 1993-99 financial perspective adopted by the European Council in Edinburgh in 1992 and made more specific in Cannes in 1995. For the financial year 1997, this aid was entered under Subsections B7 and B8 of the general budget (appropriations for commitments: 5 940,6 Mio ECU; appropriations for payments: 5 007,3 Mio ECU).

5.2. During the 1990s, taking together external assistance funded through the general budget and the European Development Funds (see the report on the European Development Funds), the European Community has become one of the world's largest aid donors. Its programmes have grown rapidly, at the same time as there has been a shift in the regional composition of the aid, reflecting political priorities. While the sub-Saharan African region still receives the largest proportion of Community aid, its share declined substantially from 70 % at the beginning of the 1970s to under 40 % in 1994/95 as the large programmes in favour of the central and east European countries, the new independent States and the Mediterranean and the Middle East have developed, reaching respectively 23 % and 9 % in 1994/95 (85).

5.3. The framework for development cooperation, at both policy and operational levels, has developed significantly in recent years. Articles 130u to y of the Treaty on European Union set out the legal basis and overall objectives for development cooperation as a part of the policy of the Union. The Development Council has, on the basis of proposals of the Commission, adopted a number of resolutions in order to strengthen different aspects of development policy and to increase its effectiveness. The Commission has proposed regulations to provide legal bases for different components of the policy. The Commission has also undertaken several initiatives to improve its management of its external aid funds. These include the introduction of improved project management procedures, the establishment of finance and resource management directorates and the development of guidelines on the evaluation of programmes and projects. In 1997 the Commission decided to create a joint service (the SCR) to simplify and rationalise the execution and management of its external programmes (see paragraphs 5.42 to 5.44).

5.4. In recent years the Court has published several special reports on a wide range of external actions. These reports have frequently identified similar management, resource and organisational problems. This chapter draws overall conclusions from these findings about the management of external action. It highlights many of the key issues which are the subject of on-going efforts by the Commission to reform its internal management and organisation.

TREND REGARDING THE UTILISATION OF APPROPRIATIONS IN 1997

5.5. The financial year 1997 was the first for which the Commission, as part of its initiative for sound and efficient management (SEM 2000), set budgetary priorities that reflected the EU's political priorities. Following the Cannes Summit in June 1995, the top priority of external aid was deemed to be the central and east European countries and the southern Mediterranean countries. The Commission assigned a relative priority to former Yugoslavia, Asia and Latin America, South Africa, the new independent States, emergency aid, fisheries agreements and the CFSP.

5.6. The rate of utilisation of commitment appropriations, generally regarded as the main indicator of how operations are being implemented, gives rise to confusion because the accounting commitments for the most part correspond to intended measures, but the specific form these measures are to take has often not yet been determined by the time it comes to agreeing the annual programmes or the financing agreements. The situation as regards commitments still outstanding and how it has developed over a period of time give a better indication of the level of progress in implementing the aid programmes. Tables 5.1-1 to 5.1-4 thus show an increase in the measures that have been under way since 1990 in the top priority areas.

5.7. In some cases, the burden of the past that is apparent from these tables is, however, overstated because of the delays in decommitting the sums remaining unused when programmes have come to an end.

5.8. The rate at which the appropriations for payments of the financial year are implemented is, for its part, quite a good indicator of the implementation of the aid during the financial year. This rate may, however, be pushed up by two practices, namely transfers of appropriations and payments of advances. Except in three cases (TACIS, former Yugoslavia and the CFSP), Tables 5.2 and 5.3 show satisfactory take-up of appropriations in the areas which have relative priority. In the case of South Africa, the high rate of utilisation in relation to the final appropriations is due to a transfer reducing the initial appropriations by 25 %. By contrast, the budget headings which correspond to a top priority are showing unsatisfactory rates of implementation, even though their appropriations have likewise decreased during the financial year. Despite payments of advances, implementation of headings B74 (MED) (86) and B7-50 (PHARE) is still limited. Moreover, in the case of PHARE, when advances of this kind are paid, this creates an intermediate cash fund between the Commission and the final aid recipients over which the public authorities can exercise control only from afar (about 370 Mio ECU for PHARE at 31 December 1997). These transfers and advances indicate that there are difficulties in implementing the programmes which the budgetary authority would do well to look into carefully.

5.9. In the case of PHARE, a special operation in 1997 had a marked effect on the programme's implementation. For example, in the wake of the floods that struck three countries in the early summer of 1997 (Poland, Romania and the Czech Republic), about 10 measures were amended to fund reconstruction work on small-scale infrastructure in the affected areas. The total amount needed (97,1 Mio ECU) was thus withdrawn from technical assistance operations (48 Mio ECU), from financial instruments (25 Mio ECU) (87) and from infrastructure projects (24,1 Mio ECU).

5.10. At the end of 1997, the volume of outstanding commitments for budget chapter B7-41 MEDA had risen by 162 % from 475,0 Mio ECU to 1 244,7 Mio ECU (88). Of payments totalling 211,6 Mio ECU disbursed from B7-41 in 1997 (67 % of payment appropriations), 155 Mio ECU concerned just four rapid disbursement projects: 130 Mio ECU was for tranches of structural adjustment support in Jordan, Morocco and Tunisia, and 25 Mio ECU was a special cash facility for the Palestinian National Authority. These payments were fully justified, but these figures show that payments concerning other, more classical projects were small, and less than initially foreseen.

5.11. Thus, the situation as regards the 1997 appropriations does not show any significant progress in relation to previous years. In the light of this finding, the Court has sought to understand the reasons for this situation by studying the extent to which the budget estimates are realistic and by examining the implementation mechanisms.

DRAWING-UP OF BUDGETS

5.12. The effects of the measures taken by the Commission in recent years to boost the rate of implementation of its measures are for the most part tempered by the concern to retain control of operations so as not to expose the Community's financial interests to unnecessary risks. In the light of this finding, the Court has sought to appraise the effectiveness of the procedures that the Commission departments follow to ensure that the preliminary draft budget they present to the budgetary authority is sufficiently rooted in reality to have a good chance of being implemented. With this in mind, the Court examined the 'fiches financières` (financial record sheets) of the preliminary draft budget for the aid earmarked for the east European countries and for MEDA and, for the east European countries, it made an analysis of the various stages of the drawing-up of the 1997 preliminary draft budget.

5.13. However, as the Commission chose to interpret the Court's investigative powers in a particularly narrow sense, the latter was thus unable to obtain all the information and explanations that it considered necessary for reaching definitive conclusions. For example, for PHARE and TACIS, the Court was not able to obtain precise information on the reasons underlying the choices and the volume of the appropriations requested. Nevertheless, the Court was able to make the following findings from the study carried out under these circumstances.

5.14. The requests in the 'fiches financières` focus on commitment appropriations and are based essentially on the forecasts in the financial perspectives, and the conclusions of the European Council.

5.15. The payment appropriations, as mentioned in paragraph 5.8, provide a reasonably good indication of the actual implementation of programmes and projects. However, the 'fiches financières` contain no analyses of estimated requirements, by country and/or sector. Moreover, they are not backed up, in particular in the case of PHARE and TACIS, by working documents which take into account such factors as historic disbursement rates, the real status of project and programme implementation, the absorption capacity of the countries concerned, and the state of advancement of projects in the pipeline. It is not possible, therefore, to determine whether the requests for payment appropriations are realistic.

5.16. The MEDA, PHARE and TACIS programmes are each presented in the budget under a single heading, so that it is not possible to assess in detail the requests for appropriations in the preliminary draft budget. Given that such global amounts are entered in the budget, it is essential that the preliminary draft budget provides much more clearly than at present analyses of the amounts requested by country, programme, and sector of intervention. This should be done in such a way that these analyses can be used later when assessing implementation. Furthermore, no attempt is made to explain how the results of the evaluations and the requests for appropriations are related, even though guidelines to this effect are laid down in the initiative for sound and efficient management (SEM 2000).

5.17. During implementation, the reports on the utilisation of appropriations consist simply of a comparison of the figures in the overall estimates with what has been carried out; they do not, however, go on to make a specific analysis by country, intervention sector or financial instrument because the estimates have not been put together in such a way that they can be used at this level. This being so, the reports are of limited use and can serve only as a basis for redirecting budgetary choices for subsequent years.

5.18. To conclude, it would appear that the under-utilisation of payment appropriations can to a large extent be ascribed to the fact that the requests which the Commission makes in its preliminary draft budgets need to take better account of the actual possibilities for implementation.

IMPLEMENTATION MECHANISMS

The management of external actions

5.19. In many areas of the world the Community plays a leading role in the provision of external assistance, often in difficult circumstances and in environments which present particular problems of management and control. It is thus all the more important that the management by the Commission of its aid be of the highest possible quality. However, in recent years, many reports of the Court have contained similar observations on the management of the full range of Union external actions funded from the budget. Paragraphs 5.20 to 5.33 are a summary of these recurring observations for which references to reports published by the Court are given in the annex (89).

Planning, programming, strategy

5.20. The Commission is increasingly committed to ambitious external actions, involving substantial budgetary funding, without sufficient regard to its administrative, financial and logistical capacity to manage them. The combination of pressure to implement the programmes and inadequate capacity means that operations are frequently launched without sufficient assessment of the true needs of the beneficiary or a clear specification of aims and objectives. Consequently, it becomes difficult to assess to what extent the operations are successful.

5.21. Greater account needs to be taken of the wider context, generally beyond the Commission's control, in which a programme and/or project will be implemented. The factors concerned typically include the degree of local political support available for the measures financed, whether the prevailing legal framework is appropriate and certain, the administrative capacity of local authorities and the effectiveness of law enforcement. Unrealistic programming, low absorption rates and unsustainable results are often the outcome, as illustrated in the Court's reports mentioned in the annex.

5.22. The number of individual projects for which overall management responsibility is kept at the level of the Commission's central services has grown to unmanageable proportions. As the volume of funds under management has grown, and as the Commission has been called upon to intervene in more and more sectors with an increasing number of partners, it has become more difficult, with unchanged management practices, for the Commission to cope. As a result, there are a large number of small projects implemented by many different organisations, about which the Commission often knows very little. Insufficient attention has been paid to assessing whether these represent the most efficient and cost-effective means to achieve programme objectives.

Implementation systems

5.23. Programme management is largely centralised. The Commission has not transferred significant financial or management responsibility to its delegations. In seeking to maintain maximum control over financial operations, the Commission has developed decision-making processes which are slow and formalistic, with routine operational decisions frequently being referred too high up the Commission hierarchy. This causes delays in implementation which adversely affect pro-ject performance, without producing tangible benefits in terms of control. It also damages the reputation of the Commission in the eyes of its partners and beneficiaries.

5.24. Tender procedures have been found on many occasions to be slow and in some cases lacking documentary justification.

5.25. The performance of contractors, carrying out either management or operational contracts, is not always of adequate quality. Few records of past performance are maintained which could prove valuable in the selection of contractors for subsequent operations.

5.26. In the wake of the radical political, social and economic change which has occurred in many beneficiary countries, public administrations often have neither the necessary experience nor the resources to handle external funding and projects to the standards required. With the greater emphasis being placed by the international donor community on developing 'ownership` of projects and programmes by their beneficiaries, the Commission should focus more on institution-building measures so that decentralised implementation to beneficiary countries becomes feasible.

5.27. Coordination between the Commission, other international donors - including the Member States - and financial institutions, NGOs and local agencies often presents huge difficulties. The Commission has frequently been placed under an obligation, by the Council or by the donor community at large, to ensure such cooperation. It has made substantial efforts to meet this obligation, both at the policy and operational levels. Nonetheless, its success in this field has often been compromised by circumstances beyond its immediate control, including the failure of other parties to meet their reciprocal responsibilities. The results include inconsistent policies, overlapping activities and a failure to maximise impact through exploiting synergies.

Staff and resources

5.28. The Commission has not allocated sufficient human resources adequately to manage its programmes, in particular in the light of the management approach applied (see paragraph 5.22 above). The division of responsibility for external actions between four external relations directorates-general and ECHO means that the limited resources are used inefficiently, with functions duplicated and the necessity for many inter-service groups.

5.29. Frequent changes within the organigramme of the relevant Commission services, especially at a senior level, have undermined the coherence of management strategy and the application of personal accountability for decisions taken. The need to strengthen management functions in some of the external relations directorates-general has been recognised by the Commission and measures are being taken under the SEM 2000 initiative. Strengthening the management 'culture` takes time, and it is essential that efficient and effective management of the programmes is seen as a key priority from the most senior echelons of management downwards.

5.30. In general, for the purpose of effective supervision of project management, the Commission has not deployed sufficient staff in the field in beneficiary countries, whether it has a delegation or not. Particularly in the PHARE programme, it cannot persuade sufficient (suitable) staff to take postings outside the EU and has not developed the tools necessary for obliging them to do so. Greater use could be made of local staff. The Court has emphasised on several occasions the key role that staff can play on the spot in ensuring effective project implementation.

5.31. The Commission has increasingly contracted management and administrative functions to outside personnel and firms (BATs - 'Bureaux d'assistance technique`). This has not been done within a clearly thought out and coherent framework and, in general, the Commission has allowed management structures to evolve on an ad hoc basis. In doing so, there has not been a consistent approach to the division of tasks and responsibilities between permanent officials, local agents and outside contractors. In such arrangements, confusion has occurred, communication has frequently been poor and, in the case of the MED programmes, confusions of interest have arisen.

Monitoring and evaluation

5.32. The Commission's monitoring of the financial and material progress of projects is in many cases weak, largely because of excessive project numbers combined with complex reporting requirements, poor communication with implementing partners, poor accounting mechanisms and the low priority accorded to this activity. Too much of the Commission's limited resources for monitoring is taken up with purely administrative rather than technical tasks.

5.33. The Commission has not generally placed sufficient emphasis on evaluating the impact of the measures financed - a situation exacerbated by the multiplication of separate evaluation services in the different external relations directorates-general. Its ability to do so is in many cases limited by the lack of firm criteria and precise indicators by which impact can be measured in programme and project documentation. Still less is the Commission able to point to the global impact of the programmes it finances. If opinion-formers and the general public do not know whether external programmes are having a positive impact, it is difficult to maintain public support for them. Also, the effective formulation of future strategies is undermined if insufficient evaluation results are available.

MEASURES TAKEN BY THE COMMISSION TO OVERCOME THE DIFFICULTIES IN USING ITS EXTERNAL AID

5.34. In 1997, the Commission took two initiatives to tackle the difficulties it was experiencing in mobilising aid, one to boost its administrative resources by using operating appropriations (technical and administrative support for programmes) and the other to increase the efficiency of its departments by setting up a joint programme management department.

Technical and administrative support for programmes (STAP)

5.35. In 1996, the budgetary authority set up a new mechanism for the PHARE, TACIS and MEDA programmes which enabled the Commission to deploy a set proportion of the operating appropriations for financing activities in support of the programmes and for coping with the shortfall in usable resources from the administrative appropriations part of the general budget (90). In 1997, this system was actually introduced for the PHARE and TACIS programmes. As for the MEDA programme, it took a year to set up the STAP and to arrange the invitations for tender and so the 'MEDA-teams` (91) were not formed until 1998. In the 1998 budget, this system was extended to the programme in support of the reconstruction of former Yugoslavia (B7-541).

5.36. In its annual report concerning the financial year 1996 (92), the Court pointed out that, with regard to expenditure in support of the Commission departments' administration, the sums committed were supposed to be used during the year. For the financial year 1997, it examined the extent to which the new mechanism helped to satisfy the concerns of the budgetary authority, namely to set a limit on the amounts devoted to managing the programmes and to improve transparency by separating operating expenditure from administrative expenditure.

5.37. As regards the PHARE and TACIS programmes, the aim of restricting the amount of support expenditure to a limited proportion of the operating expenditure during the financial year has not been achieved. Indeed, in the absence of an unambiguous definition of the nature of the costs to be borne by the STAP, the amounts devoted to support expenditure for the financial years 1996 and 1997 would be more than twice as high (93) as the ceilings that have been set (173,95 Mio ECU has been noted where the maximum amount allowed is 66,96 Mio ECU).

5.38. The second objective, that of introducing greater transparency into the management of this expenditure, has not been attained either. Indeed, because of the poor definition of the support expenditure, following the introduction of the STAP mechanism the running costs of many programmes continued to be directly charged to the latter, but this could not easily be identified in the accounts. In the reports presented to the budgetary authority in March 1998, however, the Commission gave the impression that the system was operating in a transparent manner. The case of the trans-European networks programme, where 9,5 Mio ECU was largely earmarked by the financing memorandum for the management of the programme but not charged to the STAP, is a telling example of this.

5.39. In this context, greater clarity would be achieved if, instead of setting a limit in the notes to the budget, each of the headings concerned were split into a strictly operational component and a support component. The latter would cover all the expenditure devoted to identifying, designing, preparing, flanking, monitoring and auditing the programmes. In a system such as this, which would enable the Financial Controller to have the intentions of the budgetary authority respected to a greater extent, it is probable that the rates provided for in the budget comments would have to be revised upwards.

5.40. For PHARE, the Commission has adopted a mechanism whereby the STAP commitments of one financial year have to cover the whole implementation (i.e. several years) of the programmes that are financed using the appropriations of that financial year. Not only is this system unworkable but it also gives rise to delays owing to the administrative confusion that it creates. It thus quickly became apparent that the commitments were in fact very often used for all the operations concerning similar aid measures being carried out at a given time, without it being possible to distinguish between the years of origin of the programmes. This confusion enabled the Commission to commit 31,5 Mio ECU in addition to what was authorised in 1996 and 1997, for programmes prior to the introduction of the STAP. This being so, the system adopted for PHARE should be abandoned in favour of that adopted for TACIS and MEDA; the latter system is simple, thus reducing the risk of confusion, and enables more explicit monitoring, even though it does not make it possible to link the support appropriations exclusively to those operations carried out using the appropriations of the financial year. However, since the programmes are implemented on a multi-annual basis, there is in practice no risk that, in the end, insufficient appropri-ations will be available to ensure the implementation of operations committed in respect of previous years.

5.41. For 1997, the Commission sent the European Parliament a partial report without first verifying the quality of the information it contained. A report such as this does not enable the budgetary authority to exercise rigorous control over the STAP.

Reorganisation of the departments

5.42. On 15 October 1997, the Commission decided to establish a joint service to manage Community aid to non-member countries. This decision provides for a first stage of reorganisation of the Commission's structure for dealing with external actions, and forms part of the general reform of the Commission's services for this area announced for the year 2000 in the conclusions of the Amsterdam Summit of the European Council.

5.43. The decision transfers to the joint service financial, legal, administrative and certain technical tasks related to the management of projects. The four external relations DGs and ECHO (European Community Humanitarian Office) retain responsibility for the definition of policy, programming and planning. The Commission expects that a single common service will be better able to overcome some of the main weaknesses in the Commission in the area of programme management, such as insufficient staff, unnecessary duplication of services and functions, complex, unclear and time-consuming procedures, unclear division of responsibilities, a lack of common procedures and approaches, and problems of coordination.

5.44. The project cycle management approach used by the Commission requires that projects are managed in a coherent manner throughout the whole period of their implementation (identification, appraisal, monitoring, evaluation). Switching responsibility for the tasks involved at different stages of the project between the DGs and the joint service, as provided for in the Commission decision, means that no one service will have responsibility for a given project throughout its life. The Commission will need to ensure that this separation of responsibilities and functions, which is intended to improve implementation performance, does not aggravate problems that already exist as a result of the division of responsibilities between the technical and geographical units within some DGs.

REPLIES OF THE COMMISSION

GENERAL COMMENTS

The Court's comments in this chapter on the implementation of external aid are based on ten special reports in 1997 and 1996.

Although they may be pertinent in some cases they cannot be applied to all programmes.

The Court acknowledges the Commission's initiatives to improve management both in terms of rules and organisation. However the Commission regrets that it did not make any mention of the positive results which have been achieved in often very difficult circumstances.

The continuing failures are due to a number of lengthy but necessary procedures (e.g. for contracts) or rules where the Commission is not involved in every stage of the process. There are also external constraints which may sometimes be a severe impediment to project implementation.

The rate of implementation of projects funded by external aid appropriations should therefore be examined in the light of their stage in the programme cycle.

In collaboration with other Community institutions, the Commission will continue to adapt its internal structures, procedures and resources to respond to the challenges involved in the management of external aid. It has kept pace with and contributed positively to the rapid developments in the PHARE, TACIS, MEDA and ACP countries.

TREND REGARDING THE UTILISATION OF APPROPRIATIONS IN 1997

5.6. Financial absorption of the available commitment appropriations is supplemented and complemented by other measures, both qualitative and quantitative, that together serve to indicate the degree of implementation and attainment of programmes. Quantitative information includes the level of funds contracted and paid as well as output indicators at programme, project and contract level. The financial data on contracting have been given to the Court and the budgetary authority on the Commission's own initiative. Progress on implementation is also gauged through established monitoring and assessment programmes. This data is now being supplemented by qualitative feedback obtained through the systematic evaluation of programmes, a task which is the responsibility of a dedicated evaluation unit. Moreover, greater synergy is expected once these functions of each of the Relex departments are taken over by the joint Relex service (SCR).

Commitments requiring payment (outstanding commitments or reste à liquider (RAL)) are expected to increase annually, especially in the early stages of a programme where five years is the average life of a project. In these circumstances, the accumulated outstanding commitments are expected to reach their peak in the third and fourth years of the programme. This has in fact been the case for PHARE, TACIS and MEDA. For the former two programmes the growth in RALs has slowed down substantially as the programmes have matured. The Court's Table 5.1-3 covering items B7-4 relates to three distinct programmes:

(a) Mediterranean protocols - final and closing stages

(b) Middle East peace process - mature and static stage

(c) MEDA - early and growth stage.

The largest component of the above is the MEDA programme which was expected to grow rapidly in the first three years with a resulting increase in RALs.

The Commission has expended considerable effort on terminating projects, thereby reducing the growth in RALs by making payments or decommiting appropriations. This effort has continued into 1998.

5.7. The Commission shares the Court's concern about the time taken to terminate projects and release non-used funds.

On South Africa, it did so by making use of external aid which it closely monitored. The combined efforts of Commission departments (headquarters and delegation) underpinned by well-known international auditors made it possible to terminate some 600 projects (i.e. all projects for the first phase (1986-1991) of the special programme) between July 1997 and July 1998.

The Commission intends to terminate all dormant projects in the second phase of the programme (i.e. 100 additional projects) by the end of 1998.

In 1997 the Commission launched a record number of measures to close old commitments. To date, 106 centralised programmes have been closed and decommitments totalling 58 Mio ECU have been made in respect of the PHARE and TACIS programmes.

5.8. The real impact of external aid is not purely the cash disbursements made. Commitments entered into are also an important indicator, the legal undertakings which follow are often used as leverage to obtain other co-financing for the projects supported by Community external aid. Often EC grant aid triggers a total package (including loans) 5 to 10 times more than the initial EC grant.

The transfer of payment appropriations is decided by the budgetary authority in the light of information supplied by the Commission and ensuing discussions. In the case of Mediterranean policy, the reduced need for payment appropriations stemmed from the delay in the approval of the request for a transfer of commitment appropriations. This delay caused the Commission to transfer the payment appropriations to where they could best be used.

The Commission's strengthening of financial management of payment appropriations for PHARE, TACIS and former Yugoslavia was one reason for the non-utilisation of certain payment appropriations during 1997:

(a) Refocusing of the PHARE programme led to a proposal to transfer 150 Mio ECU of commitment appropriations from 1997 to 1998 thereby reducing the need for the related payment appropriations.

(b) Political instability and difficult conditions on the ground in certain beneficiary countries have slowed down the implementation of certain programmes and the consequent disbursement of funds.

(c) Efforts to reduce the level of advance funds held in beneficiary countries' accounts to the minimum commensurate with operational efficiency resulted in lower advance payments.

Under PHARE requests for funds to be transferred from the programme management units (PMUs) have been more critically scrutinised by the Commission. As a result the funds held by PMUs at the end of 1997 fell to 370 Mio ECU. This amount compares favourably with the balance of 497 Mio ECU identified by the Court as being held by PMUs at the end of 1995 (Dis-PHARE 'Decentralised implementation system`, Special report, paragraph 5.2). The funds held at the end of 1997 were required for the payments which were expected to be disbursed during the first few months of 1998.

The payments made were under legally binding agreements backed up by a programme on the use of the funds. Public control over the funds is safeguarded by legal and contractual instruments. If the funds are not used as agreed, they will be recovered according to the provisions laid down by these instruments.

5.9. The use of the funds referred to for reconstruction after flooding was intended primarily to provide emergency aid in areas where it was needed at the time.

5.10. The increase in open commitments is normal, was expected, and is a consequence of the decisions taken by the budgetary authority. In addition to the larger disbursements referred to by the Court, the Commission made a multitude of small payments for microprojects. The payments for 'classic` projects were made as and when the negotiations on the framework and individual financing agreements were completed.

5.11. The Court's view that no significant progress has been made over previous years is a result on focusing on the two central indicators of budgetary accounting: commitment and payment appropriations. There are, as, for instance, annual reports show, other quantitative and qualitative indicators which give a fuller picture of the complex reality of programme implementation. The Commission considers that there have been significant improvements.

A number of examples from the PHARE and TACIS programmes will give a brief idea of the progress made:

- the amounts contracted in 1997 exceeded those in 1996 by 52 % in the case of TACIS and by 22 % in the case of PHARE;

- payments under the TACIS programme for the period 1996-97 exceeded those for 1994-95 by 16 % and in the case of PHARE by 11 %.

The 11 % average growth rate in global PHARE payments masks a 14 % reduction in advances to PMUs (the result of the more stringent approach adopted in the light of the Court's previous comments) and a 43 % increase in payments to contractors, which is a much more appropriate indicator of the real progress made in measures taken.

DRAWING-UP OF BUDGETS

5.12 - 5.18. A significant improvement in the implementation of external aid cannot be achieved simply by presenting realistic preliminary draft budgets. Account must be taken of political, regulatory and institutional constraints which are a key factor in the budgetary authority's decisions. The Commission has to take account of this.

The linkage between requests for funds and evaluations of past projects is part of the bargaining process which leads to the preliminary draft budget.

5.15. Budgetary information is contained in a number of documents:

- Volume 0 (general introduction);

- Volume 4 where information is given by title, chapter, article and heading (figures, remarks and schedule);

- working documents where information is analysed in much more detail by budget heading.

All these documents are sent to both the budgetary authority and the Court of Auditors.

Furthermore, the Court should be aware that the starting point is the general budget adopted by the budgetary authority. The payment appropriations projections are based on estimates and the bargaining process and are modified, sometimes substantially, by the budgetary authority.

5.16 - 5.17. The Commission's budget proposals reflect decisions taken at the highest level, for example at the European Council in Cannes. Since the budgetary procedure, and the programming that follows, take place on an annual basis, whereas the overall amounts within the financial perspectives are fixed for a five-year period, the budgetary procedure must of necessity be a top-down approach.

The requirement to establish the preliminary draft budget a full year before the financial year in question begins limits the extent to which up-to-date information on budget implementation can feed into this process. For this reason the figures proposed for the preliminary draft budget are based mainly on the 1995-99 Cannes allocation for PHARE, and for TACIS and MEDA on the 1996-99 indicative allocations contained in the respective regulations.

It would be inappropriate to differentiate within the budget at thematic or sectoral level as it would be impossible to provide a sufficient level of detail so early in the programming process. Publication of programming at sector or programme level throughout the budget process would also render implementation too rigid.

In any case, attempts to try to define financial allocations at the level of countries and sectors would severely weaken the Commission's position in negotiations with partner states on future allocations, and render it considerably more difficult to adapt allocations in the light of developments in the partner states during the period leading up to the financial year in question. This would reduce any competition in resource allocation.

5.18. The use of payment appropriations reflects:

(a) the availability of appropriations determined by, inter alia, projected requirements, previous utilisation rates and the decision of the budgetary authority;

(b) progress in negotiations on financing agreements and the practical aspects of project implementation;

(c) the exercise of financial prudence.

Efforts are being made to construct a budget on the basis of unit costs, performance indicators and anticipated results and to introduce a budget evaluation mechanism.

IMPLEMENTATION MECHANISMS

Planning, programming, strategy

5.20. The Court is correct in stating that the increased demands and expectations for external assistance are not matched by adequate resources. However, the Commission does not share the Court's criticism regarding inadequate assessment of beneficiary needs. The Commission does not contest that, if the resource constraint imposed by the budgetary authority were to be relaxed, or if objectives were to be quantified at a greater level of detail, effectiveness would be improved.

The budgetary authority has seen fit to expand the external relations budget considerably in recent years but has been reluctant to agree to the increases in administrative appropriations necessary to manage the programmes. The Commission has therefore experienced difficulties in finding suitably qualified internal personnel. Reliance on short-term external contract staff can lead to frequent staff changes and disrupt the continuity of programming preparation and procedures.

Under PHARE, with the introduction this year of the accession partnerships as an overall framework for programming, activities are tailored to their short and medium-term priorities. The accession partnerships are themselves based on the opinions prepared by the Commission in July 1997, which were the result of a detailed analysis of the candidate countries carried out by the Commission. The accession partnerships are therefore the clearest reflection of the needs of the partner states and PHARE's aims and objectives.

5.21. The purpose of external programmes is to underpin development, transformation and transition to a market economy. In most cases there is not yet an appropriate legal framework, administrations' capacity is limited and laws and regulations are often ineffectively applied. Clearly realistic programming must attempt to limit risks but cannot exclude them entirely or no help would be provided in the relevant areas, i.e. where conditions are worst and aid is needed most.

If the programme environment changes programming strategy follows suit. New guidelines were drawn up for PHARE in 1997 to take account of the factors highlighted by the Court. The recent approval of the accession partnerships, the introduction of conditionality, the criteria of project size and maturity and the focus on institution building will also contribute to a solution.

5.22. The Commission is aware of the trend towards increasing resources and a greater number of projects and has adopted a range of measures to address this issue:

(a) thirteen framework contracts have been concluded under the PHARE programme to simplify tendering and contracting procedures;

(b) the minimum threshold value of certain types of projects has been increased to reduce the numbers of small projects;

(c) the process of deconcentration and decentralisation towards the Commission's delegations and authorities in beneficiary countries will reduce the managerial burden on Commission headquarters and render implementation more effective;

(d) he SCR is designed to achieve standardised tendering and contracting procedures and, through economies of scale, to facilitate smoother implementation of programmes.

Implementation systems

5.23. The decisional aspects of programme management are centralised. The Commission seeks to ensure that responsibility for and authority to manage projects are maintained at the appropriate level. The equilibrium between delegations and Commission headquarters is in a constant state of flux depending on the existence and the size of the delegation and on the amount of monies involved. This balance is under constant review to minimise the disruption to programmes, but keeping firmly within the confines of the financial regulation.

The administrative capacity to manage the PHARE programmes will improve through the on-going decentralisation (mobilisation of the beneficiary countries for the direct implementation of programmes) and deconcentration (reinforcement of the delegations in the beneficiary countries to increase on-the-spot coordination and monitoring).

The Commission is to transfer 20 posts from its headquarters to delegations to help strengthen financial management and controls. Short term technical assistance will also be provided under the STAP facility authorised by the budgetary authority to enable delegations to recruit independent experts to deal with tender evaluations, the preparation of terms of reference, monitoring and assessment.

5.24. In January 1997, the Commission adopted a package of measures to harmonise contracting procedures for PHARE and TACIS and to increase transparency. The consolidation of tendering and contracting operations of all Relex departments in one Directorate within the SCR will help extend and consolidate these measures.

5.25. The Court's observations are pertinent and the Commission will review records on past performance procedures and improve the methods by which they are fed back into the planning and selection procedures.

The creation of a unit to monitor various aspects of contracts within DG XIX will go some way to meeting the Court's comments. At the moment there is only a database (early warning system) for contractors suspected of fraud or irregularities. It is also difficult to establish a base based on quality which the Court appears to suggest is a highly subjective criterion or subject to external constraints. A study is, however, being undertaken.

5.26. Under the process of refocusing the PHARE programme, institution building has been made one of the two priority areas, aimed at helping the candidate countries to develop the structures, human resources and management skills needed to put in place economic, social and regulatory systems so they can assume responsibility for projects and programmes and decentralised implementation.

5.27. The Commission places considerable emphasis on coordination with all development partners and particularly with the Member States, international financial institutions and NGOs. Cooperation and collaboration is kept under constant review and all practical measures taken to make improvements.

Staff and resources

5.28 - 5.29. The Court shares the concern already expressed by the Commission about the lack of human resources to cope with the increasing volume of aid and complexity of the instruments to be used.

If this constraint is not overcome the Commission's efforts to correct the weaknesses pointed out by their Court will prove fruitless. But the Commission cannot act alone on a constraint which, to some extent, depends on external factors over which it does not necessarily have any control (for example, budgetary constraints).

Nevertheless, the Commission has taken a proactive approach and made some changes. It has taken the following rationalisation measures to overcome the squeeze on human resources:

- it has regrouped and redesigned its delegation network (certain delegations have been regionalised and posts redeployed);

- it has carried out an analysis of its external departments structures, procedures and staffing;

- it has restructured departments responsible for managing Community aid to non-member countries.

Consequently, the Commission has set up a joint Relex service (SCR) to manage Community aid to non-member countries. It became fully operational in September and will assume responsibility for project implementation, budgetary and financial matters, tendering and contracting procedures, resources and relations with other institutions. Policy and project identification responsibilities will be retained by the Relex DGs.

5.30. Because the geographical areas it covers are very different, the Commission has to develop its external representation network on the principle of redeployment and regionalisation.

This has meant that 59 posts have been transferred from headquarters to the delegations, but this will not be enough to ensure sufficient human resources are provided to meet growing needs.

The Commission is now organising a recruitment competition for external relations and management of aid to non-Community countries (COM/A/10/98). It is also holding training courses for its staff on particular aspects and operational matters.

ECHO uses experienced experts which it sends out in the field to carry out in situ monitoring of operations. They have proved extremely satisfactory and crucial to the building of the Commission's capacity for in situ analysis and monitoring of humanitarian crises called for under the budget remarks and Regulation (EC) No 1257/96.

Although these additional measures cannot make up the shortfall in human resources in the delegations, they can improve the performance of all delegation staff.

The Commission is not aware of a particular problem in relation to PHARE postings. For each staff vacancy there have always been sufficient applications from (suitable) staff.

Monitoring and evaluation

5.32. The financial and material progress of projects varies from one programme to another, according to each programme's specificities. The reporting systems are highly complex and multifaceted and are necessary to ensure that Community funds are secure and are used for the purpose for which they are intended. Nevertheless, accounting systems are examined regularly and will be examined as part of the review of the financial regulation. Communication with implementing partners could be improved by enhancing the existing regular coordination and information meetings.

The Court is correct in suggesting that the excessive number of projects and its counterpart, the constraint in the staff numbers available for management, could be balanced better. The Commission has recognised this and, in addition to creating the SCR, has launched a drive to recruit further staff for the financial and technical management of external aid projects.

5.33. In the second phase of SEM 2000 the Commission opted for a decentralised approach giving operational directorates-general responsibility for organising evaluation exercises by geographical area and taking account of the particular nature of programmes and aid instruments.

Within DG IA monitoring systems have been reinforced and an independent evaluation unit was set up at the end of 1996. A continuous flow of monitoring and assessment reports (more than 150 in the case of PHARE) provides management with relevant information for corrective action. Interim evaluation reports requested by the European Parliament from PHARE and TACIS were presented on 1 July 1997. More than 25 sectoral and country evaluation studies have been launched and these reports are now becoming available and will be communicated to the Council, the Parliament and the Court. Once completed - scheduled for mid-1999 the Commission will be in a position to demonstrate the overall impact of these programmes.

Considerable efforts are been expended in setting up verifiable evaluation criteria, especially for the technical assistance and institutional reform programmes that are so characteristic of PHARE and TACIS. No widely agreed methods are yet available but the Commission is currently involved in studies to refine its techniques for the evaluation of such technical assistance programmes.

One of ECHO's objectives is to refine its impact analyses of humanitarian aid. It will improve the content of application forms and descriptive reports (introduced under the new partnership framework contract) - despite the constraints which exist - to ensure that the impact of humanitarian aid operations are more critically evaluated.

MEASURES TAKEN BY THE COMMISSION TO OVERCOME THE DIFFICULTIES IN USING ITS EXTERNAL AID

Technical and administrative support for programmes (STAP)

5.37. The Commission does not agree with the Court's wider interpretation of the budgetary comments on this subject. The administrative expenditure of other institutions or contractors is not covered by the budgetary remarks. Operating and management costs which are borne by the programme on behalf of a partner state are considered to be eligible expenditure and an integral part of the programme. The Commission therefore does not agree that the STAP ceilings have been exceeded.

5.38. In the interests of transparency STAP appropriations are covered by a special financing decision detailing how they are to be used.

Details of other management support expenditure are usually given in the respective financing agreements. New instructions have also been issued to managers of decentralised PHARE programmes on how to enter such expenditure in the accounts.

The sum of ECU 9.5 Mio quoted by the Court under the trans-European network project is intended to support substantive and operational expenditure. An initial contract financing consulting engineers to supervise works is a clear example of programme expenditure which should under no circumstances be included under the STAP allocation.

5.39. A separate budget line for administrative (i.e. STAP) expenditure would add to administrative complexity, since more budget lines involve more administrative work. It would also risk breaking the link between the expenditure at issue and the purpose for which it is being spent.

The Court's implicit suggestion that resources available for STAP be subdivided into various categories of expenditure would add to the complexity of the procedure which the Court alleges the Commission follows (point. 5.34).

5.40. The system used by PHARE is to align STAP financing on the programmes financed from the same financial year. Thus, for example, support from the 1997 STAP is used to finance 1997 programmes throughout their life. This ensures that whatever decisions are taken by the budgetary authority in future, management of existing programmes will be assured. This approach also protects the budgetary authority's prerogative to establish each year's budget. The Court's view that these are, in practice, assured, ignores this fact.

Operation of the TACIS STAP is to be brought into line with that for PHARE. The procedure previously used by TACIS, and advocated by the Court, cannot be implemented because it is difficult to determine exactly when the following annual STAP funds will be available. Preparation of each new STAP fund cannot start before January of the financial year in question because it depends on approval of the annual budget. The time required for the internal consultations and procedures for its approval and availability is impossible to determine exactly but can be up to several months. Therefore, it is essential that the previous STAP fund still be available.

Reorganisation of the departments

5.42 - 5.44. The restructuring exercise which is now being implemented reflects the Commission's determination to harmonise and rationalise the operational side of the Relex directorates-general and make economies of scale in accordance with the guidelines laid down in SEM 2000 and MAP 2000.

The Commission is using this exercise to continue and intensify its efforts:

- to improve the way in which all its external departments work;

- to gradually rationalise and harmonise management of external aid taking into account the specific features of particular agreements such as the Lomé Convention;

- to tighten up internal and external coordination;

- to clarify the responsibilities of directorates and departments but also develop coordination and synergy between them.

This will satisfy the concerns expressed by the Court, Council and Parliament.

The Commission has taken into account the different phases involved in a project cycle. Definition of policy guidelines and strategy and prior financial appraisal of programmes and development projects will be undertaken by the Relex DGs, whereas the joint Relex service will be responsible for implementation and financial, accounting, administrative, legal and technical monitoring.

This division of responsibilities and duties is an improvement rather than a danger, as the Court would appear to suggest. The Commission is aware that if the system is to work and cooperation with non-Community countries is to be improved there must be ongoing coordination between departments, even if the main responsibility lies with one or other department at different stages of the project cycle. During what is inevitably a transition period the Commission will ensure that there is minimum disruption and maximum continuity in the implementation of ongoing programmes.

Table 5.1-1 - Commitments outstanding under the PHARE programme (B7-500 and B7-502)

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Situation as at 31 December of the financial year

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Table 5.1-2 - Commitments outstanding under the TACIS programme (B7-520 and B7-521)

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Situation as at 31 December of the financial year

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Table 5.1-3 - Commitments outstanding under the Mediterranean protocols, MEDA and the Middle East (B7-4)

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Situation as at 31 December of the financial year

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Table 5.1-4 - Commitments outstanding under cooperation with Asian and Latin American countries (B7-30 and B7-31)

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Situation as at 31 December of the financial year

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CHAPTER 6 (94*) Administrative expenditure

6.0. CONTENTS Paragraph reference

Audit of the institutions' administrative expenditure 6.1 - 6.5

Commission 6.1 - 6.4

Parliament 6.5

Audit of the decentralised agencies 6.6 - 6.7

Audit of the European Schools 6.8

AUDIT OF THE INSTITUTIONS' ADMINISTRATIVE EXPENDITURE

Commission

6.1. The bulk of the Court's audit of the institutions' expenditure was carried out within the framework of the DAS.

6.2. Particular emphasis was placed upon the Commission's acquisitions of goods and services. The way in which the latter has managed this activity calls only for very specific comments, which have been notified to the departments concerned so that they can make the desired improvements.

6.3. In 1997 the Court carried out audits of several Commission Delegations in the non-Member States. The specific observations it made were drawn to the attention of the departments concerned. These audits also prompted the Court to carry out examinations in greater depth in 1998 on the remunerations of the Delegations' local staff.

6.4. In addition the Court carried out an audit of the Commission Members' expenditure on mission and travel expenses and the expenditure related to these missions. This audit does not call for any comment of any importance.

Parliament

6.5. A detailed study of the system of expenses and allowances for the Members of the European Parliament is the subject of a separate Court special report (95).

AUDIT OF THE DECENTRALISED AGENCIES

6.6. Audits which have given rise to special annual reports (96), containing some comments and published in a separate edition of the Official Journal from the one in which the annual report is published, were carried out on the accounts and operations of the following decentralised agencies:

- the European Centre for the Development of Vocational Training (Cedefop in Salonica),

- the European Foundation for the Improvement of Living and Working Conditions (the Dublin Foundation),

- the European Environment Agency (EEA in Copenhagen,

- the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA in Lisbon),

- the European Agency for Health and Safety at Work (EAHS in Bilbao),

- the European Agency for the Evaluation of Medicinal Products (EMEA in London),

- the Office for Harmonisation in the Internal Market (OHIM in Alicante),

- the Community Plant Variety Office (CPVO in Angers),

- the Translation Centre for the Bodies of the European Union (TCBU in Luxembourg),

- the European Training Foundation (ETF in Turin).

6.7. With regard more particularly to the accounts and operations of the European Training Foundation in Turin, the Court again (97) noted that an aggregate amount of approximately 380 Mio ECU received from the Commission to manage the Tempus programmes from PHARE and TACIS funds had not been shown in this organisation's financial statements.

AUDIT OF THE EUROPEAN SCHOOLS

6.8. The Court's audit of the European Schools is the subject of a special annual report sent to the European Schools' Board of Governors. Apart from the observation that in four Schools (Bergen, Culham, Karlsruhe and Mol) the number of pupils admitted from outside is well in excess of the number of entitled pupils (the children of officials and other staff of the Community institutions and bodies), which means that the Community is largely subsidising these schools for the benefit of outside pupils, the management in respect of the financial year 1997 does not warrant any particular comments.

CHAPTER 7 (98*) Financial instruments and banking activities

7.0. CONTENTS Paragraph reference

The financial instruments 7.1 - 7.5

Guarantee Fund for external actions 7.6 - 7.10

The European Investment Fund 7.11 - 7.16

THE FINANCIAL INSTRUMENTS

7.1. At the end of 1997 the financial instruments covered by the general budget of the EU, the ECSC and the EDFs in the form of loans and borrowings (see Table 7.1), subscriptions and participations (see Table 7.2) and guarantees (see Table 7.3) represented a total of 34 299 Mio ECU, which was 12,7 % lower than the position at the end of the previous financial year.

7.2. This downturn was the result of a substantial reduction in lending and borrowing operations due to the expiry of the ECSC Treaty and the New Community Instrument (NCI).

7.3. On the other hand, new, more specific and more unusual measures have been launched in recent years. In the context of measures such as the financial mechanism for the European Economic Area (99) and the temporary facility for small and medium-sized enterprises (SME) (100), interest subsidies have been applied to a significant quantity of loans from the EIB's own funds. The Commission also initiated other measures to provide financial assistance for SMEs that are innovative and create employment. The latter measures are based on hybrid financial instruments which utilise venture capital managed by the European Investment Fund (EIF), plus a system of aid, administered by the Commission, to support the creation of joint European ventures by SMEs in the European Union and a system of guarantees (the SME guarantee mechanism), administered by the EIF (101). In general, instruments of this type, managed by the banks, are increasingly being used to implement Community policy measures.

7.4. The interest-rate subsidies (see Table 7.4) are either under direct Commission management or are managed by the EIB on behalf of the Commission. In 1997 these subsidies accounted for a total of 94,8 Mio ECU, which was 23,5 % lower than the previous year. This decrease can be attributed to a number of developments. Firstly, the subsidies applied to NCI and ECSC loans will shortly cease to exist. Secondly, the funding for the more recent measures, such as the Copenhagen facility (financing authorised: 100 Mio ECU) and the financial mechanism for the European Economic Area (provisional amount of about 145 Mio ECU), is currently being implemented at beneficiary level using the funds advanced to intermediaries.

7.5. Furthermore, the outstanding borrowings raised by the EU as the counterpart of the loans administered by the Commission (Euratom, NCI, balance-of-payments loans and medium-term financial assistance) are fully guaranteed by the general budget. The Community has provided a global guarantee (102) for 70 % of the total of the EIB loans for projects carried out outside the Community for the period 1997-2000 up to a maximum of 7 105 Mio ECU.

GUARANTEE FUND FOR EXTERNAL ACTIONS

7.6. The Guarantee Fund for external actions was established on 31 October 1994 by Council Regulation (EC, Euratom) No 2728/94 (103) to reimburse lenders in the event of default by the beneficiary of a loan granted or guaranteed by the Community to or in a third country. The Guarantee Fund steps in if a beneficiary is still in default three months after the date on which payment is due; it then replaces the Community cash resources which have been used to service the loan up to that point. In accordance with Article 6 of the Fund regulation, the Commission has entrusted the financial management of the Fund to the EIB under an agreement between the Community and the EIB, which was signed in November 1994.

7.7. Since its establishment the Fund has been involved in only two operations (see Table 7.5):

- the food-aid measure based on a three-year loan of 1 250 Mio ECU. The loan was granted to the USSR in December 1991, shortly before the break-up of the Soviet Union, and was subsequently divided among the new independent States, several of which showed evidence of a poor solvency level;

- loans totalling 760 Mio ECU which were authorised between 1976 and 1987 (104) and granted by the EIB, with a Community guarantee, to the countries of former Yugoslavia.

7.8. As shown in the end column of Table 7.6, the ratio of the Fund's liquid assets to its outstanding lendings and loan guarantees for third countries, plus unpaid interest due, has continued to increase and has exceeded the 10 % level set as the target amount. Under the abovementioned regulation, the Fund's surplus at 31 December 1997 (66 Mio ECU) was to be paid back to the Community budget on a revenue heading. This payment was effected in March 1998.

7.9. The Fund's liquidity rose from 294 Mio ECU at the end of 1994 to 862 Mio ECU at the end of 1997. At the same dates the coverage ratios for the outstanding guarantees were 4,9 % and 10,8 % respectively. Due to this volume of resources it has thus always been possible for the Fund to act as a regulator, especially if the special case of food aid to the USSR is disregarded.

7.10. The Fund was the subject of a management audit at the Commission and a financial audit at the EIB for the financial year ending 31 December 1997. Those audits did not reveal any matter that required special attention.

THE EUROPEAN INVESTMENT FUND

7.11. The European Investment Fund (EIF) was created on 14 June 1994 in response to the wishes expressed by the Edinburgh European Council in December 1992. It is intended to provide additional financial capacity to support the development of the trans-European networks (TENs) and small and medium-sized enterprises (SMEs) by providing guarantees for lenders and by holding equity in exchange for covering risks which industry and banks are unwilling to accept totally. The EIF is a financial institution with a hybrid legal status, bringing together bodies that have been set up under the Treaties (the EU, represented by the Commission, on the one hand, and the EIB, on the other) and financial institutions established under national law. The Fund initially occupied offices in the EIB's buildings, but moved to independent premises in the second half of 1997.

7.12. At 31 December 1997 outstanding guarantees totalled 2 172 Mio ECU, i.e. 121 % of the subscribed capital and six times the paid-up capital. For the EU, the amount exposed to maximum risk was 724,4 Mio ECU, whilst its share of the subscribed capital was 600 Mio ECU.

7.13. The proportion of operations covered by a guarantee from the Fund and corresponding to projects financed by the EIB was 52 % at 31 December 1997, compared with 70 % at the end of 1996 and 85 % at the end of 1995. The proportion of transactions that is the EIB's responsibility has thus declined significantly but nevertheless remains substantial.

7.14. The EU has subscribed 600 Mio ECU of the EIF's authorised capital of 2 000 Mio ECU; 201 Mio ECU of the authorised capital has not yet been subscribed. The remainder of the EIF's capital has been subscribed by the EIB (800 Mio ECU) and by 77 financial institutions (399 Mio ECU). The EIB thus has the dominant interest in the EIF's capital (40 %), with 77 private sector banks holding minority interests (the average share is 0,26 % of the subscribed capital), alongside the EU's share of 30 % and the unsubscribed capital (10 %). The officers of the Fund applied a private sector interpretation of the capital-structure rules as the reason for their refusal of the requests by the European Parliament and the Council that the Court should have audit access.

7.15. In view of this persisting attitude the European Parliament decided to include this problem as one of the reasons for deferring the decision on the discharge for the implementation of the general budget of the European Union for the financial year 1996. In the resolution it adopted on this matter (105), the Parliament ' notes that the Court of Auditors, as it did not have access to the necessary information, is still not in a position to audit the European Investment Fund (EIF) and is therefore unable to submit an opinion to the discharge authority; recalls its resolution of 10 April 1997 on the discharge for 1995 (8) and calls on the Commission, in its capacity as representative of the European Community shareholding in the EIF, to ensure the introduction of transparent public audit and control arrangements providing the taxpayer-investor with the necessary assurances as to the accountability of the EIF for its use of public funds

(8)OJ L 162, 19.6.1997, p. 32.`.

7.16. In view of the fact that the Court has still not been able to obtain satisfactory access to information essential to its audit, it is not able to submit an opinion to the discharge authority.

REPLIES OF THE COMMISSION

THE FINANCIAL INSTRUMENTS

7.5. On 25 and 29 July 1997 the EIB and the Community signed a contract of guarantee laying down the arrangements for applying the new guarantee system.

THE EUROPEAN INVESTMENT FUND

7.12. The Commission's risk is legally limited to the capital it has subscribed, i.e. to only 600 Mio ECU.

7.13. It is correct that a large share of EIF business is related to EIB loans. This will always be the case as long as the EIB retains its position as the leading provider of finance to TEN projects.

7.15. The Commission has always encouraged the EIF to accommodate the Court's requests as far as possible and to provide maximum disclosure. In the last few months, meetings between the parties have taken place in order to solve the different points of view:

- on invitation by the Court, representatives of the EIF's management met with representatives of the Court in March 1998;

- the Commission organised a high-level meeting between the Court, the EIF and itself on 5 May 1998;

- following these meetings, a technical exploratory meeting between the Court and the EIF's external auditor took place on 25 May 1998.

The Commission intends to continue to do all in its powers to assist the Court in gaining access to sufficient information for it to fulfil its mission.

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PART II Statement of assurance concerning activities financed from the general budget

CHAPTER 8 (106*) The statement of assurance and supporting information

8.0. CONTENTS Paragraph reference

The statement of assurance I - XI

Information supporting the statement of assurance 8.1 - 8.40

Introduction 8.1

Scope of the audit 8.2 - 8.4

Accounting standards, policies and procedures 8.5 - 8.8

Need for clear definition of the basis on which accounts are prepared 8.6

Need to enforce accounting procedures 8.7

Need to reconsider information published 8.8

The reliability of the accounts 8.9 - 8.24

Balance sheet 8.10 - 8.17

Understatement of debtors relating to EAGGF-Guarantee expenditure 8.10 - 8.11

Understatement of claims to be recovered from beneficiaries in the context of EAGGF-Guarantee expenditure 8.10

Understatement of claims on Member States related to the clearance of the EAGGF-Guarantee accounts 8.11

Inaccurate presentation of cash account balances 8.12

Uncertainty concerning amounts owed by Member States 8.13 - 8.14

Uncertainty concerning the value of tangible fixed assets 8.15 - 8.17

Expenditure 8.18 - 8.24

Overstatement of commitments still to be settled 8.18 - 8.21

Inconsistent treatment of commitments in the budgetary accounts 8.22

Inaccurate and inadequate disclosure of budgetary payments consisting of advances and payments on account 8.23 - 8.24

The legality and regularity of the underlying transactions 8.25 - 8.40

Errors affecting the legality and regularity of commitment transactions 8.25 - 8.28

Errors affecting the legality and regularity of the transactions underlying payments 8.29 - 8.40

Formal breaches of regulations indicative of systems weaknesses 8.30 - 8.33

Substantive legality and regularity errors concerning payments 8.34 - 8.40

EAGGF-Guarantee payments 8.35

Structural Fund payments 8.36

Other payments in the field of expenditure managed directly by the Commission and other Community institutions 8.37 - 8.40

Analysis of EAGGF-Guarantee and fisheries expenditure 8.41 - 8.50

Introduction 8.41

Clearance of the accounts for 1997 8.42 - 8.43

Analysis of the DAS audit results 8.44 - 8.50

Substantive errors 8.45 - 8.47

Waiving of payments due from farmers 8.48

Formal errors 8.49 - 8.50

Analysis of expenditure on structural measures 8.51 - 8.86

Structural measure accounts 8.51 - 8.62

The systems governing Structural Fund operations 8.63 - 8.74

Management and control systems and the risks of error 8.63 - 8.70

Controls in the Member States 8.63

Availability of information on expenditure 8.64 - 8.67

Closure procedures 8.68

Eligible expenditure 8.69 - 8.70

Volume of advances paid 8.71 - 8.73

Financial corrections 8.74

Analysis of the results of the 1997 DAS audit 8.75 - 8.83

Substantive errors 8.75 - 8.80

Formal errors 8.81 - 8.83

Conclusion 8.84 - 8.86

Statement of assurance concerning activities financed from the general budget for the financial year ended 31 December 1997

I. The European Court of Auditors ('the Court`) has examined the consolidated accounts of the European Community for the financial year ended 31 December 1997. These accounts consist of the balance sheet as at 31 December 1997, the revenue and expenditure account for the financial year ended on the same date and the accompanying notes. They are the responsibility of the Commission and are summarised in Volume IV of the documents submitted by the Commission to the European Parliament, the Council and, on 30 April 1998, to the Court. Pursuant to the Treaties (107), the Court is required to provide the Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions.

II. The Court carried out the audit in accordance with its audit policies and standards. These adapt generally accepted international auditing standards to the Community context. The audit comprised an appropriate range of audit procedures designed to examine, on a test basis, evidence relating both to the amounts and disclosures in the consolidated accounts and the legality and regularity of the transactions underlying the accounts. It also included an assessment of the accounting principles used and significant estimates made by management, as well as the presentation of the accounts. Through the audit the Court obtained a reasonable basis for the opinion expressed below.

- * *

Reliability of the accounts

Balance sheet

III. The total amount of debtors representing amounts owed by Member States to the Community institutions, and disclosed in the consolidated balance sheet as 1 756,5 Mio ECU, is not accurately reflected in the accounts:

(a) Debtors relating to EAGGF-Guarantee expenditure have not been included in the balance sheet. The maximum amount concerned (763,4 Mio ECU) is only disclosed as off-balance-sheet potential assets.

(see paragraphs 8.10 8.11)

(b) One of the main components of the debtors' figure is uncertain owing to problems of completeness and valuation. This concerns the separate accounts operated by Member States under Community legislation for recording entitlement to customs duties and agricultural levies which are either unsecured or are contested. The completeness of the total recorded in the balance sheet for this component (1 362 Mio ECU) cannot be assured, nor does it reflect the extent to which the amounts due may be recoverable.

(see paragraph 8.13 8.14)

IV. Bank account balances of the Community are not accurately reflected in the balance sheet because amounts held in certain third countries to a value of several hundred million ecu have been recorded as budgetary payments instead of as assets. For the PHARE programme alone, the amount was at least 370 Mio ECU.

(see paragraph 8.12)

V. The amount shown for certain tangible fixed assets of the Community is uncertain, due to a lack of proper procedures for compiling fixed asset registers and adjusting the accounts following physical inspection of such assets and for depreciation.

(see paragraphs 8.15 8.17)

Expenditure

VI. The value of commitments still to be settled of 52 524,1 Mio ECU is overstated by a net amount of at least 530 Mio ECU. This figure is made up of both overstatements and understatements:

(a) The total value of commitments from differentiated appropriations still to be settled at the end of 1997 is overstated by at least 1 180 Mio ECU because it includes commitments that were no longer required to meet future payments. In addition, no information was provided by the Commission to demonstrate that a further 150 Mio ECU of outstanding commitments were still required to meet future payments.

(see paragraphs 8.18 8.21)

(b) Inconsistent treatment of budgetary commitments results in the understatement of the commitments of the year by almost 800 Mio ECU and the understatement of off-balance-sheet commitments by about 4 000 Mio ECU.

(see paragraph 8.22)

VII. The total value of advances or payments on account registered during the year as budgetary payments is understated by at least 4 126 Mio ECU. The value of advances made which have not been absorbed by the certified declarations of expenditure made by Member States is not disclosed in the accounts.

(see paragraphs 8.23 8.24)

Legality and regularity of the underlying transactions

VIII. The substantive legality and regularity of commitments totalling 776 Mio ECU are affected by the errors described at VI(b) above, because the amounts actually committed breached the limits of the commitment appropriations fixed by the budgetary authorities. The Commission committed at least a further 330 Mio ECU for operations which lacked a legal basis.

(see paragraphs 8.25 8.28)

IX. The audit again showed a high incidence of formal errors affecting payments. These cases consisted of failures to comply with the applicable regulations and in many cases are also evidence of specific systems weaknesses.

(see paragraphs 8.30 8.33)

X. The audit again revealed an unacceptable incidence of substantive errors affecting the amounts of transactions underlying payments.

(see paragraphs 8.34 - 8.40)

XI.

- Except for the effects of the matters summarised in paragraphs III-VII above, the Court is of the opinion that the accounts for the financial year 1997 reflect reliably the Community's revenue and expenditure for the year and financial situation at the end of the year.

- Within the limits specified in paragraph 8.4, the Court is of the opinion that the transactions underlying the revenue entered in the accounts for the financial year are, taken as a whole, legal and regular.

- Except for the effect of the matters discussed in paragraph VIII above, the Court is of the opinion that the commitment transactions for the financial year are, taken as a whole, legal and regular.

- Because of the effect of the matters described in paragraphs IX X above the Court declines to provide assurance that the transactions underlying the payments for the financial year are, taken as a whole, legal and regular.

15 October 1998

B. Friedmann

President

European Court of Auditors

12, rue Alcide De Gasperi, L-1615 Luxembourg

INFORMATION SUPPORTING THE STATEMENT OF ASSURANCE

Introduction

8.1. This statement of assurance (108) concerns the reliability of the accounts of the European Community and the legality and regularity of the underlying transactions for the financial year 1997.

Scope of the audit

8.2. The audit covers the consolidated accounts of the European Community for the financial year ended 31 December 1997, as presented in Volume IV of the documents sent to the Court by the Commission on 30 April 1998 (109). Reported revenue and expenditure in some areas of the budget may be subject to corrections in future years as a result of clearance procedures by the Commission or the Member States.

8.3. The audit was planned and performed so as to obtain sufficient, relevant and reliable audit evidence to give reasonable assurance that, in all material respects, the accounts are reliable and that the underlying transactions are legal and regular. Certain cases of deliberate irregularity to the detriment of Community finances cannot, by their nature, be detected by normal audit procedures. The primary responsibility for the prevention, detection and investigation of such irregularities rests with those responsible for the management of revenue and expenditure (the Commission and the Member States).

8.4. The Community's revenue (own resources) consists principally of contributions based on VAT and GNP (accounting for approximately 80 % of the revenue) and customs duties and agricultural levies (approximately 17 % of the revenue):

(a) The Court's audit concentrated on verifying, on the basis of the available VAT and GNP data, the accuracy of the calculations of these own resources contributions payable by each Member State throughout the various stages from the initial budget to the final revision for the financial years concerned. As part of its other work, the Court performs specific audits which examine the systems and procedures established to ensure that the Community receives all own resources based on VAT and GNP due to it.

(b) For customs duties and agricultural levies, it is not possible to provide an assurance that all taxable imports have actually been declared and have generated the corresponding revenue. Accordingly, the Court's audit focused on assessing the adequacy of procedures applied for ensuring that the Community's entitlement to customs duties and agricultural levies is properly established as soon as the conditions provided for by the customs regulations concerning entry into the accounts of the entitlement and notification to the debtor have been met. As part of its other work, the Court carries out specific audits which examine the procedures set up to ensure that the Community receives all traditional own resources due to it.

Accounting standards, policies and procedures

8.5. Since 1994 the Court has repeatedly underlined the need for the Commission to reconsider the basis on which the accounts are drawn up (110). Once clear policies have been adopted, the Commission should ensure that they are applied consistently in the preparation of the consolidated financial statements.

Need for clear definition of the basis on which accounts are prepared

8.6. Several of the matters which form the basis of the Court's continued qualified opinion on the reliability of the accounts stem from the fact that the fundamental basis on which the accounts should be prepared (cash or accruals accounting) and the nature of the information requiring disclosure are not adequately defined. Inconsistencies materially affect the accounting treatment and presentation of commitments in the financial statements (see paragraph 8.22), and the disclosure of cash balances (see paragraph 8.12) and debtors in the balance sheet (see paragraphs 8.10 8.11). For the Structural Funds, the Commission records advances for annual tranches as budgetary payments, as required by the specific regulatory texts. However, this does not disclose the provisional nature of such payments, or facilitate appropriate monitoring and control. The extent to which such payments have been absorbed by expenditure by Member States should be adequately disclosed in the financial statements (see paragraph 8.24). A clear framework establishing the basis on which the financial statements are to be prepared is needed to overcome these problems. The Commission has recently established a draft accounting and consolidation manual which aims to ensure greater consistency in the accounting for and presentation of balance sheet items, and also aims to reconcile the balance sheet and the budgetary revenue and expenditure accounts. However, it does not address the fundamental basis on which the accounts should be prepared and specifically excludes from consideration budgetary operations, to which the abovementioned problems are related.

Need to enforce accounting procedures

8.7. The other matters which give rise to qualification of the accounts result from inadequate accounting procedures, which do not ensure that information disclosed in the accounts at year end is complete and accurate, such as:

(a) omission of off-balance-sheet commitments (see paragraph 8.22);

(b) inaccurate presentation of budgetary payments which consist of advances or payments on account (see paragraph 8.23);

(c) inaccurate presentation of fixed assets (see paragraphs 8.15 8.17);

(d) lack of information concerning transfers to bank accounts recorded as budgetary payments (see paragraph 8.12).

The Commission needs to establish systematic accounting procedures and to apply them consistently to ensure that the accounts are complete and accurate in respect of such transactions.

Need to reconsider information published

8.8. The consolidated accounts presented in Volume IV and published in the Official Journal not only include the balance sheet, revenue and expenditure accounts and notes thereto, but also provide further explanatory notes and tables which are sometimes disproportionately detailed (for example, Table 13, Volume IV, Chapter 2, pp. 36 45). The Commission needs to reconsider the utility of the information it provides, to ensure that the financial statements present information which is both reliable and pertinent in a way which facilitates a proper understanding of the Community's financial position.

The reliability of the accounts

8.9. With the exception of the matters mentioned in paragraphs 8.10 to 8.24, the Court found that the accounts for the financial year 1997 reflect reliably the Community's revenue and expenditure for the year and financial situation at the end of the year.

Balance sheet

Understatement of debtors relating to EAGGF-Guarantee expenditure (paragraph III(a) of the statement of assurance)

Understatement of claims to be recovered from beneficiaries in the context of EAGGF-Guarantee expenditure

8.10. An amount of 655,8 Mio ECU, due on 15 October 1997 from beneficiaries of EAGGF-Guarantee aid schemes and declared to the Commission by paying agencies in Member States has been included in the off-balance-sheet potential assets (Volume IV, Chapter 4, 'Potential assets`, Item 13.1, p. 88). Since this item, by its nature, represents a 'tangible and valid obligation to pay` it should be reflected as an asset in the balance sheet at an appropriate valuation. Although, as the Commission states in the explanatory notes, the information provided by several Member States is unreliable, this debtor should be taken into account at the Commission's best estimate of the amount which is actually likely to be recovered.

Understatement of claims on Member States related to the clearance of the EAGGF-Guarantee accounts

8.11. The second clearance of accounts decision of 30 July 1997 relating to the EAGGF-Guarantee expenditure for the financial year 1993 fixed an amount of 107,6 Mio ECU to be recovered from Member States by compensation with the payment made in January 1998 to Member States for 1998 expenditure. This debtor has not been included as an asset in the balance sheet at 31 December 1997. It has been taken into account only as a deduction from the off-balance-sheet potential liabilities made for the EAGGF-Guarantee expenditure for the period 16 October to 31 December 1997, which is charged to the 1998 budget (Volume IV, Chapter 4, 'Potential liabilities`, Item 3.1, p. 85, 20 443 Mio ECU net).

Inaccurate presentation of cash account balances (paragraph IV of the statement of assurance)

8.12. In the field of external cooperation, the Commission continues to record certain transfers to bank accounts as definitive payments charged to the budget. Such transfers should be recorded as imprest advances in the balance sheet until the relevant expenditure has been realised (111). Consequently, the reported expenditure for a given year is overstated and the balance sheet assets (Volume IV, Chapter 3, 'Consolidated balance sheet`, Item IX, p. 52, 6 307,8 Mio ECU) are understated. The Commission needs to improve its financial management information system so as to be able to identify, monitor and control such cash balances (112). For the PHARE programmes, the difference between the Commission's transfers and the subsequent payments made by the end of the year was approximately 370 Mio ECU (see Volume I, Chapter 5, paragraph 5.8). For the other countries, neither the Commission nor the Court is in a position to state precisely the outstanding amounts concerned, but it is likely that they are of the order of several hundred million ecu.

Uncertainty concerning amounts owed by Member States (paragraph III(b) of the statement of assurance)

8.13. Of the 1 756,5 Mio ECU in amounts due to the Community institutions by Member States as at 31 December 1997 (Volume IV, Chapter 3, 'Consolidated balance sheet`, Item VII.B.2, p. 52), 1 362 Mio ECU comprises entitlements to customs duties and agricultural levies established by Member States which they have entered into separate (revenue) accounts. The Member States are responsible for keeping these separate accounts and reporting on them to the Commission once a quarter.

8.14. As in 1996 (113), the separate accounts maintained by the Member States are affected by significant errors concerning the completeness of the total debtors' figure disclosed in the consolidated balance sheet. The Commission and the Member States need to ensure that all entitlements to customs duties and agricultural levies that have been established, and which are either unsecured or contested, are properly brought to account in the separate accounts at an appropriate valuation. While the gross amounts in the balance sheet are likely to be understated, the amounts actually recoverable are almost certainly overstated. For the financial years 1990 to 1997, on average 29 % of the debts established for customs duties have been recovered, 14 % written off and 57 % remain outstanding.

Uncertainty concerning the value of tangible fixed assets (paragraph V of the statement of assurance)

8.15. There is no clear basis for the value at which fixed assets for the European Parliament (115,6 Mio ECU) are stated in the balance sheet (Volume IV, Chapter 3, 'Consolidated balance sheet`, Item III, p. 52). This amount cannot be reconciled with the fixed asset register, which has not been updated to take account of the last physical inventory made in 1994, notwithstanding the Parliament's reply to the 1995 DAS report (114)8.16. A similar problem affects the value of the fixed assets of the Joint Research Centre (509 Mio ECU). The Commission states in the explanatory notes to the accounts that the amount disclosed in the balance sheet is not reliable due to inadequate inventory procedures.

8.17. The value disclosed in the balance sheet for fixed assets (Volume IV, Chapter 3, 'Consolidated balance sheet`, Item III, p. 52) does not reflect depreciation. The Commission has adopted this treatment for the consolidated accounts (described in the foreword to the explanatory notes, p. 54, note 3 and in the explanatory note to Item III, Volume IV, p. 56) in order to avoid an inconsistent valuation of the fixed assets of all the various institutions. The notes to the accounts state that the depreciation chargeable for the Commission alone amounts to 477,3 Mio ECU. The other institutions did not calculate any depreciation on their fixed assets because there is currently no binding obligation for them to do so, the proposed interinstitutional regulation on fixed assets inventories not yet having been adopted. The Court believes that the Commission's accountant should be given full authority to require sufficient information from each institution to enable him to prepare consolidated financial statements which properly and consistently value all assets and liabilities of the Community.

Expenditure

Overstatement of commitments still to be settled (paragraph VI(a) of the statement of assurance)

8.18. At the end of 1997, some 60 000 commitments against differentiated appropriations totalling 52 524,1 Mio ECU remained to be settled, 233,4 Mio ECU of which were covered by payment appropri-ations carried over from 1997 to 1998. A sample of the commitments made in the years up to and including 1996 and still unpaid at 31 December 1997 (25 832,1 Mio ECU) were examined in order to determine whether they still represented valid obligations to pay.

8.19. The Commission was unable to provide evidence that some 5 % of the sums relating to the commitments outstanding from 1996 and previous years, estimated at about 1 330 Mio ECU over the whole population at year end, still related to an obligation to make further payments. The Court estimated that at least 90 % of this amount, some 1 180 Mio ECU, no longer represented an obligation to make payments. Separately from this an estimated 500 Mio ECU of outstanding commitments for Structural Fund expenditure were retained because legal proceedings had been initiated: previous experience suggests that much of this will not be payable.

8.20. The time limits for implementing commitments were often exceeded, sometimes by several years. Of the commitments remaining to be settled at the end of 1997, about 15 000 commitments, with a value of about 4 800 Mio ECU, concerned cases where the settlement deadlines had expired.

8.21. Notwithstanding the efforts made to improve the monitoring of outstanding commitments, the overall situation remains variable between the different Commission departments. There appeared to be no regular follow-up of outstanding commitments, estimated at at least 2 700 Mio ECU. The Commission should cancel all commitments that no longer relate to binding legal obligations and include in its financial statements an estimate of the volume of those of its outstanding commitments that are unlikely to result in a payment in subsequent financial years.

Inconsistent treatment of commitments in the budgetary accounts (paragraph VI(b) of the statement of assurance)

8.22. Figures in the accounts for commitments do not reflect the consistent application of a clear concept. In the area of the Structural Funds, the Commission's legal commitments (multiannual obligations) extend to the whole amount outstanding in each successive planning period, but the annual budgetary accounts only reflect the accounting commitments of annual tranches up to the financial year in question (see paragraph 8.57). For other areas of expenditure, there should be no difference between legal and accounting commitments. However, for certain budget headings the Commission has entered into legal obligations which exceed the amounts of available appropriations. As a result, the commitments for the year are understated by at least 776 Mio ECU. Furthermore, the total potential liabilities in the off-balance-sheet commitments are understated by about 4 000 Mio ECU. Table 8.1 indicates the budget titles and amounts involved.

Inaccurate and inadequate disclosure of budgetary payments consisting of advances and payments on account (paragraph VII of the statement of assurance)

8.23. In response to requests made by the Court and by the European Parliament in 1995, the Commission has distinguished in its accounting system between those payments representing advances/payments on account and those that comprise definitive payments. This should enable the Commission to draw up a statement of non-definitive payments in its revenue and expenditure account at the end of the financial year (Volume IV, Chapter 2, Table 14, breakdown of 1997 payments by type, p. 46). As a result of accounting errors by authorising officers, transactions totalling at least 4 126 Mio ECU, mainly in the fields of external policies and structural measures, are not identified in the accounts as being part-payments that are not definitive, and the total for these has therefore been understated. The accuracy of the information in Table 14 on non-definitive payments is also affected by the Commission's practice for EAGGF-Guidance expenditure of allocating advance payments relating to later annual tranches to commitments for the oldest outstanding annual tranches, thus closing these commitments before the payment of the final balance takes place (see paragraph 8.56), and of treating payments that partially consist of advances as final, and vice versa. It is not possible to estimate the degree to which these practices understate the payments disclosed as non-definitive, but the amounts concerned are likely to be significant.

8.24. In its 1994 report on the statement of assurance, the Court drew attention to the lack of relevant and reliable information in the accounts disclosing the provisional nature of the major part of the payments charged to the budget for differentiated appropriations (particularly in the field of the Structural Funds). This was based on the fact, already noted in paragraph 8.6, that the amounts reported as budgetary payments in the accounts do not, and are not intended to, correspond to payments at the level of final beneficiaries. The Commission subsequently introduced some additional information (Volume IV, Chapter 2, pp. 34 46), consisting of Tables 11 (cumulative payments on outstanding commitments), 13 (year of origin of such cumulative payments) and 14 ('intermediate` payments made during the year). This information is not yet fully reliable (see paragraph 8.23) and does not disclose the extent to which the Commission's payments have been translated into action by the Member States. The Commission should consider how it can present in the financial statements information showing at the end of the year the extent to which the Commission's payments have been absorbed by certified declarations of expenditure made by the Member States.

The legality and regularity of the underlying transactions

Errors affecting the legality and regularity of commitment transactions (paragraph VIII of the statement of assurance)

8.25. With the exception of the matters mentioned in the following two paragraphs, the Court found that, on the whole, the commitments for the year were legal and regular.

8.26. The cases where obligations effectively entered into by the Commission breached the limits of the commitment appropriations fixed by the budgetary authorities total 776 Mio ECU (see paragraph 8.22) and are identified in Table 8.1.

8.27. The Commission committed expenditure to finance significant Community measures although there was no basic legal act authorising the expenditure concerned. It was clearly established by the Court of Justice of the European Communities, in its ruling of 12 May 1998 (115), that, under the terms governing the separation of powers provided for in the Treaty, '... implementation of Community expenditure relating to any significant Community action presupposes not only the entry of the relevant appropriation in the budget of the Community, which is a matter for the budgetary authority, but in addition the prior adoption of a basic act authorising that expenditure, which is a matter for the legislative authority ...`. The terms of this ruling clearly and unequivocally provide that the Commission is not empowered to commit expenditure where no such basic act exists.

8.28. The estimated total expenditure committed in this irregular manner in respect of significant Community measures in 1997 amounts to at least 330 Mio ECU. It relates mainly to external measures, in particular subsidies to non-governmental organisations (Title B7-6), almost all the aid to promote democracy and protect human rights (Title B7-7) and measures in the field of commercial relations with third countries (Items B7-851 and B7-852).

Errors affecting the legality and regularity of the transactions underlying payments

8.29. The Court's audit of a sample of payment transactions down to the level of the final beneficiary has a dual significance. Following the funds in this way involves both the review of the operation of the system concerned and the examination of the legality and regularity of the transaction itself. Many of the errors found in the payments provide direct evidence of systems weaknesses. Some of the substantive errors - specific quantifiable errors directly affecting the amount of the transactions underlying Community funds disbursed - arise from systematic failures to apply requisite checks before payments are made (for example, ensuring that declarations supporting requests for subsidies are well founded, or that the correct subsidy or exchange rate is applied). In many cases, as the control procedures required are actually defined in the regulations applicable, many of the formal errors - errors without any directly quantifiable effect on the amounts of the transactions underlying Community funds disbursed - are also evidence of specific systems weaknesses. Thus failures to maintain appropriate accounting and other records, or to keep required registers of eligible land or animals, or to apply proper arrangements for competitive tendering, or to carry out the required checks in the proper manner all demonstrate that appropriate control systems have not been implemented, even if the amount of the particular transaction examined in the course of the audit was found to be correct.

Formal breaches of regulations indicative of systems weaknesses (paragraph IX of the statement of assurance)

8.30. For 1997, as for the previous years since 1994, there was again a high incidence of formal errors across most areas of the budget. The majority of these errors reflect the failures of authorities in the Member States to administer the EAGGF-Guarantee and Structural Fund programmes in accordance with the systems of control established by Community regulations.

8.31. For the EAGGF-Guarantee expenditure, the main problems encountered were as follows:

(a) incomplete or inadequate performance of regulatory physical and administrative checks, notably concerning crop types and areas;

(b) problems in the documentation relating to export refunds;

(c) the absence of olive cultivation registers in three Member States.

Further analysis is provided in paragraphs 8.49 8.50.

8.32. For the Structural Funds, the main weakness encountered in the Member States concerned inadequate accounting records, including failure to comply with the requirement for separate accounting for Community funds. Further analysis is provided in paragraphs 8.81 8.82.

8.33. Where the errors were the responsibility of the Commission, the most significant types were:

(a) approval of national schemes which lacked the required control and verification mechanisms (for the EAGGF-Guarantee expenditure);

(b) not ensuring that contractual conditions were complied with before payments were made (for external measures concerning central and east European countries).

The Commission should strengthen its management procedures to ensure that its administrative and control systems are implemented as foreseen.

Substantive legality and regularity errors concerning payments (paragraph X of the statement of assurance)

8.34. The Court's audit again showed an unacceptably high incidence of substantive errors in the transactions underlying the Commission's payments. The extrapolation of the results of the sample of transactions audited, together with other findings by the Court, shows that the substantive errors did not differ significantly in amount, nature and distribution from those found in respect of 1995 and 1996. As in previous years, the majority of errors occurred in the main areas of Community expenditure, the EAGGF-Guarantee and the Structural Funds, which are essentially managed by authorities in the Member States.

EAGGF-Guarantee payments

8.35. The majority of the substantive errors found in the Court's audit of EAGGF-Guarantee expenditure concerned misrepresentation by beneficiaries, which often resulted in relatively small overpayments in percentage terms. Nevertheless, the overall effect of the errors remains material. Eventual recovery from beneficiaries of wrongly paid amounts is a matter for the paying agencies in the Member States. The Commission can also address the problem through the clearance of accounts procedure. The Court notes the steps taken to improve financial management in this area from 1996 onwards which should have progressively greater effect as they are fully implemented. Further analysis of the substantive errors found in the field of the EAGGF-Guarantee is provided in paragraphs 8.45 8.48.

Structural Fund payments

8.36. Most of the substantive errors found in the Court's audit in the field of the Structural Funds are in the expenditure certified as eligible in Member States' declarations, and which is co-financed by the Community. The bulk of the errors are of an administrative nature caused by inadequate knowledge of Community rules leading to the inclusion of ineligible amounts in the Member States' declarations. These errors often do not imply that the related payments made by the Commission, which often take the form of advances 'triggered` by the declarations, are incorrect. However, because the reliability of the procedures for detection and correction of such errors at the stage of programme closure is doubtful, the Court has no assurance that the general budget will not be permanently affected, particularly when there is a considerable period before any closure. Eventual recovery of wrongly co-financed amounts is a matter for the Member State administrations concerned and for the Commission, although no clearance of accounts procedure comparable to that for the EAGGF-Guarantee exists. Comments on the control environment and further analysis of the substantive errors found in the area of the Structural Funds are provided in paragraphs 8.75 8.80.

Other payments in the field of expenditure managed directly by the Commission and other Community institutions

8.37. The majority of the substantive errors found in the examination of expenditure managed directly by the Commission fall into three main categories:

(a) funding of expenditure that was ineligible (see paragraph 8.38);

(b) expenditure claimed by beneficiaries in excess of the amount actually spent or authorised (see paragraph 8.39);

(c) errors in the amount paid due to the use of incorrect rates or reference prices (see paragraph 8.40).

8.38. Expenditure was ineligible either because there was no legal basis for the operations, or because it was charged against budget headings where such expenditure was not foreseen:

(a) payments with an estimated value of 309,8 Mio ECU were made for Community-managed operations where there was no legal basis allowing the Commission to carry out such measures (see paragraphs 8.27 8.28), mainly in the field of external cooperation, and notably support for non-governmental organisations (Chapter B7-6), democracy and the protection of human rights (Chapter B7-7) and commercial relations with third countries (Chapter B7-8);

(b) the Commission has used appropriations from budget headings which were not intended for administrative expenditure to finance the administrative costs of an EC office in Slavonia;

(c) in the area of cooperation with central and east European countries, the Commission has financed legal support to tax administration services, which was not eligible under the programmes concerned;

(d) following the decision of the budgetary authorities to stop the subsidies to the European Association for Cooperation (AEC), the Commission, bearing in mind its legal and financial obligations towards this organisation, met the costs of the AEC until its dissolution (in 1998) from budget headings not intended for this.

8.39. In the area of research, most of the errors concerned overpayments as a result of claims by participants in excess of what was actually spent or authorised. The Commission should consider increasing the quality and number of controls on cost claims before payments are finalised (see specific recommendations made in the context of the Court's audit of renewable energy sources, Chapter 4, paragraphs 4.214.23).

8.40. Community support in respect of the export earnings of banana growers in the context of cooperation with non-member States was not calculated in accordance with the Council regulation (116) in force, resulting in overpayments. Excessive daily indemnities were used for staff mission expenses for the European Parliament.

ANALYSIS OF EAGGF-GUARANTEE AND FISHERIES EXPENDITURE

Introduction

8.41. In 1997 expenditure under the European Agricultural Guidance and Guarantee Fund (EAGGF), Guarantee Section, and fisheries (117) totalled 41 570,7 Mio ECU in net terms, that is after certain items of negative expenditure had been deducted (see Chapter 2, paragraphs 2.13 2.16), or approximately 52,7 % of total budgetary expenditure. The 91 national paying agencies administer EAGGF-Guarantee (sub-section B1) expenditure, which accounts for 97,7 % of this amount. EAGGF-Guarantee expenditure was also subject to other audits, the results of which are set out above (see Chapter 2, Titles I, II and III). The audit results in respect of the DAS are set out below.

Clearance of the accounts for 1997

8.42. Under Commission Regulation (EC) No 1663/95 of 7 July 1995 laying down implementing procedures for the clearance process, the Member States are required to send to the Commission the annual accounts of each paying agency, together with a certificate as to their completeness, accuracy and veracity, by no later than 10 February of the following year. This certificate must be issued by 31 January by an appropriate body which is independent of the paying agency on the basis of an examination carried out in accordance with internationally accepted auditing standards of the procedures and of a sample of transactions. On the basis of this certificate, the Commission clears by 30 April the accounts for the financial year which ended on 15 October of the previous year. Notwithstanding this clearance of the accounts, the Commission may subsequently exclude any expenditure which does not comply with the Community rules. However, any such expenditure must be excluded within 24 months, except in the case of irregularities or procedures relating to Articles 93 (State aid) and 169 of the Treaty (action for failure to fulfil an obligation).

8.43. The first operation of the new clearance of accounts procedures took place in 1996 and is the subject of a special report which will be published in 1998 and which is summarised in Chapter 2 of the Court's 1997 annual report. According to the Commission's summary report (118), the financial year 1997 showed an improvement. All of the Member States, except for the United Kingdom, which was slightly late (119), submitted their accounts, certificates and audit reports by 10 February 1998. The Commission was thus able (120) to give a discharge on all the accounts within the deadlines, with the exception of those submitted by three Spanish paying agencies (Galicia, Asturias and Cantabria). The expenditure remaining to be cleared for these three agencies totals some 107 Mio ECU, or barely 2,25 % of all sums declared for Spain for the financial year 1997. At the Commission's request, the accounts of these three agencies will therefore be subjected to additional checks. However, although in this same summary report (121) the Commission emphasises the extent of the improvements made, it also states that a number of agencies have yet to take the measures needed to remedy weaknesses which are no longer acceptable.

Analysis of the DAS audit results

8.44. The audits in respect of the financial year 1997 revealed both substantive and formal errors. The latter, despite having no quantifiable effect on the value of the transactions, were nonetheless irregularities from the point of view of the applicable legislation.

Substantive errors

8.45. Substantive errors were found in about one sixth of the transactions audited. As indicated in paragraph 8.35 above, most of these errors had only a small impact on the amounts of payments to farmers. The audit results thus indicate an error rate broadly consistent with that found in previous years and with the 2 to 2,5 % final corrections imposed by the Commission, following its clearance of accounts audits of EAGGF-Guarantee expenditure for the years 1992 and 1993.

8.46. These substantive errors were detected mainly at final-beneficiary level. Most of them were due to overdeclarations of areas eligible for subsidies, especially in the cereals sector, and overestimations of areas set aside.

8.47. The vast majority of these errors were attributable to overdeclarations by final beneficiaries, which are encouraged by the generous subsidies granted and the as yet ineffective checks carried out by the paying agencies.

Waiving of payments due from farmers

8.48. In addition, two Member States did not collect supplementary levies in the dairy sector (122), but paid them over to the Commission in the place of the farmers. Although this kind of practice has no direct effect on Community finances, it still remains the case that exonerating certain farmers in this way from their payment obligations tends to give them an appreciable competitive advantage whilst freeing them of the need to modulate their production. The Court notes that the Commission has since initiated infringement proceedings against the Member States concerned.

Formal errors

8.49. Formal errors which have no quantifiable effect on the value of transactions are essentially due to misinterpretation of or failure to comply with the applicable Community legislation. All errors of this kind detected by the Court occurred in the Member States, for the most part at the level of local or national administrative authorities. The process of simplification of the legislation concerning agriculture which is currently under way at the Commission should normally help to reduce these errors. Concerning this type of error, the Court observed in particular:

(a) insufficient and/or, on occasions, late physical and administrative checks;

(b) insufficient proof of export of products (which may cast doubt on the justification for the transaction itself) and requests for excessive guarantee deposits for export refunds;

(c) failure to keep olive oil registers;

(d) payments to farmers outside the regulation limits;

(e) an absence of clearly defined terms of reference for the technical tasks delegated by the paying agencies, particularly in the field of export refunds.

8.50. As regards the implementation of the regulations by the Commission itself, an examination confined to direct expenditure for the financial year (expenditure jointly financed by the Member States and coordinated by the Commission, such as IMCS expenditure) showed that this expenditure contained a very high rate of formal errors (see Chapter 2, paragraphs 2.17 2.18).

ANALYSIS OF EXPENDITURE ON STRUCTURAL MEASURES

Structural measure accounts

8.51. The Structural Funds, and other instruments with structural objectives, account for about 26 298 Mio ECU, or approximately 33,2 % of total payments from the budget. During 1997, commitments amounted to a total of 30 345 Mio ECU, of which 18 876 Mio ECU were still open at the end of the year. The tables in Chapter 3 of the 1997 annual report contain further details on the budgetary appropriations for structural measures.

8.52. Most Structural Fund interventions take the form of operational programmes (OPs) which can run for as long as six years. These programmes are proposed by the Member States and are approved by the Commission. The corresponding amounts are committed in annual instalments, unless the measure lasts for less than two years or the Community contribution is 40 Mio ECU or below, in which case such measures can be funded in one global commitment.

8.53. The Commission's first payment in respect of a programme takes the form of an unconditional advance of a given percentage (generally 50 %) of the first commitment. The subsequent advances are disbursed when the national authorities responsible have declared to the Commission that a given proportion of the earlier advance(s) has actually been used in accordance with the specified objectives. There is no legal requirement to provide a detailed breakdown of this expenditure in these declarations.

8.54. The Commission decides when to close the annual instalments in the light of the annual progress reports on the execution of the programmes, which are prepared and submitted by the Member States. Except for the reports on measures funded under the Financial Instrument for Fisheries Guidance (FIFG), there are no clear rules on the content and presentation of these reports, and they do not usually include detailed information on expenditure. The Commission is therefore not able to use these reports to identify and exclude ineligible expenditure.

8.55. At the end of the programming period, the Commission makes the final payment of any balance which may be outstanding, after examining the implementation report and the final declaration of expenditure provided by the Member State. All intermediate annual instalments are also closed on payment of the final balance.

8.56. Given that the commitments are usually spread out over annual instalments, closing them in the accounts does not imply either the closure of the programme or final acceptance of the expenditure (except for Social Fund programmes, expenditure is finally accepted only when the commitment for the final instalment is closed). The closure in the accounts of commitments relating to the annual instalments does not always reflect the actual progress of the measures, in that the Commission does not adjust the commitments after any reprogramming and, in certain areas, charges payments for more recent instalments to commitments for earlier instalments.

8.57. Making commitments by instalments, which is allowed by the Structural Funds regulations, is an exception to the general provisions of the financial regulation. The system of differentiated appropriations established by the financial regulation in fact provides for the existence of commitment appropriations to cover the total cost of legal obligations contracted for multiannual programmes. Committing structural measures by annual instalments does nothing to dissipate the paradox of the financial perspectives, which lay down for each year, the amounts of expenditure in the form of appropriations for commitments. In its Opinion No 4/97 (123), the Court recommended abandoning this practice, which ultimately makes the logic of differentiated appropriations unworkable in their main area of application.

8.58. In its 1996 'Revenue and expenditure account and balance sheet`, the Commission also published, for the first time, information on multiannual obligations relating to structural measures, recorded as off-balance-sheet commitments. They amount to 65 616,2 Mio ECU for the Structural Funds and 5 988,4 Mio ECU for the Cohesion Fund and correspond to the share of the resources allocated at the Edinburgh European Council meeting of 12 December 1992 and amounts intended for the new Member States after accession which had not been used by the Commission for budgetary commitments by 31 December 1997. These amounts include aid already planned in the form of OPs, single programming documents (SPDs) and Community initiative (CI) programmes approved by the Commission which have not, however, yet resulted in budgetary commitments (57 434,8 Mio ECU for the Structural Funds and 3 293,4 Mio ECU for the Cohesion Fund). A distinction should be made between these amounts, which are, for the Commission, legal and financially binding commitments and those concerning the part of the appropriations decided in Edinburgh which has not already been covered by decisions, which could be presented as 'aid planned but not yet programmed`.

8.59. The annual accounts also fail to show the degree to which successive programmes have been implemented. No account of closed programmes or instalments is published.

8.60. For this reason there is no direct connection between the operations at the level of the beneficiaries of the funding and the Commission's disbursements, as most of these consist of advances. It is only when the final payments are made that a clear and definitive connection between the expenditure declared and the Commission's total disbursements emerges.

8.61. The errors detected by the Court during its audit of the legality and regularity of the underlying transactions relate mainly to the operations carried out at the level of intermediary (national or local) administrations or final beneficiaries in the Member States. Such errors do not imply that the amounts of the Commission's advances are necessarily incorrect, inasmuch as in numerous cases Member States declare amounts above the strict minimum necessary to justify the advances.

8.62. Nevertheless, in some of the cases examined by the Court, the eligible amount underlying the expenditure declared was insufficient to justify the payment made by the Commission at the actual time of payment, and correct declarations would have led to the Commission's payments being postponed to a later date (this was the case for three advances paid, which totalled 173,5 Mio ECU). In other cases examined, where final balances had been settled, the errors had a direct impact on the amounts of the Commission's payments (out of 35,9 Mio ECU paid for two programmes together, the final balances of which came to 5 Mio ECU, the overpayment amounted to 7,8 Mio ECU).

The systems governing Structural Fund operations

Management and control systems and the risks of error

Control in the Member States

8.63. The errors detected in the 1997 DAS sample of payments and the data on the management and control systems currently in use confirm that these systems are not able to provide evidence to show that all the expenditure co-financed by the Community is eligible and that the Community legislation is being properly applied. Responsibility in the area of financial management and control lies mainly with the Member States. Nevertheless, as the institution responsible for implementing the budget of the European Union, the Commission must ensure that Member States set up and consistently implement adequate management and control systems. Regulation (EC) No 2064/97 on the financial control by Member States of operations co-financed by the Structural Funds (124) is an example of such legislation. However, a major effort still needs to be made for the implementation of management and control systems to be effective.

Availability of information on expenditure

8.64. For monitoring and control systems to be effective, sufficiently detailed information on the manner in which the funds have been used must be available. However, no such information exists for the Structural Funds, either at a regional, national or Community level.

8.65. The information systems underlying the expenditure declarations submitted with payment requests must enable the control bodies, both national and Community, to retrace the audit trail so as to link the overall declaration to the expenditure incurred by the final beneficiaries via the various levels of data collection and certification. They must also make it possible to target the controls, which is indispensable to the Community control authorities, who operate mainly on a sampling basis.

8.66. The control process is, however, hindered by the lack of an information system on the projects or other operations financed (see paragraph 3.39 of Chapter 3). More precise and easily accessible information on the projects financed would, in particular, allow checks to be better targeted. The existence of an information system on the projects would also encourage final beneficiaries and those who prepare the expenditure declarations to evaluate more carefully the type of expenditure for which Community funding is requested and its conformity with the legislation.

8.67. Pertinent information on the expenditure would make it possible to identify a certain number of errors, such as ineligible expenditure, absence of co-funding, presentation of the expenditure that was budgeted for or planned, rather than actual expenditure, and mul-tiple funding of the same projects.

Closure procedures

8.68. As has already been mentioned in paragraph 8.56, expenditure on Structural Fund programmes remains provisional until the operational programme accounts have been closed, that is, until the moment when proper verification of all the expenditure declared has taken place. However, the results of the Court's audits in this area show that, in a large number of the cases examined, it is not possible to rely on the verification procedures in the Member States to uncover and exclude the ineligible parts of previously declared expenditure (125). It is possible that errors of the same type as those affecting the underlying transactions included in the expenditure declarations used to authorise the payment of advances may go unnoticed at the moment when the programmes are closed, unless the inspection at this stage includes checks which are specifically aimed at weeding out any ineligible expenditure.

Eligible expenditure

8.69. The Commission decision of 23 April 1997 (126) required that forms aimed at dispelling any uncertainty about precisely which expenditure is eligible under the Structural Funds should be included in the Community support frameworks (CSFs), single programming documents and Community initiative programmes. These forms, however, apply only to investments, actions, measures and projects which were approved and selected after 1 May 1997.

8.70. Furthermore, declared expenditure on certain European Social Fund (ESF) projects includes a high level of indirect charges, sometimes without any real basis for the allocation of such charges. Some projects are also included in the framework of Community interventions although they are in fact on the point of completion or have been introduced in substitution for ineligible projects or expenditure. Whereas the Community added value may be reduced for such projects, there is also usually no prior evaluation to check that they correspond to the objectives of the Structural Funds. Lastly, for certain measures/actions, duties and commissions which should be excluded from Community financing were included in declarations by the national authorities.

Volume of advances paid

8.71. As a general rule, advances can amount to 80 % of the total contribution for each annual instalment, with the proviso that 25 % of the expenditure forecast for that instalment must already have been incurred and have been paid out, in conformity with the terms of the legislation, without the preceding instalment having been closed.

8.72. The size of each SPD/OP instalment is determined by the financial plans, which are sometimes unrealistic or ill-adapted to the programme approach; this can lead to expenditure forecasts which are excessive in the initial part of the programme and are a contributory factor making for low levels of use of appropriations. For example, some advances paid out of the 1994 and 1995 instalments, after reprogramming, finally cover the entire instalments. Similarly, a major part of the expenditure planned for initial instalments has in some cases been transferred to later instalments (127).

8.73. Moreover, in the case of global commitments for measures lasting less than two years, or when the Community assistance granted does not exceed 40 Mio ECU, the advance payments planned should be made after taking into account the annual implementation forecasts.

Financial corrections

8.74. The Commission could be called upon to adopt a decision imposing a net correction of the Community co-financing of an operation according to the nature of the errors or irregularities discovered, in application of Article 24 (128) of Regulation (EEC) No 4253/88. Its instructions of 15 October 1997 (129) on this subject do represent progress, but this, nevertheless, does not exclude the possibility of legislation being introduced subsequently (130).

Analysis of the results of the 1997 DAS audit

Substantive errors

8.75. The expenditure declarations underlying the Commission's 1997 payments, from which the trans-actions tested were selected, will largely have concerned underlying transactions which took place before the introduction of the new and tighter definitions of eligibility (see paragraph 8.69) and before the introduction of the Commission Regulation (EC) No 2064/97 specifying the standards for financial checks to be made by the Member States of operations co-financed by the Structural Funds.

8.76. The majority of the substantive errors concerning the legality and regularity of the underlying operations occurred at the level of the final beneficiaries, among which public bodies managing programmes or measures (131) also figure.

8.77. As the Court made clear in its 1995 and 1996 DAS audit reports, most of the substantive errors found in the expenditure declarations have no necessary or direct impact on the amounts of the Commission's payments or on the financial statements as presented. However, the Court considers the level of anomalies in the declarations of expenditure co-financed by the Community to be too high.

8.78. More than half of the errors by value concerned cases where the expenditure declared was ineligible by nature (for example, projects not meeting the criteria for inclusion in a programme, or administrative costs specifically excluded from co-financing). A number of other errors have also been brought to the attention of the Commission and the Member States concerned.

8.79. Substantive errors in expenditure declarations do not in themselves generally call the amounts of the Commission's advance payments into question, since the amounts declared are frequently more than required to justify the next advance. In so far as total eligible expenditure declared in the context of a programme's closure exceeds the total amount required to justify the maximum amount of Community co-financing, there will be some margin before errors have an impact on the Commission's payments, even though - as the Court's audits of the closure of 198993 programmes (132) have shown - there are doubts as to whether errors in declarations at the intermediate stages would be detected and corrected at the closure.

8.80. In order to throw light on this problem, the 1997 DAS audit included an in-depth examination of two closed European Regional Development Fund programmes which were selected as part of a random sample of the year's payments. These audits showed a high incidence of ineligible expenditure. In both cases the rate of substantive error was high enough, even allowing for the fact that the aggregate expenditure declared by the Member State substantially exceeded the amount required to justify the maximum amount of EU co-financing, to invalidate the final payment. Indeed, corrective action requires a proportion of previous advances to be recovered.

Formal errors

8.81. Other errors consisted of a failure to apply legislative and control mechanisms, but did not have any measurable repercussion on the amounts of the underlying transactions (formal errors). Many of the formal errors encountered are themselves evidence of systems weaknesses, mainly at the level of national or regional administrations, even though the amounts of the transactions were not in themselves shown to be incorrect.

8.82. Inadequate records or the lack of separate accounting were often noted in the expenditure audited. Other administrative failures - inadequate levels of inspection, excessive delays in payments to beneficiaries, breaches of contractual conditions attached to payments and the inability to justify fully the amounts declared - were found almost as frequently. Nor were the Commission's systems free from error: there were a number of cases where EAGGF-Guidance payments were charged against the wrong commitment (see paragraph 8.56), and in one case the Commission paid a further advance even though the amount declared was not enough to justify it.

8.83. Most of the errors detected at the level of the underlying transactions are not systematic. Nevertheless, certain weaknesses in the management and control systems - such as a lack of separate accounting or adequate account identification, the use of lump-sum calculation methods and a lack of coordination between the administrations concerned - were detected during the Court's audit visits and increase the risk that errors may not be prevented or detected.

Conclusion

8.84. More adequate and accessible information systems on the use of funds, including in particular relevant information on projects, should be developed so as to improve both the follow-up, evaluation and control of Structural Fund spending.

8.85. The Commission should ensure that new management and control procedures are rapidly established in the Member States so that Community law can be enforced. Effective action to improve the reliability of expenditure declarations depends on the rigorous application of the eligibility rules promulgated in the 22 April 1997 forms (see paragraph 8.69). It will equally require the successful implementation every year by the Member States of the minimum proportionate number of checks required by Regulation (EC) No 2064/97, together with appropriate action to correct errors.

8.86. The reform of the Structural Funds under Agenda 2000 should:

(a) introduce a commitment system which covers the total expected cost of the legal obligations entered into for structural measures;

(b) provide for adjustment of payments of advances more in line with the rate of implementation of the actions, by paying an initial advance to cover cash requirements, followed by periodic reimbursements of actual expenditure, which should be subject to suitable checks;

(c) provide an adequate response to certain questions which continue to be raised concerning the eligibility of expenditure;

(d) establish a precise framework for the financial corrections which the Commission would con-sider appropriate in certain cases of errors or irregularities.

REPLIES OF THE COMMISSION

INFORMATION SUPPORTING THE DECLARATION OF ASSURANCE

Accounting standards, policies and procedures

8.5 8.6. The Court suggests that the Commission define the fundamental basis on which the accounts should be prepared (cash or accruals accounting), but also points out that the treatment of the budget payments in question complies with the regulatory texts covering the implementation of the policies. The Court concludes from this that a reference framework should be drawn up on which to base the financial statements.

The Commission has addressed this question by launching a study to produce an accounting and consolidation manual which has identified the specific nature of the transactions carried out by the Commission. This makes it impossible to base all accounting procedures on accruals, even though the method used to account for a large number of transactions is very similar.

To give a fuller picture of the financial position of the institutions, it has therefore been proposed that an extended set of accounts be presented in future. As indicated in the manual, budgetary operations are not covered, since they are governed by the financial regulation.

In the preamble to the 1997 revenue and expenditure account and consolidated balance sheet, the Commission identified for the first time the accounting principles which provide the basis for the keeping of the accounts and presentation of financial statements (see also paragraphs 8.23 and 8.24).

Reliability of the accounts

Balance sheet

Understatement of debtors relating to EAGGF-Guarantees expenditure (paragraph III(a) of the statement of assurance)

Understatement of claims to be recovered from beneficiaries in the context of EAGGF-Guarantee expenditure

8.10. In line with the current regulations, point 11 of the annex to Regulation (EC) No 1663/95 requires paying agencies to keep a debtors ledger which they must inspect at regular intervals.

The Commission services have asked the Member States to supply six-monthly reports on expected recoveries. Examination by Commission services revealed that these communications were not homogeneous, which undermines the reliability of the information received. The Commission believes that the amounts do not represent a 'tangible and valid obligation to pay` and, incidentally, also takes the view that the information is incomplete and does not appear reliable. On prudential grounds, the Commission wishes to undertake a detailed examination to determine the exact value of the claim before entering it in the balance sheet.

Additional information will be requested and instructions given to make the information more reliable.

Understatement of claims on Member States related to the clearance of the EAGGF-Guarantee accounts

8.11. The 107.6 Mio ECU to be recovered from the Member States following the second clearance of accounts decision for 1993 was to be deducted from the advance payable to Member States at the beginning of January 1998. The Commission Decision C(97) 4299 fixing the amount of this advance, which included the reductions relating to this clearance, was adopted on 18 December 1997. Since legally, in accordance with Articles 99(1) and 102(3) of the financial regulation, the Decision of the Commission constitutes a global commitment (including the negatives) the EAGGF immediately cancelled the recovery orders which had been issued in respect of the amount involved. However the recovery order should have been maintained until 31 December 1997.

Inaccurate presentation of cash account balances (paragraph IV of the statement of assurance)

8.12. The Court has already expressed its criticism of the budgetary treatment of expenditure in the field of external cooperation in 1997 in relation to the accounts for the 1996 financial year.

As was explained in its reply to paragraph 19.9 of the 1996 statement of assurance, the Commission considers these payments definitive and takes the view that when external aid is granted unilaterally and not covered by a financial protocol, the budget is implemented in accordance with the provisions of Articles 40 to 53 of the financial regulation and the procedure under Article 111 does not apply.

The Commission believes that the provisions of the financial regulation covering external aid should be made clearer and be based more on the current situation so as to avoid the differences of interpretation which have occurred. The provisions of Article 111 will be reviewed when the financial regulation itself is reviewed.

Under PHARE, funds transferred to programme management units (PMUs) are verified in advance by the Commission to ensure that they correspond as closely as possible to the actual payment obligations of the PMUs, on the basis of disbursement forecasts through work programmes. It should be noted that the figure of 370 Mio ECU represents funds held by a large number of PMUs and the Commission considers this to be a reasonable amount in relation to the PHARE programme.

The same arguments are applied to similar sectors of external cooperation.

Uncertainty concerning amounts owed by the Member States (paragraph III(b) of the statement of assurance)

8.13 8.14. The checks carried out by the Court of Auditors have revealed one-off errors by the Member States in the way they keep the separate accounts for non-recovered amounts which are either contested or unsecured.

While the Commission feels that the errors affecting the separate accounts are not of major significance, it still attaches considerable importance to the correct entry of debts. Apart from the accounting aspect, which is of prime importance, this method of keeping accounts makes it possible to monitor the development of disputes, irregularities and the effectiveness of Member States' recovery measures. Since 1993 there has been a disturbing increase in debts outstanding as a consequence of the rapid growth in the number of disputes and the manifest ineffectiveness of recovery measures.

To improve the keeping of separate accounts, the Commission recently proposed a fresh amendment to Regulation (EEC, Euratom) No 1552/89 to speed up and improve the efficiency of the procedure of writing-off non-recoverable debts. The procedures for keeping separate accounts has been part of the Commission's annual control programme for several years, and wherever anomalies are discovered the Member States are asked to remedy the situation.

The Commission is in complete agreement with the Court as regards the valuation of the debts represented by the balance of the separate account. Only part of these amounts can effectively be recovered. The amendment to Regulation (EEC/Euratom) No 1552/89 proposed by the Commission would improve the situation to a certain extent by requiring that outstanding amounts which there is no hope of recovering be removed from the accounts. However, the only way of making radical improvements to the recovery procedure is to take long-term action to improve the quality of legislation by simplifying it and improving the determination and effectiveness of recovery measures taken by national administrations.

Uncertainty concerning the value of tangible fixed assets (paragraph V of the statement of assurance)

8.16. As regards the Joint Research Centre, an inventory of fixed assets is to be taken this year and results should be available for entry in the 1998 balance sheet. The JRC has also been reminded of the obligation to take a physical inventory.

8.17. The institutions are still discussing the problem of depreciation.

The interinstitutional regulation on inventories has not yet been adopted. As the other institutions are currently not obliged to calculate depreciation, the Commission chose not to enter depreciation in the accounts, so as not to deviate from the practice of the other institutions, as it indicated in the revenue and expenditure account.

Expenditure

Overstatement of commitments still to be settled (paragraph VI(a) of the statement of assurance)

8.18 8.19. For several years the Commission has been making considerable efforts to improve the management of outstanding commitments.

The Commission believes that, on prudential grounds, commitments should remain outstanding where payments are blocked for legal reasons.

8.20. The amendment to the financial regulation (seventh series) includes procedures for automatic cancellation of commitments when the deadline for implementation is exceeded. There are also plans to provide for more binding mechanisms in the Sincom2 application (such as the automatic cancellation of any surplus commitments once the balance has been paid), which should, in time, greatly reduce the amount of commitments unpaid without any real justification.

8.21. The measures taken by the Commission to tighten up monitoring should enable it to enter more realistic amounts in the financial statements.

Inconsistent treatment of commitments in the budgetary accounts (paragraph VI(b) of the statement of assurance)

8.22. The Commission is aware of the general problem raised by the Court: inconsistency in the treatment of commitments, i.e. the existence of:

- multiannual obligations for the Structural Funds,

- disparities between planned aid and accounting commitments for certain budget headings,

- correspondence between legal and accounting commitments in the other areas of expenditure.

To remedy this inconsistency the Commission includes in the off-balance sheet liabilities aid which has not been financially committed and is of the view that these operations are not in breach of the rules (see paragraphs 13.11-13.16 and 9.18-9.19 of the 1996 annual report).

Nevertheless, the Commission did recognise the general issue raised by the Court and in its replies to the previous year's observations (paragraphs 13.13 to 13.16 annual report 1996) gave an undertaking that this point would be reviewed in the forthcoming general overhaul of the financial regulation.

As regards the understatement of 4 000 Mio ECU of off-balance sheet commitments, by far the majority is related to the problem of MIPs and cooperation with former Yugoslavia. As indicated in the 1996 DAS report, the Commission does not share the Court's view, believing that MIPs are binding neither on the Commission nor on the beneficiaries and that they are simply an indicative programme which serves as a basis for detailed planning and discussions between the Commission and the beneficiary countries.

As regards the understatement of 11.05 Mio ECU for the international fisheries agreements indicated by the Court in Table 8.1, the Commission is of the opinion that it was under no legal obligation in 1997, since the agreements concerned were not adopted by the Council until 1998.

Inaccurate and inadequate disclosure of budgetary payments consisting of advances and payments on account (paragraph VII of statement of assurance)

8.23. In response to requests made by the Court, the Commission has supplied a table of information in the revenue and expenditure account which is not required by the provisions covering the drawing up of financial statements. The Commission is making considerable efforts to ensure that this additional information (distinguishing between payments on account and definitive payments) is correct and takes the view that, in any case, any errors made should not call into question the reliability of the accounts.

As regards the Structural Funds, the specific problem concerning payments on account and balances should be improved when the new arrangements for the Structural Funds, on which the Court will be asked to rule, are reviewed.

Although the information required by the Court is not reflected in Table 14 for certain EAGGF Guidance payments it is however available for management purposes. Therefore, the practice of effecting payments using the oldest unpaid commitment in no way reduces the transparency of the transactions.

8.24. By asking the Commission to consider payments on account under the Structural Funds as non-definitive and to be shown in the revenue and expenditure account, the comment made by the Court attempts to obtain information from the financial statement which is not required by the regulations.

As the Court has acknowledged, these transactions are accounted for on the basis of existing regulations. The Commission therefore believes there is no reason, at this stage, to question the reliability of the accounts.

The legality and regularity of the underlying transactions

Errors affecting the legality and regularity of commitment transactions (paragraph VIII of the statement of assurance)

8.27 8.28. The Court's criticism is based on a ruling of the Court of Justice of May 1998, six months after the closure of the financial year under examination. As long as the 'legal bases` appeal entered by the United Kingdom was sub judice, the Commission continued to implement the Community budget in accordance with the rules of conduct regarding the definition and implementation of non-significant action not requiring a legal base set out in its communication of 6 July 1994.

The Court of Justice ruling has forced the Commission to reconsider its approach. The Commission has taken full account of the Court's ruling and drawn all the conclusions required by a strict interpretation of it for the implementation of the 1998 budget. Since then an interinstitutional agreement has set out the methods of implementing the principle upheld by the Court, methods to which the Council, Parliament and the Commission have all agreed to adhere in future.

Formal breaches of regulations indicative of systems weaknesses (paragraph IX of the statement of assurance)

8.31. See comments on paragraphs 8.49 and 8.50, below.

8.32. The absence of accounting records which identify payments to certain promoters co-financed by the Structural Funds is often due to the failure to identify Community co-financing in the agreements signed by the programme managers and the promoters. This problem will be gradually resolved with the implementation of Commission Regulation (EC) No 2064/97 which lays down measures for improving the audit trail.

8.33 (b) The errors identified by the Court have either been corrected or will be corrected in the final statements.

Substantive legality and regularity errors concerning payments (paragraph X of the statement of assurance)

Structural Funds payments

8.36. It is true that there is a need for improvement with regard to national administrations' levels of knowledge of the eligibility of expenditure for Community financing. However, considerable effort has been put into the production of datasheets on eligible expenditure which started being used in May 1997. There will naturally continue to be slight problems of interpretation but these will diminish.

Even at the moment of programme closure, any unidentified ineligible expenditure included in a Member State's final declaration of expenditure will not lead the Commission to make too large a payment provided that the total expenditure declared exceeds the maximum sum payable by an amount greater than that of the ineligible expenditure.

The reliability of Member States' expenditure declarations at programme closure is likely to be significantly increased by the application of the provisions of Regulation (EC) No 2064/97 (133), and in particular its Article 8 requiring Member States to present, on closure, an independent statement on the validity of the final payment request.

Other payments (in the fields of expenditure directly managed by the Commission and other Community institutions)

8.38 (a). See comments on paragraphs 8.27 8.28 above.

8.38 (b). The Court refers to funds used to finance an office in Vukovar. This was in the first place a project technical assistance office whose staff were essentially contributing to project identification, terms of reference and technical specifications and project supervision. The use of operational appropriations for this purpose is therefore justified.

Furthermore, the specific situation of eastern Slavonia has to be taken into consideration in order to fully appreciate the decisions taken in the implementation of the Commission's projects. The region was under the control of Untaes, which was in charge of the administration and was the only counterpart to the Commission. However, given that Untaes had no legal status it was not possible to formalise an agreement. Therefore the Commission, confronted with the need to mobilise Community aid quickly, had recourse to the procedures described by the Court.

8.38 (c). The Commission believes that the expenditure to support the tax administration services was eligible since all the programmes were aimed at supporting the public administration.

8.39. The Commission will examine the findings of the Court's audits together with the beneficiaries and, where necessary, will recover any overpayments.

8.40. The Commission accepts that the calculation was not made in strict conformity with the letter of the Regulation. However, the text of the Regulation being incompatible with its objectives the Commission considers that, with regard to the latter the correct reference prices were used.

ANALYSIS OF EAGGF-GUARANTEE AND FISHERIES EXPENDITURE

Analysis of the findings of audits in respect of the DAS

Substantive errors

8.46 8.47. According to the Court, the substantive errors were detected mainly at final-beneficiary level, particularly in relation to over-declarations concerning areas. As the Commission has pointed out in response to previous DAS reports, it is not surprising that the Court finds applications for support in its random sample which have given rise to minor differences following on-the-ground audits, if the national authorities have not carried out on-the-ground audits regarding the applications in question. However, the Commission believes that these errors do not call into question the effectiveness of the audit system. Unlike in the case of animal premiums, where an animal either exists or does not, the measurement of an area, often using more sophisticated equipment than was available to the declarer, can give rise to minor differences without necessarily proving that there was any fraudulent intent on the part of the declarer.

Any extrapolation should also take account of the deterrent effect of the penalties system, which involves not only non-payment for the area not located but also the fact that the area measured must be reduced by twice the excess area if it is larger than 2 hectares or 3 %, but less than 20 %. If the excess area is larger than 20 % of the area determined, no aid is granted in relation to the area. The heaviest penalty, for cases of deliberately false declaration, involves the exclusion of the applicant from all forms of aid covered by the integrated system. Therefore, every application of penalties involves a reduction which is greater than the actual financial impact and thus makes up for applications which have not been subject to local checks.

Formal errors

8.49. The causes of all formal errors have already been the subject of financial corrections made during the clearance of accounts for 1994, 1995 and subsequent years. This applies to:

- insufficient and/or, on occasion, delayed physical and administrative checks (in the meat, wine, olive oil, fruit and vegetables sectors)

- insufficient proof of export of products

- failure to keep an olive oil register (e.g. Greece)

- payments to farmers beyond the regulation limits (Belgium, Denmark, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, United Kingdom).

As regards the lack of clearly defined terms of reference for the technical tasks delegated by the paying agencies, clear recommendations were sent to the Member States concerned during the clearance of accounts for 1996 and 1997.

8.50. A large majority of the formal errors identified in relation to direct payments are due to the situation created by the extremely late adoption of the Regulation extending the financing of these measures which led to all the deadlines laid down in the basic regulation being automatically exceeded.

ANALYSIS OF SPENDING ON STRUCTURAL MEASURES

Structural measure accounts

8.54. The Commission has issued a model for annual reports and expects the reports to contain the substance indicated in the model. However, it is not a main purpose of these reports to allow the Commission to identify ineligible expenditure. The Commission takes account also of other information available to it, including that derived from its monitoring and control activities. But it remains in the first place the responsibility of the Member States to exclude ineligible items from their expenditure declarations.

8.56. The Commission checks the accuracy of the declarations at any point during the life of a programme and, where necessary makes the appropriate financial adjustments. The corrections can also be made, if relevant information comes to light, after the final closure of the programme.

Following reprogramming, the Commission, in order to save administrative resources, does not reduce a commitment which has, because of the reprogramming, become 'too big`; but it ensures that its next commitment is adjusted so as to make the cumulative commitment correspond to the revised programme.

More generally, it is clear that commitments at the level of the Community budget bear only an indirect relationship to programme expenditure on the ground; it is not their purpose to correspond precisely.

8.57. The Commission has addressed this question in its recent working document on the recasting of the financial regulation (134)).

8.58. The subject of 'off-balance sheet obligations` for structural actions raises questions of definition. In the Commission's view the basic obligations are derived from the Edinburgh allocations, the Structural Funds and Cohesion Fund regulations and the interinstitutional agreement. Accordingly, the off-balance sheet obligations may be defined as the overall Structural Funds allocations (including full indexation), less the implementation. This amount represents the ceiling of the relevant obligations, as well as the likely outcome, subject to any future (still unknown) decommitments.

The Court would wish a distinction to be made regarding legal obligations. This would imply a reduction of the above amount by:

(i) indexation to the extent that Member States have not yet formally made use of their option to allocate the indexation to specific programmes; and

(ii) amounts still to be allocated at programme level (e.g. reserves). These amounts are fairly marginal at the end of the programming period, but still constitute an obligation for the structural actions.

In addition, there are continuous reallocations at programme level, making a 'bottom-up` calculation of off-balance obligations at a given date impracticable.

A further problem in calculating and verifying the off-balance obligations at a given date is that only commitments and payments are registered as accounting data; the programme allocations are not registered in the same way. This may raise questions of interpretation.

8.60. Mention should be made of the situation relating to the ESF, which carries out the annual closing of tranches thus making it possible to establish a link between payments effected by the Commission and measures implemented on the ground for the financial year concerned.

8.61. The Commission continues to consider that errors which do not lead it to make an incorrect payment should be categorised separately from the generality of substantive errors. Where the Member States' expenditure declarations are cumulative from the beginning of the programme concerned, an error discovered by the Court may date from any of the years from 1994 to 1997. To the extent that financial management and control in the Member States are improving, this means that the 1997 error rate may tend to be overstated.

8.62. In the case of the two programmes which have been closed, the Commission will take the necessary corrective action.

Management and control systems and the risks of error

Controls in the Member States

8.63. In principle, no financial management and control system can ensure the regularity of every financial transaction. The task of the Commission is to seek to ensure that the Member States have put in place, and operate correctly in practice, systems designed to discourage irregularity and reduce it to the minimum. The Commission makes a continuous effort in this direction.

Disclosure of information on expenditure

8.64 8.67. A system of information is required which allows the Member State authorities which certify expenditure declarations to verify that the expenditure is eligible. This requires inter alia the presence of a satisfactory audit trail, as now required by Commission Regulation (EC) No 2064/97.

Information at project level is required by those who manage projects in the Member States. The Commission is mainly concerned with the satisfactory progress of the overall programmes. It does not need to possess systematic detailed information about projects and would not have the resources to make use of this. It is able, however, to obtain project level information when it needs it, for example when planning an on-the-spot check.

Closure procedures

8.68. It is impossible to guarantee the elimination of all ineligible expenditure. All that is possible - and the Commission does this - is to work for the presence and proper operation in the Member States of effective financial management systems designed to reduce irregularities to the minimum and identify and correct them if they nevertheless occur.

The reliability of the information obtained by the Commission will be greatly improved as it will no longer be based exclusively on the operators' declarations of expenditure, but will also include a statement drawn up by a person or organisation functionally independent of the implementing service as provided for under Article 8 of Commission Regulation (EC) No 2064/97.

Eligible expenditure

8.70. Programme managers have been issued with instructions concerning the overhead allocation in datasheet No 5 on eligible expenditure. Moreover, datasheet No 2 explains the way of determining the date from which expenditure is considered eligible. Datasheet No 10 formally excludes certain types of commission entered by programme managers from expenditure eligible for ESF funding.

Volume of advances paid

8.72 8.73. The Commission has dealt with these points in its reply to the Court's special report on the execution of Structural Funds appropriations. The Commission has proposed to repeal, for the next programming period, the provision allowing a single commitment for programmes involving less than 40 Mio ECU of Community assistance. It has also proposed that after an initial payment on account, its payments should take the form not of advances but of reimbursements of expenditure actually incurred.

Financial corrections

8.74. The Commission's regulatory proposals for the next programming period include new provisions in respect of financial corrections.

Results of the 1997 DAS audit

Substantive errors

8.77 8.78. The Commission agrees that there are still too many ineligible elements in the expenditure proposed by the Member States for co-financing. It continues to do all in its power to reduce this problem by proposing or enacting appropriate regulations, by clarifying the eligibility rules and by making on-the-spot checks.

The Commission corrects or requires the correction of all irregularities of which it is aware if they have not been corrected by the Member State.

8.79. The closure of 1994-99 programmes should take place on a better basis than the closure of 1989-93 programmes as a result of the recent introduction of numerous improvements such as Commission Regulation No 2064/97.

In the case of the ESF, for example, the annual closing of tranches makes it easier to detect errors at an intermediate stage, before the final closure of the programmes.

8.80. The Commission will take the necessary corrective action in respect of the two programmes mentioned by the Court.

Formal errors

8.82 8.83. The Commission notes with interest, and finds relatively encouraging, the Court's finding that the majority of the errors at the level of the underlying operations are not of a systematic nature.

The rules clearly require the Member States to set up separate accounting arrangements for Structural Funds operations and not to use, in general, flat-rate deduction methods.

Clarification of Community requirements concerning the audit trail and the obligation for Member States to present a declaration drawn up by a person or organisation functionally independent of the implementing service at the end of the programming period (see Commission Regulation (EC) No 2064/97) will definitely overcome some of the management weaknesses within the Member States identified by the Court.

Conclusion

8.84. Information on projects is needed by those in the Member States who manage and control projects. Systematic information on projects is not needed by the Commission, which obtains project-level information from the Member States when it needs it, for example in the context of an on-the-spot check.

Therefore it is not a question of developing a centralised computerised system at Community level, which would not be in line with the principles of the management of the Structural Funds, particularly the principle of subsidiarity.

8.85. The Commission will continue to deploy the maximum effort possible in these directions. The primary responsibility rests, however, with the Member States.

8.86. The Commission has broadly taken account of these points in its proposed draft Structural Funds regulations for the next programming period.

REPLY OF THE EUROPEAN PARLIAMENT

8.15. The amount of 115.6 Mio ECU was broken down into real property (11.7 Mio ECU) and movable property.

The value of the movable property was calculated by the authorising officers by adding the entries and withdrawals recorded in the IMMO database to the value at 31 December 1996. This database, which is the current register, contains all items entered in the financial inventory, with their initial values. Better reconciliation of the information on the database with the amounts shown in the balance sheet is one of the improvements a new inventory management system is intended to bring.

To summarise, the schedule of targeted improvements is as follows:

- during 1998 application of the procedure for removing from the inventory almost 6 000 items previously acquired, with account taken of the results of the last physical inventory;

- in September 1998 the institution began the new physical inventory by attaching bar code labels to all items of movable property listed in the inventory;

- by late 1998 the IMMO database will reflect the actual situation more accurately after these two operations. The new inventory will not, however, be entirely finished;

- in 1999 Parliament will convert its register to a new interinstitutional computer environment, which will include a financial module (developed by the Court of Justice and the Commission in 1998). At the same time, it will install a three-year verification programme with a view to maintaining the quality of the register after the updating achieved with the physical inventory in 1998.

8.40. The allowances paid are consistent with the decisions taken by Parliament's bureau pending the adoption of definitive arrangements on the basis of an agreement with the other institutions.

These decisions can be explained, on the one hand, by the Council's delay in taking a decision on the revision of the statutory rates, on the basis of objective information concerning trends in actual expenditure, and, on the other, by the specific problems facing Parliament and the exceptional working conditions linked to the use of three main places of work and the organisation of a large number of meetings outside those three places of work.

The decisions taken regarding allowances are based on trends in the price index in the hotels/restaurants/cafés sectors published by the Statistical Office of the European Communities and used by the Commission when drawing up its proposals for the revision of the rates submitted to the Council.

It should also be borne in mind that the main details of the arrangements in force in Parliament are set out in the most recent revision proposal submitted by the Commission to the Council.

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Report on the activities of the sixth and seventh European Development Funds

PART I Observations concerning activities under the sixth and seventh European Development Funds (135*)

CONTENTS Paragraph reference

Implementation of the sixth and seventh EDFs up to 31 December 1997 1 - 7

Other observations 8 - 20

Introduction 8

Non-respect of procedures 9 - 13

Liquidated damages in case of delayed performance 14

Treasury management 15 - 20

Audit executed on risk capital operations financed from EDF resources 21 - 37

Introduction 21 - 26

Conduct of the audit 27 - 29

Conclusion 30 - 37

IMPLEMENTATION OF THE SIXTH AND SEVENTH EDFS UP TO 31 DECEMBER 1997

1. The European Development Funds (EDFs) trace their origin back to international agreements drawn up between the Member States of the European Union and 71 African, Caribbean and Pacific (ACP) countries and to Council decisions relating to the association of 24 overseas countries and territories (OCTs). The Commission is responsible for the administration of the EDFs without prejudice to the European Investment Bank's responsibilities for the administration of certain forms of aid.

2. In 1997 the sixth (136) and seventh EDFs (137) were being implemented concurrently because although, in principle, each one was limited to five years, there is no time-limit on the spending of the appropriations allocated. Only when the Commission considers that the implementation of a particular fund is nearing completion does it transfer the balance to a subsequent Fund.

3. Table I.1 shows the utilisation of the sixth and seventh EDFs as at 31 December 1997. For the financial year 1997, the payments amounted to 1 212,7 Mio ECU, whilst the net commitments reached 616,0 Mio ECU. The corresponding amounts for 1996 had been 1 317,4 Mio ECU and 964,9 Mio ECU respectively. Twelve years after it came into force, disbursements from the sixth EDF represented 85,6 % of its resources; at the same stage of the fifth EDF they represented 87,6 %. The payment rate for the seventh EDF stood at 55,6 % at the end of the seventh year of implementation; for the sixth EDF it stood at 63,9 %.

4. The financial protocol for the seventh EDF expired on 1 March 1995, and on 3 November 1995 the ACP EC Council of Ministers decided that the balances outstanding for the financial instruments relating to the system for stabilising export earnings (Stabex), to the special financing facility for mineral products (Sysmin), as well as to structural adjustment support, emergency aid and assistance for refugees, would all remain allocated to their respective objectives until used up.

5. On 4 November 1995, the ACP States and the Member States of the European Union signed an agreement amending the fourth Lomé Convention. After ratification of this agreement, the corresponding eighth EDF, for which an overall amount was fixed for ACP countries and OCTs at 13 167 Mio ECU, entered into force on 1 June 1998 (138).

6. In 1995, it was agreed that, of the resources allocated to the eighth EDF, 292 Mio ECU was to come from transfers from previous EDFs of which 13 Mio ECU coming from the balances of the closed fourth EDF. This decision, however, only partly resolves the problem of unpaid outstanding balances from closed EDFs (139). In fact, as at 31 December 1997, these outstanding balances amounted to 335,9 Mio ECU, i.e. the funds transferred from the fourth to the sixth EDFs (123,1 Mio ECU) (140) and from the fifth to the seventh EDFs (444,2 Mio ECU) (141) had given rise to only 231,4 Mio ECU of payments, i.e. 40,8 % of the transfers. This being so, the Commission should propose to the Council a suitable mechanism to ensure that in future appropriations are not left unused.

7. In 1997 again a number of payments have been made on behalf of the eighth EDF which was not yet ratified in 1997 (see paragraph 20).

OTHER OBSERVATIONS

Introduction

8. In the course of the 1997 DAS audit, a number of problems were identified which did not have an implication for the statement itself, but have an impact on the soundness of the financial management. These are treated below.

Non-respect of procedures

9. As mentioned in Part II of this report concerning the statement of assurance there is a high incidence of formal errors in that the legislation applicable to the EDF (conventions, internal agreements, financial regulations) was not followed. Moreover, in a considerable number of transactions the Court found that the Commission did not properly apply the EDFs' internal rules.

10. Changes to contractual provisions as regards the period of performance, period of contract, or currency of payment, are frequently made by all parties concerned (Commission, national authorising officer (NAO), beneficiary) without written notification. Moreover, usually no justification in writing as regards the part of the contract payable in foreign currency is provided. That makes the management and follow up of projects unnecessarily difficult and could have negative financial consequences in case of legal disputes.

11. Many payment orders were issued by NAOs, without the date of signature. Equally the date of endorsement by the delegation was often not indicated. In a number of cases where the dates were indicated, the contracts were endorsed by the delegation before signature of the NAO.

12. Contrary to internal rules, service contracts included contingencies and did not respect applicable ceilings for per diems. The replenishment of imprest accounts for work programmes was not, as prescribed, limited to justified expenditure, but included additional advances as well.

13. The high number of cases in which the legislation and/or the internal instructions were not respected may be a symptom of unnecessary and sometimes unrealistic rules which render the administration of the EDFs less coherent and less reliable. While the Commission's services should adhere to the rules, the whole set of the EDFs' regulations and internal rules should be examined to assess their appropriateness.

Liquidated damages in case of delayed performance

14. In two contracts it was found that no rate nor maximum amount was specified for liquidated damages in case of delayed performance. This deprives the contracting authority of the possibility of claiming damages if such occur. However, even when the contracts contain clauses on delayed performance, the rights and penalties prescribed are not exercised. It is generally left to the NAO's discretion whether to apply these rules. The audit revealed that out of 62 cases examined there were 10 contracts with delayed performance. In none of these cases was the right to claim damages (amounting to 0,7 Mio ECU) exercised (142). The Commission should be more vigilant and should require the NAO to provide justifications in cases where the rights on liquidated damages are not exercised.

Treasury management

15. Although improvements of the treasury management have been made during 1997, a number of problems still remain unresolved.

16. Payments made locally in the ACP States are initially recorded on the basis of the bank statements received from the national paying agents in a suspense account. Expenditure is subsequently regularised and attributed to projects on the basis of supporting documents received from the delegations and cleared as final expenditure after checks made by the authorising officer and the financial controller. This procedure is not, however, uniformly applied. Some staff of the Commission do not record the payments made by the national paying agents until they receive all the supporting documents. As a result the balances of some local bank accounts shown in OLAS are overstated during the year. At year end, the differences between the OLAS figures and the actual bank balances are booked as bank reconciliation items to give a true and fair view of the bank accounts (143).

17. Contrary to Article 319.1 of Lomé IV, five ACP States (144) do not have a national paying agent bank account to execute local payments. For one of these countries (145) the local payments are executed by the Commission's central services in Brussels from European paying agents.

18. In contrast to the situation concerning all other European paying agency accounts, there has not yet been a fresh tender for the continued operation of the Stabex bank account, which was opened in 1994 for one year and subsequently tacitly renewed year by year.

19. Contrary to contractual provisions which do not allow bank charges, available balances have been reduced by such charges in one European and 12 ACP paying agent institutions. The Commission should not have accepted these charges and the amounts should have been booked in a transitory account (146).

20. The bank balance on the account with the National Housing and Savings Bank of Liberia has had no movements since 1990 and no bank statements nor any other supporting documentation were available as at 13 October 1998. As it is unlikely that this amount can be recovered (147) the EDF authorising and accounting officers should write it off.

AUDIT EXECUTED ON RISK CAPITAL OPERATIONS FINANCED FROM EDF RESOURCES

Introduction

21. During 1997, the Court has executed an audit on risk capital operations (RCOs), the results of which will be published in Special Report No 2498. This chapter gives a summary of the findings of the audit.

22. Risk capital constitutes a method of financing that also exists under both the Lomé Conventions. It allows reimbursable financial assistance to be given under favourable conditions to priority sectors in ACP States and overseas countries and territories in particular where the beneficiaries' capacity to borrow does not allow financing from the own resources of the EIB.

23. It is used for financing investments in both the public and private sectors given directly or indirectly in the form of:

(a) individual loans, loans via an ACP State or global loans via a financial intermediary;

(b) loans with participating rights;

(c) equity participations.

24. The funds form part of the EDF but are administered by the EIB on behalf of the Community and in accordance with the Bank's statute and the financial regulations related to the EDF (148). The amounts earmarked for risk capital operations (RCOs) under the Lomé III and Lomé IV Conventions are respectively 615 and 850 Mio ECU.

25. The terms of risk capital operations depend on the characteristics of the individual projects or programme financed but shall be more favourable than those of subsidised loans (149) and in the case of loans the interest rate shall be less than 3 % under Lomé IV (150). In case of on-lending the interest margin is to be used for development purposes after administrative costs, and exchange rate and financial risks have been taken into account.

26. Amounts decided upon, committed (net) and disbursed as at 31.12.1997 (151) are as follows:

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Conduct of the audit

27. The audit has been conducted on the basis of the tripartite agreement concluded between the EIB, the Commission and the European Court of Auditors and has taken into account the recommendation of the European Parliament inviting these three institutions to make regular and frequent on the spot audits of actions realised by the EIB under mandate.

28. The Court examined 42 RCOs of which 33 projects were visited on the spot comprising an examination of the operations of financial intermediaries (FIs) and of the final beneficiaries of the risk capital financing.

29. Although the Commission's filing system has improved in the course of the Court's audit, the information kept by the Commission was still not complete and documentation had to be made available to the Court directly by the Bank. However, important information was provided at such a late stage that it hampered an efficient conduct of the Court's audit.

Conclusion

30. The manner in which risk capital operations have been prepared, implemented and monitored by the Bank does not give rise to observations. Nevertheless, the transparency and effectiveness of the operations can still be improved.

31. The criteria, which should guide the allocation of risk capital resources, are very general. The Bank is thus more or less free to choose between risk capital or its own resources in making loans. The justification of the decision to use risk capital funds does not clearly emerge from the project appraisal documentation.

32. The use of different types of financing (direct loans, loans via an ACP State, global loans) has led to unequal treatment of final beneficiaries: while some beneficiaries benefit from the 3 % maximum interest rate stipulated in the Lomé IV Convention, others have to pay market rates. Though not the only determining factor, the effects of exchange rate fluctuations play an important role in setting interest rates above the 3 % level. These effects and thus the justification for higher interest rates can be calculated only after loans have been fully repaid. In addition, in the case of loans with participating rights, the total remuneration to the EIB - being at least partly dependant on the result of the beneficiary enterprises - could well exceed the 3 % limit.

33. Provisions concerning the use of the interest margin by the financial intermediary are often not clear. The Bank should ensure that finance contracts stipulate precisely how the amount of the interest margin is to be used and that any such use is in compliance with the provisions of the Lomé IV Convention.

34. Support to the private sector through global loans has been given mainly to existing - instead of to emerging - SMEs, which moreover often benefitted from financing from the FIs' other resources.

35. An ex post evaluation system is needed to provide information about the viability of operations having benefitted from risk capital finance and their real contribution to the economic and social development of the ACP States. Such an evaluation system should be developed in cooperation between the Bank and the Commission.

36. In addition, the Commission should play a more active role at the appraisal stage and regarding the evaluation of the overall effects of RCO on the development of the ACP State. Guidelines should be developed setting out the responsibilities of and the procedures to be followed by the services concerned.

37. The preceding recommendations are made in the context of improving the existing systems of management of RCOs. However, alternative systems should be considered. As a matter of fact, the Commission's role in the management of the RCOs seems to be limited in practice to an exchange of information with the Bank. The Commission is not involved in a variety of tasks (appraisal, accounting, monitoring and evaluation) which should fall within its responsibilities for the financing of risk capital operations. The Court therefore suggests that consideration should be given to the possibility of entrusting the full responsibility for RCOs to the Bank with no involvement of the European Development Funds. In this context it is noted that repayments of and interest on risk capital funds are not credited to the EDFs at present.

REPLIES OF THE COMMISSION

IMPLEMENTATION OF THE SIXTH AND SEVENTH EDFS UP TO 31 DECEMBER 1997

6. The figure of ECU 335.9 million represents the unpaid balances still outstanding from closed EDFs. Consideration must however be given to the fact that part of the unpaid balances is already committed. The remaining uncommitted balances amount to ECU 80.8 million (August 1998), i.e. 14.2 % of the appropriations transferred from closed EDFs.

Moreover, since 1995, the closure of numerous projects by the Commission has meant that the uncommitted funds allocated to them have automatically been made available again.

In order to simplify the management of the EDFs the Commission has stated its intention to propose a consolidation of all uncommitted funds under a single management system (see the statement of the Commission to the Joint ACP/EC Council made in May 1998 and also the reply to Part I paragraphs 9 to 13 of this report).

7. See Part II paragraph 20.

OTHER OBSERVATIONS

Non-respect of procedures

9 13. Present legislation and internal regulation are a result of the high ambitions of the Commission as well of the ACP States for the execution of the EDFs. The situation is, however, complicated by the fact that the Commission has at the same time to manage funds originating from different EDFs and therefore subject to different sets of rules. For the most recent fund (the eighth EDF) the Commission has sought to modernise and simplify the regulations. As mentioned in Part I paragraph 6 above the Commission will seek the agreement of the ACP/EC Council to consolidate the management of all uncommitted funds under a single system. The intention is to close the sixth EDF and to transfer all remaining balances together with all uncommitted balances of the seventh EDF to the eighth EDF. It appears logical to apply the most recent and most appropriate guidelines to all available funds, i.e. including those remaining from previous Conventions. It can also be noted that the directives for the post-Lomé negotiations contain a request for simplification of the Convention.

Liquidated damages in case of delayed performance

14. According to Article 313(2)(e) of the Lomé Convention, it is the national authorising officer's task to decide whether to impose penalties for delays in performance. Although the principles of sound financial management require the Commission to protect the economic interests of the EDF, it is by no means clear that always demanding penalties would serve that purpose. The national authorising officer is required to inform the head of delegation of his decisions in respect of penalties. The Commission is, however, under no obligation to request specific justification for such decisions.

Treasury management

16. Supporting documents for local payments sometimes reach headquarters very late, so that expenditure is entered into the accounts only after payment is made. Entries in the bank's books are constantly compared with bank statements in order to identify possible discrepancies. This time-difference between treasury management and accounting in no way affects the expenditure managed under the EDF.

17. It is correct that five countries do not have an ACP paying agent bank account. It was considered inappropriate to open such an account in Uganda and unnecessary to do so for the Comoros, Djibouti and Saint Kitts and Nevis.

19. What the Court says is correct. The Commission will endeavour to recover the amounts which were wrongfully deducted and which have not yet been recovered.

20. Regarding the paying agent account for Liberia, it is correct that it has had no movements since 1990. However, supporting documentation is available. The Commission will consider whether it can write off the balance of this account or make further efforts to recover or use it.

AUDIT EXECUTED ON RISK CAPITAL OPERATIONS FINANCED FROM EDF RESOURCES

Introduction

25. Article 234(c) of the Lomé IV Convention lays down that 'the terms of risk capital operations shall depend on the characteristics of each project or programme financed and shall in general be more favourable than those of subsidised loans`. Any comparison between the conditions of subsidised loans and risk capital operations needs to be nuanced to take account of the type of financing and of all of the conditions of the relevant operations.

Conduct of the audit

29. The Commission has conducted a major reorganisation of its EIB files. For each financial year starting with 1993, it has put together all documentation relating to the main stages of risk capital operations: financing proposal, opinion of the Article 28 Committee, financing decision, execution of payments and repayments. So from 1997, this documentation has been easily accessible and regularly used.

The EIB and its audit committee have always made every effort to assist the Court of Auditors by providing the information requested, helping the Court to prepare its visits and continuing to provide information and additional documents requested after its visits.

In any case, the EIB has always acted in accordance with the tripartite agreement. At the Court's request, this agreement is currently being renegotiated.

Conclusion

30. The Commission is pleased to note the general assessment of the Court, which has no particular observation to make on the manner in which risk capital operations have been prepared and implemented. Regarding effectiveness, the Commission recognises that there is always room for improvement. Regarding the transparency of the operations, the Commission considers that they are transparent for Member States through the Article 28 Committee.

31. The internal agreement between the representatives of the governments of the Member States, meeting in the Council, on the financing and administration of Community aid sets up an Article 28 Committee within the Bank. The Committee is made up of representatives of the governments of the Member States and a Commission representative is present.

At nearly all of its meetings, the Article 28 Committee receives several proposals for financing under the Lomé Convention, so that detailed comment in each report on the background to the reasons for using risk capital is not required. Most reports do provide a succinct justification (e.g. non-creditworthiness of the country), and usually the justification is rather obvious. The question of the utilisation of risk capital as against the EIB's own resources is only rarely raised as an issue for discussion, and where there are particular aspects on this point they are discussed during the meetings to the satisfaction of participants, as far as we are aware.

32. The EIB has certainly not deliberately developed any policy which might contravene the spirit of the Convention. In setting the interest rates that are applied to projects which it finances, the EIB has, on the one hand, to respect the conditions of the Lomé Convention - which specify subsidised rates - and, on the other hand, to take account of the need to ensure that end-borrowers, notably in the private sector, pay rates more akin to market rates, where these can be determined. This can indeed give rise to some anomalies, but:

(i) it is quite normal for a loan to a strong borrower with a strong guarantor to be at a lower interest rate than a less well-secured loan (so an own-resources loan might well have a lower interest rate than a riskier loan made from risk capital); and

(ii) a loan in a local ACP currency will normally carry a significantly higher nominal interest rate than a loan in ecus because of the underlying rates of expected price inflation or currency depreciation.

The Lomé IV Convention caps interest payable on risk capital loans at 3 % p.a. but places no limit on remuneration or profit sharing. Frequently a profit-sharing component is added to a fixed interest component on a financing, which is not prohibited by the Lomé Convention.

33. In selecting the FI, or DFC (development finance corporation), the EIB pays careful attention to the soundness of its financial situation, its development role and its support to the country's economy. In this regard, most of the DFCs are non profit-making institutions with a strong developmental impact, particularly in relation to small enterprises. These criteria are in accordance with Article 233(4)(b) of the Lomé IV Convention, first financial protocol.

35. With regard to the issue of evaluation of the risk capital operations, the Commission will carry out a review of the overall effects of risk capital operations of the ACP States before making concrete proposals for any post-Lomé Convention.

36. The Commission and the EIB work closely together at the time of the 'programming` of Community aid at the start of a Convention (e.g. the signing of the national indicative programme and the EIB's annex thereto). Close contacts (often informal) are maintained between EIB staff and Commission delegations throughout the ACP during the life of a Convention.

Article 33(5) stipulates the role of the Commission concerning the operations financed by the resources of the fund and managed by the Bank. The Commission receives each year from the Bank a report of the financial execution and, in coordination (coordination meetings take place at all levels) with the Bank, takes the necessary measures, if necessary. The Commission is present at all Article 28 Committee meetings. The Commission on the basis of the draft proposals prepared by the Bank consults the geographical desks (and if necessary the delegations) concerned and, accordingly, presents its observations, comments, suggestions, and objections to the Bank.

37. The Commission's mandate for negotiating a partnership agreement for development between the EU and the ACP countries provides for a change in the instruments intended for the promotion and development of the private sector. Specific proposals will be considered during the post-Lomé negotiations.

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PART II The statement of assurance and supporting information concerning the sixth and seventh European Development Funds (152*)

CONTENTS Paragraph reference

Statement of assurance relating to the activities of the sixth and seventh European Development Funds (EDFs) for the financial year ended 31 December 1997 I - X

Reliability of the accounts III

Limitations on the audit work relating to payments IV

Legality and regularity of the underlying transactions V - X

Information supporting the statement of assurance 1 - 41

Introduction 1

Scope of the audit 2 - 5

Limitations on the audit work relating to payments 6 - 8

Accounting standards, policies and procedures 9 - 13

The reliability of the accounts 14 - 23

Balance sheet 14 - 17

Revenue and expenditure 18 - 20

Management accounts and annexes 21 - 23

The legality and regularity of underlying transactions 24 - 41

Contributions and other revenue 24 - 26

Decisions (commitments) 27 - 34

Payments 35 - 41

Statement of assurance relating to the activities of the sixth and seventh European Development Funds (EDFs) for the financial year ended 31 December 1997

I. The European Court of Auditors ('the Court`) has examined the accounts of the sixth and seventh EDFs for the financial year ended 31 December 1997. These accounts consist of the balance sheets as at 31 December 1997, the statements of sources and uses of funds and the revenue and expenditure accounts for the financial year ended on the same date and the accompanying notes. They are the responsibility of the Commission and are presented in Chapters VIII, IX and X of communication COM(1998) 442 final of 14 July 1998 from the Commission to the European Parliament, the Council and the Court. Pursuant to the financial regulations, the Court is required to provide the Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions.

II. The Court carried out the audit in accordance with its audit policies and standards. These adapt generally accepted international auditing standards to the EDF context. The audit comprised an appropriate range of audit procedures, designed to examine, on a test basis, evidence relating both to the amounts and disclosures in the accounts and the legality and regularity of the transactions underlying the accounts. It also included an assessment of the accounting principles used and significant estimates made by management, as well as the presentation of the accounts. Through the audit the Court obtained a reasonable basis for the opinion expressed below.

Reliability of the accounts

III. Improvements are still needed in the accounts in respect of the following matters:

(a) the amount of commitments unlikely to be used according to the Commission (38,3 Mio ECU to be decommitted plus 640 Mio ECU unlikely to be used) is estimated to be understated by some 43 Mio ECU (see paragraphs 21-23);

(b) the amount disclosed as advances on contracts (for works, services and supplies) does not reveal the contracts with negative advances of 17,5 Mio ECU nor the closed contracts with advances outstanding of 4,4 Mio ECU. Moreover, advances are shown as final payments in the financial statements (see paragraphs 18-19);

(c) as in 1996, advances of 15,8 (4,3 + 11,5) Mio ECU have been paid out of the seventh EDF in respect of the eighth EDF Stabex and the Centre for the Development of Industry (CDI) budget. These amounts are not disclosed as debtors on the balance sheet of the seventh EDF, but are only included in the receipts and expenditure account of the year (see paragraph 20);

(d) the 17,9 Mio ECU shown as advances for scholarships and technical assistance include expenditure under verification amounting to 4,4 Mio ECU and a further 9,9 Mio ECU for which the Court is unable to express an opinion (see paragraphs 16-17);

(e) in certain cases generally accepted accounting principles (i.e. completeness, no set-off, disclosure, and consistency) have not been applied (see paragraphs 9-13).

Limitations on the audit work relating to payments

IV. The Court is unable to reach an opinion as to the correct use of an estimated 1,2 % of the payment transactions, due to a loss of audit trail (see paragraph 8).

Legality and regularity of the underlying transactions

V. The decisions (commitments) were affected by known substantive errors of legality and regularity in the amount of 15 Mio ECU (see paragraph 27). Without further qualifying this opinion the Court draws attention to the fact that, based on the interpretation of unclear legislation, two ACP States received more than 35 % (153) of the balance available for Sysmin.

VI. Moreover, the audit showed a high incidence of formal errors affecting the commitments (see paragraph 29).

VII. Of the 15,8 Mio ECU of payments mentioned under paragraph III(c), 4,3 Mio ECU (known error) related to Stabex. As the eighth EDF was not yet ratified, the underlying commitments, made in 1996, were realised with appropriations that were not available at the time. For the same reason, no sufficient legal basis exists either for these payments. As in the DAS 1996, these errors are regarded as being of an exceptional nature (see paragraph 36).

VIII. In 1997 the proportion of payments for Stabex and structural adjustment (usually about one third of the global amount of payments) was low, because such disbursement had to await the ratification of the eighth EDF. This situation increased the relative weight of the errors in the traditional grant payments. The audit revealed a significant incidence of substantive errors affecting the amounts of transactions underlying payments (see paragraphs 37-38).

IX. The audit again showed a high incidence of formal errors affecting payments. In these cases there were failures to comply with the applicable regulations and other conditions (see paragraphs 39-41).

X.

- Except for the effects of the matters summarised in paragraph III above, the Court is of the opinion that the accounts for the financial year 1997 reflect reliably the revenue and expenditure of the sixth and seventh EDFs for the year and their financial situation at the end of the year.

- The Court is of the opinion that the transactions underlying the revenue entered in the accounts for the financial year, taken as a whole, are legal and regular.

- Except for the effects of the matters summarised in paragraph V above, the Court is of the opinion that the transactions underlying the commitments for the financial year, taken as a whole, are legal and regular.

- Except for the effects of the matters described in paragraphs VII to IX above, the Court is of the opinion that the transactions underlying the payments for the financial year, taken as a whole, are legal and regular.

15 October 1998

B. Friedmann

President

European Court of Auditors

12, rue Alcide De Gasperi, L-1615 Luxembourg

INFORMATION SUPPORTING THE STATEMENT OF ASSURANCE

Introduction

1. The Treaty establishing the European Community entrusted the Court of Auditors with the task of auditing transactions carried out under the European Development Funds. The Court of Auditors is required to provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. This information in support of the statement of assurance sets out the overall results of the work performed under that mandate for operations under the sixth and seventh EDFs for the financial year 1997.

Scope of the audit

2. Although the accounts of both the sixth and seventh EDFs for the financial year ended 31 December 1997 are to be forwarded to the Court not later than 15 April, and 1 May of the following financial year respectively, they were only made available to the Court on 14 July 1998.

3. The audit was planned and performed so as to obtain sufficient, relevant and reliable audit evidence to give reasonable assurance that in all material respects, the accounts are reliable and that the underlying transactions are legal and regular. Certain cases of deliberate irregularity to the detriment of the Community finances cannot, by their very nature, be detected by the normal audit procedures. The primary responsibility for the prevention, detection and investigation of irregularities rests with those responsible for the management of EDF revenue and expenditure.

4. The commitments and payments examined in the context of the sampling procedures accounted for 61 % and 25 % respectively of the value of total commitments and payments for the year (154). In the fields of Stabex and structural adjustment, the size of the transactions examined was such that most of the movements in that year were examined (155).

5. At the year-end, to ascertain the appropriations available for re-use, it is necessary to deduct from the capital of each EDF both the final payments disbursed since the start of the Fund and the commitments of appropriations that are awaiting settlement. Table I.1 shows the amounts that were expected to be available for re-use at the end of the 1997 financial year and thus also provides an overview of the utilisation of the sixth and seventh EDFs (156).

Limitations on the audit work relating to payments (paragraph IV of the statement of assurance)

6. The Court audited the underlying transactions on the basis of documentation obtained at central services in Brussels and, if necessary, from the delegations in the ACP States, thereby excluding certain aspects of the operations, e.g. price revisions within work contracts, and justification of expenditure of work programmes, from the scope of the audit.

7. For the same reason, the Court was not in the position to express an opinion whether the use by the beneficiary of loans managed by the European Investment Bank (EIB) in the form of risk capital provided by the EDF and/or EDF subsidised loans from the Bank's own resources was in accordance with the contractual stipulations.

8. For two cases in the sample estimated to represent 1,2 % of payment transactions, it is not possible to judge whether the underlying transactions are legal and regular. In those cases it was in particular not possible to follow the audit trail. For one decommitment amounting to 1,1 Mio ECU supporting documents were missing.

Accounting standards, policies and procedures (paragraph III(e) of the statement of assurance)

9. Contrary to the principle of completeness:

(a) a commitment of 0,6 Mio ECU was not accounted for, thereby understating the amounts decided under the seventh EDF (157) and correspondingly overstating the appropriations available for re-use;

(b) local payments made in 1996 amounting to about 0,5 Mio ECU were, contrary to Articles 13 and 36-37 of the financial regulation not yet accounted for in OLAS, neither in the transitory nor in the project accounts (158).

10. Moreover, the audit revealed a bank account titled 'European Commission Danida` with EDF accounting officers that was not included in the balance sheet item 'cash at bank` (159).

11. The generally accepted accounting principle of gross accounting (no set-off) explicitly mentioned in the financial statements (160) has not been applied. At the end of 1997, the amount of 14,7 Mio ECU of expenditure to be regularised, mentioned on the sixth EDF balance sheet, actually comprised 1,8 Mio ECU of receipts and income to be regularised and 16,5 Mio ECU of expenses to be regularised.

12. Although the cash accounting method is explicitly stated as being one of the main principles of the EDF accounting policy (161), in certain cases the Commission uses accrual accounting techniques, for which consistency and disclosure problems arise:

(a) bank account balances held in Member States currencies were revalued at year end in ecus resulting in a loss of 1,68 Mio ECU for 1997; this loss was accounted for as cash expenditure, contrary to the cash accounting method because the losses had not been realised;

(b) on the other hand, the portfolio of government bonds, amounting to 84,1 Mio ECU, shown as included in the Stabex bank account, was not revalued to the market value at 31 December 1997 of 81,2 Mio ECU; in this case a loss of 2,9 Mio ECU was not disclosed (see also paragraph 13(a)).

13. Wrongly disclosed within the asset 'cash at bank` of 421,5 Mio ECU are:

(a) 84,1 Mio ECU of government bonds as part of the Stabex treasury balance of 91 Mio ECU;

(b) an OLAS transfer account with a balance of 0 ECU whereas the negative currency value amounted to 1 Mio ECU.

The reliability of the accounts

Balance sheet

Contributions receivable

14. Despite the Commission's previous assurance (162), an amount due for Germany's 1994 contributions (as a result of the exchange rates applied when the contributions were actually paid) is still accounted for as an account receivable instead of under profit and loss.

Cash at bank

15. The balance of the EDF bank accounts amounting to 421,5 Mio ECU contains the following anomalies:

(a) an overstatement, amounting to 0,97 Mio ECU, of the balances of two European paying agent bank accounts (163);

(b) two bank accounts, amounting to 2 Mio ECU, in Member States (164) that have not signed the Lomé IV Convention and therefore are not allowed to have paying agent accounts according to Article 319.4 of Lomé IV.

Advances for scholarships and technical assistance (paragraph III(d) of the statement of assurance)

16. Details of the advances paid for scholarships and technical assistance, amounting to 17,9 Mio ECU, are disclosed in Annex 3.3 of the financial statements and broken down into three groups:

(a) 5,17 Mio ECU managed directly by 46 delegations in the ACP States. Of this amount only 0,45 Mio ECU was confirmed to the Court by 37 delegations, an amount of 0,28 Mio ECU was not replied upon by nine delegations, thus leading to an overstatement of the outstanding advances of 4,44 Mio ECU. Specifically, for 21 advances totalling 0,3 Mio ECU, no accounting movements had been recorded since 1994, and it is likely that these have been used up. In another case (165), the advance outstanding went up from 1,45 Mio ECU to 2,13 Mio ECU although only 0,12 Mio ECU was justified during 1997 and the balance confirmed by the delegation amounted to only 0,22 Mio ECU;

(b) 9,86 Mio ECU of advances managed by AEC for technical assistance. The Court is not in the position to express an opinion on how much of the amount of the advance accounted for as an asset has already been expended in 1997; to the extent that such expenditure took place this part of the advance should instead have been accounted for as expenditure of the year;

(c) 2,89 Mio ECU managed by agencies in the Member States for scholarships. In one case, the last accounting entry was made in 1992 and the outstanding advance of 78 939 ECU was written off as an exceptional loss based on a file note which does not constitute sufficient supporting documentation to waive the rights of recovery.

17. The delay in accounting for expenditure from the delegations' scholarship advance accounts has already been commented upon by the Court (166). The Court notes that the amounts outstanding fell from 19,6 Mio ECU at end 1996 to 17,9 Mio ECU as at 31 December 1997. This balance accounted for by the Commission as an asset is overstated by some 4,44 Mio ECU according to the confirmations received from the delegations, as for this amount expenditures have already been incurred, but not yet recorded. Efforts should be continued to ensure that the accounts are up to date.

Revenue and expenditure

Expenditure: advances on contracts (paragraph III(b) of the statement of assurance)

18. Many contracts provide for the payment of advances before the commencement of works, deliveries of supplies or the provision of services. These advances are different from interim and final payments that are made on the basis of the costs incurred. In the revenue and expenditure accounts, the Commission does not distinguish between advances and interim/final payments, which leads to a misleading impression of the actual use of the funds.

19. In the annexes to the 1997 financial statements, the Commission presents for the second time a table indicating the amount of outstanding advances (167). The table does not show that for a number of contracts the amount of reimbursements recorded was higher than the advances paid by 17,5 Mio ECU (10,7 Mio ECU for the sixth EDF and 6,8 Mio ECU for the seventh EDF). Neither does it show that unused advances totalling 4,4 Mio ECU were not recovered in respect of closed contracts under the sixth EDF.

Expenses incurred in advance for the eighth EDF (paragraph III(c) of the statement of assurance)

20. As in 1996 (168), the Commission charged to the seventh EDF payments in 1997 for the eighth EDF of 4,3 Mio ECU and 11,5 Mio ECU respectively for Stabex and the Centre for the Development of Industry (CDI). These payments are included in the revenue and expenditure account without being disclosed separately in the balance sheet as debtors.

Management accounts and annexes

Situation of commitments still to be settled (paragraph III(a) of the statement of assurance)

21. In Annex 3.1 to the 1997 financial statements, the Commission presents an analysis of the commitments amounting to 538 Mio ECU (of which 79,8 Mio ECU relating to actions managed by the EIB under mandate) for which there have been no movements in the accounts for over 18 months. Of these, the Commission has identified total commitments of 38,3 Mio ECU which need to be closed (20,0 Mio ECU for the sixth EDF and 18,3 Mio ECU for the seventh EDF). The audit work performed indicates that a further 43,0 Mio ECU (169) should be decommitted. Instead of the 38,3 Mio ECU disclosed in the accounts a total of 81,3 Mio ECU should have been decommitted and added to the fund balances of 1 602,8 Mio ECU available for re-use (Table I.1).

22. The same annex also indicates that of the 4 499,4 Mio ECU outstanding commitments (i.e. decisions taken but not paid out), an estimated 640 Mio ECU (14,2 %) are unlikely to be paid out. This amount represents the contingency reserves made when the commitments are drawn up. Compared with 1996 this amount has increased by 20,8 %; nevertheless the detailed study which the Commission undertook to complete (170) is not yet available.

23. Stabex transfers of 103,8 Mio ECU, due to Sudan under the seventh EDF, are included in the outstanding commitments. The notes in the accounts do not mention that a political decision is required before these monies can be paid over to Sudan.

The legality and regularity of underlying transactions

Contributions and other revenue

Substantive legality/regularity errors

24. 0,06 Mio ECU of interest due in accordance with Articles 1.2 and 1.5 of the financial regulation, because of late payments of contributions by three Member States was either not sought by the Commission or not received.

25. Contrary to Article 2.2 of the financial regulation, Germany still pays its contribution in DEM instead of in ECU. This has not only led to a revaluation loss of 0,6 Mio ECU at year end, but also to loss of interest earnings when transferring money from the German contribution account to the German paying agent account because, if the necessary conversion to ecus cannot be executed on the same day, the overnight rates on German marks are lower than the contractual rates on ECU (171).

26. For 7 of the 16 European paying agent bank accounts still open as per 31 December 1997, including the Stabex account, the Court cannot form an opinion on the correctness of the amount of interest received because the necessary supporting documents (172) are not available at the Commission. One of the banks concerned had not even paid the interest amounts due for the months February to December 1997 at year end closure (173). For five other banks, errors at the expense of the EDF in the interest calculations were detected during the audit (174). The Commission should take greater care in controlling and checking the EDF income (both contributions and interest) in order to avoid financial losses to the EDF.

Decisions (commitments)

Substantive legality/regularity errors (paragraph V of the statement of assurance)

27. For one commitment related to Sysmin, the eligibility criteria as mentioned in the Lomé IV Convention were not fulfilled (175).

28. Attention is further drawn to the fact that, based on the interpretation of unclear legislation, two (176) ACP States received more than 35 % of the balance available for Sysmin.

Formal legality/regularity errors (paragraph VI of the statement of assurance)

29. In total 10 out of 35 commitments in the sample were affected by formal errors, of which the most important ones are presented below.

30. One commitment (177), amounting to 30 Mio ECU, was accounted for before the decision was taken by the Commission.

31. Commitments for two structural adjustment programmes (178) were increased by 1,6 Mio ECU and 2,7 Mio ECU, on the basis of Article 292 of the fourth Lomé Convention and Article 62 of the financial regulation. However, the procedures laid down in Article 292 of the Convention cannot be applied for structural adjustment as there is no 'cost overrun`. Therefore Article 25.1(c) of the internal agreement is to be applied which requires that the EDF Committee shall give its opinion on all financing proposals related to structural adjustment. These additional commitments should not have been authorised on the basis of Article 292.

32. A certain proportion of structural adjustment measures is financed by subsidies drawn from the national indicative programmes (NIPs) including the programmable reserves thereof (179). Three commitments amounting to 24,5 Mio ECU were financed in this way resulting in the 10 % ceiling being exceeded (180). Although the Commission replied in the DAS 1996 report (181) that financial proposals submitted for approval to the EDF Committee would, from 1997 onwards, explicitly mention cases where the 10 % ceiling is exceeded, no or inaccurate (182) information was supplied to the EDF Committee concerning either the degree to which the ceiling of 10 % had been exceeded, or the reasons.

33. The Court found that, by the end of 1997 contrary to Article 291.1 of the Lomé IV Convention for three commitments in the sample, no financing agreement was drawn up within 60 days of the decision and that, contrary to Article 285, for two other commitments no official request of the ACP States concerned was available.

34. For the transactions managed under mandate (183), it was noted that:

(a) contrary to Article 234(1)c of the Lomé IV Convention, the total remuneration received by the EIB for risk capital loans was not limited to the 3 % interest rate ceiling; in cases of on-lending through an intermediary to the final beneficiary in the form of equity participations, a higher remuneration for the EIB was not excluded because the remuneration consisted of variable profit distributions from the beneficiary through the intermediary to the EIB (in one case 100 % and in another case 30 % of dividends received by the intermediary);

(b) Article 233(4)b requires that any financial benefit accruing to the intermediary from the on-lending transaction shall be used for development purposes (after taking into account administrative costs, exchange and financial risks, and the cost of technical assistance). This condition was not included in the finance contract relating to one commitment;

(c) for one commitment for interest rate subsidies the stipulation of Article 235(b) of the Lomé Convention whereby the interest rate borne by the borrower shall be neither less than 3 nor more than 6 % was not fully adhered to, as the possibility of an interest rate higher than 6 % was not excluded in the finance contract;

(d) furthermore, in respect of payments requested, the Commission still does not check the basis of the calculations and the amounts entering into them (184) nor the disbursements of the loans to the beneficiary.

Payments

Substantive legality/regularity errors (paragraphs VII and VIII of the statement of assurance)

35. In 1997 the proportion of payments for Stabex and structural adjustment (usually about one third of the global amount of payments) was low, because such disbursement had to await the ratification of the eighth EDF. This situation increased the relative weight of the errors in the traditional grant payments as set out in paragraph 37 below.

36. As mentioned in paragraph 20 above, in 1997 a number of Stabex payments have, once again, been made on behalf of the eighth EDF, using funds of the seventh EDF following decisions in 1996 by the ACP EC Council. As the eighth EDF was not ratified in 1997, the related underlying payments, totalling 4,3 Mio ECU, were made with appropriations that were not available at the time of payment (known error regarded as being of an exceptional nature).

37. The most important substantive errors - quantifiable errors affecting the amounts of the transactions underlying EDF funds disbursed - were:

(a) 25 payments for which the (determination/calculation of the) amounts paid to contractors were incorrect: 17 cases for which the prescribed retention had not taken place; three cases for which the contractually foreseen liquidated damages had not been taken into account; two overpayments; two cases for which the price revision could not be justified and one case in which an excessive advance was paid out;

(b) three payments made for supplies not yet delivered or services not yet rendered.

38. In addition to the above mentioned errors, the audit revealed in certain cases a negligence by the Commission in obtaining the required performance guarantees for works and supplies contracts which creates serious financial risks for the EDF in case of problems during the warranty period.

Formal legality/regularity errors (paragraph IX of the statement of assurance)

39. There were again numerous formal errors, i.e. errors without any directly quantifiable effect on the amounts of the transactions underlying the EDF funds disbursed (185).

40. As in 1996, for structural adjustment two payments, totalling 9,5 Mio ECU were transferred to accounts outside the EU (186) contrary to Article 250.3 of the Lomé Convention. Furthermore, for one payment the legally prescribed documents were not available. As regards conditionality it was noted that two payments (187) amounting to 9,1 Mio ECU were made when not all conditions were fulfilled.

41. For the other instruments, the most prevalent errors were in the following categories:

(a) 10 payments not made within the prescribed period;

(b) 15 payments for which the bank guarantees were not in accordance with prescribed rules;

(c) five payments for which unauthorised persons signed for payment and one payment for which no payment order was drawn up.

REPLIES OF THE COMMISSION

INFORMATION SUPPORTING THE STATEMENT OF ASSURANCE

Scope of the audit

2. It is true that official transmission of the documents relating to the EDF was late. However, the Commission would point out that provisional accounts and balance sheets were sent to the Court in February 1998.

Accounting standards, policies and procedures (paragraph III(e) of statement of assurance)

9 (a) The Court's remark is correct inasmuch as the accounting entry for the decision was not finalised during 1997 although the decision was taken in December 1997.

10. An account was initially opened with Barclays Bank and the sums in question deposited in it. Later, when the bank ceased its activities, they were transferred to the Banco Argentaria.

The Court is referring to Danish co-financing for the construction of a bridge in Sierra Leone. The project is now closed and the balance of the account must therefore be repaid in full to the Danish State. Since this was co-financing on the Dutch and Italian models, the balance of the account opened for this purpose was not included in the EDF accounts. The Commission has taken steps to close the Danish account.

11. The amount of expenditure to be regularised, for the most part from the bank statements of the ACP countries' paying agent accounts, contains both negative and positive elements. The Commission can see no point in separating receipts and expenditure in this suspense account.

12 (a) In practice, balances of accounts denominated in European currencies have traditionally been adjusted at each year-end in order to include in the balance sheet the value of these balances in ecus. For the financial year 1997, this adjustment resulted in an exchange loss, whereas up to 1995 there had always been a gain.

Losses and gains are treated in exactly the same way. They are both entered in the accounts as financial costs or products rather than as expenditure linked to the projects.

(b) Since 1994, the Stabex account has been held by a bank (Sal Oppenheim). The account's credit is made up of Member States' contributions and interest earned, and debits correspond to expenditure on transferring sums to the ACP countries under Stabex. The account was opened following a call for tenders and a contract was duly drawn up in the form of an exchange of letters. The balance of the account was invested in the market in accordance with the Lomé Convention. Thus, at each year-end, the bank balance of the Stabex account is represented by a number of investments and a cash amount. Following comments made by the Court on the accounts of previous years, it was agreed that a list of bonds would be included in notes to the balance sheet. Moreover, it is not a question of loss, even if the market value of the bonds is less than the purchase price. Many bonds are sold with interest. In all cases, the interest earned during the life of these investments is greater than the difference between the purchase price and the market value.

Since provision is not made for profits or interest not yet realised, it was not considered necessary to make a provision for losses which have not yet been realised either.

13 (a) See paragraph 12(b).

(b) The anomaly mentioned is due to a technical problem with the management of value dates at the time of closure. It corresponds to an inverse anomaly in the 1996 accounts. Once these operations were regularised, the balance of the account was nil.

The reliability of the accounts

Balance sheet

Contributions receivable

14. It is true that a payment due from the German Government is still accounted for as an account receivable. The Commission made a final unsuccessful attempt to recover this amount and it will be written off by means of accounting entries during the 1998 financial year.

Cash at bank

15 (a) An account (19.24 GPR) was opened when data were transferred to OLAS from the previous system, intended for the deposit of the balance of sums in the process of collection. New operations of the same kind were entered in OLAS under the bank accounts and the former account (19.24) was no longer used. Therefore, the balance of operations which have not been finalised may be found under the bank accounts in Chart 99 (cash resources) and in a ledger of temporary movements.

(b) It is correct that bank accounts were opened and sums deposited in them (ECU 1 000 000 in each case) in Finland and Austria. The Commission opened these accounts before the delay in the ratification of the eighth EDF was known.

Out of prudence, the sums paid into these accounts were not used in 1998. However, they did earn interest in accordance with the provisions of the contracts opening the accounts.

Advances for scholarships and technical assistance (paragraph III(d) of statement of assurance)

16 17. The Commission acknowledges that there have been delays in recording expenditure made from advance accounts for scholarships and technical assistance. During 1996 and 1997, a considerable effort was made to reduce the accounting backlog. Outstanding advances decreased by 38 % between end of 1995 and end of 1997. In September 1998, there were no accounting delays for Member State agencies and AEC technical assistance. The delegations have been asked to send expense reports for all periods not yet reported to the Commission headquarters.

(a) Advances managed by delegations:

The delegations have confirmed advance balances amounting to ECU 0.45 million to the Court. However, for one delegation (Zimbabwe) that confirmed a zero balance to the Court a recently performed audit reports a balance of ZWD 225.469. The Commission contests the Court's conclusion that the advance balances reported in the financial statements are overstated by ECU 4.4 million.

As to the specific example given by the Court, the increase in the advance balance (ECU 0.68 million) is due to late recording of advances paid in previous years (ECU 0.64 million). The corresponding expenses were booked in 1998.

(b) Advances managed by AEC:

AEC has to gather and check the supporting documents for local expenditures in the ACP States. This work is completed by end-June. As the date of closure of the EDF accounts is end-January, it is materially impossible to include these expenditures in the EDF accounts. This situation is inherent to advance accounting. The advance outstanding at 31 December 1997 represents approximately three months expenditure for AEC. It appears reasonable, since advances are paid quarterly.

(c) Advances managed by Member State agencies:

During 1997, a balance of ECU 78 939 outstanding since 1992 with one agency (now bankrupt) was written-off, since the Commission's efforts to contact the agency proved unsuccessful. According to Article 15(3) of the financial regulation, the authorising officer can waive the right to recover a debt after approval by the financial controller.

Revenue and expenditure

Expenditure: advances on contracts (paragraph III(b) of statement of assurance)

18. The financial regulation does not require the Commission to distinguish advances paid on contracts from interim and final payments. The Commission maintains that these advances, which are paid within the framework of the implementation of EDF contracts, represent expenditures for the EDF on the same basis as interim and final payments and they are therefore included in the expenditures for the year.

19. The Commission considers a system of information on advances paid important in order to monitor their proper clearance. During 1995 the system of accounting for advances was therefore improved allowing the presentation of an annex detailing outstanding advances in the financial statements for 1996. In its report on the financial year 1997, the Commission has in Annex 3.4 again presented information on advances on contracts.

The negative advances of ECU 17.5 million mentioned by the Court are in most cases a result of incomplete information on advances from the period before the improvement of the information system in 1995. The new system does not allow for the closure of contracts with negative advances. These accounting anomalies will therefore be corrected when the contracts are closed.

According to the Commission, the ECU 4.4 million advances have been properly cleared. The examples extracted from the present accounting system by the Court consist of contracts closed during the period 1988-93, before the improvement of the information system. Under the old system the clearance of advances was done manually outside the accounting system.

Expenses incurred in advance for the eighth EDF (paragraph III(c) of statement of assurance)

20. The eighth EDF was only ratified in 1998. It was therefore not possible to charge these debts to it until all the legal provisions relating to this EDF had entered into force.

The amounts involved were therefore taken from the financial reserve for the seventh EDF. Since the ratification of the eighth EDF, the Commission has taken the necessary steps to show the new situation in the accounts.

Management accounts and annexes

Situation of commitments still to be settled (paragraph III(a) of statement of assurance)

21. The accounts show the Commission's legal commitments concerning the implementation of the EDF. Commitments are entered into the accounts when the funding decision is taken by the Commission. A financing agreement is then entered into by the Commission and the ACP State concerned. This document is binding for both parties and a project can only be closed if the national authorising officer agrees and confirms that the implementation of the project is completed. The reduction of the funds allocated to an ongoing project can only be made at the request or with the agreement of the national authorising officer.

The Commission identifies projects that appear to be 'sleeping` in order to, if possible, initiate their closure and prevent funds from being unnecessarily tied up. The Commission and ACP States have agreed to start the closure procedure for ECU 38.3 million. The Court maintains that a further ECU 43 million should be decommitted.

The ECU 43 million (ECU 145.3 million in 1996) difference between the Court's and the Commission's estimates is explained by:

- ECU 15.7 million for a Sysmin project in Togo, where the Commission maintains cooperation will be resumed;

- ECU 27.3 million for smaller projects where the Commission will again examine the possibility of decommitting funds or close the whole project.

22. During 1998, the Commission is making a special review of all projects with special emphasis on projects under the sixth EDF in view of its forthcoming closure. The objective is to speed up closure of projects, whenever possible. The appropriate size of contingency reserves can of course only be judged at the time of closure of the project. Priority has been given to the actual closure of projects and resources have not allowed for a separate study of that specific aspect.

The legality and regularity of underlying transactions

Contributions and other revenue

Substantive legality/regularity errors

24. It is correct that Member States sometimes fail to pay their contributions when they are due.

25. See Part II paragraph 14.

26. All documents needed for checking interest are now available. It is true that one bank issues only one statement each year. As for the mistakes identified, one involves 0.01 % and the other cases are sometimes in favour of the Commission. Interest payments due by the bank are controlled on a regular basis.

Decisions (commitments)

Substantive legality/regularity errors (paragraph V of statement of assurance)

27. The Commission considers that the eligibility criteria for the intervention in Mali were fulfilled.

28. Regarding these two Sysmin interventions, the Commission considers that the 35 % ceiling was not applicable.

In accordance with Article 219(4) of the Lomé IV Convention, no single ACP State may receive more than 35 % of the funds available as a result of the application of paragraph 2(c), which defines the Sysmin resources available for each year of application.

The years of application correspond to the five years of the first financial protocol, i.e. from 1 March 1990 to 28 February 1995. The provisions of Article 219(4) are applicable during this period. At the end of the financial protocol, the ACP/EC Council decided that the funds not yet committed under Sysmin would be used under this instrument until they were exhausted.

The Court's comment concerns two decisions taken after the end of the financial protocol; the 35 % ceiling is therefore not applicable.

Formal legality/regularity errors (paragraph VI of statement of assurance)

30. Commitments are entered in the accounts on the basis of the decision proposals and then finalised when the decision has been taken. In this case the commitment was finalised when the proposal was sent to the College of Commissioners for decision, that is one week before the decision was taken.

31. The structural adjustment programmes for Niger and Guinea-Bissau, which were increased, respectively, by ECU 2.8 million and ECU 1.6 million, are financed through the special allocation for structural adjustment support and from the national indicative programme. Article 292 of the fourth Lomé Convention provides a possibility to cover cost overruns for all projects and programmes financed through the national indicative programme regardless of their nature. Hence, with respect to NIP funds, the decision is legal and regular in accordance with the Lomé Convention.

Concerning the financing from the special allocation for structural adjustment support, the fourth Lomé Convention does not specifically indicate a method for covering cost overruns. The Commission therefore by analogy used the method indicated for financing under national indicative programmes (an approach which has been confirmed by the internal agreement for the eighth EDF, which explicitly mentions that the procedure set out in Article 292 of the Convention should also be used for structural adjustment programmes).

It is also to be noted that Article 292's notion of 'cost overruns` applies perfectly to the structural adjustment programmes, whose aim of supporting the balance of payment in the eligible countries is typically confronted with the instability and the unpredictability of the main macroeconomic indicators. Such instability can give rise to substantive excess costs of the envisaged support programme.

Article 25(1)(c) of the internal agreement stipulates that this is necessary to obtain the opinion of the EDF Committee for all financing proposals relating to structural adjustment support. The above transactions are, however, not financing proposals but funding increases to cover cost overruns and there is hence no need to obtain the opinion of the EDF Committee.

32. The Court's comment concerns three commitments amounting to ECU 24.5 million (Benin, Niger, Burkina Faso), but the amount in excess of the ceilings for financing from NIP funds was actually ECU 14.5 million, since the ECU 10 million remaining was taken from the programmable reserve allocation for aid to structural adjustment (ECU 100 million). The comment does not therefore apply to Burkina Faso, which received an increase from this reserve only; it does apply to Niger and Benin.

Regarding Niger, the financing proposal adopted by the EDF Committee did indicate, in the paragraph on previous programmes, that the 10 % ceiling would be exceeded for withdrawals from the NIP funds. Since this percentage was given for all previous programmes together, it was obvious that any subsequent withdrawal from the NIP funds would further increase the amount by which the ceiling was exceeded.

Regarding Benin, the ceiling was marginally exceeded (4 % of the NIP, or ECU 4 million) and the use of NIP funds was divided over two programmes, resulting in the omission noted by the Court of Auditors.

33. Regarding the three commitments for a road building project in Cameroon, the Commission would point out that the total funding involved considerable sums from the eighth EDF. It was thus considered preferable, before the financing agreement was signed, to ensure that all resources (including eighth EDF) necessary for an investment of that size were available. Cameroon deposited the instruments of ratification in May 1998 and the financing agreement was signed on 23 June 1998.

The Commission recognises that the commitment for the second stage of the 'Vava'u development programme` was not specifically formally requested by the national authorising officer in confirmation of the request by the national authorities and of the commitment made in the NIP seventh EDF to implement this programme. However, since no programme can be implemented without the agreement of the national authorising officer, this agreement or request was implicit.

34. See reply, Part I paragraph 32.

Payments

Substantive legality/regularity errors (paragraphs VII and VIII of statement of assurance)

36. See reply, Part II paragraph 20.

37. It should be noted that, except in two cases, these substantive errors identified by the Court have had no negative financial impact on the EDF and do not require any recovery of funds.

A commentary on some of the cases is given below. The Commission does, however, agree with the Court's suggestion that the regulation of the European Development Fund might be unnecessarily complicated and hence counterproductive (see further under Part I paragraphs 9-13):

(a)

(i) 17 cases for which the prescribed retention had not taken place: In 12 cases, the Commission recognises that the 10 % retention did not take place. For 10 of these cases, that are all technical assistance contracts, the Commission takes the view that each tranche of the contract is approved by the contracting authority as it pays the invoices for the work done. To withhold retention money while accepting the work would be a contradiction. The Commission therefore allows the ACP authorities to negotiate special conditions taking precedence over the general conditions or authorises payment of 100 % of the value of the work done.

The 10 % retention requirement for service contracts was created with study contracts in mind. Its application to technical assistance contracts appears illogical and gives rise to unintended financial consequences. The fact that no retention is made is of no financial consequence, since the payments are always made after the service has been rendered and accepted. The error is therefore of a formal rather than substantive nature.

At a future ACP-EU Council meeting, the Commission will therefore propose an amendment of this provision excepting technical assistance contracts from the retention requirement.

(ii) Three cases for which the contractually foreseen liquidated damages had not been taken into account: In two cases, the Commission disagrees with the Court's interpretation of the contract. The imposition of penalties for delay is not an obligation. The contract in French says that the contractor 'est passible d'une amende.`, which means that a fine can be imposed.

(iii) Two overpayments: In one case, the Commission acknowledges that the contractor has received ECU 1 904 too much due to an unobserved contract modification. The Commission will take steps to recover the amount wrongly paid. In the other case there was a calculation error for ECU 39.80 on an interim payment. The amount will be recovered in the next payment.

(iv) Two cases for which the price revision could not be justified: The payments of the price revisions noted by the Court include both the actual price revision and the correction of earlier revisions. The payment is hence supported by these calculations and there is no substantive error. Furthermore the revisions are based on calculations performed by the supervisor and documented in the interim statement accepted by the delegation. In accordance with Article 50(6) of the general conditions for works contracts the supervisor may make any corrections and modifications to any previous certificate issued by him.

(v) One excessive advance: Following a misinterpretation of the contract by both the contractor and the delegation the total amount payable in foreign currency was paid with the first advance instead of being spread over all the payments. There is, however, no negative financial impact, since all the other payments will be made in local currency only.

(b) Three payments made for supplies not yet delivered or services not yet rendered: In the three cases, the Commission disagrees with the Court.

38. The payments to which the Court refers were made following performance of the contracts, without the ACP national authorising officers having obtained the performance guarantee.

Therefore, the Commission will remind the national authorising officers of the importance which it attaches to compliance with the provisions on the performance guarantee set out in Articles 15 (works contracts financed by the EDF) and 11 (supply contracts financed by the EDF). It will also make clear that when the first payment is made to the contractor (advance or instalment), a copy of the performance guarantee must be attached to the payment order.

Formal legality/regularity errors, paragraph IX of statement of assurance)

39. It should be stressed that these errors are of a purely formal nature and the Commission again wishes to draw attention to the Court's suggestion that the regulation of the European Development Fund might be unnecessarily complicated (see further under Part I paragraph 13).

40. As in 1996, the Commission acknowledges that it did not apply in full the provisions of Article 250(3) of the Lomé Convention regarding the obligation to transfer foreign currency funds to accounts within the territory of the EU. However, this was done with a view to good financial management and at the wish of the parties which signed the financing agreements. It is true that in the two cases in question (Sierra Leone and Haiti), strict application of the article mentioned above would have had an extremely negative effect (lack of efficiency and transparency) on the management of the foreign currency reserves of the governments of the two countries.

The Commission also recognises that it was unable to show the existence of a legal document required for the payment to be made.

41 (a) The Commission acknowledges that 10 payments were not made within the prescribed period. Five of these payments concerned reimbursement of the EIB, where Article 60(4) of the financial regulation requires payment within 21 days of receipt of the request for payment. The value date of the payment, which is the date of economic significance, was, however, respected.

(b) For 14 payments, bank guarantees were not in accordance with prescribed rules according to the Court.

Seven of these payments concerned cases where a bank guarantee replaced retention sums. Article 47(2) of the general conditions for works contracts (Decision 3/90) requires such a guarantee to be established 30 days before commencement of the works. Contractors do, however, often not decide until later, if they want to request payment of 100 % and provide a guarantee or accept a retention. The guarantee was in all cases furnished by the contractor before payment took place.

(c) In one case the payment order for a direct payment, i.e. a payment to be executed in Brussels, was signed by an official of the NAO's services not on the list of authorised signatories. It was then approved by the head of delegation before being authorised by a person at the Commission headquarters having the power to do so. The procedures of the financial regulation have hence been respected and the signature of the person in the NAO's office is irrelevant in this case.

The payment without payment order is formally correct and in accordance with Article 319(4) of the fourth Lomé Convention. The payment in question is the foreign currency part of an advance payment on a works contract. As in most cases the Commission headquarters paid the foreign currency part. The expenditure was authorised by the chief authorising officer or his representative based on the contracts signed by the national authorising officer.

ANNEX I Financial information on the general budget, the balance sheet of the European Union and the European Development Funds

PRELIMINARY NOTES

1. Sources of financial data

The financial data contained in this annex have been drawn from the revenue and expenditure accounts and the balance sheets of assets and liabilities of the European Communities (188) and of the European Development Funds and from other financial records provided by the Commission. The geographical distribution is in accordance with the indices of the country codes in the Sincom system, except for the PHARE and TACIS programmes, where the indices of the country codes are taken from the Desiree system. As the Commission has pointed out, allocating expenditure by Member States is merely an accounting exercise which gives a very limited view of the benefits that each Member State derives from the Union.

2. Monetary unit

All the financial data are presented in millions of ECU (Mio ECU), rounded off to one decimal place. They always represent the rounding-off of each exact value and not the sum of the rounded-off figures.

3. Nomenclature

For each financial year the Court uses the budgetary nomenclature corresponding to that financial year for the presentation of the historical data. In 1988 there was a significant change in the nomenclature compared with previous financial years: as from that financial year costs incurred in the collection of own resources are no longer shown as expenditure but as negative revenue. In 1991 the nomenclature for expenditure was considerably changed with the regrouping of Commission appropriations into subsections in order to align the budgetary nomenclature of the headings used to encompass the 'multiannual financial perspective`. This should be borne in mind when comparing the various financial years.

4. Abbreviations and symbols

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SUMMARY

Part One: General budget and balance sheet

1. Background information on the general budget

2. General budget and balance sheet for the financial year 1997 and budgetary implementation during the financial year 1997

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3. Historical data in respect of the implementation of the general budget (1993-97)

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Part Two: The European Development Funds (EDFs)

Basic information on the European Development Funds (EDFs) (position as at 31 December 1997)

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PART ONE: GENERAL BUDGET AND BALANCE SHEET

1. Background information on the general budget

1.1. Origin of the general budget

The general budget was created by the Merger Treaty (189) (Article 20). It replaced, on 1 January 1968, the three separate EC budgets which existed before that date: the ECSC administrative budget, the EEC budget and the Euratom operating budget. The Euratom research and investment budget was incorporated into the general budget as from 1971 by the Treaty of Luxembourg (190) (Article 10).

1.2. Legal basis

The general budget is governed by the financial provisions of the Treaties of Paris (191) (Article 78 ECSC) and Rome (192) (193) (Articles 199 to 209 EEC and Articles 171 to 183 Euratom) and by the financial regulations (194).

1.3. Main budgetary principles laid down in the Treaties and the financial regulation

All items of Community revenue and expenditure are to be included in a single budget (unity). Revenue is to be used without distinction to finance all expenditure and, like the expenditure, is to be entered in full in the budget and subsequently in the accounts without any adjustment of one item against another (universality). The appropriations are specialised according to their nature or intended use (speciality). The budget is authorised for one financial year only (annuality). Budgetary revenue and expenditure must balance (equilibrium). There are some exceptions to these general principles.

1.4. Content and structure of the general budget

The budget consists of a 'General statement of revenue` and a 'Statement of revenue and expenditure`, which itself is subdivided into six sections: (I) Parliament; (II) Council; (III) Commission (195); (IV) Court of Justice; (V) Court of Auditors; (VI) Economic and Social Committee and Committee of the Regions.

Within each section (196), items of revenue and expenditure are classified under budget headings (titles, chapters, articles and, where applicable, items) according to their type or the use to which they are to be applied.

1.5. Monetary unit of the general budget

The budget is established and implemented in ecus. The ecu is a unit based on a basket of national currencies. Following the revision of September 1989, the basket of currencies is made up as follows: 1 ECU = 3,301 BEF + 0,6242 DEM + 0,1976 DKK + 6,885 ESP + 1,332 FRF + 0,08784 GBP + 1,440 GRD + 0,008552 IEP + 151,8 ITL + 0,130 LUF + 0,2198 NLG + 1,393 PTE.

The rates of conversion at 31 December 1997 between the ecu and the national currencies were as follows: 1 ECU = 13,902 ATS = 40,7675 BEF = 1,97632 DEM = 7,52797 DKK = 167,388 ESP = 5,98726 FIM = 6,61214 FRF = 0,666755 GBP = 312,039 GRD = 0,771961 IEP = 1 942,03 ITL = 40,7675 LUF = 2,22742 NLG = 202,137 PTE = 8,73234 SEK.

1.6. Financing of the general budget (budgetary revenue)

The general budget is mainly financed from the Communities' own resources: agricultural levies, sugar and isoglucose levies; customs duties; VAT-based own resources and GNP-based own resources; for more detailed information see the legislation in force (197).

Besides own resources, there are other, marginal items of revenue (see Diagram IV).

1.7. Types of budget appropriations

To cover estimated expenditure, the following types of budget appropriations are distinguished in the general budget:

(a) differentiated appropriations (DA) are used to finance multiannual activities in certain sectors. They comprise commitment appropriations and payment appropriations:

- commitment appropriations (CA) make it possible to enter into legal obligations during the financial year for activities whose implementation extends over several financial years;

- payment appropriations (PA) make it possible to cover expenditure arising from commitments entered into during the financial year and/or preceding financial years.

(b) non-differentiated appropriations (NDA) make it possible to ensure, during the financial year, the commitment and payment of expenditure relating to annual activities.

It is thus important to establish the following two totals for the same financial year:

(a) the total of appropriations for commitments (AFC) (198) = non-differentiated appropriations (NDA) + commitment appropriations (CA) (199);

(b) the total of appropriations for payments (AFP) (200) = non-differentiated appropriations (NDA) + payment appropriations (PA) (201).

Revenue raised in the budget is intended to cover the total appropriations for payments. Commitment appropriations do not need to be covered by revenue.

The following simplified presentation (with illustrative amounts) shows the impact of these types of appropriations in each budget year.

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1.8. Implementation of the general budget

1.8.1. Responsibility for implementation

The Commission implements the budget on its own responsibility in accordance with the financial regulation and within the limits of the appropriations allotted; it also confers upon the other institutions the requisite powers for the implementation of the sections of the budget relating to them (202). The financial regulation lays down the implementation procedures and, in particular, the responsibilities of the authorising officers, accounting officers, administrators of imprest accounts and financial controllers of the institutions (203). In certain specific areas (mainly the EAGGF-Guarantee and the Structural Funds) the management of Community funds is shared with the Member States.

1.8.2. Implementation of revenue

The estimated revenue is entered in the budget subject to change by amending and supplementary budgets. The budgetary implementation of revenue consists of establishing the entitlements and recovering the revenue due to the Communities (own resources and other revenue); it is governed by certain special provisions (204). The actual revenue of a financial year is defined as the total of sums collected against entitlements established during the current financial year and sums collected against entitlements still to be recovered from previous financial years.

1.8.3. Implementation of expenditure

The estimated expenditure is entered in the budget. The budgetary implementation of expenditure, i.e. the evolution and utilisation of appropriations, may be summarised as follows:

(a) appropriations for commitments:

- evolution of appropriations: the total appropriations for commitments available in a financial year are made up as follows: initial budget (NDA and CA) + amending and supplementary budgets + supplementary receipts (205) + transfers (206) + commitment appropriations carried over from the preceding financial year (207) + non-automatic carry-overs (208) from the preceding financial year not yet committed (NDA) + released commitment appropriations from preceding financial years which have been made available again (209) + repayments of advances giving rise to re-utilisation (210);

- utilisation of appropriations: the final appropriations for commitments are available in the financial year for use in the form of commitments entered into (appropriations for commitments utilised = amount of commitments entered into);

- carry-overs of appropriations from one financial year to the next financial year: non-differentiated appropriations belonging to the financial year which have not been committed may be carried over non-automatically to the next financial year after approval by the budgetary authority (211). Non-utilised commitment appropriations of the financial year may be carried over by the Commission to the following financial year (212). In the case of expenditure on behalf of third parties, carry-overs may be repeated;

- cancellation of appropriations: the balance is cancelled.

(b) appropriations for payments:

- evolution of appropriations: the total appropriations for payments available in a financial year are made up as follows: initial budget (NDA and PA) + amending and supplementary budgets + supplementary receipts (213) + transfers (214) + appropriations carried over from the previous financial year in the form of automatic carry-overs (215) or non-automatic carry-overs (216) + repayments of advances giving rise to reutilisation (217);

- utilisation of appropriations: the appropriations for payments are available in the financial year for use as payments (utilised appropriations for payments = amount of payments made);

- carry-overs of appropriations from one financial year to the next financial year: non-utilised appropriations of the financial year may be carried over to the next financial year in the form of automatic (218) or non-automatic (219) carry-overs. In the case of expenditure on behalf of third parties, carry-overs may be repeated;

- cancellation of appropriations: the balance is cancelled.

With regard to actual expenditure, a distinction is made between:

- actual expenditure during a financial year: total payments during the financial year = payments against appropriations for payments of the financial year plus payments against appropriations for payments carried over from the preceding financial year;

- actual expenditure charged to a financial year: expenditure charged to the consolidated revenue and expenditure account (see paragraph 1.8.4) = payments against appropriations for payments of the financial year plus appropriations for payments of the financial year carried over to the following financial year.

1.8.4. The consolidated revenue and expenditure account and the balance of the financial year

After the closure of each financial year the consolidated revenue and expenditure account is drawn up. The balance of the year, which is to be entered in the budget of the next financial year on the occasion of an amending budget, is determined therein (220) (see Diagram XVIII).

1.9. Presentation of the accounts

The accounts for a given financial year are forwarded not later than 1 May of the following financial year to Parliament, the Council and the Court of Auditors; these accounts comprise a revenue and expenditure account and a balance sheet, together with an analysis of the financial management (221).

1.10. External audit

Since 1977 the external audit of the general budget has been carried out by the Court of Auditors of the European Communities (222). The Court of Auditors examines the accounts of all revenue and expenditure of the general budget. It must provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. It also considers whether revenue has been received and expenditure incurred in a lawful and regular manner, and whether the financial management has been sound. The audits may be carried out before the closure of the financial year in question and are performed on the basis of records and, where necessary, on the spot in the institutions of the Communities and in the Member States. The Court of Auditors draws up an annual report for each financial year and may also, at any time, submit its observations on specific questions and deliver opinions at the request of one of the institutions of the Communities.

1.11. Discharge and follow-up

As from 1977 the following provisions are applicable (223): Parliament, on the recommendation of the Council, gives, before 30 April of the second year following the financial year in question, discharge to the Commission on the implementation of the budget. To this end the Council and Parliament in turn examine the accounts presented by the Commission and the annual report of the Court of Auditors. The institutions must take appropriate action on the comments appearing in the decisions giving discharge and report on the measures taken (224).

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PART TWO: THE EUROPEAN DEVELOPMENT FUNDS (EDFS)

Basic information on the European Development Funds (EDFs) (position as at 31 December 1997)

1.1. The first five EDFs

Basic information and detailed financial information on the first three EDFs was most recently given in the annual report of the Court of Auditors concerning the 1980 financial year. Information on the fourth EDF was given in the annual report concerning the 1986 financial year and information on the fifth EDF in the annual report concerning the 1990 financial year. Only a few minor sums transferred to the sixth EDF still remain to be paid under the fourth EDF. A summary of the payments made under the first four EDFs is given in Diagram XXVII.

1.2. The sixth and seventh EDFs

1.2.1. Legal provisions

(a) Legal basis in respect of ACP States:

- sixth EDF: third ACP-EEC Convention, signed in Lomé on 8 December 1984 (Lomé III);

- seventh EDF: fourth ACP-EEC Convention, signed in Lomé on 15 December 1989 (Lomé IV).

(b) Legal basis in respect of the OCTs:

- sixth EDF: Council Decision 86/283/EEC of 30 June 1986;

- seventh EDF: Council Decision 91/482/EEC of 25 July 1991.

(c) Establishment of the EDFs:

- sixth EDF: internal agreement of 19 February 1985;

- seventh EDF: internal agreement of 16 July 1990.

(d) Financial regulations:

- sixth EDF: Financial Regulation 86/548/EEC of 11 November 1986;

- seventh EDF: Financial Regulation 91/491/EEC of 29 July 1991.

1.2.2. Allocations, financing, distribution and type of aid

The EDF allocation after amendments (225) by the Council are as follows:

- sixth EDF: 7 921,6 Mio ECU;

- seventh EDF: 11 825,3 Mio ECU.

The EDFs are financed by the Member States of the European Communities in proportions laid down in the internal agreements (see also Diagrams XXIV and XXV).

The abovementioned internal agreements provide for distribution of the allocations of the EDFs between the ACP States and the OCTs and between grants, special loans, risk capital, Stabex (226) and Sysmin (227).

Part of the allocation in the form of grants is reserved for exceptional aid, support operations for structural adjustment and for interest rate subsidies on loans granted by the European Investment Bank. The rest of the allocation in the form of grants and the allocation in the form of special loans is distributed among the recipient countries, with the exception of funds for the regional projects, administrative costs and a contingency reserve. The amounts thus allocated to the recipient countries, called indicative programmes in the case of ACP States, are used to finance the projects adopted.

1.2.3. Monetary unit

EDF allocations are denominated in ecus; for the purpose of converting the monetary units previously applied into ecus, it has been agreed that 1 u.a. = 1 EUA = 1 ECU.

1.2.4. Date of entry into force

- sixth EDF: 1 May 1986;

- seventh EDF: 1 September 1991.

1.2.5. Financial implementation

The Commission draws up a timetable of requests for contributions which, in principle, are to be paid quarterly by the Member States of the European Communities. The use of the EDF resources is shown in the accounts in three stages: (I) financing decision; (II) signing of contracts against funds allocated to national authorising officers; (III) authorisation of payments to contractors.

1.2.6. External audit

The Court of Auditors is responsible for the external audit of the EDFs (in accordance with the Treaty).

1.2.7. Authority giving discharge

The European Parliament gives discharge for the financial management of the EDFs, on the recommendation of the Council (in accordance with the internal agreements).

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ANNEX II Reports and opinions adopted by the Court of Auditors during the last five years

The Court of Auditors is required by the terms of the Treaties to produce an annual report. It is also required, by the Treaties and other regulations, to produce annual reports on certain Community bodies and activities. The Treaties further give the Court the power to submit observations on specific questions and to deliver opinions at the request of one of the institutions. The reports and opinions adopted by the Court during the last five years are listed below.

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(1*) The diagrams are grouped in Annex I at the end of this publication.

(2*) The Commission's replies are on page 18.

(3) Special report No 13/98 on the audit of the use of risk analysis techniques in customs control and the clearance of goods (being published in the OJ).

(4) See special reports Nos 6/98 on the assessment of the system of resources based on VAT and GNP (OJ C 241, 31.7.1998) and 9/98 on the protection of the financial interests of the European Union in the field of VAT in intra-Community trade (being published in the OJ).

(5) Net traditional own resources (14 172,3 Mio ECU) + collection costs (1 574,7 Mio ECU) = gross traditional own resources (15 747,0 Mio ECU).

(6) VAT own resources (34 351,5 Mio ECU) = VAT own resources of the year (34 919 Mio ECU) + balances and adjustments from previous years (- 567,5 Mio ECU).

(7) GNP resources (26 891,7 Mio ECU) = GNP resources of the year (27 436,6 Mio ECU) + balances and adjustments from previous years (- 544,9 Mio ECU).

(8) Annual report concerning the financial year 1995, paragraph 1.14, OJ C 340, 12.11.1996, p. 29.

(9) Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 implementing Decision 88/376/EEC, Euratom on the system of the Communities' own resources provides as follows:

Article 6

1. Accounts for own resources shall be kept by the Treasury of each Member State or by the body appointed by each Member State and broken down by type of resources.

2. (a) Entitlements established in accordance with Article 2 shall, subject to point (b) of this paragraph, be entered in the accounts at the latest on the first working day after the 19th day of the second month following the month during which the entitlement was established.

(b) Established entitlements not entered in the accounts referred to in point (a) because they have not yet been recovered and no security has been provided shall be shown in separate accounts within the period laid down in point (a). Member States may adopt this procedure where established entitlements for which security has been provided have been challenged and might upon settlement of the disputes which have arisen be subject to change.

(10) OJ L 155, 7.6.1989, p. 1.

(11) OJ L 175, 13.7.1996, p. 3.

(12) Proposal for a Council Regulation (EC, Euratom) amending Council Regulation (EEC, Euratom) No 1552/89 implementing Decision 94/728/EC, Euratom on the system of the Communities' own resources, COM (97) 343 final, OJ C 267, 3.9.1997, p. 64.

(13) See also Chapter 2 - Common agricultural policy; Title III - Summary of special reports; Special report No 20/98 on the audit of physical checks of agricultural products receiving export refunds; paragraphs 2.87 - 2.92.

(14) The regulations governing the monitoring of agriculture products receiving refunds at export also require the use of risk analysis techniques if examination rates fall below 5%.

(15) OJ L 33, 4.2.1997, p. 24.

(16) Council Decision 91/341/EEC of 20 June 1991 on the adoption of a programme of Community action on the subject of the vocational training of customs officials (Matthaeus programme), OJ L 187, 13.7.1991, p. 41.

(17) This concerns the completeness of the GNP calculation, notably as regards taking the black economy into account. See Commission Decision 97/619/EC, Euratom of 3 September 1997 (OJ L 252, 16.9.1997, p. 33). Under this Decision, a time-limit (1.10.1998) has been set for Member States (excluding Austria, Finland and Sweden, for which the time-limit is 1.10.1999) to ensure that their national accounts are full and complete.

(18*) The Commission's replies are on page 50.

(19) OJ L 44, 14.2.1997.

(20) Document not yet published in OJ.

(21) Council Decision No 94/729/CE of 31 October 1994 (OJ L 293, 12.11.1994).

(22) Financial regulation of 21.12.1977, Article 99.

(23) Financial regulation of 21.12.1977, Article 100.

(24) OJ C 57, 23.2.1998, paragraph 15.

(25) See also the Court's annual report on the financial year 1995 (OJ C 340, 12.11.1996).

(26) OJ L 39, 17.2.1996.

(27) Document VI/36/98 of 16.2.1998.

(28) Rice is always excluded when cereals are discussed in the following paragraphs.

(29) Council Regulation (EEC) No 120/67 of 13 June 1967 (OJ 117, 19.6.1967, p. 2269).

(30) Court's Annual Report for the financial year 1988 (OJ C 312, 12.12.1989, Chapter 6).

(31) The target prices for each cereal were considered at a political level to be the farm-gate prices that would guarantee a 'fair income for the farmer`.

(32) The intervention prices for each cereal guaranteed farmers a minimum income by triggering the buying-in of cereals into public storage. They were set at 90 % of the target prices.

(33) Council Regulation (EEC) No 1143/76 of 17 May 1976 (OJ L 130, 19.5.76, p. 1).

(34) Council Directive 75/268/EEC of 28.4.1975 (OJ L 128, 19.5.1975, p. 1).

(35) As the Commission had assumed an average yield of durum wheat of 2 tonnes/ha in the regions eligible for aid, the compensation of reductions in the intervention price was only 50 %.

(36) OJ L 181 of 1.7.1992, p. 12.

(37) COM (96) 361 final of 30 July 1996.

(38) Council Regulation (EC) No 2309/97 of 17 November 1997 (OJ L 321, 22.11.1997, p. 3).

(39) COM (1998) 158 final of 18.3.1998, p.35.

(40) OJ C 121, 20.4.1998.

(41) OJ L 94, 28.4.1970.

(42) Commission Decision 97/333/EC (OJ L 139, 30.5.1997) and Commission Decision 97/608/EC (OJ L 245, 9.9.1997).

(43) OJ L 125, 8.6.1995.

(44) OJ L 158, 8.7.1995.

(45) Commission Decision 97/316/EC of 5 May 1997 (OJ L 138, 29.5.1997, p. 24) and Commission Decision 97/609/EC of 30 July 1997 (OJ L 245, 9.9.1997, p. 25). See Special Report No 21/98.

(46) In the process of being published in the OJ.

(47) OJ C 127 of 24.4.1998 and OJ C 191 of 18.6.1998.

(48) In the process of being published in the OJ.

(49) In the process of being published in the OJ.

(50) In the process of being published in the OJ.

(51) See also Chapter 1 - Own resources - Audit of the use of risk analysis techniques in customs control of the clearance of goods (paragraphs 1.10 - 1.24).

(52*) The Commission's replies are on page 71.

(53) Special Report No 14/98, to be published in the OJ.

(54) Special Report No 12/98, to be published in the OJ.

(55) Special Report No 16/98, to be published in the OJ.

(56) Special Report No 15/98, to be published in the OJ.

(57) Special Report No 22/98, to be published in the OJ.

(58) Article 20 of Council Regulation (EEC) No 4253/88 of 19 December 1988, as amended by Regulation (EEC) No 2082/93 of 20 July 1993 (OJ L 193, 31.7.1993, p. 10)

(59) Volume II of the revenue and expenditure account and the financial balance sheet referring to operations for the financial year 1997, page 754.

(60) Commission document SEC(93) 2113, 17.12.1993.

(61) OJ C 395, 31.12.1994, p. 1.

(62) Council Regulation (EEC) No 2081/93 of 20 July 1993 (OJ L 193, 31.7.1993, p. 5), amending Council Regulation (EEC) No 2052/88.

(63) Council Regulation (EEC) No 2081/93, Article 4.

(64) Regulation (EEC) No 2082/93, Article 21 (5).

(65) Council Regulation (EEC) No 2082/93 of 20 July 1993, Article 25.

(66) Regulation (EEC) No 2082/93, Article 9.

(67) Sixth annual report on the Structural Funds 1994, COM(95) 583 Final, p. 43.

(68*) The Commission's replies are on page 83.

(69) Article 41 of the financial regulation: 'Validation of any expenditure shall be subject to the submission of supporting documents showing the creditor's claim ... or the existence of a document justifying payment`.

(70) Table 4.2 shows a recapitulative statement of advances paid to certain beneficiaries of research contracts during the month of December. Out of a total of 820 advances paid by the various DGs, a sample covering 10 % of the transactions for the financial year was selected. This was enlarged by 18 transactions to allow for the DGs which were not represented in the theoretical sample. Altogether, a sample of 100 advances served as a reference for analysis. It appears from this analysis that 13 advances totalling 13,5 Mio ECU were paid in an irregular manner, of which 12,4 Mio ECU was paid by DG XII. This is the equivalent of 21,43 % by number and 37 % by amount of the payments audited in this DG.

(71) Special Report No 23/98 concerning the information and communication measures managed by the Commission (being published in the OJ).

(72) Special Report No 3/98 concerning the implementation by the Commission of the EU policy and action as regards water pollution (OJ C 191, 18.6.1998).

(73) Special Report No 17/98 on support for renewable energy sources in the shared-cost actions of the JOULE-Thermie programme and the pilot actions of the Altener programme (being published in the OJ).

(74) Transposition of the UWWT directive and nitrates directives - approaches in other Member States, National Rivers Authority (NRA), Bristol, May 1995.

(75) Directive 91/271/EEC (UWWT directive) has not been transposed by Germany, Greece and Italy; Directive 91/676/EEC (nitrates) not transposed by Austria and Finland. It was not correctly transposed by Belgium, Greece, Spain, Italy, the Netherlands and Portugal and not correctly applied in France.

(76) The widespread use of external assistance by DG XVII has made it possible for supervision to be closer than for JOULE. The introduction of external cluster managers to supervise JOULE projects in 1997 may improve the situation.

(77*) The Commission's replies are on page 100.

(78) External action (heading 4) and reserves for emergency aid and the loan guarantee fund (heading 6).

(79) 'Understanding European Community aid`, ODI and the European Commission, 1997, page xiii. In 1995 the European Community accounted for 10,5 % of all aid disbursed by the OECD countries.

(80) The payments to assist Mediterranean countries, which totalled 403,8 Mio ECU for heading B7-4, can be broken down into 128,0 Mio ECU (32 %) for the protocols, 211,6 Mio ECU (52 %) for MEDA and 63,6 Mio ECU (16 %) for the countries of the Near and Middle East.

(81) Investment funds, holdings, interest-rate subsidies.

(82) Council Regulation (EC) No 1488/96 of 23 July 1996 on financial and technical measures to accompany (MEDA) the reform of the economic and social structures in the framework of the Euro-Mediterranean partnership, OJ L 189, 30.7.1996.

(83) The Court has published the following special reports in the external relations field since the 1996 discharge procedure:

- Special Report No 1/98 in respect of bilateral financial and technical cooperation with non-member Mediterranean countries (OJ C 98, 31.3.1998);

- Special Report No 5/98 on reconstruction in the former Yugoslavia (OJ C 241, 31.7.1998);

- Special Report No 7/98 in respect of the European Community development aid programme regarding South Africa (OJ C 241, 31.7.1998);

- Special Report No 11/98 in respect of the development of the private sector - PHARE and TACIS (being published in the OJ).

(84) The 1997 budget provides for 2 % of the total appropri-ations for PHARE, 3,5 % of the appropriations for TACIS and 3 % of the MEDA appropriations.

(85) Technical support teams based in Brussels and in delegations, recruited by open tender.

(86) Annual report of the Court concerning the financial year 1996, paragraphs 13.17 and 14.10 (OJ C 348, 18.11.1997).

(87) The Court's audit has not made it possible to establish a comprehensive amount for support expenditure. In order to make such a calculation it would be necessary to examine all the programmes and contracts made in 1996 and 1997. For PHARE, 101,03 Mio ECU was identified even though the ceiling was 38,32 Mio ECU. For TACIS, 72,92 Mio ECU was identified for a ceiling of 28,64 Mio ECU.

(88*) This chapter prompts no comments from the Commission.

(89) Special Report No 10/98 (OJ C 243, 3.8.1998, p. 1).

(90) In the process of being published in the OJ.

(91) OJ C 393, 29.12.1997, p. 41.

(92*) The Commission's replies are on page 117.

(93) Council Regulation (EC) No 2894/94 of 28 November 1994 (OJ L 305, 30.11.1994, p. 6).

(94) Council decision of 19 April 1994 (OJ L 107, 28.4.1994, p. 57).

(95) COM(1998) 26 final of 21 January 1998.

(96) Council decision 97/256/EC of 14 April 1997 (OJ L 102, 19.4.1997).

(97) OJ L 293, 12.11.1994, p. 1.

(98) This amount can be broken down as follows: 50 Mio ECU in 1976, 200 Mio ECU in 1983, 60 Mio ECU in 1984 and 450 Mio ECU in 1987.

(99) Resolution No A4-0097/98 of 31 March 1998.

(100*) The Institutions' replies are on page 139.

(101) Article 188c of the Treaty establishing the European Community, Article 160c of the Treaty establishing the European Atomic Energy Community and Article 45C of the Treaty establishing the European Coal and Steel Community with regard to the ECSC's former administrative budget, which was incorporated into the general budget by the Merger Treaty of 8 April 1965.

(102) For reasons of convenience the Court has decided to use the French acronym DAS for all the Union's languages.

(103) SEC(98) 522, Volume IV, 'Consolidated revenue and expenditure accounts and balance sheet`.

(104) Special report in support of the statement of assurance concerning activities financed from the general budget for the financial year 1994, paragraphs 3.47 3.51 (OJ C 352, 30.12.1995);

Special report in support of the statement of assurance concerning activities financed from the general budget for the financial year 1995, paragraphs 3.54 3.57 (OJ C 395, 30.12.1996);

Special report in support of the statement of assurance concerning activities financed from the general budget for the financial year 1996, paragraphs 19.37 19.39 (OJ C 348, 18.11.1997);

Opinion No 4/97 on the proposal for a Council regulation amending the financial regulation applicable to the general budget of the European Communities, paragraph 15, indents 5, 6, 7 and 10, Annex to opinion, accounting principles, paragraphs 1.33 1.48, towards an accruals based accounting system 3.1 3.20 (OJ C 57, 23.2.1998).

(105) Annual report concerning the financial year 1996, paragraph 19.9 (OJ C 348, 18.11.1997).

(106) Opinion No 4/97 on the financial regulation, paragraph 15, indents 6 and 10, Annex to opinion, accounting principles, paragraphs 1.39 1.40, accounting treatment of advances and payments by instalment, paragraphs 3.53.14.

(107) Statement of assurance concerning activities financed from the general budget for the financial year 1996, paragraphs 19.6 19.7 (OJ C 348, 18.11.1997).

(108) Special report in support of the statement of assurance concerning activities financed from the general budget for the financial year 1995, paragraphs 3.89 3.90 and reply (OJ C 395, 31.12.1996).

(109) Case C-106/96.

(110) Council Regulation (EC) No 2320/96 of 28 November 1996 continuing a special system of assistance to traditional ACP supplies of bananas established by Regulation (EC) No 2686/94 (OJ L 316, 5.12.96).

(111) Discarding a TABLE

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(112) Summary report on the clearance of the accounts of the Guarantee Section of the EAGGF, accounts for the financial year 1997, Doc. VI/757/98.

(113) For this Member State these documents were received within the following two weeks.

(114) Commission Decision 98/324/EC of 29 April 1998, (OJ L 141, 13.5.1998, p. 38).

(115) Commission Regulation (EEC) No 536/93 laying down detailed rules on the application of the additional levy on milk and milk products.

(116) Opinion No 4/97 of the European Court of Auditors on a draft Council regulation (Euratom, ECSC, EC) amending the financial regulation of 21 December 1997 applicable to the general budget of the European Communities, paragraph 2.16 of the Annex.

(117) Commission Regulation (EC) No 2064/97 of 15 October 1997 laying down implementing procedures for Council Regulation (EEC) No 4253/88 concerning the financial control by the Member States of operations co-financed by the Structural Funds (OJ L 290, 23.10.1997, p. 1).

(118) Annual report on the financial year 1996, Volume I, paragraph 6.19, Special Report No 14/98 concerning the closure of the forms of ERDF intervention, paragraph 3.14 (in the process of being published in the Official Journal) and Special Report No 12/98 concerning the implementation of operational programmes for the promotion of rural development in Objective 5b areas, paragraphs 5.30 5.34 (in the process of being published in the Official Journal).

(119) Commission decision 97/317/EC of 23 April 1997 amending the decisions approving the Community support frameworks, single programming documents and Community initiative programmes (OJ L 146, 5.6.1997, p. 1).

(120) See paragraphs 3.5, 2.6, 6.14 and 6.19 of Special Report No 16/98 on the implementation of appropriations for structural measures for the 1994-99 programming period (in the process of being published in the Official Journal).

(121) Aiming to reduce, suspend and eliminate Commission assistance.

(122) Commission, financial corrections in the context of the application of Article 24 of Regulation (EEC) No 4253/88, document C(97) 3151 final II of 15 October 1997.

(123) See paragraphs 3.18 and 4.6 of Special Report No 14/98 concerning the closure of the forms of ERDF intervention (in the process of being published in the Official Journal).

(124) Expenditure by these public authorities constitutes in these cases expenditure incurred.

(125) Special Report No 14/98 concerning the closure of the forms of ERDF intervention (in the process of being published in the Official Journal).

(126) OJ L 290, 23.10.97, p. 1.

(127) SEC(1998) 1228 final of 22.7.1998.

(128*) The Commission's replies are on page 157.

(129) The Lomé III Convention (OJ L 86, 31.3.1986).

(130) The Lomé IV Convention (OJ L 229, 17.8.1991).

(131) See OJ L 156, 29.5.1998, p. 107.

(132) Already mentioned in paragraph 12.07 of 1996 annual report (OJ C 348, 18.11.1997).

(133) Reduction by 1,6 Mio ECU compared to 1996.

(134) Reduction by 12,7 Mio ECU compared to 1996.

(135) In three cases it was even a contractual obligation to claim these penalties (see Part II paragraph 37(a)).

(136) Booked on account 6 1 6 0504.

(137) Angola, Comoros, Djibouti, St Christopher and Nevis and Uganda.

(138) Uganda.

(139) Amounting to 4 139,35 ECU.

(140) Balance of 1 316,32 ECU.

(141) See Articles 10(2) and 15(1) of the internal agreement on the financing and administration of Community aid under the Lomé IV Convention.

(142) Loans from the Bank's own resources benefiting from an EDF interest subsidy.

(143) Under Lomé III the interest rate shall not be higher than 8 %.

(144) ACP States only.

(145*) The Commission's replies are on page 171.

(146) Article 219.4 Lomé IV Convention.

(147) The statistical sample comprised 35 commitments (Commission decisions) and 173 payments.

(148) In the case of Stabex, in 1997 there were no commitments, and of the payments 53 % have been examined; for structural adjustment, 53 % of commitments and 88 % of payments have been examined.

(149) COM(1998) 442 final, Chapter X, p. 144.

(150) 7 MOZ 105 micro project coordination unit.

(151) 7 PTO GPR 1 2 emergency aid for St Maarten after the hurricane Luis.

(152) Balance as at 31 December 1997 amounted to USD 15 040,67.

(153) COM(1998) 442 final, Chapter VIII p. 110

(154) See Commission reply on the annual report concerning the financial year 1996, Volume II, paragraph 22.10(c), indicating that it intended to write off the amount.

(155) Therefore the account 7 1 9 24 'Fonds en route` was understated by the same amount.

(156) Finland and Austria.

(157) Ivory Coast.

(158) Special report in support of the 1995 EDF DAS, paragraphs 3.31 and 3.32 and annual report 1996 Volume II, paragraphs 22.16 and 22.17.

(159) COM(1998) 442 final, Chapter X, Annex 3.4, p. 172.

(160) See the annual report concerning the financial year 1996, Volume II, paragraph 22.11.

(161) Of which 15,7 Mio ECU relates to a Sysmin project for Togo that has had no movements since its opening in 1989.

(162) Commission reply on annual report concerning the financial year 1996, Volume II, paragraph 22.13.

(163) Bank of International Settlement (BIS) rates; in 1997 the loss of interest earnings due to these transfers amounted to 11 764 ECU.

(164) Exchange of letters to fix interest rates, tomnext rates, contracts.

(165) Amounting to 16 250 ECU.

(166) Amounting to 13 753 ECU.

(167) Articles 215.2 and 217.1, Convention of Lomé IV (Mali).

(168) Article 219.4 Convention of Lomé IV (Jamaica and Guinea Conakry).

(169) 7 ZR 32 support programme for the preparation of elections.

(170) Guinea Bissau and Niger.

(171) COM(1998) 442 final, p. 137.

(172) According to a joint declaration by the Council and the Commission annexed to the internal agreement for the seventh EDF, drawings on the NIP can only exceed 10 % of the NIP in exceptional cases after a favourable opinion issued by the EDF Committee. See also special report in support of the 1995 DAS, paragraph 3.67 (OJ C 395, 31.12.1996).

(173) See Commission reply in the annual report concerning the financial year 1996, Volume II, paragraph 22.23.

(174) Instead of 12 % as indicated in one financing proposal, the correct figure concerning the degree of use of NIP funds before the approval of the new programme amounts to 24 %.

(175) See Part I, paragraphs 32, 33 and 36.

(176) See also paragraph 22.46, annual report 1996 (OJ C 348, 18.11.1997).

(177) 42 out of 173 payments were affected by one or more formal errors.

(178) Sierra Leone and Haiti: payments were effected to bank accounts in the USA.

(179) Mauritania and Chad.

(180) In the case of the 1997 financial year: revenue and expenditure account and balance sheet relating to operations under the 1997 budget (Doc. SEC(98), 519-522).

(181) Merger Treaty (8 April 1965): Treaty establishing a Single Council and Single Commission of the European Communities.

(182) Treaty of Luxembourg (22 April 1970): Treaty amending certain budgetary provisions of the Treaties establishing the European Communities and of the Merger Treaty.

(183) Treaty of Paris (18 April 1951): Treaty establishing the European Coal and Steel Community (ECSC).

(184) Treaty of Rome (25 March 1957): Treaty establishing the European Economic Community (EEC).

(185) Treaty of Rome (25 March 1957): Treaty establishing the European Atomic Energy Community (Euratom).

(186) Mainly the financial regulation of 21 December 1977 (OJ L 356, 31.12.1977). See in this respect the foreword on page 2.

(187) Section III (Commission) is subdivided into Part A 'Staff and administrative appropriations` and Part B 'Operating appropriations` which is further subdivided into main sectors of activity. Section VI (Economic and Social Committee and Committee of the Regions) is subdivided into Part A 'Economic and Social Committee`, Part B 'Committee of the Regions` and Part C 'Joint organisational structure`.

(188) Principal legal acts relating to own resources: sixth Council directive of 17 May 1977, common system of VAT: uniform assessment basis (OJ L 145, 13.6.1977); Council Decision 88/376/EEC, Euratom, of 24 June 1988 (OJ L 185, 15.7.1988); Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (OJ L 155, 7.6.1989); Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 (OJ L 155, 7.6.1989); Council Directive 89/130/EEC, Euratom of 13 February 1989 on the harmonisation of the compilation of GNP (OJ L 49, 21.2.1989).

(189) It is important to note the differences between 'appropriations for commitments` and 'commitment appropriations` and between 'appropriations for payments` and 'payment appropriations`. The two terms 'commitment appropriations` and 'payment appropriations` are used exclusively in the context of differentiated appropriations.

(190) Articles 78d ECSC, 205 EC, 179 Euratom and 22(2) of the financial regulation.

(191) Articles 21 to 55 and 73 to 77 of the financial regulation.

(192) Articles 28 to 35 of the financial regulation and Council Regulations (EEC, Euratom) Nos 1552/89 and 1553/89 of 29 May 1989 (OJ L 155, 7.6.1989).

(193) Article 96(2) of the financial regulation.

(194) Article 7(2)(a) of the financial regulation.

(195) Article 7(1)(a) and 7(3) of the financial regulation.

(196) Article 7(6) of the financial regulation.

(197) Article 7(7) of the financial regulation.

(198) Article 7(1)(b) of the financial regulation.

(199) Article 7(1)(a) and 7(2)(b) of the financial regulation.

(200) Article 7(1)(b) of the financial regulation.

(201) Article 7(1)(a) and 7(2)(b) of the financial regulation.

(202) Article 32 of the financial regulation and Articles 15 and 16 of Council Regulation (EEC, Euratom) No 1552/89 (OJ L 155, 7.6.1989).

(203) Articles 78 to 82 of the financial regulation.

(204) Articles 45a, 45b and 45c ECSC, 188a, 188b and 188c EC, 160a, 160b and 160c Euratom and Articles 83 to 90 of the financial regulation.

(205) Articles 78g ECSC, 206b EC and 180b Euratom.

(206) Article 89 of the financial regulation.

(207) The initial allocations were amended by Council decisions, and have been increased by various items of revenue, such as reconstitution of Stabex transfers and bank interest or supplementary contributions from the Member States.

(208) System designed to guarantee the stabilisation of earnings from exports by the ACP States to the Community (Lomé I, Article 16; Lomé II, Article 23; Lomé III, Article 147; Lomé IV, Article 186).

(209) System designed to aid ACP States whose economies are largely dependent on the mining sectors and in particular to help them cope with a decline in their capacity to export mining products to the Community (Lomé II, Article 49; Lomé III, Article 176; Lomé IV, Article 214).