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# 31996Y1112(01)

**Annual Report concerning the financial year 1995 together with the institutions' replies **

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Official Journal C 340 , 12/11/1996 P. 0001 - 0352 *

ANNUAL REPORT concerning the financial year 1995 (96/C 340/01)

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 Olavi SALMI

Joergen MOHR

Kalliopi NIKOLAOU

François COLLING

Maarten B. ENGWIRDA

Jean-François BERNICOT

TABLE OF CONTENTS

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Introduction 5

Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 23

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Budgetary management and direct expenditure 58

Chapter 3 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Organization and management of agricultural markets 75

Chapter 4 - Common policy on fisheries and the sea 102

Chapter 5 - Regional sector 123

Chapter 6 - Social sector 149

Chapter 7 - The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) 187

Chapter 8 - Financial instruments and banking activities 204

Chapter 9 - Research and technological development 214

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 235

Chapter 11 - Cooperation with developing and third countries (except Central and Eastern Europe) 264

Chapter 12 - European Development Funds 290

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND BODIES OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 334

Chapter 14 - Court of Auditors 348

Chapter 15 - The Economic and Social Committee, the Committee of the Regions and their common organizational structure 349

ANNEXES

Annex I - Reports and opinions adopted by the Court of Auditors during the last five years 353

Annex II - Annex in respect of the abbreviations and symbols used in the report and background information on the general budget 363

THE COMMISSION'S REPLIES

Page

Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 45

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Budgetary management and direct expenditure 70

Chapter 3 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

Organization and management of agricultural markets 95

Chapter 4 - Common policy on fisheries and the sea 117

Chapter 5 - Regional sector 141

Chapter 6 - Social sector 169

Chapter 7 - The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) 199

Chapter 8 - Financial instruments and banking activities 212

Chapter 9 - Research and technological development 228

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 255

Chapter 11 - Cooperation with developing and third countries (except Central and Eastern Europe) 283

Chapter 12 - European Development Funds 313

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND BODIES OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 342

Chapter 15 - Economic and Social Committee, Committee of the Regions and their common organizational structure 352

SUMMARY OF DIAGRAMS (D)

Page

D I. General budget 1995 - estimated revenue 10

D II. General budget 1995 - estimated expenditure - appropriations for payment 11

D III. General budget 1995 - appropriations for commitment 12

D IV. Appropriations for commitment available in 1995 and their utilization, by sector and institution 13

D V. Appropriations for payment available in 1995 and their utilization, by sector and by institution 14

D VI. Financial perspective: breakdown of appropriations for commitment available from the 1995 budget and implementation; total appropriations for payment available from the 1995 budget and implementation 15

D VIIA. The consolidated revenue and expenditure account and the balance calculated for the 1995 financial year 16

D VII B. Summary of the consolidated balance sheet of the European Union as at 31 December 1995 17

D VIII. Payments made in 1995, by sector 18

D IX. Payments made in 1995, by Member State 19

D X. Evolution and utilization of appropriations for payment for the period 1991 to 1995, by sector 20

D XI. Utilization rates of appropriations for payment from 1991 to 1995, by sector 21

D XII. Annual payments during the period 1991-95 by sector and by institution 22

D XIII. Estimated and actual revenue in 1995 54

D XIV. Estimated and actual own resources in 1995, by Member State 55

D XV. Actual own resources in 1995 56

D XVI. Actual own resources, by Member State (1991-95) 57

D XVII. EAGGF-Guarantee - payments made in 1995, by market 73

D XVIII. EAGGF-Guarantee - payments made in 1995, by market and by Member State 74

D XIX. The Structural Funds: commitments entered into and payments made in 1995, by Member State 185

D XX. Structural aid - commitments entered into and payments made in 1995, by Member State and by objective 186

D XXI. Aid to the countries of Central and Eastern Europe and to the Newly Independent States of the former Soviet Union: PHARE and TACIS programmes 263

D XXII. Basic information on the European Development Funds (EDFs) (position as at 31 December 1995) 329

D XXIII. The sixth EDF - allocation, financing and distribution of aid, overall utilization 330

D XXIV. The seventh EDF - allocation, financing and distribution of aid, overall utilization 331

D XXV. The sixth and seventh EDFs - utilization of aid by economic sector (situation at 31 December 1995) 332

D XXVI. The seven EDFs - evolution of annual payments (1960-95) 333

INTRODUCTION

0.0. CONTENTS Paragraph reference

Accounting and financial management 0.1

Member States' management of Community funds 0.2 - 0.5

Member States and the Commission acting together 0.6 - 0.11

The Commission's own management 0.12 - 0.27

Improvements in financial management 0.28 - 0.32

ACCOUNTING AND FINANCIAL MANAGEMENT

0.1. Improving financial management in particular cases may depend largely or exclusively on action to be taken by the Commission alone, by one or more Member States or, quite frequently, on combined action by the Commission and the Member States working together to find appropriate solutions. The Annual Report and the statement of assurance for the financial year 1995 provide numerous illustrations of unsatisfactory accounting and financial management, in many cases identical, or closely similar, to those reported in previous years. Although the Court, in the introduction to its 1994 Annual Report, welcomed the launch of the Commission's new financial management improvement programme, entitled 'Sound and efficient management (SEM 2000)`, the Court also acknowledged that rapid results could not be expected.

MEMBER STATES' MANAGEMENT OF COMMUNITY FUNDS

0.2. With regard to revenue, Chapter 1 mentions failure to collect several millions of ecus of own resources, because of weak application of legislation relating to inward processing. Considerable variations in methods and frequency of customs checks and incorrect application of the Community external transit procedure were also observed. With regard to VAT own resources, new risks arising from the abolition of tax frontiers necessitate close follow-up of management procedures, requiring appropriate national control methods and closer co-operation between Member State authorities.

0.3. Chapter 3, on the organization and management of agricultural markets, also draws attention to a Member State's failure to recover amounts owed to the Community, in this case export refunds of at least 16 Mio ECU. In the same chapter, follow-up of observations in the Court's Annual Reports for 1990 to 1992 revealed that, although both Council and Parliament had supported the Court's view that the olive cultivation register required urgent completion, this had still not been done in the main olive oil producing Member States four years later. For another essential control mechanism, the introduction of land registers for rice-growing areas, there was a similar lack of progress. In its special report in support of the statement of assurance for the financial year 1995 (), the Court concludes that, at the level of the Member States, the control procedures required by the regulations for each individual measure need to be implemented more rigorously. These controls should be considered as minimal requirements to secure an efficient and effective execution of the EAGGF budget. The effectiveness of administrative controls and physical inspections on the spot need to be increased. For hectare-based schemes, the proper implementation of a mandatory system of integrated controls is essential for the purposes of ensuring that fraudulent duplicate declarations are prevented or detected.

0.4. Despite advances of 50 % of the Community aid for investments for fishing surveillance (see Chapter 4), the implementation of annual investment programmes in several Member States was considerably delayed. Moreover, in the field of aid for investments in the processing and marketing of fisheries and aquaculture products, stricter analysis of projects and of the financial situation of beneficiaries could have prevented the financing of some failures.

0.5. Problems in Member State management of Structural Funds operations, mentioned in Chapter 6, include unreliable accounting systems for the Social Fund and lack of information about beneficiaries. These lead to delays in the flow of money, malfunctioning of monitoring committees, inadequate internal audit and unreliable expenditure certificates. Chapter 7 describes how the EAGGF-Guidance initiative, Leader, was introduced in different ways in different Member States, how cooperation and coordination between the Leader groups and national intermediary bodies varied greatly and how the considerable autonomy of the groups, together with their diverse interpretations of the basic concept, resulted in procedural failures. Ineligible expenditures were found and unreliable technical and financial information was supplied by groups.

MEMBER STATES AND THE COMMISSION ACTING TOGETHER

0.6. With regard to own resources, the system of reporting of Member States' write-off or non-recovery of debts to customs needs to be strengthened. The Commission and the Member States should also study the possibility of developing appropriate tools to measure the comparability and reliability of GNP figures. They should, in any case, continue their efforts to make national GNP statistics more reliable, comparable and accurate.

0.7. The failure of Member States and of the Commission to monitor and control the declaration of costs for Community co-financed schemes to combat irregularities and fraud in EAGGF-Guarantee has led to ineligible payments of 16,6 Mio ECU, while some of the actions financed had limited or unsatisfactory results.

0.8. Inconsistent treatment of the eligibility of particular costs for Community aid was again found, both in the common policy on fisheries and in the Social Fund. Regional Fund management is affected because the various criteria used to determine which areas are eligible for aid mean that more than 50 % of the Community's population may be covered by one or other objective. As a result, aid is widely scattered and it has become difficult to reconcile such aspects as the principle of concentration of aid, territorial enlargement, the effect of previous aid, continuity of projects and changes in needs, and to relate objective criteria to specific situations, particularly with inadequate statistics. Planned measures to improve regional statistics need to be implemented to provide a firm basis for policies and the assessment of results.

0.9. In its special report in support of the statement of assurance for the financial year 1995 (), the Court concludes that the high incidence of errors in the Structural Funds underlines the need for improved systems and controls within Member States, rigorous and strictly applied deadlines for the submission of final claims, timely clearance procedures by the Commission and complete and clearly drafted regulations covering the management of the funds. Particular attention should be paid to the certification procedure to ensure that declarations of eligible expenditure are correctly prepared and fully supported.

0.10. Community grants are often allocated to revenue-generating industrial projects. Greater caution is desirable in using grant aid for projects with a high, direct financial return. Loan finance is sometimes more appropriate, although grants might still be used where it appears investments would not be made without additional incentives.

0.11. New programmes of social expenditure do not have sufficiently clear and measurable objectives. Moreover, the audit of Community programmes for education and vocational training revealed that the launch of the new Leonardo and Socrates programmes had resulted in delays to and interruptions of their predecessors. To achieve coherence and complementarity of Community measures and prevent double funding of individual actions, coordination structures between and within the administrations concerned have to be improved.

THE COMMISSION'S OWN MANAGEMENT

0.12. The Commission's own management is criticized in most chapters of the report and, as might be expected, more frequently with regard to directly managed expenditure. Chapter 3 recognizes that the Commission acted swiftly to monitor the implementation of measures applied following an outbreak of swine fever in Belgium and Germany, but points out that it did not ensure that the conditions of implementation of veterinary and exceptional measures were clearly specified from the beginning in the texts of regulations. This failure increased the cost to the Community budget and meant that Member States were treated differently.

0.13. Chapter 4 notes that the Commission did not fix precise criteria for determining which Member States could benefit from the Community contribution to national expenditures on fishing surveillance nor for setting the level of aid. Equipment which was not exclusively used for monitoring fishing was awarded the maximum rate of grant. No evaluation of the cost-effectiveness of proposed investments was made, even for aeroplanes. Moreover, in the case of aerial surveillance, the Commission failed to take initiatives to improve the essential cooperation between Member States.

0.14. Under the PACTE and Recite programmes, described in Chapter 5, similar projects for exchange of experience between local and regional authorities are financed. Their management is entrusted to bodies whose administrative structures are not always geared to the proper implementation, monitoring and checking of projects.

0.15. The Commission urgently needs to introduce clear rules to govern the very widespread practice of sub-contracting of social fund operations. Measures to combat poverty and social exclusion did not have clearly defined objectives; overall cohesion was lacking and there was an absence of assessments for most such operations. The Commission does not have clear procedures for the allocation of grants and there is a lack of transparency. To strengthen the control system, a central unit for contract management, harmonized procedures and a separation of financial and project management are desirable.

0.16. The audit of aid for production and broadcasting of programmes in wide-screen format (16:9), within the framework of the action plan for the introduction of advanced television services in Europe (see Chapter 9), found that Community management was problematical. Neither financing mechanism could be consistently applied. Although the action plan has helped broadcasters and programme producers to become familiar with the format, it has had no discernable impact on sales of receivers.

0.17. The Court concluded that if the action plan were to be continued, aid for the production of television programmes ought to be simplified or even abandoned and, in the field of aid for broadcasting, more technical checks on broadcasters' facilities to ensure picture and sound quality would be desirable. As the market has so far been more interested in the quantity of services offered than in the wide-screen format, any further financial commitment should be decided only after detailed market research and clear definition of objectives.

0.18. Chapter 10 covers aid to Central and Eastern Europe, the newly independent States of the former Soviet Union and Mongolia. Many of the weaknesses noted result from inadequate management of human resources by the Commission, which urgently needs to better define and fully exercise its responsibilities as authorizing officer, to stop delegating to third parties a part of its public authority role, to clarify the role of external experts and in-house contract staff, and to inform the budgetary authorities of the means which it considers necessary for satisfactory execution of the programmes which it has to manage. Somewhat similar difficulties have resulted from the use of intermediary organizations for managing some structural operations (see paragraphs 0.14 and 0.15 above) and from the development aid management capacity problem which is mentioned in paragraph 0.21 below. A further example of the problems of delegation of the Commission's powers is mentioned in the Court's Special Report No 1/96 on the MED programmes ().

0.19. Although the Commission has started to overcome delays in establishing contracts, accounting commitments not yet covered by contracts at the end of 1995 were still 1 970 Mio ECU for PHARE and 644 Mio ECU for TACIS. The efficiency of TACIS operations is often hindered by the multiplicity of management levels which result in duplication of actions, confusion in the chain of command and lack of accountability.

0.20 Precipitate commitment of food and medical aid to Kyrgyzstan led to an inadequate distribution plan, difficulties is setting up counterpart funds and waste of resources. In both Poland and Kirghistan counterpart funds were used in ineligible or low priority sectors. Similar problems with the constitution, utilisation and follow-up of counterpart funds have frequently been reported by the Court, most recently in its annual reports for 1990 to 1994 and in special reports 1/91 (), 2/94 () and 2/95 (). Moreover, chapter 12 points out that although the Lomé Convention insists that the use of counterpart funds should pay particular attention to the most vulnerable social categories (the poor, the unemployed, women and children), in some countries significant amounts have been used to pay off the debts of public sector organisations. There are clearly a number of aspects of counterpart fund design and supervision that require the Commission's urgent attention.

0.21. Chapter 11 points out that outstanding commitments for cooperation with developing countries increased considerably in 1995 and that a high proportion of commitments for several key areas were made in December 1995. An imbalance is developing between the size and diversity of the programmes that the Commission has to implement and its capacity to implement them satisfactorily.

0.22. When Community aid contributes to a programme of actions co-financed by other donors and it is difficult - or even impossible - to distinguish separate components of the programme, the Commission should not restrict the use of Community funds by the beneficiary to specific parts of the programme. Examples of such excessive earmarking occurred in certain humanitarian aid actions and in financial assistance to the Palestine National Authority. Funding mechanisms and control and reporting requirements should, in cooperation with other donors, be adapted to the nature of the operations being financed.

0.23. Chapter 11 also draws attention to the need for the Commission to develop and consistently apply criteria for the treatment of interest earned on unused balances of advances paid to organizations within the framework of external actions. Previous eports of the Court, in particular the Special Report No 1/95 on the cohesion financial instrument, paragraph 3.17 (), and the Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 6.11 to 6.14, have shown that this observation applies, mutatis mutandis, to many Structural Fund operations and to other policy areas where advance payments are made by the Commission, either to intermediary organizations or to final beneficiaries.

0.24 Chapter 12 notes that the Commission's policy with regard to EDF support for structural adjustment has been carried out in accordance with the international financial institutions' evaluation of the specific situation of each beneficiary country and the role ascribed therein to the different suppliers of funds. The Commission accepts that there is only one structural adjustment programme for each beneficiary country under the conditions agreed with the international financial institutions. It nevertheless wishes to have some independent role in judging the progress of reforms and therefore introduces its own conditions for release of EDF support. The actual system is both too complex and too rigid. Two different kinds of conditions - basic and complementary - should be introduced, bearing in mind peculiarities of different countries.

0.25. The importance of the EDF contribution to structural adjustment has not been matched by the quality of follow-up of operations. Improvements must be sought both in the Commission's delegations and in beneficiary countries' administrations, which need institutional technical assistance support to help achieve the envisaged sectoral reforms. It has, however, to be recognized that the extent to which the Commission, with the other donors, can really influence the preparation, implementation and ex post evaluation of programmes in the target sectors is quite limited by considerations of the sovereignty of the ACP States.

0.26. Chapter 13 points out that the increase in the number and the development of decentralized Community organizations make it necessary for the Commission to give more attention to their activities, particularly with regard to a transparent presentation of budget appropriations, the strengthening of internal control and harmonization of management procedures. The Court also comments on weaknesses of the Commission's real estate policy and again suggests the creation of a multiannual investment budget. Moreover, the payment of taxes in the case of rented premises appears to be in contradiction with the agreements on tax exemption which govern the Commission's relation with Member States.

0.27. Chapter 11 (see paragraphs 11.68 to 11.72) raises the possibility of the Commission making wider use for control purposes of the work of other auditors. This suggestion also has potential for areas other than Community cooperation aid to developing and third countries, notably the Structural Funds. The practice of using the work of other auditors is already becoming established for EAGGF-Guarantee operations under Commission Regulation (EC) No 1663/95 of 7 July 1995 () which provides for the audit of Member States' annual accounts for EAGGF-Guarantee by independent national certifying bodies. All such initiatives are to be welcomed if they increase the real extent of the Commission's audit and control. Nevertheless, users of the work of other auditors must, according to generally accepted auditing standards (), satisfy themselves as to the auditors' independence and professional competence in the context of the audit concerned as well as the adequacy of the procedures used for that specific audit.

IMPROVEMENTS IN FINANCIAL MANAGEMENT

0.28. This report also mentions several cases, confirmed during the audit, where the Commission has either made progress towards necessary improvement of accounting and financial management or has undertaken steps, with Member State cooperation, to secure such improvements.

0.29. Following the Court's observations in Chapter 3 of its 1992 Annual Report, both Council and Parliament recognized that effective control measures were needed for the cotton market. After the Commission's examination confirmed widespread abuse, it introduced new regulations which should improve control arrangements from 1995/6. In its 1990 Annual Report the Court criticized the way in which compensation was paid to whisky distillers for their exports; a follow-up audit in 1995 noted improvements in the control of these subsidies.

0.30. Although there is still a high level of accounting commitments for PHARE and TACIS which are not yet covered by contracts at the end of 1995, the Commission has started to reduce the backlog. The Commission has also taken some initial steps to deal with the various weaknesses in managing its own fixed assets to which the Court has drawn attention (see Chapters 13 of the 1994 and 1995 Annual Reports). Furthermore, in the own resources chapter, the Court welcomes the improvements made to the Value added tax Information Exchange System.

0.31. Moreover, a number of questions regarding the eligibility of projects for Structural Fund support are being discussed by representatives of the Commission and of Member State administrations within the SEM 2000 framework, together with an examination of other possible ways of inciting national authorities to ensure both the effectiveness of Community structural aid and proper accounting for it at national level. The Court endorses the objectives of these discussions which offer some prospect of dealing with important and longstanding weaknesses. There is, however, a long way to go and considerable efforts are needed by both the Commission and the Member States.

0.32. Finally the Court would again like to emphasize that prevention of fraud and waste is much more cost-effective than detection followed by, often problematical, punishment and recovery. Administration and control arrangements and costs should always be considered when drafting legislation and when preparing specific programmes or actions. The periodic revision of agricultural market management and of Structural Fund legislation are major opportunities to improve accountability and the quality of financial management of Community operations at all levels.

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PART I Observations on the Commission's revenue and operating appropriations and on the European Development Funds

CHAPTER 1 (*) Own resources

1.0. CONTENTS Paragraph reference

General introduction 1.1 - 1.3

Implementation of the budget 1.4

Traditional own resources 1.5 - 1.63

Management of definitively irrecoverable debts (write-offs) 1.5 - 1.16

Introduction 1.5 - 1.10

Management by the Commission of write-offs of which it has been notified by the Member States 1.11 - 1.12

Treatment of cases of suspension 1.13 - 1.14

Conclusion 1.15 - 1.16

Inward processing procedure 1.17 - 1.38

Definition 1.17

Evolution of the legal framework 1.18 - 1.19

Re-export and release for free circulation of products obtained under the inward processing suspension (IP/S) system 1.20 - 1.24

Miscellaneous observations 1.25 - 1.33

Incorrect application of the EEC-Turkey agreement 1.34 - 1.37

Conclusion 1.38

Customs warehouses 1.39 - 1.54

Introduction 1.39 - 1.40

Legal procedure 1.41

Stock records 1.42 - 1.44

Shortcomings of the customs checks 1.45 - 1.48

Irregular national re-export procedures 1.49

Incorrect application of the Community external transit procedure 1.50 - 1.52

Contradictory Community provisions governing taxation elements 1.53

Conclusion 1.54

Customs union agreements 1.55 - 1.63

Conclusion 1.63

VAT own resources 1.64 - 1.103

Introduction 1.64 - 1.67

The detection of violations of Community legislation 1.68 - 1.71

The transitional system for VAT on intra-Community transfers 1.72 - 1.103

The exchange of information on VAT numbers and the value of transfers 1.72 - 1.79

Interconnection between and limits on the utilization of sources of information 1.80 - 1.88

Changes in verification methods 1.89 - 1.91

VAT revenue 1.92 - 1.97

Conclusion 1.98 - 1.103

Gross national product 1.104 - 1.128

The need to measure the quality of the statistical GNP calculation 1.104 - 1.109

The concept of quality as applied to the statistical GNP 1.110 - 1.111

Measuring the comparability of the GNP 1.112 - 1.118

Measuring the reliability of the GNP 1.119 - 1.125

Conclusion 1.126 - 1.128

GENERAL INTRODUCTION

1.1. This chapter deals with all own resources. In the field of traditional own resources, the Court examined certain areas: the management of irrecoverable debts, some aspects of the inward processing procedure, the implementation of the customs warehousing procedure and the financial consequences of the customs union agreements. As regards VAT, the Court continued to check the implementation of the detection of infringements of Community legislation as well as the implementation of the transit procedure for the payment of VAT on intra-Community trade. Lastly, it carried out a critical examination of the establishment of the statistical GNP, which is the basis for assessing this own resource.

1.2. The structure of the following observations does not reflect the relative financial importance of each of the own resources. The fact is that, with regard to the management of the traditional own resources for which the Commission is responsible, the Court must examine all procedures which are designed to lead to the collection of these resources and the protection of the Community's financial interests. The risks of irregularities are particularly high in some of these areas (transit, inward processing, the management of Community entitlements, etc.). Although the observations on traditional own resources are more numerous, they are also more diverse in nature. Owing to the nature of the observations on the other types of own resources (VAT, GNP), they focus more on accounting principles (macroeconomic and statistical) or aspects.

1.3. An examination of the development since 1986 of the financing of the Community budget reveals certain trends (see Figure 1.1): the proportion derived from the GNP own resource increased throughout the period in question, the share provided by the VAT own resource fluctuated between 50 and 60% and the proportion attributable to traditional own resources (customs duties, agricultural levies and sugar levies) tended to fall (see Table 1.1).

Figure 1.1 - Evolution of the distribution of actual own resources

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IMPLEMENTATION OF THE BUDGET

1.4. Table 1.2 shows that:

(1) actual revenue in 1995 amounted to 75 077,1 Mio ECU, which is 99,5% of the revenue provided for in the final budget. This was an increase of 13,7% compared with the financial year 1994 (66 002,1 Mio ECU);

(2) traditional own resources, net of collection costs (1 605,9 Mio ECU), were 14 453,2 Mio ECU, i.e. 19,2% of total actual revenue. These resources comprised:

(a) customs duties of 13 898,2 Mio ECU gross, or 86,5% of gross traditional own resources (16 059,1 Mio ECU) ();

(b) agricultural levies of 844,3 Mio ECU gross, or 5,3% of gross traditional own resources;

(c) sugar and isoglucose levies of 1 316,4 Mio ECU gross, or 8,2% of gross traditional own resources;

(3) the own resource based on value-added tax (VAT) (after inclusion of balances and adjustments: P521,3 Mio ECU) amounted to 39 127,3 Mio ECU (), or 52,1% of actual revenue;

(4) the GNP resource (after inclusion of balances and adjustments) amounted to 14 172,6 Mio ECU () (including reserves of 247,6 Mio ECU), i.e. 18,9% of actual revenue.

TRADITIONAL OWN RESOURCES

Management of definitively irrecoverable debts (write-offs)

Introduction

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1.5. The Member States make available to the Community established customs duties and agricultural levies that have been recovered or guaranteed. They use separate accounts known as the B accounts () to enter established entitlements to be recovered for which no security has been provided. They may enter in these accounts established and guaranteed entitlements where these entitlements are in dispute.

1.6. Table 1.3 summarizes the situation on 30 June 1995 as regards entitlements that have been established but not recovered, as compared with established entitlements as a whole. These percentages vary, depending on the Member State concerned, between 0,13% and 1,54%.

1.7. The Member States may write off certain entitlements, i.e. they are free from the obligation to make the established entitlements available to the Commission where, for reasons of force majeure, it has not been possible to recover these amounts or if it transpires that recovery is impossible for reasons which cannot be attributed to them.

1.8. The Court examined the Commission's files on cases of write-offs.

1.9. The Commission must be notified of the total value of write-offs by means of the quarterly statement. Furthermore, all write-offs corresponding to specific cases of amounts greater than 10 000 ECU are submitted to the Commission in the twice-yearly report. Where appropiate, the Commission sends its observations to the Member State concerned within six months.

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1.10. Cross-checks in respect of both types of notification revealed inconsistencies, such as write-offs which were included in half-yearly reports whereas the quarterly reports covering the same period mention no amount, or considerably smaller amounts (see Table 1.4).

Management by the Commission of write-offs of which it has been notified by the Member States

1.11. Since the write-off procedure was introduced () on 1 January 1989 (), five Member States (Germany, Spain, France, the Netherlands and the United Kingdom) have reported cases of write-offs in respect of amounts greater than 10 000 ECU. Table 1.5 summarizes the situation on 30 June 1995 in respect of the 28 cases declared by these five Member States, totalling 5,6 Mio ECU.

1.12. At the time of the Court's enquiry (December 1995), the Commission had not yet drawn up the inventory of national recovery instruments even though this inventory is needed to determine the financial responsibility of the Member States, also in the event of write-offs. Only in September 1994 did the Commission begin to question the Member States with a view to drawing up this inventory.

Treatment of cases of suspension

1.13. On 13 July 1995, the German authorities informed the Commission that the cases of write-offs of which it had so far provided notification were actually cases of suspension. According to German legislation, the authorities may take decisions temporarily to suspend the recovery procedure, but these decisions do not lead to the cancellation of the debt. Consequently, all cases of suspension of which notification has been provided since 1989 should be re-entered in a separate account. However, these amounts to be recovered do not appear in the Community accounts. At the time of the Court's enquiry, the Commission had not yet taken steps to ensure that the German authorities took the requisite action.

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1.14. Furthermore, before 1989, Germany 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 German authorities deducting from current established amounts the amounts they had written off. Neither the Commission nor the German authorities has set up a monitoring system so as to make it possible to ascertain the cumulative total of these deductions.

Conclusion

1.15. The procedure for declaring write-offs is not a decisive aid to the Commission in its analysis and comparison of the performances of the Member States in recovering difficult debts (see paragraphs 1.10 and 1.12).

1.16. In most of the Member States, the procedure provided for has still not been applied (see paragraph 1.11) and in the other Member States it is not implemented in a uniform manner. The Commission should endeavour to eliminate the reasons which, in certain Member States, lead to higher rates of non-recovery (see paragraph 1.6). In order to make the management of recovery more transparent, the Commission should take adequate measures so as to:

(a) ensure the notification referred to in paragraphs 1.9 to 1.10 is consistent;

(b) make it compulsory to provide periodic notification of all amounts owed which it has not been possible to recover at the end of a specific period;

(c) publish in an annex to the annual balance sheet the situation in each Member State in respect of the debts to the Community referred to under (b) that have not been recovered.

Inward processing procedure

Definition

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1.17. The inward processing procedure () is a customs procedure with an economic impact which makes it possible to subject the goods defined hereafter to one or more 'processing` operations in the Community customs territory. The inward processing procedure may be applied to the following goods:

(a) non-Community goods intended to be re-exported from the Community customs territory in the form of processed or 'compensating` products. These goods are not subject to import duties or to trade policy measures (the inward processing procedure suspension system, known hereafter as 'IP/S`);

(b) goods released for free circulation (), in respect of which the corresponding import duties are repaid or waived where the goods are exported from the Community customs territory in the form of compensating products (the inward processing procedure repayment system, known hereafter as 'IP/R`).

Evolution of the legal framework

1.18. In its Annual Report concerning the financial year 1988, the Court criticized misuse of the IP/S and recommended the introduction of compensatory interest where goods that had benefited from this suspension procedure were released for home use () in the Community territory. The compensatory interest aims to remove the 'unjustified financial advantage due to a postponement of the date on which a customs debt arises ()`. Commission Regulation (EEC) No 731/90 of 26 March 1990 () was a response to the Court's observations ().

1.19. In four Member States (Belgium, Germany, France and the United Kingdom) the Court examined the application of these amendments. This examination made it possible to formulate certain observations on the implementation of the IP/S in the Member States (see paragraphs 1.25 to 1.37).

Re-export and release for free circulation of products obtained under the inward processing suspension (IP/S) system

1.20. The granting of authorization for the IP/S procedure is subject to the existence of concrete intentions to re-export the compensating products. However, in three of the Member States which were visited (Belgium, Germany and France), up to 90% of the compensating products were not re-exported by some traders for several years. The customs office responsible for carrying out checks did not criticize this misuse of the IP/S procedure and the authorizations in question were regularly renewed by the national authorities.

1.21. The authorizations for the IP/S procedure, under which a high percentage of main compensating products or goods in the unaltered state is released for free circulation for several years, do not comply with the applicable Community provisions. Where, as a result of an administrative decision, the date on which a customs debt arises is postponed, a twofold misuse of the procedure occurs: the aims and rules of the IP/S are infringed and national revenue is generated by means of the compensatory interest mechanism, to the detriment of the Community budget. The fact is that, pursuant to the provisions of Article 2 of Council Decision 88/376/EEC, Euratom of 24 June 1988 on the system of the Community's own resources (), compensatory interest does not constitute own resources. These failures to comply with the provisions of the IP/S procedure result in delays in making available the own resources in question.

1.22. The effect on the Community budget of these failures to comply with the provisions in force may be estimated by calculating the amount of compensatory interest collected by the Member States. For 12 Member States, this amount was 7,2 Mio ECU for the first 10 months of 1994.

1.23. In December 1991, the French authorities, pursuant to Article 27 of Regulation (EEC) No 1999/85 () and with the Commission's agreement, authorized a trader to switch within the framework of the inward processing procedure from the repayment system (IP/R) to the suspension system (IP/S). As a result of this decision, the sum of 29,1 Mio ECU () was repaid to the trader. When the trader switched to IP/S, the French authorities granted additional time for the submission of the statement of clearance in respect of all goods which had previously been placed under the IP/R procedure. The resulting average period of 28 months is 10 months longer than the 18-month period established by the French authorities for carrying out inward processing operations ().

1.24. According to the first bill of discharge, 90% of the compensating products that were being processed when the suspension system was adopted were released for free circulation and generated compensatory interest (national revenue) of more than 3 Mio ECU. These releases for free circulation, which were carried out in breach of Community Regulations, resulted in own resources totalling 25,6 Mio ECU being established and made available after a 10-month delay (see paragraph 1.28).

Miscellaneous observations

1.25. In Belgium, an examination of the bills of discharge submitted for the financial years 1993 and 1994 by a major trader showed that the discharge procedures were incorrectly applied. This trader exported the main compensating product, which, by definition, is a non-Community commodity, by using customs documents applicable to the export of Community goods. This procedure does not provide proof that the goods in question have actually left the Community customs territory. The compensating products concerned account for total duty of more than 1 Mio ECU.

1.26. The bill of discharge must be submitted no later than 30 days after the re-export deadline has expired. This deadline applies where the inspection office draws up the bill of discharge itself (). In three Member States (Belgium, Germany and the United Kingdom), the monthly or quarterly declarations were submitted late as the customs authorities had failed to take appropriate measures to ensure that the own resources were established and collected by the deadlines laid down in the Regulations (). In Germany, one inspection office had drawn up the bill of discharge after an average delay of eight months. The duties concerned were estimated to be 13,3 Mio ECU () per year.

1.27. Although the Regulations authorize only monthly or quarterly globalizations (declarations) (), two Member States (Belgium and the United Kingdom) authorized globalization periods of up to one year. Consequently, for 1992, 1993 and 1994 alone, own resources totalling 3,6 Mio ECU were established and made available with an average delay of six months (Belgium).

1.28. In the cases mentioned in paragraphs 1.24 to 1.27, a delay was observed in making customs duties available to the Community. As a result, the provisions of Article 11 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (), which provides for the payment of interest on delays in making own resources available, must be applied.

1.29. The external Community transit procedure applies to all forms of transport of non-Community goods from one point of the customs territory to another (), except where the goods are subject to a customs procedure of economic impact and providing the specific provisions of this economic procedure makes it possible to facilitate distribution in this way. However, the inward processing procedure allows for transport only from the place of processing to the discharge office.

1.30. Nevertheless, where goods are re-exported without entering the territory of another Member State, German national instructions allow for compensating products and goods in the unaltered state to be transported to the exit point of the customs territory (not the discharge office), where an entry to this effect is made in the trader's records. In such a case, there is no need to observe the formalities required by the transit procedure (as regards the provision of security and the submission of document T1).

1.31. Where goods are re-exported by sea, this national procedure allows for them to be trans-shipped when vessels put into Community ports. This procedure is open to fraud as regards the identification of the customs status of goods. The fact is that when vessels put into a Community port () non-Community goods may, in the absence of a transit document, be placed on the Community market without payment of the corresponding import duties.

1.32. Where goods under the IP/S procedure switch to another suspensive procedure (transit, customs warehouses), the customs document which accompanies these goods must clearly indicate 'IP/S` in the section where the goods are to be described (). This reference does not appear in the corresponding document in any of the Member States that were visited. Without this specific reference, it is possible that compensatory interest may not be collected if goods are subsequently released for free circulation.

1.33. In Germany, ex post checks in respect of the IP/S procedure were carried out over periods of up to 13 years, whereas the Regulations limit the period for any subsequent recovery to three years.

Incorrect application of the EEC-Turkey agreement

1.34. Pursuant to the additional protocol to the EEC-Turkey agreement (), until 18 March 1995 ATR1 certificates could be issued in respect of goods released for free circulation. A compensatory levy () for goods re-exported to Turkey after being released for free circulation was introduced only when Decision No 1/94 () of the EC-Turkey Association Council came into force on 19 March 1995.

1.35. The national instructions sent to the Court by 10 Member States reveal that only the United Kingdom collected import duties on compensating products and goods in the unaltered state before validating ATR1 certificates. All of the other Member States apart from Spain (since November 1993) and Ireland (since 1994) have issued ATR1 certificates without collecting customs duties. However, the goods should have been released for free circulation and full customs duties should have been levied on components from non-Member States before the ATR1 certificates were issued. As the Member States may not retrospectively recover customs duties that should have been collected when the ATR1 certificates were issued, they must invalidate and rescind these latter and inform the Turkish authorities that they were issued regularly.

1.36. The Court noted in the case of two traders (in Germany and Belgium) that ATR1 certificates were validated until 18 May 1995 in respect of compensating products even though the corresponding customs duties (250 000 ECU for the period 1992-93) were not paid.

1.37. The value of the goods (whether in free circulation or not) re-exported by the European Union to Turkey by way of discharge of the inward processing procedure totalled more than 1 780 Mio ECU for 1993 and 1994. However, in the absence of sufficiently accurate data, the Court estimates the amount of own resources not collected from 1973 to 95 to amount to at least several tens of millions of ECU.

Conclusion

1.38. The Commission should ensure that Community legislation is correctly applied, in particular, by:

(a) introducing a system for actively monitoring the implementation of the IP/S procedure. This system should monitor, in particular, the percentages of compensating products released for free circulation (see paragraphs 1.21 - 1.24), the deadlines for discharge (see paragraphs 1.26 - 1.28) and the frequency and findings of ex post checks (see paragraph 1.33);

(b) establishing with the Member States concerned the amounts of own resources to be recovered following the incorrect application of the EEC-Turkey agreement (see paragraphs 1.34 - 1.37) and by invalidating and rescinding certificates issued regularly;

(c) subjecting to a critical examination all of the Community or national legislation which may create uncertainty when the status of non-Community goods is being determined, in particular where these goods are transported by sea from one point of the Community customs territory to another (see paragraphs 1.29 - 1.32);

(d) applying Article 11 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (), on the payment of interest in the event of delays in making own resources available, where the customs debt arises as a result of tolerance by the administration (see paragraphs 1.21 - 1.22).

Customs warehouses

Introduction

1.39. In the European Union, about 13 000 customs warehouses have been authorized, pursuant to Article 100 of the Community Customs Code (). Six types of warehouses are defined in the provisions for implementing the Code (), 35% of which were of the type examined by the Court (). Owing to a simplification of procedure (local clearance () when goods are released for free circulation), the warehouses selected by the Court may occasion delays in the establishment of the own resources. As these warehouses are reserved for private storage, the warehouse keeper does not necessarily own the goods concerned ().

1.40. The Court's enquiry concerned this specific type of warehouse in the five Member States (Belgium, Germany, Spain, France and Italy) which have authorized warehouses of this kind.

Legal procedure

1.41. The customs warehouse procedure allows for the storage under customs supervision of:

(a) non-Community goods, which are not subject to import duties or trade policy measures;

(b) Community goods, which, pursuant to specific regulations, may benefit from measures concerning the export of goods ().

Stock records

1.42. In order to obviate the possibility of delays in the establishment of own resources, stock records must, pursuant to Community legislation (), indicate at all times the actual situation of the stock of goods. In view of the simplication of procedures (see paragraph 1.39), these stock records must contain all of the information needed to apply the customs warehouse procedure, as well as the information required by customs to carry out the corresponding checks (). These records are a key aspect of customs checks. The aspects of taxation (type, quantity and customs value of goods) declared and entered in the records when the goods are placed in warehouses are taken into account when duties are established following the subsequent release of goods for free circulation.

1.43. The person designated by the customs authorities must keep these stock accounts in an officially approved manner (). The on-the-spot enquiries revealed the diversity of the requirements imposed by the national authorities in respect of stock accounts. These requirements vary from a simple inventory list to a detailed account of all movements of goods. In many cases, these stock records must be complemented for audit purposes by information which is available only from traders.

1.44. The Court also observed certain anomalies in the keeping of the stock records which were such as to cause delays in the establishment of own resources. Where the computerized stock records are not based on tariff headings (), it is impossible for the customs authorities and the Community authorities to monitor movements of goods in big warehouses by cross-checking arrivals in the warehouse with the corresponding dispatches. Similarly, the movement of goods cannot be accounted for and the physical inventory cannot be monitored if the warehouse-keeper manages several warehouses located throughout the national territory (Germany) and does not indicate in the customs entry document the warehouse in which the goods are stored. In one case (Italy), the stock records began only four months after the warehouse was set up. The actual initial status of the goods stored in the warehouse (valued at 1,8 Mio ECU) was not correctly entered in the stock records, as a result of which it was not possible to check the physical inventory or the movements of goods.

Shortcomings of the customs checks

1.45. The frequency of and methods adopted for the checks, the aim of which is to ensure, in particular, that own resources are established at the same time as goods are released for free circulation, vary considerably from one Member State to another.

1.46. In Germany, two types of check are made: checks that are carried out in a regular manner in respect of customs documents concerning isolated operations and thorough ex post checks which, in the case of a single warehouse, are often spread over three years, after which period outstanding customs duties may no longer be claimed (). In two of the offices which were visited no ex post checks had been carried out before the time-barring period expired in respect of 58 of the 146 warehouses for which these offices were responsible. In some of these warehouses, the most recent ex post check had been carried out in 1988, even though the total own resources concerned may be put at several million ECU per year. However, ex post checks are the main instrument which makes it possible to ensure that customs documents tally with trade documents and thus to detect late or incorrect establishments of own resources.

1.47. In France and Belgium, there are no national instructions concerning ex post checks in customs warehouses.

1.48. In Italy, sample survey-based checks were carried out by the national authorities, which compared the data contained in the arrival and dispatch documents. According to these authorities, although ex post checks, in particular in respect of trade documents and physical inventories, had been carried out, no inspection report could be produced at the time of the on-the-spot checks.

Irregular national re-export procedures

1.49. The national re-export procedures described and criticized in paragraphs 1.29 to 1.31 are also implemented in respect of goods re-exported from customs warehouses.

Incorrect application of the Community external transit procedure

1.50. The national regulations adopted in Spain pursuant to Articles 397 et seq. of the instructions for implementing the Community Customs Code () enable the warehouse-keeper to apply simplified transit procedures.

1.51. As a result, contrary to Community legislation, the warehouse-keeper is not required to send back to the competent customs office the copy of the transit document which is sent to him (). Furthermore, the transit documents issued by the warehouse-keeper are neither prenumbered nor pre-recorded by customs, with the result that the customs authorities do not have any documentary records which enable them to ensure that the transit procedure is functioning correctly. These simplified procedures, which are generally observed in Spain, were implemented in two big warehouses that were inspected by the Court.

1.52. In the warehouses the Court visited, it examined the register of transport documents kept by the warehouse-keeper. This register shows that, in certain cases, the deadlines for discharge considerably exceeded the deadline laid down in the Regulations. Pursuant to Article 379 of the instructions for implementing the Community Customs Code, recovery in respect of transactions that have not been cleared should have begun no later than 14 months after the date the Community transit declaration was registered. A number of transit documents issued between 1992 and 1993 had still not been cleared at the time of the Court's audit in June 1995 and the corresponding procedure for recovering the customs duties had not commenced.

Contradictory Community provisions governing taxation elements

1.53. The provisions of Article 278(3)(c) of the implementing instructions () contradict the provisions of Articles 214(1) and 112(3) of the Community Customs Code. On the one hand, the trader concerned may, when goods are released for free circulation, benefit from taxation elements other than those established or recognized when goods enter the warehouse and, on the other hand, the taxation elements that are established or recognized when goods are subject to this procedure are the ones to be applied when the goods are released for free circulation. Consequently, the choice made possible by the implementing instructions may lead to a systematic reduction in the amount of established own resources.

Conclusion

1.54. The Commission must take the requisite measures to ensure that:

(1) Community legislation concerning stock records is applied (see paragraphs 1.42 - 1.44);

(2) checks carried out by customs warehouses safeguard the Community's financial interests (see paragraphs 1.45 - 1.48);

(3) access to supporting documents is guaranteed when the Community institutions carry out checks (see paragraphs 1.42 - 1.44 and 1.51), in particular where:

(a) customs procedures are entrusted to economic operators;

(b) operators are authorized to employ the simplified procedure;

(c) customs offices delegate some of their powers to certain operators;

(4) national re-export procedures comply with Community legislation (see paragraph 1.49);

(5) Article 112(3) of the Community Customs Code clearly applies (see paragraph 1.53) ().

Customs union agreements

1.55. A customs union is characterized by:

(a) a common customs tariff (CCC), which applies to imports of goods from non-Member States;

(b) the free circulation of all goods obtained on the territory of the Union () and of goods that have been subject to customs formalities in respect of their release for free circulation by one of the contracting parties.

1.56. The proceeds of import duties may either be kept by the contracting party which has collected them (the accounting method) or may be shared out, irrespective of the contracting party which has collected them, on the basis of economic activity criteria (the macroeconomic method).

1.57. The European Economic Community (EEC) has concluded three customs union agreements, with the Principality of Andorra (), the Republic of San Marino () and Turkey (). In these three agreements, the accounting method was chosen for the purpose of sharing out duties collected.

1.58. In the case of the customs unions with San Marino and Andorra, the financial impact on the Community's own resources is minimal and will remain so (see Table 1.6). The impact on the Community's own resources of the customs union agreement concluded with Turkey, which has applied from 1 January 1996, may well be significant but cannot be illustrated as the agreement makes no provision for producing the requisite data. There are other customs union agreements planned for other countries (the Visegrad States) which may have a significant effect on own resources. The Court chose to examine the financial aspects of the implementation of the interim trade and customs union agreement between the EEC and the Republic of San Marino so as to illustrate the difficulty of using the accounting method (see paragraphs 1.60 - 1.62) to share out equitably the collected import duties between the signatories to the agreement.

1.59. Table 1.6 summarizes the distribution of duties collected during the financial year 1993 in accordance with the agreements concluded with San Marino and Andorra. Furthermore, the table shows the negative effects on the Community budget of the accounting method chosen in the two agreements. If, taking San Marino as an example, these effects are compared with the consequences of employing a macroeconomic approach (for example, by distributing duties on the basis of GNP), it can be seen that the accounting method is detrimental to the Community's own resources.

1.60. One of the main problems intrinsic to the accounting method is that the quantities of certain products which are imported and cleared through customs on behalf of a contracting party considerably exceed the potential consumption of these products. As a result, the import duties collected are divided up unevenly between the signatories to the agreement.

1.61. The reason for this imbalance may be found by examining the declarations for release for free circulation. For example, in the case of San Marino, this examination revealed that a significant proportion of the import duties is paid by a handful of importers, some of whom, owing to their trading presence, have exclusive control over part of the Community market.

1.62. As the import duties for a given item of merchandise are identical for all traders operating in the territory of the customs union, a trader's decision to locate his business in one or other contracting party is generally influenced by non-customs criteria. If traders are free to benefit from comparative economic or legal advantages enjoyed by one of the contracting parties, imbalances in the share of duties collected by each party to the agreement may appear or indeed increase, with the result that the Community's own resources suffer the consequences. These latter tend to depend, in particular, on the respective economic size of the contracting parties and on the real differences in their respective comparative advantages.

Conclusions

1.63. In the case of customs union agreements, the Commission should study more closely the consequences for own resources and should include in the agreements the redistribution of the duties collected by each of the parties to the agreement on the basis of one or more macroeconomic criteria.

VAT OWN RESOURCES

Introduction

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1.64. The joint VAT system was set up to ensure the creation of a uniform tax assessment base throughout the Member States. It is also the basis for the calculation of the VAT own resources owed by each Member State. For this reason, any deviation from the joint system of own resources or any malfunctioning thereof may result in a reduction in this basis and therefore of the VAT own resource.

1.65. The following paragraphs look, on the one hand, at the Court's audits of the compliance of national VAT legislation with Community law, and, on the other hand, at the question of the transitional VAT regime applicable to intra-Community transfers since the elimination of tax frontiers on 1 January 1993 ().

1.66. In view of the importance of the intra-Community transitional procedure for the collection of VAT and given the possibility that the elimination of tax frontiers might increase the risk of irregularities, the Court continued its examination of the VIES (value-added tax information exchange system) () in 1995 within an ad hoc group representing certain national audit institutions. The aim of the VIES is to enable the tax authorities of the Member States to ensure that intra-Community transactions are taxed correctly.

1.67. Wherever possible, cross-checks were made with other sources of information available on trade between Member States (in particular the Intrastat system: see paragraph 1.79). This was the case for the identification of traders and the reliability of information concerning transfers.

The detection of violations of Community legislation

1.68. The Commission had made a considerable effort to identify violations via an ad hoc committee that wound up its activities in mid-1993. Since then, violations have, in practice, been detected almost solely as a result of complaints from individuals or after audits of own resources, which the Commission now carries out every two years in the Member States.

1.69. Where the Commission finds that a violation of the joint VAT system has had an effect on VAT own resources, it has the possibility of entering a reservation on the statement of VAT own resources. The Member State concerned is then invited to check and, where appropriate, amend the statement for up to the previous three years but not before. Such reservations must therefore be entered as soon as possible so as to protect the financial interests of the Union.

1.70. Although the entering of a reservation makes it possible to safeguard the financial interests of the Union, it may take several years for the amounts which could be involved to be recovered unless the Commission reaches an agreement with the Member State concerned, pursuant to Regulation No 1553/89.

1.71. The fact that, as a general rule, no arrears interest is charged on the amounts due does not encourage the Member States concerned to make them available within a reasonable time. In its previous observations on this subject (), the Court has already pointed out the inadequacy of this situation. Once an own resource loss has been detected, it must be possible to set a deadline for the recovery of the amount concerned and interest on the arrears should be charged once that deadline has expired.

The transitional system for VAT on intra-Community transfers

The exchange of information on VAT numbers and the value of transfers

1.72. Any person supplying goods or services to purchasers in other Member States has the right to ask for confirmation of the validity of the VAT identification number of any other trader. Each Member State has a database containing a register of persons to whom a VAT identification number has been issued. The other Member States can access these databases via the VIES network. In 1995, the VIES system was consulted 2,3 million times in respect of VAT identification numbers.

1.73. However, VAT identification numbers may continue to be given as valid on the VIES network for some time after the actual date of their elimination (Germany, Greece, Spain, France, Ireland, the Netherlands, Portugal and the United Kingdom). In Italy and Portugal, traders have 30 days within which to declare that they have stopped trading. There is therefore a risk that an identification number that has been entered in the quarterly summary statement of intra-Community deliveries may subsequently be invalidated, causing problems between the authorities and the taxpayers concerned.

1.74. Under current Regulations, the Member States are required to store and process the data contained in the summary statements that they receive from intra-Community traders concerning their trade with customers liable for VAT in other Member States. The total value of deliveries to the various customers, broken down by Member State and quarter, is supplied via the VIES network to the departments responsible for managing VAT in the country to which the goods or services have been supplied. The data are exchanged three months after the end of the quarter during which the deliveries took place.

1.75. In order to enable taxable transactions to be monitored and to ensure VAT revenue is not lost, traders are required to forward their summary statements within the established deadlines. Nevertheless, the Court's checks showed that, overall, at least 20% of statements were supplied late or were not forwarded at all.

1.76. The number of lines in the summary statements rejected by computer validation checks (known as 'incorrect lines`) gives an idea of the accuracy of the data in the summary statements. A line may be considered incorrect where, for example, a VAT number is not recognized or no amount is given. The errors detected may not only be the result of material errors, but may also reveal possible irregularities.

1.77. In nine States, more than 5% of the total number of incorrect lines for 1993 (608 387) had still not been rectified in June 1994. This situation has improved but is still not satisfactory. In 1994, 4,2% (532 708) of the lines were incorrect, and, in June 1995, 2,6% (327 123) had still not been rectified (). Once the lines have been accepted by the system and transmitted to the other Member States, checks are carried out to verify the accuracy of the national VAT numbers given by suppliers in the other Member States. In 1994, in eight Member States, these checks revealed inconsistencies involving 118 000 new lines, or approximately 1% of the total. Consequently, the national authorities have to devote considerable resources to the verification of data and any subsequent corrections. This may reduce the time available for VAT checks by the same amount.

1.78. The reliability of the amounts declared by traders for deliveries is difficult to measure. An examination of the breakdown of the VIES data by Member State showed significant variations that were largely unexplained.

1.79. The VIES data declared by suppliers from one country and communicated by the system to other Member States did not always correspond to the data given by the Member State in receipt of the goods. Slight differences are acceptable because of variations in exchange rates and technical delays. However, in many cases, differences of more than 10% or even as much as 40% were found, a phenomenon for which no complete explanation could be provided.

Interconnection between and limits on the utilization of sources of information

1.80. For taxation purposes, intra-Community deliveries made by taxpayers are recorded both in their VAT declarations and in the VIES system. However, trade in goods between Member States is also covered by statistics based on the monthly declarations that traders are required to make within the framework of the Intrastat system, which was introduced under Council Regulation (EEC) No 330/91 () in order to measure the progress made in terms of intra-Community trade since the single market was implemented.

1.81. Comparing the various data is a means of checking the VAT owed on the deliveries made. However, as things stand, the shortcomings noted in these sources of information limit their usefulness.

1.82. There are considerable discrepancies in the Intrastat data which have yet to be explained. Whereas the values of intra-Community deliveries and acquisitions should theoretically coincide, differences were noted of 28 000 Mio ECU in 1993 () and as much as 34 000 Mio ECU in 1994 (). A comparison based on Intrastat data between 'arrivals` (intra-Community imports) from a given Member State and 'dispatches` (exports) made by the other Member States of the Union to this Member State revealed differences of as much as 50% in 1994.

1.83. The Intrastat system was also adversely affected by the fact that the Member States took different approaches in cases where no declaration was made. Some (Germany, the Netherlands and the United Kingdom) immediately estimate cases of non-compliance or late compliance and take the data in question into consideration when publishing their statistics for the first time. Others wait until late statements are actually submitted and subsequently amend the data for the reference month. In five Member States (Greece, Spain, France, Italy and Portugal) no amendments were made in response to non-compliance with procedures. Between 4 and 5% of all transfers between the States of the Union were subject to amendments corresponding to late declarations exclusively.

1.84. It is therefore not surprising that the Member States should hold different opinions as to the reliability of Intrastat data. Some thought them satisfactory (United Kingdom, Italy and Spain) whilst others felt them to be of dubious value (Denmark). Nevertheless, the majority noted that compliance with deadlines had improved, resulting in a decline in the value of the corresponding adjustments.

1.85. Despite these limits, cross-checks between different sources of data proved effective in certain cases. In France, in 1993 and 1994, and in the Netherlands in 1993, detailed analyses based on VAT declarations and VIES data showed that 85% of the national VAT declarations gave a different amount from the figure for intra-Community transfers. Unfortunately, in most of the Member States, this analysis was carried out at individual trader level only. For this reason, there were virtually no figures for overall differences between the two sources.

1.86. The VIES system also enables the national authorities to consult data concerning individual traders or their trading relations. The number of these consultations went up from around 40 000 in 1993 to more than 4 961 000 in 1995. To illustrate the significance of this facility, the United Kingdom reported that these consultations had resulted in the recovery of 1,4 Mio ECU of additional VAT in 1994.

1.87. The VIES data can be used in conjunction with other data to highlight certain types of operation or certain trade flows for which there is a particularly high risk of irregularity. This approach was used in France, the Netherlands and Italy. In Italy, a VAT fraud estimated at 20 Mio ECU in the beef meat sector was discovered in this way by the national authorities. In the Netherlands, enquiries had been made with regard to exempted undertakings and farmers subject to the flat-rate scheme. In 8% of the cases, VAT amounts were lower than those actually due.

1.88. Improving the reliability of the data would certainly enlarge the potential for carrying out checks aimed at providing maximum safeguards for VAT revenue (and by extension, VAT own resources). In the case of Intrastat, given that this source of information contributes to the calculation of GNP, it is clear that the quality of the data bears a relation to the calculation of the GNP own resources.

Changes in verification methods

1.89. Following the implementation of the new intra-Community trade procedure and the creation of the single market, checks are no longer made at the Member States' borders. As VAT is no longer paid when goods are imported but at a later stage on the basis of taxpayers' periodic declarations, the Member States are also faced with new risks of VAT evasion (e.g. collusion between a supplier in Member State A and a purchaser in Member State B so as not to declare certain taxable transactions or the creation of phantom businesses in other Member States for the purpose of transferring to those States amounts of VAT that are due). Audit methods in the Member States need to take account, in particular, of possible tax evasion stemming from the abolition of fiscal frontiers and should make it possible to evaluate the attendant material impact. Although greater recourse to mutual assistance by the Member States has been observed, greater cooperation is still needed between Member States if the risks related to the transit procedure are to be assessed, especially in view of the largely unexplained stagnation of VAT revenue established in 1993 (see paragraphs 1.92 - 1.97).

1.90. Since the single market was introduced, Italy and the United Kingdom have observed changes affecting the nature or scope of the irregularities uncovered. Other Member States, such as the Netherlands, Spain and Portugal, reported no changes due to the single market or had observed very few. In France, VAT reminders were 20% higher in 1994 than in 1993, but the share due to intra-Community VAT could not be measured because it had not been entered separately in the accounts.

1.91. In the case of deliveries to private individuals which are not included in the VIES system, such as mail-order sales or VAT-exempt sales of new vehicles (especially boats), the actual audit possibilities available to the tax authorities are generally more limited than those applying to registered taxpayers.

VAT revenue

1.92. In 1994, VAT revenue in the 12 Member States amounted to 390 000 Mio ECU, as against 360 000 Mio ECU in 1993 (and practically the same figure in 1992). In 1994, the increase in VAT revenue in the Member States was between 2,5 and 14,5%.

1.93. This situation is in contrast with 1993, when there was virtual stagnation in total VAT revenue, and even a fall in revenue in five Member States. The rapid deceleration in the growth of VAT revenue in 1993 constituted a clear break with previous years, during which revenues had increased each year by around 25 000 Mio ECU (285 000 Mio ECU in 1989, 309 000 in 1990 and 337 000 in 1991).

1.94. In theory, the growth in VAT revenues is a function of the following:

(a) changes in the VAT rate and base;

(b) inflation;

(c) the growth in the volume of economic activity.

1.95. The data available for the 1989-94 period confirm that the halt in the growth of revenue in 1993 cannot, generally speaking, be explained by changes in these three main factors, which indicate a potential loss in VAT revenue of around 5 to 6% for 1993. This loss of revenue for all the Member States would have been of the order of 18 000 Mio ECU in 1993, without taking into account the fluctuations in the ecu rate.

1.96. It is therefore important to establish the reasons for this deficit. It is true that following the introduction of the single market delays may have occurred in the payment of VAT, as tax is no longer collected upon importation but at a later stage, when taxpayers make a declaration. However, certain Member States have taken measures to compensate for this delay in payment. Owing to a lack of appropriate data, it is not possible at present to pinpoint reasons that provide an exhaustive explanation for the deficit that was observed.

1.97. Given the size of the problem, VAT revenues from intra-Community transfers should be specifically monitored by the Commission and the Member States on the basis of harmonized statistics throughout the Community. Only on this condition will it be possible to specify the effect of the transitional regime on VAT yields.

Conclusion

1.98. The compliance of national legislation with the Community Regulations on the joint VAT system is a prerequisite for the correct and complete payment of VAT own resources. The Commission is required to verify this compliance and, in the case of violations adversely affecting own resources, establish a deadline for the payment of the amounts owed. It should also charge interest on arrears where these deadlines are not complied with.

1.99. The introduction of the transitional VAT regime for intra-Community transfers in 1993 was followed in the same year by a stagnation in net VAT revenues which cannot be explained by factors like economic growth, inflation or changes in the VAT rate or assessment base. The question is whether this phenomenon was due solely to technical delays related to the new system or to other causes. This situation should encourage the Member States and the Commission to monitor in greater detail the evolution of data on VAT, and intra-Community VAT in particular.

1.100. Despite the improvements that the Member States and the Commission have made to the VIES system, there are still shortcomings. In particular, the data on intra-Community deliveries are not sufficiently complete, accurate and up to date. In cooperation with the Commission, the Member States should clarify the reasons for the differences between intra-Community acquisitions and deliveries. Analyses of this sort could improve the efficacy of the checks carried out by the competent authorities. There were also still inadequacies in the data in the Intrastat system. Cross-checks between the data in question revealed significant errors.

1.101. To different extents, the Member States have started to adopt the VIES system as an integral part of their range of audit tools. The Commission should encourage them and help them continue along this path.

102. The audit methods employed in the Member States need to take specific account of the risks of tax evasion directly connected with the abolition of fiscal frontiers and must also make it possible to assess the material impact of any evasion.

1.103. In the event of a move to a definitive system for VAT on intra-Community transfers, with the tax being levied in the country of origin of the goods, there may be a need for a clearing mechanism between Member States in order to safeguard national VAT revenues. However, the existing information systems on intra-Community transfers do not offer all the necessary guarantees to serve as a basis for such a mechanism.

GROSS NATIONAL PRODUCT

The need to measure the quality of the statistical GNP calculation

1.104. The GNP aggregate occupies an increasingly important place in the own resources system () (see Table 1.1). This is true at several levels, i.e. for the application of a ceiling to the overall amount of own resources, the calculation of the GNP resource, the capping of the VAT assessment base and the calculation of the funding of the United Kingdom rebate (). The GNP is also used to provide a framework for certain specific Community policies, either in order to limit expenditure (EAGGF-Guarantee) or to define eligibility criteria (structural and cohesion policies). Elsewhere, in the context of monetary policy, for example, the GDP, on the basis of which the GNP is calculated, is the scale by which the breakdown of national subscriptions to the capital of the European Central Bank and contributions to the resources of the European Monetary Institute are decided ().

1.105. Directive 89/130 () required the statistical GNP to be made more comparable and more reliable.

1.106. The European Parliament, in its resolution of 25 October 1995, voiced its fears as regards the quality of the GNP. It reminded the Commission of the need to put forward measures for the improvement and harmonization of the GNP bases and carry out the relevant checks ().

1.107. Every year since the discharge for the financial year 1991, the Council has expressed its concern as to the need to increase and verify harmonization of the calculation of national GNPs. In its recommendation on the discharge to be granted by the Parliament in respect of the budgetary implementation for the financial year 1994 (), the Council once again invited the Commission to continue its efforts in the field of statistics so as to guarantee that national GNPs are both complete and comparable.

1.108. The carrying-out of the manifold tasks provided for in the various relevant legal texts (establishing, harmonizing and developing checks on GNP) often comes up against problems such as the evaluation of progress achieved, the quantification of the impact of specific factors or measures on the GNP, studying the differences between Member States, the validation of the GNP estimates and the analysis of degrees of quality (). These problems, which are faced, in particular, by the Commission and the GNP Committee (), could be adequately solved via the development of tools to enable the measurement of the quality (comparability and reliability) of the statistical GNP and its components.

1.109. The Court examined the tools available at the Commission and in the Member States and looked into the possibilities for developments in this field.

The concept of quality as applied to the statistical GNP

1.110. The concept of quality as applied to the GNPs of the Member States as a whole must be seen as a combination of two independent aspects: the mutual comparability of the GNP statistics and the individual reliability of each of them.

1.111. The comparability aspect concerns the degree of equivalence of the rules, methods and sources used in each of the national systems. The reliability of each system may be defined as the accuracy with which the level of GNP is established in relation to the rules in question.

Measuring the comparability of the GNP

1.112. The recitals of Directive No 89/130 make a distinction between conceptual and practical comparability.

1.113. Conceptual comparability is guaranteed by compliance with the definitions and relevant accounting rules laid down in the European System of Integrated Economic Accounts (ESA). Practical comparability has two aspects. On the one hand, it depends on the evaluation procedures applied, i.e. the methods, and on the other hand it relies on the data-bases available, i.e. the statistical sources. These two dimensions involve a particular aspect of comparability - the degree of coverage of GNP, or its exhaustiveness. Improvement of this degree of coverage is precisely what may be achieved by the development of methods and sources.

1.114. In 1992, after analysing the inventories () of the national systems supplied by the Member States pursuant to Article 4 of Directive 89/130, the Commission drew up a draft list of comparability criteria for the two aspects of practical comparability (methods and sources), as well as a specific list of criteria on exhaustiveness () as a particular aspect of practical comparability.

1.115. Article 7 of Directive No 89/130 empowers the GNP Committee to verify the GNP figures annually and put forward measures to increase their comparability. In this connection, the Committee delivers an annual opinion to the Commission. An analysis of these opinions showed that, although the Committee does state its position regularly, in the absence of a detailed system of comparability indicators it only expresses itself generically and in qualitative terms. It takes into consideration the circumstances in which the GNP is drawn up, states that progress has been made towards the harmonization of the GNP and expresses the view that the figures reflect the continued and optimal efforts made by the Member States to produce comparable data.

1.116. The development of a detailed system of comparability indicators would enable the GNP Committee to draw up differentiated comments in accordance with those indicators and give a more accurate account of the diversity of the national systems. This system would also be very useful for the Commission in order to give tangible shape to its stated principle, according to which 'the Commission (Eurostat) is in a good position to assess the comparability of data and evaluate the quality of the progress made ()`.

1.117. Given that, as is stated in Directive No 89/130, practical comparability depends on methods, any methods to harmonize these methods should, pursuant to Article 7 of the same Directive, be made in the context of work aimed at increasing comparability.

1.118. As far as practical comparability is concerned, absolute harmonization, such as that accepted for conceptual comparability, would seem to be difficult to achieve given all the national peculiarities. However, those possibilities for harmonization that do exist must nevertheless be utilized in order to increase the degree of comparability.

Measuring the reliability of the GNP

1.119. Independently of its comparability with other national systems, each national system has its own degree of reliability. The fact is that the statistical GNP of each Member State, as calculated in the context of that State's national accounts system, is affected by numerous uncertainties. These uncertainties result from the application of the concepts, the implementation of national systems at assessment base level, statistical methods and techniques and the degree of exhaustiveness of the field of observation.

1.120. The combination of these uncertainties determines the reliability of the system in question, that is to say, the precision with which the GNP can be calculated. Insofar as these uncertainties can be rendered in statistical terms, the ideal solution would be to be able to measure reliability via confidence intervals, within which, with a given degree of probability, the true value for the GNP would lie. This system is already used in other statistical fields administered by the Commission ().

1.121. Moreover, the objective stated by Directive No 89/130 as regards increasing the reliability, and the provisions of Article 7 of the same Directive, concerning the annual examination of GNP files by the GNP Committee, require the implementation of quantitative techniques for the measurement of the reliability. These techniques would, in particular, enable the GNP Committee to draw up its opinions on the reliability of data with reference to the degree of accuracy of the same.

1.122. Given the need to develop a quantitative approach to the measurement of reliability, the Court gathered the opinions of the experts of the national statistics offices of seven Member States (Austria, Germany, France, Finland, Italy, Sweden and the United Kingdom) with regard to the feasibility of this approach. The experts approached in the Member States were aware of the problems posed and, with one exception (), supported the idea of developing an appropriate tool to make the statistical measurement of reliability possible. The majority of them, however, had not yet carried out detailed research on this subject. Italy and the United Kingdom were able to report on studies aimed at measuring the accuracy of the national accounts.

1.123. The United Kingdom's Central Statistical Office (CSO) () had carried out its work on reliability at the behest of the Treasury. It had been instructed to establish and publish confidence intervals for the main series of national accounts and identify the contributions of the various components towards potential errors in the aggregates (). The CSO had come to the conclusion that the measurement of reliability should become an integral and regular part of the process of drawing up national accounts and that it should not remain merely a specific and occasional exercise (). According to the experts contacted in Italy and the United Kingdom and the results of pilot studies carried out in the United Kingdom, it looks as if solutions can be found.

1.124. Italy and the United Kingdom had forwarded documents concerning their respective work on the measurement of the reliability of the GNP () to the Commission. The Commission had put these documents on the agenda of the 20th meeting of the GNP Committee on 26 and 27 June 1995 (), by way of a contribution to the discussion on procedures for the assessment of the quality of GNP data, in particular via the creation of confidence intervals. The Commission had confirmed its interest in the question and suggested the creation of an ad hoc committee on the subject. The GNP Committee did not adopt this proposal ().

1.125. The measurement of the reliability of the data and the main aggregates of national accounts has been on the experts' agenda for some time. Existing scientific bases could serve as a starting point for the deliberations of the competent Community bodies on the possibilities for the development of a measurement tool.

Conclusion

1.126. Ever since its introduction, the Community GNP system has been faced by the need to increase its comparability and reliability. Comparability should be measured via a detailed system of indicators which, for certain criteria, reflect the differences between the Member States. Measuring the reliability presupposes allocation by the Member States of statistical confidence intervals to the GNP data. The Commission, together with the Member States, should study the possibility of developing appropriate tools.

1.127. The definition and introduction of a measure of the quality of the GNP aggregate would seem to be indispensable to ensure this aggregate's legitimacy in connection with its manifold functions (see paragraph 1.114 ). On several occasions, the budgetary authority has expressed this concern with regard to GNP (see paragraphs 1.116 - 1.117).

1.128. If, in the end, it should turn out to be impossible or impractical to develop a measure of the quality of GNP, the Commission and the Member States should nevertheless continue their efforts to make national statistics for the calculation of GNP increasingly more reliable, comparable and accurate.

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REPLIES OF THE COMMISSION

TRADITIONAL OWN RESOURCES

Management of irrecoverable debts (write-offs)

Introduction

1.10. The Commission is aware of the inconsistencies highlighted by the Court. The problem is largely due to the fact that, as there is no standardized model for the quarterly report, some Member States give an aggregate total for all corrections (cancellations, amendments to established entitlements and write-offs). As a result the figures in the quarterly reports cannot always be reconciled with those in the half-yearly reports. To remedy this situation, the Commission proposed that Regulation (EEC, Euratom) No 1552/89 be amended to enable it to draw up a specimen quarterly report in which cases of write-offs would be identified. This amendment was adopted by the Council on 8 July 1996. Furthermore, Article 6(4) of Regulation No 1552/89, as amended, now provides for a new kind of report which can be used to establish a link between the quarterly statement of the separate account and the recovery of amounts at stake in cases of fraud and irregularities.

1.11. On the question of reported cases of write-offs, the Commission is also aware that only some Member States apply the procedure laid down in Article 17(2) of Regulation No 1552/89. To find out more about what happens in practice, the Commission sent a letter at the end of 1995 to those Member States which had never reported write-offs, asking for an explanation. In reply, Belgium, Ireland and Luxembourg merely confirmed that there had been no cases of amounts being written off, without giving any further information.

The Commission believes that this state of affairs can be remedied only by amending the present recovery procedure (see also point 1.16 (b)). In the meantime, it will continue to monitor implementation of these arrangements in the Member States.

Management by the Commission of write-offs of which it has been notified by the Member States

1.12. The Commission has begun analysing the answers to the questionnaire it sent to Member States concerning national procedures for the recovery of own resources. In May 1996 it held a seminar to discuss its findings and obtain further information. This process should give the Commission a clearer view of existing national recovery instruments and enable it to pinpoint possible weaknesses. If necessary, the Commission will propose new legal provisions to strengthen the recovery facilities available to Member States.

Treatment of cases of suspension

1.13. Since the Court's enquiry, the Commission has accepted the German authorities' request to discount cases of write-offs in respect of entitlements established after 1 January 1989. But it has also informed the German authorities that these cases of suspension must remain entered in the separate account and has asked them to continue recovery proceedings.

1.14. The Commission did not object to the deduction from current established entitlements of amounts from the period before 1 January 1989 considered irrecoverable. By adopting this stance, the Commission hoped to avoid any discrimination, on the entry into force of Regulation (EEC, Euratom) No 1552/89, against Member States which made available to the Commission all established entitlements as compared with those which made available only the amounts they actually recovered. The Commission has also asked the German authorities to keep it informed of progress in recovering the amounts in question.

Conclusion

1.15. It is true that under the present procedure for reporting write-offs, the Commission is unable to assess the performance of individual Member States in recovering Community debts. The recent amendment of Regulation No 1552/89 may improve this situation.

1.16. (a) This problem should be resolved by the recent amendment of Regulation (EEC, Euratom) No 1552/89 (see reply to paragraph 1.10).

(b) The Commission is considering the possibility of proposing a new amendment to Regulation (EEC, Euratom) No 1552/89 to strengthen the provisions of Article 17(2) (writing-off of debts) and achieve the result recommended by the Court.

(c) Should Article 17(2) of Regulation (EEC, Euratom) No 1552/89 be amended, the Commission might then consider publishing the position in each Member State in respect of unrecovered Community debts, after a given period, in an annex to the annual balance sheet.

Inward processing procedure

Re-export and entry into home use of goods placed under the inward processing suspension procedure (IP/S)

1.20 1.22. The Commission does not share the Court's view that the cases in question constitute infringements of the applicable rules resulting in a loss of traditional own resources totalling ECU 7.2 million for the first 10 months of 1994.

However, it does feel that the very high percentages of main compensating products or goods in the unaltered state which were released for free circulation, as reported by the Court, may reflect anomalies in the operation of the customs procedure in question as compared with its intended purpose. The fact that very high percentages of products or goods released for free circulation persist over long periods points to the existence of established practices which are not being discouraged by the national authorities. As the Court observes, these practices may be of financial benefit to the national authorities in that compensatory interest does not constitute Community own resources but is booked to national budgets. The Commission will examine the problem raised by the Court and, if necessary, propose new measures to ensure that the objectives of the IP/S procedure are respected.

1.23 1.24. The switch from the inward processing repayment system (IP/R) to the suspension system (IP/S) is entirely legitimate, even though, in practice, it may lengthen the period allowed for discharge. The French authorities, in agreement with the Commission, authorized a trader to use this facility, which is provided for under Community law. Since the procedures were carried out in accordance with the relevant legislation, there can be no question of an unjustified delay giving rise to the financial consequences estimated by the Court (see also the replies to paragraphs 1.21 and 1.22).

Miscellaneous observations

1.25. After conducting an inquiry, the Member State concerned reported that the anomaly detected by the Court could be considered to be a failure to fulfil an obligation which had no significant effect on the correct operation of the inward processing procedure, as referred to in Article 204(1) of the Community Customs Code.

The Commission will make known its final views after it has checked all the relevant details. This should be done in the near future.

1.26 1.28. The Commission had already discovered the facts in question during own resources inspections in some of the Member States cited by the Court and asked the countries concerned to change their practices. The Commission will pay special attention to the cases raised by the Court and may demand interest for late payment.

1.29 1.30. The Commission will ask the Member State in question for clarification with a view to resolving this problem, if necessary.

1.31. The Commission shares the Court's concern about the potential dangers of goods being transported by sea within the Community customs territory without proof of their Community status. Accordingly, in April 1996, it presented a proposal for an amendment to Community legislation to the Customs Code Committee.

1.32. In the course of its inspections in certain Member States, the Commission noted anomalies similar to those reported by the Court. It has already informed the relevant authorities and will ensure that Member States are reminded of the Community rules on the indications to be included on transit documents laid down in Article 610 of Regulation (EEC) No 2454/93.

1.33. Member States are certainly not able to check all transactions systematically. They must therefore target their checks by using risk analysis techniques. However, the case raised by the Court cannot be justified on those grounds. The Commission will contact the Member State in question to secure an appropriate increase in the frequency of ex post checks.

Incorrect application of the EEC-Turkey agreement

1.34 1.37. In the Commission's view, ATR1 certificates could not be issued on the export to Turkey of compensating products not in free circulation which were obtained under the inward processing arrangements. Any certificates issued in such circumstances would be invalid and would not entitle the goods in question to preferential treatment in Turkey. If such a situation did arise, the Commission feels that Member States are not empowered under Community legislation to recover retrospectively the duties corresponding to the release for free circulation of the goods in question. In these circumstances the Commission will contact the Member States, asking them to cancel the ATR1 certificates which were unduly issued. The Turkish authorities will be informed as soon as possible.

As the Court mentions, the situation changed on 19 March 1995, with the introduction of a compensatory levy under Decision No 1/94 of the EC-Turkey Association Council, so that a customs debt is now incurred in the Community in such cases.

Conclusion

1.38. (a) The Court's comments illustrate the complexity of the abovementioned customs arrangements. It is true that fraud and irregularities can be kept within tolerable proportions only if there is a highly-developed control and monitoring system. However, at a time of budget restrictions, it is worth asking whether the benefits that traders derive from the suspension arrangements justify the administrative costs borne by the authorities.

As for the introduction of a system to monitor implementation of the IP/S procedure, the Commission would point out that, in its own resources inspections, it already checks that the various customs procedures are implemented and enforced in accordance with Community law.

Furthermore, following discussions on economic customs procedures launched by the Commission, an initial report has been sent to customs authorities and traders. The report suggests that legislation should be simplified to ensure equal treatment of traders, that certain procedures and working methods (e.g. risk analysis and computerization) should be made more uniform and that account should be taken of the impact of the GATT agreement, particularly in the agricultural sector.

(b) The Commission would refer to its replies to paragraphs 1.34 to 1.37, and in particular to its undertaking to contact the Member States concerned to ask them to cancel the ATR1 certificates which were unduly issued and to inform the Turkish authorities as soon as possible.

(c) Under Community legislation, goods imported into the Community customs territory are kept under customs surveillance for as long as is necessary to determine their customs status. Nevertheless, in the case of goods transported by sea from one point in the Community customs territory to another, the Commission is proposing an amendment to existing legislation to introduce a requirement that Community status be proved.

(d) See the Commission's replies to paragraphs 1.20 to 1.22. The Commission has stated that it intends to examine the problem raised by the Court and, where appropriate, to propose measures to ensure that the objectives of the IP/S procedure are met.

Customs warehouses

Stock records

1.44. In the course of its own-resources inspections in certain Member States, the Commission noted anomalies similar to those detected by the Court. The Commission will examine the Court's remarks in collaboration with the Member States concerned and draw appropriate lessons for the protection of the Community's financial interests, as it has done in cases which it detected itself.

Shortcomings of the customs checks

1.45 1.48. Under Community legislation Member States have a whole range of control measures at their disposal for ensuring that Community rules are properly applied. However, for obvious practical reasons, Member States carry out selective checks which are targeted with the help of risk analysis methods.

The Commission will contact the Member States concerned to ask them to step up their checks.

Incorrect application of the Community external transit procedure

1.51. The Commission will thoroughly investigate the case reported by the Court and, if necessary, take appropriate steps to safeguard the Community's financial interests.

1.52. In the course of its own-resources inspections in the Member State concerned, the Commission found anomalies similar to those detected by the Court. After investigating the matter in more detail, the Commission will ask for Article 11 of Regulation (EEC, Euratom) No 1552/89 to be applied (interest for late payment) if it finds there have been delays in making available own resources.

Contradictory Community provisions governing taxation elements

1.53. There is a certain lack of consistency between Article 112(3) of Regulation (EEC) No 2913/92 establishing the Community Customs Code and Article 278(3) of Regulation (EEC) No 2454/93 laying down provisions to implement the Code. A proposal is now before the Council which would amend Article 112(3) in order to bring the Code into line with the above text as regards customs warehouses. This amendment may put an end to the inconsistency.

Conclusion

1.54 (1)-(2) The Commission will remind the Member States concerned of their responsibilities regarding:

- compliance with Community legislation on stock records;

- checks on customs warehouses to safeguard the protection of the Community's financial interests.

The cases highlighted by the Court will be dealt with appropriately by the Commission.

The cases mentioned by the Court in paragraphs 1.45 to 1.48 show that checks carried out by the Member States are not equally effective. Following the Madrid European Council, the Commission is considering ways of improving these checks.

The Commission is also conducting a pilot inspection scheme, with the participation of customs experts from certain Member States, focusing on, among other things, customs warehouses. Once the operation is over, the Commission will draw practical conclusions in order to respond to the Court's concerns.

(3) The Commission will examine the situation regarding the right of other Community bodies to have access to supporting documents, both in terms of legislation and in practice.

(4) The Commission will contact the Member States concerned with a view to resolving the problem. It is also studying the possibility of introducing rules under which goods placed under the warehouse procedure could be transported, where appropriate, to a point of exit from the Community.

(5) As the Commission stated in its reply to paragraph 1.53, a proposal to amend Article 112(3) is being discussed in the Council with a view to bringing the Code into line with the implementing Regulation as regards customs warehouses.

Customs union agreements

1.55 1.62. The Commission takes the view that the Community derives considerable economic and commercial benefits from the customs union agreements, which outweigh any possible consequences for own resources. Furthermore, one of the inevitable consequences of a customs union is that once goods have been released for free circulation, they may move freely within that union. The Community thus receives customs duties on goods which are then transported to the partner country and vice versa. These budgetary implications were taken into consideration in the negotiations leading up to the agreements.

The Commission would also stress that the three customs union agreements are not comparable, given the economic differences between Turkey, San Marino and Andorra.

The most important benefit of the customs union with Turkey is the complete abolition of duties levied by the Turkish authorities on European imports. The Community expects the agreement to give a substantial boost to European exports to Turkey and to have a positive and lasting effect on employment in the Community.

In concluding the agreement, the Community and Turkey took into account all the economic benefits and drawbacks.

As regards the agreement with San Marino, the choice of accounting method arose from the interim trade and customs union agreement concluded by the Community on 27 November 1992, and from implementing decisions adopted by the Cooperation Committee. The agreement was negotiated on the basis of directives issued by the Council on 18 December 1990. The accounting method chosen is based on the following procedures:

- formalities for release for free circulation are completed at authorized Italian customs offices;

- the Commission then repays to San Marino the duties due to it, on the basis of entitlements established by the Italian offices (from the time when they receive proof that the goods have arrived in San Marino).

The high volume of imports relative to the country's population is explained by the rather special structure of San Marino's economy, which includes, among other things, a thriving tourist trade (more than three million tourists a year).

However, the Commission is sympathetic towards the Court's recommendation that a simpler accounting method should be found, provided that such a method is equitable and gives due consideration to the special structure of San Marino's economy. It therefore proposes that a study be carried out into whether a flat-rate system, based on objective macro-economic criteria, might produce an accounting method that is more satisfactory for the three parties involved (San Marino, Italy and the Commission). Despite its administrative complexity, the method applied since 1990 has the advantage of painting a true picture of the trade flows involved, which could be used as a point of departure for switching over to a flat-rate method.

However, the Commission would remind the Court that the accounting system can be changed only by amending the present Agreement, which would require the prior approval of all the Member States and San Marino.

As regards the agreement with Andorra, the Commission is able to report that the accounting arrangements criticized by the Court have recently been amended. On 11 June 1996 the Council decided that, from 1 July 1996, the formalities for release for free circulation would be carried out by Andorra itself.

Conclusion

1.63. The Commission feels that the economic, commercial and political issues at stake in the customs union agreements mentioned by the Court far outweigh the consequences for own resources. Moreover, these consequences were taken into account when the agreements were negotiated. As regards the detailed accounting arrangements in the agreement with San Marino, the Commission is prepared to consider a flat-rate system as suggested by the Court.

VAT OWN RESOURCES

The detection of infringements of Community legislation

1.68. Detection of infringements of Community legislation is one of the priorities for the Commission and is drawn from many sources. The efforts of the ad hoc group mentioned did produce in 1992 a relative increase in the number of infringement procedures begun. In terms of results these procedures were, however, generally not successful and none of them affected VAT own resources.

The Commission believes that the quality of infringements detected is more important than their absolute number. The Commission has also arranged a study of the transposition of the transitional system into national law. It is intended that the detection of infringements will be one of the outcomes of this study.

1.70 1.71. The Commission's reservations concerning national statements of the annual VAT own resources base refer to:

- either suspected infringements of Community legislation, and in particular of the VAT directives, where these infringements could have a negative effect on the VAT base;

- or problems with the calculation of certain items in the statements, particularly as regards methods and/or the use of statistics or other data.

In the case of reservations connected with suspected infringements, if the Commission commences infringement proceedings, it asks the Member State concerned to calculate the amount of VAT resources at stake and to pay it by a prescribed deadline, after which interest for late payment will be due. If the Member State refuses, the case may be brought to the Court of Justice.

In the case of the other reservations, the Commission must obtain the agreement of the Member State concerned in order to correct the statement, as provided for by Article 9 of Council Regulation No 1553/89. In the very rare cases where this approach does not produce a correction agreed by common consent, the Commission may refer the matter to the Court of Justice. As the Commission has already explained, () it considers that bringing legal action is not the most appropriate way of resolving extremely technical problems concerning the calculation of the VAT resources base.

As long as the Commission is seeking an agreement with a Member State in order to correct a statement, it cannot impose a deadline by which it must receive the additional VAT resources that might arise from such a correction, nor can it claim interest for late payment.

The transitional system for VAT on intra-Community transfers

The exchange of information on VAT numbers and the value of transfers

1.73. The problem regarding retroactive cancellation of VAT identification numbers by certain Member States was identified by the Commission and discussed at the 23rd meeting of the Standing Committee on Administrative Cooperation in the field of indirect taxation (SCAC) held on 2 and 3 May 1995. It is caused by the time taken for traders to inform the tax administration that trading has ceased and by the time taken to incorporate this information in national databases. The Member States concluded that this does not cause significant problems. The Commission will continue to monitor this problem with the Member States through the SCAC.

1.75. It is correct that not all traders in all Member States submit their recapitulative statements to their administration within the deadlines set or at all. This has, in turn, affected the completeness of the VIES data. The SCAC has accordingly monitored regularly the completeness of the information transmitted over the VAT Information Exchange System (VIES). This has led to an improvement in the timeliness of recapitulative statements. To solve the problem caused by late recapitulative statements, the Commission has provided a technical means to ensure that any data contained on late recapitulative statements are automatically integrated into the VIES data. The databases are therefore continually kept as up to date as possible. The Commission will continue to encourage the Member States to allocate sufficient resources to ensure that traders submit recapitulative statements within the deadlines set.

1.77. The Commission shares the Court's concern regarding the number of incorrect lines remaining to be transmitted over the VIES. Nevertheless the SCAC has monitored the evolution of incorrect lines since 1993, which has led to the significant reduction in the number of incorrect lines noted. The Commission will continue to encourage the Member States to allocate sufficient resources to reduce the number of incorrect lines further. The SCAC is currently in the process of analysing the profile of the remaining incorrect lines to assess whether they are significant in nature or volume.

1.78 1.79. The comment made by the Court is based on answers supplied by Member States in response to a questionnaire. The Member States interpreted the Court's request in different ways and did not supply comparable figures. This made discrepancies inevitable, as noted by the Court. To dispel any doubt, the SCAC has decided that Member States will replicate the exercise for a future quarter using clearly defined common criteria.

Interconnection between and limits on the use of sources of information

1.85. The Commission agrees that comparisons between VIES data and VAT declarations can be effective in revealing irregularities and additional receipts. This is a welcome evolution in the use of the VIES data, to be encouraged. However, the Commission considers that such a global comparison would have limited use. Analysis of individual operators is a much more efficient and effective use of the VIES data and control resources.

1.86. The Commission encourages Member States to make the maximum use of the facilities offered by the VIES, and continues to increase the capacity of the system to cater for the increased use.

Changes in verification methods

1.89 1.90. The Commission thinks that the overall risks of fraud under the transitional regime remain unchanged, even if the pattern of risks has changed. The circulation of goods exempt from tax presents the greatest opportunity for fraud and this central aspect of the Community VAT system was already present before the introduction of the transitional system. The examples given by the Court are risks inherent in the pre-1993 and in the current VAT system. From this point of view, the transitional regime is clearly no more secure than the pre-1993 system. However, it is clear that these risks, in particular from the circulation of goods exempt from VAT, remain unacceptable. The adoption of a new common system for VAT is the only sure way of eliminating the risks that have always been linked to intra-Community transactions.

Clearly Member States' methods of control should take account of all risks presented by the transitional regime. Since the introduction of the transitional regime, the enormous increase in administrative cooperation and sharing of information between the Member States has significantly extended the range of control methods at Member States' disposal. In several Community fora (the SCAC and seminars held under the Matthaeus Tax programme, for example), the Commission and the Member States have been working to develop the use of administrative cooperation and mutual assistance to enhance control methods. The Commission shares the Court's view that administrative cooperation between Member States should continue to be reinforced. The Commission notes that the phenomenon highlighted by the Court in paragraphs 1.92-1.97 can be largely explained. However, even if it could not be explained, the fact that the phenomenon is, as the Court acknowledges, a one-off which did not persist thereafter, suggests that it could not be attributable to the factors suggested by the Court (failure of national control regimes to take account of the risks linked to the abolition of fiscal frontiers or a failure of cooperation between the Member States). If these suggested factors did cause the phenomenon in 1993, these failures have clearly been reversed thereafter.

1.91. The Commission does not agree that the possibilities of control available to the Member States are generally more limited. Different possibilities for control are available to the Member States.

VAT revenue

1.94. The evolution of VAT receipts is not necessarily a function of the growth in volume in economic activity. VAT receipts are instead a function of the evolution of domestic consumption, which is not necessarily a function of economic growth.

1.95 1.96. The Commission notes that the actual returns for 1993 were broadly in line with Member States' expectations. These expectations were reduced in 1993 because of an expected reduction in revenues linked to the introduction of the transitional regime. This expected reduction was partly due to the changeover from payment of VAT at import to payment upon declaration that the Court mentions. This in turn led to a one-off cash flow benefit for traders which would have affected revenues in 1993. In addition, expectations were reduced because of the ending of the requirement to pre-finance the VAT on acquisitions from other Member States. At the margin, this would have encouraged the holding of greater stocks of goods acquired from other Member States. This would also have produced a further one-off effect on revenue in 1993. Finally expectations were reduced because of one of the main advantages of the internal market: to lower a variety of barriers to purchasing goods available cheaper from other Member States than available domestically. The expected effect of this was for a greater proportion of purchases to be made in other Member States in 1993 compared with 1992. Certain domestic acquisitions which had led to payment immediately would be replaced by intra-Community acquisitions with payment later. All these one-off effects on revenues were acknowledged in advance by the Member States and were considered to be some of the benefits for traders of the introduction of the transitional regime.

Finally, the Commission emphasises that the Court's observation relates only to 1993 and had no sustained impact on revenues thereafter. If the 'potential loss of VAT revenues` is not fully explained by the above factors, it is clear that it had no lasting effect and therefore is not attributable to any inherent weakness in the transitional regime.

1.97. The Commission has taken steps to improve the transmission by Member States of information on VAT and excise revenue and to enable it to monitor changes in Member States' revenue more closely. At the meeting of Deputy Directors-General for Indirect Taxation on 12 December 1995, the Commission insisted that the Member States establish an automatic mechanism for transmitting this information. To this end the Commission intends to begin bilateral talks with the Member States and to carry out a detailed study of the information available.

Conclusion

1.98. Verification of the conformity of the national legislation with Community legislation continues to remain one of the priorities of the Commission. As explained at paragraph 1.71, the Commission always demands interest for late payment if Member States fail to observe the time-limits it sets when calling for funds.

1.99. The phenomenon noted by the Court can be explained, to a large extent, by the expected one-off effects of the introduction of the transitional system. The Commission has anyway taken initiatives to better monitor the evolution of Member States' receipts.

1.100. The Commission mostly shares the Court's concern regarding the completeness of the data transmitted over the VIES. Improvements have been made and the Commission will continue to work with the Member States in the SCAC to improve this data. The difference between acquisitions and supplies noted by the Court is explained in the Commission's reply to paragraph 1.79. The Commission will urge the Member States to investigate the differences noted by the Court between the VIES and Intrastat data.

1.101. The Commission agrees with the comments of the Court and will continue to encourage the Member States to integrate the VIES data into their control systems.

1.102. The Commission agrees that Member States' methods of control should take account of all risks presented by the transitional regime.

GROSS NATIONAL PRODUCT

The need to measure the quality of the statistical GNP calculation

1.104 1108 and 1115. Since the European Communities' fourth resource (the 'GNP-based resource`) was established, special efforts have been made in the GNP Committee to improve the quality of GNP statistics and their components.

For example, the 'GNP Directive` (Council Directive 89/130/EEC of 13 February 1989 on the harmonization of the compilation of gross national product at market prices) laid down procedures for checking and, where appropriate, improving the comparability, reliability and exhaustiveness of GNP estimates calculated by the Member States.

The Commission's report to the Council and Parliament on the application of the GNP Directive (COM(96) 124 of 28 March 1996) describes progress in checking and improving national accounts, with particular emphasis on the exhaustiveness of GNP estimates.

Progress has been made on a number of fronts and the main improvements can be summarized as follows:

- major efforts have been made to overhaul the national accounts of Member States which were reputed to have the least reliable estimates of GNP. As a result of these revisions, the GNP figures for Greece, Portugal and Luxembourg have increased by around 20, 15 and 10% respectively. Major work is also under way in Belgium and Ireland, although this does not mean that changes on a similar scale are to be expected for these two countries;

- all the Member States have made considerable efforts to respond to reservations entered by the Commission on certain aspects of their methods of calculating GNP.

In any event, the Commission gave an undertaking in the above report to complete all the work in progress on improving Member States' GNP estimates by October 1998. The Commission is also preparing a decision on the subject, which was favourably received by the GNP Committee.

The concept of quality as applied to statistical GNP

1.110. The Court observes that the concept of quality as applied to the GNPs of the Member States as a whole must be seen as a combination of two independent aspects: the mutual comparability of GNP statistics and the individual reliability of each of them. The Commission has adopted a more qualified approach, as explained below (points 1.112 to 1.125).

Measuring the comparability of GNP

1.112 1.118. Like the Court, the Commission would like to see greater comparability between GNPs in practice. However, it does not believe that Member States should be required to harmonize their methods entirely, as these methods vary widely from country to country because of national differences (availability of sources of information) and the way statistics are organized, which is closely linked to the administrative situation in each country.

The Commission feels that the regular checks by its departments on the observance of the accounting rules of the ESA and on improvements to the quality of sources, are a guarantee that the GNP directive is properly and satisfactorily applied.

Measuring the reliability of GNP

1.119 1.125. The Commission is aware of the theoretical importance of measuring reliability via confidence intervals, although this measurement may have no budgetary impact in practice.

The Commission acknowledges that the state of research on evaluating the quality of macroeconomic aggregates is unsatisfactory. It is not enough to know the extent of the sampling and non-sampling errors in the basic sources, since, at the stage when accounts are constructed and balanced, the various initial estimates are not always independent and, in any case, they interact according to a well-defined accounting pattern. That is why the Commission has launched a research project on 'evaluating and analysing the quality of macroeconomic aggregates`, which is under way in a number of countries. After analysing the pilot studies, the Commission will consider whether and how to extend the exercise to all the Member States. The Court will be informed of the findings.

The Commission feels that it would be premature to comment on the feasibility of establishing a system for measuring the reliability of GNP.

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CHAPTER 2 (*) The European Agricultural Guidance and Guarantee Fund Guarantee Section (EAGGF-Guarantee) Budgetary management and direct expenditure

2.0. CONTENTS Paragraph reference

General introduction 2.1

Budgetary management 2.2 - 2.6

Introduction 2.2 - 2.4

Advance payments on sheep premium 2.5

Ad hoc clearance 2.6

Direct expenditure to combat irregularities and fraud 2.7 - 2.18

Introduction 2.7 - 2.11

Integrated administration and control system 2.12

Monitoring and detection of fraud and irregularities 2.13

Remote sensing checks 2.14 - 2.17

Conclusion 2.18

Agrimonetary system 2.19 - 2.34

Introduction 2.19 - 2.26

Application of the agrimonetary regulations in the period 1 February 1995 to 31 December 1995 2.27 - 2.31

Conclusion 2.32 - 2.34

GENERAL INTRODUCTION

2.1. The Court's observations on EAGGF-Guarantee are grouped under three distinct headings:

(a) budgetary management;

(b) direct expenditures to combat irregularities and fraud;

(c) agrimonetary system.

BUDGETARY MANAGEMENT

Introduction

2.2. The initial budget of the EAGGF-Guarantee (Sub-section B1) amounted to 37 427 Mio ECU for the financial year 1995. Appropriations finally available in 1995 totalled 36 875,6 Mio ECU including the monetary reserve of 500 Mio ECU in order to cover fluctuations in the US dollar/ECU exchange rate and to contribute, where applicable, to the financing of costs arising from monetary realignments between Member States from September 1992 onwards. This monetary reserve was not used during 1995 since there were sufficient appropriations available at the end of the fiscal year to cover the additional expenditure of 543 Mio ECU. Appropriations made available were by 1 068 Mio ECU below the upper limit of 37 944 Mio ECU of the agricultural guideline fixed in conformity with Council Decision 94/729/EC of 31 October 1994 of budgetary discipline ().

2.3. The commitments, as they appear in the accounts which are shown in Tables 2.1 to 2.4, represent 94,7% of the appropriations, excluding the monetary reserve and they amount to 34 502,7 Mio ECU (or 93,5% of the appropriations when including the monetary reserve).

2.4. Out of a total of 34 502,7 Mio ECU of commitments, 34 451 Mio ECU was paid and the difference i.e. 51,7 Mio ECU (concerning Chapters B1-12, 14, 15, 17, 18, 20, 25, 35, 36, 38), was automatically carried over to 1996. Out of this 51,7 Mio ECU, 36,8 Mio ECU (71%) concerned direct payments and out of this 36,8 Mio ECU, 21,1 Mio ECU (40,9%) concerned only measures to combat fraud affecting the EAGGF Guarantee Section.

Advance payments on sheep premium

2.5. The Commission decided to pay from the 1995 EAGGF budget the second advance on the 1995 ewe premium (470 Mio ECU) in spite of the fact that, according to the relevant Council Regulation, this second advance could only be paid from the end of December of 1995, i.e. during the EAGGF-Guarantee budget year 1996. The Commission payment was to prevent the 1996 budget from exceeding the agricultural guideline in view of the constraints already imposed on this 1996 budget. But it violates the principle of budgetary annuality and gives a misleading picture of the financial situation for both 1995 and 1996.

Ad hoc clearance

2.6. At the end of 1994, a number of budget lines did not have sufficient appropriations to reimburse 27,3 Mio ECU declared by France and 18,5 Mio ECU by Italy. Proposals for transfers from chapter to chapter were not made within the time limits fixed by the Financial Regulation, so the corresponding amounts could not be included in the 1994 accounts. Thus the Commission decided on 2 February 1995 () to carry out an 'ad hoc clearance of accounts` by charging the expenditure to the 1995 budgetary heading B1-3700 (which is foreseen exclusively for the clearance of previous years' accounts). This understated the 1994 accounts and overstated those of 1995 by 45,9 Mio ECU (see statement of assurance concerning activies financed from the general budget for the financial year 1994 paragraph 3.17 ()).

DIRECT EXPENDITURE TO COMBAT IRREGULARITIES AND FRAUD

Introduction

2.7. The financing (74,7 Mio ECU for 1994 and 87,3 Mio ECU for 1995) of some specific actions relating to agricultural activities (for instance measures relating to production or consumption aid, fresh fruits and vegetables, costs of public storage, free transport of food aid or measures to combat irregularities and fraud) is decided directly by the Commission and managed either directly by the Commission or in coordination with the competent national public or private administrations. A significant part (two thirds) of the direct expenditure to combat irregularities and fraud (under budget line B1-3600) was audited from a legality/regularity point of view.

2.8. The audited expenditure gave rise to commitments in 1994 for 75,9 Mio ECU and to payments during 1994 and 1995 for 60,9 Mio ECU. These payments cofinanced:

(a) the establishment of an integrated administration and control system (IACS) in the crop and in the livestock sectors with a Community contribution determined for each Member State in the relevant regulation but not higher than 50% of the expenditure incurred (Council Regulation (EEC) No 3508/92 () and Commission Regulation (EEC) No 3887/92 ()); the IACS would include a computerized database, a system for the identification of parcels and animals and the monitoring and control of aid application;

(b) the reinforcing of the monitoring and detection of fraud and irregularities in connection with export refunds and certain aids or measures, up to a maximum of 25% of the expenditure incurred by the Member State under a certain ceiling (Council Regulation (EEC) No 307/91 () and Commission Regulation (EEC) No 967/91 ());

(c) remote sensing checks for up to 50% (except for 1994 where a higher rate was possible) of expenditure incurred by the Member State (Council Regulation (EC) No 165/94 () and Commission Regulation (EC) No 601/94 ()).

2.9. The implementing regulations set up a number of deadlines for forecasting expenditure, requesting advance payments, presenting a breakdown of the expenditure and reporting on the results of the measures. However, in a sample of four Member States (Germany, Spain, Italy and France), most of the deadlines were not respected. This was due to a combination of the absence of penalties and to the lack of sufficient monitoring at Community and national level. As far as the monitoring and detection of fraud and irregularities is concerned, the lack of reporting on the results of the measures for 1994, prevented the annual assessment by 30 September 1995 as required by Article 9 of the Council Regulation (EEC) No 307/91 ().

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2.10. According to the Commission, VAT included in the declaration of the costs is not eligible for co-financing. However the position of the Commission does not appear to be rigorously founded. Indeed, contrary to the structural funds practice, where non-eligibility is founded on the criterium of recovery (recoverable VAT is not eligible while unrecoverable VAT is eligible), the Commission declares VAT as ineligible even if it cannot be recovered by the aid beneficiary. As the Court recommended in its 1993 Annual Report (), the Commission should re-examine the matter.

2.11. After this re-examination has taken place, the Commission should take appropriate action since no consistent method was applied to all cases. For instance:

(a) for costs incurred for IACS, Baden-Wuerttemberg (Germany) included VAT in all costs of equipment declared;

(b) for costs incurred for monitoring and detection of fraud and irregularities, Baden-Wuerttemberg included VAT in all costs declared. Spain declared 25 Mio Ptas (0,2 Mio ECU) of VAT of which 25% was financed by the Community and most of the competent institutions of France which declared costs included VAT as eligible cost.

Integrated administration and control system

2.12. The audit in the same four Member States showed that ineligible elements were often included in the expenditure or that eligibility was poorly justified:

(a) the Land of Baden-Wuerttemberg (Germany) declared a certain percentage of overall administrative costs, without any justification (e.g. 20% of the total costs of 5 Mio DM (2,6 Mio ECU) for the use of the mainframe, i.e. 1,1 Mio DM (O,6 Mio ECU) for processing farmers' claims). Moreover, for an amount of 13,8 Mio DM (7,1 Mio ECU), representing personnel costs, no supporting documentation was provided to demonstrate clearly the functions of the personnel concerned;

(b) the autonomous community of Castilla La Mancha (Spain) was also unable to provide clear evidence for the allocation of personnel costs;

(c) in France, for personnel costs declared by the Ministry of Agriculture, Fisheries and Food (5 Mio ECU) the lack of supporting documents demonstrating clearly the functions of the personnel concerned meant that the charge in respect of IACS could not be justified. Furthermore, for various costs concerning control structures, no detailed supporting documents were presented to substantiate the payments, while for other costs, concerning training as well as the purchase of software and hardware, there was no written estimate to justify the percentage of the amount declared as eligible cost;

(d) in Italy, IACS has been delegated to a consortium of private and State-owned companies. For personnel costs, the declaration does not distinguish between eligible development costs and ineligible operational costs. Consequently, part of the 4,4 Mio ECU declared is not eligible.

Monitoring and detection of fraud and irregularities

2.13. The audit of this measure gave rise to the following observations:

(a) in the Land of Baden-Wuerttemberg, an amount of 0,3 Mio DM (O,2 Mio ECU) was unjustifiably charged to this measure;

(b) Spain limited its action to only one measure (the aid given for cotton), so that the other objectives of the Council Regulation (EEC) No 307/91 (10) have not been met;

(c) in France, no link could be made in some cases between payments and eligible measures while for personnel costs no supporting documents demonstrated clearly the function of the agents concerned. Finally, as with IACS, no control is carried out at national level before the declarations are submitted to the Commission;

(d) Italy declared 0,5 Mio ECU for 1994 representing 25% of the costs of 98 staff and 25% of the costs of 12 vehicles. However, the O,5 Mio ECU were not actual expenditure but forecasts, which is in breach of Article 3, paragraph 3 of the Commission Regulation (EEC) No 967/91 (). Consequently, this amount was not eligible and should not have been accepted by the Commission.

Remote sensing checks

2.14. Although the rate of co-financing is fixed at 50%, Articles 1 and 2 of Council Regulation (EC) No 165/94 () stipulate that, for 1994, the Commission may authorize a higher rate on receipt of a duly substantiated request from the Member States. However, the Commission financed 100% of the relevant expenditure even when Member States did not present such a request.

2.15. Article 1, paragraph 4 of Council Regulation (EC) No 165/94 (13) stipulates that, in order to be eligible for reimbursement, proof of payment must reach the Commission at the latest by 15 June of the year following the budget year concerned. Concerning 1994, this deadline was not respected by Spain, France and Greece, so that 1,5 Mio ECU, 0,5 Mio ECU and 1,2 Mio ECU respectively were not eligible. Italy's declaration of 2,1 Mio ECU was based on a payment made after the deadline, i.e. on 21 June 1995 only. None of the above amounts should have been accepted by the Commission.

2.16. In Baden-Wuerttemberg (Germany), the execution of the remote sensing and its results for 1994 were considered insufficient by both the national administration and the Commission.

2.17. In Ireland, the Department of Agriculture and Food declared an amount of 200 000 IRL (0,3 Mio ECU). Of this amount, 27% represented a national 'witholding tax`. The Commission should not have paid an amount of about 0,1 Mio ECU of this declaration, since this tax is to be reimbursed to the contractor.

Conclusion

2.18. Neither the Member States nor the Commission rigorously monitors and controls the declaration of costs for Community co-financed schemes. This failure has cost the Community budget 16,6 Mio ECU. Moreover, some actions financed had limited or unsatisfactory results (see for instance paragraphs 2.13(b) and 2.16). The Commission should carry out detailed enquiries on the whole of direct expenditure and deduct any amounts unduly paid from future advances.

AGRIMONETARY SYSTEM

Introduction

2.19. Prices and amounts for the common agricultural policy (CAP) are set in ECU for the Union as a whole, but are paid in national currency. The exchange rates used to convert these prices and amounts into national currency are set by the agrimonetary system which has been in existence since 1969. The rules governing the agrimonetary system are laid out in Council Regulation (EEC) No 3813/92 (as amended by Council Regulation (EEC) No 150/95). The preamble to this regulation states that the agricultural conversion rates (also known as green rates) should diverge as little as possible from the real exchange rate for a given currency, thereby reflecting actual economic and monetary circumstances.

2.20. The aims of the agrimonetary system as described in the regulations are to:

(a) maintain stability in the agricultural conversion rates;

(b) avoid falls in agricultural incomes;

(c) minimize deflection of trade;

(d) minimize cost to the Community budget.

There is no hierarchical order to these aims.

2.21. The Council regulations include provisions for compensation in the case of reductions in the agricultural conversion rates (i.e. revaluations of agricultural conversion rates which result in a fall of income in national currency).

2.22. A mechanism was introduced in 1984 as a means of protecting strong and stable currencies from the effects of their own revaluations as well as the devaluation of weaker currencies. Thus, each time a currency was devalued, the new agricultural conversion rate was calculated by applying a coefficient (known as the switch-over mechanism) to the exchange-rate mechanism (ERM) central rate for Member State currencies. The coefficient was adjusted whenever there was a realignment of the ERM central rates.

2.23. The financial impact of the agrimonetary system results from the monetary gaps between the agricultural conversion rates and the market rates for the ecu and from the ongoing effects of the switch-over mechanism. These gaps resulted in different prices in national currency being applied in each Member State as illustrated in Table 2.5. The Commission has calculated the cost of the agrimonetary system to be: 107 Mio ECU in 1993 and 456 Mio ECU in 1994.

2.24. In its special report No 1/89, the Court examined the functioning of the agrimonetary system. In this report, the Court concluded that the way the agrimonetary system operated undermined the Community's effort to impose stricter budgetary discipline on agricultural expenditure, as it had raised the common level of prices via the switch-over mechanism. The Court also concluded in this report that a true unification of prices and aid amounts could only be achieved by abolishing the agrimonetary system and allowing changes in agricultural conversion rates to follow changes in 'real` ECU rates. It is likely that this can only take place following the introduction of the single currency in all Member States.

2.25. As a follow-up to its special report, the Court examined the Commission's published report on the agrimonetary system and analysed the development of the agrimonetary regulations since 1992.

2.26. In November 1994, the Commission produced a report to the Council of the European Union on the agrimonetary system for the single market (), which analysed the functioning of the agrimonetary system during the period from 1 January 1993 to 30 June 1994. The report recognized that the switch-over system had generated permanent excessive Community expenditure by over-compensating losses of agrimonetary origin. The Council decided, in the light of the Commission's proposal, to abolish the switch-over mechanism with effect from 1 February 1995.

Application of the agrimonetary regulations in the period 1 February 1995 to 31 December 1995

2.27. In order to avoid frequent changes to the agricultural conversion rates, the agrimonetary system, as amended on 1 February 1995, includes a new series of thresholds that have to be surpassed before an adjustment to the agricultural conversion rate can be implemented. The agricultural conversion rate should be adjusted at the end of a confirmation period whenever the monetary gap (the percentage of the agricultural conversion rate representing the difference between that rate and the market rate for a national currency) exceeds five percentage points, in the case of a positive gap, and an absolute value of two percentage points, in the case of a negative gap. The new agricultural conversion rate is determined by reducing the absolute value of the monetary gap in question by half which means that the new agricultural conversion rate can only approach the market rate and the existing agrimonetary mechanisms cannot usually close the gap completely.

2.28. A revaluation of the Belgian/Luxembourg agricultural conversion rate was due to be implemented on 15 April after a 50-day confirmation period. Revaluations were subsequently due for the Dutch and Danish agricultural conversion rates. During the same time, the German and Austrian currencies avoided being revalued when their monetary gaps fell below the 5% threshold. The Council decided not to implement these revaluations because of their additional budgetary costs. The revaluations would have entailed the use of Article 7 of Regulation (EEC) No 3813/92 which provides compensation for all Member States if the agricultural conversion rate of any one Member State is revalued to an extent which outweighs the effects of any devaluations during the previous 36 months. This compensation would have been paid to producers in all Member States by means of an increase in the ecu value of all prices and aid amounts for the CAP.

2.29. The revaluations were necessary to avoid the risk of trade distortion between Member States. To facilitate the implementation of these revaluations Council Regulation (EC) No 1527/95 introduced the payment of compensatory aid to offset falls in prices in national currency, but only to producers in those Member States whose agricultural conversion rates were subjected to an appreciable revaluation in 1995 (that is one where the effect of the revaluation outweighs the effects of devaluations which have taken place during the previous three years). The implementation of this part of Council Regulation (EC) No 1527/95 would add an estimated 37 Mio ECU to the budget in 1996. In addition, Regulation (EC) No 1527/95 also froze the agricultural conversion rates applicable to the Mac Sharry premiums (the specific aids concerned are: flat rate aid per hectare or per livestock unit; compensatory premiums for sheep or goats; amounts of a structural or environmental nature).

2.30. This regulation cleared the way for agricultural conversion rate revaluations, due for several strong currencies, thereby reducing distortion of trade and of competition between Member States. It led also to significant budget savings since full implementation of the compensatory aid mechanisms laid down in Article 7 of Regulation (EEC) No 3813/92, would have cost an estimated 680 Mio ECU in 1996.

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2.31. The effect of freezing the agricultural conversion rates applicable to the Mac Sharry premiums, is that, in those Member States whose currencies have been revalued since 1 February 1995, these premiums are paid using an agricultural conversion rate which is higher than the 'current` rate. On the basis of a Commission study it is estimated that it will result in increased expenditure of 789 Mio ECU to the EAGGF Guarantee budget in the period from 23 June 1995 until 1 January 1999 (see Table 2.6).

Conclusion

2.32. The objectives of the agrimonetary system include minimizing EAGGF Guarantee Section expenditure; stabilizing agricultural conversion rates; avoiding falls in agricultural income. It was intended that these objectives should complement each other. However, this is open to question. The agrimonetary regulations may have placed too much emphasis on the objective of protecting agricultural income to the detriment of reducing EAGGF Guarantee Section expenditure.

2.33. The changes to the agrimonetary system implemented on 1 February 1995 (Council Regulation (EC) No 150/95) were intended to reform the system. They had the effect of maintaining the protection for strong currency in Member States by providing for compensatory measures if there were a significant fall in the agricultural conversion rate.

2.34. However, the freezing of agricultural conversion rates for direct payments has resulted in different levels of support in different Member States, undermining the principle of common support levels. In the years from 1996 to 1999, total additional compensation will be payable to the countries whose Mac Sharry premiums have been frozen in national currency of about 262 Mio ECU per year (see Table 2.7). Overall the effect will be to save more than half the extra 680 Mio ECU per annum which would otherwise have been incurred through the Regulation (EC) No 150/95 mechanisms for the calculation of changes in agricultural conversion rates (see paragraph 2.30). However the problem will remain that the Mac Sharry premiums are paid at different rates in different countries. The introduction of the single currency will require either a cut in payments in the countries where the Mac Sharry premiums have been frozen, or an increase in payments in the other countries.

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REPLIES OF THE COMMISSION

BUDGET IMPLEMENTATION

Payments of advances on ewe premiums

2.5. The rules on the payment of advances under the ewe premium scheme are set out in Article 5(6) of Council Regulation (EEC) No 3013/89 of 25 September 1989 on the common organization of the market in sheepmeat and goatmeat. These provisions stipulate that instalments are to be fixed before the end of each six-month period.

The Regulation allows a margin of discretion regarding the date of payment of the second instalment during the second half of the year. Since during 1995 market prices to producers were rather low, the Commission brought forward the payment of the second instalment in order to reduce their cash flow problems, with consequent impact on the date when expenditure was charged to the budget in the current financial year and the following financial year.

Ad hoc clearance

2.6. As already explained last year, for technical and administrative reasons the Commission was not in a position to submit the request for a transfer from chapter to chapter at the end of budget year 1994 for the EAGGF Guarantee Section within the time limit laid down in Article 104 of the Financial Regulation.

The deadlines imposed at the end of the budget year for operations of this type are at the limit of the possible. The Commission is looking at the possibility of proposing, in the context of the review of the Financial Regulation, that the deadline for the Commission to send its transfer proposal - now fixed at 31 December - may be exceeded in the event of duly justified need, at the same time maintaining unchanged the three-week deadline for the Council to adopt its decision.

Given the legal obligation to refund the declared expenditure to France and Italy, the Commission took an ad hoc decision 'clearing certain expenditure declared by France and Italy` and entered these amounts in accordance with budget rules in Chapter B 37 'Clearance of earlier budget years`.

DIRECT EXPENDITURE TO COMBAT IRREGULARITIES AND FRAUD

Introduction

2.9. It is true that the reports on the results of controls have been delayed in their transmission. However, of the four Member States cited by the Court, only Spain has to date not forwarded the relevant report.

In 1994, the Commission carried out an assessment of the implementation of Regulation (EEC) No 307/91 covering the years 1991, 1992 and 1993. The results for budget year 1994 are included in the 1995 EAGGF Financial Report.

2.10 2.11. The Commission will study this issue in order to define a rule which is consistent with those already existing elsewhere.

Integrated Administration and Control System

2.12. The fact that certain costs given in the declarations submitted were not very clearly identified or did not meet to the eligibility criteria, led the Commission to exclude them from Community part-financing. In particular: (a) in the accounts from Baden-Wuerttemberg, the amount to be taken into account by the Commission was reduced to DM 0.800 million; with regard to personnel costs, of the declared DM 13.8 million the amount financed by the EAGGF was reduced accordingly to DM 1 million;

(b) with regard to the personnel costs in Spain, of the PTA 2.47 billion requested, the Commission refused PTA 1.60 billion;

(c) with regard to France, the Commission will carry out an audit of the personnel accounts for 1994 on the basis of the information given by the Court;

(d) with regard to Italy, the Commission will request explanations from the AIMA on the personnel actually assigned to the Integrated Administration and Control System.

Monitoring and detection of fraud and irregularities

2.13. (a) A letter will be sent to the German authorities to recover this amount, unless a justification of the expenditure is provided.

(b) With regard to the controls carried out by Spain, only in one sector (aid for cotton) and in a limited fashion, Regulation (EEC) No 307/91 stipulates expressly that controls may be carried out in one or more sectors (Article 2).

(c) In the case of France, most of the expenditure concerned is connected with the purchase of equipment (transport vehicles, information technology, expenses connected with lab analyses and training expenses).

It is extremely difficult to know if a vehicle is completely or partially assigned to control duties. The Commission bases itself on Regulation (EEC) No 307/91, which provides explicitly for the eligibility of activities involving training and information of inspectors (Art. 1(1), 2nd indent).

(d) Regarding the personnel declared by Italy (Guardia di Finanza), the Commission received, in answer to an explicit request, a letter stating that 98 inspectors had been assigned definitively to the Centre for Combating Fraud and containing other information showing that this staff was actually being paid for these duties. The report that Italy notified the Court that this was only a forecast of staff costs will be looked into.

With regard to the vehicles, it appears that for reasons of national financial procedure, the Guardia di Finanza was not in a position to pay for them within the planned deadlines. The Commission will check up on this issue with the national authorities.

Remote sensing checks

2.14. It was the Council which, during the discussions leading to the adoption of Regulation (EC) No 165/94, requested that the part-financing rate for 1994 be changed from 50 to 100%.

2.15. The Commission reminded the Member States of their obligation to provide evidence of payment by 15 June 1995 at the latest. The majority of the Member States answered by fax, subsequently confirmed by letter. In this case, only the letter was kept which therefore does indeed bear a date of receipt after 15 June. As regards Spain, the invoices were received on 27 February 1995; in the case of Greece and France, documentary proofs were received on 20 and 16 June respectively and were accepted. As for Italy, it produced the invoices and payment order on 15 June, although the corresponding bank transfer was effective only on 21 June.

2.16. The implementation of the contract was more difficult than anticipated by the contractor and by the regional administration in the case of Baden-Wuerttemberg, which would perhaps explain the dissatisfaction of that Land. Whether the results were satisfactory or not, the contractor still had to be paid if he had fulfilled the terms of the contract, which he had in fact done. In any case, the situation quickly improved and the current results are meeting expectations in full.

2.17. Proof that the contractor has received a refund of this levy has been required from Ireland.

Conclusion

2.18. The Commission monitors the expenditure that it finances, firstly, by examining the documents transmitted by the Member States and asking if necessary for further information, and, secondly, by on-the-spot checks. It cannot therefore share the conclusion of the Court that the lack of rigorous controls on the part of the Member States and the Commission with regard to the statements of expenditure on schemes part-financed by the Community have cost the Community budget ECU 16.6 million. Among the cases cited by the Court, some in the view of the Commission involve a difference in interpreting the regulations.

The Commission also notes that there is a wide gap between the large volume of eligible expenditure carried out by two Member States quoted in the Court's report (Germany and France) and the much lower level of Community financing granted to them under Regulation (EEC) No 3508/92 which accounted for the major part of the appropriations under heading B 3600.

AGRIMONETARY SYSTEM

Introduction

2.20. The description of the objectives given by the Court is not specifically set out in the regulations. It is therefore an interpretation of the reasons given in the preamble to Regulation (EEC) No 3813/92.

2.23. The costs cited are estimates of the impact of events occurring in the years in question. They take no account of the residual effects of past events, which could be very significant.

Application of the Agrimonetary Regulation in the period 1 February 1995 to 31 December 1995

2.27. The purpose cited, to prevent frequent changes in rates, is one of the objectives referred to in point 2.21. The agrimonetary system and the amendments made in February 1995 concerning margins were intended particularly to protect farm incomes.

2.28. The compensation for farmers provided for under Article 7 of Regulation (EEC) No 3813/92 involves an increase in ecus of only certain CAP aids (those referred to in 2.30).

2.29. The Commission study referred to is an allocation of the expenditure concerned on the basis of the historical utilization of appropriations by the different Member States. It is simply a table drawn up by Commission staff for in-house purposes. More accurate information for the period 1995/96 should soon be available in the annual report on the agrimonetary system.

Conclusion

2.32. The relative importance of the various criteria cited is obviously a matter of subjective and political judgment, and so the same applies to the balance achieved by the agrimonetary system.

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CHAPTER 3 (*) The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) Organization and management of agricultural markets

3.0. CONTENTS Paragraph reference

Measures to combat classical swine fever 3.1 - 3.31

Introduction 3.1 - 3.4

Producer incomes and production 3.5 - 3.6

Veterinary measures 3.7 - 3.20

In Germany 3.7 - 3.14

Producer compensation procedures 3.9 - 3.11

Union intervention 3.12 - 3.14

In Belgium 3.15 - 3.20

Producer compensation procedures 3.17 - 3.18

Union intervention 3.19 - 3.20

Exceptional market support measures 3.21 - 3.26

In Germany 3.24 - 3.25

In Belgium 3.26

Conclusion 3.27 - 3.31

Legality and regularity of refund claims on the export of feta cheese from Denmark 3.32 - 3.64

Introduction 3.32 - 3.36

Controls provided for by EC legislation 3.37 - 3.40

National controls designed for purposes other than export refunds 3.41 - 3.44

Danish consideration of the role of tests carried out under the quality control system for exports of feta to Iran (QCSEFI), and under the Danish cheese regulation (DCR) in the control of export refunds 3.45 - 3.47

Special report no 201/96 of March 1996 by the Danish National Audit Office on the control of feta in Denmark 3.48

ECA audit objectives 3.49

ECA audit population 3.50

ECA audit findings 3.51 - 3.58

Conclusion 3.59 - 3.64

Follow-up of observations made in the Court's annual reports concerning the financial years 1990 to 1992 3.65 - 3.108

Introduction 3.65

Common market organization (CMO) - olive oil 3.66 - 3.73

Conclusion 3.73

Common market organization (CMO) - rice 3.74 - 3.79

Conclusion 3.79

Common market organization (CMO) - cotton 3.80 - 3.88

Conclusion 3.88

Common market organization (CMO) - flax and hemp 3.89 - 3.95

Conclusion 3.95

Export refunds for non-Annex II goods 3.96 - 3.108

Refunds paid on certain processed goods 3.96 - 3.102

Refunds on cereals exported in the form of certain spirituous beverages 3.103 - 3.107

Conclusion 3.108

MEASURES TO COMBAT CLASSICAL SWINE FEVER

Introduction

3.1. As part of its periodic review of the common market organization and in view of the topicality of the subject, the Court examined the application of the measures to combat classical swine fever () in Belgium and Germany from 1993 to 1995. This audit was carried out in the Member States involved and at the Commission.

3.2. The Union's strategy dealing with classical swine fever is based on an expert report which was produced in 1977. Measures were introduced in 1981 () and applied until July 1992, with the aim of eliminating the disease from the territory of the Community and thus making it possible to abolish vaccination, which was still current practice. At the end of the campaign, eight Member States were officially recognized as being free of the disease, while Belgium, Germany, France and Italy were only partially free.

3.3. Routine vaccination in the Member States had stopped by the beginning of 1990 at the latest (). However, the Union has never been completely free of the disease: 39 cases were recorded in 1992, 13 of them in Germany and there were many outbreaks in Belgium and Germany from 1993 onwards.

3.4. The Union's policy for combating classical swine fever was based mainly on two types of measures:

(a) veterinary measures, which comprise mainly of the slaughter of sick or suspect animals (); the Union contributed 50% of the compensation paid to producers () (1994: 21,8 Mio ECU; 1995: 24,6 Mio ECU; Table 3.1);

(b) exceptional market support measures adopted by the veterinary authorities following the detection of the disease. These measures consisted of buying and slaughtering healthy fattened animals when they reached maturity. This was done to provide an outlet for the disposal of stock and to prevent circumvention of the movement restrictions imposed (); the Union financing varied between 70% and 100% of the expenditure incurred (see paragraph 3.22) (1994: 135,4 Mio ECU; 1995: 6,5 Mio ECU; Table 3.1).

Producer incomes and production

3.5. For the period 1986-92, intensive farming in the pigmeat sector has resulted in above-average farm income when compared with other forms of specialized agriculture despite the relatively modest level of Community support measures in this sector (Table 3.2).

3.6. Most pigmeat is produced in pig units, some of which comprise several thousand animals. The population density reaches 4 000 pigs per square kilometre in the areas of Belgium and Germany affected by classical swine fever in the recent past. In such areas, in addition to the well-known major environmental problems, it is particularly difficult to control the escalation of the disease once an outbreak is detected.

Veterinary measures

In Germany

3.7. At the beginning of 1993, the disease appeared in the south-east of the country, then in the north and subsequently spread to the south-west. Between January 1993 and the end of 1995, 271 outbreaks occurred in pig units. The extent and duration of the epidemic indicate that the measures taken were either inadequate or not strictly applied.

3.8. In the Land of Lower Saxony, which accounts for more than 80% of the total expenditure incurred in this Member State, the major effort to curb the epidemic imposed a heavy burden on the district offices (). The latter received very little logistical support, either from the Ministry of Agriculture in Bonn or from the crisis unit in Oldenburg that was to coordinate measures () or indeed from other offices. Each of these developed its own administrative, computer and operational systems. Pooling the available resources would, in Germany, have created a useful synergy.

Producer compensation procedures

3.9. In Germany, compensation is paid by the Tierseuchenkasse, a public-sector organization which is financed by the Land in which it is situated and from an annual contribution from producers, which is fixed according to the number of animals kept.

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3.10. The methods which the Member State has established for valuing the animals to be slaughtered varied according to the particular case:

(a) the price per unit weight which is used is either the price adopted by the Commission (paragraph 3.21), or the local market price which may be higher than the former;

(b) the price may be applied either to the live weight or to the weight gained by the animal since it was bought by the producer; in the latter case, the compensation is made up of an amount corresponding to the purchase price of the piglets and a second amount corresponding to the value of the weight gain; it is higher than the compensation that is calculated on the live weight only.

3.11. Although the staff of the Tierseuchenkasse sometimes calculate the average daily weight gain of the pig and declare that they will not accept any amount above 700 g, higher figures have been accepted without particular justification. Moreover, the live weight is estimated visually and only exceptionally is it determined by weighing.

Union intervention

3.12. At the end of 1995, the expenditure defrayed by the Union for Germany amounted to 31,0 Mio ECU (), including an advance payment of 8,4 Mio ECU.

3.13. The Commission faced substantial difficulties with the files forwarded by the Land of Lower Saxony. The files were frequently incomplete or submitted in support of ineligible expenditure.

3.14. Moreover, in December 1995, the Commission refused payment of 5,2 Mio ECU because it had not received evidence that the slaughterings in question were decided on the basis of the epizootiological inquiries foreseen in the regulation (). This amount was increased subsequently to 6,1 Mio ECU following, in particular, the Court's audit and the request for further information sent by the Commission to the German authorities. The Court's observations concerning a similar case in Belgium, which was finally paid by the Commission, are set out in paragraph 3.26.

In Belgium

3.15. In Belgium, the disease was confirmed in October 1993, following importation of piglets from the Land of Baden-Wuerttemberg, and ended a year later; it involved 55 outbreaks. A frontier region of the Netherlands also had to be isolated and exceptional measures were put in place there.

3.16. The measures for combating the disease were managed from a crisis unit operating successively from Wingene and Drongen which coordinated the action undertaken; staff were placed at its disposal on a flexible basis.

Producer compensation procedures

3.17. The compensation paid to producers in connection with veterinary slaughterings was fixed by the Ministry of Agriculture on the basis of prices in specialized publications, according to the weight and breed of the animals. Precise price charts were then sent to the experts responsible for estimating their weight and value.

3.18. Nevertheless, during the audit, it became clear that the weight estimates had not been corrected subsequently to correspond to the actual weights, except where the batch of animals was made up exclusively of fattening pigs. As regards the application of the price charts, cases were found where pigs of inferior quality were treated in the same way as better quality animals.

Union intervention

3.19. At the end of 1995, the amount of expenditure defrayed by the Union for Belgium was 15,4 Mio ECU ().

3.20. Reimbursement of 0,8 Mio ECU was refused by the Commission in December 1994, on the grounds that the beneficiaries had not yet received compensation from the national authorities. It was found that, up to February 1996, the matter was still pending.

Exceptional market support measures

3.21. The procedures for implementing these measures have been laid down in various regulations establishing the periods and areas in question, the weights of the animals eligible, buying prices and the authorized use for the products of slaughtering (). The Commission could draw on the experience acquired during the African swine fever epidemic which hit Belgium in 1985, the management of which the Court examined in a report in 1990 (). This time the legislation provided that the slaughter products should be processed into fats or meat meal ('farine de viande`) and not released for human consumption. At the end of 1993, however, the Commission allowed Germany to process the meat for human consumption outside the Union and to export it (mainly to Russia) without export refunds but did not impose any specific provision against reimportation into the Union ().

3.22. The measures adopted by the Commission as regards financing did not ensure that the various Member States were treated similarly. In fact, the Commission decided to refund:

(a) 100% of purchases for a first measure in Germany and the only measure in the Netherlands;

(b) for 70% of the estimated quantity to be purchased, the balance being funded subsequently by the Member State; all the measures in Belgium and most of those in Germany were financed according to this scheme; as the actual number of animals purchased was less than the estimate, the Union funded in excess of 70%, i.e. 78% in Belgium and 77% in Germany;

(c) in respect of 70% of the number of animals actually purchased, the remaining 30% being paid for by the Member State; the only measure in force at the end of 1995, in Germany, was financed under such a scheme.

3.23. It can be estimated that had all the measures been carried out in accordance with the last-mentioned scheme, the cost to the Community budget would have been reduced by 13 Mio ECU.

In Germany

3.24. During the ex post checks, it became clear that it was impossible, from the documentation available, to retrace, to the point of processing into fats or meat meal ('farine de viande`), the path followed by individual lots of livestock purchased, nor was there any documentation proving that this processing had been carried out. This means that there is a risk that the meat returned to the market. Although the measures were indeed emergency ones, in view of the amount of expenditure concerned, the Commission should have set out procedures to ensure that the steps from purchase to eventual processing could subsequently be verified (see paragraph 3.21).

3.25. In the case of a limited number of producers, the compensatory amount was calculated on the basis of the live weight using a conversion coefficient of 0,83 (specified in the relevant regulation), even though both the live animal weight and the carcass weight were available. This led to the producer being paid a compensatory amount higher than that calculated on the basis of the carcass weight. The Commission did not reduce the conversion coefficient, which was clearly too high, until December 1994 (), i.e. long after the epidemic had reached its peak, and it was only at this time that use of the conversion coefficient was restricted to cases where the carcass weight was not available.

In Belgium

3.26. In September 1995, the Belgian authorities applied for a subsidy in respect of veterinary measures, following slaughterings that took place at the end of 1993. However, the resulting expenditure of 7 Mio ECU could not be classified as veterinary measures because of the lack of epizootiological enquiries. At the beginning of 1996, the Commission adopted a regulation aimed at solving this problem ex post by including the expenditures under exceptional measures (). The result of this was that, on the one hand, the Union subsidy covered 70% of the expenditure instead of 50% prescribed for veterinary measures i.e. an excess of 1,4 Mio ECU was charged to the Community budget and, on the other hand, expenditure was also charged to the EAGGF-Guarantee Section even though the operative event dated back more than two years. As a number of its internal documents show, the Commission veterinary service was well aware of the intentions of the Belgian authorities in this respect from the outset, so steps to clarify the situation should have been taken much sooner. Finally, it should be pointed out that the Commission regulation disregards the weight and price requirements which normally accompany the implementation of exceptional measures.

Conclusion

3.27. In general, the Commission acted swiftly to monitor the implementation of the measures applied following the outbreak of swine fever in Belgium and Germany and appropriately decided to exclude from Community financing any possible return to the market of healthy livestock slaughtered (see paragraph 3.21).

3.28. However, the Commission should in future ensure that the texts of the regulations clearly specify from the beginning the conditions under which veterinary and exceptional measures can be implemented instead of specifying them ex post (see paragraphs 3.14 and 3.26). This would ensure that expenditure refused in respect of one legislative framework cannot be charged to another, thereby increasing the cost to the Union budget (see paragraph 3.26). In this context, the standard 'request for subsidy` form should be improved. The Commission should also examine the appropriateness of different rates of support for the two measures to ensure that no incentives may arise in certain outbreak situations.

3.29. Reimbursement in respect of exceptional measures should be effected on a basis which ensures that each Member State benefits from the same rate of refund (see paragraphs 3.22).

3.30. Steps must be taken to ensure that the compensatory amounts paid by Member States to producers are calculated using more precise and homogenous methods, as regards both veterinary measures (see paragraphs 3.10 and 3.17-3.18) and exceptional measures (see paragraph 3.25).

3.31. Finally, the Commission should, in consultation with the industry, bring forward to the Council, a review of the regulations in force. It should examine the extent to which intensive pig producers should contribute in greater degree towards the measures to combat classical swine fever.

LEGALITY AND REGULARITY OF REFUND CLAIMS ON THE EXPORT OF FETA CHEESE FROM DENMARK

Introduction

3.32. Special reports no 2/90 () and no 7/93 (), drew attention to the complexity of the rules governing entitlement to refunds on the export of milk products as defined in Commission Regulation (EEC) No 3846/87 () establishing an agricultural product nomenclature for export refunds (ERN) and the difficulties this complexity creates for a posteriori controls.

3.33. Since the introduction of Council Regulation (EEC) No 4045/89 (), most Member States have accepted that once milk products have been exported, the only way to verify their composition is to examine production and quality control records (see paragraph 3.39). As observed in special report no 1/94 (), Denmark however did not use quality control records in the a posteriori control of export refunds for feta. Its arguments for not doing so are summarized later in this chapter (see paragraphs 3.45 to 3.47).

3.34. Table 3.3 gives details of refunds paid on the export of feta from Denmark which in the five years ending December 1994, amounted to some 480 Mio ECU. The total commercial value of Danish feta exports to third countries in the same period amounts to 560 Mio ECU. As Denmark is the principal EC exporter of feta and as the refunds involved were substantial, the Court undertook an audit in 1994 and 1995 in order to examine the nature of the quality control information available and consider its use in the context of a posteriori control of refunds on feta exported from that Member State. This report summarizes the results of that audit.

3.35. Feta is a cheese, originally made in Greece from ewes' milk but in recent years manufactured on a large scale in Denmark from cows' milk mainly for export to Iran. The Danish product is packed in brine in tins or in Tetrapak-type bricks. The Commission recently submitted a proposal for a regulation to the Council to the effect that after 2002, the Danish product will no longer be entitled to be described as feta. This proposal for a regulation, however, is not pertinent to the export refund issues dealt with in the succeeding paragraphs.

3.36. The principal type of feta manufactured in Denmark for export to Iran should conform to commercial standards of a minimum 40% fat content in dry matter (FCDM) and a maximum 60% water content (WC). In order to qualify for export refunds, feta cheese should conform to the compositional parameters as defined in Regulation (EEC) No 3846/87, which are:

(a) FCDM of 39% or more;

(b) a water content calculated by weight of the fat free matter (WCFFM) not exceeding 72%.

By way of example, as at 31 December 1993, the rate of refund for feta cheese of this type was 81,19 ECU per 100 kg. For the same year, the average commercial price was 112 ECU per 100 kg.

Controls provided for by EEC legislation

3.37. Under Commission Regulation (EEC) No 3665/87 (), laying down common detailed rules for the application of the system of export refunds on agricultural products, the day of export shall be used to establish the quantity, nature and characteristics of the product exported.

3.38. Provision for the current customs control of the conformity of agricultural products with the export refund nomenclature (ERN), which must be entered on the export declaration, is laid down in Commission Regulation (EEC) No 386/90 (). Under this regulation, physical examinations on the day of customs control should cover a minimum of 5% of the number of export declarations. Physical examinations include the option of taking samples of products for laboratory analysis to verify conformity with the ERN.

3.39. Under Article 1 of Council Regulation (EEC) No 4045/89 on scrutiny by Member States, of transactions forming part of the system of financing by the EAGGF, provision is made inter alia for the a posteriori verification of the accuracy of primary data by cross checks with the commercial documents of third parties. The majority of Member States accepted that production and quality control records fell within the definition of commercial documents. In order to ensure a consistent interpretation in all Member States, however, Council Regulation (EC) No 3094/94 () clarified that such records were included in the definition of commercial documents.

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3.40. To gain assurance that feta cheese conforms to the ERN parameters in respect of FCDM and WCFFM, samples of the product may be taken at the time of export and subjected to laboratory analysis under Regulation (EEC) No 386/90. In the audit situation provided for by Regulation (EEC) No 4045/89, other commercial records such as alternative laboratory analyses of samples which need not be taken on the day of export may be used to deduce the most likely chemical composition on the day of customs control. In this context, it should be noted that there is no official methodology prescribed by EC legislation for the determination of FCDM and WCFFM.

National controls designed for purposes other than export refunds

3.41. Apart from the controls provided for in the preceding paragraphs, there were two other systems of control in operation in Denmark over the quality requirements of feta cheese for the period covered by the audit. These systems were not designed with the aim of controlling export refunds. Samples for testing are taken from stocks and not at the time the products are placed under customs control.

3.42. The first, provided for in an agreement between the Federation of Danish Dairies and the Iranian authorities, involved the creation of a system of bacteriological and chemical tests on random samples of feta destined for export to Iran, resulting in the issue of certificates that the cheese conformed to the contractual specifications. The system is called 'quality control system for exports of feta to Iran` (QCSEFI). The tests include FCDM and WC. They are carried out by the official Danish Veterinary Directorate Laboratory (VDL). A second sample from the same production batch is counter tested by a commercial laboratory (CL). The results of the tests carried out by CL are communicated to the VDL.

3.43. The second system of testing was one provided for under the Danish cheese regulation () (DCR). The tests carried out included those on FCDM, WC and WCFFM. These tests, commonly referred to as 'routine tests`, were carried out exclusively by the VDL. Since 1 January 1994, the responsibility for these tests has been transferred to local health authorities.

3.44. The parameter for FCDM under both systems is a minimum of 40% and for WC, a maximum of 60%. Under the DCR, the WCFFM parameter is a maximum of 72%. Infringement of these parameters proved by the test results could result in fines imposed under the DCR.

Danish consideration of the role of tests carried out under the quality control system for exports of feta to Iran (QCSEFI) and under the Danish cheese regulation (DCR) in the control of export refunds

3.45. The Danish customs report on the Regulation (EEC) No 4045/89 control of the major Danish beneficiary of refunds granted on the export of feta for the period 1 January 1990 to 31 December 1991 acknowledges the existence of tests carried out by VDL but records no follow-up action taken in respect of individual results indicating prima facie infringements of the ERN parameters for FCDM and WCFFM.

3.46. The position of the Danish authorities on the use of analyses of samples of feta, carried out under VDL's responsibility, for the control of export refunds as conveyed during the audit and in response to the post audit letter, is as follows:

(a) the results cannot be used as it is difficult to relate them to exports to third countries (in other words, the commercial documentation does not permit the batches tested to be traced to disposal for example by export, sale on the EC market etc.) (see paragraph 3.53);

(b) the use of the available analysis results in the context of export refunds could give rise to problems, one of the reasons being that samples are often taken before the nine days laid down in the DCR (see paragraph 3.55);

(c) feta is a living cheese and as such its FC and WC change as it matures. Changes can therefore take place between sampling and the date of customs control (see paragraph 3.56);

(d) the commercial laboratory (CL) results should not be taken into account because its methodology for the determination of WC differed from that used by VDL leading to a higher WC (see paragraph 3.57);

(e) since sampling under QCSEFI and DCR does not usually take place on the day of customs control, the timing does not comply with the requirement of Article 3(4) of Regulation (EEC) No 3665/87, that the day of export shall be used to establish the quantity, nature and characteristics of the product exported (see paragraph 3.58);

(f) the only control system used by the Danish authorities as a basis for determining whether the refund stipulations in respect of feta have been satisfied is that applied by Danish customs under Regulation (EEC) No 386/90.

3.47. The Court was also informed in January 1994 during the course of the audit that the Danish authorities had set up a working group to consider the role of QCSEFI and DCR tests in the control of export refunds. The working group's conclusion, recorded in its report of May 1994, is that the results were not suitable for direct use in the determination of entitlement to export refunds but should be used in the context of risk analysis for selection of transactions for testing under Regulation (EEC) No 4045/89.

Special report no 201/96 of March 1996 by the Danish National Audit Office on the control of feta in Denmark

3.48. In March 1996, the Danish National Audit Office published a special report on the control of feta in Denmark which derives much of its material from the Court's audit. The special report contains a reference to a report dated March 1995 from a second working group set up in August 1994 to consider the use of results of analyses in export refund control. This report was not communicated to the Court at the time of its audit.

ECA audit objectives

3.49. The objective was to verify the legality and regularity of export refund claims financed by the EC in accordance with the provisions of Commission Regulation (EEC) No 3665/87 in respect of feta exported from Denmark. In particular, the audit examined whether or not the requirements in respect of minimum fat content in dry matter (FCDM) and maximum water content in fat free matter (WCFFM), as laid down in the export refunds nomenclature (ERN), had been met.

ECA audit population

3.50. The audit considered prima facie infringements under QCSEFI and DCR in the period 1 January 1989 to 31 December 1994. Refunds paid on exports of feta from Denmark in the budget years 1990 to 1994 amounted to some 480 Mio ECU.

ECA audit findings

3.51. The Court found that the tests carried out under the QCSEFI and the DCR include the same criteria, WC and FCDM, as those prescribed in the ERN. Furthermore, QCSEFI tests relate specifically to feta for export to Iran which is, in principle, all subject to export refunds and tests under the DCR cover all Danish cheese production including other cheeses which are exported to third countries such as mozzarella.

3.52. For the period 1 January 1989 to 31 December 1993, 409 instances of infringements of the ERN FCDM and WC parameters for feta have been identified, 327 under QCSEFI and 82 under DCR. Some 184 instances have resulted in the imposition of fines. It should be remembered that fines are only imposed for infringements identified by VDL and even then not in all instances. The Danish authorities, contrary to the opinion of the Court, have not taken into account any of these results in order to challenge the entitlement to export refunds of any of the batches in question.

3.53. Of the 409 cases of infringements, 229 were audited against commercial documentation. In 178 instances, the cheese was traced to disposal, including 145 traced to specific export declarations. The remaining 51 batches could not be precisely traced to disposal because of inadequate commercial information (see paragraph 3.46(a)).

3.54. The Danish authorities have contended that, in many instances, the batches have been:

(a) subject to satisfactory retests;

(b) sampled within nine days of production contrary to the sample taking guidelines;

(c) subject to satisfactory customs controls under Regulation (EEC) No 386/90.

3.55. The Court found that:

(a) evidence of satisfactory retesting was available in only 11 instances;

(b) there were only four instances where the samples were taken within nine days of production (see paragraph 3.46(b));

(c) there were only two instances where a satisfactory test of a customs sample under Regulation (EEC) No 386/90 related to a batch tested under QCSEFI or DCR.

3.56. On the issue of the timing of sample taking and compositional changes that may occur as the cheese matures, an analysis of infringement cases detected under all the control systems shows that they have been detected in samples taken in a wide time-scale from nine to 232 days after production (see paragraph 3.46(c)).

3.57. The Danish authorities correctly claim that the CL results on the same production batch tended to give a higher WC than the VDL. They attribute the difference to the fact that the two laboratories used different testing methods. Account, however, should also be taken of the fact that the samples to be tested by VDL were opened for organoleptic tests in the regional offices before being sent to the central laboratory, whereas the samples to be tested by CL arrived intact at the laboratory. The fact that the samples are handled in different ways may therefore contribute to the different WC results obtained (see paragraph 3.46(d)).

3.58. The argument that the composition of feta cheese can only be determined by taking samples on the day of customs control under Regulation (EEC) No 386/90 cannot be accepted. To do so would imply that, once the goods have been exported, it is impossible to audit their compliance with export refund requirements, thus contradicting Regulation (EEC) No 4045/89 and amendments thereto. The results of QCSEFI and DCR tests on FCDM and WC are the key source of a posteriori evidence to verify that exports of cheese from Denmark conform with the ERN parameters (see paragraph 3.46(e)).

Conclusion

3.59. Despite the Court's previous observations on this matter in special report no 1/94, the Danish authorities did not include and follow up individual QCSEFI and DCR test results in the framework of a posteriori controls under Regulation (EEC) No 4045/89 and have not ensured that there are satisfactory means in place to trace the batches tested to disposal. The obligation to include quality control records within the scope of Regulation (EEC) No 4045/89 controls, and therefore to follow up the individual test results, was clarified by Regulation (EC) No 3094/94.

3.60. The Court has suggested that the Danish authorities complete the identification and quantification of all batches of cheese tested under QCSEFI and the DCR and found to have infringed the ERN standards for WCFFM and FCDM and recover the export refunds involved. The Danish authorities are unwilling to accept that the results of tests to determine that exports of cheese conform to the national parameters for WC, WCFFM and FCDM for exports of that cheese can also be used to determine conformity with EC export refund parameters and they have not provided the necessary quantification nor taken recovery action.

3.61. Nevertheless, the Danish National Audit Office special report gives some indication as to the extent of infringements. It records that 10 783 analysis results for 40% feta were examined relating to the period from 1 January 1989 to 30 June 1995. It further calculates the percentage share by type of control of the total number of analysis results for 40% () feta which during that period failed to satisfy the national rules with regard to WC and FC. The minimum percentage not satisfying the relevant parameters is 3,3 %. The details by type of control are illustrated in Table 3.4.

3.62. It should be borne in mind that these figures are based on failures in respect of national parameters. While these are the same for WCFFM, the FCDM national parameter is 40% as opposed to 39% for the ERN. In the cases examined by the Court, the majority relate to WCFFM failures. The Danish National Audit Office further makes a reservation that the final figures for failures could be less if account were taken of retesting.

3.63. To date, the refunds have only been recovered on the individual consignments tested under Regulation (EEC) No 386/90. Between 1 January 1989 and 7 March 1994, there were 27 instances where such recovery action had been initiated involving some 350 000 ECU. The figures in Table 3.4 however indicate that in all types of control there is an error rate in excess of 3,3%. Since the samples for these controls are taken at random, there is a reasonable case for the extrapolation of the minimum percentage error rate to the totality of refunds paid for the export of feta from Denmark as summarized at Table 3.3. This represents a figure of some 16 Mio ECU.

3.64. The facts underlying this audit and the reluctance of the Danish authorities to take account of the laboratory analyses in question in the context of the determination of entitlement to export refunds has been referred to the Commission for appropriate follow-up.

FOLLOW-UP OF OBSERVATIONS MADE IN THE COURT'S ANNUAL REPORTS CONCERNING THE FINANCIAL YEARS 1990 TO 1992

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Introduction

3.65. In the last five years, the European Court of Auditors has audited and reported upon the management of a number of different common market organizations (CMOs). These audits concentrated on the implementation and effectiveness of the market support measures and on the control procedures set up by both the Member States and the European Commission to safeguard EAGGF Guarantee funds. The Court also reported on export refunds for non-Annex II goods () to which the mechanisms of a CMO do not apply, in particular there is no price fixing and price support. Export refunds for non-Annex II goods are provided under two schemes, one for 'certain goods obtained by processing agricultural products` and the other for 'cereals exported in the form of certain spirituous beverages`. In order to establish whether action has been taken to improve market management and control procedures in accordance with its observations and recommendations, the Court has reviewed the measures taken by the Commission in response to its reports concerning the financial years 1990, 1991 and 1992.

Common market organization (CMO) - olive oil

3.66. In its annual report concerning the financial year 1991 (), the Court examined for a second time aid schemes for olive oil. It concluded that the huge administrative effort for management and control of production aid did not result in a reliable system. The requirement to establish olive cultivation registers by 1988 had not been met for 50% of producers. Those which existed were not regularly updated which, in turn, limited the usefulness of the computerized production record.

3.67. In its 1991 discharge recommendation of 15 March 1993, the Council of the European Communities placed particular emphasis on the Court's conclusion concerning the reliability of the control system. It underlined the urgent need to establish olive cultivation registers and invited the Commission to intensify its efforts to assure a reliable control system.

3.68. The European Parliament in its 1991 discharge decision of 21 April 1993 (), noted that it was impossible to monitor or control the olive oil production aid system, questioning whether the Community taxpayer should be expected to finance a system over which the Community could not exercise control. Furthermore, it gave notice that it would call on the Commission to take all possible measures to suspend payments under the olive oil production aid scheme unless satisfactory controls were assured within a reasonable timescale. Finally, proposals for the reorganization of the olive oil sector should take account of the Court's comments.

3.69. Table 3.5 shows how budgetary expenditure on olive oil has fluctuated during the period 1991 to 1996, reaching a high of 2 468,1 Mio ECU in 1993 and a low of 812,5 Mio ECU two years later. The low level of expenditure in 1995 seems to result from Commission Regulation (EC) No 3062/94 of 15 December 1994 () which laid down more precise time limits for the payment of production aid, including advances. In effect, this regulation delays the payment of aid to small producers and advances to other producers for the 1994/95 marketing year until after 16 October 1995, resulting in higher expenditure relating to 1995 being transferred to the 1996 budget.

3.70. The Commission's records indicate that Italy is the only Member State that has an operational olive cultivation register, although it has not been updated since the 1992-93 aid application procedure. Spain's register will not be operational until 1997/98 at the earliest, while for Greece and Portugal, only the pilot projects have been completed. The Commission's 1992 clearance of accounts audit carried out in Greece confirmed that the olive cultivation register was not operational and that computerized records regarding producer organizations were not usable so production aid applications could not be controlled. In addition, the control agency had not carried out the number of on-the-spot inspections required by the regulations and there was an inadequate reporting system. As a result, the Commission proposed, as it did in 1991, to impose a 10% financial correction on olive oil expenditure declared in 1992 totalling 5 252 Mio DR (20,8 Mio ECU).

3.71. In Spain, the Commission's 1992 clearance of accounts audit confirmed the control agency's opinion that producer organizations were not operating in accordance with established legislation. In one case, it was proposed that the producer organization should repay 176 Mio PTA (1,15 Mio ECU) and have its recognized status withdrawn by the competent authorities.

3.72. Finally, the Commission has confirmed that there will be no change in the legislative framework governing EU aid for olive oil before the end of 1996 when the CMO reform proposals are due.

Conclusion

3.73. With regard to the CMO for olive oil, the Court considers that the current level of operational olive cultivation registers does not represent satisfactory progress for a scheme that is financed by withholding part of the general budget provision for production aid. It is also evident from the results of Commission audits that the control systems put in place by the Member States are still not of a satisfactory standard. In this context, Member States should consider, where appropriate and cost-effective, the possibilities offered by remote sensing for both completing and updating the olive cultivation register.

Common market organization (CMO) - rice

3.74. In its annual report concerning the financial year 1992 (), the Court concluded from its audit of the CMO for rice that there was:

(a) a potential financial loss of 6,3 Mio ECU resulting from a discrepancy in the official records concerning rice supplies to Réunion;

(b) a need to introduce regulations establishing criteria for settling discrepancies concerning production aid between the declared area and the area actually found.

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3.75. In support of the Court's findings, the Council, in its 1992 discharge recommendation, recognized the need to introduce land registers for areas supporting rice cultivation to improve control procedures and noted that the Commission would examine the question of rice supplies to Réunion. The European Parliament made broad reference, in its 1992 discharge decision of 5 April 1995 (), to the need for Member States to have comprehensive land registers, credible statistical data, efficient control systems, etc. which permit the sound financial management of Community appropriations.

3.76. Table 3.6 shows that EAGGF Guarantee Section expenditure on rice has decreased by 38% from 87,3 Mio ECU in 1992 to 54 Mio ECU in 1996. This decrease is caused by the phasing-out of the aid for indica rice in 1994 and, more importantly, by the drop in rice exports from 375 161 tonnes in 1991/92 to about 125 000 tonnes in 1995.

3.77. Following the examination by the Commission of the level of rice supplies to Réunion, it was established in 1994 that the actual difference was in fact only concerned with 1 604 tonnes as distinct from the earlier higher figure. While it could be demonstrated that more rice had been released for consumption in Réunion than for which there had been refunds paid concerning the period mentioned above, the Commission enquiry taken over by UCLAF in August 1995, concerning the eight export operations totalling 1 604 tonnes for which the French authorities have not supplied documentation, is still ongoing.

3.78. The Commission has made no progress in response to the Council's request to set up a system of land registration for areas supporting rice cultivation.

Conclusion

3.79. As the proposed reform of the CMO for rice is based upon a compensatory aid payment per hectare, reliable and accurate land registration remains an essential feature of the control system aided, where appropriate, by remote sensing. The difficulties which the Commission encountered in finding proof that all the rice for which refunds had been paid had actually been released for internal consumption in Réunion indicates certain weaknesses in the control system. The Commission should take the necessary steps for the system to be improved.

Common market organization (CMO) - cotton

3.80. The Court also reported in 1992 on the result of its audit of the support measures for cotton, where it found that:

(a) the CMO has serious control problems. In particular, the absence of up-to-date and complete land registers in Member States did not assist the verification of areas planted and crops harvested and rendered, therefore, the basis for production estimates unreliable;

(b) the aid scheme for small cotton producers did not achieve its objectives and aid had ended up in the hands of larger producers who had split their holdings;

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(c) the 1% of Community aid diverted by the Greek authorities to finance the Hellenic Cotton Board did not comply with Community regulations;

(d) the world market price for unginned cotton established by the Commission was unsatisfactory as it was based largely on hypothetical values;

(e) the stabilizer system did not achieve its objective of reducing production to the level of the guaranteed maximum quantity (GMQ).

3.81. In its 1992 discharge recommendation of 21 March 1994, the Council emphasized the need for the Commission to ensure that effective control measures were introduced in the cotton sector. This view was reiterated by the European Parliament in its 1992 discharge decision of 5 April 1995 ().

3.82. Table 3.7 shows how EAGGF Guarantee Section expenditure on cotton has increased by 67% from 487,9 Mio ECU in 1991 to its 1996 budget appropriations of 816 Mio ECU. The increase can be explained by the extension of surface under cotton from 351 962 hectares in 1990/91 to 477 000 hectare in 1995/96, leading to a 44% increase in production. At the same time, the aid rate went from 45,422 ECU/100 kg to 54,766 ECU/100 kg, i.e. an increase of 20%.

3.83. Council Regulation (EC) No 1554/95 () of 29 June 1995 laid down general rules for the system of aid for cotton, replacing Council Regulation (EEC) No 2169/81 () of 27 July 1981. In brief, these rules required Member States to set up control arrangements necessary to ensure that the aid system operates correctly and provided guidance on establishing the sound, fair and merchantable quality of the product. In addition, the regulation requires a system of declarations of the areas sown to be established in order to estimate the production of unginned cotton.

3.84. At the same time, Council Regulation (EC) No 1553/95 () of 29 June 1995 was introduced. This Regulation adjusted, for the fifth time, the system of aid for cotton introduced by Protocol 4 annexed to the Act of Accession of Greece. It attempts, from the 1995/96 marketing year, to ensure that cotton production is governed by the guaranteed maximum quantity (GMQ). In order to avoid an increase in expenditure, the guide price will be reduced in direct proportion to the percentage to which the actual production exceeds the GMQ and there is no limit on the reduction in aid should the GMQ be exceeded. In addition, this regulation abolished the system of aid for small cotton producers from September 1995, thereby ending the incentive for large producers to split their holdings to attract more aid.

3.85. The question of whether Community funds should be diverted by the Greek authorities to finance the Hellenic Cotton Board has still not been resolved. An infringement procedure is currently in process and the Commission is awaiting a response from the Greek authorities. In the meantime, the diversion of 1% of the aid continues.

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3.86. Furthermore, the Commission proved that the Cotton Board had seriously failed in its duties. The required number of inspections were not achieved, many documents were unofficially altered or were not properly authorized, areas were rarely re-measured and the status of small producers was never independently verified.

3.87. Finally, as a result of the large reported increase in Greek cotton production since 1991, the Commission undertook an enquiry procedure, together with the assistance of a professional accountancy firm and the national authorities. The enquiry confirmed that unjustified recourse to the aid system, including that for small cotton producers, had occurred. There is evidence that fictitious quantities of unginned cotton, upon which EU aid has been paid, appear in the records of the ginning mills and that producers were dividing land parcels in order to receive the small producers aid. Although the latter did not have any financial consequences for the Community budget, it diluted the purpose of the small producers aid. However, the Court's audit of cotton transactions in the framework of the DAS 1995 showed, that the Hellenic Cotton Board has taken measures to improve its control procedures. Finally the Commission reduced the financial correction from 25 to 10%.

Conclusion

3.88. With regard to the CMO for cotton, it is too early to say whether the new regulations, which only became effective for the 1995/96 marketing year, will address all the observations made by the Court. The Commission should take action against those responsible for the widespread abuse of the aid system for cotton to ensure that all unduly paid aid is recovered.

Common market organization - flax and hemp

3.89. With regard to Community support for flax and hemp, the Court concluded in its 1992 Annual Report that:

(a) the CMO had not achieved its objective of stabilizing the market and that more active market management was necessary;

(b) promotion programmes which had been less than effective in stimulating demand should be reviewed and cancelled if no clear benefits could be identified.

3.90. In their 1992 discharge resolutions, both the Council and European Parliament called for effective control measures to be introduced.

3.91. Table 3.8 shows budgetary expenditure on flax and hemp during the period 1991 to 1996. Expenditure increased sharply in 1995 by 137% to 78,6 Mio ECU. This increase is largely explained by the increase in both the area sown and the rate of aid.

3.92. Indeed, Table 3.9 shows an overall increase of 90% in areas used for fibre flax production during the period 1991 to 1995. In the main producer Member States (France, Belgium and the Netherlands), the overall area used has increased by 66% during the same period. In the United Kingdom, the cultivation area increased from 143 ha in 1992 to 17 115 ha in 1995. Similarly Spain, which did not produce fibre flax in 1992, had 11 300 ha dedicated to this crop in 1995. Germany also registered a sharp increase of over 300% from 835 ha in 1992 to 3 370 ha in 1995.

3.93. The significant increases in both budget expenditure and cultivation areas could have been an indication that the promotion programmes costing some 22,8 Mio ECU since 1981 and run by the Commission to stimulate demand for the product had been successful. However, this was not the case. Commission studies indicated that the use of flax in the packing paper industry was inappropriate and that flax could not compete with other fibres (both synthetic and natural).

3.94. It seems more likely that the increases in expenditure and cultivation areas resulted from the high level of per hectare aid for fibre flax introduced with the reform of the common agricultural policy (CAP). EC support for fibre flax amounted to 774,86 ECU per ha in 1994-95 and increased to 935,65 ECU per ha for 1995-96. Prior to CAP reform, production aid for fibre flax was based on 374,36 ECU per hectare of area sown. With the increased level of aid acting as an incentive for producers to increase the size of their fibre flax cultivation areas, there is a danger that production, which doubled between 1992 and 1993, will outstrip demand. Indeed, total availabilities of flax were at 157 750 tonnes in 1995/96, while total demand was only at 114 500 tonnes.

Conclusion

3.95. The Commission should actively monitor this market to ensure that the high level of per hectare aid together with the increasing size of areas used for cultivating flax does not result in an imbalance between the volume of production in the Community and the amount that can be marketed.

Export refunds for non-Annex II goods

Refunds paid on certain processed goods

3.96. Prices fixed by the Community for the majority of its agricultural products are often higher than prevailing world market prices. This results in producers of processed agricultural goods incurring higher costs than their competitors in third countries and placing the goods at a cost disadvantage when exported. To redress this situation, the Community provides compensation in the form of refunds to the exporter of the goods for the higher cost of the raw materials included in the producer price.

3.97. In its annual report concerning the financial year 1990 (), the Court examined for the second time the compensation scheme for certain goods obtained by processing agricultural products. As a result of this examination, the Court concluded that:

(a) the Member States, having received little detailed guidance concerning the checks to be carried out had adopted a variety of differing methods to control the legality and regularity of their payments;

(b) the Commission had not succeeded in ensuring coherent treatment of production losses which led to payments of export refunds in some Member States being based on goods not exported;

(c) recipes, which are the basis for calculating the amount of refund to be paid, should be re-lodged annually with the paying agency to ensure they are up to date and should be selected for verification according to an overall risk assessment.

3.98. Table 3.10 shows how EAGGF Guarantee Section expenditure for refunds on certain goods obtained by processing agricultural products has fluctuated during the period from 1990 to 1996. The high point of 700,6 Mio ECU was reached in 1993, a 49% increase over the 1990 expenditure level. In general, this peak is explained by very high refund rates for durum wheat and cereals which aimed to close the gap between high internal and very low world market prices. The decrease of expenditure in the years after 1993 may be attributed to lower internal cereals prices subsequent to the CAP reform and a firmer world market.

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3.99. In its 1990 discharge recommendation of 16 March 1992, the Council invited the Commission to act on certain of the Court's observations, in particular, establishing a registration system for recipes and making risk analysis a basis for control procedures.

3.100. The Commission responded to the Court's observations and the Council's invitation with several regulations which:

(a) introduced the consistent management of production losses by establishing a definition of losses, residues and by-products and by specifying those losses which are eligible for refunds ();

(b) improved the minimal guidance provided to Member States regarding the checks to be carried out, by laying down criteria for risk analysis which enabled the targeting of physical checks on those products, individuals, legal entities and sectors presenting the greatest risk ();

(c) updated and amended the basic regulation governing these support measures () by introducing detailed implementing rules for the application of the current trade arrangements ().

3.101. Finally, in 1995, the Commission issued further guidelines on prior registration and declaration at the time of export of quantities of agricultural products and consequential verification, which aimed to contribute to the uniform application of Commission Regulation (EC) No 1222/94 (41).

3.102. The Court agrees with the Commission's view that 'a common approach for determining the quantities of products actually used in the manufacture of goods, whether or not the subject of registration of the recipes, together with the linked obligations of verification is essential both in terms of ensuring that expenditure is in accordance with Community Regulations and that the checks made are complementary ().`

Refunds on cereals exported in the form of certain spirituous beverages

3.103. Also in its 1990 Annual Report, the Court examined export refund payments on cereals which are later exported in the form of whiskies. The aim of this scheme is to facilitate the use of cereals grown in the Community in the production of such whisky. It was found that the Commission services:

(a) had not set out guidelines either for themselves or for the Member States concerning what changes should trigger an adjustment to coefficients;

(b) had not made a critical examination of the data provided by Member States and used in the preparation of coefficients.

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In essence, coefficients express the ratio of exports of whisky to general releases onto the market and should be adjusted where stocks vary, export trends show a tendency to change and significant variations occur in the proportion of cereals imported and processed under inward processing relief from duty and Community cereals. The audit also revealed that regulations were not properly applied when cereals were taken under control and that weaknesses in control had resulted in the payment of more refund than justified.

3.104. In its 1990 discharge recommendation of 16 March 1992, the Council supported the Commission's intention to carry out a thorough examination of the system, which should take account of the Court's observations. This examination would include an analysis of the basis for the aid, the coefficients and their annual adaptation, the data to be supplied by the Member States and the control procedures. The Commission would then take the necessary measures resulting from this examination.

3.105. Table 3.11 shows the development of EAGGF Guarantee Section expenditure for refunds on cereals exported in the form of certain spirituous beverages during the period from 1990 to 1996. The budget appropriation for 1996 of 41 Mio ECU is more or less constant with the 1990 expenditure of 42,3 Mio ECU.

3.106. The Court's observations were partially addressed by Commission Regulation (EEC) No 2825/93 () of 15 October 1993 which laid down detailed rules regarding the fixing and granting of adjusted refunds in respect of cereals exported in the form of certain spirit drinks. This regulation also corrected the coefficient for calculating the barley equivalent of malt from 1,33 to 1,30 and reset the percentage levels of moisture content to be used in assessing the weight of cereals to be taken into account when calculating the payment. In its 1990 Annual Report, the Court had expressed the view that this coefficient should be in the region of 1.21. The Regulation, however, did not sufficiently specify the information to be supplied by the Member States and which is used by the Commission to calculate the coefficients for each type of whisky.

3.107. Finally, one of the Court's observations on the serious systems weaknesses in the UK concerning taking cereals under control was confirmed by the Commission during its 1989 clearance of accounts audit with the result that declared expenditure of 19,7 Mio UKL (24,7 Mio ECU) would be 'disjoined` (i.e. the clearance decision on this amount was postponed as the examination was not yet finished). In 1990, a supplementary Commission audit, once again, confirmed the Court's observations concerning control weaknesses. However, the Commission decided that the overall correction of 2% of the total declared expenditure for cereals proposed as part of the 1989 clearance of accounts was sufficient action and the 19,7 Mio UKL (24,7 Mio ECU) disjunction was dropped. Finally, the 2% proposal was overruled by a further decision and the funds in question were released because the UK had carried out a further check on the expenditure in question.

Conclusion

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3.108. With regard to refunds for non-Annex II goods, the Commission has addressed the technical problems observed upon in the Court's 1990 annual report. As far as refunds on cereals exported in the form of certain spirituous beverages are concerned, it is regrettable that the Commission did not subsequently pursue the recovery of funds 'disjoint` from the 1989 clearance decision. Later improvements in the UK control system have not removed the high risk of irregular payments in previous years. However, a more recent evolution should now be taken into account. With the CAP reform, the gap between EC prices and world market prices of cereals was significantly reduced in comparison to the conditions appertaining at the time of the relevant accession treaties. The Commission should therefore review whether the continuation of EU subsidies for whisky distillers is still justified.

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REPLIES OF THE COMMISSION

MEASURES TO COMBAT CLASSICAL SWINE FEVER

Producer incomes and production

3.6. The Commission shares the Court's opinion on the link between the density and intensiveness of pig units and the escalation of outbreaks. But the Commission has to live with the fact that most Member States are against giving the Community power to eradicate one of the causes of the spread of the disease by imposing severer limits on fattening units.

The Commission has acted in an area within its competence, namely structures, by imposing constraints on aid for pig farming investment. Regulation (EEC) No 2328/91 disallows aid for investments resulting in an increase in pig places. Other conditions are imposed where Community and national aid is granted without an increase in capacity: these involve in particular the minimum space given to animals and a capacity to produce at least 35% of the feed consumed.

Veterinary measures

Germany

3.8. The Commission very quickly realized that it was imperative that the various official bodies in Germany work in close conjunction. It made its ideas known to the Federal authorities and the responsible officials of the Laender concerned at meetings held in Brussels and also on the occasion of two field visits when the crisis began (January 1994).

Producer compensation procedures

3.11. The rules on compensation of owners whose herd has been slaughtered for health reasons are a matter of national law. The Community has enacted no provision limiting the weight of compensated animals. It cannot be deduced from the Court's observations that Community rules were broken. The Commission shares the Court's concern that national compensation rules should be as clear and precise as possible.

Belgium

Producer compensation procedures

3.18. The Commission, more concrete evidence having been supplied, will take the necessary action.

Exceptional market support measures

3.21 3.23 These measures are in general financed 100% by the EAGGF.

In 1990, however, on the occasion of the first big classical swine fever epidemic in Belgium, the Commission for the first time decided on joint financing. It set a total number of eligible animals, split it between the Community and the Member State and financed the Community part at 100%.

On the first appearance of classical swine fever in Germany in summer 1993 the extent of the epidemic and in particular its duration were hardly foreseeable. The Commission could not therefore invoke its arguments of 1990 to impose joint financing. These exceptional measures lasted only three months.

From autumn 1993, when the disease reappeared in both Germany and Belgium, the Commission reapplied the joint financing principle on the model set in 1990. It proved necessary to work in instalments.

The unintended consequence quickly appeared, however, that the last national instalment was not always fully used up, which meant that the Community financed more than the 70% supposed to fall to it. In May 1995 the Commission therefore amended the Regulation to provide for a daily split between the Community and the Member State and decided that this would apply in the future.

Joint financing with Member States is now an accepted principle and the 'classical swine fever` approach serves as a model in other areas (cf. BSE slaughtering).

The Commission accepted Germany's request to use a small proportion of the slaughtered pigs for production of preserves for export to Eastern European countries but without any refund in order to avoid indirect disturbance of the Community market, at that point in serious crisis. The pigs used came from units not touched by classical swine fever but located in the protection zone and hence under veterinary and trade restrictions.

The Commission did not consider it necessary to enact a specific provision to prevent reimportation into the Community.

Germany

3.24. The Community rules (Regulation (EEC) No 729/70) require Member States to take all necessary action to ensure that operations financed by the EAGGF are properly carried out. It is up to the Member State therefore to set up procedures that are as rigorous as is necessary to guarantee the regularity of expenditure.

Commission officials made visits to Germany throughout the duration of operations in order to examine national control. The failings found in the German authorities' control procedures resulted in financial corrections.

3.25. The coefficient of 0.83 (100 kg live weight gives 83 kg slaughtered weight) already used in the past was used for the period covered by Regulation (EEC) No 3088/93. When it was adopted in November 1993 all animals were being killed on the farm and sent to rendering plants; there was no provision for normal slaughtering at this time.

During the period of application of Regulation (EEC) No 3088/93 slaughtering of pigs and use of the carcasses for preserve production was introduced at Germany's request. Parallel use of the two methods, i.e. the coefficient and the exact carcass weight of the slaughtered animal, showed up the discrepancy. The Commission was aware of it in July 1994 but Regulation (EEC) No 3088/93 had been repealed in the meantime and it was too late to take any action.

Following appearance of the second wave of the disease in Germany in autumn 1994 Commission Regulation (EEC) No 3146/94 reintroduced exceptional support measures in December. On this occasion the coefficient was adjusted in the light of the experience acquired in Germany in the first support operation.

Belgium

3.26. At the time of the epidemic there was no strict definition differentiating veterinary and market support slaughtering, the financing source for each being different. Generally speaking market support slaughtering was carried out in support of veterinary action, hence there was a grey area between the two.

The decision taken in the case in point was one of policy. The Commission decided that this was market support more than veterinary action.

3.27. The Commission wishes to add that its officials' examination in Germany in December 1993 and January, May and June 1994 of the exceptional market support measures revealed weaknesses and anomalies in their implementation. Germany was therefore notified in December 1994 of the Commission's intention to make appropriate financial corrections in the account clearance for 1994.

Conclusion

3.28. The Commission has set additional criteria applicable since 1 January 1995 and adopted internal provisions on delimitation of what is financeable as veterinary and what as market support action.

The Commission will as in the past be careful to require Member States to complete correctly the relevant form, to which improvements are envisaged.

3.29. The Commission refers to its reply to point 3.21.

3.30. The Commission considers it inexpedient to adopt at Community level provisions on questions that are a matter of national competence. It does, however, share the Court's concern that national provisions and procedures for payment of compensation should be as clear as possible.

3.31. The Commission fully shares the Court's views. Unhappily the Member States do not.

LEGALITY AND REGULARITY OF REFUND CLAIMS ON THE EXPORT OF FETA CHEESE FROM DENMARK

3.32 3.64 Quality controls can be carried out on the basis of administrative evidence kept with companies or otherwise by public services. If this evidence indicates the parameters fixed for the granting of exports refunds they are to be taken into consideration in so far as they relate to products which have been exported benefiting from the export aid (3.33 and 3.58).

As the Court observes (3.39) Regulation (EC) No 4045/89 has been clarified in this respect (Regulation (EC) No 3094/94: entry into force 23.12.1994). It is the Commission's opinion that this clarification, which is of a general nature, does not affect the need to pursue individual cases which occurred before its entry into force. The feta case being an individual case and the Member State not agreeing on the line to take, the Commission opened its own enquiry based on Article 9 of Regulation (EC) No 729/70 on this matter. This enquiry was notified on 17 January 1996 and covers all financial years not closed at that time by way of a clearance of accounts decision (1992 onwards except for irregularity cases (Article 8 of Regulation 729/70)).

The Commission is at present examining all data at its disposal in order to establish the amount which will be proposed to the Commission to be disallowed from Community financing. Despite the difficulty of quantifying the amounts this enquiry should be finalized in the context of the clearance of accounts of the 1994 expenditure.

3.40. On the basis of Commission Regulation No 2721/95, a Regulation establishing a list of reference methods to be applied for the analysis and quality evaluation of milk and milk products under the CMO has recently been presented to the management committee where it received a favourable opinion. It should therefore be adopted shortly and will enter into force on 1 October this year. Reference methods will then be applicable for determining the composition of cheeses for the purpose of the export refunds regime.

FOLLOW-UP OF OBSERVATIONS MADE IN THE COURT'S ANNUAL REPORTS CONCERNING THE FINANCIAL YEARS 1990 TO 1992

CMO Olive oil

3.68. The Commission has threatened the Member States where control failings are most numerous with suspension of payments. In a constructive approach it has proposed, notably to Greece and Spain, adoption of a range of measures designed to cut the risks arising from the failings observed. This approach appears to be slow in giving the desired effect.

A draft proposal for reform of the CMO is at present under discussion in the Commission's departments.

3.70. The Court's remarks on cultivation registers cannot be contradicted. An updating programme for the Italian register covering the period 1990-95 is almost complete. The Court's remarks otherwise reflect the situation. In Greece the Commission also looked at the control procedures introduced as an alternative to the register and computerized records, concluding that their effectiveness was very limited. Some improvements in the checking procedures used by the Agency have, however, recently been noted.

3.71. An audit covering 1993 in Spain gave the Commission a better idea of the management and control procedures used and brought certain weaknesses to light. Appropriate financial corrections can be made in the clearance of accounts.

3.72. As noted against 3.68, reform proposals are being drawn up.

3.73. The Commission has proposed to Member States as yet without an operational cultivation register that they use means of identification similar to those of the integrated administration and control system and has taken on directly, with the help of JRC ISPRA, the immense task of setting up operational control systems in these Member States.

CMO Rice

3.78. Compensatory payments to rice growers will be made only from the 1997/98 marketing year and a registration system will be set up before 1 September 1997.

Conclusion

3.79. On the basis of the results of the enquiry carried out by UCLAF, consideration is being given as to improvements which can be made in the flow of information proving that the rice has actually been released for internal consumption.

CMO Cotton

3.80. (a) As part of the reform of the cotton aid scheme Council Regulation (EC) No 1554/95 provides for introduction of the necessary control measures, including those tied to the integrated system.

The Commission has urged Member States to set up a procedure for cross-checking areas declared against 'arable crop` declarations.

(b) Since the aid scheme for small producers has resulted in a change in production structures to an extent preventing its purpose (i.e. to help genuine small producers) from being achieved, the Commission has proposed as part of the reform that it be terminated.

(d) The provisions on determination of the world market price are detailed in Regulations Nos 1554/95 and 1201/89.

To permit sound market management the Commission has some flexibility in its evaluation of market data. While it is true that the world market price determined is hypothetical, it does reflect the day by day trend of the world price for fibre, the product of first processing of the basic product.

(e) As part of the reform the Commission has proposed the following provisions on stabilizers:

(a) allocation of the guaranteed maximum quantity (GMQ) between the two Member States on the basis of their relative importance over a reference period (GNQ);

(b) a reduction mechanism providing for full national responsibility with no Community responsibility in future;

(c) abolition of both restriction of the reduction (buffer) and possible carryover of part of it to the next marketing year.

By making each Member State responsible for its own production these measures should eventually bring about stability.

3.81. To secure introduction and proper application of suitable control procedures in Greece, where serious fraud had been detected, the Commission at the end of 1994 set up a joint working party with Greece which lasted throughout 1995. This permitted a slow but progressive improvement in control procedures and also allowed a specific enquiry to be carried out largely based on the procedures specified in Regulation (EEC) No 4045/89 and covering a sample of ginning plants, the purpose being both dissuasive and to spot any anomaly arousing suspicion of fraud or irregularity.

The outcome of this necessarily restrictive but reasonably progressive work allowed the correction finally applied for the 1991 and 1992 financial years to Greece's declared expenditure for cotton to be set at a level (10%) corresponding to the risk incurred by the EAGGF.

3.82. The stabilizers are aimed both at steadying expenditure and preventing too large an extension of Community areas under cotton. However, the level of expenditure (and thus of aid) also depends on the world cotton price, on which the level of Community production has practically no impact. As it falls, an extra charge arises to the budget.

The increase in the aid rate between the 1990/91 and 1995/96 marketing years was due to termination of the switchover arrangement in 1995. There was no impact on expenditure, the rate increase in ecus being the exact counterpart of the reduction in the agricultural conversion rates.

3.84. A number of key elements of the reform to the cotton aid regime have been introduced with effect from the 1995/96 marketing year:

(a) a system of guaranteed national quantities was introduced so that each Member State suffers directly for the overproduction of its producers;

(b) a new method for determining the world market price of unginned cotton was introduced, which is simpler and more transparent, since it is based on the historic relationship between the price agreed for ginned cotton and that calculated for unginned cotton;

(c) the quantity of unginned cotton on which aid is paid is determined by reference to the quantity of ginned cotton which is obtained, thereby ensuring that aid is not paid for low quality unginned cotton.

Conclusion

3.88. Very close attention is now being given to the recovery of unduly paid aid following the retrospective checks made on the marketing years from 1991/92 onwards. A response is awaited from Greece for final verification that the amounts it declared as recovered have in fact been credited to the EAGGF.

CMO Flax and hemp

3.89. Market stabilization has to be achieved by acting on both supply and demand. In the case of supply, private storage aid, of purely short-term impact, is aimed at restricting price falls in a slump. The Commission proposed to the Council, as part of the 1996/97 prices package, introduction of a maximum guaranteed area to give better control of production. The only instrument available to act on demand is promotion.

3.90. Commission inspection visits to four Member States growing flax and hemp revealed very serious failures to operate the CMO properly and substantial risks of non-compliance of expenditure financed by the EAGGF with the regulatory requirements.

Financial corrections will be proposed in the accounts clearance and in May 1996 the EAGGF drew up a report on operation of the CMO with detailed proposals for changes to the rules.

3.91 3.92. The increase in areas must be looked at over a longer period than the last five years and a distinction made between two sets of countries.

For the three traditional growing countries (France, Belgium, Netherlands) the average area sown over the last 25 years has been 60 000 ha with a low of 43 000 ha in 1992 and a high of 77 000 ha in 1989 and 1990. The 70 000 ha sown in these countries in 1995 is a high but not exceptional figure, the large increase over 1991 to 1993 being explained by the particularly low figures for these years. By contrast in the United Kingdom and Spain there has been since 1992, as the Court finds, a dramatic expansion of areas amounting virtually to a premium hunt.

3.93. The Commission considers that promotion of fibre flax is necessary since the clothing industry's demand is highly dependent on fashion. Only well-targeted publicity campaigns with appropriate messages can influence the public's preference.

As regards flax's competitiveness with other fibres, it should be noted that promotional action has helped maintain its position in a market of which it accounts for less than 2%, on the one hand by stimulating sales outside the traditional user countries and on the other by displaying the quality advantages of European flax over that of non-Community origin.

Since flax is not a competitive fibre for use in the paper industry the aid reduction tied to cropping method should entail a reduction in its use in it.

3.94. The aid rate is in line with the specific constraints of fibre flax growing as practised for decades in the traditional production zones. In the case of non-traditional industrial uses (paper, composite materials, geotextiles, etc.) these technical constraints do not apply, hence the production cost is lower. This is why the Commission has proposed to the Council that the aid be reduced where cropping is other than by pulling.

As regards the danger that production will outstrip demand owing to the increase in area, it must be pointed out that the increase is accounted for by non-traditional growers whose yield is very much lower than in the traditional zones. The increase in production is not therefore proportional to that in area.

The increase in the aid rate was due to termination of the switchover arrangement in 1995. There was no impact on expenditure, the rate increase in ecus being the exact counterpart of the reduction in the agricultural conversion rates.

3.95. The Commission considers that the provisions contained in its proposal to the Council will, as the Court wishes, secure a definite improvement in market balance. Promotion remains indispensable, however, to this objective.

Export refunds for non-Annex II goods

Refunds paid on certain processed goods

3.96. Regulation (EEC) No 2825/93 incorporated several suggestions made by the Court in its 1990 annual report.

On control the Commission would point out that a full audit has already been carried out in those Member States where export refunds for non-Annex II goods are most important. The audit conclusions are at present the subject of bilateral discussion. Any financial implications arising from these conclusions, which will also take due account of those of the Court, will be dealt with in the accounts clearances for 1994 and 1995.

Refunds on cereals exported in the form of certain spirituous beverages

3.104. Before submitting the draft Regulation on export refunds for whisky (Regulation 2825/93) the Commission thoroughly examined the aid mechanism and considered other options for making such refunds but following discussion between all relevant departments concluded that only the present mechanism, possibly adjusted to take due account of the Court's observations, could provide fair treatment for all parties involved.

3.105. The purpose of improving the arrangements is fair and effective aid management. It must be borne in mind that expenditure does not depend only on the level of the refund (which is falling) but also on the quantity of cereal used and the coefficient set. Thus a fall in the refund rate does not necessarily mean a fall in expenditure.

3.106. The Commission's experts consider the coefficient of 1.30 mentioned by the Court as the most appropriate. It was also agreed to by the Member States in discussion of the Commission's proposal.

3.107. The situation described in this point is exact. However, the Commission wishes to underline that the 1989 disjunction of UKL 19.7 million was decided on the basis of an initial evaluation of the risk of overstatement of the declared expenditure to the EAGGF. This risk would have resulted from the overestimated quantities of cereals entering the scheme in conjunction with subsequent misuse and speculation on the refund rates used for calculating the payment to the beneficiary.

The examination of the procedures, at the time, revealed that the refund rate employed for the payment was not the rate valid on the day the cereals were taken under control, but the rate valid on the date the first payment declaration was formally accepted (at this point the quantity of cereals to be processed is only an estimate). In theory, this allows for speculation by the trader. In practice, however, this risk is minimized because each trader has to respect a production period agreed with customs. In general, this period ranges from one week for malt to four weeks for grain. The EAGGF examined 25 payment files during its audit for the clearance of the 1990 accounts. These files were selected in such a way as to coincide with periods when refunds rates changed considerably.

The implications will be considered under the accounts clearance procedure.

Conclusion

3.108. The Commission's opinion is that termination of the whisky distillation aid would be contrary to Protocol No 19 to the Act of Accession of the United Kingdom to the European Communities. If the refund were to be terminated, distillers could well consider it more advantageous to buy cereals on the world market, under favourable customs treatment, for processing into whisky for exportation from the Community. This would mean that there were no measures to 'facilitate the use of Community cereals` as specified in the first paragraph of Protocol No 19.

While it is true that at the moment world cereal prices are higher than Community prices and therefore cereal exports are at the moment taxed and not subsidized, it is perfectly possible that in the next few years they will again fall below Community prices. Should this occur the refund mechanism will again operate.

CHAPTER 4 (*) Common policy on fisheries and the sea

4.0. CONTENTS Paragraph reference

Introduction 4.1 - 4.3

Contribution to national expenditure on fishing surveillance 4.4 - 4.55

Introduction 4.4 - 4.14

Fixing the amount of Community aid 4.15 - 4.16

Allocation of equipment to the monitoring of fishing 4.17 - 4.18

Cost-effectiveness 4.19 - 4.20

Evaluation of the effects of the measure 4.21 - 4.38

General 4.21 - 4.23

Penalties 4.24 - 4.25

Monitoring 4.26 - 4.28

Aerial surveillance 4.29 - 4.31

Cooperation between the Member States 4.32 - 4.34

Implementation of the annual programmes 4.35 - 4.38

Justification of certain expenditure 4.39

Pilot projects for monitoring by satellite 4.40 - 4.47

Conclusion 4.48 - 4.55

Aid for investment in the processing and marketing of fisheries and aquaculture products 4.56 - 4.93

Introduction 4.56 - 4.60

Effects of the measure 4.61 - 4.68

Administrative management of the measure 4.69 - 4.90

Failure to comply with the principle of commitment in annual instalments 4.69 - 4.72

Irregular payment of advances 4.73 - 4.75

Continuation of commitments in respect of completed operational programmes 4.76

Delays in the payment of subsidies to final beneficiaries 4.77 - 4.82

Audit of the reality of the investment costs 4.83 - 4.86

Eligible leasing costs 4.87 - 4.90

Conclusion 4.91 - 4.93

INTRODUCTION

4.1. Table 4.1 shows the appropriations available in 1995 and their use. The total of commitment appropriations available for the year was 714,9 Mio ECU with a rate of utilization of 94,8% which was close to that of 1994. The payment appropriations of 857,7 Mio ECU, however, experienced a relatively weak rate of utilization at 56,1%. This was a substantial drop from the 1994 rate of 71,4%.

4.2. The Financial Instrument for Fisheries Guidance (FIFG) payments appropriations experienced a particularly low rate of utilization because of delays in the implementation of the operational programmes, as did those for the Community initiative PESCA which was still at the starting phase. With regard to international agreements, the budgetary execution was particularly affected by the length of the negotiations which culminated in a new fisheries agreement with the Kingdom of Morocco in December 1995.

4.3. This chapter deals with the Union's financial participation in the expenditure agreed by the Member States to ensure the control of fishing activities and also with investment aid for the processing and marketing of fisheries and aquaculture products. Budgetary articles B2-901 and B2-110, respectively, are concerned. The observations in the chapter relate to the sound financial management and to the legality and regularity of the expenditure.

CONTRIBUTION TO NATIONAL EXPENDITURE ON FISHING SURVEILLANCE

Introduction

4.4. Council Decision 89/631/EEC of 27 November 1989 (), hereinafter known as the 'basic decision`, acknowledging that the inspection of fishing activities is an obligation of Community interest which lies with the Member States (), laid down that the Community should contribute to the financing of the investments made by the Member States during the period 1991-95.

4.5. The following items are eligible for Community financing: the acquisition and modernization of vessels, aircraft, land vehicles, and equipment installed in them, systems for the detection and recording of fishing activities, systems for recording and transmitting data on catches and other useful information.

4.6. The Member States requiring financial aid send to the Commission each year a programme of investment to be made. The Commission determines the Community's contribution to the financing and may advance as much as 50% of this contribution. Member States are required to submit their applications for reimbursement before 30 April of the year following the year in which expenditure was incurred. Reimbursement is subject to compliance with the provisions of the Directives on public procurement.

4.7. Council Decision 94/207/EC of 12 April 1994 () laid down that the Community shall finance 100% of the cost of pilot projects concerning the use of systems of monitoring the position of fishing vessels by satellite.

4.8. During the period 1996-2000, all of these measures will be continued and their scope of application will be broadened, with the budgetary provision planned for the five years being doubled up to a maximum of 205 Mio ECU ().

4.9. Table 4.2 shows, for all of the Member States, the commitments, payments and decommitments relating to the Community's financial contribution for the five years to which Decision 89/631/EEC applies.

4.10. The audit concerned the management and inspection systems implemented by the Commission and by four of the Member States amongst the main beneficiaries, i.e. Spain, France, Ireland and Portugal (see Table 4.2).

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4.11. Investment in surveillance equipment comprised of the purchase and/or modernization of ships and their equipment, aeroplanes (in Ireland and Portugal) and helicopters (in Spain), cars for land-based checks, telecommunications equipment (in particular in France) and computer equipment and systems.

4.12. The Member States are responsible for inspecting fishing activities in their exclusive economic areas and, outside these areas, ships flying their flag. Consequently, each Member State decides how to organize and manage its inspection system, the amount of resources to devote to it and, in particular, the investments it will make to render the system more effective.

4.13. The Commission is required to evaluate the Member States' investment programmes and to determine the Community financial contribution on the basis of the criteria fixed by the basic decision () and having regard to the provisions of the financial regulation for utilization of budget appropriations ().

4.14. The Commission is required to base its decision on:

(a) the scale of the task of inspecting fishing activities for which a State is responsible having regard to its budgetary capacity;

(b) the time that vessels, aircraft and land vehicles are assigned to the inspection of fishing activities;

(c) the cost-effectiveness of the envisaged investments;

(d) the progress made within the framework of the national surveillance mechanism, in particular due to Community financing.

Fixing the amount of Community aid

4.15. The basic decision provides that the Community shall contribute towards certain enforcement expenditure incurred by certain Member States for which the scale of the enforcement task is disproportionate to budgetary capacity or relative prosperity. However, the Commission did not establish precise criteria for applying this condition and aid was given to all coastal Member States without an assessment of their relative capacities (see Table 4.2).

4.16. Furthermore, while the Commission had the possibility of adjusting the rate of the Community financial contribution between 35 and 50% of the amount of eligible expenditure (), in practice, it consistently granted financing at the rate of 50% to all Member States.

Allocation of equipment to the monitoring of fishing

4.17. In certain cases, the equipment jointly financed by the Community is also used for other purposes because the bodies responsible for supervising fishing activities also perform other tasks and the resources at their disposal are multi-purpose. In France, for example, the coastal surveillance motorboats managed by the Department of Maritime Affairs are also engaged in supervising and assisting leisure craft.

4.18. Commission financing should be limited in accordance with an assessment of the length of time devoted to the surveillance of fishing by jointly financed equipment. However, the investment expenditure on all such equipment has been regarded as eligible.

Cost-effectiveness

4.19. Ireland and Portugal bought two aeroplanes each for monitoring fishing activities in the Atlantic with 50% Community financial assistance. The model of aeroplane chosen by the Irish and Portuguese authorities cost approximately 16 Mio and 8 Mio ECU, respectively. Unlike the Portuguese choice, the Irish aircraft is pressurized, is able to patrol at a speed approximately 25% faster, can patrol in a wider range and the crew's working conditions are less demanding. Flights for monitoring fishing mainly take place below 1 000 feet, with frequent stretches at low speed and altitude.

4.20. The Commission applied the same rate of financial contribution (50%) for both types of aeroplane. The files available at the Commission do not show that their cost-effectiveness ratio was evaluated and, in the second case, no comparison was made with the first despite the size of the investments in question and the provisions of Article 2 of the financial regulation.

Evaluation of the effects of the measure

General

4.21. In June 1995, the Commission sent to the Council and to the Parliament a report on the application of the basic decision, as required by Article 1(5) of the basic decision (). As regards the results of the measure, the Commission differentiates between activity indicators (number of days of inspection, checks at sea, infringements observed etc.) and indicators of effectiveness measuring the attainment of the specified objectives (restrictions on intensive fishing and protection of young fish). The Commission concluded that while the cofi- nanced investment led to an improvement in surveillance, this was insufficient to reduce illegal fishing significantly ().

4.22. The basic decision establishes criteria to be used by the Commission when appraising the effectiveness of the checks carried out by the Member States (). However, the Commission's report does not have regard to the criteria and only provides estimates of irregular catches, as established by experts.

4.23. Of these criteria, the Court paid particular attention to the Commission's treatment of data on the follow-up of established infringements at national level. The effectiveness of the surveillance mechanism depends not only on the scope and intensity of the checks but especially on the capacity of the penalty system to discourage and repress fraud.

Penalties

4.24. The Member States are required to make provisions in order to discourage offenders and, having done so, inform the Commission (). However, it was noted that the Commission does not possess the complete and up-to-date legislation in force in the Member States and that no reminder to this effect was sent to the Member States.

4.25. The Commission financed a comparative study of certain aspects of legislation in force in nine Member States (), dating from 1994, which revealed the diverse nature of procedures at the national level and the need for action in this area.

Monitoring

4.26. According to the Regulations (), the Member States are required to send to the Commission statistics on the checks they have carried out. The Commission may request additional information.

4.27. The statistics received by the Commission were incomplete in the case of Spain because they did not include data on checks carried out by the regional authorities. The division of responsibilities for surveillance and the monitoring of infringements between several bodies hampers the updating of related information at the central level (Spain, France and Portugal).

4.28. Further information relating to the outcome of the checks carried out would be useful to determine the adequacy of follow-up procedures. However, the Commission made only limited use of its powers to request additional information.

Aerial surveillance

4.29. An assessment of the effectiveness of aerial surveillance was of particular importance in view of the very high cost of the subsidized aircraft and the technical innovations in this area.

4.30. Where these inspection methods are employed, it is essential that aerial photographs of vessels, which are found to have committed an offence, can be used as evidence for Court proceedings and follow-up by the national authorities. However, the files dealing with the decision granting the Community financial contribution for this type of investment do not show that this condition had been examined beforehand.

4.31. The Commission has no information on the number of cases settled on the basis of aerial photographs or on the penalties actually imposed in these cases. The external consultant's study referred to in paragraph 4.25 provides no further information on these matters. It was noted that in Portugal, aerial photographs are accepted as proof of illegal fishing and that in Ireland, these photographs are included in the inspection reports which are submitted to the courts.

Cooperation between the Member States

4.32. The success of aerial checks on vessels flying the flag of another Member State, except for cases of arrest, depends on cooperation procedures which provide that infringements in one Member State can be followed up in another on the basis of evidence which is mutually acceptable.

4.33. However, national representatives pointed out that the procedures followed in respect of the aforementioned checks, which are governed by conventions of international law, are still cumbersome and relatively ineffective because of heavy procedural requirements involving close cooperation between Member States at diplomatic level. This inevitably leads to delays.

4.34. The Commission should take concrete initiatives to overcome the existing difficulties, where appropriate by developing the provisions of Regulation (EEC) No 2241/87 (), as amended by Regulation (EEC) No 3483/88 () and Regulation (EEC) No 2847/93, which provided for the transfer of prosecution between Member States in certain specific circumstances.

Implementation of the annual programmes

4.35. The assessment by the Commission of the results of the measure must also have regard to the utilization of the financial contribution by the Member States. In Spain, France and Portugal, the implementation of the annual programmes was generally characterized by considerable delays, with certain expenditure being postponed to subsequent years and some investments being cancelled. As Table 4.2 shows, payments are low relative to the commitments.

4.36. The aforementioned delays appear to arise, in France, from the reorganization of the system for checking fishing activities and in Portugal, from the complexity of the administrative procedures for awarding public contracts. Furthermore, in these Member States, the granting by the Commission of advances of 50% of total Community aid did not necessarily speed up the envisaged investments as the amounts in question remained at the disposal of the paying agencies for several months. In the case of the 1993 annual programme in France, the proportion of expenditure eligible for Community aid, was even lower than the advance, resulting in an excess payment of 480 166 ECU.

4.37. In Spain, sufficient national financing was not available to fund the level of investment set out in the submitted programmes. Neither did the Spanish authorities request advances from the Commission. This lack of adequate financing was the main reason for the delays encountered in the implementation of the programmes.

4.38. Closer monitoring of the implementation of the annual programmes was necessary to ensure the cancellation of appropriations when they were no longer needed. Only in 1994 did the Commission decommit and cancel 12,7 Mio ECU, which represented the difference between commitments and expenditure effected by the Member States for the programmes relating to 1991 (Germany, Greece, Spain, Ireland, Portugal and the United Kingdom) and 1992 (Germany, Greece, Spain, France, Ireland, Portugal and the United Kingdom).

Justification of certain expenditure

4.39. In Portugal, it was observed that the formulae for adjusting prices, which were negotiated by the national authorities and the supplier of two aeroplanes after the tender had been submitted, in particular regarding a reduction in the delivery times, led to increases in expenditure of about 1 Mio ECU. Although payments relating to price adjustments should have concerned only the amounts needed to cover the supplier against variations in exchange rates and the costs of production factors, this was not the case.

Pilot projects for monitoring by satellite

4.40. Regulation (EEC) No 2847/93 laid down that the Member States should carry out pilot projects, financed entirely by the Community, for monitoring the position of fishing vessels by satellite (). These projects involve the introduction of technologies used in other areas whose application to fishery surveillance started in Portugal in 1991 after experiments conducted in the two previous years. Mobile units installed on the fishing boats would, by means of the automatic and regular transmission of data on their geographical position, make it possible for a control centre to locate them continuously, or even to ascertain whether they are fishing.

4.41. Pilot projects were submitted by all of the Member States concerned except Portugal, while Finland and Sweden took part in a joint project with Denmark. The Commission paid advances to applicant Member States up to a maximum of 50% of the contribution granted (see Table 4.3 for commitments and payments).

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4.42. According to Commission Regulation (EC) No 897/94 (), a minimum number of fishing vessels flying the flag of each Member State was to be equipped with mobile units. While some operational difficulties were noted, the main problem concerned the delays in the installation of the specified number of mobile units ().

4.43. In Italy, despite the payment of an advance of 461 126 ECU in 1994 for the fitting-out of 20 vessels, in November 1995 the corresponding work had not yet started.

4.44. In Ireland, at the time of the audit, of 10 vessels to which the project was to apply, the equipment for two boats was being repaired and in the case of two others, position reports were not transmitted as regularly as required. The Irish authorities stated that these problems were due to technical difficulties with the mobile units which have since been resolved.

4.45. In France, the project should have applied to 67 vessels. However, according to the national authorities, only 58 mobile units will be installed owing to an increase in total expenditure compared with original estimates.

4.46. In Spain, the pilot scheme was approved for 124 fishing vessels. However, in October 1995, only 70 mobile units were installed on board these ships and two others were on the oceanographical vessel Cornide de Saavedra. The Spanish authorities attributed these delays to the unavailability of the vessels, which were at sea.

4.47. Portugal is the first and only Member State to have introduced the system of position-monitoring by satellite on a compulsory basis for certain categories of its fishing vessels even before the pilot scheme was launched. Consequently, it did not receive Community financial assistance under the pilot scheme. However, it obtained 50% of the cost under the terms of the basic decision. In November 1995, of the 246 mobile units for which the Commission had paid its contributions, 100 were operational. Of the remainder, 34 had installation problems or were undergoing repairs and 112 had still to be installed. The national authorities stressed that payments to suppliers were covered by bank guarantees and also stated that all units should be installed and operational by June 1996.

Conclusion

4.48. The Commission did not fix precise criteria for determining which Member States could benefit from the Community contribution and for setting the levels of aid to be applied (see paragraphs 4.15 and 4.16).

4.49. The full rate of 50% was granted to finance equipment even though this was not exclusively used for monitoring fishing (see paragraphs 4.17 and 4.18).

4.50. The Commission's files do not contain an evaluation of the cost-effectiveness of proposed investments even in the case of high-cost equipment such as aeroplanes (see paragraphs 4.19 and 4.20).

4.51. While the Commission is obliged, annually, when deciding whether to grant the financial contribution, to take account of the use made of previous contributions and of progress in making the national inspection mechanisms more effective, it was noted that:

(a) even where advances of 50% were granted, the implementation of the annual investment pro- grammes in several Member States was characterized by considerable delays and by the cancellation of certain investments; this was reflected in a low rate of utilization of the appropriations committed for the implementation of the measure (see paragraphs 4.35-4.38);

(b) the Commission did not monitor closely the actual imposition of adequate penalties for infringements, when assessing the effects of the cofinanced investments, although this was necessary for a proper evaluation (see paragraphs 4.26-4.31).

4.52. The Commission should take initiatives to encourage cooperation between Member States, which is an essential condition if aerial surveillance is to be effective (see paragraphs 4.32-4.34).

4.53. The implementation of the pilot project for monitoring the position of fishing vessels by satellite was slower than anticipated, and some operational problems were noted (see paragraphs 4.40-4.47).

4.54. The Community contribution to the financing of investments by the Member States contributed to an increase in fishing surveillance activities. However, the Commission has underlined that these have not had a significant impact on the level of irregularities (see paragraph 4.21). The progress made to date in the effectiveness of surveillance activities needs to be monitored more closely (see paragraphs 4.22-4.31).

4.55. In view of the doubling in the budgetary provision to 205 Mio ECU for the 1996-2000 period and the problems mentioned in paragraphs 4.29-4.38, the Commission needs to ensure that future programmes are planned more carefully.

AID FOR INVESTMENT IN THE PROCESSING AND MARKETING OF FISHERIES AND AQUACULTURE PRODUCTS

Introduction

4.56. Aid for investment in the processing and marketing of fisheries and aquaculture products was granted during the period from 1991 to 1993 on the basis of Council Regulation (EEC) No 4042/89, of 19 December 1989, on the improvement of the conditions under which fishery and aquaculture products are processed and marketed (). This established a 'common measure`, under EAGGF-Guidance, financed by a specific budget allocation out of which 217 Mio ECU were committed. Since the financial year 1994, aid of the same nature has been financed in accordance with the general regulations governing the Financial Instrument for Fisheries Guidance (FIFG).

4.57. As part of the first reform of the Structural Funds (1988), Regulation (EEC) No 4042/89 replaced, as regards the fisheries sector, Council Regulation (EEC) No 355/77, of 15 February 1977 thereby transferring from the Commission to the Member States the responsibility for granting and disbursing aid to businesses for selected investment projects. Pursuant to Regulation (EEC) No 4042/89, the Commission approves 'operational programmes` (OPs) comprising a series of investment projects selected by the Member States and grants global aid, where appropriate subdivided into annual instalments. The Member States may receive, by way of advances, up to 80% of this global Community aid. The balance is paid to them by the Commission when the projects which make up the OP have been completely implemented.

4.58. Following the second reform of the Structural Funds (1993) and the creation of the FIFG, the Commission's role is confined to approving six-year programmes covering all of the structural measures and to co-financing global allocations relating to all of these measures. Since 1994, it is no longer possible to identify in the Community budget the appropriations intended to cover investment in the processing and marketing of fisheries and aquaculture products.

4.59. The Court examined the implementation of Regulation (EEC) No 4042/89 by the Commission and the following Member States: Denmark, Greece, Spain, France, Ireland, the Netherlands and Portugal which account for 70% of Community expenditure under the regulation up to 31 December 1995. The checks in Denmark, Greece, Ireland, the Netherlands and Portugal were carried out jointly with the national external audit institutions.

4.60. Although the appropriations for the application of Regulation (EEC) No 4042/89 were committed during the period from 1991 to 1993, the payments relating to most of these commitments are still being made in 1996. Table 4.4 shows the number of OPs approved by the Commission, the number of OPs completed and the total commitments and payments of Community appropriations made up to 31 December 1995.

Effects of the measure

4.61. Before Community aid was granted pursuant to Regulation (EEC) No 4042/89, the Commission drew up, on the basis of 'sectoral plans` submitted by the Member States, 'Community support frameworks` containing a summary description of the economic situation of the sector and the priority objectives of the common measure. These objectives are essentially the same for all of the Member States: the modernization and rationalization of facilities for marketing (mainly auctions and public salesrooms) and processing (canneries and freezing plants), the development of new products, the improvement of the quality and hygiene of production methods and increasing the added value of the products.

4.62. Article 14 of the Regulation provides for the payment of aid of up to 50% of the cost of the investment in Objective 1 regions and up to 30% in other regions. The Member State must finance at least 5% of this cost. Furthermore, the beneficiaries' contribution must be at least 25% of the cost in Objective 1 regions and 45% elsewhere.

4.63. Although the substantial level of the aid provides a stimulus for the investments recommended by the Community support frameworks, administrative shortcomings and the lack of the necessary infrastructure may hinder the success of projects undertaken and jeopardize the expected beneficial effects of the measure as illustrated in the following paragraphs.

4.64. Several cases of particularly significant delays in the payment of the subsidies were noted when checks were made in the Member States (see paragraphs 4.77-4.82). In these cases, the real value of the aid was ultimately less than the amount granted. In addition to this material loss, the delays affect businesses' confidence in the Community measure and discourage them from submitting investment projects.

4.65. A case was observed in Greece of a new factory which remained unused for more than a year because the network of drains in the industrial zone in which the factory had been built had not yet been laid. The construction of another factory financed pursuant to Regulation (EEC) No 4042/89 was being completed in the same industrial zone. According to the Greek authorities' replies to the Court's observations, in November 1995, almost a year after the on-the-spot check, the drain network was still not functional and the two factories had to send tankers to remove effluent.

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4.66. The investment projects undertaken by the beneficiaries contribute to the modernization and technological renewal of the industrial sector concerned and therefore encourage the preservation of production facilities which are efficient from the technical point of view. However, commercial success also depends on the conditions under which raw materials are supplied and on market demand for finished products. Some Danish and Irish businesses encountered difficulties owing to inadequate and irregular supplies of fishery resources. As a result, one factory that had been modified and modernized with Community aid was not being used. The difficulty of introducing new products onto the market for processed fish-based products, which is practically saturated, is illustrated by the case of a Spanish business which was set up to produce a new product and had been approved for Community aid. This company went bankrupt after starting production because the product concerned was a commercial failure.

4.67. In addition, in Denmark and France, four of the 29 projects checked were affected by company failures, serious financial difficulties due to management problems, difficult market conditions, or excessive debt incurred by the beneficiary businesses.

4.68. The failure of an investment project is, to a certain extent, an intrinsic risk of business, and, indeed, the cases noted by the Court at the time of its audit concerned only a minority of all of the businesses examined. However, the availability of the appropriations led, in practice, to all formally correct projects being accepted. A rigorous analysis of the projects submitted and the financial situation of the businesses would, in certain cases, have revealed little prospect of profitability.

Administrative management of the measure

Failure to comply with the principle of commitment in annual instalments

4.69. According to the provisions of Article 20 of Council Regulation (EEC) No 4253/88 of 19 December 1988, laying down provisions for implementing Council Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds (), 'commitments in respect of operations to be carried out over a period of two or more years shall, as a general rule, be effected in annual instalments`.

4.70. Except for a few OPs approved in 1991, the Commission, in its financing decisions, decided that the OPs would last for a period of less than two years and would, in no event, go beyond the deadline of 31 December 1993. Therefore, it committed the totality of the Community aid in one instalment. This way of proceeding granted a global view of the engagements undertaken. However, on 31 December 1993, no OP had been completed and this deadline was extended by the Commission on several occasions. The last extension for completion of the OPs is due to expire on 31 December 1996.

4.71. Based on its previous experience of similar measures and bearing in mind the fact that an OP consists of investments made by several businesses independently of each other and at different intervals, the Commission should have realized that, in general, it was unrealistic to expect an OP to be completed in under two years.

4.72. The period of operation of Regulation (EEC) No 4042/89 fell into the first phase of the reform of the Structural Funds (1989-93), during which a considerable increase of the commitment appropriations occurred. A high level of utilization of such appropriations was possible, in the case of Regulation (EEC) No 4042/89, by way of concentration of the commitments in a limited period (1991-93). However, these commitments should have been made in accordance with a more precise plan of the actual needs of the financial year.

Irregular payment of advances

4.73. According to the provisions of Article 21 of Regulation (EEC) No 4253/88, following each commitment a first advance is paid to the Member State and a second advance may be paid after 'the responsible body has certified that at least half of the first advance has been used`.

4.74. Two cases were detected of the second advance being paid by the Commission contrary to the aforementioned rule. In the case of Irish OP No 91/1, the Commission insisted that the Irish authorities should ask for a second advance to be paid even though they had rightly pointed out to the Commission that half of the first advance had not been used. This second advance amounting to 1 184 100 ECU was disbursed by the Commission in December 1992. In the case of French OP No 91/2, the Commission disbursed in November 1992 a second advance for 1 190 215 ECU to the French authorities, which had not asked for this payment and had not yet used any part of the first advance (in the case of this OP, the first payments of Community aid to the final beneficiaries were made only in March 1993).

4.75. These irregular payments were made towards the end of the financial year, thereby avoiding cancellation of budget appropriations. However, these appropriations were exclusively intended for the payment of aid to final beneficiaries and therefore funds which, as mentioned, were not yet needed to implement the common measure, should not have been transferred to the Member States.

Continuation of commitments in respect of completed operational programmes

4.76. At the end of the financial year 1995, the Commission's accounts show outstanding commitments totalling 502 766 ECU for OPs () in respect of which, according to the same accounts, the balance of the Community aid has already been paid. These commitments should have been cancelled.

Delays in the payment of subsidies to final beneficiaries

4.77. Pursuant to Article 15(2) of Regulation (EEC) No 4042/89, the subsidy must be paid to the beneficiary by the national agency responsible within five weeks of submission of an application for payment accompanied by satisfactory supporting documents. This time limit is a week shorter in the Spanish and Portuguese versions of this provision. The time limit was exceeded in a number of cases, which were justified by the appropriate action taken by the administration (e.g. on-the-spot audits, requests for additional documents, etc.). Unacceptable delays were recorded in France and Spain. Other cases of non-compliance with time limits for payment are mentioned in paragraphs 5.5, and 6.32 and 6.33 concerning the ERDF and the ESF respectively.

4.78. In Spain, the amount of the individual subsidy determined by the central paying agency first constituted State budget expenditure and then an item of revenue and expenditure for the budget of the autonomous community in which the final beneficiary was located. It was noted in the case of Asturias that these procedures caused a delay in the payment of subsidies of two to three months. In 1995 (), responsibility for payment of FIFG expenditure was placed upon the autonomous communities, which now manage a global FIFG appropriation transferred by the central administration. This new procedure should allow subsidies to be paid to final beneficiaries more quickly.

4.79. The autonomous community of Cantabria systematically withheld the individual subsidies transferred by the central administration for periods ranging from a few months to one and a half years.

4.80. In France, the processing of some applications for payment greatly exceeded the regulatory time limit of five weeks with no apparent justification. In one case, a payment application forwarded to the central administration on 14 July 1994 had still not been processed at the time of the Court's audit in June 1995. No explanations for this delay were received and, furthermore, no notification or request for additional documents had been sent to the beneficiary.

4.81. At the time of the audit in France, payments in respect of applications that had already been processed by the administration had been held up for six months by the responsible paying agency. The subsidies related to projects for marketing fishery products and the delay was due to a shortage of funds as a result of errors made in the allocation and the entry in the accounts of the sums transferred by the Commission for advances. Since December 1992, Community funds totalling 3,9 Mio ECU had either been transferred by the Office of the Treasury to an agency other than that responsible for paying the subsidies concerned, or had been entered incorrectly in an account relating to a different EAGGF-Guidance measure. The French authorities subsequently informed the Court, in January 1996, that the accounting error had been rectified, thus enabling payments to be made in July 1995 in respect of outstanding applications and that the formal procedures for recharging the funds that had been paid to the wrong agencies had been started.

4.82. An audit focusing specifically on the OPs relating to the marketing of fishery products was carried out in France by the Directorate-General of the Commission's Financial Controller between 2 and 6 May 1994. This audit did not, however, deal with the financial administration of Community appropriations, i.e. the receipt, entry in the accounts and utilization by the Member State of all advances paid by the Commission. In view of the weaknesses detected by the Court, the Commission should carry out a detailed examination of the utilization of all sums paid to France in the form of advances, and where appropriate, recover any sums that have not been paid to final beneficiaries.

Audit of the reality of the investment costs

4.83. In paragraph 5.44 of its annual report concerning the financial year 1993, the Court remarked that, in the case of a similar subsidy measure, some national administrations were certifying payments that they had not verified. Their checks were limited to examining invoices and did not include a verification of the monetary transfers declared by the entrepreneurs. Other cases of insufficient checks were found in respect of other EAGGF-Guidance measures (paragraph 7.41) and of ESF expenditure (paragraphs 6.52 and 6.69).

4.84. Similar weaknesses were detected in the area of subsidies for investments in the processing and marketing of fishery products. For cases in Greece and Spain, the national authorities considered that payment stamp on the invoice constituted satisfactory proof of payment. The beneficiaries visited in Greece by the Court were able to prove the reality of the payments they had declared by producing relevant documents (bank statements and/or cash basis accounting). Such proof could not always be provided in Spain. The Court asked the Spanish authorities to carry out a further audit of one case involving considerable cash payments amounting to 60% of the project costs that had not been entered in the accounts.

4.85. One reason for the abovementioned weaknesses is that the national controls focus mainly on ensuring that the work carried out conforms to the project. More attention should be paid to the economic and financial aspects of the projects.

4.86. The on-the-spot audits carried out following implementation of projects should always include an accounting verification of the expenditure declared and the findings of these audits should always be reported.

Eligible leasing costs

4.87. The Spanish authorities accepted the 'capital element` of leasing contracts, still in force at the time of submission of the application for payment of the subsidy, as constituting an eligible cost of the projects. On the other hand, the Spanish administration, along with the administrations of the other Member States, considers that the subsidies paid under the terms of the regulation constitute a partial reimbursement of the costs actually borne by the beneficiary and therefore requires the beneficiary to state the payments made in the application for payment of the subsidy. The future payments connected with a leasing contract are obviously not costs already borne by the beneficiary and should not, therefore, be taken into account where payment of the subsidy is concerned. The excess subsidy paid in connection with ineligible leasing costs, noted in the files examined by the Court, amounts to 5 980 681 PTA (37 845 ECU at the exchange rate of 29 December 1995).

4.88. In one case, the payments made in connection with two leasing contracts that had expired were judged to be eligible costs. The beneficiary had paid the residual amount and as he had, thus, become the owner of the machinery, the purchase of the goods was not questioned. However, the Spanish administration also accepted part of the interest provided for in these contracts as being eligible costs. The charges for the loans taken out by the beneficiary (in substance, the lease can be likened to a loan with security) were never deemed eligible costs, either by the Commission when the old Regulation (EEC) No 355/77 was applied, or by the national administrations within the terms of application of Regulation (EEC) No 4042/89. If the beneficiary had contracted a straightforward loan, instead of concluding a leasing contract, the Spanish administration would have deemed only the price indicated on the machinery purchase invoices as being eligible.

4.89. In this particular case, when the ineligible leasing costs have been deducted, the subsidy paid does not exceed the maximum percentage that is allowed under the regulation for the remainder of the eligible costs.

4.90. The national administrations should draw up suitable provisions to define the manner in which they intend to deal with leasing contracts, where appropriate, when subsidies are paid for investments in the processing and marketing of fishery products. The Commission should ensure that such provisions guarantee that all beneficiaries throughout the Community are treated in a consistent and fair manner. This matter also affects the application of the provisions concerning FIFG which have, meanwhile, replaced Regulation (EEC) No 4042/89.

Conclusion

4.91. The subsidies granted on the basis of Regulation (EEC) No 4042/89 furthered the modernization of enterprises in the sector involving the marketing and processing of fishery products. However, some failed investment projects were noted during the audits. The availability of Community appropriations has, in fact, enabled subsidies to be granted to all applicants who submitted a project that was formally correct, whereas stricter analysis of the project and of the enterprise's financial position was necessary (see paragraphs 4.61-4.68).

4.92. The Community appropriations committed during the years from 1991 to 1993 greatly exceeded the actual requirements during that time. This was due to the fact that the Commission had attributed a duration of less than two years to most OPs. This led to all Community aid being committed at the same time, even though it was reasonably foreseeable that it could only have been paid over a period of several years (see paragraphs 4.69-4.72).

4.93. The transfer to the Member States of the responsibilities for administering the individual subsidies involves the risk of beneficiaries being treated differently, depending on the efficiency of the administration upon which they depend and according to the particular arrangements for applying Community measures at national, regional or local level (see paragraphs 4.77-4.82). The Commission should pursue vigorously its consultations with Member State administrations under the SEM 2000 programme, in order to achieve a consistent approach throughout the European Union on what costs are to be accepted as eligible for assistance.

REPLIES OF THE COMMISSION

CONTRIBUTION TO NATIONAL EXPENDITURES ON FISHING SURVEILLANCE

Fixing the amount of Community aid

4.15 4.16. The Commission has discretionary power within the limit set by the Council as to the rate of aid granted. The 50% rate has been applied to obtain a maximum multiplier effect given the deficiencies in surveillance in all Member States. It would moreover have been impossible to gain agreement to disparity between Member States and this would have prevented a favourable opinion from the Management Committee.

However, as can be seen from Table 4.2, the Member States receiving a greater share of the total amount available were those with both limited financial capacity and particularly difficult surveillance responsibilities (extent of Continental shelf in case of Ireland, extent of coastline and insular geography in case of Portugal and Greece).

Allocation of equipment to monitoring of fishing

4.17 4.18. The Commission systematically examines the investment programmes sent by the Member States and rejects expenditure not fundamentally relating to surveillance. The Netherlands asked for a contribution scaled to proportional use.

Cost-effectiveness

4.19 4.20. In the case cited Ireland and Portugal had to take account of specific constraints such as extent and dimension of the fishing zone. Ireland's Continental shelf is vast whereas Portugal's is very narrow. In both cases the utility of the aircraft has been fully confirmed from Commission inspectors' visits. The Commission considers that Article 2 of the financial Regulation was respected and that the choices made by the Member States were appropriate.

Evaluation of effects of measure

General

4.21 4.23. The Commission's report on the Community's financial contribution to surveillance expenditure (COM(95) 243 final), positively received by Parliament and the Council, was primarily designed to trace guidelines for the future in a spirit of partnership between the Commission and the Member States. To this end it reviews the application of Decision 89/631/EEC, sets out the context for preparation of a new Decision and defines the basis of future financial solidarity. The Member States' surveillance and its effectiveness, with particular reference to penalization, was reviewed in another Commission document, COM(96) 100 final of 18 March 1996.

Penalties

4.24. Member States are required to send the Commission copies of laws and other provisions adopted to prevent and pursue irregularities. When the Commission finds that this obligation has not been fully met it takes steps to obtain the documents. These may stretch to the opening of an infringement procedure against the Member State.

4.25. The Commission has sent Member States a copy of the study mentioned by the Court and will be taking follow-up action.

Monitoring

4.26 4.28. If the Commission finds that the statistics sent are incomplete or wishes additional information it requests the Member State accordingly.

Aerial surveillance

4.29 4.31. The first function of this is ongoing collection of information on the presence of the various fishing fleets in the Member States' exclusive economic zones. This improves knowledge of fishermen's behaviour and allows better use to be made of the means of surveillance on land and sea. Surveillance also has a dissuasive and hence preventive role: the fisherman who sees an overflying surveillance plane is more inclined to stick to the rules. Photography is only one of the tasks of these aircraft and they have overall a vital function in control strategy. Acceptability of photos as evidence in court proceedings is decided at national level.

Cooperation between Member States

4.32 4.34. Coordination of surveillance activities is an obligation under Article 2 of Council Regulation No 2847/93. While mutual assistance is in the first instance a task incumbent on the Member States the Commission has done much to stimulate cooperation. For example since 1995 it has been chartering an inspection vessel in the Bay of Biscay to monitor drift net fishing following serious incidents between French and Spanish fishermen in previous tuna seasons. Only limited staff availability and accumulation of other work has restricted such action.

Further, in its legislative initiatives the Commission includes provisions to promote cooperation between Member States. For example Commission Decision 96/286/EEC encourages exchanges of officials between national administrations.

Implementation of annual programmes

4.35. The Commission assesses the results of the measure from the actual annual execution rate notified, information that it regularly seeks from the Member States, at meetings of the Management Committee. For the period 1991-94 the unused appropriations (more than ECU 15 million) have been decommitted.

4.36. In April 1994 France submitted supporting documents for expenditure authorized in 1993. On examination it was found that there had been an overpayment of ECU 480 166. In July 1994 France asked for an advance of ECU 1 621 513 for the 1994 programme. The ECU 480 166 overpaid in 1993 was treated as first instalment of the 1994 advance.

4.37. The Commission shares the Court's opinion on the delay in implementation of the Spanish programme.

Justification of certain expenditure

4.39. The Commission notes the Court's findings on the price revision formulae applied in Portugal. It will check whether they were in order and take any necessary action.

Pilot projects for monitoring by satellite

4.40. On the basis of the positive experience acquired the Commission has adopted a report to the Council and Parliament on establishment of a satellite monitoring system for Community fishing vessels and a proposal for a Council Regulation (COM(96) 232 final).

4.41. Pilot projects started in 1994 (in Finland and Sweden following accession). Portugal already had long experience and adopted national legislation in 1993.

4.42. Organizing installation of the equipment on board fishing boats has been a complex matter, notably because of the need to organize visits by the installing firms' technicians to diverse ports and locations. In this situation some vessel owners have been uncooperative.

The Member States have on the whole applied Regulation 897/94, as indicated in the Commission's report. They have set up control centres, equipped a substantial number of vessels and then continuously tracked them, exchanged information electronically, sent an interim and a final report, been represented at the coordination meetings organized by the Commission, provided the information requested by the Commission etc.

4.43. The Italian authorities have invoked procedural difficulties in explanation of their delay and have stated that the project is now operational.

4.44. As this was a pilot project operational difficulties, as experienced by Ireland, were not surprising.

4.45 4.46. Spain and France were the Member States due to equip the largest number of vessels. The number of actual participants permitted both countries to execute a complete project and casts no doubt on the validity of the experience acquired. France had underestimated the total cost of the operation and not enough money was available to equip all 67 vessels. Other Member States equipped a number of vessels higher than the minimum required.

4.47. The delays observed there are a hazard of such operations, accentuated by the introduction of new technology. By March 1996 the number of units installed was 166.

Conclusion

4.48. The contribution rate is a matter for the Commission's discretion within the limits set by the Council. The 50% rate was used to achieve a maximum multiplier effect given the inadequacies of surveillance in all Member States. It would have been impossible to gain agreement to such disparity of treatment between Member States. Those which received larger shares of the total amount available were those with both limited financial capacity and particularly difficult surveillance problems.

4.49. The Commission systematically examines the annual investment programmes sent by the Member States. Any planned expenditure not fundamentally for control purposes is rejected.

4.50. The Commission has been given only the aggregate cost-effectiveness ratios yielded by the Member States' analyses. It considers that Article 2 of the Financial Regulation has been respected and that the choices falling to the Member States were appropriate.

4.51. The Commission has regularly asked Member States, on the occasion of Management Committee meetings, to notify the real execution rate of the annual programmes submitted. It has decommitted the unused appropriations amounting for the period 1991-94 to more than ECU 15 million.

Since most Member States do not provide enough information, despite the obligation incumbent on them under Article 34(2) of Regulation No 2847/93, the Commission cannot always properly monitor the imposition of penalties on vessels found to have committed an offence. The Commission continues to press for changes in national attitudes on this. When it considers it necessary it examines specific individual cases in cooperation with the Member States.

4.52. Mutual assistance is primarily a matter for the Member States. The Commission has nonetheless taken and continues to take initiatives to stimulate cooperation, notably by organizing expert meetings and concerted actions. It has also several times asked Member States to inform it when they consider that another Member State has not met its obligations. There has been no response. When framing legislation the Commission includes provisions to foster cooperation between Member States.

4.53. The delays observed are a hazard of pilot projects. The results are in the aggregate positive, as indicated in the Commission's report to the Council and Parliament on establishment of a satellite monitoring system for Community fishing vessels.

4.54. The Commission's report on implementation of Decision 89/631/EEC deals with the questions raised by the Court.

4.55. The experience acquired will enable the five-year programme for 1996-2000 to be better run.

AID FOR INVESTMENT IN THE PROCESSING AND MARKETING OF FISHERIES AND AQUACULTURE PRODUCTS

Effects of measure

4.64. The Commission, aware of delays in payment to final recipients, has both through the monitoring committees and directly to central fisheries administrations reminded Member States of their obligations. It has on these occasions pointed out that the Commission support frameworks allow for financial aid for technical assistance to resolve administrative difficulties. There has been little recourse to this possibility.

4.65 4.68. Since support under Regulation No 4042/89 has been managed at programme level the Commission knows nothing of the detail of the individual projects and thus has no information allowing it to assess the profitability of each. The distribution of responsibility under the partnership principle of the Structural Funds means that it is up to the Member State to check that all requirements for the economic success of each project appear to be met ('prior appraisal`). The Commission must therefore rely on the formal statement given by the Member State with the operational programme in which it undertakes 'to examine the financial situation of the beneficiary using its audited accounts or financial statements, so that sufficient evidence is given that the investment will be profitable` (Regulation No 650/91 of 18.3.1991, Annex IV, point 2). The Commission's responsibility is to make an ex post evaluation. The Court draws its attention to problems with certain projects, and the Commission will make the necessary case by case checks and draw appropriate conclusions.

The Commission will continue to press Member States to reinforce their prior appraisal of the profitability of undertakings receiving a Community subsidy.

Administrative management of measures

Failure to comply with principle of commitment in annual instalments

4.69 4.71. The Commission was aware that a period of less than two years was unrealistic but in most cases the Member States found great difficulty in adjusting to a radical change in their mode of operation. The upshot was that despite the Commission's insistence on real multiannual programming most of the operational programmes consisted of a limited number of projects and their theoretical duration was less than two years. Their implementation however generally took much longer than scheduled. Commitment in a single instalment of the appropriations allocated to an operational programme lasting less than two years was in line with the rules (Article 20(3) of Regulation No 4253/88). Lastly the Commission needed to approve the operational pro- grammes before 31.12.1993, date of expiry of the Community support framework.

4.72. The total financial allocations were determined on the basis of the Community support frameworks drawn up in partnership with the Member States following an analysis of the sector's actual requirements.

Irregular payment of advances

4.74 4.75. The financial implementation provisions attached to each OP interpret Article 21(3) of Regulation No 4253/88 to mean that the second advance can be paid as soon as expenditure amounting to at least half the first advance has been incurred by final recipients.

The Commission had no intention of avoiding cancellation of budget appropriations. It paid the second advances in application of the financial implementation provisions of the programmes.

Continuation of commitments in respect of completed OPs

4.76. The cancellation procedure for the commitments mentioned by the Court began at the end of 1995 and will be completed in 1996.

Delays in payment of subsidies to final beneficiaries

4.77 4.81. The Commission, aware of delays in payment to final recipients, has, both through the monitoring committees and directly to the central fisheries administrations, reminded Member States of their statutory obligations.

4.82. The French audit was part of the management and control systems audit covering all Member States launched by Financial Control at the end of 1992. As this is not a 'targeted` exercise the checks made do not cover any particular aspect of the system or of the route that Community appropriations follow, the aim being to secure an overall view of the system and identify its weak points. One weak point identified by Financial Control was a risk that aid would not be paid to final recipients within the regulatory time limit and it drew attention to this point in the letter to Inspectorate-General of Finance and the Sea Fisheries Directorate setting out its findings. Financial Control had already criticized this weakness in October 1994 following its visit. Future audit visits by Financial Control will be targeted on the risk points detected in 1994 and the problem raised by the court.

The Commission will examine in detail the payments made to France for OPs on fishery product marketing and their use and will if appropriate recover advances.

Audit of reality of investment costs

4.83 4.86. The Commission shares the Court's opinion that checks on the spot by the national authorities after completion of projects must include verification of the reality of the expenditure incurred.

The Commission in its on-the-spot checks systematically verifies the reality of expenditure actually incurred and included in the Member States' declarations.

Eligible leasing costs

4.87. Guidelines on the treatment of leasing in connection with the Community structural financial instruments (doc. 93/C 250/03) have been available since 1993 and a datasheet on the subject has also been circulated in the series 'Eligibility of expenditure within the framework of the Structural Funds`. These datasheets, recently submitted as part of the SEM 2000 initiative (stage 3) to the Personnel Representatives' Group will be published at the end of 1996. The Commission has raised the point with Spain, which has stated that it applied the Spanish legislation in force on leasing and in particular sought a commitment from the final recipient to make final purchase of the goods under contract.

The Commission will ensure that the rules on acquisition of goods according to Article 10(4) of Regulation No 4042/89 are applied.

The Commission has taken note of the Court's observations on subsidies unduly paid on ineligible leasing expenditure. It will make the necessary checks and where appropriate initiate a recovery procedure.

4.88 4.89. According to the Commission's information Spain has followed up the Court's remarks in the particular case of the two leasing contracts and recovered the amounts unduly paid against the bank interest. The Commission will check the accuracy of this information.

4.90. The problem raised by the Court should be settled in the Commission's discussions on eligibility with the Member States under the SEM 2000 programme (stage 3). The work done on this and solutions outlined by an interdepartmental group chaired by Financial Control will figure largely in these.

Conclusion

4.91. The Court recognizes that aid granted under Regulation No 4042/89 promoted modernization of the sector but noted a number of failures. The Commission would remark that investment failures are always a possibility. They are, as the Court acknowledges, an intrinsic risk of business.

Under the new distribution of responsibilities brought in on reform of the Funds responsibility for examining each investment project, including the enterprise's financial position, falls to the Member State, which formally undertakes to do this when it submits the OP. The way in which the Funds are regulated means that the Commission does not have detailed information allowing it to analyse each project included by a Member State in an OP and the enterprise's financial position.

4.92. The fact that most of the operational programmes had a scheduled duration of less than two years was not the Commission's choice but stemmed from the difficulties Member States experienced in adjusting to a radical change in the mode of operation. Commitment in a single instalment of the appropriations allocated to these programmes was in line with the rules (Article 20(3) of Regulation No 4253/88).

4.93. The Commission shares the Court's concern that the risk of differences in treatment of beneficiaries that arises from the transfer of responsibility to Member States should be restricted as much as possible. To harmonize the terms on which aid is granted it enacted a specific Regulation on the form of submission of OPs for processing and marketing fishery products (Regulation No 650/91 of 18.3.1991).

The Commission is moreover pursuing its consultations with the Member States under the SEM 2000 programme (stage 3) with a view to more precise definition at Community level of expenditure eligibility criteria.

CHAPTER 5 (*) Regional sector

5.0. CONTENTS Paragraph reference

Introduction 5.1

Budgetary and financial data 5.2 - 5.15

Implementation of the budget 5.2 - 5.5

Sleeping projects 5.6 - 5.11

Specific Community regional development measures 5.12 - 5.15

Determination of the eligible regions and areas 5.16 - 5.39

The regions eligible for Objective 1 5.18 - 5.25

The areas eligible for Objective 2 5.26 - 5.31

The areas eligible for the Community initiatives 5.32 - 5.33

Management problems 5.34 - 5.37

Conclusion 5.38 - 5.39

Interaction of loans and grants within the framework of the Structural Funds 5.40 - 5.70

Introduction 5.40 - 5.44

Supervision of the Community grants instrument to assist revenue-generating investment projects 5.45 - 5.55

Community rules 5.45 - 5.48

Major projects 5.49 - 5.55

Coordination between grants and loans at the programming stage 5.56 - 5.61

Coordination at the stage of implementing the grants and loans 5.62 - 5.65

Coordination between the Commission and the EIB in respect of the opinions concerning the aid measures involving EIB loans 5.66 - 5.67

Conclusion 5.68 - 5.70

Exchanges of experience between local and regional authorities 5.71 - 5.87

General framework 5.71 - 5.73

Pacte 5.74 - 5.79

Recite 5.80 - 5.82

Joint observations 5.83 - 5.86

Conclusion 5.87

INTRODUCTION

5.1. This chapter summarizes the findings of the checks which were carried out by the Court in 1995 in the regional sector. The first part presents the budgetary and financial situation for the financial year. In the following parts, the Court successively examines the principle of concentration by means of an analysis of the criteria for determining the eligible areas, the way in which aid measures in the form of grants and loans are combined, and the exchanges of experience in the context of the cooperation programmes between local and regional authorities.

BUDGETARY AND FINANCIAL DATA

Implementation of the budget

5.2. In budgetary terms, 1995 was marked by the effects of the enlargement of the Community. Thus, the overall financing of the Structural Funds (SFs) for the period 1995-99 was increased by 4 747 Mio ECU (1995 prices) to assist the three new Member States. Of these appropriations, 741 Mio ECU were initially allocated to a new objective (Objective 6), created for regions with a population density of eight or fewer inhabitants per km2.

5.3. Table 5.1 shows the way in which the commitment and payment appropriations for the structural measures were used in 1995. Overall, for these measures, 92 % of the commitments of the definitive budget were implemented and 80 % of the payments. With regard to the transitional measures, the rates of implementation are 41 % and 50 % respectively. The rate of implementation for payments for the Community initiatives (CI) is 58 %.

5.4. Table 5.2 shows the monthly breakdown of the commitments and payments relating to the appropriations coming under the regional sector during the period from 1990-95: 67 % of the amounts committed and 50 % of the amounts paid in respect of the financial year were effected in the last quarter of 1995, with more than half of these operations being carried out in December. It is clear from these figures that the present situation is exactly the same as that found by the Court in previous years (), except that, unlike in 1994, it cannot be vindicated by citing the difficulties encountered in starting up the second stage of the reform.

5.5. As pointed out by the Court in its earlier reports (), the Community and national methods used to make funds available to the final recipient involve so many stages that considerable periods of time elapse before the aid reaches the recipient. This assistance is often used to reimburse expenditure which in some cases has been incurred a long time beforehand. By contrast, however, there are also cases where the national systems of paying advances to the final recipient lead to funds being made available well before the project gets off the ground.

Sleeping projects

5.6. Article 12 of the ERDF Regulation () stipulates that those portions of the sums committed for the granting of assistance in respect of projects decided on before 1 January 1989 under the ERDF which have not been the subject of a request for final payment to the Commission by 31 March 1995 must automatically be released by the Commission by 30 September 1995 at the latest.

5.7. For example, at 1 January 1995 an amount of 1 230 Mio ECU corresponding to projects decided on before 1 January 1989 was still entered as commitments to be settled. During the financial year 1995, 166 Mio ECU was paid out and 222 Mio ECU decommitted, with the amount of commitments to be settled at 31 December 1995 still totalling 842 Mio ECU.

5.8. Given that these projects were experiencing implementation difficulties, the Commission, pursuant to the successive regulations, ought to have seen to it that they were properly closed. These projects, which ought to have been wound up financially in the 1980s, should have undergone strict checks, in particular on whether the works carried out complied with the operations provided for in the financing decision, on how many jobs were created or preserved and whether Community policies were followed.

The Commission based its closure operations on the expenditure declarations submitted by the Member States. Scrutiny by the Court of a sample of 50 files which had been adjusted, however, has revealed cases of inconsistencies with the interim data presented to the Commission, of non-compliance with the percentage of aid to be granted as stipulated in the financing decision and of non-compliance with the deadline for the completion of the work.

5.10. Projects adopted by the Commission in 1989 but governed by the former Regulation (EEC) No 1787/84 are not subject to the provisions stipulating automatic release laid down in Article 12 of Regulation (EEC) No 4254/88 as amended. At 31 December 1995, the commitments still to be settled which corresponded to this type of project amounted to 62,4 Mio ECU.

5.11. The situation of there being commitments still to be settled at the end of a financial year - a consequence of the numerous dormant projects and operations that exist - has been commented on before by the Court (). Even though regulations () have been adopted since 1984 aimed at speeding up the closure of operations for which no payment had been made for four years and no explanation given of the delay, it has only been since the financial year 1995, when Article 12 of the amended Regulation (EEC) No 4254/88 was applied, that the situation has improved. Nevertheless, at 31 December 1995, many files still needed to be regularized.

Specific Community regional development measures

5.12. The specific Community regional development measures, known as 'non-quota measures`, stem from three series of Council regulations adopted prior to 1985 for which the latest deadline for submitting the final payment applications was 25 February 1993. In its Annual Report concerning the financial year 1992 (), the Court criticized the failure to close these specific measures. It pointed out in particular that over 25 Mio ECU, corresponding to advances for which the Member States have not been able to justify the utilization, ought to be recovered.

5.13. Despite the undertaking by the Commission to 'make a financial adjustment when these measures are closed` (), neither of these operations has been carried out. For example, there has been no recovery order for the two main measures concerned, 'enlargement` in France involving some 20 Mio ECU and 'energy` in Greece involving about 4 Mio ECU, and these measures have still not been closed.

5.14. Over the three-year period from 31 December 1992 to 31 December 1995, just over 50 % of the amounts concerned were adjusted. At 31 December 1995, the commitments to be settled still amounted to 34,6 Mio ECU, as opposed to 71,5 Mio ECU at 31 December 1992.

5.15. At 31 December 1995, the situation in respect of five (Belgium, Denmark, Germany, Ireland and Luxembourg) of the 10 Member States concerned was that all the commitments had been settled. At that date, Italy showed an unexpended balance still to be settled of 24 Mio ECU, whilst for Greece and the Netherlands there had been no financial operations at all. The 10 recovery orders issued (two in 1994 and eight in 1995) concerned France (eight) and the United Kingdom (two) and involved amounts of 14,5 Mio ECU and 4 Mio ECU respectively. Neither of these Member States had made any reimbursements by the set deadline.

DETERMINATION OF THE ELIGIBLE REGIONS AND AREAS

5.16. The objectives and tasks of the SFs, as defined in the framework Regulation (), aim to strengthen the economic and social cohesion, and in particular to reduce the disparities between the levels of development of the various regions and the backwardness of the least favoured regions (Article 130a of the EC Treaty). In order to achieve these priority objectives, it is essential to identify precisely the regions whose development is lagging behind (Objective 1), those seriously affected by industrial decline (Objective 2), the rural areas (Objective 5(b)), the sparsely populated regions (Objective 6) and the areas which are eligible for the Community initiatives.

5.17. In its Annual Reports concerning the financial years 1990 and 1991, the Court examined the eligible regions and areas (). Following the 1993 review of the reform of the SFs, a new list of the eligible regions and areas was drawn up. The Court examined the method which had been used to do this, and the changes which had occurred, with regard to Objective 1 (hereinafter called 'O1`), Objective 2 (hereinafter called 'O2`) and the Community initiatives.

The regions eligible for Objective 1

5.18. The list of the regions eligible for O1, applicable for a six-year period from 1 January 1994, was decided by the Council (Annex I to the amended Regulation (EEC) No 2052/88) (). In addition to the main criterion for determining these regions, namely a per capita gross domestic product (GDP/capita, expressed in terms of the standard purchasing power) which is less than 75 % of the Community average, there is the notion of certain areas 'exceptionally` also being covered and of some regions being included 'for special reasons`. As a result, for the Community of Twelve, with the exception of Denmark and Luxembourg, regions from 10 Member States - instead of seven before - have been considered to be lagging behind in terms of their development, and the percentage of the Community population concerned has risen from 21,7 % for the 1989-93 period to 26,6 %, mainly because the new German Laender have been included. When the new Member States acceded to the Community in 1995, one region of Austria was added to the list ().

5.19. The main criterion (GDP/capita) concerns the regions which are designated as NUTS level II regions, in accordance with the nomenclature of territorial units for Statistics (NUTS) drawn up by Eurostat (). This statistical breakdown usually coincides with the territorial organization of the Member States, and it remains very variable from one Member State to another in terms of the surface area, the population and the financial importance. It is not neutral with regard to the eligibility of the areas, in particular for those on the borderline of the main criterion of 75 % of the Community average of the per capita GDP.

5.20. The inclusion of small-size territorial units may in certain cases lead to a significant distortion between the relative position of a unit in terms of its per capita GDP and its position in terms of available revenue. The data relating thereto must therefore be analysed carefully. For example, Eurostat explains the abnormally low per capita GDP of Flevoland (NL) by the fact that a large number of its residents have their place of work outside the region.

5.21. The per capita GDP must be calculated on the basis of the data from the last three years. For the purpose of drawing up the list of the O1 regions for the 1994-99 period, the reference years used were 1988-89-90. This can be justified by the fact that at that time no regionalized statistical data for 1991 and 1992 were published by Eurostat. An examination of the data used shows, however, that the national GDPs are broken down by region on the basis of the most recent regional distribution available of the gross value added, which, in the case of Belgium, for example, has not been updated by the Member State since 1988. Furthermore, the data relating to the new German Laender and to East Berlin have not been included in the calculation of the Community average of the GDP. Also, standard data concerning the overseas departments (F), Madeira and the Azores (P) were not available.

5.22. A comparison of the data used (1988-89-90) and those relating to 1993, the year prior to the new programming period, shows that certain regions have moved significantly closer to the Community average (see Table 5.3).

5.23. The work to harmonize the calculation of the GNP () gives rise to major revisions of the statistics. In 1993 the work resulted in increases - which in some cases were considerable - in the per capita GDPs, expressed in terms of the standard of purchasing power (SPP); in the case of Greece, the increase was over 25 % and for Portugal almost 20 % (). The example of the region of Lisbon/Vale de Tejo provides an illustration of the effect of the revision of the statistics. The average GDP for the period 1988-90, as taken into account at the time it was determined to be a region eligible for O1, was 74 % of the Community average. During the revision, it was increased to 85 % for the same period. This shows the need to direct the analyses towards regions which have been targeted as specifically as possible.

5.24. The financial provisions of the revised Regulation (EEC) No 2052/88 stipulate in Article 12 that a considerable proportion of resources should be concentrated on the O1 regions. In paragraph 3 of that Article, provision is specifically made for 'a doubling of commitments in real terms under Objective 1 and the cohesion financial instrument between 1992 and 1999` for all the four Member States eligible for the cohesion financial instrument.

5.25. The Commission and the European Parliament have interpreted the provisions of Article 12 differently. The calculation made by the Commission results in a doubling of the funds for the four eligible Member States, whereas the European Parliament considers that the doubling of the funds must be of benefit only to their O1 regions (). Furthermore, the Court wishes to point out that it would be very difficult, if not impossible, to comply with the provisions of this Article in the event of the suspension of Cohesion Fund financing pursuant to Article 6 (on the conditional nature of the assistance) of the Regulation establishing this Fund ().

The areas eligible for Objective 2

5.26. Within the framework of the review of the reform, the Commission's dominant role in the final drawing-up of the map of the areas seriously affected by industrial decline has been considerably curtailed. The first proposals are now drawn up by the Member States and the definitive list is the result of consultation between the Member States and the Commission, taking into account national priorities and situations ().

5.27. In this context, the basic criteria (rate of unemployment higher than the Community average; percentage share of industrial employment in relation to total employment; observable fall in industrial employment) have lost their importance in favour of the subsidiary criteria (). The latter are less transparent, more difficult to quantify and do not enable a comparison to be made between the Member States as there are no homogeneous statistics. In the final list, the areas concerned by the basic criteria represent 55 % of the population of all the O2 areas, whereas in 1989 they accounted for 77 %. It has been found, moreover, that regions which satisfy the basic criteria but which have not been proposed by the Member States have not been included in the final list.

5.28. As a first stage, the Member States have proposed areas representing a population of 79,7 Mio inhabitants, i.e. 22,5 % of the Community population. In the phase of consultation with the Member States, the Commission has endeavoured to bring these proposals into line with the 15 % maximum provided for by the 18th recital of the framework Regulation. Lastly, the areas included for the period from 1994-96 concern a population representing 16,8 % of the Community total. Flexible use of the eligibility criteria has made it possible to include as rural areas (Objective 5(b)), areas which could not be included as being seriously affected by industrial decline (O2).

5.29. The findings in respect of the quality and age of the NUTS level II statistical data also apply to NUTS level III. Initially, in order to identify the areas which satisfied the basic criteria, the NUTS level III statistics were used. In the second stage, in order to ensure that assistance is genuinely concentrated on the areas most seriously affected and geographically most suited, taking into account the particular situation of these areas (), various data have been supplied by the Member States. As these data are not comparable at Community level, they have served only to enable a comparison to be made between the different areas within each Member State. The geographical breakdown which has finally been decided does not correspond to the NUTS level III areas, but rather in most cases to areas of a smaller size. As there are no statistics specific to the areas eventually selected, it is not possible to ascertain whether they are in fact the most seriously affected by industrial decline at Community level. Furthermore, the indicative allocation of the funds was made on the basis of the population and the rate of unemployment, the latter being measured at NUTS level III.

5.30. The principle whereby the areas eligible for O2 are reviewed after three years is difficult to apply, given the complexity of the procedures and the delays which have occurred in granting approval to aid measures for the period from 1994-96. This had already been found during the review provided for in the first stage of the reform, where the programmes decided for 1992-93 did no more than extend those for the period 1989-91 (). For the period from 1997-99, the guidelines adopted by the Commission in 1996 confirm the need to plan on the basis of a longer period than three years, as pointed out by the Court in its Annual Report concerning the financial year 1993 ().

5.31. As regards the new Member States, lists of areas were adopted in 1995 () even though the allocation of the aid had been decided on at the time of accession. Exceptionally, the lists for Austria and Sweden cover the period from 1995-99. The list relating to Finland covers the period from 1995-96.

The areas eligible for the Community initiatives

5.32. For the Community initiatives (CI), which represent a total of 14 094 Mio ECU for the period from 1994-99, lists of eligible areas have been drawn up by the Commission. The negotiations have been complex because of the flexibility of the criteria used, the lack in certain cases of homogeneous statistics corresponding to the size of the areas concerned, the possibility afforded by the regulations of opening up the field of assistance to areas other than those referred to by Objectives 1, 2 and 5(b) and the desire to ensure a balanced distribution.

5.33. As a result of this situation, a large number of eligible areas have been established which have to share the amounts of overall financing allocated to the various initiatives. This has led to fragmentation, with a consequent loss of effectiveness of the aid measures.

The management problems

5.34. The whole situation described above leads to numerous eligible areas, which have been defined by applying numerous criteria and special considerations. In most cases, the areas eligible for O2 and for the CI fail to correspond to the administrative demarcations in the Member States, and sometimes the areas receiving Community funds overlap or are extended; all these factors affect the way in which the aid measures are managed, monitored, checked and evaluated.

5.35. Even though the revised Regulation () stipulates that any assistance under the CI must be taken into account when the corresponding Community support framework (CSF) is being drawn up or revised, this has not been the case because the CI were adopted belatedly. However, none of the corresponding CSFs has been revised.

5.36. As the Court has found in its previous Annual Reports (), the situation in the field has weaknesses and shortcomings. Thus, it has been observed on several occasions that one and the same operation appears in various forms of assistance, that projects are divided up artificially in order to make them correspond to the eligible areas, that in certain cases they are financed twice over or that the expenditure is artificially linked to the eligible areas in order to benefit from Community financing.

5.37. A comparison of the maps of the regions and areas eligible for the SFs with that of the areas which are able, under the competition policy, to receive State aid for regional purposes under Article 92, paragraph 3, subparagraphs (a) and (c), of the EC Treaty shows that the disparities which were noted for the 1989-93 programming period recur despite the Commission's intentions to eliminate them (). A large number of areas eligible for the SFs are not eligible for the competition policy and vice versa, a fact which does not fail to have repercussions on the management of the aid measures.

Conclusion

5.38. If the various criteria to be taken into consideration for determining the eligible areas are applied, this results in more than 50 % of the Community population being affected by one or other objective. As a consequence, Community aid measures are to a certain extent sprinkled over a large number of eligible areas. Indeed, it is proving difficult to reconcile the many factors involved - the principle of concentration of aid, territorial enlargement, the need to take into account the effects of aid measures from the preceding period, the requisite continuity of the projects, the adaptation to needs, the combination of objective criteria with special situations - particularly bearing in mind the quality of the statistics available.

5.39. As stated by the Commission in December 1994 in its proposal for a Council Regulation on the European System of National and Regional Accounts in the European Community (), in the absence of any improvement in Community statistics, 'Community economic and monetary policy would have to be formulated, implemented, monitored and evaluated on the basis of incomplete, non-harmonized and outdated statistics, with all the risks that would imply`. The measures which are planned for improving the quality and accuracy of the regional statistics and for reducing their delay therefore need to be implemented. It would thus be possible to make, firstly, a more exact analysis of needs and, secondly, interim and ex post assessments which were closer to the real socioeconomic situation of the areas concerned.

INTERACTION OF LOANS AND GRANTS WITHIN THE FRAMEWORK OF THE STRUCTURAL FUNDS

Introduction

5.40. The regulations of the SFs attach importance to the need for coordination and consistency between the assistance offered in the form of grants and that in the form of loans, especially European Investment Bank (EIB) loans, whilst at the same time recognizing that these two types of instrument are complementary in nature. This complementarity has been confirmed in the provisions of Article 130b of the EC Treaty. Furthermore, the Edinburgh European Council (11 and 12 December 1992) requested the EIB to consider, together with the Council and the Commission, how it could contribute, with Member States, to the improved operation of the Structural Funds and the Cohesion Fund.

5.41. In order to respond to the desire for greater economic and financial effectiveness in the combining of these two types of instrument, on 23 December 1988 () the Commission issued a communication concerning the steps to be taken, stating in particular that 'projects likely to generate substantial income will have limited recourse to budgetary resources and mainly use loans; conversely, projects not generating any income will draw on budgetary resources instead of loans`.

5.42. The Sixth Annual Report on the SFs (), presented by the Commission, states that in 1994, 31 % of the EIB loans granted for regional development related to projects which had received aid from the SFs. In the preceding annual reports on the SFs, this percentage was 35 % in 1993, 26 % in 1992, 30 % in 1991, 15 % in 1990 and 10 % in 1989 respectively. Moreover, the EIB issued a list of approved projects with Community part-financing, the financial volume of which is shown in Table 5.4. The EIB's annual financial statements also show the EIB loans for regional development (see Table 5.5). The data from these various sources correspond to different stages of the procedure and it is difficult to check them against each other in order to obtain a clear picture of the true complementarity between loans and grants.

5.43. In its Annual Report concerning the financial year 1990 (), the Court pointed out many weaknesses concerning the coordination of the two instruments and concluded that the Commission ought to make every effort to make coordination in the CSFs, and the measures which follow on from them, more specific. In this respect, the Commission recognized these shortcomings and said that it would pursue its efforts to improve coordination.

5.44. The following observations relate firstly to the different levels of coordination between the grants and loans in the regional sector and, secondly, to the rate of return which is taken into account when defining the rate of assistance. These observations have arisen from an enquiry carried out by the Court at the Commission's departments and supplemented by data obtained in the Member States.

SUPERVISION OF THE COMMUNITY GRANTS INSTRUMENT TO ASSIST REVENUE-GENERATING INVESTMENT PROJECTS

Community rules

5.45. Article 17 of Council Regulation (EEC) No 4253/88, as subsequently amended, stipulates that, for the financing of revenue-generating investments, the Commission must determine the contribution from the Funds for these investments, taking into account in particular the size of the gross self-financing margin. To this end, the Commission has defined two main areas of application: the revenue-generating infrastructure projects and the other productive investment projects.

5.46. In the field of infrastructure projects, Table 5.6 shows in the form of a grid the maximum rates of assistance adopted by the Commission according to the categories of investment. This arrangement was formalized by an agreement between the EIB and the Commission in May 1989 relating to the implementation of the combination of the loans/grants instruments in accordance with the SF regulations. It defines the operational procedures to be followed to ensure that optimum use is made of the various forms of Community financing and in particular classifies the nature of the investments in terms of the rate of return. In November 1993, this agreement was renewed without the results obtained being evaluated. The rates have never been revised since the SFs began operating.

5.47. In the field of other productive investment projects, no provision is made for the rates of assistance to be differentiated specifically in accordance with the projects' profitability, with the result that, under the same conditions in the same region, a project which pays itself off over a given period has just as much priority as one which pays itself off over a longer period.

5.48. In these two major fields concerning revenue-generating projects, the Commission does not take sufficient account of aspects of the financial analysis, such as the project's expected financial internal rate of return (IRR) (), when determining the rates of assistance, in particular where major projects are involved (see the following paragraphs).

Major projects

5.49. Article 5 of Regulation (EEC) No 4254/88 as amended requires that applications for assistance for major projects () must provide certain information, in particular an analysis of the expected profitability for productive investment and an analysis of the costs and socio-economic benefits for investment in infrastructures, usually including all the factors required for establishing the IRR. The major projects approved as part of the structural measures are particularly well-suited to having their financing arrangements supervised in so far as the Commission directly approves their financing. This is also the case for the major projects for which loans are approved under Article 5 (2), of the ECSC Treaty. These are shown in Table 5.7.

>TABLE>

5.50. In the Fifth Annual Report on the implementation of the reform of the SFs covering the year 1993 (), the Commission evaluated the major projects granted assistance for the period of the first generation (1989-1993). Out of the 200 major projects which were analysed, only 97 showed the financial IRR, as the information needed for an analysis of the profitability was missing in almost half the cases. Table 5.8 shows the average of the financial IRRs expected by the promoters and highlights considerable dispersal. In general, the IRR does not seem to be a criterion which is sufficiently borne in mind when establishing the rates of the grants.

5.51. In the industry category, the Court has examined in particular around 50 files for major projects approved by the Commission for which a financial IRR was stated by the promoter. In general, the financial data supplied by the final recipients are often inadequate for the purpose of checking the validity of the underlying assumptions and the parameters which have been applied. They are not always supported by genuine or forecast substantiating documents (balance sheet, operating account, cash flow), but are, however, the basis on which the decision to grant Community aid is taken.

5.52. Nor has the audit of the applications for Community assistance revealed any genuine link between the amount of Community aid granted and the financial IRR of the project in the industry category. Moreover, the financial IRRs for certain projects ought to have resulted in lower grants, with loans being offered instead, even though in some cases grants to projects which have an advantageous IRR may be justifiable because of the benefits which they bring locally.

5.53. Of the cases which were examined in Ireland, two projects in the solar optics sector (Nos 075732 and 072968) respectively received Community grants between 1990 and 1993 of 3 516 661 IRL (i.e. 4,6 Mio ECU), corresponding to 20,4 % of the total cost of the project, and 1 071 237 IRL (i.e. 1,4 Mio ECU), representing 10 % of the total cost of the project, whereas the two files forecast a financial IRR of 69 and 70 % respectively. Similarly, between 1989 and 1993 a project in the pharmaceutical sector (No 068629) received a total Community grant of 2 658 529 IRL (i.e. 3,5 Mio ECU), equivalent to 20 % of the total cost of the project, whereas the project description states a financial IRR of 70 %. Between 1989 and 1993, a project in the medical instruments sector (No 70278) also received a Community grant of 2 034 481 IRL (i.e. 2,7 Mio ECU), corresponding to 24 % of the total cost of the project, despite the fact that it showed a financial IRR of 55 %.

5.54. Community grants totalling 2 428 904 IRL (i.e. 3,2 Mio ECU), corresponding to 30 % of the total cost of the project, were paid to a project in the ocular and pharmaceutical products industry (No 66662), even though its application for assistance forecast a financial IRR of 40 %. Several other projects with a financial IRR higher than 30 %, which represents a high rate of profitability, have also received large Community grants.

5.55. Likewise, major industrial projects belonging to the second generation of SFs have similar characteristics to those mentioned above. For example, Community grants totalling 24,5 Mio ECU, consisting of 16 Mio ECU from the ERDF and 8,5 Mio ECU from the ESF, were approved by the Commission to assist a project in the electronics sector under the second specific industrial development programme for Portugal (SIDPP II), the cost of which was estimated at 100 Mio ECU, without taking into account the excellent financial ratios shown by the recipient company, nor the possibilities of loans which they could request.

Coordination between grants and loans at the programming stage

5.56. The regional development plans (RDP) submitted by the Member States must, in accordance with Article 18 of the framework Regulation, include an indication of the use to be made of assistance available under the funds, the EIB and the other existing Community financial instruments in implementing the plans. Furthermore, in order to comply with the provisions of Article 13 of the framework Regulation, the balance of the proposed financing plan must take account of the various rates of part-financing (the EIB, the Member State, the Commission and others) that have been agreed.

5.57 When the first CSFs were being drawn up (1989-93), it proved difficult to comply strictly with the provisions of the framework Regulation and to programme the aid granted in the form of Community loans on the same basis as that in the form of grants. Having been associated with this programming exercise, the EIB made some loan forecasts for regions situated in O1 for a total of 8 114 Mio ECU, i.e. only about 15 % of the total estimated cost of the O1 activities, and none for the regions of O2 or Objective 5(b).

5.58. Within the framework of the programming of the second generation of CSFs (1994-99), the total volume of financing planned by the EIB is in the order of 20 000 Mio ECU for the O1 regions, i.e. about 21 % of the SF allocation.

5.59. For the CSFs of Ireland, Italy and the United Kingdom, the EIB has not made any loan forecasts at the programming stage, and the latter is consequently mentioned for the record. In the second CSF for Greece, Spain and Portugal, the volume of EIB financing which is stated was established by means of linear extrapolation from the past.

5.60. As regards O2, the EIB's contribution is shown as a token entry (p.m.) in all the summary financial tables. The EIB's assistance in the O2 regions is often in the form of global loans (). These are subsequently distributed to the final recipients by a local financial intermediary. This being so, the EIB itself has problems in establishing the location of the final recipient of the financing. It is thus not always possible to determine exactly how the loans are distributed between the areas of Objective 2.

5.61. At the programming stage, there is still very little complementarity between the two types of instrument, loans and grants, because of the difficulty of reconciling the project-based approach peculiar to the EIB with the programme-based one used by the SFs. As a result, an examination of the CSFs usually reveals a large forecast for assistance from the SFs and a relative lack of financing from the EIB or the other financial instruments. The CSFs' financing structure therefore offers a dominant and, in some cases, disproportionate share to grants. When the reform of the SFs was being reviewed, the Commission did not make an ex post facto evaluation of the indicative offers of Community loans shown in the financial tables of the first CSFs by comparing them with the loans actually granted during the same period.

Coordination at the stage of implementing the grants and loans

5.62. On account of the various stages of implementation, the financing sources cannot be used in the best possible manner. Within the framework of the rules for implementing the two instruments, the procedure for approving the projects usually begins with an application for Community grants being submitted by the national authorities of the recipient Member State; once this has been approved, complementary financing is sought to balance the financing plan in the form of loans, which can only result in too high a rate of assistance.

5.63. For example, in 1991 a project in Portugal in the tyre industry, which showed a financial IRR of 21 %, received an EIB loan and Community grants corresponding to 40 and 15 % respectively of the total investment of 27 493 Mio ESC (about 150 Mio ECU). Bearing in mind the guarantees offered, however, the EIB loan could have been as much as 50 %, the maximum rate authorized by the EIB, with the grants being reduced correspondingly. The thinking behind this financing is understandable on the part of the final recipient, but far less so on the part of the Commission, which has to ensure that optimum use is made of budgetary resources.

5.64. The present rules do not stipulate sufficiently precisely that other sources of Community financing, such as EIB loans, need to be explicitly declared in the applications for grants submitted to the Community. The latter do not always state the amount of loans provided for in the project's financing plan, but show how the public financing is shared out between national, regional or other bodies, part of which may in fact be a Community loan.

5.65. Even though the way in which the instruments are to be combined is clearly stipulated in the SF regulations, this is supposed to be checked by the Monitoring Committees, within the framework of the forecasts indicated by the CSFs. In practice, not all the factors required for combining the financing in the best possible way are always present, and grants are given priority treatment by default.

Coordination between the Commission and the EIB in respect of the opinions concerning the aid measures involving EIB loans

5.66. When the EIB receives an application for financing coming from a Member State or a company, it is obliged to consult the Commission, which then has a period of two months to deliver its opinion, pursuant to Article 21, paragraph 2, of the Protocol on the Statute of the EIB.

5.67. In general, the final opinion given by the Commission on the EIB loan plans is virtually always positive and mainly relates to the eligibility of the area concerned or the link with the corresponding CSF. The Court was unable to examine these opinions. Despite scrutiny of the management department's files, it was not possible to establish that the information on the EIB's aid measures in the regions concerned existed. The Commission's departments are therefore unable to make an in-depth assessment of the projects which benefit from a combination of the two instruments. At this stage, there is still a shortfall in the operational information being exchanged between the Commission and the EIB, even though joint Commission/EIB meetings are held. Moreover, the database known as Precom, which records the opinions given by the Commission and which was set up by the Commission for this purpose, does not make it possible to remedy this shortcoming.

Conclusion

5.68. Community grants are often allocated to revenue-generating projects, particularly in the field of industry. Profitability does not seem to be a factor of which sufficient account is taken when establishing the rates of the grants. Some projects with a high financial IRR ought to have received lower rates of Community aid, as loans could have been granted instead.

5.69. The Commission must allocate itself sufficient resources to be able to ensure that more rational use is made of the Community budgetary resources devoted to revenue-generating projects, especially where major projects are involved, and in order to give priority to implementing the loan mechanism.

5.70. In this context, the Commission should endeavour in particular to improve the coordination, right from the programming stage, of the evaluation of projects which, by their very nature, are eligible to receive the two types of instrument, namely grants and loans. In the case of projects with a high, direct, financial profitability, grants must be used with great caution, as there is the possibility of alternative types of financing. This does not rule out grants for this type of project still being needed in order, in accordance with the objectives of the SFs, to encourage investments to be located in certain areas where these projects would not be set up without incentives which were higher than those that they would receive for being set up elsewhere.

EXCHANGES OF EXPERIENCE BETWEEN LOCAL AND REGIONAL AUTHORITIES

General framework

5.71. The programmes of measures for local and regional authorities in Europe (Pacte), financed by budget heading B2-600, and the Regions and cities of Europe (Recite) programmes, financed on the basis of Article 10 of the ERDF Regulation (budget heading B2-182 'Transitional measures and innovation schemes`), are based on similar aims. Community assistance under the Pacte programme is devoted to implementing exchanges of experience which aim to promote economic, scientific and technical cooperation between the European Community's regional authorities. The measures of the European cooperation networks under the Recite programme aim to improve the economic performance of the least-favoured regions, to support the local economic partners, to transfer knowledge and experience between the regions and to develop economies of scale.

5.72. The provisions of Article 10 of the ERDF Regulation and the budget remarks relating to the heading B2-600 mean that measures are financed which have similar aims and therefore need to be managed in a suitably coordinated way so that the best possible results are attained.

5.73. Since they were started in 1990, the measures financed under the Recite programme have received 47 Mio ECU in commitment appropriations. Those financed under the Pacte programme, launched in 1989, have received 37 Mio ECU.

PACTE

5.74. The appropriations of budget heading B2-600 are managed by two associations of local and regional authorities, the Council of European Municipalities and Regions (CEMR) and the Assembly of European Regions (AER), which are non-profit-making as- sociations governed by the French law of 1901.

5.75. Since this budget heading was created in 1989, it has been used to finance measures under the Exchange of Experience Programme (EEP). This programme has been implemented in two successive stages: during the first stage covering the period from 1989 to 1993, 318 projects involving the participation of 1 000 local and regional authorities were financed; in the second stage, which began in 1994, the services which are channelled through the two managing bodies were globalized in a single contract and the name of the programme was changed to Pacte.

5.76. The annual financing decisions are generally taken in November or December, at the end of a lengthy administrative procedure. This situation does not make it easy for the Commission or the recipient associations in the Member States to carry out the financial and budgetary management of these appropriations.

5.77. The system set up by the Commission for implementing the appropriations involves some delegation by the Commission of its power to manage Community appropriations, particularly in the implementation of the projects to be financed. In some cases, during the implementation, the limits of this delegation are not observed. Measures which were initially planned have been abandoned or replaced by others without any endorsement being made to the contract or even without the Commission's consent. Some of the projects which have been financed do not correspond to the objectives of the exchange of experience programme.

5.78. Furthermore, consultancy firms which have been involved on behalf of the local and regional authorities in planning the measures that have been presented for Community financing have subsequently been awarded contracts for performing them.

5.79. Despite the improvements that have been made since 1989, the current contractual procedure still has certain shortcomings, in particular:

(a) the contractual relationship between the Commission and each of the recipient associations consists of a simple exchange of letters, which do not precisely define the reciprocal obligations;

(b) the contractual agreement relates to a programme or a set of proposals for which no mention is made of either the large number of subcontracts which will be needed to perform the projects concerned or the rules which should be applied in a particular case;

(c) the performance bond, or even the quality of the service required of the parties concerned, is not systematically mentioned in the subcontracts, which in some cases are no more than a mere financial agreement between the parties, thus making it difficult to check the results and to take the requisite remedial action;

(d) because of the quality of the agreements and of the supporting documents supplied by the final recipients, it is not possible for the different administrative levels to manage, monitor and check the projects properly.

Recite

5.80. For the pilot projects of Article 10 of the ERDF Regulation, as of 1989, the Commission started a process intended to set up a programme of exchanges of experience and information between local and regional authorities. In 1991, this process led to European cooperation networks being set up under the Recite programme.

5.81. Responsibility for each of the 36 networks thus set up was entrusted to an organization, a city or a region, depending on the chosen topics. The first 15 networks were not selected according to a formalized, transparent invitation-to-tender procedure. Three associations governed by French law have been allocated responsibility for 12 of the 16 networks that were entrusted to organizations. These associations are the Conference of Peripheral Maritime Regions of Europe (CPMR) (5), the CEMR (5) and the European Regional Development Centre (CEDRE)/AER (2), which receive other Community financing.

5.82. The organizations responsible for these measures therefore receive Community financing which is often quite considerable and are instructed to manage this Community assistance, to make contracts or enter into agreements which commit the Commission, to define and verify the eligibility of the expenditure incurred by the final recipients. This situation calls for precise operating rules and procedures and requires adequate checks by the Commission. However, the Court's enquiries have revealed shortcomings in this respect, even though, in the case of Recite, a technical assistance bureau, set up by the Commission, was instructed to give assistance, to monitor and evaluate the inter-regional national network projects which received ERDF grants (). Monitoring and evaluating difficulties have already been pointed out in the Court's Special Report on the urban environment (). The managing bodies have had to implement these aid measures in the context of a legal vacuum which has forced them to devise their own financial and administrative management procedures. What is more, bearing in mind the legal nature of these organizations, the projects which have been implemented are not subject to internal and external national checks, especially as the financing that has been granted does not follow the SFs' usual financial circuits and the thinking behind the aid measures pre-supposes that the aid recipients are located in different Member States.

Joint observations

5.83. The on-the-spot checks carried out by the Court related to selected projects from the Pacte and Recite programmes. The findings of the enquiries made at the CEMR, the AER and the CPMR confirm those already expressed by the Commission (DG XX) at the beginning and end of 1994 with regard to the CEMR.

5.84. The management costs eligible for Community assistance are fixed at 10 % of the total amount of the expenditure eligible under each of the contracts. The remaining amount (90 %) must be used in its entirety for implementing the selected measures. The Court's enquiries have revealed cases for which the national associations in their turn automatically deduct 10 % of the amount received for management costs, contrary to the terms of the contract. Furthermore, the actual amount allocated to management costs should not only be confirmed by supporting documents but calculated in accordance with the total expenditure actually incurred for the projects which have in fact been carried out.

5.85. The following inconsistencies are some of those found in the implementation of the aid measures and the expenditure certificates relating thereto:

(a) the result of the project rating carried out by the Technical Committee of Independent Experts is not always complied with. For example, projects not chosen by this Committee are included on the list of the projects that have been financed;

(b) many items of expenditure were incurred outside the periods of eligibility;

(c) expenditure declared as genuine corresponds to estimates or even to forecasts of expenditure;

(d) declarations of expenditure are made without any supporting documents;

(e) invoices have been booked twice for the same aid measure and sometimes in two different projects;

(f) invoices have been entered inclusive of tax, even in cases where the VAT could be recovered;

(g) the salaries of regional or local officials or of administrative staff have been included as eligible expenditure;

(h) the balances, calculated by the Commission, of the EEP II and III programmes managed by the AER have proved impossible to reconstruct;

(i) the ecu conversion rate which has been applied does not always comply with the rules;

(j) subcontracts have been made outside the periods of eligibility, i.e. after the deadline for presenting the final report;

(k) the expenditure relating to some projects is in fact no more than the travel costs incurred within the framework of other projects;

(l) in many cases, the data declared by the aid recipients do not tally with the reconstructed data sent to the Commission.

5.86. Furthermore, for many projects there are no supporting documents, thus making any checks impossible. This applies in particular to the documents relating to the 1992 EEP managed by the CEMR. As regards the CEDRE, the technical body of the AER, the Court's enquiries have shown that there continue to be legal difficulties. The CEDRE in fact stopped functioning without the association having been legally dissolved. Access to the three Article 10 files which the CEDRE was managing has been impossible.

Conclusion

5.87. The fact that the management of projects is entrusted to bodies of which this is not their primary purpose and whose administrative structures are not always geared to the implementing, monitoring and checking of projects means that it is necessary to lay down clear, precise management rules and suitable control mechanisms. The Court's enquiries have shown that the legal and technical means introduced by the Commission do not ensure the control of financial movements and do not make it possible to present the accounting data clearly. This situation makes it difficult or even impossible to ensure effective management, monitoring of local or regional joint financing, the overall control of the financial data presented in support of applications for interim payments or for payments of the balance and do not enable the quality of the results to be safeguarded.

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REPLIES OF THE COMMISSION

BUDGETARY AND FINANCIAL DATA

Implementation of the budget

5.3 5.5. Despite a better rate of implementation in 1995, too many financial operations were bunched at the end of the year. It is nonetheless true that the bulk of difficulties encountered in 1995 still had to do with late implementation of the new programming period. The slow start-up of programmes had the effect of deferring payment of the second advance, which depends on the rate of implementation of the programmes on the ground and the volume of expenditure.

The Commission pays advances to Member States to part-finance programmes. With the exception of the initial advance, these reflect the actual progress of programmes on the ground. The Commission does not intervene directly in making funds available to the final beneficiary. It is for Member States, pursuant to Article 21(5) of Regulation 4253/88, to see that beneficiaries receive advances and payments as soon as possible, as a rule within three months of receipt of the funds by the Member State, provided the applications fulfil the necessary conditions for going ahead with payment.

Channelling of funds, under-implementation of appropriations and bunching of financial operations at the end of the year are examined as part of the SEM 2000 initiative, phase III. The Commission is striving in concert with the Member States to effect improvements in these fields in order to arrive at better and more reliable budget forecasts, better absorption of appropriations and a more regular rate of budgetary implementation.

Sleeping projects

5.6 5.9. It is important to distinguish between projects that have been the subject of a request for final payment to the Commission by 31 March 1995 and those that have not.

The ECU 842 million remaining to be settled at 31 December 1995 concerns chiefly the 742 final payment requests lodged by 31 March that year by the Italian authorities. The projects and sub-projects (more than 3 000 of the latter) in question have not yet been closed from the accounting point of view as, following scrutiny, the Commission - in order to reduce as much as possible the number of budgetary operations - settles all the projects at the same time so it can apply the compensation method between debit projects and credit projects as recommended by the Court of Auditors on many occasions in terms of recovering debts, notably in its 1991 annual report: OJ C 330, 15.12.1992, p. 225, point 16.34. This method is applied at the level of each responsible authority. The volume of information to be analysed is considerable. The Commission plans to wind up the accounts during the second half of 1996.

As for those parts of amounts committed with regard to projects approved by the Commission before 1 January 1989, and which have not been the subject of a final request for payment before 31 March 1995, the Commission - pursuant to Article 12 of Regulation (EEC) No 4254/88 as amended - discharged them automatically without prejudice to the projects suspended for legal reasons. The files were closed following a check on the last supporting documents for expenditure incurred, which were received before 31 March 1995. Where a single advance was paid out, an order was issued for recovery of that advance. If subsequent advances were paid on the basis of payment requests, with accompanying documents, closure was made on the basis of these supporting documents and in a number of cases gave rise, in addition to the discharge operation, to recovery of the excess paid out. This closure method is in line with Article 12, which provides for a special procedure, as the legislator wished to lay to rest the problem of old files.

5.10 5.11. The commitments still to be settled at 31 December 1995, totalling ECU 62.4 million, correspond to projects approved in 1989, chiefly for Italy, which were integrated into the Community Support Framework (CSF) 1989-93. Payment requests were received by the Commission in 1995 and closure of these files forms part of the overall closure exercise by means of compensation referred to above.

The rules adopted in 1984 to speed up closure of operations were applied by the Commission in many cases, notably through replacement of certain sub-projects and strengthening of others within one and the same decision to grant assistance.

The Commission's efforts to speed up closure of ERDF projects approved under the old rules has given rise to a substantial fall in the commitments still to be settled. Leaving aside the ECU 62.4 million referred to in the previous paragraph, the trend in commitments still to be settled in relation to these projects was as follows:

Commitments still to be settled (ECU million)

31 December 1990 3 443

31 December 1992 2 127

31 December 1995 842

Since 1990, the amount of commitments still to be settled has thus been reduced by 75%.

Specific Community regional development measures

5.2. In its reply to the 1992 annual report the Commission undertook to examine, on closure, the advances whose use had not been justified. This operation is continuing.

5.13. Unlike the other 'non-quota` French programmes for which the Commission closed the accounts, the programme 'South-West Enlargement` was not the subject of the recovery advocated by the Court as the information available to the Commission was inadequate in the form in which it was presented. The French authorities were asked on 8 August 1995 (they had made provision to check this operation) to supply all the supporting documents necessary for financial closure. Despite a reminder sent on 22 February 1996, no papers have been supplied to date. The Commission is following this matter closely in order to settle it as soon as possible, including the necessary recovery.

The information necessary for closing the 'Energy` programme in Greece is now available and the Commission will close the programme and recover the excess amount paid out.

5.14 5.15. The special structure of the former 'non-quota` programmes makes closing them very complex when the Commission does not have all the necessary information. For most programmes, it has had to call on the Member States' cooperation to obtain the additional information needed for closing the programmes. The 12 remaining ones will probably be closed in 1996. Where appropriate, the Commission will make the necessary recoveries.

The recovery orders sent to France have been contested by the national authorities and discussions are still under way.

DETERMINATION OF THE ELIGIBLE REGIONS AND AREAS

The regions eligible for Objective 1

5.18 5.20. The regions proposed by the Commission for designation as Objective 1 regions fulfilled the criteria contained in the regulation. Three regions (Abruzzo in Italy, Flevoland in the Netherlands and the arrondissements of Avesnes, Douai and Valenciennes in France) were added by the Council, which also amended the Commission's proposal in respect of the Highlands and Islands region in Scotland.

5.21. Information on the new German Laender and East Berlin was not taken into account as it was not available when the list of regions lagging behind eligible for Objective 1 was decided in July 1993.

Madeira, the Azores and the French Overseas Departments automatically come under Objective 1 pursuant to Article 8 of Regulation 2052/88, as amended.

5.22. The Court acknowledges that Table 5.3. contains a distortion resulting from the inclusion, in mid-course, of the new German Laender. The same is also true for Madeira and the Azores, for which figures were not available either. Even though some regions saw no real improvement in their situation as regards the Community average, the last two columns of the table are not directly comparable as the inclusion of the five new Laender and East Berlin involves a reduction in the Union's GDP per capita by several percentage points.

5.23. In addition to the inevitable time lag between the date on which the decision on the list of regions was taken and the period covered by the statistics available, the harmonization referred to by the Court was not carried out when the new regulations were adopted in 1993. At any rate, Portugal as a whole was considered eligible for Objective 1 for the period 1994-99 on the basis of the latest information available in 1993, i.e. those relating to 1988, 1989 and 1990.

Harmonization of the GNP calculation gives estimates that are more complete, reliable and comparable than before. Most Member States improved various aspects of their calculation procedures. However, much remains to be done, notably on the matter of completeness and on several problems specific to certain countries. Some of the work should be completed before the end of October 1997 and all of the work (including that done on completeness) should be completed before October 1998.

5.24 5.25. The Commission does not share Parliament's interpretation of Article 12(3) of Regulation 2052/88 as amended.

The areas eligible for Objective 2

5.28. Some areas simultaneously meet the eligibility criteria for Objectives 2 and 5b without any flexible assessment of the criteria in question being applied. This is why certain Member States amended their original proposal while negotiating the two lists. This did not run counter to the rules in force. In addition, these changes concerned only a limited number of areas without any significant impact on the final geographical concentration.

5.29. The indicative breakdown of the funds between Member States concerned by Objective 2 is based on two criteria: one being the unemployment rate actually measured at the level of NUTS 3, the finest breakdown for which harmonized data are available at Community level. The other is population, which corresponds to the area actually eligible. A criterion specific to the area eligible thus comes into the reckoning for the indicative breakdown.

5.30. The new list of areas eligible for Objective 2 for the period 1997-99 was drawn up on the basis of the principle of continuity with the previous list. National ceilings on populations eligible remain unchanged and only a few changes were made to the list applying to 1994-96.

The areas eligible for the Community initiatives

5.33. The objective pursued in implementing the Community initiatives to convert industrial regions (RECHAR, RESIDER, RETEX and KONVER) should be borne in mind, i.e. support for the regions, often small ones, in industrial decline in accordance with criteria set out in the regulations, chiefly those relating to job losses.

The Commission does not think that the large number of areas entails a loss of efficiency in the operations concerned.

Management problems

5.34. The areas eligible are proposed by the Member States and the Commission then monitors observation of the rules and criteria. The lack of matching in numerous cases with the administrative demarcations in the Member States reflects the nature of the problems dealt with in this context and the need to concentrate Community support on areas most seriously affected by industrial decline, a phenomenon which knows no strict administrative borders.

This situation does not pose insurmountable problems for the management, monitoring, supervision and evaluation of operations.

5.35. Since the CSF (support frameworks) were approved before the Community initiative programmes, the content of the latter takes into account the content of the CSF. At the operational level, consistency in ensured by setting up a joint Monitoring Committee, notably in the case of industrial initiatives coming under Objective 2.

5.36. The Commission is endeavouring, by dint of its involvement in those committees, to avoid a situation where the same project is eligible for different forms of assistance. All cases of financial duplication or any other irregularity ascertained by the Commission are corrected; it is for Member States to establish monitoring systems liable to obviate such cases.

5.37. The Commission is aware of the discrepancies that still exist between the map of regions eligible for the Structural Funds and the map of regions that may be eligible for State aids for regional purposes as part of the competition policy. Such discrepancies are due to the different methods and eligibility criteria applied in the two cases.

Conclusion

5.38. Application of the principle of concentration was affected not only by the territorial enlargement of the EU following German unification, but also by pressure exerted by Member States and by economic stagnation, which spawned a deterioration in the jobs situation in a number of areas. It is certain that in a period of growth and, as a consequence, a brighter employment outlook in Europe, it would have been easier to achieve a higher level of concentration. The Commission believes that it will be important to achieve this objective in the forthcoming programming period.

5.39. The inclusion of a 'regional accounts` chapter in the European System of National and Regional Accounts (ESA 1995) will improve the quality and comparability of data. This will be bolstered by the establishment of practical implementing rules for concepts defined in ESA 1995 for regional accounts by activity and for regional accounts of households and by the analysis, now under way, of the methods currently used by Member States to establish their regional accounts.

A limited data collection exercise at local level (NUTS 5) now makes it possible to provide some information on population and employment. Finally, the feasibility study for an information system on urban conurbations has been set in train.

INTERACTION OF LOANS AND GRANTS WITHIN THE FRAMEWORK OF THE STRUCTURAL FUNDS

Introduction

5.42. The differences between three sets of statistics on EIB regional operations can be attributed to variations in categorization, as follows:

- the percentages given in the first two sentences of the Court's remarks refer to loans signed;

- the list reproduced as Table 5.4. of the Court's observations refers to loans approved but not yet signed. The contents of Table 5.4. were communicated informally to the Court, and labelled 'approved`, as an indication of the Bank's knowledge of proposed part-financing at approval stage by region and objective. It was indicated to the Court that this was neither a definitive nor an exhaustive list of actual part-financing;

- the statistics extracted from the EIB's Annual Report (Table 5.5.) refer to individual loans signed, plus signed allocations from on-going global loans.

Supervision of the Community grants instrument to assist revenue-generating investment projects

Community rules

5.46. The EIB and the Commission considered that the terms of the agreement concluded in 1989 on the combination of Community loan and grant instruments provided an appropriate frame of reference for operations on the ground during the initial programming period: they allowed proper use of the various Community financing instruments while maintaining a sufficient degree of flexibility to take account of the peculiarities of each project.

As the operating rules were not changed after the initial programming period - notably when the Funds' rules were revised in 1993 - it was agreed in November 1993 to carry over this agreement into the second programming period. Changes in the rates set in 1989 taking account of the respective purposes of the financial instrument or budget fund concerned still hold good.

5.47 5.48. The Commission feels that financial profitability is just one assessment factor for determining rates of assistance. Article 13(1) of Regulation (EEC) No 2052/88, as amended, states the factors to be taken into account in changing the rates, i.e. the seriousness of specific problems, the financial capacity of the Member State concerned, particular interest of the schemes from the Community, national and regional points of view, and the special features of each type of project.

In the field of investment in firms, as ERDF subsidies are on the same footing as State aids, they are automatically subject to ceilings set by the Commission under Articles 92 and 93 of the EC Treaty. The Funds' rules themselves set additional specific ceilings (Article 17 of Regulation 4253/88). Participation of the Funds in investment in firms may not exceed, in Objective 1 regions, 50% of the overall cost and, in other regions, 30%.

Article 4 of Regulation 4254/88, as amended, sets out the factors to be taken into account by the Commission when scrutinizing the characteristics of aid arrangements, i.e. the level of aid rates taking account of the socio-economic situation of the regions concerned and the disadvantages of business location which stem from this; diversification of arrangements and forms of aid; priority granted to small and medium-sized enterprises; economic effects of the aid regime on the region, and the characteristics and impact of any other aid arrangements with a regional slant in the same area.

Major projects

5.50 5.51. Evaluation of 200 large projects subsidized over the period 1989-93 also embraced a large number of infrastructure projects with scarce or limited revenue. In these cases, analysis of the financial profitability cannot be the decisive criterion for determining the rate of grant. Table 5.8 supplied by the Court shows, moreover, that the profitability rates of co-financed infrastructure was often negative or very low.

In order to improve and harmonize the content of information supplied on financial profitability by Member States or regions, the Commission has sent them a guide to the costs and benefits of large schemes. Improvements are expected in the method of calculating the financial profitability of multinational undertakings (whose practices often vary when it comes to calculating the internal rate of return, the IRR).

5.52. The IRR is only one among several factors to be taken into account. Grants for industrial projects may actually be necessary in regions lagging behind in order to attract investors who without grants from the regions would go elsewhere.

5.53 5.55. The large industrial projects cited by the Court form part of national aid schemes approved by the Commission under the competition policy and whose co-financing has been approved at the level of the programmes concerned. In this case, the level of grant accorded to industrial projects is determined by the responsible authorities of the Member State while observing criteria agreed in the programme and within the limits of the volume of aid accepted by the Commission.

The grants for industrial projects mentioned by the Court were established in the light also of the large number of jobs created by the investments concerned and their induced effects on the local and regional economy and the strong propensity for export of the sectors concerned.

Coordination between grants and loans

5.57 5.59. At the CSF preparation stage the EIB pointed out that projections provided by it were illustrative in nature and could not be regarded as firm forecasts. Even when projects can be financially/economically justified, EIB lending - in contrast to grants assistance - also depends on the relative attractiveness of the terms on offer as compared with other sources of finance and the capacity of promoters to assume additional debt.

5.60. While it is difficult to forecast ex-ante the distribution of global loan allocations, the final destination of the distribution is always communicated ex-post: following the completion of each global loan the EIB sends to the Commission a detailed statistical report on the use and final destination of allocations within the framework of the global loan in question. A detailed regional breakdown of global loan allocations is also published in the EIB's Annual Reports.

5.61. The programme approach used for the Structural Funds and the project financing approach generally adopted by the Bank do indeed have intrinsic differences. However, as indicated under 5.57.-5.59., the practical difficulty in forecasting EIB operations stems primarily from the fact that its lending is dependent on the relative attractiveness of Bank lending terms compared to other sources of finance, and the capacity of promoters to assume additional debt. Grant assistance is not influenced by such considerations.

When preparing each annual report of the EIB's activities, the Commission analyses the loans actually made during the previous year and sends its observations and recommendations to the Bank's Governing Board.

Coordination at the stage of implementation of the grants and loans

5.62. At the programming stage, the financial make-up of the individual projects is the responsibility of the Member States' competent authorities. In the Monitoring Committees, the Commission regularly draws the attention of these authorities to the need to combine in an appropriate way operations in the form of grants and loans.

Moreover, as part of the quest for better coordination between aid and loans, EIB and Commission departments studied in 1994 the possibility of achieving synergy between global grants of the Structural Funds and global loans from the EIB. After a detailed examination, it turned out that in applying the rules in force and the constraints on the functioning of these two instruments, there could be no assurance that combining global grants and loans would change the credit conditions for the final beneficiaries (in this case small and medium-sized enterprises) over and above the traditional means already tried and tested, such as interest rate subsidies or guarantee premiums.

5.63. The Commission refers to its observations on points 5.53-5.55.

5.64. For applications for aid in the form of a programme, the same difficulty as that mentioned by the Court under point 5.61 explains the lack of forecasts on planned use of loans. Moreover, the aid application forms for large projects explicitly provide for information on financing received or expected in the form of EIB loans or other instruments.

5.65. As a general rule, it is not up to the Monitoring Committee to examine the combination of instruments at the level of each individual project liable to receive Community grants. This task is carried out by the competent authority on the basis of selection criteria contained in the programmes or established by the Monitoring Committee. The Commission checks to see if these selection criteria take adequate account of the need to vary the grants and loans and, where necessary, take appropriate measures.

Coordination between the Commission and the EIB in respect of the opinions concerning the aid measures involving EIB loans

5.67. The opinion given by the Commission on EIB loan projects takes into account, over and above the factors mentioned by the Court, adherence to the various Community policies.

Without exception, the Commission's opinions concern financing involving only the Bank's own resources.

As for exchanges of information, the Commission sends to the EIB for its opinion all proposals for intervention by the Structural Funds. All EIB projects are sent to the Commission, firstly for opinion, then on preparation by the Bank's Governing Board. The Bank does in fact furnish the Commission services with global statistics on its interventions in the regions concerned. Moreover, the Bank's Annual Report contains details of projects financed during the year.

Conclusion

5.68 5.70. The Commission believes that the financial profitability is only one element of assessment in determining the grant rates for these projects. The Commission therefore shares the Court's stance indicated at point 5.70, i.e. that grants for industrial projects may be necessary in regions lagging behind in order to attract investors who, without public grants from the regions, would go elsewhere.

Article 13(1) of Regulation (EEC) No 2052/88, as amended, Article 17 of Regulation (EEC) No 4253/88, as amended, and Article 4 of Regulation (EEC) No 4254/88, as amended, set out the factors to be taken into account in changing the rates of grant. It should be recalled, however, that an increase in the volume of the loans is not necessarily neutral vis-à-vis the effort made by Member States to achieve the convergence criteria, notably as regards deficits and public indebtedness.

The Commission draws attention to the different nature of the financial instruments referred to by the Court. Grants and loans constitute additional financial instruments, but the search for optimum complementarity between them comes up against difficulties because of the different methods of intervention.

Nevertheless, the Commission does not rule out the possibility of seeking improvements in the context of the next review of the Structural Funds regulations.

EXCHANGES OF EXPERIENCE BETWEEN LOCAL AND REGIONAL AUTHORITIES

PACTE

5.76. The budget decision concerning PACTE is taken by the European Parliament in December each year. The call for proposals cannot therefore be launched by the management body until January or February and the local authorities are given four months to find partners and draw up a joint proposal. The projects are lodged with the Commission in June. The Commission then convenes the Committee of Experts to evaluate them in mid-July. DG XVI draws up its guidelines in September and this enables consultation between departments to start in October for a financial commitment introduced in November or December. This procedure does not pose any particular problem for the financial and budgetary management at the Commission's level owing to the small number of commitment operations involved (only one in 1995).

5.77. The role assigned to the CEMR (Council of European Municipalities and Regions) and to the Assembly of European Regions reflects the wish expressed, from the outset, by the European Parliament and reiterated each year.

The PACTE management rules were not spelt out clearly enough from the start. However, they have clarified since. The granting each year of Community financing is accompanied by a list of projects to be financed. These are selected by the Commission with the help, since 1992, of a panel of independent experts which checks on their quality and conformity with the programme's objectives. The letters setting out granting of Community aid define the mutual obligations, and this has been the case from 1992 onwards. Any change in the general conditions accompanying the letter must be the subject of a rider to be approved by the Commission.

5.78. The Commission does not think that these arrangements should be opposed in principle.

5.79. Since 1992, the Commission has established rules to improve the management of the PACTE programme. These are communicated to the recipients of Community grants in several forms:

- the letter granting Community co-financing, which makes the grants subject to the observance of a number of general and specific conditions. For example, the letter of grant is accompanied by a list which notifies for each project the theme of cooperation (accompanied since 1994 by a brief description), the amount of co-financing and the duration;

- the agreements which are made on this basis with the different parties responsible for the project, which are based on the grant letters;

- the PACTE management guide, which sets out the Commission's procedural requirements and which has been improved through successive additions; the newsletter with its technical information and its summary records of different activities; the organization of thematic seminars when the projects are launched enabling the activities of the various networks to be recast.

That said, the Commission will recommend to the management bodies improvements in the agreements made with the project leaders and centralize the supporting documents enabling controls to be carried out more easily. At any rate, the Commission grant letters provide for production of these supporting documents.

As for the follow-up to the PACTE programme implementation, in 1995 the Commission carried out new provisions bringing in changes:

- quarterly progress reports sent to the project leaders;

- annual project control missions by the organizing body;

- setting up of an evaluation and monitoring committee during the project made up of independent experts and carrying out a critical analysis of the reports submitted and conducting missions to the partners in the inter-regional cooperation network.

Recite

5.80 5.81. Recite has had two stages. The first, on a trial basis, made it possible to launch in 1990, without publication of a call for proposals, 15 inter-regional cooperation projects with the non-exclusive aid of organizations representing local authorities (CERM, ARE, CRPM).

On the other hand, since 1991, the Commission launched the call for Recite proposals, which gave rise to 221 proposals involving several hundreds of local authorities in the Community. The final choice of projects (21) was made by the Commission with the help of an independent committee of experts.

5.82. In this context the Commission financed cooperation projects involving, under a project leader, several partners with a common objective. The project leaders had the responsibility, on behalf of the networks, for the smooth working of the projects and for implementation, including financial, in conformity with the conditions set out in the various grant letters sent by the Commission and, since 1993, in the guide to the management of inter-regional cooperation.

As these were pilot schemes, it was normal that the activity of the networks themselves should be the basis on which the definition of eligible expenditure and monitoring procedures was set out. In 1994 the Commission had discussed with Member States the possible creation of a legal and institutional framework of decentralized cooperation with the local authorities. This did not get the support of all Member States. As for checks, the Recite operations were subject to the Community on-the-spot control system within the limits of available resources.

In order to ensure that the Member States were properly informed, the Commission published an annual report on the implementation and results of the various programmes financed under Article 10. Moreover, since 1996, after each project selection following a call for proposals, the Commission sends to the Member States the list of proposals for the projects that concern them.

Joint observations

5.83 5.84. The Commission has already, when that proved necessary, alerted the recipients of Community aid to observations concerning them, whether made by the Court or Financial Control. It has - following a check by Financial Control - communicated to the CERM that the Commission would be obliged to ask for reimbursement of the costs unduly covered under project management. In the absence of a reply, the Commission examines the additional measures to be taken.

5.85. As regards the issues raised in points (b) to (f), (h) to (j) and (l), the Commission will, on the basis of detailed information supplied by the Court, carry out checks and, where necessary, make the necessary adjustments.

As regards other points mentioned by the Court, the Commission wishes to make the following observations:

- the selection of projects is a matter for the Commission and not the panel of experts. The Commission takes its decision on the basis of their evaluation but by including variables which take account of the geographical and thematic breakdown of the projects (a);

- rules relating to the conversion of the ECU are not applicable to the PACTE programme as this does not come under Structural Fund financing. As for Recite, information on this subject has been sent to all those responsible for projects in 1994 at the time of closure of the first generation of projects (i);

- where local authorities are responsible for the projects, there is no reason why, in certain conditions, the costs of the work of local public servants or agents of the administrations assigned to the projects should not be taken into account as eligible expenditure (g).

5.86. Following the checks mentioned and at the Commission's request, the CERM is taking measures to ensure that supporting documents are easily produced.

The ARE has taken over management of the PACTE programme, which was initially in the hands of the CEDRE. As for Recite projects administered by the CEDRE, the Commission is currently examining their final reports. Where this was possible, it was giving priority treatment for the payment of the last tranche of the Community grant to local authorities that are project leaders and not to the CEDRE.

Conclusion

5.87. As regards the PACTE programme, its recasting in 1995 by the Commission advocates:

- unified management in order to improve performance;

- concentration of areas of cooperation around economic development and modernization of local public authorities;

- increase in the financial size of projects in order to ensure that cooperation measures involve not only an exchange of experience but also realize concrete objectives;

- finally, creation of a programme promotion committee involving socio-economic players around the two representative bodies responsible for follow-up.

As for inter-regional cooperation projects financed under Article 10 of the ERDF, the Commission is reviewing the management of this Article following a trial period. As part of this reform, and more particularly as regards Recite, it has obtained the technical and legal means to ensure better control of the financial flows and follow-up and to obtain, from the project leaders of the measures financed, a framework for the content of the projects that will enable them to have a clear presentation of the budget statistics.

CHAPTER 6 (*) Social sector

6.0. CONTENTS Paragraph reference

Introduction 6. European Social Fund (ESF) 6.2 - 6.83

Introduction 6.2 - 6.5

Implementation of the budget 6.6 - 6.15

Freezing of payments by the Commission 6.16 - 6.19

Closure of the 1990-93 ESF 6.20 - 6.22

The 1993 revision of the 1988 ESF regulations to cover the period 1994-99 6.23 - 6.72

Programming 6.23 - 6.31

Flows of Community funds 6.32 - 6.34

Management 6.35 - 6.39

Reopening of closed operational programmes 6.40 - 6.43

Monitoring 6.44 - 6.49

Certification/control 6.50 - 6.69

Assessments/impact 6.70 - 6.72

Subcontracting 6.73 - 6.75

Administrative expenditure and operational expenditure 6.76 - 6.78

Conclusion 6.79 - 6.83

Community programmes in the fields of education and vocational training: Socrates and Leonardo, as well as preceding programmes 6.84 - 6.108

Introduction 6.84 - 6.86

Implementation of the budget 6.87

Observations 6.88 - 6.108

Transition from preceding programmes 6.88 - 6.93

Application procedure and deadlines 6.94 - 6.97

Extent of Community support and funding 6.98 - 6.99

Financial controls 6.100 - 6.101

Coherence, complementarity and the problem of overlapping financing 6.102 - 6.105

Conclusion 6.106 - 6.108

Measures to combat poverty and social exclusion 6.109 - 6.126

Introduction 6.109 - 6.110

Results 6.111 - 6.121

Legal basis 6.122 - 6.124

Conclusion 6.125 - 6.126

Audit of contracts and grants 6.127 - 6.134

Introduction 6.127

General observation 6.128

DG V (Social Affairs) Contract management 6.129 - 6.133

DG XXII (Education, Training, Youth) Contract management 6.134

Conclusion 6.135 - 6.141

INTRODUCTION

6.1. The objective of this Chapter is to examine the European Social Fund (ESF) measures (6.2 - 6.83), the Community Socrates and Leonardo programmes (6.84 - 6.108), the measures to combat poverty and social exclusion (6.109 - 6.126) and contract management (6.127 - 6.134). Financial management audits were carried out at the Commission and in seven Member States ().

EUROPEAN SOCIAL FUND (ESF)

Introduction

6.2. The following paragraphs consider, in particular, the implementation of the ESF reform for the 1994-99 period and also review the closure of the 1990-93 period.

6.3. The 1988 regulations were amended by Regulations (EEC) Nos 2081/93 (), 2082/93 () and 2084/93 (). The main innovations were the grouping together of the old Objectives 3 and 4 in a single Objective 3 (to facilitate the integration into working life of persons exposed to exclusion from the labour market) and the creation of a new Objective 4 (adaptation of workers to industrial changes and to changes in production systems).

6.4. After the accession of the three new Member States, the Structural Fund regulations were amended by Article 29 of the Act of Accession, as supplemented by Protocol No 6 on special provisions for Objective 6 (for regions with a population density of no more than 8 inhabitants/km2) in the framework of the Structural Funds in Finland and Sweden. In addition, a new Community initiative to support the peace process in Northern Ireland was decided on by the European Council at Essen on 9 and 10 December 1994, for the period 1995-97 ().

6.5. Table 6.1 shows the ESF funds allocated to each Member State and objective.

Implementation of the budget

6.6. 1995 is the second year of implementation of the new ESF statutory framework that is in force for the period 1994-99 (hereinafter called 'the 1994-99 ESF`).

6.7. During 1995, the Commission also continued to implement the ESF under different statutory frameworks (hereinafter called 'the 1984-89 ESF` and 'the 1990-93 ESF`), making both commitments and payments.

6.8. As the Court pointed out last year (), it is not possible to identify the operations for each statutory framework (1984-89 ESF, 1990-93 ESF and 1994-99 ESF) in the budget accounts, owing to the absence of separate budget headings. It is, however, possible to obtain financial data on the implementation of each of the ESF statutory frameworks from the authorizing officer's management system, but the data are not reconciled with the data from the Commission's accounting system.

6.9. ESF commitments in 1995 amounted to 5 700 Mio ECU against available appropriations of 7 400 Mio ECU, i.e. 77 %, and payments amounted to 5 100 Mio ECU, or 76 % of total available appropriations of 6 700 Mio ECU. Once again, therefore, the appropriations allocated to the ESF by the 1995 budget were substantially under-utilized, thus revealing the mismatch between the programming and the management capacities, and those of the Member States in particular (6.29 - 6.31).

6.10. Despite the extension of the payment period for the 1984-89 ESF and the 1990-93 ESF, the Member States did not use all the commitments available. In 1994 and 1995, final cancellations of commitments thus amounted to 28,7 Mio ECU for 1984-89 ESF cases and approximately 346 Mio ECU for 1990-93 ESF operational programmes (OPs).

6.11. Against the appropriations earmarked for the 1994-99 ESF the Commission committed 50,8 Mio ECU for 1984-89 and 1990-93 ESF OPs. The bulk of them concerned the United Kingdom (38,7 Mio ECU), Portugal (9 Mio ECU), Spain (2,4 Mio ECU) and France (0,5 Mio ECU).

6.12. At the end of the 1995 financial year, an amount of 53,6 Mio ECU of commitments remained open from the 1984-89 ESF, pending payments being charged to them. Of these commitments, those for 1984-88 included 12,4 Mio ECU of outstanding commitments for which the Commission should have produced final balances by 30 September 1995 () at the latest. In the case of those for 1989 and subsequent years, the regulations do not specify a final closure date.

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6.13. Following the Court's observations last year (), the amount of obligations entered into by the Commission in its decisions on the award of ESF assistance is now recorded in the accounts in the off-balance sheet commitments.

6.14. As regards the quantifiable errors detected by the Commission during its inspections (around 90,7 Mio ECU in 1995), the latter gave an undertaking in 1994 () that it would record these potential debts as p.m. (token) entries in the accounts. However,this did not appear in the Commission's accounting system at the end of 1995.

6.15. For every ESF OP, the Member States receive, each year, an initial advance of 50 % of the total programmed expenditure for the year. In order to obtain the advance, a Member State must submit to the Commission a progress certificate covering at least 60 % of the previous year's instalment. By means of a simple rescheduling of the amounts that remain unused from the previous year, the monitoring committees contrive to make the following year's advance available to some Member States without the 60 % from the previous year having been disbursed. Moreover, the following year's advance is larger than initially scheduled, because the financial rescheduling carries the unused amounts forward to the following year. One Italian OP, for example, achieved nothing in 1994, but the rescheduled amount for 1995 represented 169 % of the initial estimates for that year. In such cases the Commission has in effect paid out an additional advance in the absence of any progress with the OP.

Freezing of payments by the Commission

6.16. If substantial errors are detected within the framework of an OP, the Commission temporarily freezes any remaining payments until the Member State has taken corrective action. At the end of February 1996 the amounts thus frozen had increased by 63 % in one year (see Table 6.2). Out of a total of 1 063,9 Mio ECU frozen at the end of February 1996, 479,2 Mio ECU (45 %) had already been frozen a year earlier. There was no change in these cases during the 1995 financial year. As the Court observed last year (), this highlights the slowness of corrective action, even in cases which are not the subject of legal proceedings.

6.17. At the end of February 1996, the volume of payments frozen by the Commission in relation to ESF measures in Spain, and the National Employment Institute (INEM) and the Further Education Foundation (Forcem) in particular, was 543,7 Mio ECU.

6.18. The Commission highlighted shortcomings in the INEM certification system, and especially the unjustified increase in indirect costs, during an audit in 1993. The problems have still not been resolved. An amount of 396,6 Mio ECU thus remains frozen, without the Commission's having issued any recovery order.

6.19. In response to a Court audit report on OP 900222 ES1, which concerned the Ministry of National Education and was forwarded to the Commission on 24 March 1993, the latter decided to freeze the 1992 balance for an amount of 22,9 Mio ECU. It was only two and a half years later that the Commission informed the Court of its decision to recover an amount of 2,6 Mio ECU, although no on-the-spot checks that might have enabled it to establish any amounts to be recovered, or to suggest to the Member State the improvements that were necessary in the certification systems, had been carried out.

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Closure of the 1990-93 ESF

6.20. According to DG V (see paragraph 6.8), out of the total 1990-93 ESF allocation (20 283,9 Mio ECU), 20 108,3 Mio ECU was committed (99,1 %) and 18 209,7 Mio ECU was disbursed (89,7 %).

6.21. Of a total of 851 operational programmes (OPs) approved in the period 1990-93, in only 37 % of cases were the final accounts for the four annual instalments available at the beginning of 1996. The final accounts for the final tranches of the other OPs are still outstanding. At commitment level, implementation of the OPs should have been finished by the end of 1993. However, some were extended until 1995, or, even, the end of 1996. The Commission must ensure that extensions for the 1994-99 period are the exception rather than the rule.

6.22. As regards the programmes of Community initiatives (CIs), the final accounts were available for only 15 % of the total of 192 OPs approved for the period 1990-93 by the end of 1995, and a significant number of CIs had been extended to the end of March/April 1996.

The 1993 revision of the 1988 ESF regulations to cover the period 1994-99

Programming

6.23. Regulation (EEC) No 2082/93 entered into force on 3 August 1993 and provided for an interval of three months within which Member States must submit their plans regarding Objectives 1, 3 and 4. The Commission accordingly forwarded a programming guide to the Member States in September 1993 for Objectives 1 and 3, and another one in November 1993 for Objective 4. As the deadline for the submission of plans was 3 November 1993 (), the Member States only had one month in which to prepare and submit them. Programming was carried out hastily, as had already happened with the 1988 reform ().

6.24. It would have been preferable for the programming to be based, as far as possible, on the assessment for the 1990-93 period () and the ex ante appraisal of the 1994-99 period. This was not adequately done. This was also true of the CIs, and employment in particular.

6.25. The ADAPT () and Employment () initiatives were launched in July 1994. The Member States were to submit their OPs within four months of the date of the publication in the Official Journal of the European Communities of 1 July 1994, that is, by the beginning of November 1994. As the guide for the preparation of the OPs was not sent to the Member States until September 1994, they had only two months in which to prepare the OPs. The Commission's decisions on the Employment OPs were adopted in December 1994 and the ADAPT ones in May 1995. The Member States were required to prepare projects which were to be the subject of approval in partnership with the Commission.

6.26. Between December 1993 and October 1994 the Commission, with the help of external consultants, carried out an appraisal of the plans submitted by the Member States. The Court examined this work and the most salient points which emerged are as follows. When the plans were being drawn up, quantified results were often not available for the 1990-93 period, because there had been no ex post evaluation. A lack of clarity was observed in the details of the measures to be carried out, the expenditure and estimated impact, as well as the number of beneficiaries per target group and the type of measure. Similarly, there was no description of sub-objectives within the measures which make up the plans.

6.27. The absence of definitions of intermediate and specific objectives makes it difficult to establish a link between the general objectives and the impact indicators (weak ones at that) generally used in the forms of intervention. Moreover this does not facilitate analysis of the complementarity of the measures and the financial resources allocated by the ESF to the different types of intervention (Objectives 1 to 5b and CIs), although such analysis would make it possible to avert the risk of duplication of Community funding.

6.28. The current situation, where similar types of measure qualify for funding from various forms of intervention, such as OP/SPD (), the CIs ADAPT and employment, the Leonardo programme and certain technical assistance measures, tends to foster competition between the various measures, instead of encouraging complementarity.

6.29. Considerable delays were found in the OP/SPD approval procedures. In the case of the multi-fund objectives, the average interval between the receipt of applications and the Commission's decision was seven and a half months, instead of the six months laid down in the Regulation (). The majority of decisions were taken only in the second half of 1994, or during 1995.

6.30. The amount earmarked in the financial forecasts for the 1994 and 1995 annual instalments, for all Member States, for Objectives 1 to 6, was 12 108,6 Mio ECU. The amount committed was 10 540,4 Mio ECU and payments amounted to 7 283,2 Mio ECU. In the first two years' implementation of the 1994-99 ESF, commitments were under-utilized by 13 % and payments by 40 % relative to the financial forecasts. The most significant in country terms were Italy, which used only 25,2 % of payment appropriations, Sweden (45,5 %) and Belgium (47,3 %) (see paragraph 6.9).

6.31. Theoretically, the under-utilization of appropriations mentioned in the previous paragraph will be even larger since, as the Court pointed out in 1993 () and 1994 (), and as evidenced by the 1994 expenditure certificates submitted in 1995, there was widespread under-utilization of commitments and payments in some Member States.

Flows of Community funds

6.32. Member States must ensure that beneficiaries receive payments as soon as possible and, as a general rule, three months after receipt of the appropriations (). This rule was not adequately respected. In Spain, for example, the deadline was not respected in 31 % of cases and in Italy the percentage was 72 %. There was also found to be a lack of transparency in the transfers of Community funds for Forcem in Spain. This organization inherited INEM's duties, but the corresponding transfers of funds in 1993 and 1994 (300 Mio ECU from INEM) do not specify the distribution between the ESF and the national finance from public funds.

6.33. In France, merely crediting the funds to the revenue side of the budget took 77 days (for Objectives 3 and 4, i.e. 63 % of the total). For example, 17,4 Mio ECU of the Objective 3 payments effected by the Commission on 21 June 1995 for the benefit of the Association pour la formation professionnelle d'adultes (AFPA) had still not been paid to the beneficiary by the Delegation for Employment five months later. Furthermore, it is impossible to differentiate between the flows of funds used for exclusive co-financing of ESF qualifying measures and the rest of the budget, because the expenditure that is co-financed by the ESF is not identified clearly in the national budget. In North Rhine Westphalia, Germany, seven and a half months after the receipt of the first advance on OP 944001 D4, only 50 % had been paid out to the promoters.

6.34. Monitoring by the public bodies that are the recipients of Community funds at national level (the treasury and the ministry of employment) is sometimes such that individualized financial management, by Structural Fund and form of intervention, is not possible. In France, for example, 30,8 Mio ECU could not be attributed to definite AFPA measures for at least six months, because of the lack of information from the Employment delegation of the Ministry of Employment.

Management

6.35. In 1993 () and 1994 (), the Court criticized the inadequate definition of criteria governing eligibility for ESF aid, mainly because there were no management guidelines. However, the Commission has set up an inter-departmental working party on eligibility criteria to remedy this situation. The subject is being dealt with as part of the SEM 2000 exercise. There was no impact on the 1995 management, however, and national and regional authorities have thus been left to apply their own interpretations of eligibility, which are often divergent. There is thus a possibility that the measures co-financed by the ESF may be judged eligible by the Member States, but not by the Commission.

6.36. The utilization of Objective 4 funding remains far behind programme/forecast. For 1994, no Member State requested a second advance. As per 1 April 1995, only five Member States had requested a first advance, leaving 87 % of the 1995 approved amounts unspent.

6.37. The delay in implementing the Greek OPs for the period 1994-99 is very substantial. In November 1995 only two of the 20 OPs approved (excluding CIs) included measures that had been implemented. The Commission nevertheless disbursed the first advances, which amounted to 159,2 Mio ECU.

6.38. The amounts approved for the Employment and ADAPT initiatives for the period 1994-99 were 1 396,6 Mio ECU and 1 349,8 Mio ECU respectively. However, the first employment projects were approved only towards the end of 1995. Although the Commission was aware of the absence of projects, it nevertheless committed 583 Mio ECU and automatically paid 291,1 Mio ECU by way of advances at the beginning of 1995, although Regulation (EEC) No 2082/93 () did not require it to do so automatically. In consequence, that amount remained with the Member States for a year without being used for the purpose intended.

6.39. In terms of the programme initially adopted for the ADAPT and Employment CIs (1994-99), it was found that there was already a two-year delay in the execution of them.

Reopening of closed operational programmes

6.40. The 1990-93 ESF programmes were due to end by 31 December 1993 and, although payment appropriations could be carried forward to the following year, commitments had to be entered into by that date. Any variation of this latter condition required an extension of the programme(s) ().

6.41. The United Kingdom authorities, without an examination by the monitoring committees, notified modifications to the Objectives 3 and 4 operational programmes to the Commission on 31 March 1994. New commitments had been entered into for various projects after the final date, amounting to a net 38,7 Mio ECU. However, the Commission did not accept these modifications and, as the Court stated in its Annual Report for the year 1994 (), the United Kingdom ESF operational programmes were closed with effect from the end of 1993.

6.42. Despite this closure, and although the United Kingdom authorities had not complied with the procedure for extending the programmes, the Commission decided ad hoc on 10 October 1995 to extend the date for taking expenditure into account to 31 December 1995. A total of eight programmes were reopened in order to adjust advances and make commitments and payments of 38,7 Mio ECU from 1995 appropriations. The additional payments will be within the amounts allocated at the Edinburgh Council and will come from the total appropriations to be disbursed by the United Kingdom authorities in 1995-99.

6.43. The action taken by the Commission and approved by the Financial Controller was detrimental, as: it had no legal basis; the accounts for the objectives in question had already been closed and accepted; it contravenes the concept of annuality of the budget. A part of the funds allocated to the 1994-99 ESF will be used for expenditure relating to the 1990-93 ESF. The Commission should strongly resist such practices in future.

Monitoring

6.44. Monitoring is carried out in tandem by the Commission and the Member States (), by means of progress reports, sample checks and monitoring committees.

6.45. As of end-1995, the Commission had not made any proposals for jointly agreed reporting procedures and the quality of the progress reports submitted by Member States with requests for payment of balances was rarely satisfactory. Although monitoring indicators had been laid down in the Community Support Frameworks (CSF/SPD), practical use of them in the certificates submitted by the Member States remains very limited and there has been hardly any change in the situation, seven years after the 1988 reform came into force. Furthermore, a methodology for sample checks on the educational and financial aspects has not been instituted systematically, either at the Commission or at Member State level.

6.46. In view of the difficulty of putting ESF management and monitoring on an operational footing on the basis of partnership between the Commission, Member States, regions and the social partners, the monitoring committees have not been able to play the key role assigned to them by the regulations. In view of the number of meetings (an average of two per week in France, for example) it has also proved difficult for the Member States and, more especially, the Commission, to provide adequate representation on the monitoring committees ().

6.47. As many OPs from the 'old` Fund have been extended beyond 1993, the monitoring committees set up under the 1994-99 ESF have to deal with the closure of OPs belonging to the 'old` Fund, even though this is not their responsibility.

6.48. In 1995, the Commission forwarded to the Member States a document entitled 'Joint guidelines for monitoring and intermediate assessments`. Each monitoring committee will nevertheless choose the system that it considers most appropriate, which will make it difficult to compare results within the Union.

6.49. The conclusions of the various audit bodies were not always taken into consideration by the monitoring committees. The Committees should, however, take note of them, so that they can rectify the shortcomings described. The Court has already pointed this out in the past ().

Certification/control

6.50. The Commission has still not defined the key concept of 'expenditure incurred`, which forms the basis of the certification by the Member States that gives rise to subsequent commitments and payments. For the Spanish authorities, the 'expenditure incurred` corresponds to the volume of expenditure authorized during a given eligible period. For the Italian and French authorities, an item of 'expenditure incurred ` often represents no more than a legal commitment, without the payment's having been authorized. The term 'expenditure incurred` thus does not necessarily mean that action has been taken. As a result of this method of procedure the Commission makes payments before the implementing conditions have been satisfied.

6.51. A large number of ESF management agencies did not comply with the requirement that they must keep accounts identifying the qualifying assessment base, even though the base is the subject of a certified declaration by the Member States. This was found to be the case in audits in Greece, Spain, France, Italy, Portugal and the United Kingdom. It was rarely possible to reconcile the accounting data of the ESF managers with those given in the certificates submitted to the Commission. It was, therefore, difficult to verify the reliability of the overall volume of expenditure as declared by the managers, the required national co-financing and compliance with the additionality principle, despite the obligation introduced by the 1988 reforms and ratified in 1993.

6.52. The practice of estimating expenditure has sometimes taken the place of declarations of actual expenditure. The Court found that the certification methods of some large national management agencies did not make it apparent that some measures had been co-financed by the ESF. The management and accounting systems did not provide separate identification of the basis of the eligible expenditure. Similarly, there was no link between eligible measures programmed, those that were carried out, their cost and the reflection given of them in the accounts. Final payments by the Commission were partly based on flat-rate costs declared by the Member States, but there was nothing to show that they did not exceed the volume of eligible expenditure actually incurred.

6.53. The French authorities have recognized that they have not always collected the actual figures for the expenditure declarations which should have been issued by the dispersed and decentralized government cost centres (). During the Court's audits at AFPA, for example, it transpired that in 1994 the flat-rate figures used at central level were four to five times higher than the expenditure actually incurred, which confirms the approximate and over-estimated nature of AFPA's certificates. Furthermore, the management and certification system of one of the three largest ESF managers in France, the Délégation à la formation professionnelle (DFP), does not provide any guarantee of the validity of the volume or nature of the expenditure declared as qualifying expenditure actually incurred. The certification provided by this organization in 1994 included 110,9 Mio ECU for Objective 3 alone, of which 46,4 Mio ECU was for the ESF.

6.54. The information on the national co-financing, as contained in the certificates on the requests for final payments issued by the Italian authorities, did not always reflect reality. Where it was possible to reconcile the amounts certified with those recorded as paid in the accounts of the Lombardy and Sicily regions, it was found that the amount certified was 114,9 Mio ECU too high.

6.55. In Italy the management of the OP/SPD subject to ministerial responsibility (for example, the public corporations) was and is undertaken by the Ministry of Employment. Although the Ministry of Employment has been given a coordinating role, Article 4 of Law 845 provides that the regions are to programme and carry out vocational training measures. The decisions approving the OP/SPD and CIs did not, however, allow for this. The result could be a conflict between the powers of the national and regional authorities, with possible repercussions on the monitoring and control of the Community measures in question.

6.56. For every year of implementation of ESF measures, the national co-financing must be decided by the Interministerial Committee for Economic Programming (CIPE). For the years 1990-94 these decisions, which are the legal basis for the co-financing, were adopted late, in some cases even after the end of the reference year.

6.57. Bearing in mind that once the CIPE decisions have been adopted the funds still have to be made available to the managers by means of payment orders, further delays are added to the CIPE delays. In view of the fact that all the payment applications and all the implementation declarations forwarded to the Commission include the ESF and the national portions, the applications and certified declarations cannot be regarded as correct, because of the absence of national co-financing (see paragraph 6.54).

6.58. The results of the evaluation of checks on the 1989-93 ESF in Portugal were available in 1995. Checks, of varying extent and intensity, were performed on parts of some three quarters of the programmes funded.

6.59. However, the audits carried out by the department for ESF matters in Portugal (DAFSE) itself, or by external auditors on its account, covered only a very small number of measures compared with the number of applications, and that number was even smaller in terms of the entire population (). Despite the generally non-random nature of the audited sample, the large percentage of irregularities detected demonstrates that the number of audits was insufficient and gives rise to serious doubts regarding the eligibility of the costs that were accepted. The national authorities have taken steps to tighten up controls, so that this situation can be corrected for the new CSF.

6.60. In two 1994-99 OPs () that were audited in Portugal in 1995, expenditure concerning training measures carried out in November and December 1993 was financed under the 1994 tranche, although the programme covers the period 1 January 1994 to 31 December 1999.

6.61. The Portuguese authorities attributed 'intrinsically credible` status to certain private-sector organizations, which means that their eligibility for ESF financing cannot be called into question. One of the largest promoters obtained increasingly large amounts of Community funding in this way, even though, since 1988, ESF operations sponsored by this promoter have often ended in the courts on grounds of a suspicion of serious irregularities.

6.62. In the final claims the Member States are also to report on the control provisions, which are of a very general nature, mostly giving only a description of the control bodies involved. However, since neither the outcome of the controls nor their financial consequences are mentioned in the final claims, it is not possible to identify areas of risk or form an opinion on the Member States' actual control activity with regard to ESF funding.

6.63. As the Court pointed out in 1994 (), the final claims submitted by the Greek authorities between 1990 and 1994 must be recalculated in ecus, because Regulation (EEC) No 1866/90 on the use of the ecus was not complied with. The calculations have not yet been done and it remains to be decided, with the Commission, how the financial transfers resulting from the calculations are to be dealt with.

6.64. ESF aid may be granted in the context of Objective 1 to persons who are threatened with unemployment, particularly within the context of restructuring (). As the Court has already pointed out, in 1994 (), part of the 1990-93 ESF financing again involved large public corporations in Greece, in the form of training for their employees. A review of one large undertaking's restructuring plan showed that there was no provision for redundancies. It is thus not clear what the criterion for granting this aid was.

6.65. In Greece audits of public undertakings and public administrations are infrequent and must be increased. According to information received on the spot, a certain number of beneficiaries for the period 1990-93 received assistance even though their structures were inadequate. Following the introduction of new EDF management procedures by the Greek authorities, at the time of the Court's audit visit, only 350 of the 3 500 promoters that had received ESF assistance satisfied the necessary conditions, according to the Ministry of Employment. The Court was informed in 1995 that the Ministry of Employment had taken steps to recover amounts that had been paid unduly.

6.66. The Commission and the Member States did not always have databases to facilitate reliable, real-time identification of the ESF's final beneficiaries and the relevant amounts. For this reason, checks cannot be based on rigorous sampling or on analytical review and cross-checks. Data concerning final beneficiaries and access to these data must be provided.

6.67. The national audit bodies only very rarely apply tests that are based on ESF eligibility criteria. Despite the protocols of agreement signed on this subject since 1994 between the Financial Controller at the Commission and the national internal control authorities of seven Member States (), there was a lack of criteria for selecting ESF beneficiaries for audit. There was no detailed programme or up-to-date audit methodology and no procedures for following up audit reports. In addition, the results of the few audits that were carried out were not systematically forwarded to DG XX and the Court of Auditors (only one report by the Spanish Intervención General de la Administración del Estado () was sent to DG XX at the end of 1995).

6.68. According to the regulations (), the beneficiary organization and the responsible authorities must keep all the supporting documents concerning expenditure and checks on an operation at the disposal of the Commission for a period of three years after the final payment on the operation. The Commission and the Member States must ensure that the documentation needed for these checks continues to be available for three years after the closure of an OP, as provided in the regulations, and not simply for three years after the completion of individual projects. In 1995, for example, the Court was unable to audit fully the operations of the Association pour la formation professionelle d'adultes (AFPA) because, under the rules applicable to such associations in France, the period of availability for supporting documents has been reduced to six months, which is contrary to the Community rule.

6.69. The role of the parties responsible for certification has changed very little in relation to the period 1990-93. Basically, they do no more than forward to the Commission the certificates issued by the subsidiary public-sector management agencies. These intermediate certificates are not checked and the forwarding of declarations of expenditure thus becomes a mere formality. In Italy and France the bodies responsible for certification did not even have the power to make checks. Furthermore, there is no link between the results of any checks that may have been carried out by the competent bodies and the certificates issued when payment applications are submitted to the Commission, and the reliability of the certificates cannot, therefore, be guaranteed. There were also found to be restrictions on audits by the national and Community bodies responsible for ESF management and control in Portugal. Furthermore, the Commission's audit powers were called in question, even in a case where serious irregularities were suspected.

Assessments/impact

6.70. The ex post assessment () of structural measures seeks to measure their effectiveness in terms of the objectives mentioned in Article 130a of the Treaty and the strengthening of the economic and social cohesion of the Community, in particular, as well as their impact at the level of each CSF and the operational measures.

6.71. When the 1994-99 programmes were in preparation the real impact of the ESF was relatively unknown in terms of jobs found or maintained in the area of the training received, the number of people recruited to long-term employment or the additional knowledge gained that might put trainees in a better position to find or keep jobs.

6.72. The Court has already, in 1990 (), criticized the almost systematic absence of ex ante appraisal in relation to the launching of the 1988 reform. In its audits in the Member States it was unusual for the Court to find such appraisals for the period 1994-99. When some data were available (for example, the number of persons likely to be affected, the costs of the operations and their duration), they were too generalized. They did not provide a sufficiently detailed description of the expected results or the means of achieving them. The costs were not always set out clearly. It will, therefore, be difficult to produce an ex post assessment for the period 1994-99 in terms of the results achieved, the justification for the costs and the jobs found.

Subcontracting

6.73. Subcontracting is a very widespread practice in the Member States. The Court found that national, regional and local authorities frequently subcontracted training measures successively, sometimes without formalizing the arrangements and without safeguarding their audit rights.

6.74. The national certifying authorities did not always know which organization was providing the training. Similarly, they did not always know whether the declared expenditure was eligible and had actually occurred. The Commission must ensure that its right of control is not affected where services are provided by subcontractors and financed with Community funds.

6.75. In order to give the necessary transparency and provide the necessary control by the promoter and national and Community agencies, the granting of ESF aid should be subject to acceptance of special rules. For example, promoters should be required to include in the subcontracting contract clauses which allow national and Community authorities to enjoy the same rights and guarantees with regard to subcontractors as they enjoy vis-à-vis the promoter himself. Furthermore, the promoters should not transfer all or part of their rights and obligations, nor should they subcontract the performance of the contract, whether in whole or in part, unless they have first obtained the manager's consent.

Administrative expenditure and operational expenditure

6.76. The Commission does not insist on a breakdown by type of expenditure for requests for final payment concerning the 1994-1999 period. It is thus becoming increasingly difficult to carry out any cost analysis (see paragraph 6.18).

6.77. Furthermore, the fact that Member States have prepared expenditure declarations on the basis of flat-rate figures makes it still more difficult to determine the nature of the expenditure (see paragraphs 6.52 and 6.53).

6.78. The Commission did not analyse the costs declared by the Member States in order to assess their eligibility and relative volume. Furthermore, in the case of expenditure it does not have average indicative cost figures for the types of training, although that is required by the regulations ().

Conclusion

6.79. The mismatch between the programming and the management capacities, of the Member States in particular, resulted in substantial under-utilization of ESF appropriations in 1994 and 1995 (see paragraphs 6.9 - 6.11; 6.24).

6.80. The Commission must improve the system for monitoring frozen amounts (see paragraphs 6.16 - 6.19 and 6.51 - 6.64).

6.81. The Commission must pay particular attention to the very widespread practice of subcontracting (which may even result in a series of subcontractors) and must provide clear rules on the subject (see paragraphs 6.73 - 6.75).

6.82. The control mechanism agreed in a protocol between the Commission and the Member States has not yet produced the desired results. Audits agreed between the Commission's Financial Controller and the National Audit Authorities of seven Member States in the framework of the protocol have not been carried out as expected (see paragraph 6.67).

6.83. The experience with the programmes up to the end of 1993 was unsatisfactory (see previous Annual Reports and paragraphs 6.21 - 22 and 6.40 - 6.43); although some progress has been made, the audit of the 1995 accounts has demonstrated that further improvement is highly desirable:

- the new programmes have not sufficiently identified clear and measurable objectives (see paragraphs 6.23 - 6.28);

- the problem of implementation of eligibility remains (see paragraphs 6.35, 6.40 - 6.43, 6.50, 6.52 - 6.53, 6.60, 6.64 - 6.65), although the Commission has at last begun a serious discussion with the Member States in the context of SEM 2000;

- accounting systems in a number of Member States are not sufficiently reliable (see paragraphs 6.51 - 6.52), nor is information available about beneficiaries (see paragraphs 6.66 - 6.68);

- the result is that satisfactory management and control are impaired, leading to delays in the flow of money (see paragraphs 6.32, 6.33), malfunctioning of monitoring committees, etc. (see paragraphs 6.44 - 6.49, 6.57 - 6.59, 6.73), inadequate internal audit controls (see paragraphs 6.60 - 6.66, 6.68 - 6.69) and unreliable expenditure certificates (see paragraphs 6.54, 6.59, 6.69, 6.71).

Action is needed to define objectives clearly, implement eligibility criteria fully (for example, for indirect costs), establish reliable accounting and information systems and install effective monitoring and control arrangements, including those for subcontractors. Lack of action on the part of Member States should be dealt with by the Commission refraining from making further advances and by making financial corrections if Member States persistently make payments contrary to the regulations.

COMMUNITY PROGRAMMES IN THE FIELDS OF EDUCATION AND VOCATIONAL TRAINING: SOCRATES AND LEONARDO, AS WELL AS PRECEDING PROGRAMMES

Introduction

6.84. The Socrates and Leonardo programmes, running from 1 January 1995 to 31 December 1999, with funding of 850 Mio ECU and 620 Mio ECU respectively, consolidate and enhance the Community education and vocational training programmes which ended in 1994. New actions have been included, such as transnational cooperation in the field of pre-university education (Socrates) and the intensification of the transnational character of projects, as well as the desired integration of previously separated measures in the area of innovation in vocational training (Leonardo).

6.85. The overall aim of Socrates is to help improve the quality and relevance of education for children, young people and adults, by enhancing European cooperation and increasing access to the range of learning opportunities available across the Union. It seeks to provide learners of all ages and social groups with insights into the European dimension of the subjects which they are studying. The aim of Leonardo is to support and complement operations in the Member States of the European Union, with the object of improving the quality of training policies and practices and their potential for discovering new approaches to learning. Leonardo provides support for the development of transnational cooperation in training by encouraging a broad range of experiments in Europe, in order to develop new approaches to training methods, content and materials in this area.

6.86. The Court audited Leonardo and Socrates at the Commission as well as in seven Member States ().

Implementation of the budget

6.87. For the Leonardo programme, commitments were 144,076 Mio ECU out of appropriations of 144,089 Mio ECU; payments were 110,3 Mio ECU out of appropriations of 122,3 Mio ECU. For the Socrates programme, commitments were 188,9 Mio ECU out of appropriations of 189,1 Mio ECU; payments were 147,7 Mio ECU out of appropriations of 178,6 Mio ECU (). Table 6.3 shows the commitments entered into and payments made by the Commission during the financial year 1995. The data for the Leonardo programme show that there is a high concentration of commitments and payments at the end of the budgetary year.

Observations

Transition from preceding programmes

6.88. The merging and extension of individual actions in the field of vocational training, which were dealt with by the preceding programmes, led to transition problems during the period of adoption of the new programmes.

6.89. The closure of the preceding programmes was followed by a reorganization of the administrative structures in some Member States. In Greece, following the liquidation of a company involved in the management of a preceding programme, it is not clear which organization will take over the rights and duties as legal successor for the outstanding payments and recoveries.

6.90. In spite of the delay in the adoption of the decisions concerning the new programmes, the final evaluations of the preceding programmes were still not available in time for the observations contained therein to be taken into account in the drawing-up of the new programmes. Even at the time of the Court's visits not all evaluations had been finished.

6.91. The late adoption of the decisions concerning the new programmes endangered the continuity of Community actions within the area of education and vocational training. The Leonardo transitional measures were only allocated 8 Mio ECU. The delays experienced before the new programmes were implemented, especially within the exchanges and placements actions of Leonardo, may disrupt the continuity of the work carried out during the previous programmes.

6.92. In all Member States visited it was noted that, within the field of exchanges and placements for both programmes, the appropriate contracts for some strands were concluded after the beginning of the academic or vocational training year. Since the first payments are only authorized after receipt of the countersigned contracts by the Commission, this led to the exchanges and placements being delayed.

6.93. At Commission level the expected savings from the reduction of technical assistance offices from six in the preceding programmes to two for Leonardo and Socrates did not occur. The annual payments for expenses from the Commission to the two new Leonardo and Socrates technical assistance offices are 18,4 Mio ECU for 1995/96, a reduction of only 4 % (1994/95: 19,2 Mio ECU).

Application procedure and deadlines

6.94. The Leonardo application procedure involves two different methods: procedure I - submission of an application to the national coordination unit of the Member State; procedure II - submission directly to the Commission. Both procedures involve the national coordination unit receiving a copy of all applications of project coordinators resident in its own Member State.

6.95. The setting-up of two distinct procedures makes the system unnecessarily complex. Since all applications are to be evaluated by the national coordination unit and the decision on whether to accept or reject a project application has to be approved by the Leonardo Committee, the decision cannot be taken against the will of the Member States. In order to simplify the administration, all applications should be dealt with by a single procedure.

6.96. Most of the organizations visited complained about the excessively tight deadlines. Many national agencies were unable to contact and provide information to all potential applicants and review properly the eligibility of the applications received, and applicants had difficulty in completing the application forms in time.

6.97. Regarding the purely technical aspect of the application procedure, the Leonardo application form for pilot projects and exchanges and placements (Strands I, II, and III) is some 30 pages long with a further 30-page appendix. It is not always clear to the national coordination units, and even less to the project promoters, what relevance some of the questions on the forms have to the project.

Extent of Community support and funding

6.98. Community support is intended for projects which would not otherwise be undertaken. However, some on-the-spot visits to Leonardo transnational pilot projects revealed that where the Community funding was a low proportion of total funding required they would have proceeded without Community funds.

6.99. The situation is similar in the Erasmus chapter of the Socrates programme. In the majority of the Member States visited, the grant set per student per month for the academic year 1995/96 was 100 to 150 ECU (France, Italy, United Kingdom) and 70 ECU in Germany, compared with a possible maximum of 5 000 ECU/year. The success of the programme in attracting an ever-increasing number of applicants, despite a constantly diminishing grant per student month, is also due to non-financial incentives, such as the recognition of the studies undertaken.

Financial controls

6.100. In the case of projects directly managed by the Commission no provision is made for underpinning the Commission's financial controls, which can never be comprehensive, with controls carried out by appropriate bodies within the Member States. Where the programmes are carried out in partnership with public sector bodies in the Member States, it would be reasonable for the Commission to recommend controls to be undertaken by internal or external audit services reporting to those bodies. In other cases the Commission could require an external audit as a condition of its funding.

6.101. The Leonardo technical assistance office, responsible for checking statements of expenditure for the 749 pilot projects currently running, still has no written procedures for staff to follow.

Coherence, complementarity and the problem of overlapping financing

6.102. The Decisions establishing the Socrates and Leonardo programmes require the Commission, in partnership with the Member States, to ensure overall consistency with other Community actions and foster complementarity with the Community initiatives.

6.103. However, certain objectives within the framework of the Leonardo programme overlap with those funded under the European Social Fund, in particular Objective 4 and the Community initiatives ADAPT and Employment. The Leonardo programme and the Community initiatives with an ESF contribution, such as ADAPT and Employment, contain some almost identical objectives, such as the integration of the young in the labour market, equal opportunities, disadvantaged people, transnational exchanges involving young people (Leonardo/Employment) and the adaptation of the workforce to industrial change (Leonardo/ADAPT). In addition, coherent coordination is impaired by the multiplicity of organizations involved. As a result, not only do certain actions overlap, but the achievement of the objectives is also impaired, since the duplication leads to competition instead of complementarity and multiple applications from individual potential projects are made possible. At present, the level of information available at the different administrations concerned (Commission, Member States' local and central levels) is not sufficient to enable such cases to be identified.

6.104. The risk of double financing arises in particular with regard to actions in Leonardo and the European Social Fund, including the Community initiatives ADAPT and Employment.

6.105. At the level of the Member States visited, a comparison between databases of applications is only possible by indirect methods. It takes place either unsystematically, as in France (), or incompletely, as in Germany (). A systematic control requires a centralized database to be held, as planned in Greece, where the coordination of the Leonardo programme is assigned to an entity controlled by the Ministry of Labour, which also administers the ESF Community Initiatives ADAPT and Employment.

Conclusion

6.106. The implementation of the two new programmes, Leonardo and Socrates, resulted in delays and interruptions of the preceding programmes (see paragraphs 6.91 - 6.92).

6.107. Final evaluations for the preceding programmes were only completed after the new programmes had begun. Thus the results could not be taken into account when formulating the new programmes (see paragraph 6.90).

6.108. In order to achieve the required coherence and complementarity of Community measures and prevent the risk of double funding, the coordination structures between and within the administrations concerned must be improved (see paragraphs 6.88 and 6.102 - 6.105).

MEASURES TO COMBAT POVERTY AND SOCIAL EXCLUSION

Introduction

6.109. The Court analysed the expenditure under heading B3-4103 in 1995 (13,6 Mio ECU of commitments, see Table 6.4). This expenditure mainly concerned the financing of individual measures to combat social exclusion (86 projects) and to prevent delinquency (46 projects), as well as several European networks in this field. The Court also examined the Commission's assessment of the results of the main programme financed under this heading, Poverty III (1989-94), which became available in 1995.

6.110. The total allocation for the first and second Poverty programmes, covering the periods 1975-80 and 1985-89, was 49 Mio ECU. Fifty-five Mio ECU was available for Poverty III (1989-94). The funding for projects in this programme ended in June 1994, as planned. The technical assistance funding, however, was extended till September 1995. The Poverty IV programme, for the period 1994-99 (121 Mio ECU), had not been approved by the Council as of end-May 1996.

Results

6.111. In the absence of precise, quantified objectives, it is difficult to evaluate the impact and effectiveness of the Poverty programme measures and other measures in the same field that are financed under this budget heading.

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6.112. The aim of Poverty III was to ensure that all the Community operations in favour of the economically and socially less privileged form a coherent whole. This is only just beginning.

6.113. Council Decision 89/457/EEC of 18 July 1989 also stated that Poverty III was 'to contribute to the development of preventive measures to assist groups in society at risk of becoming economically and socially less privileged and of corrective measures to meet the needs of the very poor`. As regards the 'preventive measures`, overall information should be available. In the case of the 'groups in society` referred to above, no information is available as to how many there are and the programme appears not to have included any measures which affect them, in spite of the large number of studies that have been carried out. As regards 'corrective measures to meet the needs of the very poor`, the programme estimates that it reached a population of 38 000 people ().

6.114. There are no statistics to indicate the results achieved among the population affected or by the measures as a whole in the same field during the same period.

6.115. The above-mentioned Council Decision aimed to 'produce, from a multidimensional viewpoint, innovatory organizational models for the integration of the economically and socially less privileged members of society, involving all economic and social agents`. As regards the multidimensional viewpoint, most projects covered several areas, but the internal cohesion was often weak. As regards the demonstrational effect: for this type of project, its ability to survive once the Community financing has ended is an important indicator of its value as a solution that could be made generally available. Once the Community funding ended 10 out of 42 Poverty III projects stated that they had wound up their activities, and 15 continued with other Community funding. The Court sent out a questionnaire to all projects one and a half years after the end of Poverty III. It revealed that the number of abandoned projects had risen from 24 % to at least 40 %. Half of those that continued to operate were in receipt of Community funds. As the projects in question are pilot projects, it would seem to be fairly important for there to be an assessment of their dissemination in the Member States. That has not been done.

6.116. The projects financed under Poverty III were proposed by the Member States and selected by the Commission. There are no cost/benefit figures, which is particularly important in the case of pilot projects, as such projects are only of value if they can be applied generally.

6.117. The concrete results of the intra-Community exchange of knowledge and the transfer of methods are not fully known. Furthermore, the objectives of these exchanges have not been specified and there is no definition.

6.118. As regards the expenditure on pilot measures in the field of social exclusion and the prevention of delinquency, which were financed outside Poverty III in 1995, the intended impact of the measures was not defined in concrete terms and the definition of the target population was vague and unquantified.

6.119. The effectiveness of the numerous European networks that receive funding in this context has not been demonstrated and has never been evaluated, and neither has their contribution to the reduction of social exclusion. The same also applies to their overall cohesion and their relationship to the other instruments financed by the Community budget.

6.120. The European Anti-Poverty Network (EAPN) is an example in point. It is the summit of a hierarchy of European networks grouping together national networks. According to the Commission, the network's activities are justified by the fact that it '... can help the Commission with information, and indeed with the dissemination of Commission information.` The task of rendering services to the Commission (1,3 Mio ECU in 1995) should have been placed by means of a call for tenders.

6.121. The 1995 budget allocated an amount of 2 Mio ECU for cooperation with charitable associations (Declaration No 23 annexed to the EC Treaty). There are no precise details of the results to be achieved.

Legal basis

6.122. In 1995 86 pilot experiments in the field of social exclusion (6 Mio ECU) were financed by the Commission, but the Council had not adopted the legal base for them. The sum in question was devoted to operations in the same field as those of the Poverty programmes, even though the Council had not given approval for the continuation of the programmes beyond 31 January 1995. Similarly, the activities financed under Poverty III since July 1994, and technical assistance in particular (0,95 Mio ECU for 1994 and 0,9 Mio ECU for 1995), do not have any legal basis. The legality of these operations is currently the subject of a case brought before the Court of Justice (C-106/96, United Kingdom v. Commission).

6.123. In addition, the 1,3 Mio ECU committed for EAPN has no legal base and, furthermore, the provision in the 1995 budget was only 0,65 Mio ECU. Part of EAPN's activities was financed under Declaration No 23. The criteria which led to these different attributions, and, in particular, to their being treated as a 'training programme` under Declaration No 23, can be found neither in the programme which EAPN submitted to the Commission nor in the other documents made available by the Commission.

6.124. The 1995 budget earmarked 1 Mio ECU for delinquency-related measures. The Commission, however, committed 1,9 Mio ECU, again without any legal base. Similarly, the amount of 2,1 Mio ECU which was committed for cooperation with charitable associations (Declaration No 23) did not have any legal basis either, and, furthermore, the 1995 budget had earmarked only 2 Mio ECU for that purpose.

Conclusion

6.125. There is insufficient information about the results obtained, which measures have proved successful and how widespread they are. This is a particularly serious omission in the context of experimental measures that are intended to serve as pilot schemes. The effectiveness and overall cohesion of the numerous networks that are in receipt of funds and their effectiveness and overall compatibility with the various measures that are being financed from the Community budget in a similar area has not been demonstrated (see paragraphs 6.109 - 6.121).

6.126. In the absence of Council approval for the Poverty IV programme, there is no legal basis for the measures that were financed in 1995 (see paragraphs 6.122 - 6.124).

AUDIT OF CONTRACTS AND GRANTS

Introduction

6.127. When the Commission enters into contracts for technical assistance to provide such services as administrative support, management, studies, etc, the Financial Regulation () is applied and, if the amount of the proposed contract exceeds 42 000 ECU, the Advisory Committee on Procurement and Contracts (ACPC) is consulted. In addition, the Commission enters into agreements when it makes grants for similar projects such as studies, information measures, or other measures for which the budgetary authority has authorized appropriations.

General observation

6.128. The amount of the grant made frequently represents a large part of the total cost but, no matter how large the grant is, the justification for making it is not independently examined by a body similar to the ACPC. The Court considers that, for reasons of sound financial management, such a system should be introduced. The grants are often made without publication and selection, with the result that only a limited number of organizations are aware of, and apply for, grants. In addition, the determining factor of the level of aid granted is frequently a function of the appropriations available, rather than an economic assessment of the value of the output and need. There is a particular problem for grants made at the end of the budgetary year when the Commission accelerates the use of remaining appropriations. This severely weakens financial control.

DG V (Social affairs) Contract management

6.129. In 1995 DG V entered into 2 987 non-ESF contracts for a total value of 203 Mio ECU, including 2 268 agreements for grants totalling 123,6 Mio ECU; of these, 826 (99,1 Mio ECU) were for grants of aid which exceeded the 42 000 ECU ACPC threshold but which were not, in accordance with the terms of the Financial Regulation, examined by it. Management of contracts is decentralized within DG V and the contract managers are responsible to the appropriate director. A total of 22 DG V agreements (2 Mio ECU) concerning the payment of grants under various budgetary measures were examined by the Court and two non-ESF contracts for technical assistance. The Court's examination of grants revealed the following weaknesses:

(a) there was no check on the beneficiaries' financial reliability and their ability to meet their part of the expenditure; such checks are important when the grant is substantial;

(b) there was no evidence of checks that the total cost and the aid were justified;

(c) the agreements did not contain a clause requiring prior authorization of sub-contracting;

(d) even for large grants, advances were made without any financial guarantee;

(e) management procedures should be harmonized between the different directorates;

(f) the conditions for output and reporting were not always fully defined.

6.130. There was poor management of the contract for technical assistance to provide a Community system for documentation on employment (Sysdem). The project started in 1989, has been renewed each year and amended twice; the value of the contract for the work undertaken in 1995 was about 1,0 Mio ECU. The contracts and their amendments did not run consecutively, there were gaps and overlaps. It was not clear to the contractor or the contract manager whether the contract was for a fixed price or not. The contract entered into was different from that presented and approved by the ACPC: both periods and terms of payment were changed.

6.131. External consultants have supplied technical assistance for Poverty III since 15 December 1989. The contract between the Commission and the consultants provided for funding for pilot projects and other measures, including payment for the provision of technical assistance. The amount allocated for pilot projects was under-utilized, 9,1 Mio ECU being earmarked (this figure does not include the research appropriations of 0,9 Mio ECU) and the out-turn being 8,9 Mio ECU. On the other hand, the part that was not earmarked for projects (technical assistance, studies and seminars) more than doubled, reaching 5,1 Mio ECU, compared with the 2,3 Mio ECU initially allocated.

6.132. A third renewal extended the technical assistance contract till 30 September 1995 and provided for a progress report on all the activities in the programme as of 15 March 1995. The date specified in the initial contract was 15 July 1994. The report was not completed within the deadlines set, despite a 10 % increase in the contract price from the first renewal and the initial six-month extension allowed by the second renewal.

6.133. The justification for expenditure amounting to 0,9 Mio ECU for the period between January and September 1995 was stated to be the publication of revised editions of several publications, which was found to be necessary after the cancellation of the only activity that had been provided for initially, namely a conference. In reality, the only explanation for most of the expenditure for this period was the desire to keep the technical assistance office in operation. Given that the approval of a new Poverty programme would require a new call for tenders for the provision of technical assistance, the necessity of paying for the running of an inactive office has still to be proven.

DG XXII (Education, Training, Youth) Contract management

6.134. In 1995, DG XXII entered into 1 525 contracts for a total value of 385 Mio ECU. The Court examined the management of 12 contracts (value 2,3 Mio ECU) by DG XXII, to see whether the weaknesses identified within DG V occurred in another Directorate-General. DG XXII contract management was rather better than that of DG V, partly due to the fact that it has a separate financial management unit. However, the weaknesses identified in paragraph 6.129 (a) to (d) were again found in the three contracts examined on-the-spot. In addition, in one of the files, the Financial Controller had approved a commitment after the event.

CONCLUSION

6.135. The difficult employment situation throughout Europe at the present time clearly highlights the need for the measures provided for within the framework of European social policy. The Madrid European Council of 15 to 16 December 1995 reaffirmed that the fight against unemployment is the priority task of the Community and its Member States (). Under the circumstances, it is difficult to understand why, in this most important area, EU resources, which between 1990 and 1995 were used to make payments totalling 27 736,6 Mio ECU (of which 5 104,7 Mio ECU in 1995), are not planned and used in a way that is more closely targeted toward achieving the objectives. Thus, there is a need for an in-depth reappraisal of the methods used by the Commission and the Member States to target and deliver ESF aid. The Commission should take clear and urgent steps in this direction (see paragraphs 6.9 - 6.12; 6.20 - 6.31; 6.70 - 6.72).

6.136. The Court stated in its annual report () concerning the financial year 1994 that there were no effective sanctions against those Member States that failed to meet the conditions for receiving a Community subsidy, and that the system for recovering unduly paid amounts needed to be improved. The Commission replied that it shared the Court's concern and that it intended to ensure greater protection of the Community's financial interests by putting forward, in the near future, horizontal proposals for regulations and agreements which would specifically address the question of sanctions (). For 1995 the Court has noted no improvement in this respect. On 18 December 1995 the Council adopted the Commission proposal concerning the Regulation (No 2988/95) on the protection of the Community's financial interests. The Regulation sets out a general framework for applying Community administrative sanctions in all areas of the budget. The SEM 2000 initiative in 1996 can be considered, at this stage, to be a further constructive step towards removing ambiguities from the definition of eligibility and securing from the administrations concerned in the Member States a proper exercise of their responsibilities for managing and controlling the programme in accordance with the applicable legislation. Further concrete action is however deemed necessary by the Commission (see paragraphs 6.10 - 6.12; 6.20 - 6.31 and 6.60 - 6.69).

6.137. The Commission's task is to ensure the administrative framework for the proper application and implementation of ESF regulations and measures and this should not be threatened by ad hoc decisions taken outside the general legal framework (see paragraphs 6.40 - 6.43).

6.138. The fact that there are so many different intervention instruments in this field, all with very similar objectives (e.g. the European Social Funds, the European Initiatives ADAPT and Employment, the Leonardo programme), complicates administration and control, at both Community and local level. The Commission and the local authorities, the social partners and the monitoring committees should agree appropriate measures as soon as possible, in order to ensure an acceptable overall result from these complementary means of Community financing (see paragraphs 6.28 and 6.100-6.105).

6.139. The Leonardo administrative procedures should be simplified and the control procedures strengthened. Outstanding payments and recoveries of the preceding programmes need to be followed up (see paragraphs 6.89; 6.94 - 6.97 and 6.100).

6.140. As regards the measures to combat poverty and social exclusion, the Court's audits revealed the absence of a clear definition of the objectives pursued, lack of overall cohesion and an absence of assessments for most of the operations financed (see paragraphs 6.109 - 6.126).

6.141. The Commission should establish clear procedures concerning the allocation of grants and ensure that transparency is introduced. In addition, DG V should create a centralized unit for the financial management of all contracts, strengthening the control system by harmonizing procedures and separating financial and project management (see paragraphs 6.127 - 6.134).

Table 6.3 - Budgetary implementation of the Leonardo and Socrates programmes

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REPLIES OF THE COMMISSION

EUROPEAN SOCIAL FUND (ESF)

Implementation of the budget

6.8. The transfers between databases are effected by electronic file and daily lists are printed out. However, the data are checked manually once a month to ensure that the updates of the operations performed by Sincom are correct.

The rare cases in which reconciliation of the data may pose problems concern budget heading B 21830. Operations of a different kind, which are stored in two separate databases, are entered in this line: Adabas, which features traditional ESF measures (technical assistance and innovatory projects under Regulation (EEC) No 4255/88, as amended by Regulation (EEC) No 2084/93, Article 6), and Gessoc (DG V's internal computer system), which stores the operations linked to the part of the budget managed by the authorizing officer. The Commission will study what solutions can be introduced up to the end of the current programming period.

6.9. Following the under-utilization of ESF funds in 1995, the Commission made a big effort to obtain more reliable financial estimates from the Member States. A letter to this end was sent to the Member States on 29 March 1996 (Letter No 6652) and meetings have been organized with the national authorities responsible for financial management. As a result the Commission now has at its disposal - for the first time - a matrix for each Member State which recapitulates, with a breakdown by OP, the national estimates concerning the use of ESF appropriations.

6.12. The commitments still open relating to the 1984-89 programming period mainly concern Portuguese dossiers now before the courts. In line with the Commission's recommendations, the Portuguese State proceeded, within the time limit laid down by Article 8 of Regulation (EEC) No 2084/93 (i.e. before 30 March 1995), to certify definitively the dossiers relative to the 1984-88 period which had not yet been certified. In the meantime, the Commission has closed all Portuguese dossiers from before 1988 which were not before the courts.

Currently, therefore, the commitments that are still open concern either dossiers which are before the courts or dossiers from 1989 which are not subject to Article 8 of Regulation (EEC) No 2084/93 but which the Commission is trying to close as soon as possible in cooperation with the Member State.

6.14. Following the Commission's undertaking given in its reply to point 5.39 of the Annual Report for 1994, this question was included in the context of SEM 2 000 discussions in respect of financial corrections introduced because of ineligibility or irregularities. After consultations with the Member States in the context of phase 3 of SEM 2 000, concrete measures should be forthcoming.

6.15. The Structural Funds Regulation and the financial implementing mechanisms lay down the conditions applicable to rescheduling of the appropriations made to the OPs. It is for the Monitoring Committee to propose or implement rescheduling after a meticulous analysis of the circumstances which have led to the failure to use the funds earmarked for this tranche.

In the Italian case mentioned by the Court, the authorizations for the OPs of CSF II were not issued until the second half of 1994. As a result, only a very small proportion were utilized that year. Under these circumstances the unused amounts in 1994 were rescheduled for 1995 to 99, as the example cited by the Court confirms. This practice is in compliance with the legislation in force.

In future the Commission will decide what rate to use for the first advance depending on actual progress as compared with the programming.

Freezing of payments by the Commission

6.16. Article 24 of Council Regulation (EEC) No 4253/88 as amended by Regulation (EEC) No 2082/93 permitting the reduction, suspension or cancellation of Community assistance is very difficult to apply, notably because it involves formal proceedings with the Member State and the final beneficiary which by their nature are long drawn out.

Because of the time-consuming nature of this regulatory instrument, the Commission uses the mechanism of temporarily freezing the payments in the interests of good management of the ESF. The Commission uses this measure in a considered and effective manner.

6.18. The Commission has already sent the Member State a proposal for reducing Community assistance in the case mentioned by the Court. The Member State has submitted its observations and the Commission is currently preparing a decision on reducing payment.

6.19. The Commission had proceeded to freeze the 1992 balance for the OP mentioned by the Court following an audit conducted by the latter for preventive purposes. It then sought supplementary information from the Member State. Finally the Commission considered that the information supplied by the national authorities was sufficient to allow the release of the funds in question after correction of an amount of 2.6 Mio ECU paid in excess in the 1991 tranche. This sum was deducted from the payment of the balance for 1993 dated 11 December 1995.

However, the Commission is taking the precaution of auditing this OP exhaustively. A first mission was organized in May 1996. A second check is planned to supplement the results of this audit.

Closure of the 1990-93 ESF

6.21. The Commission shares the Court's view as to the need to minimize the use of extensions in its future programming.

6.22. The Commission recognizes that implementation of the CIs for the 1990-93 period has been somewhat delayed. However, it wishes to stress that these measures require far more delicate handling because of their mandatory transnational nature.

The 1993 revision of the 1988 ESF regulations to cover the period 1994-99

Programming

6.23. The Commission recognizes that the time limits laid down for implementing the 1995-99 CSFs were very tight. The Commission had to prepare its guidelines and the Member States had to prepare their national plans in three months.

The rules in no way require the Commission to prepare a programming guide. This optional guide was prepared as rapidly as possible to assist the Member States in preparing their plans.

Despite the time constraints the Member States presented plans of a higher quality than in the preceding programming period, within the stipulated 3-month deadline.

6.24. The programming periods run without interruption, for two reasons. Firstly, many programmes were extended to 1995. Thus ex post assessments were carried out for the completed programmes, while on-going evaluations were made for the extended programmes. Secondly, programming of the new period should have started in 1993. This de facto overlapping of two programming periods prevents the ideal linkage aspired to by the Court: closure of CSF I, then ex post evaluation of CSF I, and finally ex ante evaluation of CSF II.

Nonetheless the Commission has conscientiously verified the consistency with Community rules of the plans received from the Member States for the new programming period, notably by securing a quantification of the objectives to be achieved, which will open the way to on-going and ex post evaluations. The Commission will endeavour to further improve its assessment capacities for the end of the current programming period.

6.25. Although there is no obligation on the Commission to prepare an OP programming guide by a given date for communication to the Member States (point 6.24), it has produced such a guide to help them in their programming work.

6.26 and 6.27. The Commission receives the Member States' plans as they stand, with all their strengths and weaknesses, and then proceeds to analyse them rigorously. Its only role in the preparation of the CSFs and SPDs is in selecting the priorities which the Union wishes to part-finance, notably with reference to the White Paper on growth, competitiveness and employment. Hence the results of this work are not visible in the plans but in the CSFs and SPDs approved by the Commission.

6.28. The PCIs (ADAPT and Employment) and the Leonardo programme have different objectives and are complementary rather than competing.

The services responsible at Community level meet regularly to avoid duplication of funding. In most Member States the CI managers participate in the Leonardo Committee and, conversely, the Leonardo officials are members of the Employment and ADAPT Monitoring Committee. Whenever projects selected in the context of the CIs could overlap with Leonardo, the national officials responsible for the two programmes examine all the projects, in order to encourage complementarity and to avoid duplication of funding.

Despite all the precautions taken the problem mentioned by the Court is a real one. The Commission will propose extending a practice already established in certain Member States, whereby the final beneficiary of an action has to assume personal liability by signing a contract by which he agrees not to draw on other Community funds for the same measures.

Finally, in the context of its audits the Commission checks to ensure that there is no duplication of Community funding.

6.29. As a rule the delays mentioned by the Court are due to the need to renegotiate all the OPs.

6.30 and 6.31. The Commission is actively addressing the problem raised by the Court and has launched a large-scale operation with the Member States to induce them to transmit reliable budget estimates (see answer 6.9).

Flows of Community funds

6.32. The Commission shares the Court's view. In the course of its inspections it came to the same conclusions. It is pursuing its drive to get the Member States to respect the regulatory deadlines.

For example the problem concerning Forcem, identified by the Court and the Commission in 1995, was the subject of a follow-up and during a recent mission in June 1996, the Spanish authorities agreed to provide the Commission with proof of payment of the ESF funds to Forcem.

6.33. The Commission has drawn the same conclusions as the Court as regards the non-identification of ESF funds in the Delegation's budget. Thus on 13 May 1996 (Letter No 9733) it froze payments of the balance for 1995 and the second advance for 1996, until such time as the Delegation establishes a permanent system for identifying ESF appropriations and for reducing the time taken to credit them.

The Commission is aware of the problem mentioned by the Court in the German case. An on-the-spot check will be carried out on 31 July 1996 to assess the dimensions of the corrections needed.

6.34. The problem raised by the Court crops up from time to time. The Commission urges the Member States to see to it that the necessary changes are made to ensure individualization of the ESF appropriations.

Management

6.35. The ESF eligibility criteria are laid down in Regulation (EEC) No 2084/93, notably in Article 2. Moreover, aspects linked to the eligibility of expenditure are addressed together with the Member States in an integrated manner by all the structural funds in the framework of SEM 2 000, where the Commission is actively involved. The 'eligible expenditure` forms have already been presented to the Member States for a first exchange of views. Nonetheless the Commission has encouraged the national authorities to prepare national inspection vade-mecums together with the Commission. France and Portugal have already followed this advice.

6.36. The slow take-off of Objective 4 is due to the novelty and the highly ambitious nature of this objective. Implementation must be preceded by a rigorous assessment of the firms' needs, in line with the principle of forward planning. Delays in implementation are the subject of active discussions between the Member States and the Commission has pledged to take all the necessary measures to ensure catch-up during the coming financial years.

6.37. The difficulties in implementing the Greek CSF have already led the Commission to draw the national authorities' attention to the need to improve their management capabilities. A rationalization programme is under way.

6.38. The Commission paid the advances following approval of the OPs at the maximum authorized rate so that the actions could be launched in the best possible conditions. It afterwards emerged that the Member States needed more time than foreseen to approve the individual projects which were to be funded by these advances. However, in future, the Commission will proceed, in duly justified cases, to adjust the rates it pays to actual progress made in implementing the measures (see 6.16).

6.39. The delay in implementing the Employment and ADAPT initiatives in 1994 was linked to the fact that these CIs cannot be prepared until the Commission's priorities for 1994-99 have been defined. In contrast to the CSFs and SPDs, which reflect the national priorities of the Member States, these initiatives express Community priorities as formulated by the Commission. These Community priorities were published too late to allow satisfactory execution of the appropriations in 1994. However, these constraints no longer exist in 1996 and so the measures can be implemented normally.

Re-opening of closed operational programmes

6.41 6.42 and 6.43. On the basis of Article 4.3 of Regulation (EEC) No 4253/88, this decision made it possible to finance final beneficiaries who had in good faith organized training measures eligible for the ESF and whom it would have been unfair to penalize for circumstances beyond their control. In this context the use of appropriations for the 1994-99 period for Objectives 3 and 4 is justified by the need to resolve the problem without using appropriations set aside for other purposes.

Moreover, as the Court itself states in 6.43, the amounts covered by this decision are to be deducted from those allocated at the Edinburgh Council to the United Kingdom for the 1994-99 period.

Monitoring

6.45. The Commission recognizes that much has to be done by the Member States to improve the monitoring system so that the Monitoring Committees can take decisions in the light of all the necessary information and also prepare complete and reliable progress reports.

Since 1995 the Commission itself has tried to improve the monitoring system but it must be stressed that policing measures part-financed by the ESF that relate to tens of thousands of training courses of variable duration is inevitably a very complex exercise.

In the form of technical assistance, the Commission has funded measures to improve computer systems in the Member States so as to conduct more technical and pedagogic checks during the courses. The situation varies from country to country but considerable improvements have already been made.

6.46. The situation is different in each Member State, depending on the number and nature of the programmes (national or regional). In the new programming an attempt has been made to limit the number of programmes and hence the number of Monitoring Committees.

The Commission is represented on the Monitoring Committees, wherever possible, by the head of unit responsible for monitoring the programme. In the case of multifund programmes, the representative of the 'lead` fund is always present.

6.47. Since the rules contain no provisions concerning the extension of the old Monitoring Committees, the Commission considers that the existing Monitoring Committees are responsible for managing all the funds.

6.48. The Commission feels that some flexibility in the monitoring indicators is in order, given the differences between the measures provided for in the programmes, but it tries to ensure some degree of consistency for monitoring and evaluation purposes.

6.49. Despite the Commission's efforts, it must be conceded that the Monitoring Committees do not always take into account the results of the various audits, but the crucial point is that payment freezes be imposed wherever necessary and that payments be released only when the necessary corrections have been made.

Certification/control

6.50. The concept of 'expenditure incurred` is defined in the chapter 'Financial provisions` of the standard terms annexed to all Commission decisions on the CSFs, SPDs and OPs as follows: 'actual expenditure must be documented by receipted bills or equivalent supporting documents referring to payments made by the final beneficiary...` Member States are required to apply this provision and the Commission checks for compliance, notably during its on the spot audits. The Commission will pursue its information measures on the procedures to be followed by the Member States and the conditions to be complied with in implementing this principle.

6.51. The Commission has also discovered certain cases of non-compliance with the requirement that accounts identifying the qualifying assessment base be kept. This generally concerns large training organizations in which the ESF part-finances only a relatively small proportion of the measures. In this case the Commission has encouraged the creation of an analytical accounts system. Certain organizations have already adopted it (the IEFP in Portugal), whereas others are currently doing so (INEM in Spain, EFPA in France).

When the Commission cannot reconcile the accounts with the certificates which are presented to it, it takes measures to clarify the situation. For example, the manager may be obliged to present certificates or requests for final payments based on actual expenditure.

6.52. The Commission's inspection services conduct on the spot checks to detect and remedy problems of this kind. The Commission reaffirms that requests for final payments must be based on real costs.

6.53. The Court's observation is based on a joint inspection by the Court and Commission at the AFPA. During this mission it was found that AFPA's request for final payment was based on estimates, in contravention of the Community provisions. Hence the mission report specified that the request for final payment be corrected and based on actual expenditure. These corrections should be carried out in 1996. As regards the DFP and the AFPA, the Commission has decided to freeze payments of the 1995 balance and the second advance for 1996 (Courrier No 9733 addressed to the Employment Delegation on 13 May 1996).

6.54. The Italian programmes mentioned by the Court have been frozen by the Commission pending correction.

6.55. The Commission approves the requests presented by the authorities appointed by the Member State. However, the Commission has limited the number and dimension of national programmes in the framework of CSF II and so the problem mentioned by the Court will become less pressing. The Commission has also sometimes found it difficult, in the past, to find competent partners for inspection purposes, given that they are vaguely defined.

6.56. It is true that Italian national co-financing was greatly delayed. However, a top-level agreement has been reached between the Italian authorities and the Commission. This agreement envisages a transformation of Italy's internal procedures with an eye to achieve simultaneous national and Community funding. This system should be up and running by end 1996.

6.57. The problem mentioned by the Court differs depending on whether the matter concerns a certificate for implementing a request for a second advance or a request for final payment. In the latter case the total amount declared must include the total cost of the measure, which presupposes a distinction between Community funding and national funding. In the first case, the request for the second advance may be submitted once half of the first Community advance has been used up.

6.59. The Commission shares the Court's view on the inadequacy of DAFSE's auditing resources (DAFSE is attached to the Ministry of Labour) for compliance with its statutory obligations. This is why the Commission provided substantial funds under the heading of technical assistance. DAFSE used them to pay for the services of over 20 private auditing firms. These additional sums were mainly used to monitor actions part-financed by the ESF between 1986 and 1989, and this explains the low level of monitoring of CSF I between 1990 and 1993.

As the Court mentions the recent reorganization of the DAFSE's auditing services should lead to significantly more intensive monitoring of the measures part-financed by the ESF.

6.60. The Commission's auditing services have found that some of the advances paid in April 1993 under CSF II were used to pay advances of CSF I which had not yet been submitted to the Commission for approval.

Following Commission audits, notably in January 1995, the ESF payments were frozen until the Portuguese authorities agreed to rectify matters. To this end it was decided to open separate bank accounts to record separately the payment of appropriations under the 1986-89 fund, CSF I, CSF II and the CIs. Portugal was obliged to transfer back to CSF I accounts the funds it had used to finance CSF II.

6.61. The Commission agrees with the Court that it is unacceptable to attribute a priori 'intrinsic credibility` to certain organizations. An organization must be able to provide evidence of its credibility at any time. The Portuguese authorities have themselves recognized this and have modified their practices.

The Commission would recall that the specific case mentioned by the Court is currently before the courts. The Commission has frozen payments and is a civil party in the proceedings. The same promoter has been subjected to an audit covering all his activities under CSF I and CSF II.

6.62. The Commission recognizes that in some cases there is room for improvement in transmitting the conclusions drawn from the audit reports so as to ensure that they have a real impact on the calculation of the certified amounts.

The ESF requires a balance for each annual tranche, which must be in by 30 June of the following year; on that date the results of the audits are rarely available. Under these circumstances the Commission tries to verify whether the appropriate corrections have been made even if this involves changes to later tranches.

6.63. At the Commission's request the Greek authorities submitted corrections to the financial tables relating to the operational programmes for the programming period 1990-93 at the end of February 1996, this time in compliance with Regulation (EEC) No 1866/90. An on-the-spot audit at the Greek Ministry of Labour is planned to check that the drachma/ecu parity mechanisms have been implemented, to make the necessary adjustments to the financial tables by year, and to close the programmes.

6.64. Employees of public corporations do not have civil servant status. Their employment contracts are governed by private law. Hence the existence of a threat of unemployment must be based on a detailed case-by-case analysis, which the Commission always undertakes.

6.65. The Commission's services when carrying out on-the-spot checks focus on the major beneficiaries, the vast majority of which are public bodies. The Commission is aware that the public bodies are subject to control from the National Audit Office. Nevertheless, the Commission agrees with the observation of the Court and will take up the issue with the competent Greek authorities which are entitled to carry out controls for ESF purposes.

The certification procedure for training organizations in Greece was the subject of four on-the-spot audits by the Commission in November 1995, January 1996, June 1996 and July 1996 respectively. Weaknesses in the certification procedure were identified. Following these audits the Greek authorities withdrew their accreditation from several organizations and decided to overhaul their certification system. Thus all organizations must undergo a new certification procedure. The Commission is keeping close tabs on developments.

6.66. In accordance with the management system in force, the lists of final beneficiaries must be kept by the Member States which are responsible for approving the projects. The Commission recognizes that circumstances differ greatly from one Member State to another. In certain cases information exists at central level and is published in the Official Journal. In other cases lists of operators are published at regional level. But the Commission recognizes that in most cases the dispersion of part-financed actions makes access to information more difficult.

The Commission will examine the procedures for accessing the Member States' information networks in order to obtain the necessary information on the final beneficiaries.

6.67. The Commission wishes to recall the objectives set out in the protocols concluded with the Ministries of Finance in the seven Member States mentioned by the Court, which, moreover, do not concern the ESF alone:

(a) Auditing of the systems and checks of individual measures by the Member States concerned.

(b) To this end, agreement on a methodology compatible with that used for financial control and annexed to the protocols, laying down minimum standards.

(c) Joint creation of inspection schedules which reflects the audit forecasts made by all national and Community services.

(d) Regular communication of individual results relating to national audits and follow-up of the audits.

The protocols have been followed up by regular monitoring meetings and pooling of information, notably in regard to coordinating the audit programmes. On several occasions, monitoring and further investigation of certain findings based on the Community on-the-spot audits were entrusted to national partners who regularly participate in these audits with positive effect.

The Commission considers that the experience with the protocols, most of which were signed from end 1994 onwards, is too short for a conclusive evaluation to be made at this stage.

6.68. The Commission shares the Court's view on the need for the beneficiary bodies to comply with the rules governing the periods during which supporting documents concerning expenditure and audits relating to part-financed measures must be kept. However, in the AFPA case mentioned by the Court, the supporting documents are kept for 10 years, i.e. for longer than required under the Community rules. It is true however that only absences of trainees were entered in the technico-pedagogical dossier. Following the Court's audit the AFPA has instructed its training centres to keep attendance lists of trainees in the future and to preserve these lists for at least three years after closure of the OP.

6.69. Most of the certifications follow a formal procedure and the main thing is to ensure that the certification system works properly.

If doubts exist as to the reliability of the information given at the time of certification, there is nothing to prevent the certifying body from transmitting the casefile to the agency responsible for auditing. However, the Commission recognizes that there is room for progress and that Member States should be encouraged to move in this direction.

The Commission is aware that the link between audit and certification is not optimal. However, there will always be a time lag between the certification and that of communication of the results of audits which make a posteriori corrections necessary.

The Commission confirms that it was initially prevented from auditing costs in Portugal but in the meantime it has been able to do so thanks to the Member State's support. Difficulties of this kind sometimes crop up when checking the origin of costs of a more delicate nature, because the audited body is not the direct beneficiary of the aid. As emphasized by the Court, the national and Community audit bodies have run up against this problem.

Such restrictions on auditing powers are unacceptable and the national audit bodies in general are cordially invited to demonstrate the same resolve as the Commission.

Assessments/impact

6.71. To learn more about the impact of the measures, theme-oriented assessments were conducted in 1992 on the different target groups (long-term unemployed, women, the disabled) as well as on aids to recruitment.

In measuring the impact of training measures (which were the priority for 1989-93), the assessments focused on the adequacy of the training systems in the light of demand and on the effectiveness of training measures in the context of seeking employment. Even if in certain Member States the use of control groups revealed a positive correlation between participation in an integration/training measure and having a job more than six months after completion of the measure, much remains to be done. However, it should be noted that measures in the field of human resources always take time to take effect.

6.72. The negotiations with the Member States focused mainly on the definition and quantification of the objectives to be achieved. The Commission negotiated the definition of a 'battery` of indicators (provided for in the CSFs/SPDs) which must be used in following up the results and the impact of the measures. Wherever the monitoring systems were not sufficient to complete quantification of the indicators since 1993, the Member States have been invited to pursue their drive to quantify and interpret the indicators in order to complete the interim assessments provided for in the standard CSF/SPD terms. These interim assessments will be available in 1997. The implementation of this battery of indicators and interim assessments will pave the way to satisfactory ex post assessments.

Subcontracting

6.74. The Commission shares the Court's view on the need to keep tabs on subcontractors. It can assure the Court that if makes full use of its rights in this domain.

6.75. The Commission shares the Court's view and has already had occasion to request the Member States to adopt such measures. The Commission is increasingly carrying out cross-audits on the origin of costs to ensure that subcontracting helps improve the quality of the measures. The Commission also checks whether the subcontractors have been chosen in accordance with the normal rules of competition and that their prices tally with market prices.

Administrative expenditure and operational expenditure

6.76. The Commission has tried to simplify the forms for requests for final payment but recognizes that it may have gone too far, with the result that information on costs is now too aggregated. The heading 'Other expenditure` thus becomes too heavy. The Commission is considering introducing a new system of costs breakdown. Nevertheless the Member States have the basic information needed for carrying out cost audits.

6.77. Flat-rate figures are admissible in requests for assistance if and only if they are properly justified by real expenditure (at least equal to the flat rate) when the request for final payment is submitted. The nature of the expenditure must be systematically verifiable. Otherwise the Commission takes the appropriate measures (see points 6.54 and 6.55).

6.78. During the preceding programming stage the Commission tried to develop a method of calculating average indicative cost figures but, because of the complexities involved, the expected operational results were not forthcoming. Apart from substantial methodological difficulties the Commission wishes to point out that the introduction of average indicative cost figures with a breakdown by types of training would certainly push costs upwards, since the promoters - no longer bound by market conditions - would try to justify a cost at least equal to these indicative amounts.

Conclusion

6.79. Mindful of the importance of the problem raised by the Court, the Commission has already adopted a raft of initiatives designed to:

- elicit more reliable expenditure estimates from the Member States;

- ensure that the national counterparts to the Community part-financing are entered in the Member State budgets;

- simplify the administrative procedures without jeopardising the rigour of the implementation audits, so as to guarantee good financial management.

The Commission considers that the under-utilization of appropriations is partly due to the absorption difficulties facing the Member States in a period of budgetary consolidation.

6.80. All cases in which payments have been frozen are being regularly monitored. Most of them are before the courts. In the other cases the Member States must prepare new certifications to correct the non-eligible amounts.

6.81. The problem of subcontracting, notably when a cascade of subcontractors is involved, has always been a central issue for the Commission, notably that of its audit services, as has been shown in the case of certain audits with which the Court is familiar. The Commission shares the Court's views on this matter and is pursuing its efforts to identify cases of unjustified subcontracting at the level of the final beneficiaries of the measures.

6.82. See the answer to point 6.69.

6.83. While it is aware that there is room for progress in the management of the ESF, the Commission wishes to recall that important improvements have already been made. Hence:

- the CSFs and SPDs in the new programming period are far more closely linked to Community priorities than they were in the preceding period;

- these programmes are in compliance with the regulations in force notably as regards the eligibility of part-financed measures. The drive to clarify the definition of eligibility is under way in the context of SEM 2000;

- the complexity of the management of hundreds of OPs and - indirectly - of hundreds of thousands of part-financed training courses each year poses major difficulties at the organizational and accounting level. Nonetheless the Member States have tried hard to improve their management and auditing mechanisms. In the context of SEM 2000 the Commission will pursue its efforts, in collaboration with the Member States, to improve their management and auditing systems;

- the Commission will pursue its endeavours to improve management of the ESF measures, notably as regards Member State compliance with the time limits for transferring the appropriations to the final beneficiaries and the obligation to adhere to the certification rules regarding expenditure based on real costs.

COMMUNITY PROGRAMMES IN THE FIELDS OF EDUCATION AND VOCATIONAL TRAINING: SOCRATES AND LEONARDO, AS WELL AS PRECEDING PROGRAMMES

Implementation of the budget

6.87. Despite the tardy adoption of the legal basis (December 1994 for Leonardo da Vinci; March 1995 for Socrates) and the duration and complexity of the implementing procedures, all appropriations had been completed by the end of the financial year. Performance, which was less consistent in 1995, the year the programmes were launched, than in earlier programmes, has been improving as of 1996. As a result of major commitments made at the end of 1995, payment in respect of certain contracts could not be made until 1996; the result was under-utilization, unusual for line B3-1, of the payment appropriations.

Observations

Transition from preceding programmes

6.88. Rationalization - by consigning all the old measures to a single programme and extending it to new domains - was one of the stated objectives of the reform of the old vocational training programmes. Even if there were difficulties during the transitional phase, the Community action gained in profile and a clear political framework has emerged: Leonardo da Vinci is a fully-fledged and coherent programme of Community measures that implements a Community vocational training policy designed to promote the concept of lifelong learning. The Commission has seen to it that the information on this new programme (notably the Vade-mecum, Guide for promoters, application forms, calls for proposals) enables potential beneficiaries to distinguish clearly between the various strands of which it is composed.

6.89. The outstanding debts and claims between the Commission and the agency designated by the Greek authorities to manage the decentralized measures in the framework of the old Petra programme were settled at the end of the 1993 financial year.

6.90. In the final evaluation of these old programmes, the Commission complied with the provisions set out in the relevant decisions. And even if the result of the final audits is not available, various interim evaluations, most of which were conducted in autumn 1993, have been taken into account in the Commission's proposals for the new programmes. Some of the final evaluation reports were to be based on the contributions from the Member States. Hence for Petra these reports were to be sent to the Commission by 30 June 1995; in fact, the last national reports did not arrive until the end of 1995 (after several reminders), and so preparation of the Commission's final report was delayed (it was initially scheduled for 31 December 1995).

6.91. The late adoption of the programmes led to delays in their takeoff (the need to set up the committees and national agencies, to prepare, have approved and distribute the vade-mecums and promoter guides, etc.). The reason for resorting to transitional measures was to limit the temporary disruption within a given measure between the old and new programmes. For the placement actions and exchanges, an accelerated procedure was adopted for placing students in firms and global subsidies were granted in time for placement actions for young people receiving initial non-university training, young workers and instructors. The Commission, in line with a favourable opinion delivered by the Leonardo da Vinci Committee, decided that 8 Mio ECU were sufficient for this operation.

6.92. This situation arose because the programmes were late in getting started (the Commission had to wait for the Member State to nominate the national agencies). This situation no longer applies in 1996: the contracts were signed earlier on in the year, before the placements and exchanges got under way.

6.93. The reduction of technical assistance offices from six to two was part of a consolidation strategy with an eye to proposing two programmes only, but the idea was also to exploit economies of scale in the management of these programmes. These economies of scale will make themselves felt over several years: as of 1996/97 technical assistance expenditure has fallen to 16.2 Mio ECU, a reduction of 16%. In 1996, this expenditure represents only 5% of the operational appropriations allocated to the programmes (as opposed to 8% in 1994, the last year of the old programmes).

Application procedure and deadlines

6.95. The Commission proposal did not spell out any particular proposal submission procedure and, during the negotiations with the Council, the Commission always insisted on the need to adopt a single submission procedure for the programme, i.e. applications to be submitted directly to the Commission. The final provisions in the Council Decision, envisaging two types of procedure, emphasize the political importance attached by the Member States to receiving and pre-selecting proposals which affect their national vocational training systems, before submitting them to the Commission. To ensure transparency in the procedures, the Commission and the Member States forward one another copies of the proposals they receive. It is important to emphasize that the Programme Committee delivers its opinion on the lists of projects proposed by the Commission, but the Commission takes the final decisions on the projects to be funded.

6.96. Despite this situation, linked to the launching of the programmes (notably because certain Member States were slow to set up the national agencies), over 4 500 proposals were received, considerably in excess of the budgetary resources available for part-financing under Leonardo da Vinci.

As of 1996 more generous time limits have been granted to potential promoters, i.e. between the date of publication of the call for Leonardo da Vinci proposals and the deadlines for the submission of applications.

6.97. In 1996, the forms were simplified and their number substantially reduced, notably in response to the Court's comments.

Extent of Community support and funding

6.98. Projects were selected on the basis of the quality of the proposals and their compatibility with the programme's objectives. It is not just a matter of funding projects: the Commission keeps abreast of developments and has created a monitoring system to accompany projects during the lifespan of the contracts. It would not be possible to monitor projects that do not have a contractual link with the Commission, or to verify that they contribute to achieving the programme objectives.

6.99. The Commission encourages the national agencies and universities to go for a differentiated approach as regards the allocation of grants, so that students whose needs are greater (because of their economic and social circumstances and their destination) receive higher grants than those in a more fortunate position. It also insists that not all Erasmus students have to receive a grant and that the choice should be made after examination of the applicant's circumstances.

Again, even if the Erasmus grants are on average quite modest, their existence has had a considerable impact on student mobility. The amounts provided under the Community budget may be small but they can trigger the release of additional resources, notably in the form of supplementary grants funded at national or regional level in most of the participating countries.

Financial controls

6.100. The national agencies have been invited by the Commission to audit the decentralized activities under the programmes (this provision is contained in the contracts between the Commission and the agencies).

The Commission will study the possibilities of supplementing its own audits of the centralized activities with audits at national level, while bearing in mind the need for a reasonable cost/benefit ratio.

6.101. When the programmes were launched priority was attached to tasks linked to evaluating projects and concluding contracts with the beneficiaries. The procedures for auditing the accounts will have been established, in agreement with the Commission, before the first interim reports for projects selected in 1995 arrive at the end of 1996. The Commission has already prepared an administrative and financial guide designed to provide a reference framework to help project administrators in preparing the financial reports; this document will also be a reference tool for the staff of the technical assistance office responsible for analysing the accounts.

Coherence, complementarity and the problem of possible double funding

6.103. The Leonardo da Vinci programme, adopted under Article 127 of the EC Treaty, is designed to contribute to developing Community policy in the field of vocational training. Vocational training measures which are part-financed by the ESF under Article 123 of the EC Treaty are designed to support vocational training policies in the larger context of employment market policy and economic and social cohesion.

The fact that certain supplementary measures are supported under the ESF, and notably under Objective 4 and the Community initiatives ADAPT and Employment, demonstrate the coherence of the Commission's approach as regards the priorities and objectives of vocational training.

To avoid the risks of double funding mentioned by the Court, several measures have been adopted, notably:

- the Commission units concerned adopted a framework document on complementarity before the first call for Leonardo da Vinci proposals in order to explain the possibilities of complementarity and to encourage Member States to create appropriate coordination structures. The programme committees and agencies have examined this document and have been informed of the procedures and time schedules pertaining to all the programmes and initiatives;

- the operational plans of the Leonardo da Vinci agencies provide for coordination at Member State level with the Community initiatives, notably as regards selection and preselection of proposals. Moreover, certain Member States - strongly encouraged by the Commission - have established specific structures responsible both for Leonardo da Vinci and the Community initiatives;

- within the Commission the units concerned provided one another with mutual and regular information on the implementation of the programmes and initiatives and, in 1995, DG V participated in evaluating the Leonardo da Vinci proposals concerning industrial changes.

6.104. The calls for proposals and application forms in 1995 and 1996 clearly state that no overlapping is allowed between Leonardo da Vinci and other Community programmes. Verification is a matter for the Member States, who have access to the necessary information.

Within the Commission the units involved keep one another abreast of the project lists and compendia.

6.105. The Commission has encouraged Member States to create Leonardo da Vinci/ESF coordination structures or to nominate unique national structures responsible for Leonardo da Vinci and the Community initiatives. Certain Member States have adopted this approach, which should facilitate the type of auditing envisaged.

Conclusion

6.106. This situation is due to the late adoption of the legal bases and the procedures necessary to launch the new programmes (in particular the creation of programme committees), which could not be anticipated. Since 1996 the situation has been the same as in the old programmes.

However, the Commission has been taking transitional measures to minimize the deficiencies mentioned by the Court.

6.107. This situation results from the deadlines for adopting a new programme. However, evaluation is an ongoing process: the new programmes were proposed taking into account various past evaluations and the experience gained in implementing the old programmes, even if the final evaluations of these programmes were not yet available.

6.108. As indicated in point 6.107, certain Member States - with the full backing of the Commission - have established single structures responsible both for Leonardo da Vinci and the Community initiatives, which should make it possible to identify the risks mentioned. An additional effort will be undertaken to improve coordination at national level in this connection. The Commission is already mindful of this problem.

MEASURES TO COMBAT POVERTY AND SOCIAL EXCLUSION

Results

6.111. Although the Council Decision does not lay down precise or quantifiable objectives, and although there are objective difficulties in evaluating the impact and effectiveness of the programme measures, the Commission introduced evaluation requirements in the agreements signed with the beneficiaries.

6.112. Ensuring overall coherence is a long-term and ambitious objective, Poverty 3 being the first step. The top priority was to integrate the very concept of social exclusion into the different Community policies and measures. This is explained by the Commission in its final report (COM(05)94). These efforts have borne fruit, notably as regards the structural policies and research policy.

In particular, the new strand of the Community employment initiative, Integra, launched in 1996, embodies the three major principles which proved effective in Poverty 3 - the multidimensional approach, partnership, and participation in the projects of persons in a situation of exclusion.

The specific research programme for 1994-98 has social integration and social exclusion in Europe as its priority socioeconomic domain.

Finally, in order to advance this policy of coherence, the Commission is preparing in 1996 - in line with its medium-term social action programme 1995-97 - a report on all Community measures concerning poverty and social exclusion.

6.113. General information on preventive measures is more advanced in certain Member States and depends on the extent to which their national policies focus on combating exclusion.

On the other hand, the purpose of Poverty 3 was not to cover a large population but rather to identify new methods of combating social exclusion. This was why, initially, priority was attached to a qualitative analysis.

6.114. The quantitative analysis the Court would like to have is difficult to realize. The available poverty indicators are too global and influenced by numerous factors external to the programme.

Information is available on each of the projects, even if it is difficult to make a global evaluation, and the Commission has pointed this out in its final report on the programme.

6.115. Partnership is one of the programme's plus points, and most of the projects have effectively opted for a multi-dimensional approach and measures covering several areas; the internal cohesion of these measures - often weak at the outset - has been growing as the programme proceeds. The rationale of an innovative programme may disappear simply because its innovative features may become diffused, or because its concerns, initially neglected by other players, have become integrated in their regular policies.

As to the spread of demonstration projects in the Member States, the Commission has questioned their representatives, in the context of the programme's Advisory Committee, about the strengths and weaknesses of Poverty 3, notably in order to flesh out its proposal for a new programme. It has gleaned additional information in the course of seminars organized in certain Member States.

6.116. Such a cost-benefit approach is not always possible. The approach was adopted for certain Poverty 3 projects, for example, in evaluating credit provided to certain unemployed persons to allow them set up business. However, the Commission recognizes the importance of this approach, notably when evaluating the transferability of methods and their application on a wider scale.

The Commission has integrated the cost-benefit data in the evaluation scheme for projects financed in 1995 and in the 1996 guide to calls for projects.

6.118. The Commission avoids pinpointing the target population to avoid stigmatizing the persons concerned. The remarks in the budget mention the large groups at greatest risk within which projects may be financed.

To define the concrete impact as suggested by the Court would be out of proportion to the very limited funds at the Commission's disposal in this particular case (2 Mio ECU for delinquency, for example).

6.119. The Commission recognizes the need for better evaluation of the work of the networks it subsidizes. But their effectiveness must be appraised in relation to their specific impact: information, sensitization, cooperation at European level through exchange of experience and identification of transferable good practices.

6.120. The EAPN, although financially dependent on the Community budget, is not subordinate to the Commission in the same way as a provider of services where the Commission lays down the terms of the contract. The EAPN proposes a work programme to the Commission, which the Commission agrees to subsidize to the extent that it contributes to the realization of common objectives.

6.121. The Commission has organized wide-ranging consultations in this area with a view to better targeting and structuring its subsidies. The first achievement was the European Forum on social policy organized in March 1996, where the non-governmental organizations referred to in Declaration 23 were massively represented and made up the majority of the participants.

Legal basis

6.122. The question as to whether the funding of the 86 projects referred to in the text required a legal basis is currently before the Court of Justice of the European Communities (C-106/96, United Kingdom v Commission).

In essence the Commission's defence is that the remarks in the budget relating to line B3-4103 authorized expenditure outside the framework of the programme which was not adopted by the Council and did not place a ceiling on the amounts which could be allocated. The 86 projects financed under this action were by their nature different to those which had been financed under the Poverty 3 programme and which would have been financed under the social exclusion programme. Each of the actions financed was 'non-significant` within the meaning of the Financial Regulation and therefore did not need a legal basis.

As of July 1994, technical assistance comprised two distinct phases:

- July to December 1994: closure of the Poverty 3 activities and final publications;

- January to September 1995: transition between Poverty 3 and the new programme, distribution and maintenance of the Community acquis.

6.123. The 1.3 Mio ECU cover different measures. A total of ECU 650 000 is earmarked for financing the network. The remainder corresponds to a different part of the remarks in the budget outside the programme permitting the financing of specific activities in the context of Declaration 23.

6.124. According to the remarks in the budget, the 1 Mio ECU and 2 Mio ECU allocated to delinquency and Declaration 23 respectively are indicative. The question of implementing the budget on the basis of the remarks in the budget adopted is addressed in point 6.126.

Conclusions

6.125. Monitoring and later exploitation of the results of the projects financed are major features of a global strategy to combat poverty and social exclusion which the Commission wishes to pursue in the context of multi-annual programmes.

It greatly regrets that the last programme which it proposed to the Council in September 1993 has not yet been adopted. In the meantime the Commission is obliged to work on an ad hoc annual basis which makes management more difficult. The Commission attaches great importance to consistency between the different measures in the field of poverty and social exclusion.

In 1996, in line with its medium-term social action programme 1995-97, it is preparing a systematic inventory of all Community measures capable of contributing directly or indirectly to fighting social exclusion.

6.126. The question of the need for a legal basis for the 86 projects financed in 1995 is currently before the Court of Justice of the European Communities.

AUDIT OF CONTRACTS AND GRANTS

Introduction

6.127. A clear distinction should be made between the notions of 'contract` and 'grant`. Only the former are subject to the 'public contract` directives and the CCAM procedure.

General observation

6.128. The Commission will examine the Court's suggestion of creating a supplementary agency to monitor grants.

The tasks and role of this agency have to be clearly defined if duplication with existing competences is to be avoided.

The creation of such an additional monitoring body will inevitably create administrative burdens and give rise to delays and costs which must be taken into account in assessing the pros and cons.

At any rate such a body can never replace the authorizing officer in assessing the advisability of a grant.

The Court's criticism as to the absence to publication and selection prior to the award of Community grants concerns only some sectors of activity and represents but a small percentage of the appropriations concerned.

DG V (Social Affairs) contract management

6.129. The award of grants is not the subject of contracts but of 'letters` or grant 'agreements`. The nature of these acts is different as regards the subject, the notion of counterparty, the initiative and management of the measure, ownership of the results and the selection modalities.

Since no 'contracts` are involved, the 'weaknesses` (points a and d) mentioned by the Court do not apply to the award of grants. As regards point f, the agreements used for major grants provide for the submission of interim and final reports.

6.130. The contracts clearly specify that the amounts indicated are maxima.

6.131. The management expenditure was 2.5 Mio ECU instead of the 2.3 Mio ECU initially foreseen.

The difference between the amount of 5.1 Mio ECU mentioned by the Court and that of 2.5 Mio ECU actually spent on management is due to research outgoings (0.9 Mio ECU), closure of the programme (0.9 Mio ECU) and the transitional period (0.9 Mio ECU).

6.133. Pending the implementation of the new programme and the selection of an appropriate structure, the Commission launched a call for tenders in spring 1994. Because of the decision to freeze at Council level, it became impossible to pursue the selection procedure in regard to this new structure. Given the likelihood of the dossier being approved in the first half of 1995, maintenance and diffusion of Poverty 3's acquis would be the best preparation possible for this new programme. This is why the Commission extended the contract of the existing technical assistance team.

DG XXII (Education, Training, Youth Contract management

6.134. In the last case mentioned, it is true that the contract concerned the part-financing of an operation which, because of the delay in preparing the dossier, had already started; financial control had given its approval before the contract was proposed to the beneficiary.

CONCLUSION

6.135. The Commission shares the Court's view that good use should be made of all the appropriations allocated to human resources. This will involve an additional effort on the part of the Commission and the Member States. The Commission has already pledged itself, in partnership with the Member States, to prepare estimates of how appropriations will be utilized which should in due time make it possible to reschedule in cases in which plans are not matched by performance. Effective cooperation between the Member States and the Commission should lead to positive results in this area.

Under these circumstances we should continue to make increasingly better use of the tools which current legislation places at the disposal of the ESF managers.

6.136. Concrete measures in the field of the protection of the Community's financial interests have recently been taken. Hence, in 1994 the Council adopted Regulation (EC) No 1681/94 on irregularities and the recovery of unduly paid sums and in 1995, the Regulation cited by the Court.

On this horizontal regulatory basis, and using the information derived from the comparative study of national provisions to combat fraud, under way since the beginning of 1995, the Commission will take the appropriate measures.

Finally, the SEM 2000 initiative is currently in its third phase. As urged by the European Council in Madrid, one of the focal topics of this project is to study the possibility of extending the system of financial corrections to other sectors, and thus notably the structural funds. This work should lead to a report to be submitted to the Dublin European Council.

6.137. The Commission has complied with the regulations in force and the solution to which the Court refers has made it possible to finance training measures eligible for the ESF.

6.138. No effort has been spared to avoid double funding of actions part-financed by different programmes.

6.141. In the context of SEM 2000, DG V's organization chart was amended on 17 July 1996. This modification has allowed the creation of 'Resources Directorate`, whose functions include allocation and management of human and financial resources, audit, monitoring and evaluation. The Commission considers that application of the SEM 2000 principles is in line with the Court's wishes.

General conclusion

Bearing in mind the Commission's replies to the Court's observations, it is clear that the two institutions are of like mind on many of the key issues, such as the good management of part-financed measures.

The Commission will pursue its efforts in this area, notably in the context of SEM 2000, so that management of the ESF can become as efficient as possible.

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CHAPTER 7 (*) The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance)

7.0. CONTENTS Paragraph reference

Introduction 7.1

Implementation of the budget 7.2 - 7.8

Commitment appropriations 7.3 - 7.4

Payment appropriations 7.5 - 7.8

The Community 'Leader` initiative (1990-93) 7.9 - 7.60

Introduction 7.9 - 7.15

Transfers between Structural Funds 7.16 - 7.17

The idea of local action groups 7.18

Global grants 7.19

Bank guarantees 7.20 - 7.22

Interest 7.23 - 7.24

Observations concerning specific groups in Germany 7.25 - 7.26

Observations concerning specific groups in Italy 7.27 - 7.38

The Vulture Alto Bradano Leader Group 7.30 - 7.38

Observations concerning specific groups in Spain 7.39 - 7.52

Technical assistance 7.53

Conclusion 7.54 - 7.60

INTRODUCTION

7.1. The Court's observations on the European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) concern the implementation of the budget and the Community 'Leader` initiative (a French acronym meaning: Links between actions for the development of the rural economy; 1990-93).

IMPLEMENTATION OF THE BUDGET

7.2. Compared with the previous financial year, the increase in appropriations utilized for the EAGGF-Guidance in 1995 was greater in the case of commitments than of payments (see Tables 7.1 and 7.3) (). Although the overall utilization rates (97%) did not vary significantly, there were considerable variations in terms of the objectives to which funds were committed.

Commitment appropriations

7.3. In 1995 the commitment appropriations amounted to 3 609 Mio ECU compared with 3 335 Mio ECU in 1994 (see Table 7.2). Commitments to areas covered by Objective 1 increased considerably (2 395 Mio ECU, compared with 1 902 Mio ECU in 1994), as did those of the Community initiative programmes (250 Mio ECU compared with 3 Mio ECU in 1994). By contrast, it should be emphasized that commitments to Objectives 5a (656 Mio ECU compared with 1 088 Mio ECU in 1994) and 5b (250 Mio ECU compared with 265 Mio ECU in 1994) fell sharply.

7.4. The rates of utilization were poor for certain Community initiative programmes, especially for REGIS II (no commitments) and Interreg II (63%), and also for temporary measures and innovative actions (35%). These rates reflect delays in approval of the Commission's decisions.

Payment appropriations

7.5. Total payment appropriations utilized in 1995 amounted to 2 696 Mio ECU, compared with 2 619 Mio ECU in 1994 (see Table 7.4).

7.6. Payment appropriations increased in regions covered by Objective 1 (1 695 Mio ECU compared with 1 619 Mio ECU in 1994) and also for Community initiative programmes (94 Mio ECU compared with 32 Mio ECU in 1994). In contrast, they fell in regions covered by Objective 5b (207 Mio ECU compared with 234 Mio ECU in 1994).

7.7. A total of 404 Mio ECU of unused payment appropriations which had been entered in the budget under the Community Support Framework headings was cancelled.

7.8. The rates of utilization of the payment appropriations fell from 84% in 1994 to 83% in 1995. This slight decrease is due to poor utilization of budget headings relating to Objectives 5a (74%), 5b (52%), and the Community initiative programmes (48%). This rate of utilization of the payment appropriations is due to the poor rate of implementation of measures in the Member States and also to the delay in approving decisions.

THE COMMUNITY 'LEADER` INITIATIVE (1990-93)

Introduction

7.9. On 15 March 1991, the Commission decided, acting pursuant to Article 11 of Regulation (EEC) No 4253/88, to establish a Community initiative (CI) referred to as Leader (Liaison entre actions de développement de l'économie rurale - in English, links between actions for the development of the rural economy) for the period 1990 to 1993 (). The application procedures were set out in a 'Notice to Member States` published in OJ C 73 on 19 March 1991. Initially, the commitments were to be made in all the Member States by 31 December 1993 (subsequently extended to 31 December 1994) and the payments by 31 December 1995. Some Member States were granted an extension to 30 June 1995 for commitments and 31 December 1996 for payments.

7.10. The chief objective of this initiative is to 'find innovative solutions which will serve as a model for all rural areas...` in regions covered by Objectives 1 and 5b. To this end, the Community provides financial assistance in the form of global grants (). In order to implement Leader I, the concept of local action groups (Leader 'groups`), selected by the Member States and the Commission in collaboration, was introduced (). These local groups are supposed to manage the global financial allocations they receive under Leader I. They are to be made up of leading figures 'in the local economy and society` who are well acquainted with the specific regional problems and able to operate in a network in order to exchange information and experience.

7.11. The principal measures eligible for grants under Leader I are:

(a) agricultural and rural development as such (consisting of six specific measures: technical support for rural development, vocational training and assistance with recruitment, rural tourism, small enterprises, craft enterprises and local services, adding value to and marketing of local agricultural, forest and fishery products and other measures);

(b) assistance for the Leader groups (operating costs, cost of data-processing equipment, cost of technical assistance)

(c) expenditure for the implementation of a transnational network (technical assistance).

Total financing for administrative tasks and for the management of the groups and the network must not account for more than 12% of the total funds available.

7.12. The financial allocations for the three Structural Funds (ERDF, EAGGF-Guidance and ESF) for 1991-95 (see Table 7.5) amounted to 448,9 Mio ECU of commitment appropriations. Directorate-General VI, which is the body responsible for the management of the EAGGF and contributes approximately 176,6 Mio ECU to this CI, is also the coordinating authority for Leader.

7.13. The principal beneficiaries of the Leader I CI are Spain and Italy, who have been given budgetary allocations of 120 Mio ECU and 80,9 Mio ECU respectively.

7.14. In July 1994, the Commission decided to establish the Leader II CI for the period from 1994 to 1999 with an indicative budget of 1 446,7 Mio ECU. On 31 December 1995 the Commission had already committed a total of 545 Mio ECU from the three Structural Funds to Leader II.

7.15. In 1995, audits were conducted in Italy (four groups), Spain (four groups) and Germany (three groups). These groups were chosen because of the volume of finance involved and because of geographical considerations.

Transfers between Structural Funds

7.16. The appropriations allocated to the Community Structural Funds are utilized in different ways by the Member States and some of them lay down stricter eligibility criteria than others, as the audits conducted by the Court in Germany, Italy and Spain showed. Thus, in one case, the Commission refused to allow Leader projects within the framework of ERDF to benefit from EAGGF appropriations. In other cases, projects coming under the EAGGF-Guidance were financed by ERDF appropriations without provoking any reaction from the Commission. These discrepancies can be explained by the absence of binding guidelines for such cases in the regulations. However, the Structural Funds are not interchangeable in terms of their objectives. The Commission must ensure that this principle is respected.

7.17. The choice of a particular Structural Fund to finance a Leader I project does not lie within the competence of the group, but of the intermediary body approved by the Commission. In order to improve coordination of the utilization of all appropriations available, the Commission should define the type of projects eligible for finance from the various Funds, and establish clear rules for the transfer of appropriations that are still available from one Fund to another.

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The idea of local action groups

7.18. A network of 217 local action groups has been set up within the framework of Leader I. The local action groups (referred to here as the 'groups`) are public, private or mixed bodies whose objective is to initiate, assist and guide rural development actitivities and projects which, by reason of their innovative character, may serve as a model (). Each group submits a programme made up of a number of specific measures. The programmes are designed so as to achieve a variety of projects which should complement the measures envisaged in the Regulation (). The groups operate completely autonomously but under the supervision of intermediary bodies. They are non-profit-making bodies. In the case of Germany, this idea of creating local, decentralized groups was not always put into practice, as their functions are often fulfilled by the regional authorities concerned. Such administrative procedures are not consistent with the innovative spirit of Leader. The role of the groups in the choice of projects and their assessment and monitoring activities (of both financial and technical aspects) constitute the fundamental basis of the Leader CI. The responsibilities assigned to these groups and the way they operate vary from one Member State to another. In general, in order to to be able to operate, they require financial support in the form of sizeable subsidies to cover their day-to-day running costs. Subsidies for the projects approved by the groups come from the Structural Funds, but also from the national governments, operating at national, regional or local level.

Global grants

7.19. The Community contribution takes the form of a global grant to national intermediary bodies to be distributed to local action groups. The latter are responsible for allocating the grant to the final beneficiaries. The proposal put forward by certain regional governments, to use this Community contribution in order to make loans, was not accepted by Directorate-General VI, on the basis of the regulation in force. By contrast, within the framework of the ERDF operational programmes ('Local Development`), Directorate General XVI accepted this practice (see the observations on this subject in the Court's annual report on the financial year 1994, paragraph 4.46). The Commission should harmonize the application of the regulations concerning the global grants within the framework of the various Structural Funds.

Bank guarantees

7.20. Both in Italy and in Spain the Leader groups were required to submit bank guarantees payable to the intermediary body before they could receive the assistance granted to them. Particularly in Italy, this arrangement led to delays of more than one year in the implementation of the entire Leader I programme.

7.21. The expenses linked to these bank guarantees represented a cost of between 1 and 2% a year in Spain, compared with between 0,5 and 0,8% in Italy. In Italy, the Leader groups, with the exception of the Campobasso/Molise group, also demanded a bank guarantee from every private beneficiary, at the beneficiary's expense. The Campobasso group arranged a bank guarantee of 3,5% a year with its own bank, which enabled the final beneficiaries to be exempted from supplying a bank guarantee in favour of the Leader group. This simplified procedure quadrupled the group's costs.

7.22. The Commission should take steps to ensure that, at national level, the procedures guarantee beneficiaries the same treatment. This is especially important now that the initiative is being continued as Leader II.

Interest

7.23. The use to which interest earned on advance payments should be put has not been clearly defined. Apart from financing the costs borne by the Leader groups for bank guarantees, interest income has, as a general rule, been utilized to finance technical assistance activities and the groups' operational costs. It has also been used as the groups' own contributions to projects of which they themselves are the beneficiaries. For example, the Leader group in Campobasso/Molise, Italy, took the view that the income generated belonged to it and used it to buy government bonds, while the Spanish Maestrazgo-Teruel group allocated the interest to the construction budget for a building intended to house the regional government. This building will subsequently have to be placed at the disposal of the group under the Leader II arrangements.

7.24. Interest generated by unspent Community appropriations does not belong to the Leader groups. Clear rules should be drawn up regarding the use of interest paid on Community advances because such interest should be used for the benefit of Leader. The Court has already expressed concern about this problem (). In fact, the use that should be made of interest income is considered by the Court to be a general problem that should be tackled by the Commission (see also paragraphs 11.57 - 11.66 of this report).

Observations concerning specific groups in Germany

7.25. Among the groups audited at Leer, Aurich and Kusel, one of the latter's projects (alterations to and fitting-out of the youth hostel at Burg Lichtenberg) received an ERDF grant of more than 2 Mio DM (± 1 Mio ECU), towards total costs of more than 10 Mio DM (± 5 Mio ECU). More than 81% of all the Leader I assistance to the Kusel group was assigned to this one project. In the plan submitted to the Commission, the amount entered for this project was considerably less than the actual cost. A project on so large a scale is not compatible with the spirit of the Leader I CI (see paragraph 7.18). In any case, the project was only financed by the Leader CI because there were no appropriations available under Objective 5b within the framework of the normal operational programmes.

7.26. In place of the project approved initially as a measure 'to exploit and market local agricultural, forestry and fishery products`, the Kusel Leader group (just like the two other Leader groups in Rhineland-Palatinate) incorporated into the Leader I initiative a programme run by the Land, which had already been in existence since 1989. The programme in question offers assistance to farmers for investments aimed at reducing environmental pollution ('Liquid Manure` programme). The group increased the grant by 166 000 ECU using EAGGF appropriations. A number of individual projects that were solely the responsibility of the Land thus became projects co-financed by the Leader I programme. In this case the Community financing was neither an incentive nor a spur to innovation, although these two concepts are the very essence of the spirit of Leader.

Observations concerning specific groups in Italy

7.27. In Italy, the Basilicata, Umbria, Molise and Vulture Alto Bradano groups were subjected to audit. The Court discovered that a whole series of projects selected by the groups had not received formal approval until after 30 June 1995, the final date given in the Commission decisions for the commitment of appropriations. Moreover, at the time of the audit (October 1995), other projects had still not received approval from the regional authorities, which was expressly required by the national procedures.

7.28. This problem was particularly acute in the case of the Campobasso/Molise Leader group. In October 1995, only 10 of the 29 projects put forward by this group had been formally approved. The Leader group enjoyed very little support from the regional authorities, and at the end of the month of June 1995 it was even refused finance to cover its personnel and administrative costs as the relevant measures were rejected. The result was that this Leader group was technically incapable of performing its tasks. This attitude on the part of the regional authorities severely hampered the progress of the Leader I programme. The Commission and the Monitoring Committee should both have intervened without delay with the national intermediary body.

7.29. Two of the projects audited in the field of 'Rural tourism` concerned the renovation of an old monastery by the municipality of Apiro (the Colli Esini Leader group of Colli Esini) and of an agricultural building in private ownership in the comune of Sepino (the Campobasso/Molise Leader group). These two projects had already benefited, in respect of other parts, from assistance within the framework of the Integrated Mediterranean programmes (IMPs), which have since been closed. In both cases, those parts of the projects already subsidized by the IMPs had still not been completed, and the projects are still not operational as the promoters have not invested any of their own funds.

The Vulture Alto Bradano Leader Group

7.30. The Vulture Alto-Bradano Leader group in Acerenza/Basilicata, established by the Federation of Italian Cooperatives (Confederazione Cooperative Italiane, CCI), was quite different from all the other Leader groups audited by the Court in the various Member States. In practice this group was operating like a consultancy, mainly drawing up, or having other cooperatives who are members of the Leader group draw up, studies and programmes for future development measures. More than half of the funds made available (of which 3,9 Mio ECU had been provided by the Community) were used for studies of this kind and thus flowed back to the cooperatives that were members of the group or to the group itself. In addition, the results of some studies prepared under measures in the context of technical assistance were disclosed in return for payment by the requestor. Less than 20% of the available funds were used to finance actual investment projects. As a result, the impact of the activities of the group in the context of rural development could only be minimal. The predominance of activities of this kind is not consistent with the Leader philosophy. The Commission should ensure that the activities of the groups are more and more oriented towards the realization of concrete projects of rural development.

7.31. The list of projects presented by the Leader group in Vulture Alto-Bradano did not allow any clear identification of the nature of the activities being subsidized. This is clearly evidenced by the following points.

7.32. In the context of the 'Exploitation and marketing of agricultural and forestry products`, one of the three specific measures - 'Creation of a Leader exhibition centre` - consisted of eight separate projects at a total cost of 1 000 Mio LIT (± 645 000 ECU). One of these projects, namely the purchase of an administrative building for the use of the Leader group (100 000 ECU), had nothing to do with the abovementioned measure. This project is thus not eligible for Leader I support and the Community financing involved (37 700 ECU) must be recovered.

7.33. With a view to setting up this exhibition centre, the Leader group rented a large warehouse on 6 June 1994 for a period of five years, which was largely in excess of the duration of the Leader I programme. This warehouse belonged to a cooperative which was a member of the Leader group. The agreed annual rent was 100 Mio LIT (± 64 500 ECU), the first three years' rent being payable in advance. This advance payment was not only exceptionally high but in part also extended for a period which exceeded the duration of the Leader I programme. This is also true of the annual rent payments still outstanding.

7.34. Neither the advance payments nor the subsequent payments for services rendered after 31 December 1996, the final date for Leader I payments, qualify for Community financing. All advance payments of rent in respect of the period after 1 January 1996 will therefore have to be recovered.

7.35. Only half the total of the three years' rent paid in advance, together with the expenses already incurred by the Leader group for the 'Installation of equipment for an exhibition on tourism` part of the project were charged to the 'Creation of a Leader exhibition centre` measure. The other half was charged to a project coming under the 'Small firms, craft enterprises and local services` measure. As a result of this apportionment of the costs, it is not at all clear where the financing for the various project costs has come from.

7.36. Four further projects included in the group's list for the 'Small firms, craft enterprises and local services` measure were, in fact, one single project artificially divided into sub-projects. The project concerned was for the preparation of a general study, and then of specific studies, for the development of 15 small enterprises, including the acquisition of the stock and equipment they required. Only 12 small enterprises could be found, none of which had yet received any stock or equipment under these Leader I projects. Their actual requirements in connection with an activity of this kind had not been taken into consideration during preparation of the general study, initiated by the Leader group.

7.37. The contract for the consultancy work involved in the preparation of the general programme and of the various development projects for the small enterprises selected was awarded to a cooperative bank which was not only a member of the Leader group but also the group's principal commercial bank and the supplier of its bank guarantee. The three tenders for this consultancy work (total cost: 295 000 ECU, of which 198 000 ECU were financed by the ERDF) which were required by the regional authorities were superficial and were no more than concise summaries, and consequently no comparison of their qualities based on concrete facts was possible. This being the case, there was no way of guaranteeing the proper use of the public funds concerned.

7.38. Several cooperatives which were members of this Leader group took part in certain study projects which made no concrete contribution to rural development and are thus not in keeping with the spirit of the Leader CI.

Observations concerning specific groups in Spain

7.39. In Spain, audits were carried out on the Tierra de Campos/Camino de Santiago, Navarre, Maestrazgo-Teruel and La Montaña Alicante groups.

7.40. The national appropriations envisaged in the financing agreements were placed at the disposal of the Leader groups only in exceptional cases, and even then only partially. The bulk of these national contributions was supplied by the regional governments concerned (Comunidades Autónomas) and paid directly to the beneficiaries, without the Leader groups being informed. As a consequence, the majority of these groups (with the exception of the Montaña de Navarra group in Pamplona) had only very vague ideas of the sums paid to the beneficiaries by way of national financing.

7.41. As a result, the Court's audits revealed that the financial information recorded by the groups and transmitted via the national intermediary body to the Commission was often incomplete and not very reliable.

7.42. The Maestrazgo-Teruel Leader group in Molinos/Teruel and the La Montaña Alicante group in Cocentaina/Alicante are obliged to make up for the reduction in the planned national financial contributions by an increase in private contributions. However, this increase of 1,6 Mio ECU for the first group and 1,2 Mio ECU for the second is not guaranteed. The fall in the national financial contribution calls the principle of partnership into question and could compromise the projects.

7.43. It was impossible to ascertain how the various Leader groups and the national intermediary body had been able, together, to produce evidence of the agreed national financial contribution. Three Leader groups were unable to justify the planned national financial contributions and it was observed that the list of groups and projects submitted by the intermediary body-which will be used at the end of the programme to authenticate the closing financial statement of the Leader I programme in Spain-contained numerous inaccuracies.

7.44. The audit of two projects in Tordehumos, for which the Tierra de Campos Leader group is responsible and which were implemented by the same final beneficiary, revealed grave irregularities reflecting an absence of control on the part of the Leader group.

7.45. One of the projects, in the field of 'Rural tourism`, concerned, amongst other things, the renovation and furnishing of a house. In fact, though, this house was used exclusively as a weekend and holiday home for the owner, who was not a local resident. This project, therefore, does not qualify for the support given, which amounted to 3,92 Mio PTA (± 26 000 ECU) of Leader I EAGGF appropriations; the sums already paid out must therefore be recovered.

7.46. The second project in the field of 'Exploitation and marketing of local agricultural and forestry products` involved fitting-out a large hangar-like building for the breeding of partridges for hunting purposes, the creation of a three-hectare enclosure for the breeding of rabbits, again for hunting purposes, and also the fitting-out and furnishing of two apartments for the future accomodation of hunters.

7.47. Apart from the fact that it is unacceptable for appropriations linked to a measure concerning the exploitation and marketing of agricultural and forestry products to be used for the fitting-out of two apartments, on-the-spot checks revealed that the building, for which a total of 5,13 Mio PTA (± 38 600 ECU) of Leader I EAGGF appropriations had been paid out supposedly for the breeding of partridges, had been let by the beneficiary to a poultry breeder, and it was thus not being used for the purpose intended. The principal justification of support for the entire project, which came to 12,67 Mio PTA (± 79 700 ECU), has therefore disappeared and the project can no longer be considered eligible for EAGGF aid under Leader I. All financial support already disbursed should therefore be recovered.

7.48. National and Community financing for a project by the Montaña de Navarra Leader group within the framework of measures for the 'Exploitation and marketing of agricultural and forestry products` consisted of an interest subsidy linked to a loan granted in 1990 and scheduled to run for 10 years which the beneficiary, an agricultural cooperative in Arizkun, had obtained to enlarge its warehouses.

7.49. Originally, this was not a Leader I project. Only in March 1993 was it added to the list of projects benefiting from Leader I appropriations. The remaining part of the life of the loan, for which the Community interest subsidy of 3,54 Mio PTA (23 000 ECU) was granted, extends for the most part over a period which was not eligible for support, since the Leader I programme will already have been closed. Community subsidies disbursed should therefore be reduced to the amount corresponding to the eligible period and the difference should be recovered.

7.50. Another of the Montaña de Navarra Leader group's projects involved the renovation of 28 farm guesthouses. The audit revealed that the Navarre Federation of farm guesthouses (Federación de casas rurales de Navarra), the official beneficiary of this project, was, in reality, acting as an intermediary between the owners of the guesthouses and the group. In this capacity, it managed the project and kept for itself 20% of the sums awarded to the real beneficiaries (the owners of the guesthouses). This deduction was unjustified and irregular. Aid from the Structural Fund must be passed on to the final beneficiaries in its entirety.

7.51. The Montaña Alicante Leader group displayed several serious administrative deficiencies. It was the only Leader group audited which did not respect the administrative procedures laid down for the selection and control of projects by the national body acting as intermediary.

7.52. This group approved the building of a restaurant as a Leader project, the cost of which came to 46 080 777 PTA (± 307 000 ECU). During the Court's audit, it was discovered that the value added tax included in the invoices had been treated as eligible expenditure. Another of the Montaña Alicante Leader group projects (modernization of a cooperative for the production of olive oil at Benimantell) had already been completed and all the relevant payments made at the time financing was requested and the project accepted as a Leader I project. No authorization had been given to commence this project in advance of the measure and no concrete reason could be produced, a posteriori, to justify a grant of 2 Mio PTA (13 000 ECU) to the oil mill, which had already resumed production, or to consider it a Leader I project (). Such cases of refinancing have no incentive effects.

Technical assistance

7.53. The Commission allocated a total of 6,5 Mio ECU to technical assistance for contracts approved by the European Association for information on local development. (AEIDL). The task of this association, which is based in Brussels, is to ensure that the groups receive all the technical assistance they need to achieve their objectives. It is also responsible for organizing meetings for the exchange of information and experience between the groups, as well as for setting up an information network between all the groups. The Court's audit of this body demonstrated its inability to keep accounts during its first year of operations. Moreover, an audit by the Commission (DG XX) had uncovered similar problems and the AEIDL was obliged to supply additional information regarding its statements of expenditure in order to obtain the appropriations. Not only had the Commission not made certain from the beginning that the Association had adequate means at its disposal to ensure its proper management but it was also necessary to wait until 1995 before an initial audit of the account was made by an external auditor at the behest of the AEIDL.

Conclusion

7.54. The innovative aspect of the Leader local action group idea was not always implemented in the same way in all countries. The degree of cooperation and coordination between the Leader groups and the national intermediary bodies varies greatly from one group to another, particularly in the case of exchanges of information (see paragraph 7.40).The considerable autonomy granted to the groups and the interpretation of its conception resulted in dysfunctions in the procedures (paragraph 7.18). Moreover, the procedures put in place by the Commission did not stop a regional government from obstructing the work of one of the groups (paragraphs 7.27-7.28).

7.55. Bank guarantees are not demanded on a systematic basis in the various Member States. As a consequence, those final beneficiaries who are compelled to furnish this guarantee are at a disadvantage compared with those who are exempted from this obligation (paragraphs 7.20 - 7.22).

7.56. The use of interest earned on advance payments from the Structural Funds must be regulated by the Commission (paragraphs 7.23 - 7.24).

7.57. Several items of expenditure declared by the beneficiaries were not eligible and, consequently, must be recovered (paragraphs 7.32 - 7.34, 7.44 - 7.49).

7.58. Certain items of technical and financial information supplied by the groups lacked transparency and reliability, which is detrimental to the good management and monitoring of Leader I actions (paragraphs 7.35 - 7.40).

7.59. In the case of several actions and projects financed by Leader I, doubts exist as to whether they conform to the objectives defined in the Leader Community initiative (paragraphs 7.25 and 7.30).

7.60. The Leader II Community initiative (1995-99) was implemented before the closure of the Leader I programme for the previous period and before any ex post assessment could be carried out. The results of such an assessment were not therefore available in time to have any influence on the planning phase of the new Leader II Community initiative. Effective and continuous assessment must therefore be established.

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REPLIES OF THE COMMISSION

'Leader` COMMUNITY INITIATIVE (1990-93)

Introduction

Some of the Court's remarks deal with the general management of the Leader I initiative. It should be pointed out without going into detail that a different organizational approach, following the model of the operational programmes, has been adopted for Leader II. This is pointed out where relevant.

Transfers between Structural Funds

7.16. The eligibility of measures for financing from the Structural Funds is indicated in Regulations (EEC) Nos 4254/88 (ERDF), 4255/88 (ESF) and 4256/88 (EAGGF Guidance). Some action can be considered potentially financable by either the ERDF or EAGGF Guidance, e.g. rural tourism projects financed by the ERDF and farm tourism projects financed by EAGGF Guidance.

The rules governing the Structural Funds in general and in the case of Leader I allow the Member States some margin of flexibility in assigning projects to the individual Funds. This is borne out in the implementation of Leader II on the model of the operational programmes. The Commission will ensure consistency of the rules on expenditure assignment.

7.17. The Commission's decisions on financing of action under Leader I contain a financing plan indicating the contributions of each Fund by type of action. It must be remembered, however, that the Commission does not approve individual projects but global subsidies or programmes.

Since certain types of project may have eligibility for more than one Fund, where Community financing is not from a single source, selection of the financing source for these projects is done at a later stage. The Commission considers that the flexibility thus given to the intermediary bodies is an advantage. No transfer of appropriations between Funds is, however, permitted as these have been committed in a single instalment at the time of approval of the global subsidies or programmes.

The idea of local action groups (LAGs)

7.18. It is inevitable that the types of groups set up reflect the legislation and traditions of each Member State. Some Laender of the Federal Republic of Germany chose, as permitted under point 6 of the Notice to Member States, to designate only public bodies. Their administrative capacity (second indent of point 6) was appreciated by Commission officials and in particular the fact that public accounting rules immediately applied to them. Moreover point 7 (first paragraph) reiterated the choice offered to Member States. In consequence certain Laender opted for existing bodies.

Global grant

7.19. The Commission has interpreted the Regulation as a general rule not to allow the use of global grants as a loan. However, the Commission agrees that there is a need further to harmonize the application of the Regulation in the different Structural Funds.

Bank guarantees

7.20 7.22. The Commission imposes no bank guarantee requirement but the Council Regulations make Member States responsible for Community funds. This led some organizations to protect themselves by demanding bank guarantees. Such arrangements between intermediary bodies, LAGs, final recipients and banks fall outside the Commission's area of authority.

On all appropriate occasions the Commission endeavours to help Member States resolve difficulties hindering implementation of Leader I. The legal and administrative provisions covering relations between LAGs and intermediary and other bodies vary very widely from one Member State to another. If the Commission had authority to set identical rules for these relations in all Member States, the outcome of such harmonization would be to burden procedures.

Under the partnership arrangements with the Member States discussions are in progress to determine the eligibility of bank guarantee costs.

Interest

7.23 7.24. Under the Council rules applicable the Commission ceases to be the owner of funds once these have been transferred to Member States on condition that projects are properly implemented. It cannot therefore specify what use is to be made of the interest generated on advance payments but has, however, acted to ensure that funds are transferred to final recipients without unjustified delay.

In the specific case of the Leader LAGs the Commission considers that any interest ought to be assigned to action eligible under the initiative. Following its approach the Spanish authorities were notified by the Maestrazgo-Teruel LAG on 26 April 1996 that it would reassign the credits initially intended for construction of the building to other group operating costs.

Observations concerning specific groups in Germany

7.25. It is true that renovation of the castle at Lichtenberg turned out more costly than anticipated but the youth hostel located in it benefited directly from the work, which was fully in line with point 13(c) in the notice to Member States for Leader I (third indent - rural tourism and theme holidays). The project thus contributed to expanding the rural economy of the area.

7.26. Article 4(1) of the basic Regulation (EEC) No 2052/88 states that 'Community operations shall be such as to complement or contribute to corresponding national operations`.

The Commission has no grounds for rejecting a programme that is in line with point 13 of the notice (tourism).

Observations concerning specific groups in Italy

7.27. Funds are committed to projects by means of legal acts on the part of the LAGs conferring a right. Although these commitments are made on condition of approval of the project by the region, they convey firm rights to the project operators.

In consequence, provided that commitment was made before 30 June 1995 and payment before 31 December 1996 the Commission considers projects to be eligible.

Accordingly on the basis of Commission Decision C(95)738 of 3 April 1995 extending the time limit for commitments under the Leader Community initiative in Italy to 30 June 1995 the commitments made by LAGs before that date are valid. It should be noted that co-financing of projects is by the Ministry of Agriculture with global advances addressed directly to the LAGs.

7.28. This difficulty was not specific to the Molise region but arose in all those involved in Leader I. The Commission representative therefore strongly insisted at meetings of the various monitoring committees that the intermediary body act to remedy the regions' failure by serving notice on them and following this up, if there was no reaction, by using its power to substitute for them.

7.29 7.38. The Commission notes the Court's remarks. It would point out, however, that the Commission does not approve individual projects but programmes. Responsibility for preparing, executing and monitoring projects falls to the Member States.

In the case of Leader I the Commission approved the LAGs' 'business plans`, in which projects were particularized according to the Commission's notice. Selection of projects and verification of their consistency with the programme is the remit of the LAGs and verification of implementation and of eligibility of expenditure that of the intermediary body. The latter jointly with the Member State is responsible to the Commission in line with Article 23 of Regulation (EEC) No 4523/88.

7.29. The Commission will ask Italy for explanations and if necessary for recovery of the sums.

Vulture Alto-Bradano group

7.30. The Commission considers that feasibility studies are useful and even necessary to the creation of new activities. These projects were approved by the region.

7.31. The Commission will contact Italy to seek improved presentation of the lists of subsidized operations so that their nature is identified.

7.32 7.36. The Commission will call for Italy's comments on the matters raised.

7.37. The Commission encouraged participation of banks in the Leader groups because it considered this advantageous. It will call for a statement from Italy on the tendering procedure followed for the consultancy work.

7.38. The Commission will ask Italy whether the studies had any practical outcome.

Observations concerning specific groups in Spain

7.40. The national financing breakdowns given in the financing plans of the various groups were forecasts made by the groups themselves when drawing up their programmes and were of indicative value only. The data sheet for each project that the group was supposed to keep up to date should have included exact details of the aid received from the various sources.

The Commission has already drawn the Spanish intermediary body's attention to the need for the LAGs to monitor not only total project costs and Community aid but also that paid by the Comunidad Autónoma, often made over directly to the final beneficiary.

7.41. The errors that the Court found in the financial information recorded by the groups were covered in a report of 3 May 1996 from the intermediary body, which pointed out that they were administrative errors subsequently corrected.

7.42. The Community contribution to Leader is calculated as a percentage of total eligible cost for the entire global grant (Article 17.2 of Regulation (EEC) No 4253/88) and does not reduce when one financing source replaces another. It is accordingly possible for a reduction in the national contribution to be offset by private contribution.

7.43. As previously pointed out, the Community contribution to the Spanish Leader programme was calculated as a percentage of the total cost, the breakdown between the other contributors being indicative.

The errors that the Court cites in the list of groups and projects were corrected and the Commission undertakes to call for more rigorous checking by the national and regional authorities of the data transmitted.

The Commission is aware that the special nature of Leader, involving as it does responsibility on the part of local groups without administrative experience, is liable to result in more such material errors than other types of operation run by the national authorities. Its advantages include greater flexibility, greater awareness of needs on the ground and consequently a more effective stimulus to the rural environment.

7.44 7.47. On 19 April 1996 Spain called on the group to repay the amounts wrongly expended.

7.48 7.49. The Commission will seek clarificatory information from Spain.

7.50. On 19 April 1996 Spain asked the Féderación de Casas rurales de Navarra to repay the sums wrongly retained.

7.51. Spain has asked the group to take the necessary remedial action.

7.52. VAT can be included in eligible expenditure only where it cannot be recovered. According to Spain's reply to the Court of Auditors of 3 May 1996 it has asked the group to recover the VAT component of the subsidy.

According to the Spanish authorities the first application for aid for modernization of the olive oil production cooperative was made by the group in June 1992 before work began. The Commission has asked Spain to send evidence of this date of application (contact has been made with the group). The work was carried out between October 1992 and October 1993. In April 1994 the group decided to grant aid following abandonment of other projects previously deemed more important.

Structural Fund rules allow a financing decision to be taken after a project has begun provided the application was made in time.

Technical assistance

7.53. The Commission inspectors visiting AEIDL in September 1994 found that its accounting system had been inadequate, in the course of the first year only, to allow assignment of certain general costs to its contract. To remedy the situation properly AEIDL asked an independent firm of accountants to verify the figures. Following its report in February 1995 the Commission raised its reservation.

For subsequent years a more analytical accounting system has been used by AEIDL that has allowed the evolution of each product to be followed. For Leader II this system covers not only products but the organization's operating costs.

Further, at the Commission's request AEIDL has commissioned an external auditor to review its accounts and check the financial report to be submitted to the Community.

Non-profit making associations such as AEIDL are not obliged under Belgian law to have their accounts externally audited.

Conclusion

7.54. Section III of the Commission's notice for Leader I specified the eligible types of action while leaving a wide margin of assessment to project promoters. The innovatory character of any action has to be assessed in its context and what is considered innovatory in one zone may not be in another.

The Commission sets no specific procedure for relations between groups and intermediary bodies, decisions in this area being the competence of the latter.

On programme approval the Commission followed the procedures set in the Structural Fund Regulations.

In Leader II the concept of innovation has been defined in a more targeted way and work on this has led to compilation of a methodology guide for analysis of local innovation requirements.

7.55. No bank guarantee is required under the European-level rules. Variations in treatment of recipients result from the respective responsibilities of each participant and the degree of risk that each is prepared to assume. Member States are free to choose the solutions best suited to their specific situations (7.20-7.21).

7.56. In the case of payments made from the Structural Funds via the Member States' public administrations the Community ceases to own the funds once these have been transferred to the Member States. The Commission does, however, check that the three month time-limit for transfer of funds to the final recipient required by Article 21(5) of the coordinating Council Regulation (EEC) No 4253/88 is observed. Apart from the first advance of the first instalment, advance payments from the Community and, hence, payments to final recipients are triggered off by submission by the latter of statements of their actually incurred expenditure backed up by receipted invoices or documents of equivalent probative value. Payments to final recipients therefore normally accompany execution of the project on the ground.

7.57. The Commission will contact the Member States.

7.58. The Commission is making every effort to improve technical and financial management in Leader II, for which the operational programmes serve as reference model.

7.59. The Commission does not intervene in project selection. It considers, however, that projects of a certain size can be key projects profiting neighbouring areas also, as in the case dealt with at 7.25 and that financing of studies, as in the case raised at 7.30, can be indispensable.

7.60. When launching Leader II the Commission had at its disposal country-by-country assessments made by AEIDL and the results of a network impact survey. Since the Leader I programmes were not sufficiently advanced in 1994 it was too soon to make an ex post assessment. The Commission has, however, recently selected an evaluator for Leader I.

CHAPTER 8 (*) Financial instruments and banking activities

8.0. TABLE OF CONTENTS Paragraph reference

Financial instruments 8.1 - 8.17

Introduction 8.1 - 8.5

Joint ventures 8.6 - 8.12

Exhaustiveness and valuation of the statement of items not included in the balance sheet 8.13 - 8.15

Management and payment of interest subsidies 8.16 - 8.17

Guarantee fund for external activities 8.18 - 8.28

The Fund's objectives and how it works 8.18 - 8.20

Utilization of the Fund during 1995 8.21 - 8.22

Situation of the Fund at the end of the financial year 1995 8.23 - 8.25

Financial management 8.26 - 8.28

European investment fund 8.29 - 8.36

The Court's audit 8.29 - 8.30

The Fund's objectives and how it works 8.31 - 8.33

Operations 8.34 - 8.35

Conclusion 8.36

FINANCIAL INSTRUMENTS

Introduction

8.1. The European Union (EU) has a large range of financial intruments at its disposal. Firstly, we must single out loan operations (Table 8.1), which can be financed either by borrowing on the financial markets or from EU own resources, i.e. from budgetary appropriations. Operations refinanced by borrowing on the financial markets are managed outside the budget as they do not involve Community resources as such. The borrowing and lending operations of the European Coal and Steel Community (ECSC) are administered autonomously and are not included in the general budget of the EU.

8.2. Secondly, the EU can take up direct participations in common interest bodies such as the European Bank for Reconstruction and Development (EBRD) or the European Investment Fund (EIF), or else it may acquire shares in special operations such as joint ventures. A summary of the EU's participations as at 31 December 1995 is set out in Table 8.2.

8.3. The EU is also authorized to grant guarantees against its own budget (Table 8.3) in order to guarantee borrowings it has incurred directly itself, whether these are intended to finance loans in Member States or in third countries. Furthermore, the EU may also guarantee borrowings by third parties, in particular, borrowings by the European Investment Bank (EIB) to finance loans in non-member States. The total value of these guarantees is not included in the balance sheet and appears in the budget as a 'p.m.` (token entry). In addition, a Guarantee Fund for external activities has been established, the purpose of which is to take on the liabilities of defaulting debtors as soon as they fail to meet interest payment deadlines on a loan granted or guaranteed in full or in part by the EU (see following section on the Guarantee Fund).

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8.4. Finally, there exist certain operations which are associated with the loans and are financed by the general budget (or by the operational budget in the case of the ECSC), whereas the financing which benefits from them was granted from borrowed funds. At present, these operations mainly consist of interest subsidies (see Table 8.4).

8.5. Special attention has been paid in this chapter to joint ventures (paragraphs 8.6 to 8.12), to guarantees, and especially to the exhaustiveness and valuation of the statement of items not included in the balance sheet (paragraphs 8.13 to 8.15), and also to the present system of interest subsidy payments (paragraphs 8.16 to 8.17).

Joint ventures

Their objectives and how they work

8.6. The goal of the European joint venture programmes is to encourage the creation of mixed enterprises based on cooperation between local companies and companies from within the Community. The principal programmes are the ECIP (European Community Investment Partners) (), JOPP (the Joint venture programme of PHARE) and JOTP (the Joint venture programme of TACIS) (), the two latter programmes having been merged to form the JOP programme in November 1995.

8.7. The ECIP mechanism, which is designed to encourage cooperation between companies in the EU and companies in developing countries (countries in Latin America, Asia, Southern Africa and around the Mediterranean), has four facilities () whose goals complement each other but whose procedures for the granting of credits differ. The objective of both the JOPP and JOTP programmes is to facilitate the creation and development of joint ventures, either in the form of jointly owned companies or, more unusually, in the form of direct investments. Every project must consist of three phases, each of which is eligible for subsidies ().

Loan accounting

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8.8. As far as accounting procedures are concerned, it should be observed that all finance released for joint ventures is entered as expenditure under budget headings (), even if, eventually, it takes the form of loans granted (). For every instrument, an inventory of loans granted and also of participations taken in joint venture schemes is drawn up at the end of the year and the total entered in a capitalization account in the Commission's balance sheet, and thus in the consolidated balance sheet of the EU.

8.9. This form of loan accounting requires loan repayment instalments to be entered as revenue, whereas in principle only interest collected could be classified as genuine budgetary revenue.

8.10. Nevertheless, the conditional nature of the loans, the risk associated with repayment and the fact that management is sometimes delegated to financial intermediaries are all so many imponderables which go a long way towards justifying the budgetization of such funds.

Discrepancies in the way instruments with identical aims operate

8.11. For the JOPP and JOPT programmes, financing in the form of grants for the preliminary phase, covering feasibility studies, does not finally accrue to the beneficiary until the jointly owned enterprise has actually been set up, or until the condition that the investment should be completed within one year has been met (unless the study is taken over by the Commission). In contrast, for the ECIP, the interest-free advances under Facility No. 2, the objective of which is similar to that of the co-financing phase of the JOPP and JOPT programmes, are transformed into aid, pure and simple, if the project fails within two years, whereas, if it succeeds, the advances are repayable or are converted into a Community equity holding. So, as far as the ECIP is concerned, in addition to the fact that the default period is two years instead of one, the arrangements governing Facility No. 2 are less stringent since the investors are not obliged to pay back the advances should they abandon the projects. This problem has already been raised once before, in Chapter 13 of the Court's Annual Report concerning the financial year 1993 (paragraphs 13.38 and 13.39).

8.12. It would be useful for joint ventures sharing the same aims to be run on lines which are, if not identical, then at least comparable, as this would encourage the creation of a coherent framework for each type of financial measure.

Exhaustiveness and valuation of the statement of items not included in the balance sheet

8.13. The items not included in the balance sheet are essential to a clear understanding of the consolidated accounts of the EU. Information on these items constitutes a financial statement in its own right which, in addition to residual commitments against differentiated appropriations, should record all the costs and all the potential and contingent revenue likely to be entered in the accounts in the EU's name. This is particularly relevant in the case of guarantees granted by the EU either in respect of loans made by third parties, and in particular by the EIB, or in respect of its own borrowings.

8.14. Thus the statement of ex-balance-sheet items, while recording potential liabilities, must also assess potential revenue against commitments received. At present it is incomplete, as the total of all guarantees received for loans granted by the EU has not been entered and has, therefore, not been valued either. At the present time the Commission has no exhaustive inventory of guarantees given to it.

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8.15. In future, it would be desirable for the Commission to draw up an exhaustive statement listing both guarantees received and items not entered in the balance sheet, as these items are essential prerequisites for a precise view of the EU's true financial situation.

Management and payment of interest subsidies

8.16. The EIB disburses the majority of the interest-rate subsidies granted in connection with the loans it manages through direct payment to the beneficiaries (for example, within the framework of the temporary loan mechanism for small and medium-sized enterprises), or by deduction from the interest owed by the beneficiaries (for example, within the framework of NCI earthquake loans and loans to Mediterranean countries). Under these circumstances, the EIB is effectively managing funds from the general budget on behalf of, and under instruction from, the Commission.

8.17. It would be more appropriate to centralize systematically the administration of subsidies. In particular, it would seem opportune, for every new measure involving subsidies, to transfer the management of them, from the stage of granting through to disbursement, to the Commission's services. Although it might appear logical to entrust the management of loans to a banking institution, this argument does not apply in the case of budgetary expenditure such as interest subsidies. The Commission, as the body responsible for the implementation of the budget, is best placed to ensure, by means of appropriate procedures, strict adherence to the conditions attaching to such payments and, as a consequence, should not relinquish its responsibilities in favour of organizations which do not have Community Institution status and over whose activities control is, in practice, limited.

GUARANTEE FUND FOR EXTERNAL ACTIVITIES

The Fund's objectives and how it works

8.18. Established on 31 October 1994 by Council Regulation (EC, EURATOM) No 2728/94, the Guarantee Fund for external actions is designed to reimburse the Community's creditors in the event of a default by the beneficiary of a loan granted or guaranteed by the Community to, or in, a non-member State. The Guarantee Fund intervenes if the beneficiary is still in default three months after the due date; the servicing of the loan which, up to this point, is the responsibility of the Community treasury, is then taken over by the Guarantee Fund.

8.19. The Fund is endowed by payments from the general budget corresponding to a percentage of the capital value of the operations decided on and committed as from 1 January 1993 until a target amount has been accumulated. This amount has been set by the Council at 10% of the Community's total outstanding capital liabilities arising from each lending and guarantee operation for the benefit of third countries, plus interest due and not yet paid.

8.20. The Guarantee Fund's mechanisms impose a de facto limit on the amount that can be granted in loans and loan guarantees to non-member States. This limit is equal to the ratio between, on the one hand, the guarantee reserve (Budget item B0-230) and, on the other, the rate of provisioning of the Fund. The guarantee reserve was set at 323 Mio ECU for 1995 and at 326 Mio ECU for 1996, while the rate of provisioning is at present 15%.

Utilization of the Fund during 1995

8.21. During the financial year 1995, the Guarantee Fund, the resources of which amounted to 294,19 Mio ECU on 1 January 1995, was endowed with three payments totalling 250,75 Mio ECU. During 1995 the Fund provided guarantees totalling 303,07 Mio ECU (including 8 Mio ECU of interest on arrears). A total of 35,63 Mio ECU was recovered from defaulting debtors (including 1,39 Mio ECU in interest on arrears).

8.22. The net balance of Fund activities amounted to 267,44 Mio ECU on 31 December 1995 (including 4,69 Mio ECU interest on arrears) and breaks down as follows:

- a loan of 1 250 Mio ECU to finance food aid to the republics of the former USSR accounts for almost the sum total of loan guarantees provided, i.e. a total of 232,21 Mio ECU in principal and interest (see paragraphs 10.64 to 10.69 of Chapter 10).

- loans with an authorized total of 760 Mio ECU granted by the EIB under a Community guarantee to the countries of former Yugoslavia, for which calls were made on the Guarantee Fund amounting to 35,23 Mio ECU.

Situation of the Fund at the end of the financial year 1995

8.23. Table 8.5 charts the main vicissitudes of the Fund since its launch. On 31 December 1995 total Fund resources came to 300 Mio ECU whilst the total outstanding for loans and loan guarantees to non-member States, plus interest due but not yet paid, reached 5 851 Mio ECU. The ratio between the Fund's resources and the sum outstanding, as defined in the Regulation, is 5,1%,compared with 4,9% on 31 December 1994. These percentages become respectively 5,05% and 3,79% if defaults on payments which have been outstanding for less than three months at the end of the financial year are taken into consideration. The amount of contingent liabilities then amounted to 5,2 Mio ECU as at 31 December 1995 and 65,9 Mio ECU as at 31 December 1994.

8.24. These figures show that in 1995 the Fund was able to cope with the defaults mentioned, even though its resources were far from having reached the target amount.

8.25. As far as interest on arrears is concerned, the amount of 5,7 Mio ECU, mentioned in the annual report on the situation of the Guarantee Fund and its management during 1995, is not included in the Commission's revenue and expenditure account or in the consolidated accounts of the EU. As a consquence the financial situation as presented is incomplete.

Financial management

8.26. The Fund was considered in 1995 to be an investment fund investing in short-term instruments with a maturity not exceeding one year, in implementation of the agreement between the Commission and the EIB concerning the management of the Fund.

8.27. Interest produced on bank deposits, and the Fund's reciprocal account and current account balances, all came to 23,54 Mio ECU, while the commission charged by the EIB, at a rate reduced from 0,125% to 0,05% in application of Article 6 of the agreement, together with financial charges, totalled 0,19 Mio ECU. The net result was, therefore, 23,35 Mio ECU.

8.28. The Court conducted its audit of the Fund for the financial year ending 31 December 1995 by firstly examining its administration by the Commission and then by examining the financial management by the EIB. Apart from the observations in paragraph 8.25, the Court has no particular comments to make.

THE EUROPEAN INVESTMENT FUND

The Court's audit

8.29. The Court has still not obtained satisfactory access to information which is essential to its audit and has thus still not been able to form a satisfactory and independent opinion as to the quality of the Fund's risk management, its financial holdings, and even of its actual operations from the point of view of the Community interest. For this reason the Court is not in a position to report on these matters to the budget authority. However, discussions are in progress between the institutions in order to agree appropriate arrangements.

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8.30. Since the Court has no access to the Fund's internal documents, the following observations are based on information available to the general public (see paragraph 8.29).

The Fund's objectives and how it works

8.31. The Fund (EIF) was created on 14 June 1994 in response to the wishes expressed by the Edinburgh European Council in December 1992 and was designed to offer additional financial capacity to support the development of trans-European networks (TENs) and small and medium-sized enterprises (SMEs). Its role is to furnish guarantees to lenders and to hold participations, thereby assuming risks which the banking and industrial sectors are not prepared to accept.

8.32. The Community has subscribed 600 Mio ECU of the EIF's capital of 2 000 Mio ECU. This represents a holding of 30%. Of the Community's total subscription, 20% (120 Mio ECU) is being paid up, in four annual payments of 30 Mio ECU commencing in 1994 (budget item B5-730). The EIB has a 40% (800 Mio ECU) stake in the EIF and the remaining 30% (600 Mio ECU) is reserved for public and private banking institutions.

8.33. On 31 December 1995, 64% of the shares reserved for banking institutions had been subscribed, compared with 50% on 31 December 1994, representing 384 Mio ECU on 31 December 1995 (76 institutions), as compared with 300 Mio ECU (58 institutions) on 31 December 1994. The increase is due in particular to subscriptions by banking institutions with registered offices in those Member States which joined the European Union on 1 January 1995.

The unsubscribed part of the capital thus fell from an overall total of 15% on 31 December 1994 to 11% on 31 December 1995.

Operations

8.34. Four operations were authorized in 1995, for a total of 116,46 Mio ECU. The Fund's annual report for 1994 detailed six operations totalling 515,33 Mio ECU, which were authorized from June 1994 onwards. Three of the four operations authorized in 1995 guarantee loans granted by the EIB and totalling 62,28 Mio ECU. These accounted for 53,5% of the total. In 1994, five of the six operations were EIB loan guarantees for a total of 439,42 Mio ECU, accounting for 85,3% of the total.

8.35. According to Article 30 of the Fund's statutes, total commitments may not, initially, exceed three times the amount of the capital subscribed as regards loan guarantee operations. At the end of 1994 subscribed capital amounted to 1 700 Mio ECU and total commitments in the form of guarantees represented 30,31% of this sum. On 31 December 1995 the subscribed capital amounted to 1 784 Mio ECU and total liabilities represented 35,41% of this sum. If these figures are compared to the paid-up capital, which is equal to 20% of the subscribed capital at the present time, the ratio is 1,52 for 1994 and 1,77 for 1995. Thus, in 1995, there was very little increase in the utilization of the Fund.

CONCLUSION

8.36. The EU has equipped itself with a very varied range of financial instruments (see paragraphs 8.1-8.5). In this connection:

- regarding the joint venture instruments, the loan operations are governed by special accounting rules, which result moreover from the way these instruments are treated in the budget (see paragraph 8.10);

- the rules governing the joint venture instruments are not always harmonized, even though the objectives are identical (see paragraph 8.12);

- for contingent liabilities, commitments received for the EU are not listed or valued in the statement of extra-balance-sheet items (see paragraph 8.15);

- for most of the interest subsidies, part of the administration, especially the payment thereof, is delegated to an external financial institution, even though this is budgetary expenditure (see paragraph 8.17);

- it has been established that, with regard to the Guarantee Fund's situation as drawn up at the end of the year, the amount of interest on arrears entered in the annual report on the Fund's financial situation and management during the financial year 1995 is not indicated in the Commission's revenue and expenditure account nor in the consolidated accounts of the EU (see paragraph 8.25);

- although it represents a substantial investment for the EU, the Court has no access for audit purposes to the European Investment Fund (see paragraph 8.34).

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REPLIES OF THE COMMISSION

FINANCIAL INSTRUMENTS

Discrepancies in the way instruments with identical aims operate

8.11 8.12. The Commission remarks that the Council and the Parliament explicitly considered the question of the repayment conditions to be applied to ECIP financings, and their compatibility with JOP, during their discussions on the new ECIP Regulation in 1994-1995. Account having been taken of the different environments in which the two instruments operate, the legislative authority approved the new ECIP Regulation No 213/96 on 29 January 1996 and thereby concluded its position on the question of the repayment conditions to be applied to ECIP financings.

Exhaustiveness and valuation of the statement of items not included in the balance sheet

8.13 8.15. The Commission proposes, at the end of the 1996 financial year, to provide details in a note on the accounts regarding loans guaranteed by the Community budget in respect of which other guarantees have been sought from third parties.

Management and payment of interest subsidies

8.16. It is true that the EIB generally manages the interest subsidies financed from the Community budget and granted in connection with the loans it administers. However, the arrangements governing two loans from the EIB's own resources (Madeira reconstruction scheme and Northern Ireland peace initiative) provide for the Commission to transfer the corresponding interest subsidies directly to the intermediaries or recipients.

8.17. The procedures for management of Community interest subsidies on EIB loans have, in the past, been decided on a case by case basis with a view to putting in place those most appropriate for the specific action.

With respect to subsidized EIB loans, the Court - through the Commission - has access to all information necessary to verify that the subsidies are correctly managed by the EIB.

The EIB systematically provides the Commission's services with all related calculations, confirmations and statements of account. Finally, it should be noted that the criteria for granting and implementation procedures of interest subsidies are laid down in agreements signed by the Commission and the EIB.

The Commission and the EIB are of course prepared to continue to examine the managing of interest rate subsidies in the context of individual mandates for the Bank.

GUARANTEE FUND FOR EXTERNAL ACTIVITIES

Situation of the Fund at the end of the 1995 financial year

8.25. The Commission proposes, as from the 1996 financial year, to show the amounts corresponding to interest on arrears in the revenue and expenditure account and the consolidated financial statements of the European Union.

EUROPEAN INVESTMENT FUND

The Court's audit

8.29. The Commission is making every effort to ensure that an agreement is reached as soon as possible.

Operations

8.35. It is correct that the EIF has not used up its full guarantee capacity of three times the amount of its subscribed capital yet. As is the case for many public financial organizations, such a ceiling was defined for the EIF as a medium- to long-term target. A permanent organization of this kind has to build up its activities gradually in order to establish trust and to ensure the quality of its operations. The progress of the Fund in building up operations cannot be denied.

CONCLUSION

8.36. -When the ECIP Regulation was renewed in January 1996, the Council decided not to align the ECIP rules on those governing the JOP instrument.

- When the ECIP Regulation was renewed in January 1996, the Council decided not to align the ECIP rules on those governing the JOP instrument.

- The Commission proposes, at the end of the 1996 financial year, to provide details in a note on the accounts regarding loans guaranteed by the Community budget in respect of which other guarantees have been sought from third parties.

- The procedures for management of Community interest subsidies on EIB loans have, in the past, been decided on a case by case basis with a view to putting in place those most appropriate for the specific action. The Commission and the EIB are, of course, prepared to continue to examine the managing of interest rate subsidies in the context of individual mandates for the Bank.

- The Commission proposes, as from the 1996 financial year, to show the amounts corresponding to interest on arrears in the revenue and expenditure account and the consolidated financial statements of the European Union.

- The Commission hopes that the discussions currently being held on the EIF will soon lead to a satisfactory agreement.

CHAPTER 9 (*) Research and technological development

9.0. CONTENTS Paragraph reference

Introduction 9.1

Implementation of the budget 9.2 - 9.4

Audits of contractors 9.5 - 9.11

Action plan for the introduction of advanced television services in Europe 9.12 - 9.49

Introduction 9.12 - 9.23

High-definition television policy 9.12 - 9.16

Reorientation as part of the action plan 9.17 - 9.19

Strategic importance and specific objectives 9.20 - 9.23

Volume and utilization of appropriations 9.24 - 9.26

Mode of financing 9.27 - 9.28

Implementation of the action plan 9.29 - 9.34

Aid for the production of programmes 9.30 - 9.31

Aid for the broadcasting of programmes 9.32 - 9.34

Effectiveness of the action plan 9.35 - 9.40

Supply of 16:9 9.36 - 9.37

Demand for 16:9 9.38 - 9.40

Conclusion 9.41 - 9.44

Recommendations 9.45 - 9.49

INTRODUCTION

9.1. The Court's observations on research are grouped under three different headings:

(a) the implementation of the budget;

(b) its audit of contractors within the framework of indirect research;

(c) its audit of the action plan for the introduction of advanced television services.

IMPLEMENTATION OF THE BUDGET

9.2. The budget appropriations devoted to the field of research totalled 2 995 Mio ECU in commitments and 2 887 Mio ECU in payments for the financial year 1995 (see Table 9.1).

9.3. The rate of utilization of the available appropriations was high: it accounted for 98% of the commitment appropriations and 86% of the payment appropriations.

9.4. The rate of utilization of the appropriations carried over from the previous fiancial year was at a lower level. A particularly low rate was noted for the following budget headings:

(a) B6-292, 'Scientific and technical support activities for Community policies`: 99% of the commitment appropriations were not used;

(b) B6-43, 'Provision of services for outside bodies`: 86% of the commitment appropriations and 84% of the payment appropriations were not used;

(c) B6-44, 'HFR`: 68% of the commitment appropriations and 44% of the payment appropriations were not used;

(d) B6-53, 'Completion of projects not covered by the framework programme`: 65% of the commitment appropriations were not used.

AUDITS OF CONTRACTORS

9.5. In 1995, eight on-the-spot audit visits were carried out in five Member States () of organizations benefiting from indirect measures so as to check eight operations (each of which concerned a cost statement with a view to the payment of Community aid for a research contract signed by the Commission and the beneficiary, whether a company or a laboratory). Seven of these operations were selected at random as part of the preparation of the Statement of Assurance in respect of the financial years 1994 and 1995.

9.6. The findings of these audits, which are summarized in Table 9.2, invite a number of observations which go beyond their consequences for the corresponding Statement of Assurance. Out of total costs of 6,26 Mio ECU declared by the contracting parties which gave rise to a payment by the Commission, 1,732 Mio ECU (i.e. 28%) displayed irregularities. Even if conclusions cannot be drawn in respect of all concluded and current contracts, the fact that all eight audits revealed serious anomalies is disquieting.

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9.7. Although certain anomalies could have been detected from the documents sent to Brussels, it must be pointed out that the number of on-the-spot checks initiated by the Commission is still inadequate. For example, only 60 checks covering 144 contracts were carried out in respect of the almost 13 500 contracts in force in 1995. These checks have already led to the recovery of about 9,1 Mio ECU, as shown in Table 9.3.

9.8. The Court has already drawn attention, on several occasions, to the disadvantages of contracts based on real costs (). These contracts require complex analytical accounts to be kept, which may result in arbitrary valuations, and therefore lead to long and sensitive audits. Furthermore, the Directorates-General (DGs) responsible for concluding research contracts do not all adopt the same approach - for example, as regards the methods for sharing out overheads, the number of annual hours or the eligibility of certain items of expenditure. The Commission should review its procedures and consider the possibility of adopting negotiated lump-sum costs. This approach would be of help not only for its own checks, but also for the management of contracts by businesses and, in particular, by small and medium-sized companies.

9.9. Lastly, certain contracting parties are sometimes subject to audits by the bodies allocated this responsibility by the Member States within the framework of projects they have subsidized. Although these audits may provide important information on these contractors, the Commission is not always informed of the results. However, it would be desirable for the Commission to receive copies of these reports systematically. Steps should also be taken to ascertain whether the Commission could introduce an initiative to improve the exchange of information with the Member States.

9.10. Furthermore, an examination of the Commission's files on two demonstration projects in the field of energy (projects which concerned the same beneficiary) reveals that:

(a) the projects, which were never implemented, received an advance payment of 0,3 Mio ECU between 1986 and 1988;

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(b) although these two contracts were terminated in March 1988 and November 1992, the Commission issued a partial recovery order for 0,2 Mio ECU only in May 1995;

(c) no reimbursement had been made by the end of December 1995, and no legal action had been taken to recover the funds.

9.11. The Commission should review the procedures for monitoring current files and examine whether the requisite conditions have been satisfied as regards the liability of the Authorizing Officer (Article 73 of the Financial Regulation).

ACTION PLAN FOR THE INTRODUCTION OF ADVANCED TELEVISION SERVICES IN EUROPE

Introduction

High-definition television policy

9.12. European HDTV strategy dates from the 1980s (). The action plan for the introduction of advanced television services in Europe is a new approach. From the early 1990s, it became clear to the Commission that the development of technology and the markets required a review of this strategy.

9.13. The following paragraphs describe the period from the development of the initial HDTV strategy and its subsequent revision in 1993 until the introduction of the action plan.

9.14. It was not possible to achieve the main objectives defined between 1986 and 1992 (see Table 9.4). In particular, the MAC group of broadcasting systems () could not be established as the compulsory standard at the European, or indeed world, level for direct broadcasting of satellite television in such a way as to contribute to the creation of a significant economic advantage in terms of competitiveness for the European electronics industry. Furthermore, the scheduled target date for launching HDTV commercial equipment on the market (1992) was not observed.

9.15. In fact, this policy suffered several setbacks which ultimately resulted in its failure. On 5 May 1992, the Commission submitted a proposal for an action plan for the introduction of advanced television services in Europe (). The aim of this action plan was to facilitate the transition to HDTV based on the use of the D2-MAC and HD-MAC transmission standards developed in Europe. However, during the discussions concerning this proposal the European Union realized that the policy geared to the MAC standard had been overtaken by events and no longer corresponded to the requirements of the market or to technological development.

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9.16. The fact is that the advent of satellite television has led to the appearance on the market of many new broadcasters. These latter, which for the most part are private, have been able successfully to propose high-quality pictures by using the current definition and tried and tested standards such as the PAL standard (). Furthermore, thanks also to the participation of European companies, technical progress has made it possible to develop digital broadcasting technologies in a very short space of time. Consequently, the analogue MAC standards are no longer regarded as having a future.

Reorientation as part of the action plan

9.17. For all of these reasons, therefore, in 1993 the European Union reviewed its television policy. The Commission's proposal of 1992 for an action plan for the introduction of advanced television services was reexamined in the light of the observed developments. In the end, the idea that the action plan would be an accompanying measure whereby a European market for the D2-MAC and HD-MAC standards could be created was abandoned. The action plan was therefore adopted by the Council on 22 July 1993 once its objectives had been redefined ().

9.18. The aim of the definitive action plan is to promote a new format for television, i.e. the wide format with a width/height ratio of 16:9 () in normal definition or high-definition. The MAC standards are no longer compulsory for broadcasting (). The 16:9 format is also being promoted irrespective of the mode of transmission (terrestrial, satellite or cable).

9.19. The 16:9 format, which displays pictures in a format resembling cinemascope, is acknowledged to be better suited to the human field of vision because it increases the brightness and power of pictures. According to the Commission, the 16:9 format is unanimously recognized at international level as the format of the future for television and will also facilitate the eventual introduction of HDTV ().

Strategic importance and specific objectives

9.20. The action plan was conceived primarily in view of the strategic importance of television for the European consumer electronics industry and for the European cinema and television industries (). The fact is that European companies still play an important world role in the field of televisual technology.

9.21. In the Annex to the action plan, the objectives to be attained are defined as follows:

(a) objective: 'In order to contribute to market penetration by receiver equipment in the 16:9 format, the objective of the action plan is to ensure the accelerated development of the market for advanced television services in Europe in the 16:9 format using 625 or 1 250 scanning lines`;

(b) goals to be achieved during the life of the action plan:

- 'a critical mass of advanced television services in the 16:9 format;

- a sufficient and increasing volume of programming in the 16:9 format and with high technical quality both in picture and sound and of such a nature as to facilitate an optimum audience rating, such programming to be broadcast in the above-mentioned services`.

9.22. The activities provided for in this context are not research measures. They are designed to facilitate the marketing of existing research findings. By reducing start-up costs (), the aim of the action plan is to make it possible to create a market for 16:9 television.

9.23. The observations set out in the following paragraphs concern the utilization of appropriations, the mode of financing, implementation problems and the objectives attained to date. The checks carried out at the Commission and on the premises of external consultants essentially concerned the legality and regularity of the implementation of the contracts. In addition, on-the-spot audits were carried out on the premises of six television stations and two independent producers in Belgium, Germany, Spain, France, the Netherlands and the United Kingdom.

Volume and utilization of appropriations

9.24. The action plan provides, for a period of four years (until 30 June 1997), for a financial package of 228 Mio ECU of Community appropriations. On 31 December 1995, the value of commitments entered into totalled 169,9 Mio ECU and the value of payments made amounted to 110,9 Mio ECU (see Table 9.5). Expenditure on the action plan for 1993 and 1994 was charged to the 'Research and development` (B6) sub-section of the general budget. Since 1995, this expenditure has come under the 'Training, youth, culture, audiovisual media, information and other social operations` (B3) sub-section.

9.25. Of these 228 Mio ECU, the Commission was to keep in reserve 68 Mio ECU, which was not to be allocated before 1 January 1995. This reserve was intended to ensure 'that Member States' markets that are not fully served in the early stages of the implementation of the action plan can be served towards the end of the period` (). At the end of the first year in which these provisions were applied (1995), the corresponding commitments totalled 15,4 Mio ECU and total payments amounted to 2,5 Mio ECU.

9.26. The appropriations are allocated to broadcasters who provide television services in the 16:9 format and to producers of television programmes in this format. Aid may also be granted to film producers where the format used makes it possible to produce a 16:9 video tape. Broadcasters who not only broadcast but also carry out production work may benefit from the action plan as regards broadcasting, the production of programmes and films and the reformatting of films onto 16:9 video tapes. On 31 December 1995, 75,7 % of the aid had been granted to broadcasters and 24,3 % to independent producers (see Tables 9.6 and 9.7). No assistance is granted to manufacturers of 16:9 television sets.

Mode of financing

9.27. In principle, the Community appropriations are intended to cover 50% of the additional costs incurred by broadcasters and producers in providing a 16:9 service rather than a 4:3 service. In the case of markets which started up later on (see paragraph 9.25), the rate of financing equals 80% of the additional costs.

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9.28. If appropriations from other sources (national aid and private sources) are added to the Community appropriations, the amount provided for in Article 2 of the Council Decision for implementing the objectives of the action plan totals 405 Mio ECU (see Table 9.8).

Implementation of the action plan

9.29. Two Commission Directorates-General (DGs) are responsible for implementing the action plan. DG X (Audiovisual media, information, communication and culture) is responsible for aid for production in the 16:9 format, and DG XIII (Telecommunications, information market and the exploitation of research) is responsible for managing aid for broadcasting in the 16:9 format.

Aid for the production of programmes

9.30. The management of the production component is very complex. On 31 December 1995, 653 different companies had submitted 4 561 applications for aid; 3 117 production (video and films) and reformatting projects ultimately received support. All areas are covered: fiction, sport, culture and documentaries. Table 9.9 shows 10 flat-rate amounts provided for by the action plan in respect of programme production. These amounts are supposed to reflect the additional costs of the 16:9 format when compared with the 4:3 format, per hour of production. According to the mode of financing provided for in the action plan, only 50%, or even 80%, of these amounts (see paragraph 9.27) is paid as flat-rate aid.

9.31. In terms of aid for production, the Court noted a considerable number of problems.

(a) DG X sought the assistance of external suppliers of services to implement the provisions of the action plan. A technical assistance contract was therefore concluded with the European Economic Interest Grouping (EEIG) 'Vision 1250` (). Coordination problems arose between the Commission and 'Vision 1250`. Furthermore, although at the technical level the powers of 'Vision 1250` made it possible to obviate numerous problems, where financial follow-up is concerned its performance did not prove to be as good. Lastly, during the first four months of 1995 'Vision 1250` had to work in a precarious situation because the Commission did not renew its annual contract in time.

(b) In the light of early practical experience, the flat-rate amounts had to be reviewed. The Commission noted that, particularly in the case of broadcasts of sporting events and live programmes, the aid disbursed sometimes covered all of the additional costs, or even all production costs. A review of the flat-rate payments resulted in a distinction being made between the long-term stock programmes and the short-term flow programmes () (see Table 9.9). Consequently, it was possible to make the problem less acute.

(c) A problem arose as regards the use of the flat-rate amounts. Initially, these amounts were used systematically. Subsequently, the Commission indicated that aid should be calculated on the basis of actual additional costs and that flat-rate amounts should not be considered as maximum payments. However, actual additional costs are often impossible to identify or to check accurately. For example, a film producer who usually works with a super 16mm camera is unable to determine to what extent the use of a 4:3 video camera would have made it possible to reduce the cost of his film. The Commission therefore decided to calculate the amount of aid on the basis of estimates of the additional costs borne by the beneficiary companies. However, in the vast majority of cases, companies assess their additional costs in such a way that the flat-rate amount is applied at the maximum rate. In this respect, companies benefit from the fact that the Commission has never precisely defined additional costs and that as a rule it does not require a breakdown of additional costs when a production is finished.

(d) The increase in the number of projects and the complexity of the aid system require a2 considerable number of checks. The files of 'Vision 1250` show that technical problems appeared in the case of projects in respect of which a volume of aid of 16 Mio ECU was granted. A series of technical errors were identified, as a result of which it was possible to ensure that aid was not paid in error. In one case, it noted that the producer did not have the equipment needed to produce programmes in the 16:9 format. In several other cases, the format, classification as 'stock or flow programmes` or the actual length of the programme did not tally with the information that had been provided. In the case of reformatting, 'Vision 1250` often noted that inferior-quality transfer work from the 4:3 video format had taken the place of 16:9 reformatting.

(e) 'Vision 1250` was unable adequately to monitor progress on many of the projects. Some projects had not yet begun and, moreover, were no longer included in the production programme although they should have been completed several months earlier. However, the corresponding financial commitments had not been cancelled. On various occasions, the producers also criticized the slowness with which the payments were made.

(f) In the Netherlands, an independent producer received an advance of 125 828 ECU. When the Commission realised that the production would never be likely to get off the ground, it tried, to no avail, to recover the sum advanced. It transpired that the Commission could have demanded a bank guarantee.

(g) In Spain, a small production company was expressly created so as to be able to receive the sizeable amounts of aid granted to the high-definition video production sector. The company, which had capital and reserves of 6 000 ECU, applied for financial aid totalling 3 Mio ECU. Although there was no guarantee of financing from other sources, the Commission granted 0,7 Mio ECU of aid. Once the production of the programmes was finished, a technical check was made by the 'Vision 1250` grouping and a firm of auditors was asked to carry out a financial audit. The pictures were sometimes of poor quality. The aid disbursed was reduced to 0,3 Mio ECU.

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Aid for the broadcasting of programmes

9.32. Managing aid for the broadcasting of programmes is less complex than managing aid for production because there are fewer beneficiaries (41 television stations on 31 December 1995). These stations receive a fixed amount of aid per hour of broadcasting (3 000 ECU an hour for the first 50 hours and 1 250 ECU an hour thereafter), irrespective of the nature, scheduling and frequency of broadcasts, provided that the programmes concerned are in the 'non-letterbox` 16:9 format (i.e. no black bands at the top and bottom of the screen).

9.33. The additional costs of broadcasting in the 16:9 format essentially stem from the cost of additional investments (such as the cost of converting television studios or installing encoders), which may vary considerably from one broadcaster to another, depending on factors such as the broadcasting technique used. However, flat-rate amounts of aid take no account of variations in these additional costs. Two of the broadcasters audited by the Court thus received aid in excess of their total additional costs.

9.34. In one case, according to the supporting documents, a film was broadcast in 16:9 before the date given for reformatting to 16:9. The company in question provided no explanation. There are two possible explanations:

(a) the film in question was never broadcast in 16:9, despite claims to the contrary;

(b) the film was broadcast as a low-quality 16:9 version that was not eligible for aid and was produced from a 4:3 video tape with the aid of what is known as a format converter, without any 'genuine` reformatting taking place [see paragraph 9.26 (d)]. It should be pointed out in this connection that although companies are obviously free to broadcast low-quality 16:9 versions, they are not eligible for any Community aid if they do so. However, it is not known to what extent this rule is observed.

Effectiveness of the action plan

9.35. There is a logical link between the aims and objectives of the action plan as described in paragraph 9.21. In order for 16:9 equipment to be able to penetrate the market and thereby create '16:9 demand`, '16:9 supply` must first exist. Supply may develop only if there are television stations capable of broadcasting in 16:9 [see paragraph 9.19(b)(i)] and if programmes exist in 16:9 to be broadcast [see paragraph 9.19(b)(ii)]. Needless to say, account must also be taken of potential demand.

Supply of 16:9

9.36. On 31 December 1995, 41 television stations were broadcasting in the 16:9 format. Following tendering procedures in 1993, 1994 and 1995, subsidies were granted for a total of 51 703 hours of broadcasting in the 16:9 format (see Table 9.10) and for 17 036 hours of production and reformatting in 16:9 (see Table 9.11).

9.37. On the basis of these figures, it may be concluded that a basic supply has been developed in the 16:9 format. However, the following shortcomings limit the effectiveness of the action plan.

(a) The majority of subsidized hours of programming are broadcast by D2MAC or subscription channels. Therefore, as most households do not have decoders or do not subscribe to these channels, they were unable to receive these programmes.

(b) The 16:9 format does not automatically lead to the better picture or sound quality predicted in the action plan. However, although 'Vision 1250` had drawn up a technical charter proposing a minimum number of technical requirements, it was never adopted by the Committee of Representatives of the Member States.

(c) There is no guarantee that all of the financed productions are actually broadcast. As regards stock programmes (), the contracts with the producers lay down that they shall be broadcast 24 months after they have been produced. However, 'Vision 1250` drew attention to difficulties in carrying out checks to this effect, especially as, in the event that programmes are not broadcast, the contractual consequences for beneficiaries are yet to be defined.

(d) The financing of high-definition video productions of 1 250 lines is more costly and less effective than other means of attaining the goals of the action plan:

- 35,3 Mio ECU, i.e. 42% of the EU appropriations intended for new productions, were allocated to high-definition video productions. However, the result in terms of hours produced in the 16:9 format (2 102 hours), i.e. 17,6 % of the hours subsidized, is relatively modest;

- no station broadcasts in the high-definition format of 1 250 lines. Nevertheless, in order to be able to broadcast programes produced with 1 250 lines, they must be converted to the 625-line format. The Commission made available a further 0,4 Mio ECU for this purpose;

- some 1 250-line flow programmes also show evidence of low cost-effectiveness. 'Vision 1250` quoted by way of example the 1995 world figure-skating championships in Birmingham. Although the production received a subsidy of 0,2 Mio ECU, it was not broadcast throughout Europe but was screened for a very small number of viewers by a theme-based French television channel;

- some 1 250-line productions were actually relatively esoteric artistic or cultural programmes with which the required audience figures could not be achieved. The same was also true of some productions checked by 'Vision 1250` which are broadcast only as an interlude or at the end of other programmes, so as to postpone displaying the test card.

(e) In the case of sports programmes, which make it possible to attain high viewing figures, television stations are still too often reluctant to take risks. In England, for example, the intention was to broadcast horse-racing in the 16:9 format, to which end the Commission had made provision for the sum of 1,8 Mio ECU. However, these projects were never carried out because the vast majority of viewers who own standard sets equipped for the 4:3 format would have seen the broadcast in 16:9 with black bands at the top and bottom of the screen. Broadcasters feared complaints from owners of 4:3 sets. However, they are at present having to deal with complaints from the rare owners of 16:9 sets who receive the normal broadcasts in the 4:3 format with a black band on the left and right of the screen. Although, in order to obviate this problem, they may increase the size of the picture to fit the screen, some of the picture is lost.

(f) with the exception of subscriber television stations and theme-based channels which use the 16:9 format as a commercial argument, television stations do not employ adequate techniques to promote their broadcasts in the 16:9 format. The fact that some broadcasters consider the format of the screen to be of secondary importance may not be without significance. Priority is being given to consideration of the major changes which could result from the introduction of digital television (e.g. interactive services such as pay-per-view, video-on-demand and multimedia).

Demand for 16:9

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9.38. The action plan made it possible to increase the number of 16:9 sets sold as a percentage of total sales in the European Union from 0,5 % in 1993 (92 000 units) to 1,0 % in 1995 (220 500 units) (). The manufacturers hope to reach 30% by 2000. This forecast was revised downwards at the 'Widerview` conference held in Brussels in 1995. For the first time, regressive trends were noted on the French market, which is regarded as the pioneer for services in the 16:9 format. The use of the MAC standard, which enables programmes in 16:9 to be broadcast only by cable and by satellite, is a restrictive factor in France. Only 6% of French households with a television set subscribe to a cable channel and only 1,7 % have a satellite dish ().

9.39. On the other hand, the PALPLUS standard also makes it possible to broadcast 16:9 programmes by terrestrial means. In 1995, for the first time, 16:9 sets of various sizes with a built-in PALPLUS decoder were offered for sale to the general public. However, the widest choice was offered by Japanese manufacturers, with the result that the action plan had no particular impact on the promotion of European manufacturers' sales.

9.40. The German market only really got off the ground in 1995. However, even in this leading market, it is impossible to say to what extent the upward trend can be sustained in the long term and how many consumers are willing to spend more on a 16:9 receiver, given that the price is still high. Furthermore, many consumers are still reluctant to buy a 16:9 television because they know that in the medium term most programmes will continue to be broadcast in the traditional format.

Conclusion

9.41. The 'action plan for introducing advanced television services in Europe` was drawn up in 1993 after the failure of the European Union's policy on the MAC standards (paragraphs 9.12-9.16). The aim is no longer to introduce a given broadcasting standard for high-definition television but to promote the introduction of the wide-screen format based on a width/height ratio of 16:9. Aid is granted not only for broadcasting but also for the production of programmes in the 16:9 format.

9.42. The management of Community aid for productions in the 16:9 format proved to be very unwieldy and problematical (paragraphs 9.30 - 9.31). As regards productions and broadcasting, the mode of financing for which the action plan provides could not be applied in all cases (paragraphs 9.31(b) - 9.33).

9.43. Most subsidized hours of programming could not be received by the vast majority of households with a television set (paragraphs 9.37(a)). The cost/effectiveness ratio of high-definition productions (of 1 250 lines) is particularly disadvantageous if it is borne in mind that the aim was to develop the 16:9 market rapidly (paragraph 9.37(d)).

9.44. The action plan has enabled broadcasters and programme producers to become acquainted with the 16:9 technique. On 31 December 1995, aid had been granted for 51 703 hours of broadcasting and for 17 036 hours of production in the 16:9 format (paragraph 9.36). The proportion of 16:9 sets as a percentage of total sales in the European Union increased from 0,5 % in 1993 to 1% in 1995 (paragraph 9.38). The action plan had no particular impact on the promotion of sales by European manufacturers as most 16:9 receivers on sale are produced by Japanese and Korean manufacturers (paragraph 9.39).

Recommendations

9.45. By June 1997, the 16:9 market will have received financial incentives totalling 228 Mio ECU over a period of four years. If this measure is extended, it will be increasingly difficult to speak of start-up aid. Permanent financing must be avoided, as it may paralyse rather than mobilize the economic agents concerned.

9.46. However, should the decision be taken to extend the action plan, corrective measures will have to be taken. The management of aid for production should be simplified or even abandoned.

9.47. As regards broadcasting, a system of flat-rate financing for each hour actually broadcast in the 16:9 format could be adopted and external aid for the management of the budget would not be necessary. Independent producers would benefit indirectly from contracts concluded by television stations ().

9.48. In order to guarantee high-quality pictures and sound, technical checks in respect of broadcasters' facilities should be stepped up. Any extension of the action plan should, in particular, benefit markets that are lagging behind and should cover the greatest possible number of households that have a receiver.

9.49. The digital television age has begun. Many experts believe that it will lead to a further increase in the supply of programmes and to new interactive services. After extensive consultations in Europe, all of the important players in the market agreed on the technical standards required for digital video broadcasting. This decision will enable the market in digital television services to get off the ground straightaway. As was the case when satellite television was introduced, the markets are more concerned with the quantity of services than with improvements in picture quality. Although high-definition television is technically feasible, it has not so far penetrated the market. In view of this situation, any possible continuation of the European Union's financial commitment to high-definition television and the 16:9 format should be decided on the basis of detailed market studies and clearly defined objectives.

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REPLIES OF THE COMMISSION

IMPLEMENTATION OF THE BUDGET

9.4. (a) The appropriations available in Article B6-292 of the budget come from activities entrusted to the JRC on a competitive basis by the various Directorates-General of the Commission. This is a new type of competitive activity introduced with the Fourth Framework Programme and could only be implemented after the adoption of the amendment to the Financial Regulation on 18 September 1995 (Regulation (EC) No 2335/95, OJ L240 of 7 October 1995). The model Administrative Arrangement containing the agreement between the commissioning Directorate-General and the JRC also had to be drawn up.

When the commissioning Directorates-General entrust these competitive activities to the JRC, they have to comply with the rules governing public contracts, leading to further delay.

Since 27 November 1995, the JRC has received and signed the first Administrative Arrangements establishing the agreement between the commissioning Directorate-General and the JRC.

The Accounting Officer was therefore unable to make appropriations available until after each Administrative Arrangement was signed between 27 November 1995 and the end of the year.

(b) The Court's comment on the low rate of utilization in the heading for work on behalf of outside bodies is correct from a strictly budgetary point of view. In fact, the proportion of appropriations not used is slightly lower than indicated by the Court: 72.6% for commitment appropriations and 62.8% for payment appropriations.

However, it should be pointed out that this budget heading covers an order book for work which the JRC is to carry out for outside bodies over a period of several years. In this sector of activities, the JRC operates like any private form subject to the rules of the market. It must therefore possess a budget reserve to cover work as it is commissioned and carried out.

The low rate of utilization for appropriations in this heading is therefore a natural phenomenon. Whenever a contract is signed, commitment appropriations are immediately available, even if the contract signed is a multiannual contract, as is virtually always the case.

The utilization rate in the course of a financial year cannot therefore be gauged against the total appropriations 'available`, but must be compared with the annual tranche corresponding to the volume of work to be carried out in the year in question; this annual tranche cannot be determined from examination of the revenue and expenditure account.

It should also be pointed out that, of the total commitment appropriations available, ECU 4 450 000 relates to only one contract (the Envireg contract signed with the Italian Ministry of the Environment) for which the appropriations could not be used in 1995 as the Italian Court of Auditors did not approve this contract until April 1996.

(c) The arguments set out above for the heading for work for outside bodies are also valid here.

Tables 10 and 11 of the revenue and expenditure account show that when expenditure on personnel and administration is included, the percentage of unused appropriations for the management of the HFR programme comes to 26.7% for commitments and 23.8% for payments.

(d) The appropriations in question were carried over from 1994 to provide cover for a contract of around ECU 800 000 to supplement the operational aspects of the Earsec programme (European airborne remote sensing capabilities).

After a call for tenders was published in July 1994, the file for this contract was presented in December that year to the ACPC (JRC) which gave an unfavourable opinion.

As the contract was nearing completion, the JRC asked for the appropriations to be carried over. This request was granted. The intention was to resubmit the file to the ACPC (JRC) in March 1995.

However, the JRC found that the comments made by the ACPC (JRC) were justified and decided that a new call for tenders should be published.

Because of this new call for tenders, there was no longer any guarantee that Article 7(2)(a) of the Financial Regulation, which allows carry-overs to be used only for operations for which preliminaries have been virtually completed at 31 December of the previous year, would be correctly applied. After consulting Financial Control, the JRC therefore decided not to conclude the contract in question and not to commit the appropriations since the conditions for using the appropriations carried over from 1994 had not been met.

CHECKS IN RESPECT OF CONTRACTING PARTIES

9.7. The Commission recognizes the importance of increasing the number and quality of audits. To this end, it has increased the number of staff in DG XII's audit cell from 4 in 1995 to 12 in 1996, and the relevant auditing policy and methodologies are being reviewed. This will lead to a significant increase in the number and type of audits, as well as to improvements in the utilization of the results of audits for the surveillance of existing contracts and the negotiation of future contracts.

In the framework of SEM 2000, the Commission is currently raising awareness of contractors' obligations by means of information meetings for newly launched projects consortia and in all Member States, and through the participation in the audits of scientific and project officers of the programme directorates.

9.8. The funding of research costs is based on Article 7 of the Council Decision on the rules for participation in RTD activities under the Fourth Framework Programme, but it may be reviewed under the terms and conditions defined in Article 10(3) of the same decision. An interdepartmental working group on costs and audit is currently examining the various possibilities with a view to the Commission considering changes as part of the Fifth Framework Programme. This review includes guidelines on major financial provisions for cost reimbursement research contracts, a priori controls including preventive and administrative measures, auditing of work programmes and the approach to be taken towards audited contractors, administrative measures and sanctions against defaulting contractors, and a common database for global monitoring of contractors and of the labour rates applied to cost sharing research contracts. This proposed common database should provide the necessary statistical basis for the development of fixed rates.

9.9. Administrative agreements with the UK's Department of Trade and Industry, France (DGA/SECAR) and the Federal Republic of Germany (BMWI) on the use of audit results are at various stages of formal acceptance and implementation. The Commission welcomes all such initiatives. It must, however, be noted that such agreements require lengthy discussions with national and/or regional authorities, verifications that the model of funding applied by them is comparable to that of the Commission, and also the testing of their audits' reliability.

9.10. A recovery order was issued in 1995. So far, the co-contractor has failed to respond to the three demands which the Commission's Accounting Officer sent him at the end of 1995. The Commission is currently examining the procedure for legal action.

9.11. At a more general level, the Commission has reviewed the procedures for monitoring current files, focusing on the strengthening of internal controls as part of the SEM 2000 exercise. In particular, the financial channels in the energy sector were reorganized in autumn 1995. Application of Article 73 of the Financial Regulation could be considered if it were to be established that the Commission had suffered financially.

ACTION PLAN FOR THE INTRODUCTION OF ADVANCED TELEVISION SERVICES IN EUROPE

Introduction

Policy on high-definition television

9.12 9.16. The MAC/HDTV strategy was triggered by a Japanese attempt to establish a single global standard for HDTV which would have disadvantaged European consumers, broadcasters and manufacturers. There was considerable political pressure from Member States and industry to mount a European response. No one disputed that HDTV was the correct objective and that it should be achieved by the fastest possible route, via MAC technologies, in order to meet the Japanese threat by achieving rapid time-to-market. The digital option was considered for HDTV but considered too long term to meet the time-to-market requirement; in fact the much heralded American Grand Alliance digital HDTV system is still not market-ready five years after the abandonment of HD-MAC. The political message at the time was that manufacturers should bring products to market rapidly, using market-ready technologies. This followed the earlier debacle with video recorders, where Europe had produced the most advanced system, but at too high a price and too late.

During the period when the HDTV technology was being developed, the structure of the broadcasting market changed. In particular, the rise of pay-TV operators brought an increasingly commercial approach to television. They had not existed when the HDTV/MAC consensus was reached. They identified several important consumer propositions in digital television at standard definition. First, the increased number of channels made possible by digital compression means that broadcasters can segment their audiences and offer special interest and thematic programming much more cost effectively than by using analogue broadcasting. This widens choice for the consumer. Second, digital television enables entirely new service concepts like near video on demand, which increases consumers' opportunities to see a particular programme. This change in market structure towards pay-TV could not have been predicted in 1985.

Reorientation as part of the action plan

9.17 9.18. The current policy also includes a light regulatory strand that will enable the digital TV market to start. In the light of developments, the Commission has initiated a revision of this regulation.

Aid for the production of programmes

9.30. The system set up by the Council Decision establishing the Action Plan, which was the result of a difficult political compromise, does indeed lead to a complex method for the management of 'programme production`.

9.31. (a) The Commission sought the assistance of an external supplier of services in order to acquire the technical competence it needed to carry out a number of tasks under the Action Plan.

The technical competence of Vision 1250 allowed a number of pitfalls to be avoided in both the evaluation of proposals and the technical controls carried out.

A new call for proposals is now under way to select two external suppliers for the following tasks:

1. evaluation, reports, and technical controls;

2. preparation and implementation of payment files, and financial audits.

9.31. (b) The Council insisted on the use of flat rates in its decision for the reasons set out by the Court.

However, a derogation was required in two cases: when the tenderer announces additional costs which are lower than the flat-rate amounts (application of the double ceiling) and when technical factors prompt the Commission to conduct an ex post financial audit.

9.31. (c) The number of projects under way increased from around 800 in early 1994 to more than 2 500 at the end of 1995.

9.31. (d) Delays in the implementation of programmes, and even cancellations, are common in this sector of activity and alternative projects are often submitted for the Commission's approval. The financial commitments have therefore been deliberately extended past the theoretical date for the end of production, within reasonable limits and if the information required was available, in order to make allowances for the delayed presentation of files or the presentation of alternative files.

9.31. (e) The Dutch producer in question received an advance on 28 February 1994 when he accepted the notification of aid for a project expiring on 30 April 1995. The Commission already launched an inquiry in 1994 and issued a recovery order on 27 January 1995. This case has also been the subject of a judicial investigation in the Netherlands in which the Commission is playing an active role.

9.31. (f) The company mentioned by the Court was indeed set up with limited capital. The tenderers' professional experience suggested that this 'pioneering` project in Spain would be carried out in fully acceptable circumstances.

Aid for the broadcasting of programmes

9.32 9.33. Article 5.1 of the Annex to the Council Decision sets out a number of quality criteria for broadcasting projects, including the requirement to facilitate optimal audience ratings. The rate of repeats, scheduling policy, and programme genre are key considerations for audience ratings. The independent evaluators therefore assess these criteria in their report on each call for proposals. The Commission then discusses the evaluators' assessment carefully with broadcasters during contractual negotiations, securing improvements when necessary.

9.34. Verification of every programme broadcast would entail costs for the Commission and broadcasters out of proportion to the subsidies provided since the output of each broadcaster would have to be monitored. The Commission's approach has been to verify the suitability of broadcasters' technical facilities in advance of signing contracts to ensure they were able to fulfil the requirement. Commission staff and experts from Vision 1250 made a number of such visits to certain broadcasters.

Furthermore, it is specified in the contract that the Commission can demand tape copies of transmissions in order to verify that broadcasters are fulfilling their commitments. This has led to the rejection of certain invoices, following study of the tapes by Vision 1250 and Commission staff. Moreover, broadcasters must certify the number of hours of true 16:9 they have transmitted in order to receive the 20% of the total subsidy held in retention.

Effectiveness of the action plan

Supply of 16:9

9.37. (a) It is clear that the existing majority of TV sets in Europe have screens in the traditional 4:3 format. The objective of the Action Plan is to accelerate consumer uptake of 16:9 TV receivers, and the existence of wide-screen broadcasting is a precondition for consumers to acquire 16:9 sets.

There are several systems for transmitting 16:9, but the majority choice among Action Plan broadcasters so far has been the PAL Plus system. This is compatible with the PAL system used in all Member States, except France. Pictures transmitted in PAL Plus therefore reach the whole audience of conventional 4:3 sets and 16:9 sets.

9.37. (b) The Commission called on Vision 1250 to draw up a draft technical charter. This draft failed to gain the approval of the Committee of Member States which considered that it undermined the principle of flexibility needed for the implementation of the Action Plan given the diversity of production conditions in the audiovisual sector in the Member States.

The terms of this draft were also considered more favourable to the industries of some Member States than others. In these circumstances and as the Council Decision did not demand a 'technical charter`, the Commission, after receiving the Committee's favourable opinion, adopted non-binding 'guidelines` which have proved fully adequate in practice.

When the necessary equipment is fitted, use of the 16:9 format will improve sound and picture quality.

9.37. (c) First, the producer cannot be held responsible for any shortcomings on the part of a broadcaster. Furthermore, flux programmes are paid for on the basis of the quarterly broadcasting records once they are actually broadcast; stock programmes receive the balance of their financial contribution after the end of production or when they are ready to be broadcast. These stock programmes are eminently repeatable and indeed attract plenty of buyers.

9.37. (d) HD production is more expensive but by no means less efficient than 625-line video production, as the higher rate of finance reflects.

These HD stock productions can, by their nature be repeated (on average, a stock production is rebroadcast six times). HD productions are also suited technically for digital broadcasting and thus for the television of the future and the stock list built up will fill the programme schedules.

Neither Vision 1250, nor the Commission is willing or able to assess the artistic content of the programmes or interfere in the composition of the broadcasters' programme schedules.

9.37. (e) Like the Court, the Commission regretted the cancellation of plans to cover sports events in the United Kingdom. However, viewers' behaviour is changing in this Member States. The budget earmarked for this was transferred back to the general budget, as always when projects are abandoned.

9.37. (f) In evaluating broadcasting projects, the Commission has always insisted on the importance of promotion, the need to communicate with the audience, to explain. Pay-TV operators are highly professional about this because it is so important for their commercial success. Public broadcasters are, however, less commercially aware by definition and it has been difficult to ensure satisfactory levels of promotion. The promotional plan for each project is negotiated and annexed to the contract and this approach has produced some notable successes even among public broadcasters; for instance, France Supervision has devoted considerable resources and ingenuity to the promotion of its service. Other broadcasters like RTBF and Channel 4 have collaborated with industry to promote 16:9 in an innovative way.

Demand for 16:9

9.38. In the view of the European Association of Consumer Electronics Manufacturers, the public sector strikes in the final months of 1995 caused a down-turn in the French consumer electronics market - most TV sets are purchased towards year-end - and the Commission understands that French sales of 16:9 receivers have since recovered entirely.

9.39. The Action Plan was not intended specifically as an aid to manufacturers, but to catalyse the 16:9 market. All the 16:9 television sets sold in Europe have been made in Europe. Moreover. television is the one consumer electronics product where European-owned manufacturers collectively outsell their foreign-owned competitors.

An important background point here is that television sales are shrinking throughout the EU (-1.1% average 1995/4), mainly because there is only a replacement market and the products have a long life. The only growth segment is wide-screen TV where sales have grown by an average of 63.7% over the same period. This demonstrates the importance of wide-screen to manufacturers because it restores the consumer incentive to speed up the replacement of their existing equipment.

9.40. Small screen receivers became widely available last year and prices will continue to fall as economies of scale and experience curves develop. The increasing efficiency of each generation of PAL Plus integrated circuits also opens the possibility for cost reductions and for prices to fall. Basic wide-screen sets now cost only 20-30% more than 4:3 equivalents; this premium is in line with other new products and will diminish as sales build up.

Conclusion

9.42. The management of aid for the production of programmes is indeed complex because of its nature and because of the quality level and is therefore likely to make administration rather cumbersome: the complexity is exacerbated by the constantly growing number of requests for aid in a period of tight budgetary restrictions.

Although programme management is a difficult task for the Commission, the tendering procedures do not cause tenderers any problem.

9.43. While the cost/effectiveness ratio for HD 1250 production cannot be considered viable in the short term in view of the current state of the market, the richness and potential profitability of the programme lists, whose longevity is ensured by their technical support should be stressed: there will be a return on investment sooner or later.

See also reply to 9.37 (a).

9.44. The Commission has argued above that the objective was not to assist manufacturers specifically but to catalyse the 16:9 market. In those Member States where 16:9 broadcasting is well established, the share of 16:9 sets as a percentage of total sales is growing strongly, starting at the top end. This shows what the future market will look like.

Recommendations

9.45 9.49. The Commission is considering the corrective measures which should be taken should it be decided to extend the action plan. However, the Commission cannot endorse the Court's conclusion regarding the programmes section. The volume of producers' and broadcasters' proposals testifies to genuine demand from the market; the Court it would seem has not taken sufficient account of the objective results on the market targeted by the Community action (see above comments on paragraph 9.40).

The fact that the management of aid for the production of programmes is complex is not a sufficient argument for dropping the aid. The Court does not raise any doubt regarding the need for intervention to assist programme production and stresses the need to avoid any distortion of competition.

The Council Decision instituting the action plan deliberately includes procedures aimed at facilitating access to Community aid for all producers, including independent producers in conditions that are as fair as possible. It is an objective desired by the Council and firmly supported by Parliament at the time.

The administrative burden cannot be a criterion for not renewing a programme which has proved its worth. The Commission fully shares the view of the Court that should the programme be extended, administrative measures should be adapted to simplify the management of programmes and from this point of view improve the cost/effectiveness ratio.

The Commission would stress that an increase in the supply of digital broadcasting services is bound to prompt growth in demand for programmes, and although the debate may not for the time being be focused on the quantity/quality issue, in the near future this may well come to the fore. We therefore believe that the production of new programmes in high-quality production formats, particularly those offering the necessary long-term guarantees, should continue to be encouraged.

An evaluation study is under way already and its conclusions will be an important input into the Commission's reflection on the requirements for a sequel to the Action Plan. The Commission accepts that any sequel should ensure that the late starting markets are well-primed. The action plan will remain in force until 1 July 1997 and departments are already considering future possibilities.

ANNEX

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CHAPTER 10 (*) Measures in favour of the countries of Central and Eastern Europe, the newly independent States (former Soviet Union) and Mongolia

10.0 Contents Paragraph reference

Introduction 10.1 - 10.3

Budgetary implementation 10.4 - 10.12

Budgetary implementation of the PHARE programme 10.8 - 10.10

Budgetary implementation of the TACIS programme 10.11 - 10.12

Observations common to the PHARE and TACIS programmes 10.13 - 10.21

Payment of taxes 10.13 - 10.14

Awarding of contracts 10.15 - 10.21

Delegation of public sector responsibilities to third parties 10.15 - 10.17

Conflicts of interest 10.18 - 10.21

Specific observations concerning the programmes 10.22 - 10.52

Local structures set up by PHARE 10.22 - 10.24

Financial contributions from the CCEE 10.25 - 10.28

Organization of the TACIS programme 10.29 - 10.40

Distribution of responsibilities between the programme managers 10.30 - 10.36

Official representation of the Commission 10.37 - 10.40

The status of experts in the NIS 10.41 - 10.42

Turnover of programme managers 10.43 - 10.44

Assessment of the impact of the programmes 10.45 - 10.52

In the NIS 10.45 - 10.50

In the CCEE 10.51 - 10.52

Observations concerning cooperation with the EBRD 10.53 - 10.55

Observations concerning the loan for the importation of food and medical products into Kyrgyzstan 10.56 - 10.61

Observations concerning the counterpart funds 10.62 - 10.69

Counterpart funds from food aid to Kyrgyzstan 10.63 - 10.64

Counterpart funds generated by sales of agricultural inputs in Poland 10.65 - 10.69

Assessment of the programmes 10.70 - 10.71

Conclusion 10.72 - 10.75

INTRODUCTION

10.1. Cooperation between the European Union (EU) and the Countries of Central and Eastern Europe (CCEE), the newly independent States (NIS) of the former Soviet Union and Mongolia is intended to support the process of reform by promoting, in particular, economic restructuring and the development of the private sector. In some CCEE, this aim is part of the broader objective of future accession to the EU, according to the conclusions reached by recent European Councils. Cooperation takes a number of forms:

(a) in the CCEE, with effect from 1989 the supply of technical assistance and, since 1994, investment finance under the PHARE () programme;

(b) support in the form of technical assistance in the NIS since 1991, and in Mongolia since 1993, through the TACIS () programme;

(c) cross-border cooperation (European Union-CCEE) in the field of structural operations;

(d) programmes in support of democracy in the CCEE and the NIS;

(e) humanitarian aid under the PHARE programme since 1990, and under TACIS since 1993;

(f) food aid financed in particular from the European Agricultural Guidance and Guarantee Fund (EAGGF);

(g) the mobilization of counterpart funds generated by food aid and by certain PHARE supplies programmes;

(h) loans granted to recipient countries under the PHARE and TACIS programmes by the Commission, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD);

(i) support for the coordination of the measures undertaken by certain Member States of the Organization for Economic Cooperation and Development (OECD) within the framework of the 'Group of 24`.

10.2. Disregarding other limited measures, such as the Synergy (energy cooperation with third countries) and Thermie (programme for exploiting technologies for energy management) programmes, the Community appropriations committed to the CCEE since 1989, and to the NIS since 1991, amounted to 5 416,7 Mio ECU and 2 265,4 Mio ECU, respectively, at the end of 1995 (Tables 10.1 and 10.2). As of the same date, the EU had approved the granting of loans totalling 5 560 Mio ECU, of which 3 426,4 Mio ECU had actually been disbursed. At 31 December 1995, 850 Mio ECU had been repaid by the recipient countries, and 206,8 Mio ECU by the guarantee fund (Tables 10.3.1-10.3.3). The EU had also guaranteed loans amounting to 4 700 Mio ECU (Table 10.3.4).

10.3. The observations contained in this chapter are based on an examination of the relevant files, supplemented by on-the-spot audit visits to Hungary, Poland, Romania, the Czech Republic, Slovakia and Slovenia for the CCEE, and Russia, Kazakhstan and Kyrgyzstan in the case of the NIS. A number of these observations reiterate some of the criticisms made in previous Court reports.

BUDGETARY IMPLEMENTATION

10.4. Tables 10.4.1 and 10.4.2 show the utilization under the 1995 budget of the commitment and payment appropriations under Title B7-6, 'Cooperation with the countries of Central and Eastern Europe and the independent States of the former Soviet Union`. Although the commitments were spread more evenly over the financial year 1995 as a result of the new planning procedures, they were still disproportionately concentrated in the final quarter. In fact, almost half of the PHARE commitment appropriations were booked in the last two months of 1995.

10.5. Tables 10.5.1 and 10.5.2 show the budgetary implementation of appropriations, other than those for PHARE and TACIS, managed by ECHO () that were allocated in 1995 for emergency humanitarian aid to the peoples of the countries of Central and Eastern Europe and of the independent States of the former Soviet Union.

10.6. Table 10.6 shows the utilization of the commitment and payment appropriations allocated to the 'Democracy` programmes in the CCEE, the NIS and the successor States of former Yugoslavia (Chapter B7-52). The commitment appropriations for these programmes were utilized in full in the CCEE and the NIS, whereas the payment appropriations initially entered in the budget were only utilized at the respective rates of 38,3 and 64,5. In contrast, the payment appropriations for the successor States of former Yugoslavia, which almost tripled during the financial year 1995, were utilized to the extent of 80,3.

10.7. The slow implementation of the nuclear safety programmes () has already been pointed out in the Court's Annual Reports concerning the financial years 1992 (paragraph 11.22) and 1993 (paragraphs 12.83 and 12.84). In its replies to the Court's Annual Report concerning the financial year 1993, the Commission said that there would be a 'significant` increase in the rate at which contracts were awarded. Nevertheless, despite the urgency of the measures, only 56 of the funds committed had been used on contracts at the end of 1995, and payments accounted for only 26 of the commitments.

Budgetary implementation of the PHARE programme

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10.8. During 1995, the commitment appropriations (B7-600), which were 15 higher than in 1994, were fully utilized (99,4). The definitive payment appropriations, which were 21,2 higher than in the preceding financial year, were utilized to the extent of 87,8. This implementation rate is in keeping with a cash management system based mainly on the payment of advances and their gradual clearance in the accounts, as and when operations are carried out. In 1995 the payment estimates proved more realistic than they had been in the past, thereby curbing the payment of excessive advances, which had too often characterized the management system in previous financial years. Despite this improvement in the estimates for 1995, the funds awaiting utilization in bank accounts in the CCEE had reached 497 Mio ECU at the end of 1995. As a result the interest received on these funds increased from around 9,7 Mio ECU to some 34,7 Mio ECU between November 1994 and December 1995, which provides ample illustration of how excessive the previous advances had been.

10.9. The rate of implementation of the payment appropriations for 'cross-border cooperation in the field of structural operations` (B7-602) accounted for only 36,7 of the budget, despite the latter having been reduced by 60 during the course of the financial year. In fact, two years after the programmes had been approved, most of them were still at the project identification or definition stage.

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10.10. For the first time since 1990, the Commission began to make up its delays in concluding contracts. Nevertheless, the accounting commitments still awaiting the conclusion of contracts amounted to some 1 970 Mio ECU at the end of 1995 (Table 10.7), which represented some 190 of the commitment appropriations for the financial year 1996.

Budgetary implementation of the TACIS programme

10.11. The commitment appropriations available for TACIS (B7-620) in 1995, which were 9 higher than in 1994, were used up completely. The same applies to the payment appropriations, which were reduced by almost 10 by the Budgetary Authority during the financial year.

10.12. In 1995, for the second consecutive year, the Commission was able to conclude contracts at a steady rate, just as it had done for the PHARE programme (see paragraph 10.10). However, commitments awaiting contracts still accounted for 644 Mio ECU at the end of the financial year (Table 10.8), or 129 of the commitment appropriations for the financial year 1996.

OBSERVATIONS COMMON TO THE PHARE AND TACIS PROGRAMMES

Payment of taxes

10.13. The PHARE and TACIS regulations lay down that operations financed by the Community are exempt from all taxes, duties and charges normally levied by the recipient countries. In the Court's Annual Report concerning the financial year 1991 (paragraph 14.22), it was pointed out that tax payments had been charged to PHARE appropriations. At the time, the Commission

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replied that, where local purchases were concerned, it was simpler to pay the full amount of the invoice, i.e. including taxes, and subsequently to recover the amounts of tax paid by PHARE by deducting them from the balance due to the recipient country when the advances were cleared. This system is acceptable, in principle.

10.14. In 1995, during the Court's audit visits to Hungary, Poland, Rumania, Slovakia and the Czech Republic, it was noted once again that unnecessary taxes, in particular VAT, had been paid from PHARE and Tempus funds, and that the Commission had not always taken the appropriate steps to recover the sums involved. The Commission should first set a threshold below which no recovery need be made, owing to the administrative costs involved, and should then insist that the recipients ensure that the taxation agreements are applied strictly for all sums above the threshold.

Awarding of contracts

Delegation of public sector responsibilities to third parties

10.15. With regard to TACIS, the Court's Annual Report concerning the financial year 1993 (paragraphs 12.43 and 12.44) drew attention to the matter of the preparation of invitations to tender and payments being subcontracted to a private company and expressed reservations concerning the authorizing officers' managerial prerogatives being sub-delegated in this manner.

10.16. The Commission published a new invitation to tender in April 1995, when the sub-contracting agreement was due to expire. In June 1995, during the conclusion of the new contract, an element of concern, which the Court shares, arose within the Commission regarding whether subcontracting in this way was not tantamount to abandoning public-sector responsibilities and might not create conflicts of interest, and even constitute insider trading.

10.17. In the end the Commission concluded a one-year contract for 1,7 Mio ECU with a consortium of companies in September 1995. By November 1995, some of these companies had been awarded 13 contracts under the TACIS programme with an overall value of 6 Mio ECU. Bearing in mind the staffing situation at the Commission, the main assurance it has regarding the contracting party's impartiality is to be found in the latter's undertaking to notify the Commission in writing, on its own initiative, of any situations likely to generate conflicts of interest (). This is unsatisfactory in a situation where public funds are involved.

Conflicts of interest

10.18. The invitations to tender relating to the TACIS programme are drawn up with the assistance of an outside company (see paragraphs 10.15-10.17). Evaluation of the tenders is also generally entrusted to consultants and the evaluation committee is chaired, but without any voting rights, by a Commission official.

10.19. As for PHARE, the experts working in the PMUs () in the recipient countries also play a significant part in preparing the invitations to tender, and take a leading role when contracts are awarded by private treaty. For example, in the Czech Republic a contract for 49 209 ECU was awarded by private treaty to the company that employed the expert who had been involved in preparing the contract's terms of reference. The selection of this company was defended by the Management Unit on the grounds that the company was 'currently assisting the Aid-coordination Unit at the Centre for Foreign Assistance, which was responsible for the preparation of the financial proposal`. A justification of this kind is unacceptable in the absence of additional grounds because in situations of this sort there is a high risk of creating situations of vested interest.

10.20. In the case of both PHARE and TACIS, the reasons for selecting enterprises for restricted invitations to tender should be stated in writing, which would make for greater procedural transparency.

10.21. The identification register of commercial companies who are working, or aspire to work, with the Commission in connection with PHARE or TACIS, and on which the short lists are based, is managed by an external consultant with successive contracts (PHARE: 0,4 Mio ECU; TACIS: 0,4 Mio ECU). The owner-manager of this consultancy, which was actually set up in March 1994, was previously an employee not subject to the Staff Regulations at the Commission who worked in the contracts unit of the TACIS department until July 1994. He was awarded his first contract under conditions of imperfect competition, i.e., after a short-listing which excluded, without good reason, the previous contractor, even though the latter had been satisfactory.

SPECIFIC OBSERVATIONS CONCERNING THE PROGRAMMES

Local structures set up by PHARE

10.22. The Commission either uses existing local networks to implement some of the PHARE programmes for SMEs and for regional development in the CCEE, or it sets them up specially. The selection and development of these networks are crucially important to the smooth running of the programmes.

10.23. In Slovakia, the poor organization of the local structures (a regional investment company and a regional development agency that were independent of each other), coupled with the vague definition of their respective roles, hindered the implementation of the regional development programme. Moreover, because two parallel competing networks were used, the regional development programme (6 Mio ECU) received little benefit from the spin-off effects that the measures (16 Mio ECU) in favour of the SME sectors should have created for it.

10.24. In Hungary, the financing of parallel networks for the SMEs and for regional development resulted not only in the duplication of effort on operational support for the local entities, but also in the various networks competing for the funds available.

Financial contributions from the CCEE

10.25. During the Essen Summit, held in December 1994, the European Council stressed the importance of the PHARE programme for the process of reform in the CCEE. The objective set by the Council for this programme, management of which is largely decentralized, was to prepare these countries for membership of the EU. It was then decided at the Cannes European Council, in June 1995, gradually to increase the funds for the PHARE programme to 1 653 Mio ECU by 1999.

10.26. According to the White Paper (), the PHARE programme is the precursor of future Structural Fund measures, after accession. With this in mind, and by applying the provisions of the basic PHARE regulation, which provide for gradually reducing the financing of administrative expenditure, the Commission must further encourage the CCEE to set up the administrative structures required to prepare them for membership.

10.27. As stated in the Court's Annual Reports concerning the financial years 1991 (paragraph 14.48) and 1992 (paragraph 11.100), contributions from the national budgets of the CCEE to all measures, starting right at the study stage, would involve the recipient States more closely in the implementation of the projects, and provide more of a guarantee of these projects being continued after the PHARE measure is concluded. The Commission also recognized that co-financing would tie a beneficiary country more closely to the PHARE measure and thus make it more responsible, and went on to say that this arrangement could be applied more often in the future and would have to be promoted through multiannual planning. In 1995, this arrangement had taken on only limited concrete form.

10.28. Nevertheless, where national measures and external measures financed by the Community or other sponsors are genuinely complementary, the PHARE projects can prove particularly effective, as is evidenced by the programmes in favour of SMEs in Hungary or Slovakia. Concrete measures have been taken in Slovakia to give effective support to the SME sector, primarily by creating a national agency for the development of SMEs which administers both the PHARE and national funds that are allocated to this sector. The fact that SME-related policy and financing decisions are made by the same national body has been genuinely beneficial in terms of effectiveness and coordination. The unequivocal and continuing support of the political authorities thus remains a decisive factor in guaranteeing the success of a system of this nature, as was shown, a contrario, by the unsatisfactory results of a similar programme implemented under PHARE in Romania without local political support.

Organization of the TACIS programme

10.29. The Court's audit visits to the NIS in 1995 revealed that the distribution of responsibilities for identifying, implementing, monitoring and evaluating the TACIS projects between the various interested parties was still unclear. At the end of 1995, there was no guideline defining the roles of the various parties involved in implementing the TACIS programme, i.e. the Commission in Brussels, the coordination units, the technical offices, the monitoring teams and the Commission Delegations (in the countries where these exist).

Distribution of responsibilities between the programme managers

10.30. At the end of 1995, the Commission had set up only four delegations in the 13 TACIS recipient countries, and the variation in the number of staff assigned to TACIS was notable, in that there were seven officials subject to the Staff Regulations in Moscow, and only one each in Kiev, Alma-Ata and Tbilisi.

10.31. From 1993, the Commission set up technical offices in St Petersburg, Minsk and Kiev staffed by experts who were responsible for drawing up and monitoring the programmes.

10.32. Moreover, three teams were also set up by the Commission to monitor and evaluate the projects: one for Russia, and the other two for the other NIS of Eastern Europe and Central Asia, respectively. In 1995, following the publication of invitations to tender, three consultancy firms were entrusted with renewing these teams.

10.33. Coordination units were also set up in the beneficiary States. These are national public bodies made up of civil servants from the recipient country. They are supported by technical assistants who, although paid for by TACIS, perform their tasks independently of the Commission. These coordination units provide a link with the ministries involved with the TACIS measures and take part in drawing up the terms of reference applicable to technical assistants, whose work they subsequently supervise.

10.34. In 1995, however, the operating conditions of the technical offices differed considerably from country to country. The St Petersburg office received its instructions from the Commission Delegation in Moscow, to which it had to report, and provided technical support in the preparation, implementation, monitoring and coordination of the measures financed in the region by TACIS. The Minsk office, which was opened in 1994 to make up for the shortcomings of the coordination unit, was made responsible for providing technical assistance to the Commission in the preparation and follow-up of programmes and was directly accountable to the central departments. Lastly, the task of the Kiev office, opened in 1995, was to provide technical support to the Delegation, which has only one official, assisted by four local staff, to monitor the numerous TACIS projects in the Ukraine.

10.35. The monitoring teams, for their part, are required to send regular reports on the progress of the projects to both the Delegation and the Commission in Brussels. There are some decisions that only the Commission may take, such as amending terms of reference, budget revisions or project extensions.

10.36. The various technical assistance sections thus provide different types of support in the preparation, implementation, follow-up and coordination of the TACIS projects. In practice, these various contributions create duplication of effort and prevent direct communication between the Commission and the beneficiaries, which, in a system of centralized management, slows down decision-taking. The role of the Commission Delegations on the spot is thus sometimes rendered unclear as far as TACIS is concerned. The need for the Delegations' duties to be clearly defined was emphasized in the Court's Annual Report concerning the financial year 1994 (paragraph 10.34). At the time, the Commission said that instructions would be issued so that the general, coordination and political-representation tasks would be covered. At the end of 1995, it had still not issued definitive instructions to each of its Delegations concerning this matter.

Official representation of the Commission

10.37. In its reply to paragraph 12.81 of the Court's Annual Report concerning the financial year 1993, the Commission said that it had clarified the distribution of tasks between the Delegations' technical assistance sections and the monitoring teams, on the one hand, and the coordination units, on the other, in order to prevent any overlapping or misunderstandings.

10.38. However, in Kazakhstan, technical assistants attached to the coordination unit had represented the Commission de facto up until the moment the Delegation was opened in 1994. In 1995 their role was unclear to many experts and the local authorities alike. In Kyrgyzstan, the coordination unit's technical assistants represented the Commission at the monthly coordination meetings of donors, whereas their terms of reference linked them exclusively to the unit, and not directly to the Commission. Nevertheless, in the eyes of the local authorities and of the other financial sponsors, these assistants appeared to be the Commission's only on-the-spot representatives. Similarly, the experts from the technical offices, who are not contractually authorized to represent the Commission, are, in fact, often perceived as being its representatives. Lastly, in connection with the agreements on the implementation of the food aid operation in the countries of the Caucasus and Central Asia, the supervisory companies were described as 'EU Representatives`.

10.39. For legal, operational or political reasons, it is not desirable for external consultants to appear to be representatives of the Commission. If the Commission wishes to be represented in regions where a large number of projects are being carried out, it should open official branches of the Delegation, with at least one official subject to the Staff Regulations present, instead of relying on technical offices or experts on the spot. These branch offices would provide support for all Community operations taking place locally, in addition to TACIS itself.

10.40. Likewise, in countries where the Commission has no Delegation, it should take the necessary steps to be represented officially, even if only intermittently initially, so that technical assistants are not taken as being its official representatives. Such an arrangement would remove the possibility of loss of control described above with respect to the coordination units and technical offices, and would also prevent mistakes by some consultants, such as the one who, at the beginning of 1995, was directed to sign on behalf of the Commission, but without its written authorization, a protocol amending the distribution terms of a food aid programme valued at 14 Mio ECU with the Prime Minister of Kyrgyzstan.

The status of experts in the NIS

10.41. In 1995, in Russia, some consultancy firms had not registered with the authorities because the procedure was either too cumbersome or too troublesome to go through for the mere 12 or 18 months they would be posted to these States. For example, the St Petersburg technical office's position with regard to the administration (see paragraph 10.34) was still irregular in July 1995. The contractor was still unregistered in Russia and was, therefore, unable to conclude contracts locally, open bank accounts or license his vehicles. His local staff, for whom no social security contributions had been paid, were employed in contravention of the local labour legislation. Many experts in Russia are in a similar position.

10.42. In other countries, difficulties arise not only because such consultancy firms are not registered, but also because the general protocols concluded between the governments and the Community are not applied, particularly as regards exemption from paying local taxes on imported equipment. In Kyrgyzstan, for example, some consultants had been obliged to open personal bank accounts in order to pay their local staff, which is completely illegal. In Kazakhstan, the general protocol signed in February 1994 had not been applied by 1995, and some enterprises that had set up companies in accordance with local legislation were liable to pay tax, despite the protocol's provisions concerning exemption. The Commission should waste no time in order to find a way of regularizing the difficult position of its contractors in the various countries concerned.

Turnover of programme managers

10.43. During the preparation of the audit visits in 1995, it often emerged that the repeated changes of manager at the Commission in Brussels had hindered the implementation of the programmes. For example, in Slovenia, the post of administrator of the privatization and restructuring of companies sector was occupied by five different officials between October 1992 and October 1995, while that of administrator of the science and technology sector was occupied by three officials in succession in less than a year. The ensuing lack of continuity of monitoring resulted in the loss of a bank guarantee for 15 080 ECU which had already expired by the time it was needed to cover a contractor who had gone into bankruptcy eight months earlier, despite seven warnings sent to the Commission by the Slovenian authorities during this period.

10.44. Three administrators in succession managed the programmes for agriculture in Kazakhstan between July 1994 and July 1995. Although the Commission had to intervene as a matter of urgency at the end of 1994 to modify the terms of reference governing one particular consultant to a TACIS project connected with the production of agricultural machinery, the amendment could not be implemented until a new administrator arrived, one year after the programme had begun, despite the repeated requests of the consultants and the recipient.

Assessment of the impact of the programmes

In the NIS

10.45. TACIS is a programme which provides mainly technical assistance and it is, therefore, difficult to single out its concrete effects. The very moderate finance provided for equipment is often the most tangible part of the measures; such financing is particularly useful when it enables a specific insight to be gained into the technical assistance work and provides the recipients with the means to continue the project, which still happens too rarely.

10.46. The TACIS programme was still little understood in 1995 by the authorities in Kazakhstan and Kyrgyzstan that were not directly involved in either managing or evaluating it. This was notwithstanding that the EU was the main donor of non-refundable aid to Kyrgyzstan.

10.47. Training measures can prove particularly effective means of asserting the Community's presence in the recipient countries, provided that the Commission deploys them to good effect. In the case of the support to the Kazakhstan Institute of Management, of which TACIS was by far the main financial sponsor, the MBA-type training given was conducive to strengthening the country's managerial capabilities in the long term, whilst simultaneously tightening its ties with the Community. In the light of this, it would have been beneficial to develop a closer partnership with the recipient State, so as to ensure the Institute's viability and further promote exchanges with European universities.

10.48. Only in some cases is the Commission beginning to maximize the benefits of its investments in the NIS. For example, based on its experience in the field of restructuring collective farms, it has published a booklet setting out the various principles and guidelines that have, in practice, been shown to produce good results. Using the successes of one of its technical assistance sections in Kyrgyzstan as a basis, the Commission has also distributed another booklet on training and providing advice to private farmers. In this way, the TACIS projects on which these publications are based have taken on the form of pilot projects, a factor likely to produce a by no means negligible multiplier effect.

10.49. The impact of the programmes depends greatly on the actual interest shown in them by the main recipient. For example, two projects connected with the privatization of soviet-style collective farms were examined in the St. Petersburg region. The first project, in favour of the milk sector and the fruit and vegetables sector, had been proposed by the region's Ministry of Agriculture (2,4 Mio ECU). The recipient neither supported it, nor made any real contribution, and there was too limited a measure of coordination with the other TACIS projects, notably in the food distribution sector. The technical assistance also provided for the purchase, using TACIS funds, of equipment for a dairy which was 15 years old and its residual operating life was limited. The cost-effectiveness of this investment, therefore, remained debatable in 1995.

10.50. On the other hand, the second project concerning the privatization of soviet-style collective farms (2,2 Mio ECU) was adopted enthusiastically by the recipients, who, just like the technical assistants, became fully involved in its implementation. The equipment supplied was suitable and could be maintained on the premises. In addition, an integrated approach was adopted, characterized not only by the coordination of food distribution with the TACIS project, but also by cooperation with experts on farm credit from the TACIS development project.

In the CCEE

10.51. The appropriations under the PHARE indicative programmes were too often spread over a broad range of sectors, and individual programmes are themselves sometimes broken down into a large number of projects, or sub-projects. This dispersal greatly hinders any attempt to assess the impact of the measures, especially in Poland. In contrast, in Slovakia the specific measures to aid SMEs, and those to promote labour-market development or training, have contributed far more to giving tangible form to the effects of PHARE than the financing reserved for studies, which is often excessively diversified.

10.52. Well-targeted studies linked to specific forms of technical assistance can prove particularly useful, as is evidenced by the projects financed by the Commission for Slovenia's energy sector. Two studies, totalling 0,9 Mio ECU, form the basis of this country's energy strategy and have defined its legal and institutional framework. The Commission has provided long-term, high-quality technical assistance, and the recipient's willingness to contribute to the reform of this sector by using PHARE funds as an integral part of the national budget has been a determining factor in making sure that this project will not be ephemeral.

OBSERVATIONS CONCERNING COOPERATION WITH THE EBRD

10.53. The Court's Annual Report concerning the financial year 1992 (paragraphs 11.43-11.52) pointed out difficulties regarding the application of the Bangkok Agreement (), in that too many of the studies did not lead to investment projects, and the EBRD awarded an inordinate number of contracts financed by Community funds to operators from the same Member State. Since that time, the procedures followed by the EBRD in managing PHARE and TACIS appropriations have improved. Nevertheless, in 1994 and 1995 the majority of the contracts were once again awarded to companies with registered offices in the same Member State, most of which were international in their structure and activities.

10.54. The Court also noted that the Commission failed to monitor Community funds managed by the EBRD, and it recommended the adoption of more appropriate and more effective procedures to cover operations entrusted to the EBRD, whilst still allowing the Commission to fulfil its managerial responsibility as defined in Article 105(3) of the Financial Regulation. Lastly, the Court hoped that this cooperation, and the activities financed via the EBRD, would be evaluated on a regular basis. Not only did the Commission fail to evaluate the projects financed via the Bank, but it did not even ensure that they were monitored in 1995. For example, in the case of the projects for providing advice to managers responsible for restructuring enterprises (Turn Around Management Programmes), the remuneration taken by the EBRD for a limited range of services rendered accounted for up to 13 of the administrative costs, unbeknown to the Commission. In July 1995, the Commission notified the EBRD of an imminent amendment to the Bangkok Agreement, which was unsatisfactory to both of the institutions. Despite the declared intentions, a new cooperation agreement was not concluded until April 1996.

10.55. In its Annual Reports concerning the financial years 1993 (paragraphs 6.11-6.14) and 1994 (paragraph 10.27), the Court raised the matter of the bank interest earned on advances of PHARE and TACIS funds deposited with the EBRD that were earmarked for financing preparatory measures for the Bank's investment projects. The interest received on these deposits in 1992 and 1993, totalling 396 421 ECU, had still not been recovered by the Commission at the end of 1995, despite the reminders sent to the Bank.

OBSERVATIONS CONCERNING THE LOAN FOR THE IMPORTATION OF FOOD AND MEDICAL PRODUCTS INTO KYRGYZSTAN

10.56. In 1991, the Council decided to grant a medium-term loan of 1 250 Mio ECU to the Soviet Union and its Republics () for the importation of food and medical products originating in the Community or the CCEE. Generally speaking, granting loans for the importation of products like these, which barely come under the head of humanitarian aid, is hardly a solution to the constraints experienced by the recipient countries. In 1995, several of these countries, particularly Georgia, were unable to comply with the time-limits for repaying the loan capital or interest (Table 10.3.1). Because of the terms under which the loan had been granted (9 interest rate and repayment over three years), Kyrgyzstan had used only 71 of the funds (32 Mio ECU) it had been allocated originally.

10.57. The Kyrgyzstan authorities issued invitations to tender for the importation of agricultural and medical products at the end of 1992 and the beginning of 1993. The lack of transparency in the organization of these invitations to tender led to very critical comments in the local press. Closer supervision by the Commission would have allowed clarification of the contract award procedures. In particular, the authorities receiving the loan ought to have been obliged to submit an evaluation report on all of the tenders received.

10.58. The final beneficiaries in Kyrgyzstan only received the medical products in 1994, one and a half years after the contracts had been awarded. The country was therefore obliged to pay the interest on the loan before it had even received the revenue from the sale of the medicines. A third of the medicines were then sold to hospitals which, in July 1995, still owed 7,1 Mio ECU. Furthermore, one enterprise in a Central European country delivered medicines whose use-by dates had expired. These had to be replaced by the contracting authority, thus further delaying distribution to the final beneficiaries.

10.59. Concerning the import of baby food into Kyrgyzstan, the products were delivered CIF to St Petersburg, which further augmented transport costs that were already higher than those for importing other similar products into the country.

10.60. Despite successive reductions (up to 50), the selling price of these foods remained uncompetitive. Whilst the total value of the imported products was approximately 3 Mio ECU, the Kyrgyzstan Government attempted, unsuccessfully, to sell them for 1,3 Mio ECU. In the end, 68 of the deliveries were handed over to Russia for the extremely low price of 0,4 Mio ECU, compared with a purchase price of some 2,2 Mio ECU.

10.61. In April 1995, the Ministry for Trade and Industry issued instructions for the remaining quantities to be distributed from the warehouses. Even though the use-by date for the foods had already expired in June 1995, the national laboratories concluded that the overall quality was still good. Some 45 tonnes of these foods remained at the time, 27 tonnes of which comprised milk that could be consumed by adults after it had been boiled. In October 1995, two tonnes (12) of baby food, which was no longer fit for consumption, was still in stock.

OBSERVATIONS CONCERNING THE COUNTERPART FUNDS

10.62. The delays in the actual utilization of the counterpart funds again illustrate the need to specify more clearly the use to which these funds should be put, before the first supplies arrive [see the Court's Annual Reports concerning the financial years 1991 (paragraph 14.89) and 1992 (paragraph 11.79)].

Counterpart funds from food aid to Kyrgyzstan

10.63. With regard to the agreement concluded in October 1994 to provide food aid, the agreement concerning the management and use of these funds, which was signed in April 1995, four months after the first deliveries had been made, did not provide for the payment of interest on the special bank account. This subsequently created problems for the monitoring team when it sought to obtain interest on the funds deposited as a hedge against inflation.

10.64. Four projects were selected to absorb the counterpart funds. The selection, however, was not made until May 1995, and the funds, which, according to the protocol concluded between the Commission and the Government, should have been disbursed before the end of November 1995, had, on the contrary, only been transferred to the accounts for the four projects, and were far from exhausted at the end of 1995. For some projects, between 16 and 20 of the funds were used to cover the overheads of the recipient bodies, which is excessive.

Counterpart funds generated by sales of agricultural inputs in Poland

10.65. Counterpart funds were accumulated following the sale of pesticides (50 Mio ECU) and animal feed (20 Mio ECU) that had been delivered to Poland in 1990 using PHARE funds. On 31 March 1995, these counterpart funds showed expenditure of only 17,9 Mio ECU, leaving an available balance of 38,6 Mio ECU.

10.66. The slow utilization of the counterpart funds was due mainly to the Polish authorities' delays in approving the indicative expenditure programmes. The agreement concluded between the Polish Government and the Commission in October 1990 provided, in fact, for the submission of annual indicative programmes for the utilization of these funds. The first indicative programme was not approved until February 1992, and the second was approved in February 1993. These excessive delays meant that both programmes had to be extended until the end of 1995.

10.67. The counterpart funds had been earmarked mainly for infrastructure work and the purchase of equipment, including the related taxes. In fact they were also used to pay salaries. In March 1995, of the 58 employees paid using these funds, 27 worked for the National Coordinator and 31 were directly or indirectly associated with the Cooperation Fund.

10.68. These funds were utilized to the amount of 5,7 Mio ECU, inter alia, to renovate an old castle and convert it into a school building for up to 50 pupils. The operating expenditure for this project, which will require external contributions in order for it to be financially viable, is also being charged to the counterpart funds. Having been questioned on the matter in July 1995, six months later, in December 1995, the Commission was still unable to state the total cost of this project, or say who the other donors were. The same failure to monitor was also noted with regard to all of the other projects financed using counterpart funds.

10.69. Through its on-the-spot Delegation, the Commission should improve its monitoring of the counterpart funds, which should be audited regularly. In May 1995, for example, ineligible expenditure (incurred without prior authorization or any legal basis) amounting to 1,3 Mio ECU was recorded in connection with the 1993 indicative programme alone.

ASSESSMENT OF THE PROGRAMMES

10.70. The Court's previous Annual Reports recommended the introduction of an autonomous system for evaluating the programmes. In 1995, the Commission began to introduce such a system and also set up monitoring and assessment units to cover the PHARE and TACIS programmes.

10.71. However, whereas the unit responsible for the TACIS programme had already produced a summary report on the assessments made of the programmes approved in 1991 and 1992, which was accompanied by recommendations for future projects, the unit responsible for the PHARE programme had still not produced anything similar by the end of 1995.

CONCLUSION

10.72. At the end of 1994, the European Council made preparing the CCEE for EU membership one of the objectives of the PHARE programme, yet one year later the Commission had still not carried out a global evaluation, either of the measures it had financed since 1991 or of their impact with regard to enlargement. This type of evaluation is, however, essential to defining a pre-accession strategy along the lines of that requested by the European Parliament. It is also needed to reorient the PHARE programme, where appropriate, in keeping with this new objective (paragraphs 10.70 and 10.71).

10.73. Unlike the PHARE programme, which is increasingly geared towards economic aid measures, the TACIS programme remains devoted mainly to technical assistance in many diverse sectors. Given the large volume of needs, there is a high risk that the Community's efforts will be scattered over too wide an area, and particular care must, therefore, be taken to ensure that financial support is properly targeted. In this regard, it is also important for the hitherto confused responsibilities of the various parties involved in identifying, implementing and monitoring the projects to be more clearly defined in practice, and for the Commission to improve its supervision of the activities of its experts on the spot (paragraphs 10.34-10.40). It should also direct its measures towards projects that are liable to produce more concrete results and consolidate its presence locally (paragraphs 10.45-10.50).

10.74. Whatever the country involved, the management of the counterpart funds remains a delicate matter (paragraphs 10.62-10.69) and the Commission has not adopted a clear policy in this area. In third countries other than the CCEE, the NIS and Mongolia, the Commission has, for the purposes of a cohesive overall economic policy, and in agreement with the international financial institutions, adopted the approach of crediting counterpart funds, mostly on a targeted basis, to the recipient country's national budget. This matter should be examined further so that coherent policies for the management of these funds are adopted, once the overall economic conditions are similar.

10.75. A number of the deficiencies pointed out in this chapter result primarily from the difficulties of staff management at the Commission (paragraphs 10.43 and 10.44). The Court must therefore repeat the request it made to the Commission in its Annual Report concerning the financial year 1994, namely for the Commission to draw up 'a transparent and realistic proposal concerning the resources it needs to discharge its responsibilities` (paragraph 10.71) 'without systematically entrusting to third parties or staff not subject to the Staff Regulations tasks that should be executed by a public service body` (paragraph 10.70). Despite this, in March 1996 the Commission had still not submitted such an analysis of its requirements and, given the absence of a plan of action, the same uncertainties persist regarding the roles of the external experts, the in-house service providers and the officials, whether at the Commission itself, or in the on-the-spot Delegations (paragraphs 10.15-10.20).

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REPLIES OF THE COMMISSION

BUDGETARY IMPLEMENTATION

10.4. Although the Commission has further streamlined the procedures, it is not possible to commit a significant amount of funds during the first half of the year. In addition to the time required to prepare the programmes and the internal procedures thoroughly, it should be noted that given the present political and economic environment in the partner States, projects cannot be prepared too early if they are to remain valid at the time of implementation.

As to the abovementioned streamlining of procedures, the Commission has adopted a new strategy for the PHARE programme aimed at accelerating budgetary implementation both in terms of commitments and in terms of contracts (see also point 10.12.). This strategy is based on:

- new programming tools: mainly based on a multi-annual indicative programme agreed with each partner country for the period 1995-99, which facilitates project identification for the Country Operational Programme to be committed annually;

- reform of implementation procedures, with further decentralization, which is taking place in 1996;

- enhancement of monitoring and evaluation of programmes and projects, with the creation of a dedicated unit following a reorganization of the services in charge of relations with Central and East European countries (CEEC),

- reinforcement of human and logistic resources allocated to the relevant departments, which should give results in 1996 and 1997.

10.6. Delays in the establishment of contracts have caused delays in project implementation and, as a consequence, lower than expected disbursements. When it became evident that not all appropriations could be used, the Commission decided not to propose a transfer of the appropriations given the small overall amount involved.

10.7. The Commission agrees that programme implementation in the nuclear safety sector needs further acceleration. To this effect, additional human resources are being allocated to this sector. Despite the measures already adopted, there are still specific problems which slow down the commitment of funds. In particular, contracting has been delayed by the fact that the beneficiary countries have not yet adhered to the Vienna Convention on nuclear liability. Moreover, the complex nature of the projects often requires long and detailed preparatory discussions between several organizations in the recipient States as well as between western donors.

Budgetary implementation of the PHARE programme

10.8. The Commission is aware of the need to develop a sound cash management system while not impeding the rate at which programmes are implemented, and is making efforts to match the payment of advances to requirements on the ground, an approach which it will continue throughout 1996. It will also look at the possibility of making payments direct to the central banks or comparable bodies in the countries concerned, bypassing intermediate structures directly involved in programme management.

10.9. The principal reason for delays in implementation has been the innovative nature of these programmes, which required new implementation structures to be set up and to become operational.

10.10. Please refer to point 10.12.

Budgetary implementation of the TACIS programme

10.12. The Commission intends to further reduce the backlog of uncontracted commitments. However, it may prove difficult to compress further the project cycle given the time necessary to prepare and evaluate tenders and contracts following the commitment of funds. Implementation of programmes following the commitment, i.e. selection of projects, elaboration of terms of reference and receipt of statement of endorsement, tender launches and evaluation of offers, require some time. It should also be noted that the majority of financing memoranda have a legal duration of four years.

OBSERVATIONS COMMON TO THE PHARE AND TACIS PROGRAMMES

Payment of taxes

10.13 10.14. VAT recovery systems have been set up in each of the countries in line with the local tax system, and the Commission takes care to see that no taxes are charged to PHARE or Tempus funds. In any case, any unnecessary VAT payments which may have been overlooked are recovered when the accounts are cleared following the final programme audit.

Awarding of contracts

Delegation to third parties of responsibilities belonging to the public sector

10.15. The points concerning the subcontracting of (a) preparation of tenders and (b) processing of invoices were addressed by the Commission under the new contract. The Procurement Unit (PU) is not involved in the preparation of short-lists, which are handed over to the PU only to deliver the invitations to the firms on the list. In the meantime, all work related to payments has been re-integrated into TACIS services.

10.17. Every time a member of the consortium is involved in a restricted tender or contract, the relevant dossier is handled internally by the Commission. The contractor has already signalled to the Commission seven cases of conflicting relating to tenders. Moreover, the Commission knows perfectly well the activities of all constituents of the consortium running the PU, and can itself identify and examine possible cases of conflict of interests.

In the light of the above considerations and in particular the provisions made in the contract with the PU contractor, the Commission does not share the Court's views.

Conflicts of interest

10.18. Most evaluation committees comprise two Commission representatives, a representative of the final beneficiary and one or two external experts chosen by the Commission.

10.19. The Commission is aware of the dangers of conflict of interest inherent in the position of experts working in the PMUs, and is currently working out a system for PHARE which will eliminate the award of small-scale contracts by private treaty. Contracts worth less than ECU 300 000 will be awarded via a process of sectoral framework contracts concluded with consortia of specialists in particular fields following a restricted award procedure based on calls for expressions of interest published in the Official Journal.

10.20. In the case of TACIS, since April 1994 all short-lists submitted to the hierarchy for approval are accompanied by a note written by the task manager explaining the grounds of the selection.

For PHARE, there is already an established internal procedure for contracts awarded in Brussels which requires a statement in writing of the reasons for selecting enterprises to take part in restricted invitations to tender. As part of the current reform of programme implementation procedures (see 10.4.), a similar rule will be laid down for contracts concluded on a decentralized basis.

10.21. The Commission accepts the facts presented by the Court and has instituted procedures designed to ensure that such situations do not occur again.

SPECIFIC OBSERVATIONS CONCERNING THE PROGRAMMES

Local structures set up by PHARE

10.23. The Slovak Regional Development Agency (RDA) was set up with the purpose of coordinating regional policy for the country as a whole. The aim of the Regional Investment Company (RIC) was to provide equity financing for sound investment projects in the Horné Povazie - Zilina area. RIC was designed to operate as a completely private sector vehicle on a profit making basis, reporting to a board of directors primarily from the private sector.

This structure and set-up of the RDA and the RIC are comparable to agencies and investment companies established in the European Union and should have proved workable in Slovakia. However difficulties arose because the Slovak authorities wanted a larger say in the activities of the RIC whereas, in light of the transformation process general objective of reducing State involvement in enterprise development, a more restricted role for public sector intervention in the equity investment vehicle was foreseen by the Commission.

The Commission recognizes that complementarity between the regional development and the SME programme can only be achieved through a national body which has the representation and competence to direct policy effectively and to manage implementation through the various local agencies. The establishment of the Office for the Development Strategy of Society, Science and Technology of the Slovak Republic, following a recently approved law on new administrative boundaries, addresses this problem.

10.24. As the Court notes in 10.28, measures funded by PHARE in favour of SMUs have shown encouraging results. The existence of parallel networks in Hungary can be attributed to decisions taken by the authorities there, often against Commission wishes and advice. The April 1996 regional policy and development act reforming regional structures in this field should ultimately ensure that the networks are complementary rather than competing.

Financial participation by Central and East European countries

10.26. The established system whereby Commission and national officials work regularly together on the programming, implementation, monitoring and evaluation of PHARE programmes in itself helps prepare the Central and East European countries' administrative structures for membership. All the programmes call for financial participation by the country concerned, if only in the form of their providing all or part of the programme management structures.

A number of programmes to align public administration on the Community model had been approved by the end of 1995 to a total value of ECU 234 million, and sectoral programmes include measures of similar kind.

The new programming instruments (see 10.4) stress the need to prepare government departments for membership, with particular emphasis on the importance of taking on board the 'acquis communautaire`.

10.27. The state of public finances in the countries of Central and Eastern Europe makes it impossible to insist on co-financing for every sector and programme without swelling budget deficits and jeopardizing economic recovery plans. Since 1991 various programmes, especially those backed by financial institutions (and, since 1993, particularly infrastructure programmes) have included a component co-financed from the national budget.

- Hungary: M2 motorway, Stage II (Dunakeszi-Vac), total ECU 39 million, co-financed by PHARE (25%), the Hungarian Government (25%), and the EIB (50%).

- Czech Republic: road repair programme, total ECU 116 million, co-financed by PHARE (9%), the Czech Government (41%) and the EIB (50%).

- Romania: road repair programme, total ECU 270 million, co-financed by PHARE (8%), the Romanian Government (28%) and international financial institutions (64%).

10.28. It was precisely the lack of interest shown by the authorities in Romania that undermined the programme in favour of SMUs despite the Commission's best efforts.

Organization of the TACIS programme

10.29. As requested by Parliament during the 1996 budget procedure, instructions clarifying the role of the Delegations in connection with the various technical assistance and cooperation programmes were drafted in 1995 and adopted early in 1996. They make it clear that the Delegations represent the Commission in all contacts with the government of the country concerned. The terms of reference drawn up for technical assistance teams, coordination units and other bodies involved in technical assistance make it absolutely clear that they do not represent the Commission. As the Commission is represented by a Delegation in only four of the thirteen TACIS beneficiary countries, contacts between the Commission and the governments of the countries without a delegation are handled directly from Brussels.

Distribution of responsibilities between programme managers

10.35. The Commission monitoring teams also report to all the other actors involved - coordinating units, contractors and beneficiaries. This way, the Commission makes sure that the same information is communicated to each party concerned.

10.36. The Commission memorandum on the role and competences of Delegations in the PHARE and TACIS countries lays down the whole range of their tasks in the preparation, implementation and follow-up of PHARE and TACIS projects. There should be no confusion between the coordinating units (CUs) and technical offices roles, and the Commission is taking the necessary steps to rationalize the situation on the ground.

Official representation of the Commission

10.38. The EU experts put at the disposal of the CUs work for and report to the national authorities of the partner States. They do not, in any way, represent the Commission. Their terms of reference and their legal status should avoid any possible confusion in this respect. Their role is clearly limited to assisting the national authorities in the CU, in particular in the identification of projects to be funded and the evaluation of technical aspects of project proposals. This was repeatedly explained and underlined to the EU experts of the coordinating units.

10.39. The Commission agrees with the Court and intends to open representations, i.e. delegations or antennae, in all NIS (Newly Independent States) as soon as the necessary budget means are available.

10.40. The consultant was not formally authorized by the Commission to sign an official document on its behalf. However, the consultant got precise instructions as to the substance of amendments to the distribution procedures to be agreed with the government. The corresponding addendum to the Memorandum of Understanding which was signed by the prime minister and the consultant were fully in line with these instructions. Therefore, this case is purely a formal mistake. In the future, the Commission will take the appropriate steps to make sure that this kind of mistake is not repeated.

The status of experts in the NIS

10.41. The Commission agrees that the St Petersburg technical office was in a particular situation as Russia is the only country which so far has refused to sign the 'General Rules`. The signature of the 'General Rules` by the Russian authorities would solve the problem.

So far the Commission has not received formal complaints either from contractors or from local authorities about problems concerning the registration of TACIS contractors.

10.42. The Commission agrees that appropriate official measures should be taken in the event of breach of the 'General Rules` by the TACIS partner States. Contractors suffering from such a breach of the 'General Rules` should seek assistance from the Commission rather than sorting out the problems through arrangements which might not be in line with the local laws. However, so far the Commission has not received any formal and circumstantiated complaints from contractors alleging that local authorities had refused to grant exemptions allowed for by the 'General Rules`. On the basis of detailed information to be provided by the Court, the Commission will take the appropriate measures to remedy the situation.

Turnover of programme managers

10.43. The Commission agrees with the Court about the importance of staff continuity within the departments responsible for managing the programmes. The problems which have arisen are due to a number of factors. These departments were reorganized in 1993 and 1995 in response to the rapidly-evolving state of relations with the countries concerned, and the structural reform inevitably meant a redistribution of the caseload among programme managers. The workload also resulted in a number of applications for transfers within the Commission, and the difficulty of finding officials with the right profile means delay, and the need to hire outside consultants. As the contracts are for a limited term, this becomes another factor making for high turnover.

The Commission agrees that, in the case of the bank guarantee mentioned by the Court, a mistake was made. The Commission underlines that the problem exemplifies the extreme work pressure on the relevant departments and the difficult work conditions caused by the staff turnover mentioned above.

10.44. In the specific case referred to, the new task manager has immediately taken appropriate corrective measures with the result that the project is now progressing very satisfactorily.

Assessment of the impact of the programmes

In the NIS

10.46. In both countries, TACIS is implemented in close cooperation with the responsible national authorities represented by the Coordination Units. In addition, a European Delegation is operational in Kazakhstan since late 1994.

10.47. In line with the Court's recommendations, TACIS decided on 5 September 1995 to allocate additional resources to the Kazakhstan Institute of Management (KIMEP) in order to strengthen the MBA Faculty and Administration to support long-term viability and sustainability of the MBA programme. Moreover, continued TACIS support will enable the KIMEP MBA Faculty to get involved in a network of European business schools and universities, to reinforce its research and to guarantee overall quality. The objective of the project is to ensure that the initial development of the MBA programme of KIMEP, as Kazakhstan's major management education school, becomes both fully consolidated and sustainable.

KIMEP is also eligible to participate in the Tempus programme with its great emphasis on the improvement of the universities' international relations, and has already considered making an application.

10.48. The Commission welcomes the positive comments about some pilot dissemination initiatives in the field of agriculture. Its clear intention is to continue and increase the sectoral dissemination activities and other initiatives in the framework of the TACIS programme.

10.49. The operating life of a piece of equipment depends not only on its age but on its state at the time of purchase and the way it is maintained.

Notwithstanding the observations made by the Monitoring Team, the project team leader regularly participated in the coordination meetings of the agriculture sector, organized by a special expert designated from TACIS to that purpose, and thus ensured coordination with other TACIS activities in the region.

In the CCEE

10.51. The sectoral spread of PHARE measures was a response to the need to address a range of priorities identified jointly with the countries concerned. It is therefore true that, given the scale of economic and social reform in these countries, priorities were identified over the whole spectrum. The Commission agrees with the Court that this hinders attempts to assess the impact of the measures, though it believes nevertheless that the results on the whole are satisfactory.

It is aware of the problem, however, and has urged national authorities to focus PHARE aid on priority sectors in each country. The establishment of a 1995-99 programme budget and new programming procedures (see 10.4.) are significant in this connection, in that they will enable measures to be coordinated and focused in accordance with a proper timetable for the whole period.

OBSERVATIONS CONCERNING COOPERATION WITH THE EBRD

10.53. While it is still the case that too many studies fail to lead on to investment projects, the situation has improved and a link was recorded in 74% of cases in 1995. Even if a study does not lead on directly to an investment, it may nevertheless have an overall impact on the EBRD's loan portfolio and foster a positive investment climate, indirectly attracting foreign investment. While in the early days of the Bangkok facility, no specific rules existed to ensure sufficient diversification of operators from different countries on short-lists, this has been changed during the review of implementation procedures in June 1994. Since then, stronger diversification of operators from different nationalities on short-lists is required, and the EBRD has promised to undertake increased efforts in this respect. Nevertheless, the Commission and EBRD cannot prejudice the results of competition, and thus not influence the result of tenders with respect to winning operators' nationality.

10.54. The implementation procedures of June 1994 provided for regular reporting on project implementation by EBRD. These reporting requirements include also the provision of final and evaluation reports.

The Commission agrees with the Court that the implementation procedures have not in all respects been sufficiently enforced, thus the necessity to revise procedures. During negotiations for the setting up of new implementation procedures, which was completed in April 1996, co-operation between the EBRD and the Commission was thoroughly evaluated.

One of the main problems with the reform of the Bangkok Agreement operating rules was that the EBRD wanted to tie the reform to a claim against compensation for monitoring and management of funds granted by the Commission. Not until March 1996 did the EBRD and the Commission succeed in finding enough common ground to draft the final version of the new operating rules.

The main new elements in cooperation between the EBRD and the Commission are: (i) programmes are managed and implemented by the EBRD and subject to ex post controls by the Commission, (ii) the EBRD is granted a 2% management fee.

10.55. The Commission finally secured repayment of the bank interest earned on the PHARE and TACIS advances. The ECU 396 421 representing interest for 1992-93 was repaid in April 1996.

OBSERVATIONS CONCERNING THE LOAN FOR THE IMPORTATION OF FOOD AND MEDICAL PRODUCTS INTO KYRGYZSTAN

10.57. The Commission verified that contracts were awarded by the national authorities in compliance with the tender procedures provided for in Commission Regulation (EEC) No 1897/92 of 9 July 1992. The Regulation did not foresee the receipt of evaluation reports by the Commission. However, the Commission received the relevant documentation regarding each individual contract as a basis for its endorsement. Attribution of the contract was done at competitive market prices, as revealed by a price comparison.

10.58. The fact that interest was due on the loan before the Kirghizes had sold any of the medical produce is attributed entirely to the delay in distribution of the produce by the Kirghiz authorities.

10.59. Import of the produce via St Petersburg was usual practice, because it was considered that use of local transport was less expensive, thus allowing an increase in the quantity of produce purchased. It is possible that due to Kirghiz inexperience in commercial matters, they were unable to benefit from this advantage.

10.60. The Kyrgyzstan Government could estimate the price of the imported products from the invitation to tender, and realizing that they were too expensive to sell at a price competitive with local products it could have chosen instead to import other items which would not have been in such competition with local goods.

10.61. The problem to which the Court alludes is the responsibility of the Kyrgyz authorities. While the Commission was asked to provide aid, it is clearly within the authority and competences of the Kirghiz Government to carry out a quality control and to decide on the distribution of the produce.

OBSERVATIONS CONCERNING THE COUNTERPART FUNDS

Counterpart funds from food aid to Kyrgyzstan

10.63. All general questions about the counterpart fund were agreed in the memorandum of understanding on the implementation of the operation signed in October. The memorandum of understanding on the management and use of counterpart funds details only the procedures (signatories of the account, account number, procedures for the utilization, etc.) and was signed on 11 April 1995, 11 days after the first amounts were due on the account.

The memorandum of understanding on implementation envisages payment of interest to the account but the subsequent discussions ended without result as the banks were ready to apply an interest rate only for accounts blocked for a minimum of six months or in exceptional circumstances for three months. As it was envisaged to start using the counterpart fund soon after its accumulation (disbursement started at the end of May) it was not possible to block the money for such a long period of time.

10.64. Projects utilizing the counterpart fund were selected by a special committee appointed by the government. Three of the projects had used the money allocated to them by January 1996. The fourth project is related to employment creation and involves other international institutions.

Counterpart funds generated by sales of agricultural inputs in Poland

10.65 10.69. The Commission admits it did not adequately monitor the use of counterpart funds generated by early PHARE programmes. It was more important to use the limited resources available on implementation of the steadily increasing programme budgets.

To remedy matters, financial audits of all Central and East European counterpart funds were carried out in the first half of 1996, that for Poland taking place in March. The necessary action will be taken in the light of the auditors' reports.

ASSESSMENT OF THE PROGRAMMES

10.70 10.71. The creation of the monitoring and evaluation unit in mid-1995 did not mark the start of the evaluation of PHARE programmes - independent experts had been carrying out ongoing and ex post evaluations throughout the year. Their reports provided input for new programmes and allowed course corrections for programmes under way. A separate evaluation was undertaken of PHARE aid to Romania from 1990 to mid-1995 and the report was finalized in the spring of 1996.

The new monitoring and evaluation unit was established in July 1995 and teams of independent experts were set up in the second quarter of 1996. The resulting system combines the Commission's requirements for supervision and the need for close partnership in monitoring and evaluation. The more structured approach maximizes opportunities for cooperation with actors involved and is hence well suited to the task of preparing for membership.

CONCLUSION

10.72. The Commission would point out that PHARE operations to date have been financed in accordance with the current legislation, which pre-dates the formulation of the pre-accession strategy, and they cannot therefore be assessed in terms of enlargement. Following the Essen and Cannes European Councils, however, new programming and monitoring instruments were developed for the period 1995-99. The Commission now plans to analyse PHARE in the light of the pre-accession strategy, and in that connection it will take account both of these new instruments and of the answers to a 23-part questionnaire covering the full range of EU activities sent to the Central and East European countries to help the Commission prepare its opinion on their membership applications.

10.73. The Commission agrees that TACIS interventions need to be more concentrated. In the framework of indicative programming it was therefore proposed to the partner States (except Russia and Ukraine) to select a maximum of two sectors of intervention for the implementation of the 1996-99 TACIS programmes.

Instructions clearly defining the role of delegations in the implementation of technical assistance programmes have been issued in 1996. With respect to the other institutions involved in the programme, e.g. coordinating units, technical offices, etc., their roles have always been laid down extensively in the terms of reference of the contracts.

The Commission intends to strengthen its presence on the spot by opening delegations or antennae in the NIS when the necessary budget means become available. These measures will also allow stricter control of experts employed by the TACIS programme in the beneficiary countries.

10.74. The situation of other third countries cannot be compared to the situation of the Central and East European countries (CEEC) and the Newly Independent States (NIS). The CEEC have the prospect of accession to the European Union, and are in a specific situation of transition to a market economy and a different level of economic development. Moreover, in both the CEEC and the NIS, the operations which lead to the establishment of counterpart funds are expected to be very limited in time. However, while the Commission believes that the use of counterpart funds should be adapted to the transitional situation in these countries, it will consider the need for stronger coherence in its overall policy of counterpart fund management.

10.75. The Commission concurs with the Court's views that the deficiencies which have come to light are linked to the inadequate staffing of the PHARE and TACIS programmes, and has carried out a preliminary survey to analyse its requirements and identify the tasks that should be executed by a public service body. On the strength of this study the Budget Authority has accepted in part the Commission's proposals in the preliminary draft supplementary and amending budget No 1 for 1996. The Commission plans further analysis of requirements, with the aim of improving its capacity for sound, efficient management of the additional appropriations allocated by the Budget Authority to the CEEC, the candidates for accession and the Newly Independent States.

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CHAPTER 11 (*) Cooperation with developing and third countries (except Central and Eastern Europe)

11.0. CONTENTS Paragraph numbers

Introduction 11.1 - 11.3

Implementation of the budget 11.4 - 11.28

Food aid (B7-20) 11.5 - 11.6

Humanitarian aid (B7-21) 11.7 - 11.10

Financial, technical and economic cooperation, Asia and Latin America (B7-3) 11.11 - 11.13

Cooperation with Mediterranean countries (B7-4) 11.14

Financial and technical support for the Peace Process in the Middle East (B7-71) 11.15 - 11.18

European programme for reconstruction and development in South Africa (B7-5070) 11.19

Common Foreign and Security Policy (B8) 11.20 - 11.22

Concentration of commitments at the end of the year 11.23

Outstanding commitments 11.24 - 11.26

Financing Decisions, EC Investment Partners (ECIP) 11.27 - 11.28

Earmarking the use of funds 11.29 - 11.57

Humanitarian aid 11.33 - 11.40

Financial assistance to the Palestinian Authority, teachers' salaries 11.41 - 11.50

EU Administration, Mostar (EUAM) 11.51 - 11.53

Conclusion 11.54 - 11.57

Treatment of interest 11.58 - 11.67

Conclusion 11.66 - 11.67

Audits provided for in contracts and financing agreements 11.68 - 11.72

General conclusion 11.73 - 11.78

INTRODUCTION

11.1. Expenditure on external policies of the European Community financed from the general budget includes food and humanitarian aid, financial and technical assistance with the countries of Asia, Latin America, the Mediterranean area, and South Africa, and various other policies such as the co-financing of projects implemented by non-governmental organizations (NGOs), environmental programmes, and supporting actions for the defence of human rights and democracy. It also covers the costs of the common foreign and security policy (CFSP) charged to the general budget as set out in Title V of the Treaty on European Union.

11.2. In 1996 the Court has adopted special reports on the implementation of the decentralized cooperation programmes in the Mediterranean area (the MED-programmes), and on the European Union Administration in Mostar (). The second of these concerns an operation under the CFSP.

11.3. As noted in the Introduction to this Annual report, a central part of the Commission's programme to improve the management of Community funds is the SEM 2000 initiative launched in 1995. In this chapter issues are examined which have arisen in different areas audited by the Court in recent years. All concern matters where the approach of the Commission is unsatisfactory and where action is needed if financial management is to be improved.

IMPLEMENTATION OF THE BUDGET

11.4. Table 1 summarizes budgetary implementation in 1995 for the whole area. This shows that for the whole of sub-section B7 of the final budget (except for B7-6 and B7-8) utilization of commitment appropriations was 99%, and that of payment appropriations was 78%. Table 2 sets out for the main programmes how commitment and payment appropriations were used.

Food aid (B7-20)

11.5. During 1995 the food aid programme was reinforced by budgetary transfers on two occasions with additional commitment and payment appropriations. The first transfer, for 10,0 Mio ECU in commitment appropriations () was justified by the Commission as being for a food aid programme for the Caucasian Republics. A total of 65,0 Mio ECU was to be provided from B7-20, 55,0 Mio ECU from reprogramming the 1995 programme and the balance from the transfer (). The Commission was not, however, able to implement this part of the food aid programme in 1995 because the countries concerned were not eligible to receive funding under the food aid regulation (). No funds were committed for the Caucasian Republics from B7-20 in 1995. The requirements of the Caucasian operation were the principal arguments advanced by the Commission for the reutilization in 1996 of 42,5 Mio ECU receipts recovered from advances in 1995.

11.6. The second transfer (), using the 'pipeline` facility whereby unused EAGGF appropriations for export refunds that are granted on food aid shipments can be transferred to the food aid products budgetary line (), was for 44,4 Mio ECU in commitment and payment appropriations. The transfer was made to Article B7-201 'Other aid in the form of products and alternative operations`. The justification for this transfer was increases in food product prices. After the pipeline transfer had been approved, in December 1995 the Commission transferred 13,6 Mio ECU in commitment appropriations from B7-201 to B7-202 'Transport, distribution, storage and support operations`. The agreement between the European Parliament, the Council and the Commission provides specifically that the appropriations transferred from EAGGF export refunds may be used only for financing the purchase of commodities. The document requesting transfer of appropriations 36/95 should have been much more explicit about the requirement to transfer appropriations to the transport line.

Humanitarian aid (B7-21)

11.7. In the Court's annual reports concerning the financial years 1992, 1993 and 1994 attention was drawn to the manner in which, in the area of humanitarian aid, a systematic exception had developed to the rule that unused differentiated payment appropriations lapse at the end of the year. Once again, at the end of 1995, 136,5 Mio ECU were carried over to 1996. Table 2 shows that on the basis of experience in 1995, this procedure is not necessary. The payment appropriations of the year (initial, plus transfers from the emergency aid reserve) amounted to 500,0 Mio ECU. Total expenditure of payment appropriations in 1995 was only 433,1 Mio ECU. It was not, therefore, necessary to bring forward from 1994 the 186,4 Mio ECU to meet the overall requirement for payment appropriations in 1995. Its sole effect was to leave 248,0 Mio ECU of payment appropriations of the year (almost 50%) unused, thus enabling a further carry-over to 1996.

11.8. The reply of the Commission does not explain why, when sufficient payment appropriations for the year to meet requirements have been authorized by the budget authority on the budget headings concerned (including the emergency aid reserve), it is necessary to have systematic recourse to large carry-overs of unused payment appropriations from the previous financial year. In 1996, although the payment appropriations of the year in Chapter B7-21 were almost all utilized by mid-1996, there were still 326,0 Mio ECU of payment appropriations in the emergency aid reserve (Chapter B7-91) which were unused.

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11.9. Article 7.2(b) of the Financial Regulation governing the utilization of carry-overs provides that 'the Commission shall, depending on management requirements, endeavour to use first the appropriations authorized for the current financial year and not use the appropriations carried over until the former are exhausted`. Again, as in 1994, the Commission used the appropriations carried over first. Neither in its report on the execution of the budget nor in its carry-over decision did the Commission explain what were the management requirements which led it to use the carry-overs from 1994 while appropriations for the 1995 year were still available.

11.10. In its reply to the Court's observations in the 1994 annual report, the Commission said that it would take into account the Court's remarks concerning decisions on carry-overs in future. There was no sign in 1995 that this had been done.

Financial, technical and economic cooperation, Asia and Latin America (B7-3)

11.11. During 1995 the Commission utilized almost fully the commitment and payment appropriations available, albeit with an exceptionally high concentration of commitments in December (see paragraph 11.23).

11.12. As part of the transfer of appropriations No 20/95 () to reinforce the humanitarian aid section of the budget, 6,7 Mio ECU was transferred from two lines of B7-30. When the European Parliament approved this transfer, it did so on the condition that this reduction in appropriations for Asia and Latin America be compensated as part of the 'global transfer` (the so-called 'Notenboom procedure`) later in the year (). This, however, was not done.

11.13. At the end of 1995 the total of outstanding commitments in chapter B7-30 amounted to 2 535,0 Mio ECU, an increase of almost 17% on the situation at the end of 1994, and almost 90% higher than the level of outstanding commitments at the end of 1990. This rapid increase in appropriations and projects which are managed directly by the Commission is considered further in paragraphs 11.24 to 11.26 below.

Cooperation with Mediterranean countries (B7-4)

11.14. A high rate of utilization of commitment appropriations was achieved (99%), with a high concentration of commitments in December (45%). The level of payments, however, reflected a slower than planned implementation of projects and other actions. Even allowing for the transfer out of Title B7-4 of more than 25% of the initially budgeted payment appropriations - 40,0 Mio ECU was transferred in July 1995 to reinforce B7-711 (support to the Middle East Peace Process, and 65,5 Mio ECU was transferred to other lines as part of the global 'Notenboom` transfer - only 73% of those remaining (224,6 Mio out of 309,3 Mio ECU available) were spent. The major reasons for this low level of utilization are considered further in paragraphs 11.24 to 11.26. The level of outstanding commitments grew by 29% during the year from 888,5 Mio to 1 145,7 Mio ECU.

Financial and technical support for the Peace Process in the Middle East (B7-71)

11.15. The management of appropriations used for operations concerning the Occupied Territories and to support the Peace Process in the Middle East is complex which makes it difficult to understand from the accounts how operations have been implemented. Council Regulation (EC) No 1734/94 of 11 July 1994 () provides for a five-year development programme of financial and technical cooperation, and is the legal basis for expenditure on budget line B7-711 which in 1995 was the only active line in Chapter B7-71. At the same time as this regulation was adopted, the horizontal regulation for cooperation in respect of Mediterranean non-member countries was modified to cover the Occupied Territories (), which enable actions to be financed from B7-410 (the 'MEDA` line). In 1995, in addition to the 68,4 Mio ECU committed on budget line B7-711, 23,5 Mio was committed on B7-410. In addition, Council Decision 94/276/CFSP of 19 April 1994 () provides for a joint action in support of the Middle East process, on the basis of which 10,0 Mio ECU was committed on budget line B8-103 'Other joint actions of the EU for the CFSP` (). In total 101,9 Mio ECU was committed for the Occupied Territories and the Middle East Peace Process in 1995.

11.16. A considerable part of the expenditure from budget line B7-711 consists of contributions to the recurrent budget of the Palestinian National Authority. The two transfers of appropriations reinforcing the line in 1995, totalling 15 Mio ECU in commitment appropriations and 55 Mio ECU in payment appropriations (), were a consequence of this. The transfers of payment appropriations were well above actual requirements, 31,5 Mio ECU remaining unused at the end of the year.

11.17. Although recurrent budget support is an essential element for the Palestinian National Authority, and forms part of the EU's commitments with regard to the international community, Council Regulation (EC) No 1734/94 does not provide for such expenditure (). Council Decision 94/276/CFSP of 19 April 1994, however, provides in Article 2 that 'the Council will examine proposals that the Commission will make: for the rapid implementation of programmes of assistance for the development of the Occupied Territories and a Palestinian operating budget...`. Article 3 also provides that the EU will provide up to 10,0 Mio ECU from the Community budget to assist in the creation of a Palestinian police force. As this Council Decision falls under the CFSP provisions of the Treaty on European Union, it would have been appropriate to finance these expenditures from B8-103 rather than B7-711. This, indeed, was what the Commission proposed, but the Council rejected. Despite the insistence of the Council that these recurrent expenditures be financed from B7-711, Council Regulation (EC) No 1734/94 was not modified to provide an adequate legal basis.

11.18. There is a need for a clarification of the legal bases for expenditure in the Occupied Territories and in connection with the Middle East Peace Process, and for greater transparency in the allocation of expenditure between the different budget headings.

European programme for reconstruction and development in South Africa (B7-5070)

11.19. Table 2 shows that available commitment appropriations were nearly fully used. Nevertheless, almost all the commitments were made in December. Some 49% of payment appropriations were used partly as a result of the late commitment of actions. The level of outstanding commitments rose from 113,2 Mio ECU at the beginning of the year to 191,1 Mio ECU at the end, an increase of 69%.

Common Foreign and Security Policy (B8)

11.20. The main action covered in 1995 was the EU Administration in Mostar (EUAM), on which the Court adopted a Special Report in 1996 ().

11.21. A second significant action concerns the Office of the High Representative for Bosnia-Herzegovina. The Council, by Decision 95/545/CFSP of 11 December 1995 () provided that 'In order to cover the contribution of the European Union to operational expenses in connection with the High Representative's mission, a maximum amount of ECU 10 million is hereby charged to the general budget of the European Communities for 1995`. When the transfer of appropriations () from the reserve to B8-103 was approved by the Parliament, the Committee on Budgets said that it considered that all infrastructure and running costs for the Brussels part of the operation should be provided by the Commission. To this end an additional 2,13 Mio ECU was provided within the administrative appropriations of Part A of the Commission's budget (). These funds are managed directly by the Commission. This means that:

(a) the ceiling of 10 Mio ECU to be provided from the EU budget for this CFSP Joint Action in accordance with the Council Decision has been exceeded by 2,13 Mio ECU ();

(b) administrative appropriations intended for the functioning of the Commission are being used to finance the administrative expenditure of a non-Union organization: the High Representative was appointed by a resolution of the Security Council of the United Nations, and his operations are co-financed by the international community. The normal procedure would have been to finance the entire EU contribution under the terms of the CFSP decision from the operational appropriations of B8-103;

(c) the 2,13 Mio ECU for the Brussels office are managed directly on a day-to-day basis by the Commission, and not by the Office of the High Representative and the funds do not form part of the Office's accounts. This complicates the functioning of the Office, and means that its accounts do not present the full cost of the Office's operation.

11.22. In its reply the Commission makes a distinction between the 'dépenses administratives d'accompagnement du Haut Représentant à Bruxelles`, financed by the 2,13 Mio ECU from Part A of the Commission's budget, and the 'dépenses opérationelles du Haut Répresentant` financed from Part B of the budget. However, the nature of the expenditure is the same: salaries, office rental, running costs, telecommunications, etc. The Brussels office is an integral part of the High Representative's operations.

Concentration of commitments at the end of the year

11.23. The bar charts in Table 2 show that in many areas in 1995 there was a heavy concentration of commitments at the end of the financial year. In financial and technical cooperation with Asia and Latin America this reached extraordinary levels, with 541,4 Mio ECU out of total new commitments for the year of 684,0 Mio ECU (79,2%) being committed in December. Very high concentrations of commitments in December are also shown for the Mediterranean and South Africa, and in food and humanitarian aid, ECIP and trade cooperation, and the other cooperation measures (NGO actions, environment and health, human rights and democracy, etc.) there is a strong concentration at the end of the year. This is a reflection of established annual work practices of the Commission services combined with the heavy pressure to utilize fully the available commitment appropriations before they lapse. It does not, however, encourage sound financial management, as the Commission has itself noted in its documents on the SEM 2000 initiative ().

Outstanding Commitments

11.24. Table 2 and the above analysis of budgetary execution highlights the rapid growth in outstanding commitments in several areas. This is particularly the case for the programmes of financial and technical cooperation in Asia and Latin America, the operations in the Mediterranean countries and in support of the Middle East Peace Process, and the programme to support reconstruction and development in South Africa. There is an ever-increasing portfolio of projects to be implemented.

11.25. The low rates of utilization of payment appropriations in several areas is partly explained by the late commitment of funds (see paragraph 11.23), but is also a reflection of the difficulties which the Commission encounters in implementing projects as quickly as planned.

11.26. The Court has noted on a number of occasions () the lack of sufficient capacity, in terms of resources and procedures, in the Commission for the management of the programmes of development cooperation. The Commission has pointed this out on several occasions (). This capacity should be strengthened. Also, although the Commission continues to report the difficulties inherent in implementing such programmes in countries where the internal political situation is difficult, and where the capacity of local administrations is limited (), there is little evidence that this leads to greater realism in its forecasts of how quickly the projects and programmes can be implemented, and thus the volumes of appropriations to be provided for in the budget. Greater priority should be given to ensuring effective implementation of projects and activities which have already been contracted.

Financing Decisions, EC Investment Partners (ECIP)

11.27. In the annual reports of the Court of Auditors concerning the financial years 1992 and 1993 the Court of Auditors, when considering financing decisions under the ECIP scheme, drew attention to the requirement to have an appropriate administrative decision to finance an operation, in addition to the commitment of appropriations as part of the budgetary execution of that decision (). This distinction was made, for example, by the Court of Justice in its ruling No 16/88 (). The Court of Auditors argued that, by failing to make this distinction, commitments of expenditure for actions financed under Council Regulation (EEC) No 319/92 of 3 February 1992 governing the implementation of the ECIP financial instrument were entered into the accounts without any legal basis.

11.28. In its reply to the 1993 Annual report, the Commission stated that although it did not agree with the Court of Auditors' argument, 'in order to avoid any misunderstanding and in the interest of clarity, it intends to use the formal delegation procedure pursuant to Article 11 of the Commission's Rules of Procedure for financing decisions`. Subsequently, the Commission accepted that the distinction between the administrative decision to finance a project and the decision to commit expenditure is valid in law and is supported by the jurisprudence of the Court of Justice (). It was, however, not until November 1995 that the first financing decisions in respect of ECIP were taken in accordance with the correct procedure. In 1995, 269 commitments of ECIP actions amounting to 29,5 Mio ECU were made without a financing decision having been made in advance by the Commission.

EARMARKING THE USE OF FUNDS

11.29. In the area of development cooperation and other external actions, the financing agreements and contracts between the Commission and the implementing organization usually specify, sometimes in considerable detail, what the funds are to be used for ('earmarking`). In one way or another, the Commission tries to define a self-contained project or action which it agrees to finance. There are several reasons for this:

(a) it enables the Commission to identify what it is funding;

(b) it sets out what the organization is accountable to the Commission for;

(c) it enables the services of the Commission responsible for monitoring implementation and checking the use of the funds to identify what it is they need to check;

(d) it enables the Commission to promote the 'visibility` of its actions, by identifying what its funds have been used for.

11.30. This approach is straightforward when the action or project financed by the Commission is self-contained, especially if the Commission is the sole donor for a project or a specific component of it.

11.31. When, however, the Commission provides funds which contribute to a programme of actions, and where it is less easy - or even impossible - to identify separate components of the programme, trying to define a 'project` against which the Commission's funds can be earmarked can create complications in the administration and management of the funds. The degree of control over whether funds are being properly used can be reduced, together with the accountability of the beneficiary.

11.32. Recent audits by the Court have identified such problems in several areas, notably in humanitarian aid, the financial assistance to the Palestinian Authority to cover the cost of teachers' salaries and the European Union Administration in Mostar (EUAM). The audit of the Structural Adjustment Support Programmes (SASP) in the Mediterranean countries, reported in the annual report concerning the financial year 1994, also pointed to this question ().

Humanitarian aid

11.33. The approach of the Commission to the financing and control of humanitarian aid actions is governed by the provisions of the Framework Partnership Agreement (FPA) between the Commission and NGOs, UN agencies and other international organizations. The FPA sets out general conditions governing the procedures for the preparation of funding requests, the mobilization of the aid once approved, narrative reporting and the presentation of accounts, and payments of the aid. Individual actions are the subject of operational contracts. These contracts normally set out the conditions for the operation, establish what is to be done and determine the precise items of expenditure which are eligible for Community funding for a specified period not exceeding six months.

11.34. The same FPA and operational contracts are applied to all the partners of ECHO, irrespective of the type of operations that are carried out. This contractual format is most suited to operations involving the purchase, transport and distribution of humanitarian supplies to a well-defined group of beneficiaries. As the operations become larger and more complex, and are implemented over longer periods, the FPA becomes an increasingly inflexible and inappropriate instrument. Where the operation forms part of a programme of assistance, financed by several different donors, the precise definition of allowed expenditure that is implied by the terms of the FPA creates problems of management, reporting and accounting for the partner. This is the case notably with the agencies of the United Nations, international organizations such as the International Committee of the Red Cross, and with some of the larger NGOs. This procedure of precise determination of what the funds are to be used for does not necessarily increase the degree of control exercised by the Commission over the use of the funds. Furthermore, the earmarking required by the Commission for humanitarian aid is considerably greater than that of other donors.

11.35. Firstly, the partner's operational and management procedures and information and accounting systems are geared to the implementation of the programme as a whole. Individual donor contributions are not managed separately. Special conditions and reporting requirements for items earmarked by the Commission in its contracts mean that the partner has to develop special procedures and devote extra resources for their management. In some cases this can be done fairly simply, by means, for example, of coding expenditure by donor. In other instances, however, it may be much more difficult. For example, the UN agencies and the International Committee of the Red Cross each have had to establish a separate administrative capacity to manage the Commission's humanitarian aid. If all donors were to earmark expenditure as the Commission does, the humanitarian aid agencies would be obliged to increase substantially their administrative resources. As they do not have their own financial resources, other than contributions from donors, the costs of extra administration have to be provided by the donors. The cost-effectiveness of the use of humanitarian aid funds in this way would be questionable.

11.36. Secondly, when the Commission is co-financing with other donors an operation implemented by an NGO or a multilateral agency, it is the total delivery of the operation and the achievement of all its objectives that matter, and not just the spending of Commission funds on individual components. Focusing its attention entirely on specific components within a programme can mean that the Commission does not follow sufficiently closely the implementation of the total programme. For several of the operations examined by the Court the Commission had little or no information on the other components of the programme financed by other donors, even where these donors were Member States. Components funded by the different donors may be interdependent: a problem with the financing or implementation of one component may put at risk the implementation of others. It is, therefore, essential that the Commission monitors the delivery of the total programme to which it contributes, rather than just check expenditure against the Commission's earmarked components. Although earmarking expenditure need not be associated with insufficient monitoring of the total programme, there is nevertheless a tendency for this to happen.

11.37. With regard to the degree of effective control over the use to which funds are put resulting from close earmarking, the Commission is not in a position to carry out detailed checks of the invoices and supporting documents for each action. Indeed, it no longer requires the organizations with which it has signed the FPA to send them to the Commission with the financial report. The financial checks that are made consist of checking a declaration of final expenditure against an initial budget, with the possibility at some stage in the future of visiting the headquarters of the organization to carry out further detailed checks. To date few such control visits have taken place and the resources of the Commission for this task are limited. The checks carried out by the Commission are unable to detect, for example, whether more than one donor has financed the same items of expenditure.

11.38. Further, the close earmarking of funds and the need for the partner to obtain the approval of the Commission to all but relatively minor changes to their specified use, means that a considerable amount of the scarce management resources of the Commission - as well as those of the partner - are devoted to processing contract amendments.

11.39. In the context of the Rwanda crisis of April 1994, the Commission decided to channel more than half of its available funds through the leading UN agency, the office of the United Nations High Commissioner for Refugees (UNHCR), which then contracted directly the NGOs. This in effect amounted to a block funding of the UNHCR's programme in response to the emergency, and was a different approach from that foreseen by the FPA. It is an approach that was strongly supported by a multinational, multi-donor evaluation of the Rwanda crisis as having strengthened the effectiveness of the UNHCR's coordinating role with its NGO implementing partners ().

11.40. The Commission should, therefore, adapt its contractual and control requirements to the reality of the operations it is financing. Where operations are not parts of co-financed programmes, and it is possible to track the use made of Community funds, earmarking may be appropriate, otherwise alternative procedures are more effective. The Commission should increase its knowledge of the financial and management procedures and systems of those major partners - NGOs, multilateral and international organizations - whose programmes it finances so that it can assess the degree of reliability it can place on financial information and reports that are produced. It should work together with, and not separately from, the other donors (especially the other Member States of the Union) in order to agree on appropriate reporting and control procedures where they are co-financing operations (). With multilateral and international organizations the Commission could also ask for specific audits to be carried out on programmes to which it has contributed funds, either by the internal auditor of the organization or the external auditor. The detailed knowledge that these auditors have of the organization's systems and procedures favours their utilization.

Financial assistance to the Palestinian Authority, teachers' salaries

11.41. In February 1995, the Commission concluded with the Palestinian National Authority (PNA) a Financing Agreement () by which a grant of 10,0 Mio ECU was provided directly to the PNA's budget to meet the salary costs of Palestinian primary and secondary school teachers for the months of February and March 1995. Although the funds were earmarked for these two months' salaries, in reality they formed part of the general resources of the PNA to cover its recurrent budget needs. The choice of months was artificial. The grant was to be provided to the Ministry of Finance (MOF), which was to release it immediately to the Ministry of Education (MOE). The MOE would then transfer the salaries directly to the bank accounts of the teachers. The agreement provided for the MOF and MOE to supply various documents to support the utilization of the funds, and for a consultant to check the use made of the funds. In addition, it provided for the MOE to supply a report on curricula reforms and the upgrading of teachers. The consultant carried out missions on the spot, checked the flow of funds and checked, on a sample basis, transfers to individual bank accounts of the teachers. He reported to the Commission that, despite delays in implementation, the funds had been spent in accordance with the Financing Agreement.

11.42. The grant was paid by the Commission to the MOF on 16 March 1995. Although conceived as urgent support to the budget of the MOE, the funds were not released by the MOF until 1 November 1995. In the intervening period, the funds passed through different accounts of the MOF, accruing interest of more than 0,7 Mio ECU.

11.43. The Commission was not aware that the funds had not been transferred to the MOE and had not been used to pay teachers' salaries until August 1995, when the consultant made his first visit on the spot. After discussions and exchanges of letters, the Commission and the PNA agreed to use the grant to cover the cost of salaries for July and August. These salaries already having been paid (see paragraph 11.47), this was no more than an accounting exercise.

11.44. This action reveals major shortcomings in conception, notably in the inappropriate mechanism chosen to provide funds to the PNA to cover salaries, and in the control measures specified.

11.45. With regard to the funding mechanism, the Commission decided not to contribute to the Johan Jorgen Holst Peace Fund (the Holst Fund) which has been set up by an Agreement between international donors and the PNA, with the objective of:

(a) establishing the main lines of budgetary policy for the PNA, and the expenditure categories eligible for funding;

(b) setting out the financial procedures to guarantee that funds are available to the PNA in a timely manner.

11.46. The Holst Fund is managed by the World Bank, and financed by multilateral and bilateral donors, including most of the Member States of the European Union. The World Bank carries out regular budgetary reviews to ensure that the PNA's budget policy is consistent with the Agreement. The use of funds by the PNA is reviewed on a monthly basis by external accountants ().

11.47. The EC grant was provided too late for the salaries of February and March. Also, the July and August salaries initially were covered by overdraft although the money was available in a bank account of the Ministry of Finance.

11.48. Providing recurrent budget support for teachers' salaries outside the mechanisms agreed on an international basis - i.e. the Holst Fund - was at variance with the coordinated approach to the financial support programmes to the PNA followed by the donors and in which generally the Commission has played a leading role.

11.49. The control procedures provided for by the Commission in the Financing Agreement consisted of tracking the EC funds to ensure that they had been used for the earmarked expenditures. Given that effectively the funds formed part of the recurrent budget resources of the PNA and that the teachers were paid, this procedure gave little added value. The consultant contracted to carry out these checks was paid 24 388 ECU, almost double the initially contracted value of 12 704 ECU ().

11.50. The Commission has informed the Court that, while it might have been preferable to channel the EC funds through the Holst Fund, it chose not to do so because the regulations of the Holst Fund do not provide for audits of the utilization of the Community funds by Commission officials and those of the European Court of Auditors, a principle on which the Commission has always insisted. The Court agrees with the Commission that nothing should be done to reduce the rights provided in the Treaty and the Financial Regulation for Community auditors to check how Community funds are used. The Court considers, however, that without compromising this principle, a satisfactory solution could have been found by placing reliance on the work of the Fund's external auditors, and by providing for liaison between the auditors of the Fund and the Community's auditors. This would have enabled the rights of Community auditors to be respected, and would be in line with the provisions of the standard audit clause provided for in contracts with third parties. As an important donor to the Palestine National Authority, the Commission should be in the position to ensure that the scope of the work by the external auditor is adequate, (checking that the funds have been spent in a regular manner, and have not been used for unauthorized purposes). If necessary the Commission should be able to ask for specific additional work to be done on its behalf. The Commission's own checks should be concentrated on ensuring that the PNA's budgetary policy is directed in an appropriate manner, and it should participate actively in the global and sectoral budget reviews carried out by the World Bank.

EU Administration, Mostar (EUAM)

11.51. In the case of the EUAM a similar problem arose, which, although a budgetary management problem rather than one concerning the precise earmarking of the use to which Community funds may be put, reflected an approach to control by the Commission which involved an excessively detailed breakdown of how individual tranches of the annual budget should be spent.

11.52. The 1995 budget for the EUAM (), which was entirely financed by appropriations from the general budget, was released by the Council in three tranches. Each tranche covered a part of the requirements for the year in each sector of activity. The Commission transferred the funds for each tranche in three stages. In effect, the Commission split the 1995 budget of the EUAM into three parts and treated each of them as a separate project. This was an excessively complex procedure, made financial reporting very difficult and time-consuming, and was a major reason why the EUAM suffered cash shortages in July and October 1995.

11.53. A more appropriate procedure, combining flexibility of implementation with the necessary accountability of the EUAM, would have been to have treated the annual budget as a whole and to have released funds on a cumulative basis as required, with financial reports showing cumulative expenditure against budget. After the Court of Auditors pointed this out to the Commission and the EUAM, the procedures were simplified by the Commission by regarding the activities of the EUAM over the full period of its mandate as one continuous project.

Conclusion

11.54. The Commission should, therefore, review the manner in which it designates the use to which its funds may be put. In some cases, where the Commission is the sole provider of funds for a whole or part of a project, detailed designation of how those funds are to be used is both feasible and desirable. In other cases, such as those described above in paragraphs 11.33 to 11.53, where earmarking is ineffective as a means of control, alternative approaches are needed. It is most important to note that the arguments set out above do not mean that the Commission should pay no attention to examining ex ante what a programme or operation should contain, or should simply provide funds on an unconditional basis. As a major source of funds it has a responsibility to ensure that the implementing organization has well-defined objectives that correspond to the aims of the Commission in the area concerned, and that the components of a programme to which it decides to contribute are what is needed to achieve those objectives. It may make the release of funds conditional upon the implementation of certain priority elements within the programme, while maintaining oversight of the whole programme.

11.55. What is essential is that the Commission's funding mechanisms and control and reporting requirements are effective. Procedures should be avoided which, although giving the appearance of rigour, in practice are of limited value in ensuring proper accountability. The mechanisms and procedures used need to be adapted to the nature of the operation being financed.

11.56. In many instances this requires cooperation and coordination with other donors, particularly where programmes involving multiple sources of finance are concerned. The Commission as a major source of funds is in a good position to take a leading role in this.

11.57. Inappropriate earmarking of funds should not be used as a means to enhance the visibility of EU actions. Usually this can be achieved more effectively by other means.

TREATMENT OF INTEREST

11.58. The implementation of most development cooperation actions involves the payment by the Commission to beneficiaries of advances. In many instances these transfers of funds are not entirely used straight away but are placed on deposit in financial institutions where they earn interest. This is the case for food aid operations, where, for example, advances are paid to EuronAid (), and UN agencies such as the World Food Programme; development programmes in Asia, Latin America, and the Mediterranean countries where, for example, the Commission finances revolving fund programmes () and sectoral programmes; the financing of actions carried out by non-governmental organizations (NGOs) (), and such measures as EC Investment Partners (ECIP) where funds are provided via financial intermediaries to entrepreneurs establishing joint ventures ().

11.59. The Commission, wherever possible, requires balances of advances to be held in ecus, or another hard currency, to avoid loss through monetary erosion. This is essential if the value of the Commission's contribution is to be maintained. The Commission should, however, avoid allowing large balances to build up unused in organizations' accounts, and to that end should monitor regularly the size of such balances.

11.60. The examination of a wide range of measures in recent years has shown that there are considerable variations in the way in which interest is treated between different services and types of measure ().

11.61. The financial regulation and the implementing measures do not provide clear guidance on the treatment of interest (). The different provisions, and differing degrees of attention paid to the question of interest in the various services of the Commission is a consequence of this.

11.62. In the area of food aid, the Commission now includes in its Official Letters to EuronAid and the UN agencies such as UNHCR and the WFP the requirement that 'Any bank interests accrued by the recipient on funds received as a financial contribution from the Commission is to be taken into account as an additional contribution of the Community and will be accounted for in the beneficiary's books. The use of these interests will be subject to a written agreement between the recipient and the Commission`. This clause is not, however, always included in food aid-related contracts with other NGOs, for reasons which are not clear. The practical value of this clause is limited in the case of the UN Agencies: for example, the WFP separately accrues and accounts for in its books interest on Commission bilateral contributions, but not on contributions to multilateral actions such as the International Emergency Food Reserve (IEFR) or Protracted Refugee Operations (PRO). However, this clause is included in all contracts with the WFP. To date the application of this clause has not been checked by the Commission.

11.63. Further, this clause is unsatisfactory as it permits the establishment of parallel funds such as the 'mutual trust fund` in EuronAid which the Court criticized so heavily in its 1992 Annual report. As it was stated there, it allows financial assets of the Community to be managed outside the balance sheet and the purview of the budgetary authority.

11.64. The Framework Partnership Agreement developed by the Commission for use in its contractual relations with partners in the field of humanitarian aid contains no provisions relating to interest earned on advances. Its partners are frequently the same as those handling food aid contracts. There is no justification for different contractual provisions between food aid contracts managed by one service of the Commission and humanitarian aid contracts - including food aid - managed by another.

11.65. Although the General Conditions for co-financing contracts with NGOs provide specifically for how interest should be treated, those dealing with contracts in the field of the campaign against drug abuse or tropical forests contain no such provisions. There is variation also in the financing agreements concerning financial and technical assistance to Asian and Latin American countries (B7-3000 and B7-3010): some financing agreements provide that project accounts shall be interest bearing, and that any interest shall be used for the project. Others, however, contain no provisions at all in this regard.

Conclusion

11.66. The Commission, therefore, needs to develop clear guidelines on how interest earned on advances paid by the Commission should be treated. This is a matter which has wider application than the area of development assistance and it is necessary to take this into account. As a first step, it would be useful to distinguish between:

(a) situations where the transfer of funds by means of an advance is made directly by the Commission services to the beneficiary, which implies the immediate transfer of the ownership of the funds to this beneficiary (): in such cases the interest earned on any balances of funds should be considered to be no longer subject to the budgetary procedures of the financial regulation. The Commission should, in advance in the financing agreement or contract, specify clearly what use may be made of the interest. This solution should be foreseen, for example, in the case of development projects in Asia, Latin America and the Mediterranean, and projects with NGOs, as is currently the situation with regard to the PHARE programmes (see paragraph 10.9 in this report);

(b) situations where the advances are paid to intermediary organizations, as is the case with food aid operations of NGOs financed by the Commission through EuronAid, or actions within the ECIP programme financed through financial intermediaries. In such circumstances, the balances held by the intermediaries, and the interest amounts earned thereon should be considered as belonging to the Commission, and thus fully subject to the rules for the implementation of the budget.

11.67. The Commission should codify such criteria and provide detailed guidance to the services on the provisions to be included in contracts and financing agreements, and the manner in which this should be checked.

AUDITS PROVIDED FOR IN CONTRACTS AND FINANCING AGREEMENTS

11.68. In recent years the Commission has increasingly provided in its financing agreements for audits to be carried out either regularly (e.g. annually) or at specific stages (e.g. before the release of a tranche of finance). This general trend is to be welcomed. There is a need, however, to go further and to develop a clearer strategy in this regard.

11.69. First, the Commission should examine how best use can be made of the various audit capacities that exist. These include:

(a) national audit bodies (): in some countries, e.g. the Philippines, local rules require that the national audit bodies carry out regular audits. In other countries, e.g. Pakistan, some bilateral donors and the World Bank have contracted the national audit body to audit the projects that they finance;

(b) the internal auditors of, for example, multilateral agencies such as the UN agencies and the World Bank: there are instances where other donors have commissioned the internal auditors to report on the use that has been made of particular contributions, the Court is not aware that the Commission has done this. Using the internal auditors can be cost-effective and efficient: they have intimate knowledge of the systems and procedures of the organization;

(c) the appointed external auditors of, for example, multilateral agencies. The approval of the governing bodies of these agencies has to be obtained for this. It is provided for in the verification clause included in the contracts of the Commission with some organizations, and is favoured by the external auditors;

(d) auditors from the private sector: these are already used by the Commission in the context of individual projects, both for regular (for example annual) audits, and for specific audit tasks. Careful definition of the audit tasks to be carried out is essential in these cases (see paragraphs 11.71 and 11.72);

(e) the use of the Commission's own staff, from within the operational services and financial control.

11.70. The capacity of the Commission's own staff to carry out audit checks on the spot is very limited in relation to the volume of operations for which it is responsible. It is, therefore, essential that it uses other audit capacity, and seeks to take full advantage of the special expertise that exists in national audit bodies and the organizations that audit its major partners.

11.71. Secondly, in some cases where an 'audit` is provided for, the task actually defined in the terms of reference and contracted is not an audit in the accepted sense. Specific examples of this have been identified in the context of the structural adjustment support programmes in the Mediterranean countries () and the MED-programmes of decentralized cooperation.

11.72. The Commission should only apply the term audit to work which is carried out in accordance with generally accepted audit standards, which should be specified in the terms of reference. Where something less is required, for example involving limited or no independent testing of financial data, a more general term such as financial review should be used.

GENERAL CONCLUSION

11.73. Data on the implementation of the budget for external actions in 1995 draw attention to the difficulties that the Commission has in implementing the programmes with their current scale and diversity. Whereas commitment appropriations, as in previous years, were almost entirely used, the utilization of payment appropriations in several areas reflected slower than planned real implementation of the programmes, projects and actions. The volume of outstanding commitments, which reflects the portfolio of operations which the Commission has to manage, grew considerably in 1995 (see paragraphs 11.13, 11.14 and 11.24 to 11.26).

11.74. The pressure which the Commission is under to implement the budget is partly shown by the particularly high proportion of commitments in key areas of the Commission's programmes that were entered into the accounts in December 1995. There is a risk that priority that is given to avoiding the cancellation of commitment appropriations can mean that management resources in the Commission are concentrated on preparing new projects for commitment rather than improving the rate of implementation of existing projects (see paragraph 11.23).

11.75. This situation is a matter for concern. An imbalance is developing between the size and diversity of the programmes that the Commission has to implement and its capacity to implement them satisfactorily. Greater attention should be paid by the Commission and the budgetary authority to addressing this problem. Serious problems in this regard have also been identified in the part of this report dealing with external actions in Eastern and Central Europe and the Commonwealth of Independent States ().

11.76. This chapter highlights three areas where the Commission should improve its systems and procedures for the management and control of appropriations. First, the Commission should avoid excessive earmarking of the use to which its funds may be put by a beneficiary when the kind of operation being financed requires a different approach to management and control. It should review its procedures in order to ensure that its funding mechanisms and control and reporting requirements are effective: these mechanisms and requirements should be adapted to the nature of the operations being financed. In some cases, where actions are co-financed with other donors, this requires cooperation and coordination with other donors (see paragraphs 11.29 to 11.57).

11.77. Secondly, there is a need for the Commission to develop and apply consistently criteria for the treatment of interest earned on the unused balances of advances paid to organizations within the framework of external actions (see paragraphs 11.58 to 11.67).

11.78. Thirdly, there is scope for the Commission to develop further its arrangements for ensuring adequate audit of the projects and actions it finances. It should take more advantage than at present of the possibilities for involving the national audit authorities of the beneficiary countries, using the internal and external audit capacity of beneficiary organizations, notably international and multilateral bodies, as well as the private sector (see paragraphs 11.68 to 11.72).

Table 11.2 - Budgetary implementation by area of expenditure

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REPLIES OF THE COMMISSION

IMPLEMENTATION OF THE BUDGET

Food aid (B7-20)

11.5. The ECU 10 million granted by the budget authority for the Caucasian and Central Asian Republics was used to implement the 1995 food aid programme.

11.6. The Commission agrees with the Court of Auditors that the rule is that appropriations transferred from the EAGGF to food aid may be used only to finance the purchase of commodities. It complied with this rule throughout; the point of transfer No 36/95 was to switch ECU 44.4 million to heading B7-2010 ('Other aid in the form of products and alternative operations`) in order to cope with the rise in world market prices in 1995. These appropriations were used solely for the purpose stipulated by the budget authority.

The Commission could have transferred the ECU 13.6 million to which the Court refers internally on its own authority before initiating transfer No 36/95, point 2 of which stated that in the light of circumstances and specific requirements it had adjusted the tonnage on the basis of which the budget appropriations were calculated, resulting in a saving of ECU 24.8 million, sufficient to cover the extra transport costs arising from revision of the programme. The Commission further stated that the revised programme remained within the overall ceiling fixed in the 1995 budget. The transfer to the transport heading therefore in logic preceded transfer No 36/95.

The Commission thought it proper to inform the budget authority of this state of affairs, thus enabling it to form its own judgment of the revised programme and the savings and extra costs it entailed. The authority approved the ECU 44.4 million in the knowledge that part of the initial appropriation would then be transferred to transport.

Humanitarian aid (B7-21)

11.7. Half-way through financial 1995 the shortfall of appropriations entered for humanitarian aid made it necessary for the Commission to request mobilization of the emergency aid reserve plus additional commitment and payment appropriations to cope with needs which became apparent in the course of the year. Not until late in 1995 did the additional commitment and payment appropriations from the emergency aid reserve and the global transfer become available to the Commission, and that is largely why so many decisions and commitments were bunched at the end of the year and why the rate of execution of payment appropriations was so low. Virtually all the payment appropriations for the 1995 budget year were used in 1995, accounting for appropriations available at the beginning of the year plus those carried over from 1994. Some of the payment appropriations from the late topping-up exercise were carried forward to 1996.

11.8 11.9. In 1996 appropriations are being used in accordance with Article 7(2)(b) of the Financial Regulation. Payment appropriations for the year were virtually exhausted at 12 June 1996.

Financial, technical and economic cooperation, Asia and Latin America (B7-3)

11.12. The Commission did say that in connection with the Notenboom transfer it would see whether it was possible to reinstate the ECU 6.7 million for Asia and Latin America. When the Notenboom transfer was actually adopted, however, it transpired that this was neither possible nor, indeed, necessary in the light of the programming decisions just taken.

11.13. (See points 11.24 and 11.26)

Cooperation with Mediterranean countries (B7-4)

11.14. While it is difficult to predict local developments in a volatile situation, the Commission is doing its best to programme payments more reliably.

Financial and technical support for the peace process in the Middle East (B7-71)

11.16. The reasons for the shortfall in that year are twofold:

1.the original calculation for the commitment appropriations totalled ECU 30 million, however, only ECU 15 million were transferred in 1995 because the budget deficit was less than originally envisaged. The remainder was held over to cover the 1996 budget deficit.

2.the disbursement rate has been slower than originally intended due to unexpected factors, notably the changes in the political situation on the ground, which have retarded the completion of a significant number of projects. In addition, the lack of a local paying account has had serious repercussions on the disbursement rate. This problem is presently being resolved.

11.17 11.18. The Commission agrees with the Court of Auditors that a Community support operation under the CFSP should have been financed from CFSP appropriations, a view reinforced by the fact that heading B7-711 was topped up from appropriations entered in the reserve (B0-40) earmarked for heading B8-103. However, since Article 2(1) of Council Regulation (EC) No 1734/94 explicitly includes the setting-up and improvement of institutions necessary for the working of the public administrations, financing of the operation under Article B7-711 was covered.

The purpose of Council Regulation (EC) No 1734/94 is to aid the sustainable economic and social development of the Occupied Territories. In accordance with Article 2.1 of this regulation, the setting-up and improvement of institutions necessary for the working of the public administration is crucial to the development process in the West Bank and the Gaza Strip. In current circumstances, as the Court recognizes, recurrent budget support to the Palestinian National Authority, is essential. The Commission has interpreted the Council Regulation as permitting such support to be financed under it. In the light of the Court's observations, however, and in the interest of clarity, it will propose to the Council a modification to the Regulation.

European programme for reconstruction and development in South Africa (B7-5070)

11.19. Project commitments ran late in 1995 because the declaration of intent between the new South African authorities (following the April 1995 elections) and the Commission was not signed until September of that year. Only then did it become possible to identify projects to be financed by the Community, which were then approved by the Commission in November, after consultations had taken place with the Member States. The delay significantly affected the use of payment appropriations.

Common foreign and security policy (B8)

11.21. Parliament transferred ECU 2.13 million to the Commission (transfer No 50/95) stipulating that it be used for administrative expenditure connected with the establishment of the High Representative's secretariat in Brussels. Decision 95/545/CFSP with its ECU 10 million ceiling relates to the EU's contribution to operational expenses in connection with the High Representative's mission.

The administrative appropriations used to finance the High Representative's ancillary administrative expenditure in Brussels were assigned by the Parliament for that purpose in the decision approving transfer No 50/95.

The Commission keeps separate accounts of expenditure for the High Representative's Office, enabling it to monitor use of the sum allocated by the budget authority continuously and ensure it is not overspent. It reported to Parliament on 31 May 1996 on the execution of the appropriations made available to it by transfer No 50/95, so the operating costs of the Brussels office are a known factor.

Concentration of commitments at the end of the year

11.23. The transfer of responsibility to the Technical Units for project preparation, as well as project implementation, has enabled programming and project identification and preparation to start earlier. In Asia, a project pipeline has been constituted which should bring about a more even distribution of commitments throughout the year.

As regards Mediterranean countries aid, a more even distribution of commitments has been hindered by delays in project/programme preparation with the local authorities. As of 1996, the Commission has changed the modus operandi for the MEDA programme to include annual reviews and reallocations within triannual indicative programmes.

Any concentration of commitments under the ECIP resulted from the grouping of ECIP actions following the introduction of the procedure for formal decision by the college.

Special planning and monitoring measures for South Africa, food aid, NGOs, the environment, health, and human rights and democracy were adopted in 1996 to ensure a more even spread of expenditure over the whole year.

Outstanding commitments

11.24 11.26. The Commission is in the process of reviewing all the contracts and financial commitments which lapsed or were to be completed before 31 December 1995. The objective of this review is to either decommit these amounts, thereby releasing funds for other projects or to extend both the financial commitments and the related contracts. The process of regularization should be completed by 15 October 1996.

Supervision of on-going projects is being strengthened. The supervision system comprises, inter alia, periodic project Steering Committee meetings of Project Management (PMU), EC Delegation and local counterpart staff; mid-term reviews by independent consultants; final project reviews, prior to project closing; annual working group meetings with recipient Government representatives to review the status of all ongoing EC-funded projects (in the country concerned) and to recommend appropriate correctives measures. There is, however, a pressing need to increase the staff time, both in Brussels and in the Delegations, available for supervision of projects under implementation.

Financing Decisions, EC Investment Partners (ECIP)

11.26 11.28. The Commission remains of the opinion that: while Article 205 of the Treaty and Article 22(1) of the Financial Regulation do give the Commission responsibility for execution of the budget, Article 22(5) allows the institutions - including, therefore, the Commission - to delegate their powers with the exception of the power to take decisions overruling the withholding of the financial controller's approval. The Internal Rules for the Execution of the EC Budget adopted each year by the Commission constitute the instrument by which the Commission delegates these powers to its own departments (Articles 3 and 6 of the Internal Rules). The Commission does not believe the Court of Justice's ruling of 24 October 1989 means that the Council, in adopting basic legislation, can so constrain the Commission's internal operation as to oblige it to have all its decisions adopted by the full Commission, acting as a body. The Council can define the Commission's powers of execution, but the way in which they are exercised is a matter for the Commission's discretion. Nevertheless, as a result of the Court's remarks in their annual report on 1993, the Commission introduced a formal written procedure for decisions, in addition to the approval procedure under the Internal Rules for the Execution of the EC Budget.

The 269 ECIP commitments mentioned in the Court's report were made prior to the adoption of the new procedures.

The Commission is currently giving considerable thought to this issue in connection with the SEM 2000 initiative, and reserves the right to adopt a final stance in the light of the outcome of its deliberations, which affect other budget headings as well as ECIP. It will naturally inform the Court of its decision.

EARMARKING THE USE OF FUNDS

11.29 11.32. The Commission agrees with the Court that earmarking is not always possible nor meaningful. Notable examples are budgetary funding and/or balance of payments support. In these cases, the Commission should insist on the auditing of the accounts through which pooled resources are utilized and not on the partial auditing of fungible funds. The Commission has already moved in this direction, notably in its Structural Adjustment support programmes (SASP) operations.

But this needs to be qualified in the light of the Commission's policy, backed by the Council and Parliament, of ensuring that the use of funds committed by the Community is clearly identifiable. The Commission is ultimately answerable to the European taxpayer.

Humanitarian aid

11.34. The Framework Partnership Agreement (FPA) used by the Commission as a legal instrument for humanitarian aid operations is a management tool which has proved effective in bringing a greater measure of order and discipline to the Commission's relations with NGOs and international organizations. One advantage of the FPA is that it makes for a standardized, non-discriminatory approach towards all partners; it also allows clear identification of funds committed by the Community. The FPA is currently up for revision, and improvements are being considered jointly with the other parties with the aim of strengthening and simplifying the partnership arrangements in the light of experience to date. The review will concentrate inter alia on the presentational quality of applications and how this aspect can be incorporated in the contract. However, it would be wrong to increase flexibility at the expense of rigour and financial discipline, which requires a certain amount of detailed information about the way the funds have been used.

11.35. While the approach developed by the Commission - in which, incidentally, a number of donors are showing a keen interest - imposes more stringent financial and administrative demands on its partners, and requires them to devise appropriate instruments, it does provide assurances that Community funds are being properly used and allows the requisite checks to be made. The Commission therefore feels that this approach, imposing as it does greater rigour on its partners, is consistent with the principles of cost-effectiveness and sound financial management.

11.36. As regards co-financing, the FPA makes it possible to identify every component of a humanitarian operation. Where humanitarian programmes consist of a number of programmes financed by other donors as well as the Commission, the Commission does not rely solely on the FPA for the purposes of monitoring and evaluation. It is involved in a variety of measures to evaluate requirements in the field. The rule for all our partners, international organizations as well as NGOs, is that applications must be supported by essential information regarding the objectives, target populations, organization and scope of the proposed operations. There is now a standard assessment form and this Standard Operation Procedure is soon to be incorporated into a single master form. The Commission therefore considers that the checks it carries out via the FPA and the evaluations are complementary and provide it with an adequate overview of programmes involving more than one donor. Exchange of information - the key to coordination - is dealt with under points 11.54 and 11.55.

11.37. The Commission shares the Court's view that submission of supporting documents does not enable it to detect possible fraud. For that reason, and in the interests of cutting the red tape that otherwise holds up clearance of contract payments, it waived the requirement to submit supporting documents with the final report, while stipulating that they must be held available for subsequent audits. It believes in any case that the checks it carries out at the headquarters of partner organizations and in the field enable it to control the use of the funds. Such checks are in line with the recommendations of Stages 1 and 2 of the Sound and Efficient Management (SEM) initiative and the Council Regulation on humanitarian aid, and are in fact to be stepped up.

The Commission is putting the finishing touches to a field audit methodology for control visits, and is also working on a methodology for the evaluation of humanitarian aid. A small but growing core of experienced evaluators initially concentrated on individual operations, with the aim of refining their methodology and terms of reference and getting to know the various partners, gauging their efficiency and financial administrative capabilities, before moving on to sectoral or thematic evaluation of whole programmes or disaster prevention measures.

11.38. The Commission is aware of how the situation on the ground can change, and allows its partners scope for modifying contracts either under the FPA, which provides for offsetting of limited cost increases without the need to seek prior approval from the Commission, or by submitting requests for amendments. Those requests are scrutinized by the desk officer, giving him a view of the changing situation, and thus providing both sides with a mutually agreed and understood oversight of developments. The amendment procedure thus represents a monitoring tool for desk officers which is well worth the time spent on it.

It should be possible to streamline the procedure somewhat under the revised FPA without sacrificing its value as an instrument of control.

11.39. The Commission's decision to channel such a large proportion of its humanitarian aid through the UNHCR in summer 1994 reflected the exceptional gravity of the situation in the region and the importance of a planned and coordinated response to the sudden flood of over two million refugees. At the same much of the work of the major NGOs coping with the immediate plight of the displaced and other victims inside Rwanda and Burundi, which did not fall within the remit of the UNHCR, was financed by the Commission direct.

The overall strategy was planned jointly by the Commission and the UNHCR. The Commission had the final say on the choice of partners and allocation of the money on the basis of proposals submitted by the UNHCR.

That particular operation was necessitated by the scale of the disaster in Rwanda. It should not blind us to the fact that in complying with the duties and constraints imposed by the European Community's financial regulations, the Commission often has problems working with UN agencies because of their overlapping spheres of responsibility and poor inter-agency coordination.

11.40. The ways in which the Commission familiarizes itself with its partners' financial and management systems are described in connection with points 11.34-11.38. The Commission is thus following the Court's suggestion that it increases its knowledge of its partners' financial and administrative procedures and in particular has put in a considerable amount of work with a number of UN agencies to improve two-way understanding of internal decision-making procedures.

UN agencies with responsibilities for emergency operations do not all operate in the same way. Each has its own rules of procedure, mandate, special features and accounting system. Detailed cooperation arrangements have been laid down for those which work on a long-term basis with the Commission in the humanitarian field, mainly the UNHCR and the WFP. Given the differences in the agencies' working methods, experience is the only basis on which to establish a detailed foundation for lasting cooperation.

The audit clause in the Memorandum of Understanding referred to in connection with 11.48 provides for collaboration with the internal and external auditors of UN agencies. The negotiation of an audit clause with the UN was also an important factor in consolidating the Commission's right to operate controls.

Financial assistance to the Palestinian Authority, teachers' salaries

11.47. Decision on the timing of this operation was made in coordination with the World Bank, manager of the Holst Fund. On the strength of cash flow forecasts that the Bank made with the Palestinian Authority Ministry of Finance, the Commission was advised that the optimum time for the Community contribution to be made to the PA budget, would be early spring.

In the event, these forecasts turned out to be inaccurate, and the money was held over by the Ministry of Finance. That the Commission had foreseen its own check on the use of the funds, enabled it to identify what had happened, and to act accordingly.

The Holst Fund is normally kept in credit by the World Bank. The Ministry of Finance would have been at liberty to apply to the Holst Fund in order to cover any shortfall, without recourse to bank overdraft facilities.

11.48. The Commission notes that donors who contribute to the Holst Fund agree that grant funds may be used by the World Bank, at its discretion. This would have conflicted with the financing proposal, agreed by the Member States and the Commission, which states the clear preference that the EC contribution be made towards the recurrent costs of the Ministry of Education. Moreover, as already pointed out by the Commission, the letter of agreement with donors does not allow for the right of donor audit. The Commission is, nevertheless, redoubling its efforts to coordinate its contribution with the Holst Fund. It will continue to take part in the global and sectoral reviews carried out by donors on the fiscal situation of the Palestinian Authority. The Commission will ensure that its audit of its 1996 contribution to the recurrent costs of Palestinian education is conducted in liaison with the World Bank's audit of Holst Fund operations. Finally, it should be stressed that the Commission has now received a report from the Ministry of Education on steps being taken to promote the curriculum reform and the upgrading of teacher qualifications.

11.49. It was envisaged that the consultant contracted would have to make only one trip to the West Bank and Gaza Strip for what should have been a simple task. This trip took place in August 1995. When it was discovered that the Community funds had not been used to cover February and March salaries, it was realized that a second mission on the part of the consultant would be necessary - this trip taking place in November - in order to track how the funds were used, and to ensure that they were paid towards teachers' salaries.

11.50. The Commission and the Court of Auditors have consistently insisted on the need for the provisions of the Financial Regulation governing the right of the Financial Controller and the Court to audit the utilization of Community funds granted to beneficiaries outside the institutions to be complied with. The provisions in question are in Articles 24 and 87 of the Financial Regulation. The Commission regards the Memorandum of Understanding (audit clause) signed with the United Nations in December 1994 as the model for the working arrangements necessary to give effect to the provisions in question. The Memorandum which was negotiated by the Commission in association with the Court ensures that officials of either institutions have the right to verify on the spot the use to which the funds are being put and to have access to the relevant audit papers in collaboration with the auditors (internal and/or external) of the organization concerned. This does not affect the possibility of the Commission as authorizing officer to obtain through its financing agreements audits by qualified and suitably independent auditors at agreed steps of the programmes. As the Court points out, the capacity of the Financial Controller and the Commission services (and of the Court itself) to carry out audit checks on the spot is limited and must be supplemented in the ways indicated by the Court. There must, however, be no departure from the principle of the statutory provisions that the two institutions are entitled to audit on the spot the utilization of Community funds granted to beneficiaries outside the institutions and the Community.

EU Administration, Mostar (EUAM)

11.51 11.53. The Commission, in agreement with the recommendations of the Court already formulated in July 1995, has treated all three 'tranches` of the 1995 budget as a whole and since then the funds were released as required. The EUAM now presents regular financial reports showing accumulative expenses against the budget. In the light of the experience the Council Presidency has agreed to 'liberate` the 1996 budget (ECU 32 million) immediately and in one single 'tranche`, which has allowed the Commission to continue this simplified procedure.

Conclusion

11.54. The Commission agrees with the Court that earmarking is not always possible or meaningful. Nevertheless, in a number of areas it has reservations about allowing greater flexibility which might lead to a slackening of the monitoring, operational and reporting disciplines it has - quite successfully - urged its partners to comply with.

11.55. The Commission intends to continue developing and modernizing its instruments for monitoring and evaluating the use of Community funds.

11.56. The Commission agrees with the Court on the importance of cooperation and coordination among donors, and holds itself ready to work with other donors whenever the occasion arises.

11.57. The Commission has taken note of the Court's remark but would point out that its information strategy, which it works out in collaboration with the Member States, relies on a variety of measures and is in no way linked to earmarking. The latter is purely a means of ensuring the proper management of resources allocated by the Community.

TREATMENT OF INTEREST

11.58 11.67. As part of the seventh reform of the Financial Regulation, the Commission is proposing an amendment to clarify the rules regarding interest generated by Community expenditure, particularly in cases where it uses third parties - international organizations or agencies - to achieve its aims. The Court's views and the distinctions it draws in 11.64 follow the thrust of the amendments proposed by the Commission.

AUDITS PROVIDED FOR IN CONTRACTS AND FINANCING AGREEMENTS

11.68 11.72. The Commission refers the Court to its response to paragraph 11.50, which deals with the question of audits in general.

GENERAL CONCLUSION

11.75. The Commission's introduction of the sound and efficient management initiative (SEM 2000) in 1995 shows that it fully endorses the Court's concerns and has responded with appropriate action, the results of which should increasingly be apparent (see in particular the answers to 11.23, 11.24 and 11.26).

11.76. As noted under 11.29 to 11.40 in connection with humanitarian aid it is the Commission's policy, backed by Parliament and the Council, to ensure as part of its responsibility towards the European taxpayer that funds committed by the Community are clearly identifiable. Commitments have to be clearly identified and matched with assessment of needs, of other bilateral financing operations between donors and NGOs or local agents. The Commission also stands by the reservation expressed in connection with 11.35.

11.77. As noted in connection with 11.58 to 11.67, the Commission intends to propose an amendment to the Financial Regulation designed to clarify the rules applicable to interest generated by Community expenditure.

11.78. The Commission refers the Court to its response to paragraph 11.50, which deals with the question of audits in general.

CHAPTER 12 (*) European Development Funds

12.0 CONTENTS Paragraph reference

Implementation of EDFs up to 31 December 1995 12.1 - 12.7

Assistance from the seventh EDF in support of structural adjustment 12.8 - 12.106

Audit field and procedure 12.8 - 12.17

Framework and objective of the Court's enquiry 12.8 - 12.15

Scope of the audit observations 12.16 - 12.17

The structural adjustment support policy followed by the EDFs 12.18 - 12.48

General guidelines 12.18 - 12.27

Division of funds between beneficiary countries 12.28 - 12.33

Conditionality 12.34 - 12.38

Coordination 12.39 - 12.48

Implementation of the structural adjustment support programmes 12.49 - 12.93

Usefulness of the import programmes 12.49 - 12.52

Use of the counterpart funds 12.53 - 12.68

Development of certain macroeconomic indicators 12.69 - 12.75

Implementation of the reforms at sectoral level 12.76 - 12.79

Effects of assistance in the sectors targeted 12.80 - 12.88

Supervision of the programmes 12.89 - 12.93

Conclusions 12.94 - 12.106

IMPLEMENTATION OF EDFs UP TO 31 DECEMBER 1995

12.1. The European Development Funds (EDFs) trace their origin back to international agreements drawn up between the Member States of the European Union and 70 African, Caribbean and Pacific (ACP) countries and to Council decisions relating to the association of 24 overseas countries and territories (OCTs). The EDFs are endowed by virtue of internal agreements signed among the Member States of the Union and relating to the financing and administration of assistance granted to these countries. The Commission and the European Investment Bank are jointly responsible for managing the EDFs.

12.2. In 1995 the sixth () and seventh EDFs () 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. This usually happens after about 15 years.

12.3. Table 12.1 shows the implementation of the third and fourth Lomé Conventions as at 31 December 1995. The payments for the financial year amounted to 1 563,7 Mio ECU, whilst the net commitments of the financial year had reached 1 520,1 Mio ECU. The corresponding amounts for 1994 had been 1 781,6 Mio ECU and 2 480,7 Mio ECU respectively. Ten years after it came into force, disbursements from the sixth EDF represented 81,2% of its resources; at the same stage of the fifth EDF they represented 80,8%. The payment rate for the seventh EDF stood at 37,4% at the end of the fifth year of implementation; for the sixth EDF it stood at 41,5%.

12.4. 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 stabilizing 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.

12.5. On 4 November 1995, the ACP States and the Member States of the European Union, meeting in Mauritius, signed an Agreement amending the Fourth Lomé Convention. This Agreement was to be followed in 1996 by a Council and Commission decision making it possible to deposit the formal notification needed for the procedure of ratification by the signatory States so that the revised Convention could come into force in good time (in all likelihood, at the beginning of 1997). In June 1995, in Cannes, the European Council fixed the overall amount of Community aid to the ACP States at 14 625 Mio ECU, for a new five-year period starting on 1 March 1995 (eighth EDF) and at 200 Mio ECU to the OCTs for the same period.

12.6. The problem of the balances of closed EDFs mentioned in previous Annual Reports of the Court () was partly resolved in 1995, in that it was agreed that, of the resources allocated to the eighth EDF, 292 Mio ECU was to come from transfers from previous EDFs, namely:

>TABLE>

(a) 111 Mio ECU from funds reserved for Somalia in respect of its national indicative programme for the seventh EDF;

(b) 142 Mio ECU from appropriations relating to subsidies from the seventh EDF which are to be considered unusable;

(c) 26 Mio ECU from the balances of subsidies from the sixth EDF;

(d) 13 Mio ECU from the balances of the fourth EDF.

12.7. These reallocations of appropriations show that the question of outstanding balances can be solved if there exists the political will to do so on the part of the Community. The solution adopted in 1995, however, goes only part of the way towards solving the problem. In fact, as at 31 December 1995, the outstanding balances from closed EDFs amounted to 478,7 Mio ECU, i.e. the funds transferred from the fourth to the sixth EDFs (125,1 Mio ECU) and from the fifth to the seventh EDFs (492,5 Mio ECU) had given rise to only 138,9 Mio ECU of payments i.e. 22,5% of the transfers. This being so, the Commission should propose to the Council a suitable mechanism for solving this question once and for all in order to ensure that in future appropriations are not left unused without good reason.

ASSISTANCE FROM THE SEVENTH EDF IN SUPPORT OF STRUCTURAL ADJUSTMENT

Audit field and procedure

Framework and objective of the Court's enquiry

12.8. Since the fourth Lomé Convention, support for structural adjustment has constituted a special instrument of financial cooperation. For countries which have embarked on economic reforms and reforms to restore the financial balance, this support is intended to offer balance-of-payments assistance in the form of general or sectoral import programmes and to allocate, within these countries, the counterpart funds () generated by these programmes to budgetary support (). This assistance is most usually directed towards measures to compensate for the negative social effects of adjustment. To this end, the resources to support structural adjustment from the seventh EDF, i.e. 1 150 Mio ECU, may be supplemented by a proportion - in theory a limited proportion - of the programmable resources not allocated to the concentration sector indicated in the country's national indicative programme (). The Development Council's resolutions () have, over recent years, marked out the main aspects of the policy to be pursued by the Community in this area, in collaboration with the international financial institutions (IFIs) - i.e. the International Monetary Fund (IMF) and the World Bank (WB).

12.9. The reform programmes are generally carried out in two stages ():

(a) a stabilization stage, more particularly supported by the IMF and aimed at stabilizing the country's financial situation;

(b) structural adjustment, which concentrates on righting the basic aspects of the economy, such as inflation, the exchange rate system and the fiscal system, or the liberalization of trading arrangements with a view in the longer term to economic growth. This second stage is based on a strategy agreed by the World Bank.

12.10. On 31 December 1995, as the first Financial Protocol of Lomé IV had expired, the financing decisions relating to structural adjustment support programmes amounted to 1 436,5 Mio ECU. Payments of 1 153 Mio ECU had been made. Furthermore, during the 1991-95 period, appropriations from other resources, in particular from Stabex () (544,7 Mio ECU) and from Sysmin (60 Mio ECU) (see Table 12.2) were used for operations closely linked to those of structural adjustment, in keeping with the Council's guidelines.

12.11. Following a study of import programmes carried out within the framework of the sixth EDF () and in response to a request by the European Parliament in the resolution accompanying its discharge decision for the financial year 1993 (), the Court of Auditors examined the operations in support of structural adjustment financed from the seventh EDF.

12.12. The financial support is supposed, in accordance with the fourth Lomé Convention, to take the form of import programmes and technical assistance related to structural adjustment programmes (). Importers in ACP countries must have the widest and most transparent access possible to the financial resources of the EDF (). In order to ensure that the resources are disbursed swiftly, it is stipulated that 'on a case-by-case basis, retroactive financing of a limited part of imports of ACP-EEC origin may be permissible` (). The Convention authorizes budgetary support only through the use of counterpart funds generated by the various Community instruments (). The system thus described corresponds completely to the one used for the mobilization of appropriations from the sixth EDF (see paragraph 12.11).

12.13. In the case of the seventh EDF, the Commission tried to give priority to the rapid implementation of its financial support, both in order to respect the time-tabling restraints imposed on the ACP States by the IFIs and also to achieve its own disbursement targets. This rapid implementation was facilitated by:

(a) general recourse to retroactive financing of imports which had already been carried out, combined with the generation, by the central bank of the ACP State concerned, of counterpart funds in a single operation;

(b) in a number of cases, the practice of disbursing the financial resources of financing agreements in one single tranche.

12.14. The Commission gave a very broad interpretation to the provisions of the Convention relating to the seventh EDF by introducing a system less directly linked to the physical implementation of imports and, in practice, equivalent to global balance-of-payments assistance and support to the budget of the ACP States. In broad terms, this system corresponds to that introduced by the Agreement amending the Convention which was signed in Mauritius on 4 November 1995. This development, which was sought after by the Commission, is what led the Court to ignore the concrete aspects of importing and counterpart fund accumulation operations and to pay particular attention to the macroeconomic aspects and the impact of the budgetary expenditure of the ACP States in the most deprived social categories.

12.15. The enquiry therefore related to the implementation of programmes between 1991 and 1995 in 11 ACP countries, five of which were the subject of an on-the-spot visit (). The 11 countries examined together received 919,3 Mio ECU (), i.e. 64% of the total support for the decisions taken within the framework of structural adjustment () and equivalent to more than 47% of their national indicative programmes (). The ecu value of sums paid out and the amounts of counterpart funds are shown, country by country, in Table 12.3. The Court first studied the allocation of funds and the conditions for their use. It then analysed the economic effects, the allocation and use of counterpart funds, the reforms undertaken at sector level, the effects of assistance in the protected sectors and the monitoring and supervision carried out at the various levels. In 1993 and 1994 the national audit institutions (NAIs) of the Netherlands, Sweden and the United Kingdom also carried out checks relating to the implementation of the national programmes for structural adjustment support. Although the Court's audit was aimed more at the macroeconomic aspects and the impact of budgetary expenditure in the social sectors, the Court finds itself in agreement with the findings of these NAIs to the extent that they concerned countries which it itself also examined (). In particular, these enquiries found that the aims of the programmes needed to be more specific and measurable and that the checks carried out on the import programmes were not very effective. With regard to counterpart funds, it was found that these have to be transferred to the central governments and that they ought to be included in the budgetary process and be shown in a clear manner in the State's accounts. If conditions are attached to these funds, they should be properly monitored by those providing the funds.

Scope of the audit observations

12.16. The Commission has pursued the policy of structural adjustment support and implemented the relevant measures in a manner which has been considered satisfactory overall, bearing in mind that it is a new instrument for development aid policy and is complex by its very nature. However, the Court has found a number of problems and areas where improvements are needed. To a greater extent than in the case of other types of aid, the Community's approach is, in the case of structural adjustment support, heavily dependent on the options chosen in the reform programmes supported by all suppliers of funds under the management of the IFIs. Furthermore, these programmes, the scope of which is very wide, are subject to political and socioeconomic constraints which cannot be ignored in the context of the development of democracy. By their very nature, the positive effects resulting from these interventions usually prove to be rather slow in emerging and must consequently be analysed in the long term.

12.17. It must also be borne in mind that the volume, the areas of application and the efficiency of budgetary support, although the subject of guidelines in the financing agreements and the related agreements, remain heavily dependent on the priorities of the ACP States and on the quality of their institutional and administrative procedures. It follows that lasting changes can be obtained only if the beneficiary State is itself convinced of the sense and feasibility of the reforms.

The structural adjustment support policy followed by the EDFs

General guidelines

12.18. The programmes in support of structural adjustment managed by the EDF have two objectives:

(a) support for the balance of payments via sectoral or general import programmes linked to the macro-economic reforms formulated by the IFIs;

(b) support for the budget, with priority being given to the social sectors via the allocation of counterpart funds to the national budget, combined with sectoral reforms.

12.19. In any given country, there is only one programme for structural adjustment, that is, the programme drawn up by the State in collaboration with the IFIs (). This restricts the Commission's room for manoeuvre and the result therefore tends to be that the guidelines for the Community's support policy can take shape only in the field of sectoral reforms linked to targeted budgetary supports, financed in principle from counterpart funds.

12.20. When the fourth Lomé Convention came into force, the Commission presented a fairly comprehensive description of the main strategic, political and practical elements of structural adjustment support as planned by the Community. Provisional guidelines were drawn up. However, these set out objectives rather than, at operational level, the methods for generating counterpart funds, the degree of detail in the targeting of them (see paragraph 12.54), the retroactive financing of imports and budgetary expenditure charged to the Fund and ways support would be given to the social sectors (education and health). The implementation of the support programmes in the ACP countries thus seems to lack consistency. As the observations contained in this report show, marked differences occur, depending on the country, between financing agreements governing similar programmes, as well as in the implementation of these programmes, even though in terms of management of public funds or monetary systems there are no fundamental differences on first analysis.

12.21. Whilst it is true that the Commission's support programmes have generally followed the Council's guidelines on coordination and concentration of support in the social sectors fairly well, where the regional dimension of adjustment and protection of the environment are concerned the results of the programmes examined have been less than envisaged.

12.22. The regional dimension of structural adjustment support has been implemented at the level of specific measures financed from structural adjustment facility funds through the cross border initiative (CBI), support for the regional reform programme of the Customs and Economic Union of Central Africa (CEUCA) and support for the West African Economic and Monetary Union (WAEMU). In the case of the latter two measures, Community support took the form of the financing of technical assistance and studies. In the case of the CBI, the aim of which is to liberalize regional trade, investments and payments in 12 ACP countries (), an amount of 51,9 Mio ECU had been reserved for financing additional import programmes. By the end of 1995, only two countries (Zambia and Malawi) had been able to benefit from financial support connected with the CBI, which greatly delayed its impact.

12.23. Similarly, none of the structural programmes examined gave evidence of any particular attention having been paid to the protection of the environment aspect through the use of the counterpart funds, as required by the Council resolution of May 1992.

12.24. The Commission endeavoured to ensure that the Community's priorities concerning structural adjustment support were fully taken into account in the reform programmes of the countries undergoing structural adjustment, even though in some cases the Community's specific objectives were not explicitly set out in the economic policy framework document.

12.25. In Ghana, one of the specific objectives of the first support programme, i.e. the creation of jobs, was not incorporated into the economic and financial policy framework document.

12.26. In the case of the Ivory Coast, as of October 1993 a large proportion of the counterpart funds was allocated to decentralization, even though this sectoral reform did not feature in the country's reform programme until 1995.

12.27. In Mozambique there were plans for specific support for the deregulation of the oil market, but this reform does not feature in the economic and financial policy framework document.

Division of funds between beneficiary countries

12.28. Only funds relating to the structural adjustment facility (SAF) (1 150 Mio ECU) are divided up among the eligible countries. The other funds allocated to interventions of this sort (see Table 12.2) are taken from resources already allocated to the beneficiary country in respect of the financial instruments concerned and according to the criteria corresponding to these instruments.

SAF for the 1991-92 period

12.29. In the case of the seventh EDF, in June 1990 the Commission reserved some 460 Mio ECU for a first tranche of adjustment support for 38 ACP States which were potentially eligible for specific SAF resources ().

12.30. In so doing, some amounts were allocated to countries which had not undertaken reform programmes supported by the IFIs and the eligibility of which had not been definitively established by the Commission either at the time when they received notification of the allocation or during the period concerned. As a result, appropriations worth 76 Mio ECU had been left unused since 1991 in accounts for four different countries (). They were not released until 1995 so they could be reallocated to other beneficiaries in 1996. The Court has already expressed criticism of this situation (). In the case of Uganda, the support programme (17 Mio ECU) was not disbursed until 1994. Furthermore, the programmes agreed in 1992 with two other countries () did not start until 1995, whilst in a third country () the allocation was released in 1995.

SAF for the 1993-94 period

12.31. Several improvements were made to the system when the overall amount (900 Mio ECU) () for the second group of decisions (1993-94) was divided up. The most important of these decisions related to the fixing of an annual disbursement target, with the option of revising the provisional target for 1994.

12.32. The additional allocations relating to 1994 were, in the case of some countries (), distributed using the powers of the Chief Authorizing Officer without being put to the EDF Committee. This is an infringement of the provisions of the fourth Lomé Convention and of the Internal Agreement ().

12.33. Up until 1995, the EDF accounts did not allow a direct overview of all the sums that are allocated to the adjustment programmes from the various financial instruments of the Lomé Conventions. This being so, the financing decisions cannot be seen in the context of the EDF aid measures as a whole, which deprives the opinions (authorizations) given by the EDF Committee of part of their value.

Conditionality

12.34. In its interim report for 1991 (), the Commission said that it intended to carry out an independent and thorough evaluation of the economic and financial situation of the country and that this evaluation would be based on three levels of conditions:

(a) general conditions concerning the question of keeping the country to the adjustment process, in order to ensure that overall progress is generally satisfactory;

(b) specific conditions, often sectoral or linked to the use of counterpart funds, which would constitute the few crucial measures relating to the mobilization of Community resources;

(c) administrative and financial conditions.

12.35. Whilst the Commission is of the opinion that, in principle, the specific conditions constitute fixed conditions which have to be met before subsequent tranches can be released, it was once again found () that in Ghana successive tranches of programmes had been released without the specific conditions of the financing agreements having been completely fulfilled. Nevertheless, the Commission considered that either these conditions were for the most part satisfied or that they would be shortly. In the Ivory Coast, the specific conditions for the second support programme are meaningless because it is a programme with one single tranche, payable once the financing agreement had been signed.

12.36. The Court has also on several previous occasions () pointed to the general nature of, and lack of precision in, the conditions imposed by the Commission, which often allows quite considerable room for manoeuvre. The decision to release funds thus tends to become mainly dependent on the assessment of how credible it is that a macroeconomic and sectoral reform programme is being carried out, and this greatly reduces the actual force of certain conditions laid down in the financing agreements.

12.37. The Commission, like most of the other donors, regards the present practice of attaching conditions to the structural adjustment programmes as unsatisfactory (). It is also recognized that:

(a) the rates of observance of these sets of conditions are usually low, around 60%, or even lower for the reforms which are more complex but fundamental for the programme's long-term viability;

(b) these low rates of observance do not always result in the suspension of the adjustment aid, as the donors are often under pressure to disburse the funds, which reduces their credibility still further.

12.38. The Court therefore takes the view that it would be better to work with a smaller number of basic conditions, which were realistic and objective, so that they could be applied more clearly and strictly. Depending on the specific circumstances of each country, it may nevertheless be necessary to lay down sectoral criteria for the evaluation of the scope of the reforms. The Court would encourage the Commission to keep to this position in favour of reforming the conditionality in the context of the discussions currently under way between the providers of funds within the special programme of assistance (SPA).

Coordination

12.39. In its Resolution of 16 May 1989 the Council had emphasized the importance of close coordination between providers of funds and expressed a desire to:

(a) increase the coherence and degree of convergence between the approaches taken by the Commission and the Member States in the Community, in the ACP States, and at the World Bank and the IMF;

(b) make other donors aware, sufficiently early on in the process, of the Community's point of view.

12.40. The Commission thus plays an active role in the international coordination of aid for structural adjustment within the framework of the SPA. In this field, the Commission occupies a top-ranking place which gives it an opportunity to air the Community's priorities. More specifically, it co-chairs the working parties responsible for reviewing public expenditure and conditionality.

12.41. The Commission also takes part in the meetings organized by the World Bank for all the ACP States which are undergoing structural adjustment. These meetings (Consultative Group meetings and round tables) are intended to assess the overall financing requirements and the contribution levels of providers of funds. They also constitute a forum at which the conduct of the structural adjustment process for each country can be usefully discussed.

12.42. In the ACP countries, the Commission Delegations regularly participate in the work of coordinating assistance for adjustment programmes via their contacts with the various providers of funds, at head of mission level and at expert level.

12.43. The providers of funds consulted during the Court's on-the-spot visits declared themselves reasonably satisfied with the significant efforts made by the Commission to make coordination more efficient.

12.44. In Burkina Faso, for example, a coordination structure was created to provide a framework for assistance in the education and vocational training sector. The Commission and the Netherlands act as the Burkina Faso national administration's contact point for all the providers of funds. In the same country, the Commission, the Netherlands and France have, in the health sector, collaborated closely on setting up and managing the Purchasing Centre for Essential and Generic Medicines (CAMEG).

12.45. In Ethiopia, the entry in the accounts and the management and use of counterpart funds generated by balance of payments assistance granted by six providers of funds () followed the same pattern, and payment of the second tranche was linked to that of a World Bank loan (interlinked conditionality).

12.46. Some complications were found concerning the actual coordination of certain measures. In Zimbabwe, for example, even though the implementation of the structural adjustment programme diverged from the requirements initially laid down (it went 'off track`) and the IFIs, the Commission and several Member States had suspended payment of their assistance, the Netherlands and Sweden continued to pay out their balance-of-payments assistance.

12.47. In Ghana, in 1994, the World Bank interrupted payment of its assistance whereas the Commission continued its disbursements.

12.48. In conclusion, it is clear that, with a few exceptions, the Commission and the Member States are normally careful to maintain good coordination, both in appraising programmes and in implementing them. This approach must be continued, in particular in the field of public expenditure reviews (see paragraphs 12.59 - 12.61).

Implementation of the structural adjustment support programmes

Usefulness of the import programmes

12.49. Structural adjustment support, as developed by the IFIs and to which the Community's support is linked, is based on the macroeconomic and monetary situation in the countries concerned. However, the Community's support programmes always contain import programmes, as provided for by the fourth Lomé Convention.

12.50. The Commission has tended increasingly to grant retroactive financing to imports which have already been carried out, even though in the Convention this possibility is provided for only in exceptional cases. In so doing, the Commission has sought to adapt its structural adjustment support to the fact that this instrument is in reality a macro-financial one. The import programme thus becomes fictitious and the currencies (ECU) contributed by the EDF are, as a matter of priority, directly used by the ACP States for stabilizing their balance of payments. In view of both the monetary, macroeconomic impact of the balance-of-payments assistance and the monetary policy followed by the Central Bank of the ACP State concerned, one of the key factors to be borne in mind when assessing the situation must be the control of the money supply so as to avoid any possible inflationary effects.

12.51. From a practical point of view and leaving aside regulatory aspects, it is clear that, at least in the case of countries with convertible currencies (Benin, Burkina Faso, Cameroon, Ivory Coast, Ghana and Mali), using import programmes is an expensive and pointless bureaucratic practice. In many countries, technical assistance is thus used to carry out a series of accounting checks which turn out to be useless. The object, in fact, is never to reduce the amounts transferred by the EDF but simply to compile documentation on eligible imports, which is always possible because the beneficiary countries import enough as it is to provide, a posteriori, the volume of import bills needed to justify the advance paid by the EDF ()12.52. In those countries where the national procedures and the economic situation so permit, a direct transfer of the funds to the ACP State's national budget or to its Central Bank, i.e. bypassing the import programmes, would make it possible to focus European Community checks (direct support) on the real use of the aid, i.e. the execution of the social expenditure entered in the national budget. The Commission should pay special attention to this question when drawing up plans for the eighth EDF. In fact, in cases where the operation constitutes direct budgetary support, the checks should relate, as recommended by the Working Party on Counterpart Funds from the SPA, primarily to the overall budgetary discipline of the ACP State () and to the effective use of the budget headings selected as priority ones in the financing agreements.

Use of the counterpart funds

Targeting principle

12.53. 'Targeting the counterpart funds` is the process by which Community assistance is directed towards sectors that have been designated priority areas in agreement with the ACP beneficiary State, most frequently in the memoranda of understanding which form part of the financing agreement. Targeting takes the form of allocating fixed amounts to selected national budget headings or to financial or social institutions. Even when the targeting is fairly detailed, it does not, on its own, because of the fungible nature of budget resources, make it possible to guarantee that the State's resources will actually be used to finance the sectors thus selected ().

12.54. Article 226 of the Lomé Convention recommends the targeted use of counterpart funds. The Commission, like the SPA, accepts that the degree of targeting has to depend on the quality and reliability of each State's budgetary procedure. In other words, the targeting should gradually become less specific as the quality of the budgetary procedure and the management of public expenditure improve.

12.55. Two groups of countries can be identified, according to the quality of the implementation and control of the budget: the first group consists of countries where the procedures are reliable and where the targeting of expenditure receiving assistance may be global, whilst the second is one where the targeting must be detailed.

12.56. However, significant differences between the targeting methods used were found in the countries examined. These disparities can be partly explained by quality differences in the budget process and procedure of the countries concerned. They range from the straightforward global allocation of funds to a single ministry's budget (sectoral targeting) (Mozambique and Tanzania) to the detailed indication of specific programmes or measures to be financed (1993-94 programme for Zimbabwe).

12.57. Those countries where the targeting was sectoral (Zambia and Tanzania) were the ones where the mobilization rate for the counterpart funds was highest (100% and 94% respectively), whilst in those countries where the targeting was detailed (Zimbabwe and Ghana) the disbursement rate was much lower (51,4% and 68,6% respectively).

12.58. In order to avoid the risks of slippage, the allocation of Community assistance to certain items of budget expenditure should be maintained, but with some modifications to the procedures in order to avoid the blockages that result from excessively detailed targeting.

12.59. In this respect, and as the Commission itself has pointed out on several occasions (see also paragraph 12.44), the review of public expenditure by the IFIs in collaboration with the other providers of funds could become a means of guiding and checking public expenditure, provided that it is done systematically at the end of each financial year, so that the conclusions drawn from these reviews can be taken into account when drafting the next budget (n+2). This was not the case in any of the 11 countries examined.

12.60. Finally, budgetary assistance is of only limited value in countries where the budgetary procedures are shaky or where the implementation of the budget is slow, centralized and not very transparent, or where the control of expenditure is almost non-existent (see paragraphs 12.82 - 12.88). Several Council resolutions recommend assistance to these countries and emphasize the need to improve the way their public finances work. In each of the fields mentioned in the Council Resolution of June 1995, the progress made in the countries examined is very far from permitting a changeover to a system of global allocation without excessive risk ().

12.61. Sectoral targeting is a tempting option for the Commission because of its simplifying effects. It can also have a significant impact on the overall restructuring of public expenditure, obviate administrative controls linked to identifying budget headings and accelerate the disbursement of funds. However, as it is in effect global allocation, this sort of approach must be accompanied by an examination of all the budget headings actually implemented in order to ascertain that previous contributions have not produced unintended negative effects and that the general rules of budget management (actual distribution among the various areas of expenditure) were indeed respected in the end. The Commission, together with the main providers of funds, must continue to take part in drawing up the budget, if it wants to be able to guarantee adequate financing of the priority sectors. Its involvement should be made a basic condition of its intervention. However, such a system may be contemplated only in those countries where the procedures for effecting public expenditure are transparent. Before setting out along this new path, the Commission ought to check that such procedures do exist and, where appropriate, should allow the ACP States to strengthen their budget control procedures by giving them substantial institutional support. It thus follows that the Commission should regularly assess the quality of these procedures and it must take a firm line if the ACP State goes back on its commitments ().

Priority social sectors

12.62. Bearing in mind that the Commission has decided () that within the social sector priority should be given to the areas of health and basic education, the Court has confined its examination to the latter.

12.63. The initial allocation of the counterpart funds and their actual use in the 11 countries examined are shown in Table 12.4. This table shows that the proportion of the counterpart funds allocated to the priority social sectors ranges from 20,8% (Benin) to 100% (Tanzania, Zimbabwe and Ethiopia) of the total amount of funds concerned. For some countries, it does not therefore reflect, at least in financial terms, the priority which the Community gives to these sectors. Although this priority has never been expressed as a figure, a rate which significantly exceeds 50% should be considered the minimum to ensure an adequate volume.

12.64. The amount of assistance granted to the priority social sectors in certain countries of the franc area (Benin, Burkina Faso, Cameroon) poorly reflects the priority which the Community has given to them. In these countries, large sums have been used for clearing the earlier budget deficits of public and para-public bodies. This can be seen from Table 12.5.

12.65. Mention must also be made of the payment made to a private company following a court case against it in Burkina Faso (1 200 Mio FCFA) (1,8 Mio ECU) (), and the repayment of the Ghana government's debts to the National Bank (28 800 Mio Cedis) (18,8 Mio ECU) ().

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12.66. The main reasons given by both the authorities of the countries in question and the Commission to explain the rates of utilization of the counterpart funds for the priority social sectors fall into two categories:

(a) inadequate absorptive capacity in the sectors concerned (Burkina Faso and Ghana);

(b) bureaucratic and cumbersome procedures for implementing the measures and programmes and for justifying the associated expenditure (Burkina Faso, Mali and Zimbabwe).

12.67. In fact, the priority which the ACP countries give to the social sectors concerned is difficult to evaluate because of a lack of reliable data on the expenditure actually incurred (budgetary implementation). That is why the Court has taken amounts entered in the budget as its basis for analysing the allocations to the priority social sectors. Similarly, since there is no single indicator which provides a complete picture of the budgetary priority given to the priority social sectors, the Court, on the basis of the data supplied by the delegations and the ACP countries, has reconciled the budgetary allocations of these sectors with two different indicators: the total budget and the GDP (). It is apparent that, despite the support of the Community, the situation of the budget in the priority social sectors has not shown any manifest improvement for certain countries (see Tables 12.6(a) and 12.6(b)).

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12.68. The figures available tend to show that priority still needs to be given to these sectors if the aim is to retain the objective of palliating the negative effects of structural adjustment on the most deprived areas (). If this last objective were to become a priority, it would be necessary to establish whether the aid programme is the best way of achieving it, and the choice of this form of assistance rather than of the more traditional, project-based aid to which some donors have returned (Canada/Denmark) would have to be justified.

Development of certain macroeconomic indicators

12.69. Before trying to draw any conclusions as to the macroeconomic development of these countries, attention must be drawn to the problem of the reliability of the statistical data and the impossibility of isolating the effects of structural adjustment support from other factors which have an impact on macroeconomic trends (). This situation restricts the quality of the monitoring of the structural adjustment programmes by the providers of funds and partly explains the difficulties encountered in implementing the related support mechanisms.

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12.70. On several occasions, the IMF has formulated objectives concerning macroeconomic development for the countries undergoing structural adjustment by means of a number of indicators (see Table 12.8).

12.71. The development of these indicators and of those concerning the balance of payments, the Central Bank's basic rate and the exchange rate in relation to the reference currencies during the period 1991-95, as shown in Table 12.7, has been somewhat unequal in the countries examined. In spite of some improvements, comparison with the objectives described in the IMF's economic policy framework documents shows a still modest level of performance for the countries for which data are available.

12.72. As regards the growth of the GDP, Zimbabwe was the only country to achieve the targets laid down in the framework document. For the inflation rate, an improvement was found only in Ethiopia, where the aims of the framework document were also achieved. Moreover, for most of the countries examined, Table 12.7 shows that the budgetary deficits became worse, except for Ghana, Tanzania and Zambia. With regard to the growth of the money supply, a trend giving cause for concern has been noted in Ghana and Mozambique.

12.73. It can be seen (see Table 12.9) that there was an alarming increase in the level of foreign debt, and therefore in the cost of servicing that debt, between 1990 and 1994. In spite of the programmes in support of structural adjustment financed by the IFIs, the problem of the indebtedness of the beneficiary countries persists. The structural adjustment loans granted by the IFIs in fact require external assistance in the form of donations which allow new loans to be contracted. The loan conditions stipulate the volume of foreign assistance that will in future be allowed to the beneficiary countries, because the own resources of the countries undergoing adjustment are not sufficient to finance both the repayment of the earlier debts and budgetary expenditure.

12.74. It should also be noted that population growth to a large extent neutralizes efforts made in respect of structural adjustment (). In fact, even in an exceptional context of 5% economic growth, a population increase of 3% will in principle not leave adequate resources to cope with debt repayment maturities. In the 11 countries examined, the population is growing at between 2,3% and 3,4% ().

12.75. The economic situation of the countries examined is still very poor, unlike, for example, some countries in eastern Asia. The lack of progress looks set to continue, despite the structural adjustment support given by the Commission, the other providers of funds and the IFIs.

Implementation of the reforms at sectoral level

12.76. The EDF support programmes include sectoral reforms which often constitute specific conditions that must be met before aid is disbursed. These reforms have sometimes been found to be partial, but this did not delay release of the tranches of the programmes.

12.77. In Zambia, the social action programme, which was part of the structural adjustment programme, has not been completed and has been replaced by the social sector rehabilitation and development programme. The public sector reform programme referred to in the second structural adjustment support programme has not been implemented.

12.78. In Zimbabwe, the reforms relating to the deregulation of trade and the economy have been satisfactory, whilst the reforms connected with the implementation of the social dimension of adjustment plan have fallen well short of expectations.

12.79. In the light of these cases, it is clear that the Commission did not consider it expedient to insist that certain sectoral reforms stipulated by the financing agreements be implemented.

Effects of assistance in the sectors targeted

12.80. In the countries visited, the implementation of budgetary support has not always been as easy as the financing agreements would seem to suggest it might be, and many obstacles result from the procedure for implementing the national budgets of the ACP States, or even from the economic policy pursued by the governments concerned.

12.81. For all of the countries visited, it should be pointed out that budgetary support provided by means of targeted allocation of counterpart funds has come up against two difficulties:

(a) firstly, there is no clear link between the mobilization of appropriations in the social sectors and the extent to which the populations particularly affected by the adjustment policies implemented have actually benefited from the assistance (see Tables 12.10 to 12.12);

(b) secondly, it does not emerge clearly from the Lomé Convention () whether or not the counterpart funds may be used to finance staffing expenditure. The Commission has different policies depending on the individual country concerned.

The budgetary implementation in the ACP States

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12.82. A combination of an extremely centralized system for implementing the budget and the cumbersomeness of the procedures for committing, authorizing and making payments has very considerably slowed down the process of mobilizing the appropriations intended for the social sectors. The following examples illustrate this:

(a) in respect of the budget year 1993, 236 Mio FCFA (0,36 Mio ECU) reserved to pay the salaries of newly

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recruited schoolteachers have still not been used (Burkina Faso);

(b) at the end of July 1994, the use made of funds for the 1994 budgetary support was very low in some sectors: in the field of education, only 471 Mio FCFA (0,7 Mio ECU) had been used from an allocation of 1 475 Mio FCFA (2,2 Mio ECU), i.e. 32%. In respect of health expenditure, only 344 Mio FCFA (0,5 Mio ECU) out of a possible 2 306 Mio FCFA (3,5 Mio ECU) had been used, i.e. 15%. Even in the case of road maintenance, the implementation rate was only 22% (Mali);

(c) in the education field, in respect of budgetary assistance to the regions, the releasing of the monthly tranches of appropriations was severely behind schedule in November 1995 and the situation was worse than it had been the previous year (Zambia);

(d) the targeted allocation of the counterpart funds to specific measures in the education and health sectors under the first structural adjustment support programme (1993-94), together with the obligation to justify every item of expenditure in detail, which is itself very difficult on account of the cumbersome administrative procedures, had resulted in quite a low rate of utilization of the counterpart funds (51,4%) when the on-the-spot visit took place in November 1995 (Zimbabwe);

(e) the mobilization of the counterpart funds using a system of additional authorization prior to the release of appropriations ('vote of credit`) has hampered their use to support budget headings (Zimbabwe). This being so, the Commission has taken steps to modify certain procedures;

(f) the provision of the memorandum of understanding on the use of the counterpart funds, which stipulates that the programmes supported may not relate to imports of goods and services, has also acted as a brake on the use of the funds (Zimbabwe).

Geographical distribution of the budgetary support

12.83. A more balanced geographical distribution of expenditure is an aim which must be pursued, because the aid has most benefited the urban areas, as the following examples show:

(a) in the primary education sector, Community support for staff expenditure was above all of benefit to the urban areas (Burkina Faso);

(b) in the health sector, even though it was observed that medicines are more easily available in most of the health centres, it is still difficult to fill doctors' posts in rural areas, in spite of the fact that housing is financed from the counterpart funds (Zimbabwe);

(c) in the primary education sector, it was observed that, despite an acceptable level of budget allocations, schooling conditions (state of maintenance of school buildings, availability of supplies and number of qualified teachers) were found to be rather poor in the rural areas in comparison with the conditions in the urban areas (Zimbabwe).

Priority accorded to primary education and primary health care

12.84. The priority given within the social sectors to primary education and primary health care has not been systematically reflected in the financial allocations, as the following examples show:

(a) in the health sector, the priority given to primary care has remained too low, whilst the running costs of the central services and tertiary care ate up more than 40% of the Health Ministry's operational appropriations. If the Community assistance is to benefit the poorest people, the proportion of the budget allocated to primary health care ought to be increased (Burkina Faso);

(b) during the on-the-spot visits in Pasore and Yatenga provinces, primary schools were found to be short of equipment and supplies, canteens were supplied on an irregular basis and the housing conditions of school staff were often precarious. However, there were enough adequately qualified teachers (Burkina Faso);

(c) in the case of Mali, a review of public expenditure revealed inadequate financing of primary education and a substantial decline in the resources allocated to the health sector, in spite of the overwhelming needs. Reforms in the social sectors, and in particular in the education field, are the very ones which have made the least progress. It is also clear that the budgetary mechanisms and the content of the expenditure are such that they tend to favour the better-off social classes, which is, quite obviously, entirely at odds with the objectives being sought;

(d) in 1994, budgetary assistance to Ghana for the education sector was redirected from primary education to secondary education, even though primary education is very deprived. The use of counterpart funds in the primary education subsector would not only have been more desirable but would also have been more in accordance with the Community guidelines;

(e) also in Ghana, in the health sector budget, the amount of money allocated to primary care remains low, because the central services and tertiary care absorb a large part of the resources available (the two national hospitals account for 10% of the annual budget). The total amount of money paid in remunerations, which accounts for 75% of the health budget, also limited operational expenditure.

Other observations

12.85. In Ghana, the following specific problems were encountered:

(a) a programme for the renovation of primary schools entered in the 1993 budget as costing 1 000 Mio Cedis (1,2 Mio ECU) had not been carried out, notwithstanding that the total amount of the contract value had been paid over to the supplier. The fact is that the building materials were never delivered to the Ministry of Education. The Commission ought to have examined this case so that the appropriate corrective measures could be taken;

(b) another programme concerning the supply of books and educational equipment to primary and secondary schools amounting to 1,9 Mio USD (1,4 Mio ECU), which was also provided for in the budget for 1993, had barely begun in August 1995;

(c) the government's restrictive budgetary policy has resulted - also at the level of the social sectors - in a reduction in appropriations, the reorientation of some programmes and the introduction of cash limits on the use of certain budget headings and has therefore had the effect of limiting the volume of expenditure which the EDF intended to devote to these sectors. As a result, 28 800 Mio Cedis (18,8 Mio ECU) of counterpart funds were still unused in September 1995 (see paragraph 12.65);

(d) in Burkina Faso, the initiatives planned in the first support programme to encourage the creation of private enterprises in the context of structural adjustment remained weak because expenditure was limited to 36 Mio FCFA (0,06 Mio ECU).

12.86. In Burkina Faso, the centralized storage of school equipment and supplies, combined with a shortage of means of transport, delayed distributions to schools. In September 1995, significant stocks of school supplies bought for the previous academic year (1994/95) were still undistributed at Ouagadougou.

12.87. A contract for the purchase of geographical maps, concluded in 1993, was still awaiting execution in September 1995 because the local contractor had not been able to pay the advance requested to his supplier in France (Burkina Faso).

12.88. In Zambia, although an increasing share of appropriations had been allocated to the primary education subsector, accompanied at the same time by a reduction in the wage bill for the period 1992-95, the supporting documents submitted did not provide evidence by which to assess the extent to which the funds had been used in favour of the most deprived groups.

Supervision of the programmes

12.89. The fact that structural adjustment support is considered a rapid disbursement instrument () does not mean that there is less need for rigorous monitoring and proper supervision of the operations, so as to guarantee that the measures undertaken by the Community are successsfully completed (). Such monitoring should cover not only the execution of the ACP State's macro-economic stabilization and adjustment programme, but also the sectoral reforms, policy in the social sectors, and the drawing-up and implementation of the State budget.

Monitoring by the Commission

12.90. Supervision is primarily the task of the Commission Delegation in each country concerned. It is accompanied by individual monitoring and audit visits by the Commission's Brussels staff, whilst day-to-day support is provided by the technical assistants.

12.91. In this context, it should be pointed out that making only one economic adviser available in the Delegation for the purpose of such monitoring is usually not enough, given the financial importance of the aid in question (see paragraph 12.15). It has thus not been possible on the whole to monitor the implementation of the Community support on the ground in a systematic manner, in spite of the importance of such monitoring for the purpose of evaluating the ultimate impact of the aid.

Technical assistance

12.92. The inadequacy of the Delegations' resources was partly made up for by recourse to technical assistance, which supplemented the Delegations' own monitoring work but which varied from country to country in respect of volume and the terms of reference given to the assistants. For example, it was observed in Burkina Faso that the technical assistants had done a remarkable job of work and had made an active contribution to the shaping of the reforms and the monitoring of budgetary support in the health and education sectors. In Zimbabwe, on the other hand, technical assistance was more orientated towards accounting checks on the use of counterpart funds, which was of very limited value. In Zambia long-term technical assistance had been granted to the national EDF authorizing officer and the assistants' role was to act as advisers on budgetary management matters. In Mali, technical assistance was limited to the implementation of the GIP and to the targeting of expenditure items for which support was to be given out of the counterpart funds. In Ghana, there was no permanent technical assistance, in spite of the difficulties that had already been encountered in the management of the import programmes of the sixth EDF ().

Monitoring by the recipient States

12.93. In the financing agreements and in the agreements attached to them there is a stipulation that the government is to report on the implementation of the budget, especially in connection with the use of the counterpart funds. It was found that no such reports had ever been made in Burkina Faso and Ghana. In Zambia no statement of expenditure incurred in the social sectors had been supplied for 1992 and 1993, whilst the statements for the years 1994 and 1995 were very sketchy.

Conclusions

12.94. The Commission's policy in respect of support for structural adjustment has been conducted in accordance with the way in which the specific situation of each recipient country has been evaluated within the IFIs and the part which the various providers of funds are allowed to play there. This has not made it possible to establish a single model or a standardized implementation. This is particularly true with regard to the constitution and targeted allocation of counterpart funds, where significant differences (the justification of which is not always easy to understand) between beneficiary countries were found (see paragraphs 12.20 and 12.54).

12.95. Whether it is a question of notifying financial assistance to beneficiaries (), paying advances to be cleared (), raising the upper limits in the financing agreements (), making programme disbursements in a single tranche (), the retroactive nature of the import programmes () or the use of the counterpart funds (), the Commission, with the consent of the EDF Committee, has given a broad interpretation to what is laid down in the regulations.

12.96. The Commission's approach is both to follow the conditionality of the IFIs, by pointing out that there is only one adjustment programme for any given country (see paragraph 12.19) and, at the same time, to retain its total freedom when it comes to assessing the progress of reforms by defining its own conditions for the releasing of EDF assistance for structural adjustment (see paragraph 12.34). This situation may lead the Commission subsequently to waive some of the conditions laid down in the financing agreements (see paragraph 12.35). The resulting system is too complex and may be detrimental to the credibility of the Commission's requirements. Efforts must be made to simplify, clarify and give strict application to the basic conditions in order to make the system more rational (see paragraph 12.76).

12.97. As the general import programmes are normally fictitious in nature, abandoning them in favour of direct budget assistance, provision for which has been made in the eighth EDF, would be more in harmony with the realities of the situation and would make it possible to find the funds that are lacking so as to ensure, in the field, that assistance is actually being implemented to the benefit of the most deprived (see paragraph 12.52).

12.98. The Commission's work is most convincing in the field of the coordination of donors. This concern for coordination can be seen in its dealings with both the international institutions and the Member States and the main donors involved in the reform programmes in the beneficiary countries (see paragraph 12.48). However, as the OECD's Development Assistance Committee emphasized, it would be a good idea to arrive at a consensus among the donors on the question of the generation and the utilization of counterpart funds.

12.99. Although the provisions of Article 244(f) of the Lomé Convention insist that particular attention should be paid to the most vulnerable social categories, in particular the poor, the unemployed and women and children, it is clear that in some countries there has been a shift in favour of measures to restore financial equilibrium to the public sector (see paragraphs 12.64 - 12.65). In so doing, the EDF's resources have not been allocated in full to the poorest elements in society.

12.100. In the other countries (those outside the franc area), the budget assistance contributed via the counterpart funds has generally been in accordance with the Council guidelines in the health and education sectors. In some countries, however, the effectiveness of this assistance in the social sectors has remained modest, in particular as a result of over-detailed targeting of the counterpart funds (Zimbabwe) for the first programme (1993/94) (see paragraph 12.82(e)) and slowness and delays in implementing the national budget (Ghana, see paragraph 12.85, and Zimbabwe, see paragraph 12.82(f)).

12.101. In several of the countries visited (see paragraph 12.83) the social services in urban areas were more favourably treated than those in rural areas, and an attempt to redress this imbalance of public financing must be made. Similarly, as far as education is concerned, the priority given to primary education has not always been high enough (see paragraph 12.84). A similar situation was observed in the health sector, where primary care has not always been given the appropriations it required (see paragraph 12.84).

12.102. The detailed targeting of the counterpart funds has necessitated a significant amount of administrative and monitoring work both at Delegation level and at the level of technical assistance. In some countries, in view of the fungible nature of budgetary resources, the targeting of the counterpart funds could be less detailed (see paragraphs 12.53 - 12.54), but should be accompanied by quantitative objectives to be achieved in the social sectors and by the setting-up of a monitoring and assessment system.

12.103. An examination of the recent annual budgets of the countries visited shows that efforts must continue to be made to give greater weight to sectoral policies aiming at social cohesion; this is important, especially as regards the provisions of the Convention (), which stipulate that structural adjustment support must assist ACP States in their effort to improve, inter alia, the social and economic well-being of the population as a whole and to ensure that adjustment is economically viable and socially and politically bearable (see paragraphs 12.64 and 12.65).

12.104. Given the volume of the sums mobilized by the EDF in respect of structural adjustment (more than 47% of all the national indicatives programmes of the countries concerned), strict monitoring of the operations is unavoidable (see paragraphs 12.91 - 12.92). Monitoring of this kind has proved difficult in the countries examined and improvements must be aimed for at two levels:

(a) first, in the Delegations, for the targeting of the adjustment support (see paragraph 12.91);

(b) secondly, in the national administrations, where institutional support is needed, in particular through the systematic supply of technical assistance to control the budgetary procedure and help the ACP countries to carry out reforms in the areas targeted by the EDF.

12.105. It is clear from the situation of the public finances and other macroeconomic indicators in the countries examined that, despite the structural adjustment support, the situation sometimes falls far short of the original objectives, i.e. restoring internal and external balance to the countries' finances and a return to economic growth in the countries concerned (see paragraphs 12.70 - 12.72).

12.106. In view of the very considerable needs of these countries in the basic social service sectors (health, education), EDF funding of targeted expenditure does not by itself make it possible to limit the negative effects of adjustment on the most deprived parts of society (see paragraphs 12.60 - 12.61). Indeed, the budget does not necessarily favour the social dimension of public measures, and this is a fact over which the Commission does not in practice always have the necessary control. In this respect, it looks as if budget support can only be a really effective instrument provided that it is linked to closer involvement of all donors, and thus also of the Commission, in the preparation and implementation of programmes in the sectors targeted and subsequently in the ex post assessment (review of public expenditure) of the budgets of the countries receiving aid. It should be emphasized at this point that such an approach, which is the logical consequence of the amendments made to the fourth Lomé Convention in November 1995, might well clash to a certain extent with the very sovereignty of the ACP States ().

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REPLIES OF THE COMMISSION

IMPLEMENTATION OF THE EDFs UP TO 31 DECEMBER 1995

12.7. For several years now there has been a genuine political will on the part of the Community to tackle the problem of outstanding EDF balances.

Besides the transfer of ECU 292 million to the eighth EDF, the following measures also deserve mention:

- ECU 150 million has been allocated from the outstanding balances of the fifth and sixth EDFs to increase the funding available under Article 254 of the Convention. This measure was adopted in July 1994 to cope with the consequences of the crisis in Rwanda.

- The Commission's decision on 12 June 1996 to propose that the ACP-EC Council reconstitute Somalia's Lomé II and III NIPs will ensure that the entire outstanding balance from the first six EDFs is absorbed, a total of ECU 36.8 million. Indeed, since that sum will not cover the full cost of the reconstitution, EDF interest may have to be drawn on to make up the difference.

It goes without saying that reallocating the balance of an NIP is legally and politically out of the question, save in the exceptional cases of Sudan and Somalia.

Their use to fund new projects, primarily within the present legal framework, will undoubtedly help resolve this problem.

ASSISTANCE FROM THE SEVENTH EDF IN SUPPORT OF STRUCTURAL ADJUSTMENT

Audit field and procedure

Framework and objective of the Court's inquiries

12.13 12.14. The Commission believes that it has been applying the Lomé Convention

properly:

(a) Financing is not backdated for reasons of rapid disbursement, but because the availability of foreign currency is usually concentrated in time, whereas the timing of imports is geared to the needs of the economy rather than to disbursements.

(b) Funds are very rarely paid in a single tranche.

(c) The rules have been applied in accordance with the legislation in force, which provides for a case-by-case approach. This approach is specified in the financing proposals presented to the EDF Committee. Retroactive financing is a practice used by all the donors.

The Court's report mainly focuses on the impact of the Commission's funding for the social sectors. It accords limited attention, however, to the impact of balance-of-payments support. This approach could cause readers to underestimate the role actually played by the Commission in structural adjustment, especially with regard to the liberalization of foreign exchange markets, support for making currencies convertible etc.

EDF policy on support for structural adjustment

General guidelines

12.20. In addition to the definition of the main axes for the implementation of Community structural adjustment support to ACP countries when the Lomé IV Convention became effective, a series of relevant documents have been presented detailing the modalities of structural adjustment support, policies on counterpart funds and public-spending reviews. Among the relevant documents we can cite:

(1) Commission's document on use of CPF (1991) and Commission's Directive on modalities on constitution and financial follow-up of CPF (1991);

(2) Council resolution on constitution and use of CPF (1991) and SPA Guidelines on CPF (1991);

(3) Council resolution on structural adjustment (1992);

(4) Council resolution on structural adjustment (1995);

(5) SPA guidance on public expenditure review process (1995).

These documents present clearly the operational framework concerning the constitution, remuneration and use of CPF, earmarking, priorities for the social sectors, modalities of control and follow-up, etc.

It is obvious that no precise directives were produced on other subjects since this would have worked against the principle of avoiding standardization.

While giving a precise framework for policy in the field of structural adjustment, these documents have certainly left room for manoeuvre in order to comply with the Lomé Convention request for adapting our modalities of intervention to the specific situation of each country in order to avoid standardization of programmes. In particular, modalities of earmarking of CPF have to take into account sectoral policies and quality of budgetary processes as well as overall macroeconomic objectives.

12.22. The regional dimension of adjustment is taken into account not only in the implementation of measures and specific funding but above all in the design of programmes (the nature and content of tax and customs reforms, of liberalization and cross-border harmonization measures etc.).

In order to judge whether a programme, and any action by the Community relating to that programme, takes account of the regional dimension, the regional content of PFPs - and the regional consistency of a given country's PFP with those of its neighbours - would have to be assessed. Nor should discussion of regional activities be confined to financial matters, which account for only a very small part of the Commission's involvement. In the case of UEMOA, for example, the Commission has studied the impact on production systems, the introduction of a multilateral surveillance system, the launch of a public relations campaign and a project to improve and harmonize consumer price indexes in the UEMOA countries, and financed a seminar on national accounts in the said countries.

In order to undertake any objective impact assessment of the cross border initiative, it is essential to distinguish from the outset between the implementation of CBI-type measures (which in some countries have been implemented outside of the framework of CBI) and that of CBI support projects and programmes. Moreover, although some effects may be apparent in the short term, history demonstrates that liberalization programmes of this kind can only realistically be assessed in the long term and taking into account the dynamic effects on competitiveness, etc.

With regard to the implementation of CBI measures, it should be noted that CBI is based on the principles of self-selection and variable geometry. It was never the intention that all the participating countries should implement all measures at the same speed. Countries are therefore in varying stages of implementation. Nevertheless, nearly all the countries have made substantial progress in the removal of non-tariff barriers (particularly the alleviation of exchange restrictions and the abolition of export/import licensing) and in deregulation of investments.

If one considers the implementation of specific programmes supported by the Commission under CBI, it is important to note that the initiative recognizes the differences in the participating countries. Each country was thus requested to formulate a programme to be implemented in collaboration with the co-sponsors. There is thus no CBI 'programme`, as implied in the text, but a number of country-specific programmes. The formulation of these programmes has, quite naturally, advanced at varying speeds. Some countries like Zambia and Malawi have had agreed country programmes for some time now. Others like Namibia and Swaziland are on the verge of completing formulation of their programmes. Many of the remaining countries have draft programmes which are under consideration.

In light of the foregoing, it would be more accurate to state that two countries have already benefitted from the Commission's CBI-related balance of payments support: Zambia and Malawi. The Commission is in the process of discussing suitable projects in the case of Mauritius, Namibia and Swaziland which currently have no structural adjustment programmes. For the rest of the countries, the country-specific programme outlines are being finalized and should all be ready for implementation by end September 1996.

12.23. There seems to be now a general consensus that structural adjustment financing is not an adequate instrument to help implement environment protection measures. A study launched by the Commission for some ACP countries confirms this point of view. Despite this, other instruments that also generate counterpart funds and are implemented in coherence with structural adjustment financing, such as Stabex, have been used in order to promote measures to protect the environment (for example in Côte d'Ivoire).

12.25. Job creation was mentioned as a government policy objective in the 1992 PFP, which was contemporaneous with the first EC structural adjustment support programme (paras 40-44 of the PFP). However, the essential point of the first SASP was not directly to promote employment creation or food security but to make foreign exchange available to private-sector SMEs and, with counterpart funds, to protect budgetary financing of education and health and of the local costs of EDF-financed projects.

12.26. In Côte d'Ivoire, decentralization first became eligible for counterpart funds under GIP II, in October 1993. That decentralization was one of the Government's chief priorities is borne out by a variety of studies and legislative acts. Since 1993, the Commission has been working closely with the Government to help it design this policy, which figures in the economic PFP drawn up with the main donors in 1994 for the period 1995-97.

Moreover, all the areas of expenditure targeted by Community support are written into the national budget and thereby become spending priorities for the structural adjustment programme.

This shows that the Commission's action has a specific impact on the content of structural adjustment pro- grammes.

12.27. Though the liberalization of the oil market in Mozambique was not specified in the PFP, it was nevertheless vital for the Commission (since it was financing oil imports) and perfectly consistent with the general guidelines in the PFP.

Division of funds between recipient countries

1991-92 SAF

12.29. Countries which, in 1990, seemed most likely to need support for their adjustment programmes received notification. That notification did not commit the Community financially. For countries not automatically eligible in 1990, i.e. those which did not have a reform programme recognized or at least supported by the main multilateral donors, memos on their eligibility were subsequently presented, in accordance with Article 25(1) of the Internal Agreement, to the EDF Committee for its opinion before any financing proposal was put to the Member States.

12.30. Four countries considered potentially eligible in 1990 - Kenya, Madagascar, Rwanda and Nigeria - did not continue their reform programmes. The funds earmarked for them were released in 1995.

Financing decisions for Uganda, Burundi and Jamaica were adopted in 1992: the delays in disbursement result from their failure to comply with general, specific or administrative conditions attached to these programmes.

The situation with regard to Togo is different yet again. The country was granted financing in 1991, but implementation was blocked when political events caused cooperation to be suspended. Since the situation has still to return to normal, the 1991 decision was annulled and the funds released.

1993-94 SAF

12.32. Financing decisions relating to structural adjustment programmes financed under the NIPs may be increased by the national authorizing officer where that increase represents 20% or less of the initial commitment (see Article 292 of the Lomé Convention and Article 62 of the seventh EDF Financial Regulation).

There being no such procedure for structural adjustment programmes financed with structural adjustment aid, the Commission applies the above procedure by analogy.

That is why the new Internal Agreement for the revised Lomé IV expressly permits this option in the case of structural adjustment.

Article 292(1) of the Lomé Convention is not, however, suitable for structural adjustment - a purpose for which it was not designed - since, in the event of a need for additional funding being identified (as is the case here, annual allocations being based on the need for financing), scaling down the project or calling on national resources would only exacerbate funding problems.

Article 25(2) of the Internal Agreement is inapplicable to structural adjustment because all financing proposals concerning structural adjustment support go before the EDF Committee (including those for less than ECU 2 million).

12.33. Following upgrades to the EDF accounts system introduced in 1995, it is possible to identify separately the amounts of the various financial instruments comprising the structural adjustment programmes. Whilst the amounts in the financial statements have been presented at a more aggregate level, a further expanded breakdown of the information based on the statistical coding in the EDF accounting system (OLAS) can be produced on request. The full detailed information will be presented in future financial statements.

Conditionality

TEXT CONTINUED UNDER DOC.NUM: 396Y1112(01).10

12.35. At the appraisal stage, the Commission proposed a two-tranche programme for Côte d'Ivoire. However, after the EDF Committee had discussed the matter and the Member States had given their opinion, the financing proposal was amended: the second tranche was done away with and the overall amount of the programme reduced by that sum. It was, however, agreed that the specific conditions negotiated with the Government for the programme would be kept as a basis for assessing the next programme.

These specific conditions lose none of the meaning conferred by paragraph 3 of the Financing Agreement:

'This programme is scheduled to enter into force at the beginning of October. Resources will be released in a single tranche upon the signing of the Financing Agreement. An evaluation will be carried out in the second quarter of 1994. It will cover the implementation of the adjustment programme as a whole and the specific conditions laid down for this programme in Annex 2.5. The results of this evaluation will determine eligibility for the resources earmarked for structural adjustment in 1994 and the amount of structural adjustment support for 1994.`

In view of the upheaval caused by the devaluation of the CFA franc, a decision was taken with the other donors at the start of 1994 to provide a third GIP in support of Côte d'Ivoire's adjustment programme. In the light of the need for funds to be mobilized rapidly in support of the devaluation and the time normally needed to fulfil the highly detailed and exacting conditions attached to the second GIP, it was decided, after consultation of the EDF Committee, that fulfilment of these conditions would be evaluated at the same time as the second tranche of the third GIP. The report on that evaluation, which took place in November 1994, was completed in January 1995 and is at the Court's disposal.

The Court's contention that successive tranches of structural adjustment support for Ghana were disbursed before relevant conditions were fulfilled is based on too literal an interpretation of conditions.

12.36. Assessing performance and compliance with conditions is the cornerstone of the Commission's management of structural adjustment support. Disbursement decisions are always preceded by a thorough analysis of the implementation of preconditions, taking account of the general background to the programme and any external factors, and closely coordinated with the other donors, in particular the World Bank and IMF. Such analysis has often caused disbursement to be blocked or deferred until all conditions have been fulfilled. Recent cases involving the countries studied by the Court include the 1994-95 programme for Benin, the 1995-96 programme for Côte d'Ivoire and Zimbabwe, where the second tranche of the second programme has been blocked for over a year.

The conditionality of adjustment programmes is a topical issue in the SPA, where the donors, at the Commission's prompting, are engaged in a wide-ranging debate on its reform.

12.37. The Commission shares the view of the Court and as a matter of fact has always supported the search for a more realistic and objective conditionality, based as well on the reduction of the number of conditions. This has been the line of action undertaken in the context of discussions on conditionality in the SPA. The Commission is working on a new formulation on conditionality that would concentrate on essential reforms as well as on results rather than on formal or administrative aspects.

Coordination

12.47. In 1994, the World Bank did not have a structural adjustment programme for Ghana as such. It had a series of sectoral programmes, each with its specific conditionality. There was no expectation or requirement that shortcomings by Ghana in fulfilling some of these conditions should trigger a suspension of the EC's structural adjustment support.

Implementation of the structural adjustment support programme

Utility of import programmes

12.49. The Commission has applied retroactive financing on a case-by-case basis as foreseen in the Convention.

The management of the money supply and the control of inflation is always a central point of economic policy in countries under adjustment.

12.50. In the matter of support for adjustment in countries with convertible currencies, the Commission cannot ignore the provisions of the Convention, even if they make little economic sense. That is why the Commission proposed, successfully, that the revised Lomé Convention provide for structural adjustment support to countries with convertible currencies to take the form of direct budget aid.

Use of the counterpart funds

Targeting principle

12.53. The Convention provides for the targeting of counterpart funds. In the light of experience, the Commission reported to the Member States on the arrangements for such targeting, which inevitably depends on the quality and reliability of a country's budgetary procedures. The Council followed the Commission's recommendation, laying down guidelines in its 1995 resolution.

12.54. The new approach will increasingly hinge on public-spending reviews. Each year the Commission has organized training seminars for all departments on counterpart funds, targeting, budgetary processes and public-spending reviews. There is also an increasing shift away from a 'micro` approach to counterpart funds and towards the budgetary approach being developed in the SPA context to ensure the requisite consistency between donors' practices.

12.55. It is important to adjust to each country's situation and become familiar with its budgetary processes and procedures and the quality of its public finances before deciding on the targeting and use of counterpart funds. The inadequate attention given to public finances in the past (see the results of the study on public-spending reviews carried out in the SPA context), even by the international financial institutions, meant that the Commission began its activities in a situation that was far from transparent. The current consensus about the need to pay greater attention to public finances is the result of the Commission's efforts.

12.57. If we consider the evolution of the situation in Zimbabwe in the months following the Court of Auditors mission, the CPF disbursement rate improved substantially in February 1996. The Commission disbursed the second 50 % of the CPF constituted under SASP II after the GoZ had complied with the conditions of our agreement. This brought the total CPF disbursement rate to 100 % excluding interest and to around 75 % including interest.

At present, the disbursement rate is around 85 % out of the total amount of CPF constituted which is around ZWD 494 million (including interest).

The above positive results have been achieved through a proactive action of the Commission (delegation and headquarters) in identifying and solving the problem areas of CPF disbursement and justification.

The disbursement rate of CPF in Ghana, almost 70% at the time of the Court's mission, is entirely normal.

The argument that earmarking specific actions considerably slows down the disbursement does not always hold true. It is not clear that there is a general rule linking detailed earmarking of CPF with low mobilization of funds and non-achievement of budgetary targets.

12.58 and 12.59. The realization that the public-spending review could become a tool for steering and controlling expenditure led the Commission to launch a major debate in the SPA, initially concerning counterpart funds and then on public-spending reviews as a means of improving the quality of budgets. The major study carried out by the Commission on this issue shows the limitations of the public-spending review as it was conducted in the past and the need both for a clearer understanding of the objectives sought and for a fundamental change in approach, with the emphasis on assimilation of ideas and practices by national administrators and the development of national capacities (programming, execution, control and monitoring etc.).

The Commission would like to underline the effort its departments have made to analyse the situation, present practical proposals and, above all, to convince its ACP partners and fellow donors. Backed by the donors, several ACP (and SPA) countries are already applying the new approach to reviewing public spending. Progress will, however, be gradual and significant only in the medium term, given the change in attitudes required on the part of the ACP countries and the donors. There is a fundamental contradiction between, on the one hand, the aid institutions' legitimate desire to supervise closely the way funds are used, notably by means of external audits, and, on the other, their desire to develop national capacities (and in particular supervisory capacities) to pave the way for the rule of law and transparent and accountable government.

12.61. Though the revised fourth Lomé Convention introduces the possibility of direct budget aid (i.e. without having to prove that imports have been made), the problem of whether targeting should be more or less specific remains the same. Methods depend very much on the quality of public finances in the country concerned. We do, however, share the Court's view on the attention to be given to the budget.

Through its participation in public-spending reviews with the other donors and its own sectoral reviews (in the social sphere), the Commission is already very much involved in assessing the quality of public finances in terms both of the nature and efficiency of spending and of the budgetary process and procedures. This approach is currently employed on a country-by-country basis under the SPA donor group's new guidelines for the improvement of public finance, institution-building being the very foundation of the Commission's action.

Priority social sectors

12.62. The Court confines its analysis to the basic education and health sectors. The Commission feels that any overview requires other factors to be taken into account. The Council requires that action be consistent with the priorities laid down by the countries concerned, with priority being accorded to the social dimension of adjustment, and in particular ensuring adequate provision in the education and health sectors. A narrow interpretation could, moreover, obstruct much-needed developments, inasmuch as - beyond health and education - alleviating poverty (jobs, income, covering basic needs for water etc.) is becoming a priority for development aid, of which structural adjustment is only one aspect.

12.63 12.64. Even if the Commission has accorded priority to health and education, confining examination of the impact of Community measures to education and health produces a narrow picture of the fruits of the Commission's support for the social sectors. It has financed a whole series of socially-relevant schemes transcending the narrow confines of these two sectors. These include the direct funding of labour-intensive works, redundancy payments for government employees and other schemes with social spin-offs (for example, settling deficits in the agricultural sectors safeguarded high cash incomes for producers).

The budgetary needs of the ACP countries are not confined to the social sectors: given the priorities of adjustment and the Community guidelines, it is perfectly reasonable to use a proportion of counterpart funds in other priority sectors.

Table 12.4 shows that the counterpart funds allocated to the health and education sectors make up 69.8% of forecast spending and 63.6% of actual spending in the eleven countries concerned. These percentages clearly confirm the priority accorded by the Commission to the health and education sectors.

Given that health and education are not the only social sectors, a broader examination could have shown the role of the counterpart funds in the social sphere as a whole.

In the case of Benin:

- The data presented concerns only the first programme (1991-92); the next two had very different focal areas and management procedures. All three figure in the Commission's calculations.

- The following programmes focused counterpart funds on socially invaluable health and labour-intensive urban works programmes: health accounted for 51% and labour-intensive urban works for 23% in the 1992-93 programme, compared with 55.4% and 25% respectively in the 1994-95 programme.

- The only social sector of the 1991-92 programme considered in the report was support for the health sector. Yet this programme was centred on a voluntary-redundancy programme for the Government payroll (47% of the counterpart funds), which helped cushion the social impact of administrative restructuring by providing payments for those leaving. Accordingly, 62% of counterpart funds can be said to have been used to cushion the social impact of adjustment measures.

In Burkina Faso, 62% of the counterpart funds (in ECU) were allocated to the priority social sectors identified by the Court. Though a critical mass is probably necessary to have any real impact on the sectors concerned, care must be taken not to saturate the budget headings concerned. The overall impact of structural adjustment support on the implementation of programmes may depend on it (achieving greater efficiency, where this is possible and desirable, through more flexible targeting).

Nor is it enough to take account of the percentage of counterpart funds allocated to the social sectors: account must always be taken of the percentage of social budgets covered by Community aid. They can be so small that counterpart funds cover them entirely (maximum critical mass), even though they attract only a small percentage of total counterpart funds.

The Commission believes impact on social sectors is a matter not only of the targeting and use of resources, but of the measures (conditions) flanking restructuring and the actual effictiveness of spending, the impetus imparted to sectoral policy. The Commission has allocated 70% of counterpart funds to the social sectors, a rate higher than that proposed by the Court.

12.64. In Burkina Faso, the funds allocated to clear the deficits built up by the state and semi-public agricultural marketing organizations account for 18% of the counterpart funds, ECU 14.3 million out of a total of ECU 78 million. The priority given to the key social sectors is therefore manifest. The accumulated deficits were, moreover, a consequence of the decision to maintain producer prices at more reasonable levels than would have resulted from the direct application of world market prices. As these earnings were the sole cash income for almost two million of Burkinabé, the Commission would argue that this was social spending.

In the case of Cameroon, the restructuring of the public and semi-public sectors was in part a matter of clearing inherited deficits and a necessary phase of the post-devaluation process not concurrent with the support for the social sectors, which do not always have to account for a majority of counterpart funds.

In the case of Benin, Table 12.5 fails to distinguish between the support given to the country's social security office (OBSS) and that given to its national savings bank (CNE) in the form of help towards clearing the government's arrears to nationalized firms (the water and electricity company and the post office). The grants to the OBSS and CNE were motivated by social considerations, the first being intended to bolster the financial viability of the body managing public-sector pensions and the second to restore deposits lost by small savers when Benin's banking system collapsed in 1991. The contribution towards clearing internal arrears was part of an operation conducted across the entire Franc Zone after January 1994's devaluation with a view to relaunching the economy and limiting the social impact and inflationary pressure.

In view, moreover, of the fact that the support programmes were carried out after the devaluation of the CFA franc, the use of counterpart funds to reduce the internal debt is perfectly consistent with the guidelines laid down - which were put to the Member States in January 1994 - for measures to flank post-devaluation adjustment programmes (see page 6 of the memo to the Member States, which provides for counterpart funds to be used to help reduce the recipients' domestic debt in support of measures to counter inflation).

12.65 (1) The arrears in question were owed by Burkina Faso's Government to the firm concerned for additional works, which, though properly executed, had given rise to a dispute and court ruling because they were not covered by the requisite riders. Covered under the agreements concluded with the donors governing the structural adjustment programme, of which clearing arrears is a component, the sum in question represented only 1.5% of all the government's recorded arrears for 1991. The payment was wholly in line with the programme (validity, control, clearance priority).

(2) The use of SAP counterpart in Ghana to reduce the Government's domestic debt has never been a priority but falls perfectly into the framework of the instructions circulated by the Commission.

12.67. Independently of the indicator chosen, a detailed analysis of budgetary expenditures on education and health in ACP countries under adjustment shows that despite the stabilization efforts a priority has been given in general to protect the social sectors. EC structural adjustment financing has played a crucial role in helping maintain these expenditures.

The data used by the Court are not exact. In Table 12.6(a), Budgetary allocations for Zambia in 1994 as % of GDP should be 2.6 in education and 1.9 in health. Averages should then be 3.8 in education and 1.9 in health), both increasing clearly from 1991.

In Table 12.6(b), budgetary allocations as % of total budget in Zambia are 15.3 in education and 12.9 in health. Averages should then be 17 and 8. Figures clearly show that globally there has been a positive evolution of Government expenditures in the education and health sectors in the five countries under study between 1991 and 1994. This positive evolution is particularly clear in terms of budgetary allocations as percentage of total budget. The average has gone up from 15 to 17 % in education and from 6 to 8 % in health. If the indicator chosen is budgetary allocations over GDP there seems to be as well a slight increase in both education and health, showing the effort by countries to preserve the social sectors despite the stabilization efforts.

There are some exceptions to this trend that can be explained. In Zimbabwe, the percentage of total budget expenditures on education has varied little over the referenced period (+/- 20 %). In 1994/95, it was less than 1 % down on the figure for 1991 and in 1993/94 it was slightly higher. For health, it significantly increased when the EC programme came onstream in 1993/94 (9.82%), although it dropped a little last year because of the drought. These figures exclude debt service. If percentage allocations for health and education over total actual expenditure are calculated including interest and loan repayments as presented by the Court, the percentage allocation to health comes to 6 % while percentage allocation to education comes to 14 %. When one considers that in nominal terms the overall budget has increased nearly threefold, and inflation only about 125 % in the period, it is obvious that social expenditure has been maintained rather satisfactorily.

The evolution of the percentage of capital expenditure financed out of structural adjustment CPF compared with total capital expenditure in those sectors, clearly show the relevance of Community's support to maintain expenditures in the targeted areas.

If the indicator chosen is the percentage of total expenditures on health and education over GDP the figures show that expenditures on those sectors have remained fairly constant and at very high levels for African standards in the period 1991-95.

For Zambia, both the Court and the Commission data show that the share of health expenditures in % of GDP has increased and the share of education expenditure has decreased somewhat. The decrease of education expenditure as % of GDP can be explained by the difficult fiscal situation in Zambia.

However, regarding the shares, both health and education shares in the budget have increased gradually, and the share of health expenditures substantially. The Government's objective is to further increase social sector expenditures, while achieving fiscal balance.

Monitoring trends in social spending in countries undergoing adjustment is a standing concern of the Commission. Indicators must be tailored to each programme's objectives and specific implementing procedures.

In the case of Burkina Faso, where the overall budget underwent a series of exceptional modifications during the period under review - modifications not reflecting the medium-term trend (debt-servicing, mass of restructuring costs, settling of arrears, varying impact of devaluation on different categories of expenditure) - the most suitable indicator is the percentage of current spending accounted for by health and education, a share which rose from 23% in 1992 to 26% in 1995.

In contrast, Community aid to Zimbabwe has mainly taken the form of capital spending (equipment and investment) in the health and education sectors owing to the threat of cuts in the course of the budgetary consolidation imposed by the stabilization programme.

The social sectors were protected in accordance with the objectives laid down in all five of the countries cited.

With regard to the use of counterpart funds, the bulk of structural adjustment support must continue to take the form of budget aid; the sectoral policy dialogue may ultimately lead to a degree of State withdrawal from the social sectors (e.g. via active measures to recover costs). Systematic recourse to aid projects could have undesired side-effects, since the ultimate goal should be for the services in question to function without outside help.

Trends in certain macroeconomic indicators

12.69 12.75. SAPs make it easier for recipient governments to avoid macroeconomic management slippage giving rise to excessive deficits and rising inflation. Consistency with IMF programmes reinforces the pressure on them to discipline their public finances.

12.71 12.72. Despite the fact that some of the countries have not pursued their adjustment policies (Cameroon, Zimbabwe, etc.) data on GDP growth are positive for most of the countries and there seems to be a general tendency towards the improvement of budget deficits.

The most recent studies and data presented to the SPA show that countries that have adopted adjustment policies have an average achieved greater efficiency in allocation of resources and growth in income and exports. Adjustment policies have also led to reductions in budget deficits and inflation levels while real exchange rates have been brought back to levels more compatible with the economic fundamentals (see Annex 3).

The median for GDP growth of SPA countries during the period 1994-96 will be 4.1% () over 1.6% during the period 1991-93. At the same time, the median for export growth for 1994-96 will be 6.7 % while only 2.2 % in 1991-93. On the other hand, a major increase in gross domestic investment (10.6 %) will take place in 1994-96 after a significant fall in the previous period.

12.73. The debt burden of the heavily indebted poor countries has continued to increase during the 1990s. For these countries, sound economic policies are not enough to eliminate the debt problem. Direct debt relief is also needed. This is why discussions on further debt relief have intensified during recent years; this work has led to the proposal by the IMF and the World Bank to consider further debt relief for the most heavily indebted poor countries whose debt levels are deemed to be unsustainable.

The examples cited by the Court again involve different periods and are partly attributable to exchange-rate fluctuations (nominal impact of the devaluations of the Ethiopian birr, CFA franc etc.).

12.74. It is essential not to abandon support for adjustment programmes during the lifetime of agreements with the international financial institutions; indeed to do so would be to breach Article 246 of the Lomé Convention.

The fact that debt remains a problem for many ACP countries does not mean that adjustment policies are exacerbating that problem.

Debt is a problem being tackled separately by the Paris Club and the London Club. New proposals on tackling multilateral debt are currently being studied by the IMF and World Bank.

The general remarks made in other paragraphs (1.83-85) call for a similar response: the Commission is perfectly aware of the difficulties inherent in adjustment, the ultimate objective of which is a resumption of growth in per capita GDP.

12.75. The insufficient supply response and economic growth in African countries under adjustment and the fact that African countries have generally been less successful than other developing countries have been a concern for the Commission for many years. This concern was fully expressed in the 1994 communication from the Commission ('Community support for structural adjustment in the ACP countries forwards the consolidation and strengthening of a realistic and concerted approach`) and later adopted in the 1995 Council resolution on structural adjustment. The Commission has always insisted on the need to adapt the modalities of structural adjustment programmes to the specificity of African countries.

On the other hand the economic situation in Africa is not so bleak and the most recent data as presented in paragraph 12.71 show noteworthy improvements (remarkable in some cases) are being obtained by countries committed to adjustment in the fields of GDP, export and investment growth.

Implementation of the reforms at sectoral level

12.77. It would be more accurate to say that the social action programme has evolved into the social sector rehabilitation and development programme. Although the implementation of the programme has been rather slow, an analysis of the underlying reason for this is necessary in order to understand the difficulties the Government of Zambia is facing in rehabilitating the social sectors and reforming the civil service. The main constraint is the weak institutional capacity due to a number of factors (poor management and planning, inadequate recurrent funds to maintain operations, inadequate salary structure, lack of trained staff etc.). Another constraint is the level and coordination of donor funding of the social sectors. Regarding the PSRP, the lack of resources to finance retrenchment is one important explanation for the delay in implementation.

12.78. It should be mentioned that the social dimension of the adjustment plan in Zimbabwe could not be fully implemented due to the enormous budgetary resources that the Government had to dedicate to drought relief operations.

12.79. All the Commission's disbursement decisions follow a thorough assessment of whether conditions have been fulfilled. The points made in reply to paragraphs 12.35-37 show, however, (i) that conditionality is a highly complex matter (currently the subject of a wide-ranging debate launched by the Commission in the SPA donor group) and (ii) that the fulfilment of conditions must not be viewed in isolation from the wider context of reform programmes and any external factors that might affect results.

Effects of assistance in the areas targeted

12.81. (a) Accurately identifying the groups most affected by structural adjustment policies is quite difficult enough: establishing a clear link between the state's budget-financed activities in the social sectors and such groups is harder still.

(b) In two cases, a proportion of counterpart funds was allocated for payroll costs: in Mali such targeting was necessary to get the social services back on their feet, which in particular entailed the recruitment of temporary staff. Such measures are often endorsed via economic policy framework papers: in many cases provision is expressly made for recruitment in the social sectors, even though the general objective is to reduce the ratio of the government payroll to GDP. Targeting wages in these sectors should, without becoming systematic practice, remain an option to be considered on a case-by-case basis.

Another such case is Burkina Faso, where the counterpart funds were used to cover the wages of permanent staff newly recruited to the Ministry of Basic Education pending the completion of the relevant paperwork and the charging of these costs to the government payroll.

Budget execution in the ACP countries

12.82. The following replies to the examples cited show that it is impossible to be so categorical about delays in the mobilization of credits for the social sectors or to make generalizations about all countries, even if it is true that administrative procedures in some countries are cumbersome and sometimes delay the implementation of Commission programmes.

In the case of Burkina Faso:

(a) The resources in question were not used because the new teachers were actually recruited several months later, with the result that the associated expenditure was charged to the following year's budget.

(c) Cumbersome budgetary procedures mean that the use of resources generally only approaches the 100% mark after an additional commitment period, on top of the usual delays between commitment, processing and payment. The audit, in January/February 1996, of the 1995 tranche of the 1995-96 SASP, showed that 85% of the counterpart funds generated by that tranche had been disbursed - a perfectly satisfactory rate for funds subject to detailed targeting and direct disbursement procedures (with no advances).

(d) The monthly releases may differ from one month to another because of the constraints of the cash-budget. Expenditures had to be matched by domestic revenues. Furthermore, the delay in releases might be explained by the necessity to comply with the IMF benchmarks. The Government was concerned to comply with the benchmarks in order to have the right accumulation programme concluded by the end of 1995. Unfortunately, this led to some delays

(e) Concerning the criticism of the report on protocols on CPF in Zimbabwe being too restrictive and preventing budget support of the EU in the social sector from being optimal, the following comments apply. The Commission had already undertaken measures to correct the problems signalled by the Court at the time of its mission. The protocol drafted on March 1994 significantly loosened the earmarking and procedures associated to the SASP. In fact, it implied an important departure from the previous protocol signed on 14 January 1993, together with Rider No 1 and Rider No 2 (signed on May 1993), which comprised a precise list of 11 specific programmes in the health and education sectors. The mentioned protocol moved away from individualized programmes emphasizing general budgetary support in the social sectors.

Indeed, in order to speed up the CPF disbursement, the protocol moved away from a reimbursement system where funds were made available once invoices and bills were provided to a cash-in-advance system with ex post justification. This was accomplished by allowing (at the beginning of the fiscal year) the release of funds to the GoZ in order to support identified budget lines.

(f) The vote of credit is an integral part of the budget and it is fully considered for the calculation of the total budget expenditure. Therefore any allocation to health and education in the vote of credit is an integral part of the budget allocated to the two ministries. The VOC is simply a system for accounting for donor funding and it comprises mainly capital and investment programmes which could not be implemented by GoZ because of lack of funds. In practice, this system is useful in maintaining that kind of expenditure at a reasonable level.

(g) The report criticizes the requirement that excluded expenditures in imports. (If the programme, on its first stage, provides support for the balance of payments, it would be also incoherent to allow the unrestricted imports with CPF.) However, later on, this restriction was waived as well for budgetized expenditures in order to speed up disbursements.

Geographical distribution of budgetary support

12.83. (a) Top priority when appointing newly-recruited staff went to rural areas where classes had been shut down for lack of teachers. Next in line were towns where class sizes had risen to 120-150 pupils. Now appointments are being made as new classes and/or schools are opened both to extend provision to areas where previously there was none and to reduce the size of existing classes.

(b) and (c) GoZ priorities, which the Commission supports through its SASP are to improve the conditions of the poorest segment of the population (mainly rural population). If the results are not yet visible in full, it is not because we do not support it but because of the magnitude of the task considering the situation inherited by GoZ at independence and the fact that the population is growing at a fast rate.

Inadequate priority accorded to education and basic health

12.84. The Commission believes that it has generally accorded sufficient priority to education and basic health. Recent evaluation reports suggest that 70% of counterpart funds have been allocated to the two sectors. The key subsectors have been primary health and drugs and basic education.

The examples cited call for the following remarks:

Burkina Faso (a) The allocation of counterpart funds reflects the structure of the budget, with tertiary provision remaining disproportionate to primary care, but also the fact that certain types of expenditure (drugs, equipment, maintenance etc.) are inevitably higher in the tertiary than in the primary sector. A special effort has been made in Burkina Faso to standardize and restore balance to equipment and operating costs in all health structures. Regional hospitals and health centres were running the greatest deficits, with other levels routinely benefiting from bilateral aid (in the case of central hospitals) or NGOs (regional and local health centres).

(b) The Commission can only agree that budgets must be increased further, albeit with the controls to ensure that money is well spent, and services improved.

(c) Mali

The social and political situation in Mali was such that budget spending in the social sectors first had to be safeguarded: that was the purpose of the first two allocations which were for primary education and health. At the same time, the Government has tried to increase the share of the overall budget allocated to cover operating costs in these sectors. The trends for education and health/welfare have been as follows:

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The execution of Mali's budget having improved greatly, the chief objective of structural adjustment support is now to help restructure budget spending in the social sectors, and especially health, which is set to account for 10% of the total from 1997 on (see the economic policy framework paper for 1996-98).

(d) Ghana

The year 1994 is unrepresentative of the trend of increasing funding - in real terms and as a percentage of GDP - for basic education. Over the period 1990-95, actual real expenditures on basic education increased by 8.4% per annum, reflecting the effective advocacy of the EC and other donors. Basic education - comprising the primary and junior secondary levels - consistently represents close to two thirds of government education expenditure.

Primary education is the responsibility of district councils. Real public outlays on primary education increased by 8% per annum in 1990-95. They account for over 40% of total public expenditure on education. The Government has latterly increased its support for districts councils' expenditure on primary schools, thus improving their access to educational materials.

The Government is now fully committed to a programme entitled free compulsory basic education for all for which donors are supporting and which will improve educational coverage at both primary and junior secondary levels.

(e) Compared with other countries, Ghana allocates a relatively high share of its health budget to primary care. Over 40% of the budget is allocated to district health services - 55% of the budget excluding headquarters overhead expenditure. The Ministry of Health's draft medium-term strategic framework for health development (August 1995) emphasizes primary and first referral level care. The EC and other donors have pressed hard for this outcome and have established a promising dialogue with the government on the bases of future sector support.

Other remarks

12.85. (a) The non-fulfilment of a contract let by the Ministry of Education with a local supplier of construction materials is primarily a matter for the Ghana Government. The government identified this particular problem, attributed it to the failure by one of its agents to follow established procurement procedures, and has taken remedial action. The defaulting supplier will reimburse the government the sums earlier paid to him. The Commission has followed the government's action on this case. It has appointed local consultants to monitor the government's uses of the counterpart funds generated by EC structural adjustment support. However, the Government of Ghana has control over the management of the public expenditures which it finances out of the counterpart funds of EC assistance. The Commission cannot accept responsibility for individual public procurement actions of a partner government.

(b) The Commission is pursuing this case with the Government as part of its monitoring of the uses made of counterpart funds. On the question of Commission responsibility, see the response to para 12.98 (a) given above.

(c) The Court observation is not an indication of declining expenditures in the social sector in Ghana during that period. The facts are that the trend in real basic social service expenditure is rising. Education is the largest component, and basic education trends are discussed above in the response to para 12.97(d). Education and health together receive a high (45%) share of total recurrent expenditure. In 1995, there was a large real increase in outlays on supplies for basic services thanks to a large rise in the funding by government of the district councils. Overall, though, there may have been some fall in actual 1995 expenditure when deflated by the unexpectedly high rate of inflation. The real supply of goods and services for basic social sector support probably increased, but the purchasing power of staff wages and salaries fell.

The purpose of EC in earmarking the counterpart funds of structural adjustment support to secure the financing of the basic social services is not to cause expenditures to exceed budget limits by pressing for the use of every Cedi of counterpart in these sectors. The respect of macroeconomic discipline is very important to the success of structural adjustment. The Commission is satisfied that its pressure, with that of other donors, has contributed to raising the real level of funding of the basic social sectors. It has always made allowance in its financing agreements with Ghana that counterpart funds unspent would serve to reduce the fiscal deficit and thus lower the Government's domestic borrowing requirement. Counterpart funds used in this way are not wasted. Deficit reduction plays a very important part in stabilising the economy and in laying the foundations of healthier public finances in the future.

(d) Burkina Faso

In Burkina Faso, few of the keynote projects in support of the private sector initially earmarked for the use of counterpart funds were implemented, and the relevant resources were reallocated to the basic education and health sectors.

The chief reason was the realization that direct State intervention was not the best way to stimulate private enterprise; a number of operations more likely to relaunch the private sector were, however, set up (SME project, labour-intensive works, administrative reforms, the investment code, labour code, privatizations etc.).

The Commission has therefore put the emphasis on reforms, abandoning the initial allocations of counterpart funds in this sector (these headings no longer figure in the Government's budget either).

12.86. Means of transport are indeed a problem, and one that shows that increasing budgets without taking account of all aspects of the situation can be futile or even counter-productive. This illustrates the importance to be attached to the effectiveness of spending rather than its level. Furthermore, steps have been taken to speed up the distribution of stocks and to draft contracts for the delivery of supplies and equipment free at destination. There are now almost no stocks in the central warehouses.

Supervision of the programmes

12.91. The Commission feels that the delegations, backed up by monitoring and audit missions and the technical assistance staff on the spot, are able to exercise proper supervision of structural adjustment support programmes.

Technical assistance

12.92. The relevance of technical assistance and its terms of reference are the responsibility of the recipient country and depend on what it asks for.

In Zimbabwe, the work of the technical assistance has evolved over time. The increase in CPF justification in the last few months has been substantially due to the considerable amount of advice and assistance given by the TA to both GoZ Ministries and the delegation for the implementation and flow of information on the social sector programmes.

Additional TA has been put in place with the introduction of the CPF Management Committee (at present, there are three TAs and monthly meeting of the CPF Management Committee).

Burkina Faso's procedures and normal budget practice did not produce sufficiently reliable statements, a problem remedied by the submission of such reports by the auditors and technical assistance staff. It is these reports that the Court used. It is this situation, one frequently encountered in countries undergoing adjustment, which inspired the Commission to take steps to improve budgetary procedures (see work of the SPA and projects in the countries concerned).

Ghana: Since the GoG was not able to submit an itemized statement, the Commission fielded consultants who have reported exhaustively on patterns of planned and actual expenditure in sectors targeted for CPF allocation.

Conclusions

12.94. Since 1991, the Commission has been trying to clarify, systematize and rationalize the procedures for implementing structural adjustment support. Its efforts have taken the form both of administrative circulars and general guidelines reflecting practical experience.

In so vast and sensitive an area, coordination is crucial. The Commission has devoted special attention to pushing for concerted harmonization with all the other donors.

Adapting these instruments to needs is a guideline written into the Lomé Convention and endorsed by the Council.

In the Commission's opinion, the differences in the constitution of counterpart funds are justified in all cases by the exchange-rate systems in force and the requirements of the Convention.

As for the targeting of counterpart funds, the differences observed are the consequence of a variety of factors, and in particular the content of sectoral policies and the quality of budgetary processes, which are difficult to assess.

12.95. As its replies show, the Commission has always complied with the rules governing the notification of recipients, the raising of ceilings in financing agreements, the use of national indicative programmes, the disbursement of tranches, the retrospective financing of imports or the use of counterpart funds.

While complying strictly with the rules, however, the Commission has taken account of each country's specific circumstances and the objectives sought when using structural adjustment aid.

As the Court emphasizes, some of the rules may no longer be suited to the current needs of adjustment programmes and should be improved. In such cases, the Commission has tried to change the rules, as it did when it abolished import programmes for countries with convertible currencies under the revised Lomé Convention.

12.96. The Commission has never intentionally added conditions of its own. Normally, it just clarifies or expands on much more general conditions already set out in the programme.

This can naturally make management more complicated in some cases, but it also reduces the element of subjectivity.

In the exceptional cases where it does add a condition, it does so in the light of the relative priority accorded to the programme's objectives and the means by which they are to be achieved.

This is always done in close consultation with the government and the IMF/World Bank, which take the condition into account when they come to update the programme.

This approach is consistent with the Council guidelines and has never caused problems with the Commission's partners.

The Commission's chief desire is to see a permanent dialogue and - for its judgment to retain its worth - to avoid being systematically bound by inflexible assessments. A proposed new approach is currently being discussed.

12.97. The revised fourth Lomé Convention does take account of the 'fictitious` justification for foreign exchange in countries with convertible currencies, providing for them to receive direct budget aid.

12.99. The fundamental purpose of structural adjustment aid is to restore conditions conducive to growth, and more specifically sustainable growth.

As elsewhere, the Commission accords particular priority to social objectives and equity when supporting structural adjustment.

However, when it comes to helping the most vulnerable social groups, structural adjustment, though effectively influencing the economy and the restructuring of the State, will never replace operations specifically targeted on the groups in question.

The Commission does not accept that measures to restore financial equilibrium to the public sector have led to a decline in assistance to the poorest. The countries concerned have received guidelines on attaining the priority objectives set - in conjunction with the donors and in accordance with the programme - for structural adjustment support after the devaluation.

These priority objectives concerned the restoration of the state's finances, increasing its credibility and restoring its suppliers' confidence, but in no way impinged on the priority accorded to the social sectors.

12.100. The Commission denies that detailed earmarking of CPF reduces the efficiency of budget support when needed as was the case in the first support programme to Zimbabwe. As a matter of fact, this possibility of detailed earmarking of CPF is best when no sufficient information about the budget is available.

12.101. The Commission disagrees with the Court's conclusions: its own assessment is presented in its replies to paragraphs 12.83 and 12.84.

12.103. In line with the guidelines provided by the Lomé Convention, the Commission has always given priority to supporting the social sector and any other scheme with undeniable social benefits. That being said, structural adjustment does require a balance to be struck between short- and long-term schemes designed to relaunch the economy (paragraphs 12.63, 12.64 and 12.65).

12.104. The Commission is already helping the ACP countries improve the preparation and administration of their budgets and shares the Court's views on the vital nature of this activity. A key element of any adjustment programme, this task involves:

1.long-term technical assistance,

2.consultancy missions,

3.training.

These activities are closely coordinated with the other donors (notably the IMF and World Bank), who share the same objectives.

The monitoring of Commission programmes is a separate activity, which has always been rigorously carried out by staff in the delegations, backed up where necessary by specialized technical assistance.

12.105. The latest studies by the World Bank and IMF (notably in the SPA context) show that trends in the public deficit, balance of payments and economic growth of countries engaged in structural adjustment programmes have generally been encouraging over the last two or three years.

12.106. The Commission would emphasize that its experience has enabled it to develop its expertise in the matter of budget support for the social sectors and its capacity to influence gradually the process, procedures and structure of the budget in countries concerned.

The Commission would draw the Court's attention to the SAP's conclusions on public finances, 'ownership` priorities, increasing national authorities' sense of responsibility and developing assistance in the form of capacity building.

The Commission rejects claims that structural adjustment in its present form is failing - whether because of an alleged unsuitability, lack of resources or whatever - to serve effectively the objectives laid down in the Lomé Convention.

The Commission naturally shares the Court's view on the need to step up the budget dialogue with the ACP countries and support for the social sectors in order to enhance the impact of its support for structural adjustment pro- grammes.

List of abbreviations as they appear in the text

EC = European Commission

ACP countries = African, Caribbean, Pacific countries

EDF = European Development Fund

SPA = special programme of assistance for Africa

IMF = International Monetary Fund

WB = World Bank

CPF = counterpart funds

IMF = International Monetary Fund

SA = structural adjustment

EDF = European Development Fund

PFP = policy framework paper

UEMOA = Union Economique et Monétaire Ouest-Africaine (West African Economic and Monetary Union)

CBI = cross border initiative

SASP = structural adjustment support programme

NIP = national indicative programme

GIP = general import programme

IFI = international financial institutions

SIP = sectoral import programme

ZWD = Zimbabwe dollar

GoZ = Government of Zimbabwe

VOC = vote of credit

GoG = Government of Ghana

GDP = gross domestic product

CFA = Communauté Financière de l'Afrique

SME = small- and medium-sized enterprises

PSRP = public sector reform programme

NGO = non-governmental organization

TA = technical assistance

EU = European Union

ECU = European currency unit

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PART II Observations on the administrative appropriations of the institutions and bodies of the European Communities

CHAPTER 13 (*) Commission

13.0 TABLE OF CONTENTS Paragraph reference

Administrative expenditure (Title A-2 of the budget)

Follow-up of previous observations on inventory management 13.1 - 13.15

Changes in the rules 13.2

Inventory of assets 13.3

Preparation and reliability of balance-sheet figures 13.4 - 13.8

Values attributed to different types of assets 13.9 - 13.13

Changes in management systems 13.14 - 13.15

Expenditure on buildings 13.16 - 13.39

Awarding of contracts 13.16 - 13.18

Lack of accounting transparency 13.19 - 13.22

Management systems 13.23 - 13.24

Management procedures 13.25 - 13.28

Payment of taxes and charges 13.29 - 13.39

Management of the European Commission Delegations (Title A-6 of the budget)

Introduction 13.40

Budgetary appropriations and staff 13.41 - 13.42

Management of the Delhi Delegation 13.43 - 13.48

Management of the Kiev Delegation 13.49 - 13.52

Community satellite organizations

Introduction 13.53

The organizations' rules of procedure 13.54 - 13.55

Budgetary presentation of appropriations 13.56 - 13.57

Discharge of the duties of the Financial Controller 13.58 - 13.60

Accounting systems 13.61

Conclusion 13.62

Administrative expenditure (Title A-2 of the budget)

FOLLOW-UP OF PREVIOUS OBSERVATIONS ON INVENTORY MANAGEMENT

13.1. Following the Court's observations (), the Commission has carried out a thorough reform of its inventory management.

Changes in the rules

13.2. In December 1995, the Commission laid down new principles in respect of the responsibility for the safeguarding of assets and adopted the basis for a new framework of rules. The entry into force of the latter has, in fact, been deferred until such time as the institution has laid down implementing procedures, which will be at the end of 1996. It should be noted that the adoption of rules applying to the Commission only will not resolve the problems that are encountered during the consolidation of the financial statements of other institutions.

Inventory of assets

13.3. The Commission instructed outside contractors to carry out a full inventory of the assets, at a cost of 3,4 Mio ECU, as the main way of redressing this situation. However, following difficulties in defining which was the appropriate budget heading, the start of the inventory had to be postponed for three months after the date initially planned.

Preparation and reliability of balance-sheet figures

13.4. Since the task of preparing an inventory of the assets is to be completed by the end of the first half of 1996, it was obviously not possible to remedy the shortcomings found in the 1994 balance sheet by the end of the 1995 year.

13.5. As regards the figures presented in the balance sheet, the managers themselves were unable to vouch for the existence and locations of movable assets, as the Commission acknowledged in a note to its financial statements (). The Court used the Commission's own inventory valuation principles to carry out an analysis of the data held on the Commission's computerized asset management system, Sysbien. The analysis confirmed the final figures presented in the balance sheet at 31 December 1995, but the statements which the managers had drawn up and forwarded to the accounting officer did not give correct details of the inventory changes recorded in 1995. Finally, the criteria for the breakdown of movable assets between the Commission offices in Brussels and Luxembourg are inconsistent and although there is a differentiation, it does not indicate the actual location of the assets. For these reasons the Court is unable to give any opinion as to the intrinsic reliability of the amounts in question.

13.6. The various revenue and expenditure accounts prepared by the accounting officer must be submitted to the Financial Controller, in advance of their final adoption by the Commission. Although the Financial Controller has access to the Sysbien data, the provisions governing his role and responsibilities are unclear and it is thus not possible to guarantee that the preparation of the asset accounting entries is subject to effective internal control.

13.7. The numerous other controls applied by various Commission departments, including DG IX (Personnel and Administration) and the accounting service, remain superficial because none of these departments was concerned with the process by which the final figures are prepared.

13.8. In the case of assets located in the offices opened by the Commission in the Member States of the Union, the rules for the valuation of buildings and inventory were ignored by the managing department when the financial statements were prepared. Internal rules that are readily accessible to managers are necessary, in order to prevent errors of this type.

Values attributed to various types of assets

13.9. The correction of recording errors following the Court's checks on three items of computer equipment in 1995 resulted in a reduction of asset values by 13,7 Mio ECU, or 9,1% of the total value of such items.

13.10. At the end of 1995 the Court carried out a selective inventory check of the computer equipment, which forms a substantial proportion of the value of the Commission's movable assets (157,8 Mio ECU, excluding the research computer equipment). In this case the findings were positive: the existence of these items can be verified, although their value has still to be clarified and the existence of wrong amounts is still to be ruled out.

13.11. Following the Court's audit, some telephone switchboards and the associated computers were included in the inventory. However, by no means all such items have been added to the inventory. Moreover, none of the accounting particulars on the payment orders, namely 8,6 Mio ECU, include any details by which to check that acquisitions of inventory items have been recorded by Sysbien.

13.12. Valuing such high-value items is a complicated matter and an appropriate administrative structure and special valuation rules must be established quickly.

13.13. The situation is not satisfactory as regards the Commission's vehicle fleet in Brussels. The Commission owns some sixty vehicles, representing 1,6 Mio ECU, but it has not yet entered the details in Sysbien in a way which allows their value to be included on the balance sheet. The work of reconciling Sysbien with the information held by the managing department was still in progress in February 1996.

Changes in management systems

13.14. Certain undertakings that were given by the Commission in response to the 1994 Annual Report have not been honoured:

(a) the final version of the technical audit report on Sysbien, which was promised for July 1995, was not sent to the Court until July 1996;

(b) the increase in the staff of the inventory sector only involved the staff required for the stock-taking operation. Additional resources are required for the computer aspects of the central Sysbien system. The concordance tables, in particular, still require improvement and the existing inconsistent items on the base (especially dates) have yet to be removed.

13.15. The only significant improvement is in the link between Sysbien and the central computer equipment base, which prevents duplicate data entry.

EXPENDITURE ON BUILDINGS

Awarding of contracts

13.16. As the regulations stand at present, the Commission is not required to make a formal request to the budgetary authority to authorize expenditure for multiannual commitments involving property. For example, the Commission took out a long lease on the Charlemagne building and committed itself to paying an amount of at least 12,5 Mio ECU annually, at 1995 prices, for 27 years, beginning at the end of 1997.

13.17. The Commission has not been in a position to pursue a policy of acquiring its own premises, and in any case the amounts available under the financial perspective have been used up. As a result, sums are being paid out with no prospect of anything to show for them at the end of the day because, unlike other property contracts, this contract does not at present contain any option for the purchase of the Charlemagne premises. The only way that 'savings` could be achieved would be via the possibility of exemption from the Belgian property tax (précompte immobilier).

13.18. The Court must reiterate its suggestion that there should be a multiannual capital investment budget which, within the framework of the financial perspective, would make it possible to respect the rules and would also serve the interests of sound financial management ().

Lack of accounting transparency

13.19. For expenditure that is classified as 'current`, and rents in particular, there exists a possibility of making provisional commitments. The Commission commits substantial amounts, but the proposals for commitments are not supported by formal estimates of the expenditure to which previously contracted legal obligations have given rise (i.e. the leases for premises rented by the Commission), or do not, even, mention the names of the creditors as required by the Financial Regulation.

13.20. When a payment is to be made, it becomes virtually impossible for the authorizing officer to verify the existence of a prior commitment if a balance is available against that commitment. The individual commitments mentioned in the financial regulations are neither constituted nor listed. In such a situation, the validation of each payment requires much more attention, since it cannot be charged to an element of a commitment that has been constituted and approved beforehand. The accounts cannot be used as a management tool for estimating, evaluating or comparing the costs of the various buildings occupied.

13.21. The regulations do not cover cases where the existence, or even the amount, of a debt cannot be determined precisely; for example, the case of the property tax or charges that are refunded, or not, at the request of owners of premises.

13.22. It is thus not possible to use the accounts to inventory the obligations that the Commission has entered into or is subject to. There are no precise figures for the financial risk associated with the existence of various property charges.

Management systems

13.23. Although the facilities are available in the Sincom accounting system and DG IX's own GIBUS financial system, they are not used to make management transparent or to facilitate it. In 1995 the work of fitting out premises in Brussels amounted to 6,3 Mio ECU, of which 4 Mio ECU (63%) cannot be attributed to any specific premises, because there is no system for codifying premises. The necessary data should form the basis of an information system that is accessible to all concerned and readily updated. Within DG IX there are several lists of buildings, each of which has been created for managers' individual requirements (mailing addresses, rent management, buildings insurance, location of assets, accounting records). The differences revealed by cross-checking are such that no management department has been able to produce a complete list of all the property assets.

13.24. As the financial and accounting organization is not based on reliable criteria, the preparation of the financial statements is based to a considerable extent on information outside the accounts, the reliability of which is less easily assured (inventory, property charges).

Management procedures

13.25. The Commission has elected to share out responsibilities between one department, which is responsible for negotiating the contract, and another department which performs the duties of authorizing officer. It did not, however, provide a precise breakdown of powers and responsibilities and there is no joint access to the items making up the file. During the audit, for example, it was found that, because there had been no coordination, expenditure in 1994 had been unduly increased by 4,0 Mio ECU. Poor coordination between the two departments was the source of a payment which was authorized and subsequently corrected in 1995.

13.26. At the end of 1994, the Commission elected the early repayment option for loans which it had taken out with the ECSC for the acquisition of various premises. As of 1995 there were no deeds to regularize the transfer of ownership which was supposed to ensue. For that reason, the premises, which have a value of ± 10 Mio ECU, still appeared in the balance sheet at 31 December 1995 as fixed assets in course of purchase.

13.27. In 1995 a building was acquired for a total of 21,5 Mio ECU by means of a direct payment to a private vendor's account, before the deed of transfer had been regularized, whereas paying the funds via a notary's client account would have provided adequate guarantee that the payment was secure.

13.28. Rent arrears are sometimes demanded by agents acting on behalf of the owners of the properties. In the case of one property on which an annual rent of 2,8 Mio ECU was paid, the agent's powers had not been established by relevant supporting documents. Moreover, because of uncertainty as to the legal capacity of the holder of the bank account into which the rent was paid, the Commission was running a risk. Such risks ought to encourage it to verify creditors' entitlements systematically.

Payment of taxes and charges

13.29. Total expenditure on renting premises for the Commission's staff in Brussels amounted to 110,6 Mio ECU in 1995. A significant proportion of that amount (12,3 Mio ECU or 10,9%) was not for the payment of rent in the strict sense but was accounted for by local property tax.

13.30. The fact is that in the case of rented premises, the Commission has for years agreed to allow the inclusion in tenancy agreements of a special clause requiring it to refund to the proprietors of the premises all taxes and charges for which the latter are liable. In practice these payments mainly concern the reimbursement of one particular Belgian direct property tax, the précompte immobilier, which is deducted at source on the basis of a notice of assessment forwarded by the owners of the premises.

13.31. The amounts paid under this head soon mount up. They rose from 0,9 Mio ECU in 1978 to 3,7 Mio ECU in 1987, reaching 10,2 Mio ECU in 1994 and 12,3 Mio ECU in 1995.

13.32. The Commission is still ultimately liable for some 4,2 Mio ECU by way of reimbursement of property taxes for the years for which the owners have not yet submitted requests for reimbursement.

13.33. In addition to the 12,3 Mio ECU of property tax, there is a further 7,0 Mio ECU which cannot be found anywhere in the accounts. It relates to the various charges imposed since 1992 by the Bruxelles-Capitale regional authorities and some local authorities in the Brussels urban area.

13.34. The remarks against budget heading A-200 (rent) authorize the payment of rent only. The way in which this budget heading is currently being used to support a substantial annual charge thus lacks transparency and regularity.

Evacuation of the Berlaymont building

13.35. Following the evacuation of the Berlaymont building, on which the Commission had not paid any property tax in the past, the Commission and the Belgian government agreed that the Commission would continue to pay the same amount of rent on the substitute premises as it had paid for the Berlaymont. In full awareness of what it was doing, the Commission subsequently entered into a commitment which was contrary to the promises made by the Belgian government throughout the negotiations, and undertook to pay the property tax on the 10 substitute buildings leased directly by the Belgian government, although the Commission itself had taken no part in the discussions with the owners when the terms of the leases were negotiated.

13.36. This increase in the rental cost (3,0 Mio ECU) was not mentioned in the working document dated 21 October 1991 which the Commission addressed to the budgetary authority, setting out the details of the additional costs associated with the move from the Berlaymont buildings. It was in April 1994, in the context of the 1995 preliminary draft budget, after it had received the first notices of assessment, that the Commission specifically mentioned its liability for these charges, which represent 23% of the rent specified in the Berlaymont lease (13,1 Mio ECU).

Conclusion

13.37. In order to enforce the principle of exemption from payment of any national tax that does not correspond to a service rendered, the Court, with the support of the European Parliament, recommended as long ago as 1979 () that, as regards the property tax, the institutions should 'examine with the Belgian authorities whether an exemption from this tax and/or in future a refund of the payments can be brought into effect, and whether payments already made will be refunded`. In its 1987 Annual Report, the Court noted that the only change was in the size of the sums involved.

13.38. The Commission has not reported any new approaches to the Belgian government since 1993, following the decision which finally settled the seat of the Community institutions. The decision did not produce any change in the situation which might have led to the conclusion of a proper agreement with the Belgian authorities concerning the institutions' headquarters. It was only in response to the sudden increase in the taxes and charges levied by various Belgian authorities (8,7 Mio ECU is outstanding) that the Commission refused to comply, which led to the first court action.

13.39. Without seeking to ignore the contract provisions accepting the reimbursement of property tax, the Court:

(a) draws attention to the rules on tax exemption laid down in international and Community law;

(b) finds that, in consequence, the Union's budget should not be required to bear a tax and/or charge levied by a Member State: the only real beneficiary of the amount of 12,3 Mio ECU paid in 1995 is the Belgian government;

(c) finds that Article 3 of the Protocol on the Privileges and Immunities of the European Communities cannot be implemented in the absence of an agreement between the European Union and the Belgian government on the remission or refund of the property tax. The Commission did not put itself in a position to obtain an interpretation of the provisions of the Protocol from the Court of Justice, which might enable it to cease all payments under certain circumstances.

Management of the European Commission Delegations (Title A-6 of the budget)

INTRODUCTION

13.40. In 1995 the Court continued its audits of the administrative expenditure of the European Commission's Delegations, visiting the Commission's offices in Brussels, as well as its Delegations in the field (). In the context of these audits the findings concerning two of the delegations call for particular attention.

BUDGETARY APPROPRIATIONS AND STAFF

13.41. Appropriations totalling 193,4 Mio ECU were credited to Title A-6 of the Commission's budget (Staff and administrative expenditure of European Community Delegations) in 1995. The appropriations were used to cover the Delegations' staff expenditure (127,1 Mio ECU) and administrative expenses (66,3 Mio ECU).

13.42. At 31 December 1995, staff in the Commission's external departments occupied 555 of the total of 622 posts allocated to the Delegations. In addition to these officials, the Commission employs some 2 000 local staff, including 1 814 in administrative and operating areas. It must also be remembered that the Commission's managerial activities in non-member countries also involve the use of staff who are either recruited and managed by the European Agency for Cooperation (AEC) or are employed by the European Community Humanitarian Office (ECHO), as well as the developing countries experts, who are paid on a different basis. These employees and experts are, however, not on the staff of the Delegations and are not covered by the appropriations credited to Title A-6 of the budget.

MANAGEMENT OF THE DELHI DELEGATION

13.43. In the past the Court has pointed out the problems associated with the management of locally recruited staff (), for whom the Commission is obliged to adopt special rules for each country as regards recruitment, termination of service, remuneration, leave and social security arrangements.

13.44. The special conditions of employment for local staff serving in India were approved by the central Staff Committee in Brussels in 1993, signed by the Director-General on 24 February 1994 and entered into force on 1 March 1994.

13.45. However, these rules were not being applied in the Delegation at the time of the Court's on-the-spot visit at the end of 1995, as all the locally recruited Indian staff (30) had refused to sign a contract which would have imposed new conditions of service on them. The new conditions of service were being applied to other members of the local staff merely on the basis of a recruitment letter, without any contract of employment having been concluded in accordance with the existing rules.

13.46. As of end-1995, no insurance contributions had been deducted from the salaries of these staff; medical expenses were being reimbursed, however.

13.47. Some elements of remuneration, amounting to approximately 50% of basic salary, were being paid in the form of allowances.

13.48. In the case of the local staff serving in the Nepal office (which is a unit of the Delhi Delegation) and in Sri Lanka, where a Delegation was opened in October 1995, there were no rules specifying their conditions of employment. Also in Nepal, the remuneration of three employees was being charged to the 'appropriations for local staff` item in the budget, whereas the responsible Commission departments had authorized the recruitment of two people only.

MANAGEMENT OF THE KIEV DELEGATION

13.49. The Kiev delegation was opened in October 1993 and its management has been marked by serious shortcomings from the beginning. No reliable accounting system was set up. The expenditure included some items which had been recorded in the accounts without supporting documents and others that had been charged twice, and the expenditure could not be reconciled with the cash accounts. Private expenditure was paid for out of imprest accounts. The imprest documents were sent to Brussels for clearance for the first time in November 1994 (this is normally done on a monthly basis).

13.50. It became necessary in the meantime for the task of administering the imprest accounts in the Delegation to be entrusted to other staff of the delegation and to a member of staff recruited locally for that purpose, as well as to officials sent from Brussels to Kiev, on mission, on many occasions.

13.51. It was only during the second half of June 1995, during the Court's visit to the Delegation, that the Commission recalled the administrator of imprest accounts to Brussels, one year after the head of the Delegation had first reported the malfunctioning of the Delegation and five months after a new administrator of imprest accounts had been appointed.

13.52. Weaknesses concerning administrative aspects of personnel management also remained uncorrected at the time of the on-the-spot audit. For example, around 200 transactions to an amount of 188 582 USD were awaiting clearance in the extra-budgetary account. They mainly concerned 1994 expenditure, some of which was the responsibility of the previous administrator of imprest accounts.

Community satellite organizations

INTRODUCTION

13.53. The Community satellite organizations () are the subject of special Court audits each budget year. The resulting audit reports make it possible to grant discharge for the implementation of the budget. Some general points concerning the activities of the satellite organizations in question are discussed below.

THE ORGANIZATIONS' RULES OF PROCEDURE

13.54. As regards the rules of procedure of these various organizations, the Court gave its opinion in 1995 on the harmonization of the draft financial regulation of each body with the provisions of the Financial Regulation applicable to the general budget of the European Union.

13.55. Despite this effort in respect of the regulations the Court found that, at the practical level, the organizations' accounting and budgetary management did not always comply with the fundamental principles of administrative organization (segregation of duties, management of human resources, application of cost/benefit criteria). It is imperative that all the organizations introduce these essential elements without delay.

BUDGETARY PRESENTATION OF APPROPRIATIONS

13.56. A common problem with regard to these organizations has been brought to the attention of the Commission and the budgetary authority, namely the presentation in the budget of the appropriations earmarked for these organizations.

13.57. In this respect, it should be noted that the appropriations for the award of subsidies that were entered under Part B of the general budget are presented as differentiated appropriations (operating appropriations), whereas the Financial Regulations adopted by all the organizations in question provide that the appropriations are to be used as non-differentiated appropriations (administrative appropriations). The current budget presentation should be modified to reflect the real use of the appropriations.

DISCHARGE OF THE DUTIES OF THE FINANCIAL CONTROLLER

13.58. In various agencies, the task of verification of the commitment and payment of all expenditure and of the establishment and recovery of all revenue of the organizations is carried out by the Commission's Financial Controller.

13.59. The control function assigned to the Commission's Financial Controller sometimes proved to be inadequate, especially during the start-up phase.

13.60. In this situation, the use of imprest accounts was too systematic, which is not in accordance with the principles of the Financial Regulation. The Commission's Financial Controller should appoint his own deputy in the agencies on a long-term basis, in order to eliminate the inconveniences experienced.

ACCOUNTING SYSTEMS

13.61. In these agencies the need for the establishment of efficient accounting systems is paramount and improvements should be made accordingly. The chief characteristic of the present system is, in fact, the use of incomplete accounting systems, such as a system of general accounts which cannot be used for monitoring the budgetary side of expenditure, or which does not always meet strict criteria of accuracy and completeness.

CONCLUSION

13.62. Because of the increase in the number of Community satellite organizations and the growth they have experienced, the Commission must give increased attention to their activities, as regards the transparent presentation of the appropriations credited to the budget, the reinforcement of internal control procedures and the harmonization of management procedures.

REPLIES OF THE COMMISSION

FOLLOW-UP OF PREVIOUS OBSERVATIONS ON INVENTORY MANAGEMENT

Changes in the rules

13.2. As the Court points out, the measures taken by the Commission in December 1995 will not come into effect until the 1996 accounts are being prepared, as the results of the physical inventory will not be available until the last quarter of 1996.

With respect to the problems relating to the consolidation of information on tangible fixed assets of the institutions, the Commission would point out that the heads of administration in the various institutions were informed during the second quarter of 1995 of the draft internal Commission rules. Moreover, there was initial discussion of the draft rules at the meeting of the accounting officers of the institutions on 28 November 1995, which concluded that measures could not be fully harmonized until 1997.

However, with a view to harmonizing the presentation of the 1995 accounts, the Commission Accounting Officer sent a number of recommendations to the Accounting Officers of the other institutions, relating to:

(a) the valuation of stocks and fixed assets;

(b) the transfer of the inventory;

(c) leasing contracts;

(d) a separate presentation of computer equipment.

Preparation and reliability of balance-sheet figures

13.5. The problems with the asset management system (Sysbien) identified by the Court were analysed by the Sysbien technical audit. The introduction of a local management system (ELS) and the completion of the current physical inventory will solve the problems raised by the Court.

13.6. Measures will be taken under the Commission's initiative SEM 2000 to extend/clarify the internal control of payments regarding fixed assets in order to improve the reliability of the inventory records by the use of ex-posts audits.

A preliminary review of the 'comptabilité de gestion` and, in particular, closing entries for inventory accounts will be undertaken to ensure the reliability of the figures reported in the balance sheet. It is foreseen that Sincom2 will automatically connect the payments in question to the inventory with a distinct audit trail which will give an even higher degree of reliability to the amounts reported in the balance sheet for fixed assets.

13.7. The Commission recognizes that the gathering of information by the staff of the Commission's Accounting Officer, for the purpose of presenting a valuation of tangible fixed assets, is based on non-accounting procedures. In view of this, the checks which the accounting department can perform are necessarily confined to verification of overall consistency, particularly in relation to the preceding year.

It should be pointed out that none of the financial rules in this area - neither the Financial Regulation nor its Implementing Rules - impose any obligation on the Accounting Officer other than that of ensuring the objectiveness of the financial statements (Article 16 of the Implementing Rules).

In any case, the Accounting Officer has insisted that the information which is communicated to him be authenticated by the authorizing departments. In the framework of the Sincom2 project and the development of the inventory management application, the Accounting Officer will introduce accounting procedures to check information relating to fixed assets, to ensure the relevance of budgetary accounting data which is communicated to him. Such improvements are unlikely to produce results until 1998. The ways in which inventories are valued is also under review.

13.8. In the preparatory phase of the inventory of the Commission offices in the Member States, all items above a value of ECU 100 were included in the inventory, whereas under the rules for inventory valuation effective from 31 December 1993, a value of ECU 350 should have been applied. The corrected figures were included in the final inventory value.

The Commission's accounting departments have repeatedly drawn attention, both when the accounts were provisionally closed on 30 September 1995, and at year-end closure on 31 December 1995, () to the accounting rules to be followed with respect to inventories and the presentation of related data. These are now very familiar to the managing department.

Furthermore, procedures and processes in respect of the valuation of goods and buildings currently being revised under the inventory exercise will also apply to the Commission offices in the Member States as from 1 January 1997.

Values attributed to various types of assets

13.9. The new inventory rules provide for the decentralization of the task of valuing computer assets, which will reduce the risk of inconsistent valuations, as the managers will be familiar with the cases with which they are dealing. Furthermore, automatic valuation procedures are currently being introduced. These measures should reduce the risk of data entry errors.

13.11. The inventory exercise, which will be completed before the end of 1996, will allow for the identification of all items of equipment, including telephone switchboards and associated computer equipment, which may not have been included in the inventory at 31 December 1995. Furthermore, procedures have now been put in place as at 1 January 1996 which ensure that no payment can be made without the item having been included in the inventory. No payment may be approved by the Financial Control unless the invoice has been clearly marked 'Bien inventorié`. This will ensure that the situation mentioned by the Court cannot arise again.

13.12. The inventory operation currently being carried out as mentioned by the Court (paragraph 13.1), includes the development of an updated series of internal regulations dealing with the decentralized inventory management system. This includes the development of management procedures for stock valuations which will be finalized before the end of 1996.

Based on the results of the inventory which will confirm the number and value of inventory items, the Commission is willing to examine whether specific measures need to apply to high-value items.

13.13. A list of vehicles in the Commission fleet is maintained by the managing department, but has not, as yet, been incorporated into Sysbien. The fleet inventory is regularly updated to monitor accurately the situation of vehicles both leased and owned by the Commission.

Each year, detailed information on the Commission fleet as at 31 December is provided for inclusion in the Communities' balance sheet. Vehicles will be monitored in accordance with the new implementing procedures introduced for all movable property from 1 January 1997.

Changes in management systems

13.14. (a) The delay in the finalization of the report on the Technical Audit of Sysbien has to be seen in the context of the ongoing work being carried out on the inventory management system, of which Sysbien is of course an integral part, and the development of new inventory rules and regulations deriving from this exercise.

(b) Scarce resources within DG IX have prevented the release of personnel for the computer unit dealing with the inventory operation. Resources have now been made available to assist in the Sysbien operations, in the decentralization of the computerized system, and to allow for the introduction and testing of inventory management software during the same period (ELS system).

EXPENDITURE ON BUILDINGS

Awarding of contracts

13.16. In the area of buildings, the Commission endeavours to provide all the necessary information, including space requirements and buildings occupancy forecasts, via documents transmitted to the budgetary authority in the course of the budgetary procedure for the preparation of the budget for year n+1. For information: the budgetary authority is generally informed of buildings matters in the following cases: plans for purchase, construction or renovation.

13.17. Pursuing a buildings policy based on the purchase of property is dependent on the availability of resources within the financial perspective. Despite the limited scope offered within this framework, the Commission endeavours, on the one hand, to implement the most economical solution, in the medium and long term (long-term lease allowing the Commission not to pay the property tax) and, on the other hand, to make the purchase of better buildings possible through a clause in the contract containing an option to buy. Specifically, for the Charlemagne, an option to buy existed until 31 December 1995, and talks are in progress on new opportunities to purchase.

13.18. The Commission is interested by the Court's suggestion of a multiannual investment budget. Such a budget would, however, involve amendments to the existing rules.

Lack of accounting transparency

13.19. Each year, the appropriate departments of the Commission prepare an expenditure programme for the current year which will, in future, be attached to each proposal for a provisional commitment. Information on beneficiaries will be added to the programme.

13.20. To comply with the Court's suggestion, the reconciliation of payments booked to a provisional commitment will be monitored by a non-accounting procedure which will detail the amounts committed for each building.

Technically, Sincom does not allow a payment to exceed the balance available against a commitment. Nevertheless, in order to make monitoring more transparent, it is planned that in Sincom2, individual commitments relating to a provisional commitment will be entered in the central accounting system without such transactions being submitted for the approval of the Financial Controller.

13.21 13.22. See reply to paragraphs 13.29 - 13.39.

Management systems

13.23. The GIBUS application, and hence Sincom, has codes for all payments relating to buildings. The non-accounting data mentioned above (table of expenditure by building) gives details of expenditure for each building. The implementation of Sincom2 should allow a direct link to be established between such non-accounting data and payments made.

The Commission is aware of the need for harmonization of the information about buildings and their designations, depending on the purpose (mailing lists, maintenance, etc.). It intends to purchase a software package to manage the Commission's property assets, so that all departments concerned can use the same basic information.

13.24. The Commission proposes attaching the list of buildings to the financial statements, with, for each building, a list of the relevant legal obligations.

Management procedures

13.25. The error identified by the Court arose from an oversight in respect of the chronological order of the stages of a purchase procedure, which took place at the end of a financial year, and involved a transfer using appropriations which were still available. This error was corrected as soon as it was detected by the relevant Commission department. A recovery order was established and the amount in question was recovered.

13.26. The buildings in question were not the property of the Commission on 31 December 1995 as the legal formalities had not been concluded at that time. These are still in progress and the transfer of ownership will probably take place sometime this year.

13.27. In line with the Court's recommendation, the departments concerned will be instructed to ensure that funds used for an operation covered by an official deed should pass through the accounts of the Commission notary.

13.28. Arrangements for systematically checking all leases and powers of beneficiaries of payments have been introduced by the managing department.

In Sincom2, the appropriate tools will help the authorizing officer to distinguish clearly between the final beneficiary, on the one hand, and the alternative payee on the other.

Payment of taxes and charges

13.29 13.32 and 13.34 13.39. Until now, the Commission has always considered that the reimbursement of the property tax to the owner of a rented building was an integral part of the rent to be paid.

It notes the arguments put forward by the Court, and, from September 1996, will initiate the recommended action, at political level, with a view to ensuring that buildings occupied by Commission departments in the Member States are exempted from all property taxes.

13.33. The Commission mentioned in its off-balance sheet commitments, under potential liabilities, a total amount of ECU 2 million per year in regional tax to be paid in respect of its office space. For the years 1992-95, the total amount was ECU 6 957 619. For 1996, it will be ECU 1 742 038.

Management of the European Commission Delegations (Title VI of the budget)

MANAGEMENT OF THE DELHI DELEGATION

13.45 and 13.47. The difficulties encountered here arise mainly from the setting of allowances for local staff. In accordance with the Court's recommendations following the audit visit, the system of allowances was modified to bring it into line with the practices of comparable organizations (international organizations, embassies, public or private firms operating locally). The salary scale was amended as a result. Meanwhile, all the employment contracts have been signed.

13.46. Deductions for social security were made following the Court's visit.

13.48. The conditions of employment for local staff in the Sri Lanka delegation were drawn up in November 1995 and approved on 31 May 1996.

As far as Nepal is concerned, there is currently no Commission representation in the country, only a technical assistance office which is attached to the Delhi delegation. Administrative support is provided by two local staff members (one secretary and one chauffeur). A part-time secretarial post was also financed under budget heading A 6001 until 31 December 1995.

MANAGEMENT OF THE KIEV DELEGATION

13.49 13.51. The Commission recognizes that there were serious problems with the Kiev delegation's imprest accounts for administrative appropriations during 1993 and 1994. Support missions had to be organized to clear the accounts and regularize the records. Management of imprest accounts was put in order in 1995 and has caused no particular problems since then. Private expenses have been reimbursed to the delegation or recovery orders have been issued.

13.52. The accounting weaknesses noted by the Court during its June 1995 mission (ex-budget transactions) have been corrected. The entries in the ex-budget accounts now comply with the appropriate rules.

Community satellite organizations

INTRODUCTION

13.53. Community satellite organizations have legal personality. Relations between these organizations and the Commission are governed by the regulations setting up the organizations. By their nature, they are independent from the Commission. Some of them are even self-financing. The Commission sits on the management boards and governing bodies of these organizations, but does not occupy a dominant position. Its role is not one of management but one of verification, and is defined by the regulations setting up the organizations.

THE ORGANIZATIONS' RULES OF PROCEDURE

13.54 13.55. Within its field of competence, the Commission endeavours to ensure that the fundamental principles of administrative organization are observed in the various sets of rules.

The internal financial regulations for the satellite organizations were established on the basis of a model produced by the Commission. The basic regulations setting up the organizations provide that the Commission should be consulted before the management board adopts an internal financial regulation, although they do not confer any decision-making powers in the area on the Commission.

In practical terms, the Commission feels that it is primarily for the satellite organizations themselves, who have legal autonomy, to apply the fundamental principles of administrative organization. Any specific cases of improper application of these principles by organizations should be corrected as soon as possible, once identified by the control authorities for the above organizations (Financial Controller and Court of Auditors) in the course of their duties.

Nevertheless, the Commission would like to improve the transparency and control of these organizations to ensure that these principles are applied in budgetary management and accounting. To this end, the recent report to the budgetary authority suggests in its conclusions that the revision of internal regulations could be put on the agenda of management board meetings or of the appropriate bodies of these organizations (e.g. the budget committee for the Office for Harmonization in the Internal Market). The report raises the following points:

(a) performance of the duties of financial controller by the Commission's Financial Controller;

(b) systematic transmission of all decisions with financial repercussions (including discharge documents) to the Commission and to the budgetary authority;

(c) quarterly transmission of supporting documents for accounts to the Court of Auditors;

(d) status and operating rules of an ACPC (Advisory Committee on Procurements and Contracts) for the agencies;

(e) the procedure for revising estimated revenue, supplementary budgets and any revision of the Community subsidy.

BUDGETARY PRESENTATION OF APPROPRIATIONS

13.56 13.57. All budget headings providing subsidies for Community satellite organizations appear in Part B of the general budget of the European Communities. () From the point of view of the general budget (Commission section), the Commission considers the funds to be operational appropriations as the Agencies are complementary but important instruments for the implementation of Community policies (environment, health, training, etc.).

These subsidies from the Community budget are, from the organizations' point of view, the main element () in the 'revenue` section of their own budgets; such budgets are made up of non-differentiated appropriations (except for the European Environment Agency, which carries out multiannual programmes and whose internal financial regulation provides for the entry of non-differentiated appropriations).

Consequently, a distinction should be made between the presentation of the general budget, where, from the Commission's point of view, the subsidies represent operating appropriations (differentiated appropriations), relating to the implementation of the Community policies, and therefore funded under heading 3 of the financial perspective, and the presentation of each organization's budget, where appropriations may or may not be differentiated, depending on the nature of each Agency's operations.

DISCHARGE OF THE DUTIES OF THE FINANCIAL CONTROLLER

13.58. The Commission has always supported an approach whereby the Commission's Financial Controller would act as the financial controller of the satellite organizations. The reasons for this are based on principles and practicalities. Because of his experience and his knowledge of all aspects of the budget, the Commission Financial Controller is in the best position to ensure the required consistency in the application of the financial regulations of all the satellite organizations (). Furthermore, his position is the best guarantee of complete independence in relation to the authorizing officer. However, some of the regulations setting up the organizations () allow their management boards to appoint their own financial controller. To date, the European Environment Agency has appointed the Commission Financial Controller as controller for the Agency, while the European Agency for the Evaluation of Medicinal Products and the Office for Harmonization in the Internal Market have appointed their own financial controller.

13.60. With respect to the use of imprest accounts, the Commission, in the opinion it was required to issue in respect of certain internal financial regulations, and in the report on the Agencies mentioned above, recommended a change to the provision allowing the use of imprest accounts, to limit the use of this instrument to expenditure for which provisional commitments may be made (routine expenditure). To date, the financial regulations of the Environment Agency, the Translation Centre and the European Training Foundation have already incorporated this change. Furthermore, the report on the internal financial regulations of the satellite organizations which the Commission prepared at the request of Parliament and the Council (), proposed that this amendment be incorporated in the financial regulations of all the new agencies.

In view of the fact that the bulk of the expenditure provided for in the Agencies' budgets is routine administrative expenditure, the Commission feels that the use of imprest accounts is in line with the principles set out in the Financial Regulation and in its Implementing Rules. This method of management is also in general use in the Commission's external delegations and in the Offices in the Community.

The appointment of a financial controller in each agency is an inappropriate use of human and financial resources in view of the relatively limited amounts of appropriations involved, as the management of the resources available to Financial Control must also take account of the criterion of cost-effectiveness. The planned use of the Commission's accounting system (Sincom2) by the Agencies will lead to the adoption of an alternative control methodology in which computerization will play a vital role.

ACCOUNTING SYSTEMS

13.61. The Commission will continue to try to improve its cooperation with the Agencies with a view to producing uniform accounting systems which allow the appropriate monitoring of expenditure and comply with the criteria laid down by the Court. Meetings on the matter between the accounting and computer departments of the Commission and the Agencies have already taken place. As a result of these meetings, it is planned that the Agencies will adopt the Commission's Sincom2 accounting system, as indicated at paragraph 13.60.

CONCLUSION

13.62. The Commission, like the budgetary authority, is very conscious of the need for the satellite organizations to carry out their activities in a well-defined framework. With this in mind, the Commission is prepared to make every effort, within its field of competence, and in so far as is possible - given the level of autonomy of the agencies - to ensure that the management of the above organizations complies with the requirements of transparency and effectiveness which must be observed in the utilization of appropriations.

CHAPTER 14 Court of Auditors

The external auditor's certificate as to the regularity and fairness of the revenue and expenditure account and the financial balance sheet as at 31 December 1995

and

his report on the internal control system and the soundness of the financial management of the Court of Auditors

were published in OJ C 328 on 1.11.1996.

CHAPTER 15 (*) The Economic and Social Committee, the Committee of the Regions and their common organizational structure

15.0. CONTENTS Paragraph reference

Introduction 15.1 - 15.4

Purpose of the audit 15.4

How the common organizational structure works 15.5 - 15.7

Procurement of goods and services and expenditure on buildings 15.8 - 15.13

Management system 15.8 - 15.12

Application of the Financial Regulation 15.13

Leasing of offices 15.14 - 15.15

Payment of property tax 15.16 - 15.17

Conclusion 15.18 - 15.19

INTRODUCTION

15.1. The Economic and Social Committee (ESC), which is an advisory body serving the European Union (129 posts), and the Committee of the Regions (hereinafter called the COR) (75 posts), which was set up under the Maastricht Treaty as an advisory body to represent the Union's regions, are each assisted by a General Secretariat headed by a Secretary-General.

15.2. The sixteenth Protocol to the Maastricht Treaty provides for a common organizational structure (COS) for the two bodies. This structure (457 posts) comprises nine joint services (translation, general coordination, printing and distribution, library, accounting, procurements, information technology, administration of rights and obligations, and organization and procedures) which are needed for the ESC and the COR to be able to operate.

15.3. The Secretaries-General of the two organizations are required to settle jointly all matters concerning the abovementioned joint services.

Purpose of the audit

15.4. The Court's audit focused on how the COS works and on the expenditure incurred by the ESC, the COR and the COS for the purchase of goods and services, including the leasing of buildings. The amounts corresponding to the financial years 1994 and 1995 are recorded under Parts A, B and C of Section VI of the general budget (see Table 15.1).

HOW THE COMMON ORGANIZATIONAL STRUCTURE WORKS

15.5. The fact that the appropriations are distributed between the three parts of Section VI of the budget makes the implementation of this expenditure complicated. A summary is set out below of the existing situation regarding the management of the appropriations for administrative expenditure (Titles A-2, B-2 and C-2 of the budget), a task that is assigned mainly to the COS.

15.6. Pursuant to Article 22(2), first and second subparagraphs, of the Financial Regulation, 'by common agreement, the ESC and the Committee of the Regions shall delegate the powers of authorizing officer to the official responsible for administering Part C, the common organizational structure, and shall establish the limits and conditions of this delegation of powers`.

15.7. In its present form, the COS does not comply with the provision of the Financial Regulation quoted above. The Financial Controller and the accounting officer of the ESC/COR/COS were, in fact, correctly appointed. The same is not true of the appointment of the Head of Administration.

>TABLE>

PROCUREMENT OF GOODS AND SERVICES AND EXPENDITURE ON BUILDINGS

Management system

15.8. In past years the 'Internal Affairs` unit had no organizational chart specifying the duties of the main officials and staff and the extent of their responsibilities. In the end, a new structure and a specific organization were only worked out in January 1996 in a document detailing the various organizational measures (). The fact remains, however, that in February 1996 this document had still not entered into force.

15.9. There are also no provisions concerning the performance of the day-to-day tasks of higher-ranking officials by other employees when the former are absent (annual leave and illness).

15.10. The accounting service also has no up-to-date organizational chart detailing the names and duties of the main officials and employees either. The number of persons and the qualifications of the current staff bear no relation to the various duties (notably for the purpose of introducing an analytical accounting system) and their individual levels of responsibility.

15.11. Apart from the provisions of the Financial Regulation, no other internal rules governing budgetary and general accounting have been established. The accounting procedures are not set out in a manual or in any other written document.

15.12. The accounting plan has not been harmonized with Article 22(5) of the Financial Regulation, which provides for the establishment of an accounting system with a breakdown of expenditure; this would enable the COS to determine, on the basis of the implementation, the proportion of services actually provided to each of the two institutions.

Application of the Financial Regulation

15.13. With regard to the procurement of goods and services and the leasing of buildings, it was noted that:

(a) in half of the cases examined (12 out of 25), the payee's address was not stated on the payment order (Article 44 of the Financial Regulation), and in some cases the addresses differed from those stated in the contracts or did not appear on the computer print-out;

(b) there are still contracts that have not been properly signed;

(c) in several cases no invitation to tender had been issued, but contracts had been awarded by private treaty (contrary to Article 58 of the Financial Regulation) on the pretext of urgency, technical specialization, exclusivity and satisfaction with previous services provided (Article 59(b) and (d) of the Financial Regulation);

(d) as for the obligatory consultation of the Advisory Committee on Procurement and Contracts (ACPC) where contracts exceed 42 000 ECU, at least 53 % of the cases examined had not been forwarded to the ACPC for an opinion;

(e) similar expenditure in favour of various companies had been charged to one or more budget headings and to more than one commitment. This splitting-up of the expenditure contravenes the terms of the Financial Regulation which provide for the obligatory consultation of the ACPC and the provision of a guarantee for any contract exceeding 42 000 ECU and 300 000 ECU respectively (amount of expenditure involved in 1995: 1 987 523 ECU);

(f) in some cases the Financial Controller had been notified of contracts only once they had been concluded (or where contracts had been renegotiated in 1994 and 1995); unless prior checks are made, there can be no guarantee that the criteria of sound financial management have been applied;

(g) concerning office leases (12 cases) signed before 1991, it was impossible to check whether the Financial Controller at the time had been able to examine the contracts before they were signed.

LEASING OF OFFICES

15.14. In the wake of the growth of the COR's activities, additional premises had to be sought to house the services located in central Brussels (Rue Ravenstein). The solution chosen, in fact, followed a decision taken by the European Parliament in the context of the budget, the aim of which was to have the COR move into a building that the Parliament had itself vacated (the 'Ardenne` building), so as to make optimum use of the Community institutions' premises.

15.15. This solution, however, is not the best one from the point of view of the requirements of the COR, which has had to move away from the ESC and the COS. Moreover:

(a) it was found that the Ardenne building requires fitting-out work estimated at some 35 Mio BFR, even though all of the existing installations and facilities had been left in place by the Parliament;

(b) finally, it also turns out that the ESC and the COR signed an agreement extending the European Parliament's former lease for one year (31 December 1996) with a further one-year extension (until 31 December 1997) on exactly the same conditions. If the possibility that is being entertained of the COR moving a second time to the Van Maerlant building (), which will be vacated by the Parliament in 1998, were to come to pass, the fitting-out costs (35 Mio BFR) for such a short leasing period would not be consistent with the criteria of economy.

PAYMENT OF PROPERTY TAX

15.16. The payment of this tax is included in all of the property leasing contracts signed by the ESC and the COR. In 1995, the sums paid for the years from 1987 to 1995 inclusive amounted to some 22 Mio BFR (0,6 Mio ECU). According to the 'Internal Affairs` unit's calculations, the sums relating to 1994 and 1995, unquantified as yet, are still outstanding, and there is a risk that the carry-over of approximately 2,5 Mio BFR for this purpose will not be sufficient.

15.17. The payment of taxes and duties by the institutions constitutes a notable burden on the Community budget. As with the Commission (see Chapter 13), the ESC and the COR should obtain an interpretation of the Protocol's provisions from the Court of Justice such as will enable them to cease making any further such payments.

CONCLUSION

15.18. As a result of the failure by the organizations concerned to apply Article 22 (2) (delegation of powers to the official responsible for administering the COS) and (5) (establishment of an accounting system with a breakdown of expenditure) of the Financial Regulation, the ESC and the COR must take immediate action to ensure appropriate financial management and compliance with the provisions in force.

15.19. The existing rules on awarding contracts must be respected, failing which the liability for further breaches will fall on the authorizing officers, in accordance with the Financial Regulation (Article 73 et seq.).

REPLIES OF THE ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS

15.7. The director of the Common Organizational Structure (COS) was appointed by the ESC Bureau on 24 January 1995. By Decision 26/95A of 9 February 1995, the secretaries-general defined his powers as authorizing officer.

Although he acts as 'de facto` administrative head of the COS, the director has never been appointed to these duties.

The two Committees intend to formalize this situation as soon as possible. The relevant decision will probably be taken in September.

15.8. The 'organizational chart` for the Internal Affairs Unit ('screening document`) has been in force since May 1996.

15.9. Unfortunately available human resources do not permit satisfactory 'stand-in` arrangements.

15.10 The screening document (cf 15.8) also sets out the structure and organization of the financial service.

15.11. Several internal rules have been established, inter alia on closure of accounts, since the beginning of 1996.

In addition, the Committees intend to draft a budgetary procedures manual for the different chapters of Section VI.

15.12 The Committees are aware of the shortcoming identified by the Court.

As the Court noted in 15.10, the financial service is currently not in a position to develop and set up such a system in the short term. The Committees are currently considering the case for contracting out this system.

In addition the computer programme for accounts is overloaded because of the extensions needed to cope with the advent of the COR (establishment of three budget sections). This programme cannot be subjected to any further pressure. The Committees are therefore obliged to transfer their accounts system to a new computer environment. A COS internal working group is dealing with this transfer.

15.13. In general terms, the Committees accept the Court's comments on this point and propose to improve their procedures in order to observe the financial regulation more rigorously.

A number of comments should however be put into perspective:

(b) the copies of the leases concerned (2) in the Committee's archives have not in fact been properly signed. The Committees will take the requisite steps immediately;

(d) the leases which have not been sent to the Committee on Procurement and Controls relate to extensions of leases and extensions with suppliers who have long-term connections with the ESC (cleaning firms).

15.16. The relatively expensive refurbishment of the Ardenne building was necessary for two reasons:

(i) the available equipment (including electrical wiring) did not meet modern industrial safety legislation;

(ii) the Ardenne building had to be brought into line with the systems used in the ESC (computer systems, telecommunications, security).

15.18. The ESC and the COR are currently required to honour the leases.

The Committees will align their practices on the procedures instigated by the Commission.

() paragraph 4.13 OJ not yet published.

() See paragraph 4.27 not yet published.

() OJ C 240, 19.8.1996.

() Special Report No 1/91 on the European Development Fund rehabilitation and revival plan, (OJ 83, 27.3.1991.

() Special Report No 2/94 on the import programmes carried out under the sixth EDF (OJ C 97, 6.4.1994).

() Special Report No 2/95 concerning the Stabex fund in the context of the first financial Protocol of the fourth Lomé Convention (OJ C 167, 3.7.1995).

() OJ C 59, 8.3.1995, p. 16.

() OJ L 158, 8.7.1995. These arrangements entered into force at the beginning of the EAGGF-Guarantee financial year on 16.10.1995.

() For example, International Standard on Auditing No 600 'Using the work of another auditor`, issued by the International Auditing Practices Committee of the International Federation of Accountants.

(*) The Commission's replies are on page 45

() Net traditional own resources (14 453,2 Mio ECU) + collection costs (1 605,9 Mio ECU) = gross traditional own resources (16 059,1 Mio ECU).

() VAT own resource (39 127,3 Mio ECU) = VAT own resource for the financial year (39 648,6 Mio ECU) + balances and adjustments from previous financial years

(-521,3 Mio ECU).

() GNP resource (14 172,6 Mio ECU) = GNP resource for the financial year (14 442,0 Mio ECU) + balances and adjustments from previous financial years (-269,4 Mio ECU).

() Article 6(2)(b) of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 implementing Decision 88/376/EEC on the system of the Communities' own resources (OJ L 155, 7.6.1989, p. 1).

() Article 17(2) of Council Regulation (EEC) No 1552/89 of 29 May 1989 implementing Decision 88/376/EEC, Euratom, on the system of the Communities' own resources (OJ L 155, 7.6.1989, p. 1).

() Because of the period granted to the Member States within which to adapt their internal procedures, the keeping of separate accounts started only on 1 January 1990 in most Member States (see the declaration contained in Article 6.2.b of the Council's minutes of 29 May 1989).

() 176 360 675 DM converted into ECU at the accounting rate for 31.12.1995 (1 ECU = 1,879350 DM).

() Article 114 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() Non-Community goods released for free circulation assume the status of Community goods. The procedure essentially comprises the fulfilment of import formalities and the application of duties that are legally owed [Article 79 of Council Regulation (EEC) No 2913/92 of 12 October 1992, OJ L 302, 19.10.1992, p. 1].

() Paragraph 4.90 of the Annual Report of the Court of Auditors concerning the financial year 1988 (OJ C 312, 12.12.1989).

() Third recital of Commission Regulation No 731/90 of 26 March 1990 (OJ L 81, 28.3.1990, p. 14).

() Commission Regulation No 731/90 of 26 March 1990 amending Council Regulation (EEC) No 3677/86 laying down provisions for the implementation of Regulation (EEC) No 1999/85 on the inward processing procedure (OJ L 81, 28.3.1990, p. 14).

() These new provisions were included in the Community Customs Code [Article 114(3) of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1)] and in the corresponding implementing instructions [Article 589 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993)].

() Council Decision 88/376/EEC, Euratom of 24 June 1988 on the system of the Community's own resources (OJ L 185, 15.7.1988, p. 24).

() Council Regulation (EEC) No 1999/85 of 16 July 1985 on the inward processing procedure (OJ L 188, 20.7.1985, p. 1).

() 187,6 Mio FF converted into ECU at the accounting rate for 31 December 1995 (1 ECU = 6,437800 FF).

() Article 559 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993, p. 1).

() Article 596(1) and (3) of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 597 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() 25 Mio DM converted into ECU at the accounting rate for 31 December 1995 (1 ECU = 1,879350 DM).

() Article 563 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() OJ L 155, 7.6.1989, p. 1.

() Article 91 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10,1992, p. 1).

() Article 313 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 610 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Additional Protocol to the Ankara agreement (OJ L 293, 29.12.1972, p. 1).

() Decision No 1/94 of the EC-Turkey Association Council of 19 December 1994 on the application of Article 3 of the Additional Protocol to the Ankara Agreement on goods obtained in the Member States of the Community (OJ L 356, 31.12.1994, p. 1).

() The compensatory levy is charged on products from non-member States which have been used to manufacture goods that are re-exported. The exporting State must collect the compensatory levy, the rate of which is set by the Council on the basis of the duties under the common customs tariff (see Article 3 of the Additional Protocol of the EC-Turkey Agreement).

() OJ L 155, 7.6.1989, p. 1.

() Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() Article 504 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 504(1)(4) of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 112(3) of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() A warehouse-keeper is any person authorized to manage a customs warehouse [Article 99 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1)].

() Article 98 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() Article 520(3) of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 520 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 105 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() Article 20(6) of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() Article 221(3) of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Articles 402(2) and 409(1)(b) of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() Article 402(2) (copy for the country of dispatch/export, No 1) and Article 409(1)(b) (copy for the office of destination, No 4) of Commission Regulation (EEC) No 2454/93 of 2 July 1993 (OJ L 253, 11.10.1993).

() OJ L 302, 19.10.1992, p. 1.

() Obtained in the circumstances referred to in Article 23 of Council Regulation (EEC) No 2913/92 of 12 October 1992 (OJ L 302, 19.10.1992, p. 1).

() In force since 1 July 1991 (OJ L 374, 31.12.1990).

() In force since 1 December 1992 (OJ L 359, 9.12.1992).

() In force since 1 January 1996 (OJ L 35, 13.2.1996).

() A first analysis was presented in the Annual Report of the Court of Auditors concerning the financial year 1994, paragraphs 1.90 - 1.111, (OJ 303 of 4 November 1995, p. 1).

() Council Regulation (EEC) No 218/92 of 27.1.1992 (OJ L 24, 1.2.1992, p. 1).

() Annual Report of the Court of Auditors concerning the financial year 1988, paragraphs 4.16 to 4.31 (OJ C 312, 12.12.1989), Annual Report of the Court of Auditors concerning the financial year 1989, paragraphs 1.74 to 1.80 (OJ C 313, 12.12.1990), Annual Report of the Court of Auditors concerning the financial year 1991 paragraphs 1.99 - 1.102 (OJ C 330, 15.12.1992).

() These figures do not include Denmark, Italy and Luxembourg. Available data do not enable us to make this sort of analysis for these countries.

() Council Regulation (EEC) No 3330/91, of 7 November 1991 (OJ L 316, 16.11.1991, p. 1)

() 685 000 Mio ECU declared for deliveries and 657 000 Mio ECU declared for acquisitions; the difference is 5%.

() 759 000 Mio declared for deliveries and 725 000 Mio ECU declared for acquisitions; the difference is 5%.

() The specific role of the GNP in own resources and the procedures for its various applications were described in the Court's Annual Reports concerning the financial years 1991, 1992, 1993 and 1994.

() Annual Report of the Court of Auditors concerning the financial year 1991, paragraph 1.119, p. 41, (OJ C 330, 15.12.1992).

() Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 1.71 and 1.75, (OJ C 327, 24.11.1994).

() Council Directive 89/130/EEC, Euratom, of 13 February 1989, concerning the establishment of the gross national product at market prices (OJ L 49, 21.2.1989, p. 26).

() European Parliament: Resolution on the adaptation of the system for auditing own resources following the introduction of the single market, 25 October 1995, paragraph 8. Moreover, the Parliament's Committee on Budgetary Control stressed the problems posed by the utilization of the GNP as an indicator of the Member States' capacity to contribute and judged the management of the GNP resource to be 'unwieldy, complex, non-transparent and unreliable`. (European Parliament, Committee on Budgetary Control: Report on the adaptation of the system for auditing own resources following the introduction of the single market, PE 213.380/fin of 11 September 1995, paragraph 52).

() The Budgetary Committee of the Council, document 4486/96 of 7 February 1996, p. 11.

() See the Commission's report to the Council and the European Parliament on the application of the Council Directive concerning the establishment of the gross national product at market prices. Document COM (96) 124 final of 27 March 1996.

() The Committee that assists the Commission is made up of representatives of the Member States and is chaired by the Commission. It examines questions related to the application of Council Directive 89/130/EEC/Euratom of 13 February 1989 concerning, in particular, the observance of the definitions and data forwarded each year and the information forwarded concerning statistical sources and the process of calculating the gross national product at market prices (GNPmp) and its components. It is also concerned with the questions of the revision of GNPmp data and the problem of the exhaustiveness of GNPmp. Where necessary, it provides the Commission with suggestions for measures to make GNPmp more comparable and representative.

() The inventory of statistical procedures and bases that each Member State uses for calculating its GNP and the components thereof constitutes one of the basic elements of the machinery for the verification and appraisal of the comparability and representativeness of the gross national product laid down in the Directive. (Report of 13 February 1989 on the application of the Council Directive concerning the establishment of the gross national product at market prices. (89/130/EEC/Euratom), Commission of the European Communities, SEC (92) 588 final, paragraph III.1, p. 8).

() Annex to the report on the eighth meeting of the GNP Committee of 28-30 October 1992, doc Eurostat/B1/CPNB/059.

() The Commission's reply to paragraph 1.97 of the Annual Report of the Court of Auditors concerning the financial year 1992.

() See, for example, Council Regulation (EC) No 2744/95 of 27 November 1995, concerning statistics on the structure and breakdown of salaries(OJ L 287 of 30 November 1995). Article 7 sets a variation coefficient (ó/m) of 3 % on mean hourly wages.

() The Austrian experts prefer an evaluation in qualitative terms.

() As of 1 April 1996, the Central Statistical Office became part of the Office of National Statistics.

() 'Measuring the accuracy of the national accounts,` by S. Penneck (CSO, United Kingdom), International Conference on Survey Measurement and Process Quality, Bristol, April 1995, point 1.

() Ibid., paragraph 42 (4).

() 'A preliminary approach for the analysis of the quality of national accounts estimates`, by M. Calzaroni and A. Puggioni (ISTAT, Italia), International Conference on Survey Measurement and Process Quality, Bristol, April 1995.

Measuring the accuracy of the national accounts, by S. Penneck (CSO, United Kingdom), International Conference on Survey Measurement and Process Quality, Bristol, April 1995.

() Doc. Eurostat/B1/CPNB 157, paragraphs 3 and 4.

() Minutes of the GNP Committee, doc. Eurostat/B1/CPNB/159, paragraph 9.2.

() See the Commission's reply to paragraph 4.31 of the Court's report in respect of 1988.

(*) The Commission's replies are on page 70

() OJ L 293, 12.11.1994, p. 14.

() Commission Decision 95/268/EC final of 2 February 1995 (unpublished).

() OJ C 352, 10.12.1995.

() Council Regulation (EEC) No 3508/92 of 27 November 1992 (OJ L 355, 5.12.1992).

() Commission Regulation (EEC) No 3887/92 of 23 December 1992 (OJ L 391, 31.12.1992).

() Council Regulaton (EEC) No 307/91 of 4 February 1991 (OJ L 37, 9.2.1991).

() Commission Regulation (EEC) No 967/91 of 19 April 1991 (OJ L 100, 20.4.1991).

() Council Regulation (EC) No 165/94 of 24 January 1994 (OJ L 24, 29.1.1994).

() Commission Regulation (EC) No 601/94 of 17 March 1994 (OJ L 76, 18.3.1994).

() Council Regulation (EEC) No 307/91 of 4 February 1991 (OJ L 37, 9.2.1991).

() Annual Report on the financial year 1993 (point 7.47) (OJ C 327, 24.11.1994).

() Commission Regulation (EEC) No 967/91 of 19 April 1991 (OJ L 100, 20.4.1991).

() Council Regulation (EC) No 165/94 of 24 January 1994 (OJ L 24, 29.1.1994).

() COM(94)498 final of 16.11.1994.

(*) The Commission's replies are on page 95

() Classical swine fever causes a high degree of mortality among infected pigs. The disease has never been reported in human beings.

() Council Directive 80/1095/EEC of 11 November 1980 (OJ L 325, 1.12.1980, p. 1); Council Decision 80/1096/EEC of 11 November 1980 (OJ L 325, 1.12.1980, p. 5).

() Abolished by Council Directive 91/685/EEC of 11 December 1991 (OJ L 377, 31.12.1991, p. 1). Emergency vaccination may be introduced pursuant to a Commission decision to that effect (Article 14 of the Directive).

() Council Directive 80/217/EEC of 2 January 1980 (OJ L 47, 21.2.1980, p. 11) provided for a number of operational measures where classical swine fever is suspected or confirmed, namely: movement restrictions; epizootiological enquiry; destruction of pigs; disinfection; investigation of the risks of the disease spreading as a result of contact or simply because of the location of holdings; establishment of a protection zone within a 3-km radius of the outbreak site and a surveillance zone within a 10-km radius of the site, both subject to movement restrictions.

() Article 3(5) of Council Decision 90/424/EEC of 26 June 1990 provides that the Union's financial contribution towards certain costs incurred by the Member States in compensating owners must be 50 %. The costs in question are the costs incurred in compensating owners for the slaughter, destruction of animals and their products, for the cleaning, disinsectization and disinfection of holdings and equipment and for the destruction of contaminated feeding stuffs and contaminated equipment that cannot be disinfected.

() Article 20 of Council Regulation (EEC) No 2759/75 of 29 October 1975 (OJ L 282, 1.11.1975, p. 1).

() The AEmter fuer Veterinaerwesen und Lebensmittelueberwachung. The districts (Kreise) are administrative units comprising several local areas.

() Article 7a of Council Directive 80/217/EEC of 2 January 1980 (OJ L 47, 21.2.1980, p. 11) as amended by Directive 91/685/EEC of 11 December 1991 (OJ L 377, 31.12.1991, p. 1).

() Source: Commission DG VI/B/II/2). Commission Decisions 94/189/EC of 18 March 1994 (OJ L 89, 6.4.1994, p. 31) and 95/79/EC of 13 March 1995 (OJ L 65, 23.3.1995, p. 31).

() Articles 4, 5 and 7 of Council Directive 80/217/EEC of 22 January 1980 (OJ L 47, 21.2.1980, p. 11).

() Source: Commission (DG VI/B/II/2). Commission Decisions 94/190/EC of 18 March 1994 (OJ L 89, 6.4.1994, p. 31) and 94/742/EC of 14 November 1994 (OJ L 296, 17.11.1994, p. 56).

() For Germany: Commission Regulation (EEC) No 1930/93 of 16 July 1993 (OJ L 174, 17.7.1993, p. 32), Commission Regulation (EC) No 3088/93 of 9 November 1993 (OJ L 277, 10.11.1993, p. 30) and the eight amendments thereto, Commission Regulation (EC) No 3146/94 of 21 December 1994 (OJ L 332, 22.12.1994, p. 23) and the six amendments at the end of July 1995. For Belgium: Commission Regulation (EC) No 3337/93 of 3 December 1993 (OJ L 299, 4.12.1993, p. 23) and the six amendments thereto, Commission Regulation (EC) No 2865/94 of 25 November 1994 (OJ L 303, 26.11.1994, p. 25). For the Netherlands: Commission Regulation (EC) No 1393/94 of 17 June 1994 (OJ L 152, 18.6.1994, p. 27) and the three amendments thereto.

() Special report no 1/90 on certain storage operations in the pigmeat sector (OJ C 76, 26.3.1990, p. 1).

() Commission Regulation (EC) No 3336/93 of 3 December 1993 (OJ L 299, 4.12.1993, p. 20) amending Commission Regulation (EC) No 3088/93 of 9 November 1993 (OJ L 277, 10.11.1993, p. 30).

() Commission Regulation (EC) No 3146/94 of 21 December 1994 (OJ L 332 of 22.12.1994, p. 23).

() Commission Regulation (EC) No 151/96 of 29 January 1996 (OJ L 23 of 30.1.1996, p. 9).

() OJ C 133, 31.5.1990.

() OJ C 53, 19.4.1994.

() OJ L 366, 24.12.1987.

() OJ L 388, 30.12.1989.

() OJ C 75, 12.3.1994.

() OJ L 351, 14.12.1987.

() OJ L 42, 16.2.1990.

() OJ L 328, 20.12.1994.

() No 540 of 3 December 1969 concerning the processing, marketing, import and export of cheese and soft cheeses.

() Feta of a fat content in dry matter of 40%, the main type of feta exported.

() Annex II to the Treaty establishing the European Community contains all agricultural products to which the common agricultural policy applies as specified in Articles 39 to 46 of the same Treaty. Contrary, to non-Annex II goods, which are, in the main goods, obtained by further processing of agricultural goods, the provisions of the abovementioned articles do not apply. For example: cereals flour, sugar, butter and eggs are agricultural products and as such are contained in Annex II. Biscuits, obtained by processing these ingredients are not contained in Annex II; in the same way, barley and malt are contained in Annex II, beer and whisky made out of them are not. Chocolates and sweets are further examples of non-Annex II goods.

() OJ C 330, 15.12.1992.

() OJ L 155, 26.6.1993, p. 72.

() Commission Regulation (EC) No 3062/94 of 15 December 1994 (OJ L 323, 16.12.1994, p. 21).

() OJ C 309, 16.11.1993.

() OJ L 141, 24.6.1995, p. 51.

() OJ L 141, 24.6.1995, p. 51.

() Council Regulation (EC) No 1554/95 of 29 June 1995 (OJ L 148, 30.6.1995, p. 48).

() Council Regulation (EEC) No 2169/81 of 27 July 1981 (OJ L 211, 31.7.1981, p. 2).

() Council Regulation (EC) No 1553/95 of 29 June 1995 (OJ L 148, 30.6.1995, p. 45).

() OJ C 324, 13.12.1991.

() Commission Regulation (EEC) No 3615/92 of 15 December 1992 (OJ L 367, 16.12.1992, p. 10).

() Commission Regulation (EC) No 3122/94 of 20 December 1994 (OJ L 330, 21.12.1994, p. 31).

() Council Regulation (EEC) No 3035/80 of 11 November 1980 (OJ L 323, 29.11.1980, p. 27).

() Commission Regulation (EC) No 1222/94 of 30 May 1994 (OJ L 136, 31.5.1994, p. 5).

() Commission document 235/94/29 Rev.4, April 1995.

() Commission Regulation (EEC) No 2825/93 of 15 October 1993 (OJ L 258, 16.10.1993, p. 6).

(*) The Commission's replies are on page 117

() Council Decision 89/631/EEC of 27 November 1989 on a Community financial contribution towards expenditure incurred by Member States for the purpose of ensuring compliance with the Community system for the conservation and management of fishery resources (OJ L 364, 14.12.1989, p. 64).

() Second recital of the basic decision.

() OJ L 101, 20.4.1994, p. 9.

() Council Decision 95/527/EC of 8 December 1995 (OJ L 301, 14.12.1995, p. 30, with a corrigendum in OJ L 302, 15.12.1995, p. 45).

() Paragraph 3 of the Annex to the basic decision.

() Article 2 of the Financial Regulation of 21 December 1977 (OJ L 356, 31.12.1977) and subsequent amendments.

() Article 1(3) of the basic decision.

() COM(95) 243 final. This document also contains the proposal for a decision in respect of financial participation for the period 1996-2000.

() Paragraph 1.4. of the report.

() Prevention, discovery and prosecution of infringements; application of adequate penalties; reliability of the catch figures; amount and effectiveness of the human and material resources devoted by the Member State concerned to fisheries enforcement; diversity of fishing activities in the Member State's exclusive zone; degree of cooperation with other Member States and the Commission (paragraph 4 of the Annex to the basic decision).

() Articles 31 and 34 of Regulation (EEC) No 2847/93 of 12 October 1993 establishing a control system applicable to the common fisheries policy (OJ L 261, 20.10.1993, p. 1).

() Centrum voor Rechtshandhaving en Europese Integratie: Fisheries Legislation of the EC Member States: Issues of Enforcement and Cooperation, Utrecht, October 1994.

() Commission Regulation (EEC) No 3561/85 of 17 December 1985 concerning information about inspections of fishing activities carried out by national control authorities (OJ L 339, 18.12.1985, p. 29) and Regulation (EEC) No 2847/93.

() Council Regulation (EEC) No 2241/87 of 23 July 1987 establishing certain control measures for fishing activities (OJ L 207, 29.7.1987, p. 1).

() Council Regulation (EEC) No 3483/88 of 7 November 1988 amending Council Regulation (EEC) No 2241/87 of 23 July 1987 establishing certain control measures for fishing activities (OJ L 306, 11.11.1988, p. 2).

() Article 3 of Regulation (EEC) No 2847/93.

() Commission Regulation (EC) No 897/94 of 22 April 1994, laying down detailed rules for the application of Council Regulation (EEC) No 2847/93 as regards pilot projects relating to continuous position monitoring of Community fishing vessels (OJ L 104, 23.4.1994, p. 18).

() Decision 94/207/EC initially laid down that the Member States' eligible expenditure would relate to the financing of the implementation of pilot projects during the period from 1 June 1994 to 1 June 1995; subsequently Council Decision 95/528/EC of 5 December 1995 (OJ L 301 of 14.12.1995, p. 35, with a corrigendum in OJ L 302 of 15.12.1995, p. 45) extended the final deadline until 31 December 1995, while allowing the Member States to submit their applications for reimbursement to the Commission up to 30 April 1996.

() OJ L 388, 30.12.1989.

() OJ L 374, 31.12.1988.

() The OPs concerned are DK 92/2 (1 000 ECU), DK 93/1 (150 707 ECU) and PORT 91/1 (351 059 ECU).

() Real Decreto 798/1995 of 19.5.1995.

(*) The Commission's replies are on page 141

() Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 7.4 - 7.6.

Annual Report of the Court of Auditors concerning the financial year 1994, paragraph 4.6.

() Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 6.5 - 6.14.

() Regulation (EEC) No 4254/88 (amended by Regulation (EEC) No 2083/93 of 20 July 1993) laying down provisions for implementing Regulation (EEC) No 2052/88 as regards the ERDF.

() Annual Report of the Court of Auditors concerning the financial year 1980, paragraph 7.21.

Annual Report of the Court of Auditors concerning the financial year 1982, paragraph 6.47.

Annual Report of the Court of Auditors concerning the financial year 1983, paragraphs 7.11 - 7.16.

Report in support of the 1994 DAS, paragraphs 3.18 - 3.26.

() Council Regulation (EEC) No 1787/84 of 19 June 1984 relating to the ERDF.

() Annual Report of the Court of Auditors concerning the financial year 1992, paragraphs 6.56 - 6.69 and 6.89 - 6.93.

() Annual Report of the Court of Auditors concerning the financial year 1992, the Commission's replies - paragraphs 6.67 - 6.69.

() Council Regulation (EEC) No 2052/88 of 24 June 1988 on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, as last amended by Council Regulation (EEC) No 2081/93 of 20 July 1993 (OJ L 185, 15.7.1988, p. 9 and OJ L 193, 31.7.1993, p. 5).

() Annual Report of the Court of Auditors concerning the financial year 1990, paragraphs 7.5 - 7.17.

Annual Report of the Court of Auditors concerning the financial year 1991, paragraphs 5.16 - 5.37.

() Council Regulation (EEC) No 2052/88 of 24 June 1988 on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, as last amended by Council Regulation (EEC) No 2081/93 of 20 July 1993 (OJ L 185 of 15.7.1988, p. 9 and OJ L 193 of 31.7.1993, p. 5).

() Decision of the Council of the European Union of 1 January 1995 adjusting the instruments concerning the accession of new Member States to the European Union (OJ L 1, 1.1.1995, p. 1).

() Nomenclature of Territorial Units for Statistics (NUTS) regions, published by Eurostat E4 - Regional statistics and accounts.

() Directive 89/130/EEC of 13 February 1989 on the harmonization of the compilation of gross national product at market prices (OJ L 49, 21.2.1989, p. 26).

() Source: Eurostat.

() Resolution on the Annual Report of the Commission on the cohesion financial instrument (1993/94) of 29 June 1995 (OJ C 183, 17.7.1995, p. 36).

() Council Regulation (EC) No 1164/94 of 16 May 1994.

() Article 9(3) of the revised Regulation (EEC) No 2052/88.

() Article 9 of the revised Regulation (EEC) No 2052/88.

() Article 9(4) of the amended Regulation (EEC) No 2052/88.

() Annual Report of the Court of Auditors concerning the financial year 1993, paragraph 7.26.

() Annual Report of the Court of Auditors concerning the financial year 1993, paragraph 7.26.

() Commission Decisions of 22 February 1995 and 10 May 1995.

() Article 11 of the amended Regulation (EEC) No 2052/88.

() Annual Report of the Court of Auditors concerning the financial year 1992, paragraph 6.21.

Special Report No 1/93, paragraph 5.8.

Annual Report of the Court of Auditors concerning the financial year 1994, paragraphs 4.12, 4.15(f), 4.67 - 4.69, 4.92.

Special Report No 1/95, paragraphs 4.8 - 4.10.

() XXIst Commission Report on competition policy, paragraph 56.

() COM(94) 593 final, p. 1a.

() COM(88)244 final of 23.12.1988, 'The EIB and the other financial instruments strengthening economic and social cohesion`.

() COM(95)583 final of 14 December 1995.

() Annual Report of the Court of Auditors concerning the financial year 1990, paragraphs 7.36 - 7.43.

() The internal rate of return (IRR) is usually defined as 'the discount rate at which a stream of costs and benefits has a net present value of zero`. Guide to cost-benefit analysis of major projects, drawn up by the Commission, in the context of EC regional policies.

() Article 16(2) of Council Regulation (EEC) No 4253/88, as subsequently amended, defines major projects as 'those the total cost of which taken into account in determining the amount of Community assistance is, as a general rule, greater than 25 Mio ECU for infrastructure investments or greater than 15 Mio ECU for productive investments.`

() COM(95)30 final of 20 March 1995.

() The EIB's global loans are intended to make medium-term or long-term finance available on acceptable terms to SMEs which are making investments. The financial institutions, which have the task of distributing these global loans, are responsible for evaluating the projects and assume the risk in their capacity as lenders (Guide to the Financial Engineering Techniques used by the Commission within the framework of the regional policy - DGXVI/142/96-EN).

() Inter-regional cooperation guide No 1, September 1993.

() Special Report No 4/94 on the urban environment, OJ C 383, 31.12.1994, paragraphs 4.4 - 4.8.

(*) The Commission's replies are on page 169

() Germany, Greece, Spain, France, Italy, Portugal and United Kingdom.

() Council Regulation (EEC) No 2081/93 of 20 July 1993 amending Regulation (EEC) No 2052/88 on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, OJ L 193, 31.7.1993.

() Council Regulation (EEC) No 2082/93 of 20 July 1993 amending Regulation (EEC) No 4253/88 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments, OJ L 193, 1.7.1993.

() Council Regulation (EEC) No 2084/93 of 20 July 1993 amending Regulation (EEC) No 4255/88 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards the European Social Fund, OJ L 193, 31.7.1993.

() OP No 958901 IR8 of 28 July 1995. The ESF part is for 107,2 Mio ECU.

() The Court's 1994 Annual Report, paragraph 5.5, OJ C 303, 14.11.1995.

() Article 8 of Council Regulation (EEC) No 2084/93.

() The Court's 1994 Annual Report, paragraphs 5.7 and 5.113.

() The Court's 1994 Annual Report.

() The Court's 1994 Annual Report, paragraph 5.43.

() Date set by Article 6 of Council Regulation (EEC) No 2082/93.

() The Court's 1991 Annual Report, paragraph 6.13, OJ C 330, 15.12.1992.

() Article 26(3) of Council Regulation (EEC) No 2082/93.

() The transnational element of Objective 4.

() Integrating NOW (equal opportunities), Horizon (disadvantaged and handicapped) and Youth Start (integration of young people without qualifications).

() Single programming document made up of the plan, the CSF and the operational programme.

() Article 14(3) of Council Regulation (EEC) No 2082/93.

() The Court's 1993 Annual report, paragraph 14.10(b), OJ C 327, 24.11.1994.

() The Court's 1994 Annual report, paragraphs 5.16 and 5.17.

() Article 21(5) of Council Regulation (EEC) No 2082/93.

() The Court's 1993 Annual Report, paragraph 8.10.

() The Court's 1994 Annual Report, paragraph 5.47.

() Article 21(2) of Council Regulation (EEC) No 2082/93.

() Article 25(5) of Council Regulation (EEC) No 4253/88.

() The Court's 1994 Annual Report, paragraph 5.16.

() Article 25 of Regulation 2082/93.

() Standard clauses annexed to Commission decisions.

() The Court's 1994 Annual Report, paragraph 5.28.

() The terms 'dispersed` and 'decentralized` have been taken from French civil service terminology and mean that, in the case of the first term, the powers are national, whereas in the second they are regional.

() According to the report by the Inspectorate General of Finance.

() 178 Mio ECU (PO 942000P1) and 46,1 Mio ECU (PO 944000P1), for the 1994 tranche.

() The Court's 1994 Annual Report, paragraph 5.25.

() Article 2 of Council Regulation (EEC) No 4255/88 concerning the European Social Fund.

() The Court's 1994 Annual Report, paragraph 5.50.

() Greece, Spain, France, Italy, Luxembourg, Portugal and the Netherlands.

() Internal control organization of the Spanish central administration.

() Article 23(3) of Regulation (EEC) No 2082/93.

() Article 26(2) of Regulation (EEC) No 2082/93.

() The Court's 1990 Annual report, paragraph 6.20, OJ C 324, 13.12.1991.

() Article 2(1) of Council Regulation 2084/93.

() Germany, Greece, Spain, France, Italy, Portugal and the United Kingdom.

() The payments figures include 15,6 Mio ECU and 22,6 Mio ECU for Socrates and Leonardo respectively, being payments carried forward from the corresponding budget headings of the preceding programmes.

() Where at present the national audit authorities may detect cases of double financing only by chance as part of their testing procedures.

() Where the comparison of data between the central coordination units of Leonardo, ADAPT and Employment includes only that known at Federal level, since the Laender have their own separate databases.

() The Statistics Office at the Commission estimates that the number of persons living in poverty in the EU is about 52 million. COM(93) 435 final.

() Article 60 of the Financial Regulation, OJ C 80, 25.3.1991.

() Office of the Council Secretariat, ref. SN 400/95.

() The Court's 1994 Annual Report, paragraph 5.114.

() The Commission's reply to paragraph 5.114 of the Court of Auditors' 1994 Annual Report, OJ C 303, 14.11.1995.

(*) The Commission's replies are on page 199

() It should be remembered that the amounts concerning the 1995 financial year include appropriations allocated to the new Member States, i.e. Austria, Finland and Sweden.

() Hereinafter also referred to as Leader I.

() According to Article 5, paragraph 2, of Regulation (EEC) No 2052/88 of 24 June 1988.

() Within the framework of Leader II for the period 1994-99, the Member States select the groups autonomously.

() Commission communication No 91/C/7314, OJ C 73, 19.3.1991.

() According to Article 5, paragraph 2, of Regulation (EEC) No 2052/88 of 24 June 1988.

() See, as an example, paragraphs 6.11 - 6.14 of the Annual Report concerning the financial year 1993 (OJ C 327, 24.11.1994).

() The Commission itself acknowledges that a project which has already been completed no longer justifies a grant (see Commission communication No 38/95 addressed to the Member States; OJ C 294/22, 9.11.1995).

(*) The Commission's replies are on page 212

() See also Chapter 13 of the Court's Annual Report concerning the financial year 1993 for more information on this subject. The ECIP was set up by Council Regulation No 319/92 which has just been superseded by Council Regulation No 213/96 of 29 January 1996. ECIP includes some developing countries in its field of operations (countries in Latin America and Asia - DCLAA -; Mediterranean countries and countries in Southern Africa).

() JOPP and JOTP were set up respectively within the framework of the PHARE regulations (Economic aid to the Republic of Hungary and the Polish People's Republic, which subsequently became a programme of aid to the countries of Central and Eastern Europe), and TACIS (Technical Assistance to the Commonwealth of Independent States) by the Commission, whose decisions were based on recommendations of the ad hoc consultative committee. The field of operations of these two programmes thus covers the countries of Central and Eastern Europe (PHARE) and the countries of the former USSR (TACIS).

() See paragraph 13.38 of the Court's Annual Report concerning the financial year 1993.

() The preliminary phase consists mainly of feasibility studies and market research. Financing takes the form of an advance which can be transformed into a grant if the enterprise is actually set up within a period of one year. If the business is not set up, the beneficiary is required to reimburse the Community financing unless the feasibility study is placed at the Commission's disposal, in which case the advance finally accrues to the beneficiary. For the actual co-financing stage, the financing arrangements allow for the creation of own resources, or the equivalent, or even guarantees. The Community contribution can take the form of a direct participation or of a guarantee given against the loan granted by the financial intermediary if the latter retains this mode of financing. For the stage of technical assistance and transfer of know-how the Community contribution takes the form of a grant. Finally, the Community contribution towards the organization of events and seminars also takes the form of a grant.

() Under general headings PHARE and TACIS for JOPP and JOTP and under Item B7500 for ECIP.

() Within the framework of Facilities 2, 3 and 4 for the ECIP.

(*) The Commission's replies are on page 228

() Furthermore, audits are conducted as part of the audit of sound financial management, such as the audit of the action plan for the introduction of advanced television services (see paragraph 9.23).

() Annual Report concerning the financial year 1993, paragraph 11.17,

Annual Report concerning the financial year 1990, point 11.6.

() In Europe, the standard format for colour television is 625 lines. For high-definition television, the number of lines is doubled (1 250).

() MAC: Multiplexed Analogue Components. Family of broadcasting systems developed in Europe for satellite broadcasting. D2-MAC was originally intended to take over from the PAL and SECAM European television standards and to serve as a standard during the transition to HDTV. HDMAC is a satellite during the transition to HDTV. HDMAC is a satellite broadcasting standard for high-definition television pictures using 1 250 lines.

() OJ C 139, 2.6.1992, p. 4.

() PAL: Phase Alternating Line. Colour television system developed in Germany and used in Western Europe (except in France), China, the Far East, Africa and South America. France developed the SECAM colour television system (sequential colour memory) which, as well as in France, is also used in a number of former eastern bloc countries, Africa and South America.

() OJ L 196, 5.8.1993, p. 48.

() The television format used to date involves a width/height ratio of 4:3.

() According to the action plan, the project must be based on high-quality broadcasting systems in the 16:9 format, including, inter alia, the MAC/HD-MAC system, on greatly improved versions of existing European standards, such as PALPLUS, and on wholly digital technology which has been standardised by the competent European standard- ization authorities. Nevertheless, European Parliament and Council Directive 95/47/EC of 24 October 1995 on the use of standards for the transmission of television signals (OJ L 281, 23.11.1995, p. 51) provides for the use of the HD-MAC broadcasting system for high-definition and not wholly digital services. However, this Directive has no more than a theoretical impact in this respect since no high-definition service currently exists. If a high-definition service is established in future, it is highly likely that it will be in digital form.

() First annual report on the implementation of the action plan for the introduction of advanced television services in Europe, European Commission, COM (95) 263 final, p. 9.

() See first recital of the action plan.

() See fourth recital of the action plan.

() Paragraph 5.4 of the Annex to the action plan.

() The 'Vision 1250` grouping was created in 1990 on the initiative of the Commission for the purpose of managing the Community appropriations paid until 1993 to promote high-definition television by means of demonstrations at important events. The members of or participants in 'Vision 1250` are broadcasters, manufacturers, film and programme producers and telecommunications service companies. In 1994, more than 50 % of the resources of 'Vision 1250` came from the Commission.

() Stock programmes are defined as programmes the production of which requires sequences to be recorded and considerable post-production work to be done and which may be broadcast several times. The cost of producing them is therefore higher than flow programmes, for which there are no such conditions. As a result, flat-rate sliding-scale payments were introduced solely for flow programmes.

() Stock programmes are defined as programmes the production of which requires sequences to be recorded and considerable post-production work to be done and which may be broadcast several times. The cost of producing them is therefore higher than flow programmes, for which there are no such conditions. As a result, flat-rate sliding-scale payments were introduced solely for flow programmes.

() Figures supplied by the 'European Association of Consumer Electronics Manufacturers`, Brussels.

() 1994/1995 Statistical Yearbook, Observatoire européen de l'audiovisuel, p. 42.

() Furthermore, account must also be taken of the fact that support, irrespective of the action plan, of an independent production sector is proposed within the framework of a guarantee fund to encourage cinema and television productions, COM(95) 546 (final) and of the MEDIA II programme (OJ L 321, 30.12.1995, p. 25).

(*) The Commission's replies are on page 255

() Council Regulation (EEC) No 3906/89 of 18 December 1989 (OJ L 375, 23.12.1989, p. 11) on economic aid in favour of the countries of Central and Eastern Europe (Albania, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia), as amended by Council Regulation (EEC) No 2698/90 of 17 September 1990 (OJ L 257, 21.9.1990, p. 1), Council Regulation (EEC) No 3800/91 of 23 December 1991 (OJ L 357, 28.12.1991, p. 10), Council Regulation (EEC) No 2334/92 of 7 August 1992 (OJ L 227, 11.8.1992, p. 1), Council Regulation (EEC) No 1764/93 of 30 June 1993 (OJ L 162, 3.7.1993, p. 1) and Council Regulation (EC) No 1366/95 of 12 June 1995 (OJ L 133, 17.6.1995, p. 1).

() Council Regulation (EEC, Euratom No 2157/91 of 15 July 1991 concerning the supplying of technical assistance to the Union of Soviet Socialist Republics in its efforts towards the improvement and recovery of the economy (OJ L 201, 24.7.1991, p. 2) and Council Regulation (Euratom, EEC) No 2053/93 of 19 July 1993 (OJ L 187, 29.7.1993, p. 1) concerning the supplying of technical assistance to the independent States of the former Union of Soviet Socialist Republics and to Mongolia in their efforts towards the improvement and recovery of the economy.

() European Community Humanitarian Office.

() Budget headings B7-600, B7-620 and B7-634.

() Situations of this kind were pointed out by the Court in its Special Report on the MED programmes, and have also been noted in Chapter 5 of this Report (ERDF).

() Programme Management Unit.

() 'Preparation of the associated countries of Central and Eastern Europe for integration into the internal market of the Union` Doc COM (95) 163 final of 3 May 1995.

() An agreement concluded on 15 October 1991 at the G-24 meeting, pursuant to which the Commission and the EBRD agreed to ensure that investment projects in the PHARE countries would be prepared in a coordinated manner, with the Commission financing the preliminary studies.

() Decision 91/658/EEC (OJ L 362, 31.12.91, p. 89).

(*) The Commission's replies are on page 283

() Special Report No 1/96 (OJ C 240, 19.8.1996), and Special Report No 2/96 (OJ C 287, 30.9.1996).

() Transfer of appropriations No 29/95, SEC(95) 1700 of 10.10.1995 (the 'Notenboom` global transfer).

() The Caucasus operation covers Armenia, Azerbaijan, Georgia, Tajikistan and Kyrgystan and involves 197 Mio ECU financed as follows:

- 80 Mio ECU from EAGGF Guarantee

- 65 Mio ECU from B7-20 Food Aid

- 35 Mio ECU from B7-21 Humanitarian Aid

- 17 Mio ECU from TACIS.

(see Conclusions of the Council (General Affairs) of 17 July 1995).

() Council Regulation (EEC) No 3972/86 of 22 December 1986 (OJ L 370, 30.12.1986). A new food aid regulation including these countries was proposed by the Commission in 1995, but was not adopted in time to permit 1995 appropriations to be used.

() Transfer of appropriations No 36/95, SEC(95) 1812 final of 31 October 1995.

() Agreement between the European Parliament, the Council and the Commission of 12 February 1990.

() Transfer of appropriations No 20/95, SEC(95) 1053 of 21 June 1995.

() See letter of 8 September 1995 from Mr Haensch, President of the European Parliament, to the President of the Council.

() Council Regulation (EC) No 1734/94 of 11 July 1994 on financial and technical cooperation with the Occupied Territories (OJ L 182, 16.7.1994).

() Council Regulation (EC) No 1735/94 of 11 July 1994 modifying Council Regulation (EEC) No 1763/92 of 29 June 1992 concerning financial cooperation in respect of all Mediterranean non-member countries (OJ L 181, 1.7.1992).

() Council Decision 94/276/CFSP of 19 April 1994 on a joint action adopted by the Council on the basis of Article J(3) of the Treaty on European Union, in support of the Middle East Peace Process (OJ L 119, 7.5.1994).

() To finance the EU Electoral Unit providing support for the EU observers to the Palestinian elections.

() Transfer of appropriations No 5/95 SEC(95)759 of 15 May 1995. Transfer of appropriations No 30/95 SEC(95)1654 of 5 October 1995.

() Article 2 of the Regulation provides, amongst other things, for the 'setting up and improvement of institutions necessary for the proper working of the public administration and the advancement of democracy and human rights. Community aid may be given for investment projects, feasibility studies, technical assistance and training`. This does not cover subsidies for the day-to-day functioning of those institutions.

() Special Report No 2/96 (OJ C 287, 30.9.1996).

() OJ L 309, 21.12.1995.

() Transfer of Appropriations No 49/95, SEC(95)2203 of 11 December 1995.

() Transfer of Appropriations No 50/95, SEC(95)2287 of 20 December 1995.

() The Council Decision makes no distinction between the operations of the High Representative in Brussels and in Sarajevo. It covers the total mission.

() See, for example, SEC(95)1301/4 of 22 July 1995.

() See paragraphs 15.59 to 15.64, Annual report concerning the financial year 1991 (OJ C 330, 15.12.1992), paragraph 11.68, Annual report concerning the financial year 1994 (OJ C 303, 14.11.1995), and paragraph 144 of Special Report No 1/96 (OJ C 240, 19.8.1996).

() In its 'Rapport sur l'exécution du budget de la Commission au 31 décembre 1995`, the Commission states openly that in the area of NGO co-financing (B7-5010) a 10% increase in financial resources in 1995 had not been accompanied by a corresponding increase in human resources, so that delays had occurred in the examination of new proposals, the commitment of funds and the preparation of payment orders.

() See for example the comments on page 62 of the 'Rapport sur l'exécution du budget de la Commission au 31 décembre 1995` (SEC(96) 250 concerning the implementation problems in the Mediterranean countries.

() Paragraph 13.53, Annual report concerning the financial year 1992 (OJ C 309, 16.11.1993), and paragraphs 13.57 to 13.59, Annual report concerning the financial year 1993 (OJ C 327, 24.11.1994).

() Paragraph 17 of Court of Justice ruling, Case 16/88 Commission v. Council.

() Communication to the Commission for written procedure in respect of Decision E/2084/95 of 17 November 1995.

() Chapter 11, Annual report concerning the financial year 1994 (OJ C 303, 14.11.1995), notably paragraphs 11.36 to 11.44.

() 'The International Response to Conflict and Genocide: Lessons from the Rwanda Experience`, Synthesis Report of the Joint Evaluation of Emergency Assistance to Rwanda, March 1996, page 45. The Joint Evaluation was a multinational multi-donor effort, with a Steering Committee consisting of representatives from 19 OECD member bilateral donor agencies, the European Union and the Development Assistance Committee of the OECD; nine multilateral agencies; the ICRC and the International Federation of the Red Cross (IFRC), and five international NGOs.

() The Joint Evaluation of Emergency Assistance to Rwanda also stressed the responsibility of donors to standardize amongst themselves the formats they use for reporting requirements of agencies to whom they provide funding. (Joint Evaluation Synthesis Report, page 61).

() OT/95/01B support for the running costs of the Palestinian primary and secondary schools.

() These reviews, which are conducted in accordance with International Standards on Auditing, include monitoring fund disbursements to ensure that disbursements are made in a transparent manner, that there are adequate controls on disbursements, and that all disbursements are for eligible expenditure; that the amounts for which reimbursements are requested are properly accounted for; checking the accounting systems, identifying internal control weaknesses and recommending corrective action.

() The delays in the transfer of the funds meant that the consultant carried out more missions on the spot than initially foreseen.

() Eighty Mio ECU, of which 20 Mio ECU from 1994 appropriations.

() EuronAid is an association of non-governmental organizations (NGOs) which programmes, procures and mobilizes food aid provided by the Commission to its member NGOs.

() For example, the Fonds de Développement Agricole in Morocco, FEPEX in Central America (Honduras and Nicaragua).

() See, for example, Chapter 13, Annual report concerning the financial year 1990 (OJ C 324, 13.12.1991).

() See Chapter 13, Annual report concerning the financial year 1993 (OJ C 327, 24.11.1994).

() See, for example, paragraphs 13.24 to 13.27, Annual report concerning the financial year 1990 (OJ C 324, 13.12.1991) concerning the application of the provisions in the General Conditions governing co-financed projects of NGOs; paragraphs 12.50 to 12.52, Annual report concerning the financial year 1992 (OJ C 309, 16.11.1993), concerning the irregular 'Mutual Trust Fund` that the Commission allowed EuronAid to establish with the interest earned on advances for food aid operations; paragraph 13.71, Annual report concerning the financial year 1993, which considered the treatment of interest earned on funds advanced by the Commission to financial intermediaries under the ECIP scheme (OJ C 327, 24.11.1994); paragraphs 66 to 70, Special Report concerning the implementation of the MED-programmes, (OJ C 240, 19.8.1996), where it was found that the Commission's treatment of interest earned on advances to the Agence pour les Réseaux Transméditerranéens was not in accordance with the financial regulation.

() Article 111(4) of the financial regulation provides that interest earned on any accounts that have been established in the financial institution of a recipient State in order to make payments in the currency of that State shall be used exclusively for the projects concerned, unless otherwise agreed when the functions of the paying agent are being exercised by a public financial institution. The only other reference to interest on amounts paid out by the Commission is in Article 49, which refers to the rules to be applied for the payment of any interest owed by the recipients of Community aid in the event of recovery of undue payments to the Community. Article 94 of the implementing rules, which relates to Article 49 of the financial regulation does not cover interest earned while funds are held by a beneficiary.

() This would affect the situation should the project or action not be implemented and the rights of the Commission to recover unused amounts.

() Especially those which are Members of the International Organization of Supreme Audit Institutions (INTOSAI).

() See paragraphs 11.54 and 11.59, Annual report concerning the financial year 1994 (OJ C 303, 14.11.1995).

() Paragraphs 10.51, 10.52 and 10.83 of this report.

(*) The Commission's replies are on page 313

() The third Lomé Convention (OJ L 86, 31.3.1986).

() The fourth Lomé Convention (OJ L 229, 17.8.1991).

() The Court of Auditors' Annual Report on the financial year 1994, paragraph 12.4 (OJ C 303, 14.11.1995).

The Court of Auditors' Annual Report on the financial year 1993, paragraph 15.4 (OJ C 327, 24.11.1994).

() The counterpart funds are generated in the local currency of the beneficiary country to an amount equivalent to the foreign currency provided by the Community and used by the Central Bank to pay foreign debts. In its Resolution of 27 May 1991 (paragraph 8), the Council stated, with reference to the use of counterpart funds, that 'priority shall be given to the social aspect of adjustment, by ensuring adequate cover of the education and health sectors and paying particular attention to the environment`.

() Articles 224(d) and 243 to 250 of the fourth Lomé Convention, and the Internal Agreement on the financing and administration of Community aid under the fourth ACP-EEC Convention, Article 20.

() Article 281(2)(e) of Lomé IV.

() Council Resolutions of May 1988, May 1989 (Council doc. 6453/89), May 1991 (Council doc. 6379/91), May 1992 (Council doc. 6038/92) and June 1995 (Council doc. 7711/95).

() Commission document on the implementation of support for structural adjustment under Lomé IV-VII/4 of 2 March 1990.

() See the Court's Special Report No 2/95, paragraphs 7.5 - 7.24 (OJ C 167, 3.7.1995).

() The Court's Special Report No 2/94 (OJ C 97, 6.4.1994).

() Doc. FR/PR/263/263848 (PE 211.583), p. 8.

() Article 247(2).

() Article 248(c).

() Article 250(2).

() Article 224(d).

() Benin; Burkina Faso*; Cameroon; Ivory Coast; Ethiopia; Ghana*; Mali*; Mozambique; Tanzania; Zambia*; Zimbabwe* (*: on-the-spot check).

() The support for the balance of payments of these 11 countries granted by the IFIs in the form of loans over the same period totalled 3 170 Mio ECU (World Bank) and 1 850 Mio ECU (IMF).

() Outside Stabex and Sysmin.

() Ranging from 10 % (Burundi) to 97 % (Zambia).

() Ghana, Mozambique, Tanzania, Zambia and Zimbabwe.

() Framework document on economic and financial policy.

() These countries belong to three regions: east Africa, southern Africa and the Indian Ocean.

() Article 281(1)(b).

() Kenya, Madagascar, Rwanda and Nigeria.

() Annual Report of the Court concerning the financial year 1993, paragraphs 15.79 - 15.81 (OJ C 327, 24.11.1994).

() Burundi: 12 Mio ECU; Jamaica: 7,1 Mio ECU.

() Togo: 17 Mio ECU.

() 1993: 580 Mio ECU; 1994: 320 Mio ECU.

() Benin, Burkina Faso, Comoros, Mali, Mauritania, Papua New Guinea.

() Article 292(1) of the Convention and Article 25(2) of the Internal Agreement; see also DAS-EDF Report, paragraph 3.50 (OJ C 352, 30.12.1995).

() SEC (91) 2320 final, page 14.

() The Court's Annual Report on the financial year 1992, paragraphs 14.39 - 14.41 (OJ C 309, 16.11.1993).

() The Court's Annual Report on the financial year 1992, paragraph 14.39 (OJ C 309, 16.11.1993).

The Court's Annual Report on the financial year 1993, paragraphs 15.83 - 15.84 (OJ C 327, 24.11.1994).

() Document given to the Court by the Commission in the context of the contradictory procedure.

() The African Development Bank, the World Bank, Canada, the Netherlands, Sweden and the European Union.

() See in this respect the observations made in paragraphs 11.24 11.27 of the Court's 1994 Annual Report with regard to the structural adjustment support programmes in the countries in the southern Mediterranean (OJ C 303, 14.11.1995). The Commission, moreover, also recommended this point of view to the Member States, with the result that in the end the Lomé Convention negotiations made provision in the eighth EDF for the possibility of direct budgetary aid.

() See paragraph 9 of the Council Resolution of 27 May 1991, in particular concerning the assurance to be obtained with regard to an efficient and fair budget level and composition.

() The Court's Annual Report on the financial year 1994, paragraph 11.37 (OJ C 303, 13.11.1995).

() In this context, see the 'aid accountability initiative`, under the auspices of the UNDP, which aims to support and to coordinate donors' and recipient countries' efforts to improve the reporting of the results of measures carried out in developing countries.

() See the observations made in paragraph 11.40 of the Court's Annual Report on the financial year 1994, relating to the structural adjustment support programmes in southern Mediterranean countries (OJ C 303, 14.11.1995).

() Guideline approved by the Council in its Resolution (Doc. 6379/91).

() June 1994 (50 %) and June 1995 (50 %) exchange rate.

() September 1995 exchange rate.

() See Tables 12.6(a) and 12.6(b).

() Article 244(f) of the fourth Lomé Convention.

() See Council Resolution of 1 June 1995.

() See the Resolution of the Joint ACP-EU Assembly on the mid-term review of Lomé IV (6 October 1994).

() Human Development Report 1995 (UNDP).

() Article 224(h) of Lomé IV.

() Article 224(h) and (i) of Lomé IV.

() Principles of the OECD's Development Assistance Committee (DAC) concerning the programme aid, paragraph 259 (ISBN 92-64-23779-8).

() The Court's Special Report No 2/94 on the import programmes carried out under the sixth EDF, paragraph 4.18 (OJ C 97, 6.4.1994).

() Article 281(1)(b) of Lomé IV.

() Article 250(3) of Lomé IV.

() Article 292(2) of Lomé IV.

() In its 'principles for the programme aid`, the OECD's DAC is of the opinion that the splitting-up of the programme aid into tranches... is an efficient means of ensuring that the programme is effectively implemented, in so far as it makes the payments of assistance dependent on the application of the agreed reforms.

() Article 250(2) of Lomé IV.

() Article 224(d) and (i) of Lomé IV.

() Article 243(b) and (g) of Lomé IV (OJ L 229, 17.8.1991).

() See the concern expressed in the proposal adopted by the Joint ACP-EEC Assembly at its meeting in Kampala on 28 February 1991 (OJ C 216, 19.8.1991).

() Data for 1996 are estimates from the WORLD Bank.

(*) The Commission's replies are on page 342

() Annual Report concerning the financial year 1994, paragraphs 13.38-13.89 and the Commission's replies, in particular the reply to 13.89.

() 1995 revenue and expenditure account, Volume II, page 687.

() The Court's 1987 Annual Report, paragraph 10.77.

() Special report on the accommodation policies of the institutions of the European Communities, paragraph 7.6(a) (OJ C 221, 3.9.1979) and Annual Report concerning the financial year 1987, paragraphs 10.56 - 10.58.

() The Court's 1994 Annual Report, paragraphs 13.1 to 13.37.

() The Court's 1994 Annual Report, paragraphs 13.5 to 13.16.

() The Community satellite organizations can be divided into three types of agency:

-the 'first generation` organizations: the European Centre for the Development of Vocational Training (Cedefop) in Salonica and the Foundation for the Improvement of Living and Working Conditions, Dublin;

-the non-self-financing 'second generation` satellite organizations: the European Environment Agency, European Training Foundation, Monitoring Centre for Drugs and Drug Addiction, Agency for Health and Safety at Work;

-the 'second generation` satellite organizations which are self-financing: Agency for the Evaluation of Medicinal Products, Office for Harmonization in the Internal Market, Community Plant Variety Office and the Translation Centre.

() Notes XIX/D/00407 of 18.1.1996, XIX/D/01141 of 6.2.1996, XIX/D/01877 of 29.2.1996, XIX/D/02576 of 20.3.1996, XIX/D/02558 of 20.3.1996.

() Except the subsidy for the Translation Centre, which appears in Part A, but which should only be used in exceptional circumstances, as the Centre is funded from contributions from the satellite bodies which it serves.

() For organizations with a specific purpose such as the European Agency for the Evaluation of Medicinal Products, the Office for Harmonization in the Internal Market and the Community Plant Variety Office, the main element of their 'revenue` - and, in time, practically the only element - will be made up of fees received for services provided by these organizations.

() See Commission communication to the budgetary authority on the main budgetary aspects in the rules governing decentralized Community bodies (SEC(92) 2389 final of 17 December 1992).

() European Environment Agency, European Agency for the Evaluation of Medicinal Products, Office for Harmonization in the Internal Market, Community Plant Variety Office.

() Declaration of the European Parliament and the Council on the Agencies - Document 11679/95, PV CONS 62 BUDGET 10, page 10.

(*) The Institutions replies are on page 352

() Doc No 9/96 of the common organizational structure (COS) of 2 February 1996.

() See the ESC/COR proposal for a transfer of appropriations 1995/C-3 (appropriations transfer No 28/95).

ANNEX I

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.

>TABLE>

ANNEX II

Annex concerning the abbreviations and symbols used in the report and background information on the general budget

1. Sources of financial data

The financial data in the diagrams included in this report have been drawn from the revenue and expenditure accounts and the balance sheets of assets and liabilities of the European Communities () 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.

2. Monetary unit

All the financial data are presented in millions of ECU (Mio ECU), rounded 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 historic 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 prospects`. This should be taken into account when comparing the various financial years.

4. Abbreviations and symbols

EC European Community(ies)

ECSC European Coal and Steel Community

EEC European Economic Community

EAEC or

Euratom European Atomic Energy Community

EFTA European Free Trade Association

GNP Gross national product

VAT Value-added tax

BFR Belgian franc

DKR Danish crown

DM German mark

DR Greek drachma

ESC Portuguese escudo

FF French franc

FMK Finnish markka

HFL Dutch guilder

IRL Irish pound

LFR Luxembourg franc

LIT Italian lira

OS Austrian schilling

PTA Spanish peseta

SKR Swedish krona

UKL Pound sterling

u.a. Unit of account (until 1977)

EUA European unit of account (from 1978 to 1980)

ECU European currency unit (as from 1 January 1981)

Mio ECU Million European currency units

DA Differentiated appropriations

NDA Non-differentiated appropriations

CA Commitment appropriations

PA Payment appropriations

AFC Appropriations for commitment

AFP Appropriations for payment

B Belgium

DK Denmark

D Germany

GR Greece

E Spain

F France

IRL Ireland

I Italy

L Luxembourg

NL Netherlands

AT Austria

P Portugal

FI Finland

SE Sweden

UK United Kingdom

EUR 10/12 Total of the 10 or 12 Member States of the European Communities

CEEC Central and East European Countries

ex-GDR The former German Democratic Republic

NIS Newly independent States (ex-Soviet Union)

EDF European Development Fund

ACP African, Caribbean and Pacific States signatories to the Lomé Convention

OCTs Overseas countries and territories

FOD French overseas departments

RRP Rehabilitation and revival plan

Stabex Stabilization of export earnings

Sysmin System of stabilization of export earnings from mining products

FR Financial Regulation of 21 December 1977 (see also the foreword on page 2)

OJ Official Journal of the European Communities

S Budgetary section

Ss Budgetary subsection

T Budgetary title

Ch Budgetary chapter

0,0 Data between zero and 0,05

- Lack of data

% Percentage

D Diagram referred to within other diagrams (e.g. D IX)

5. Background information on the general budget

5.1. Origin of the general budget

The general budget was created by the Merger Treaty () (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 () (Article 10).

5.2. Legal basis

The general budget is governed by the financial provisions of the Treaties of Paris () (Article 78 ECSC) and Rome () () (Articles 199 to 209 EEC and Articles 171 to 183 Euratom) and by the Financial Regulations ().

5.3. 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 specialized according to their nature or intended use (speciality). The budget is authorized for one financial year only (annuality). Budgetary revenue and expenditure must balance (equilibrium). There are some exceptions to these general principles.

5.4. 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 five sections: (I) Parliament; (II) Council (annexed: Economic and Social Committee); (III) Commission (7); (IV) Court of Justice; (V) Court of Auditors; (VI) Economic and Social Committee and Committee of the Regions.

Within each section (), 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.

5.5. Monetary unit of the general budget

The budget is established and implemented in ECU. 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 = 0,6242 DM + 0,08784 UKL + 1,332 FF + 151,8 LIT + 0,2198 HFL + 3,301 BFR + 0,130 LFR + 0,1976 DKR + 0,008552 IRL + 1,440 DR + 1,393 ESC + 6,885 PTA.

The rates of conversion at 31 December 1994 between the ECU and the national currencies were as follows: 1 ECU = 13,2554 OS = 38,6979 BFR = 7,29536 DKR = 1,88397 DM = 311,567 DR = 196,505 ESC = 6,43979 FF = 5,71695 FIM = 2,10857 HFL = 0,82047 IRL = 38,6979 LFR = 2 082,71 LIT = 159,549 PTA = 8,69726 SEK = 0,847242 UKL.

5.6. 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 ().

Besides own resources, there are other, marginal items of revenue (see Diagram XIII).

5.7. 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 commitment (AFC) () = non-differentiated appropriations (NDA) + commitment appropriations (CA) (1)

(b) the total of appropriations for payment (AFP) (1) = non-differentiated appropriations (NDA) + payment appropriations (PA) (1).

Revenue raised in the budget is intended to cover the total appropriations for payment. 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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5.8. Implementation of the general budget

5.8.1. 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 (). The Financial Regulation lays down the implementation procedures and, in particular, the responsibilities of the authorizing officers, accounting officers, administrators of advance funds and Financial Controllers of the institutions (). In certain specific areas (EAGGF-Guarantee, mainly the Structural Funds) the management of Community funds is shared with the Member States.

5.8.2. 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 ().

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.

5.8.3. Implementation of expenditure

The estimated expenditure is entered in the budget. The budgetary implementation of expenditure, i.e. the evolution and utilization of appropriations, may be summarized as follows:

(a) appropriations for commitment:

- evolution of appropriations: the appropriations for commitment allocated in the initial budget can undergo certain modifications until the final appropriations for commitment are obtained: final appropriations for commitment = initial budget (NDA and CA) + amending and supplementary budgets + supplementary receipts () + transfers (1) + commitment appropriations carried over from the preceding financial year () + non-automatic carry-overs () from the preceding financial year (uncommitted NDA) + released commitment appropriations from preceding financial years which have been made available again () + repayments of advances giving rise to re-utilization ();

- utilization of appropriations: the final appropriations for commitment are available in the financial year for use in the form of commitments entered into (appropriations for commitment utilized = 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(6). Non-utilized commitment appropriations of the financial year may be carried over by the Commission to the following financial year(5). 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 payment:

- evolution of appropriations: appropriations for payment may also undergo modifications before leading to the final appropriations for payment: final appropriations for payment = initial budget (NDA and PA) + amending and supplementary budgets + supplementary receipts(4) + transfers(1) + appropriations carried over from the previous financial year in the form of automatic carry-overs () or non-automatic carry-overs () + repayments of advances giving rise to re-utilization (8);

- utilization of appropriations: the appropriations for payments are available in the financial year for use as payments (utilized appropriations for payment = amount of payments made from the appropriations of the financial year);

- carry-overs of appropriations from one financial year to the next financial year: non-utilized appropriations of the financial year may be carried over to the next financial year in the form of automatic () or non-automatic () 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 payment of the financial year plus payments against appropriations for payment 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 5.8.4) = payments against appropriations for payment of the financial year plus appropriations for payment of the financial year carried over to the following financial year.

5.8.4. 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 () (see Diagram VII A).

5.9. Presenting 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 ().

5.10. External audit

As from 1977 the external audit of the general budget has been carried out by the Court of Auditors of the European Communities (). The Court of Auditors examines the accounts of all revenue and expenditure of the general budget. It shall 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.

5.11. Discharge and follow-up

As from 1977 the following provisions are applicable (): 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 ().

() In the case of the 1995 financial year: revenue and expenditure account and financial balance sheet concerning the budgetary transactions pertaining to the financial year 1995 [Doc SEC(96) 421-424].

() Merger Treaty (8 April 1965): Treaty establishing a Single Council and Single Commission of the European Communities.

() Treaty of Luxembourg (22 April 1970): Treaty amending certain budgetary provisions of the Treaties establishing the European Communities and of the Merger Treaty.

() Treaty of Paris (18 April 1951): Treaty establishing the European Coal and Steel Community (ECSC).

() Treaty of Rome (25 March 1957): Treaty establishing the European Economic Community (EEC).

() Treaty of Rome (25 March 1957): Treaty establishing the European Atomic Energy Community (Euratom).

() Mainly the Financial Regulation of 21 December 1977 (OJ L 356, 31.12.1977). See in this respect the foreword on page 2.

() 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 Regional Committee) constitutes an intermediary subdivision of Part A 'Economic and Social Committee` Part B 'Regional Committee` and Part C 'Common organizational structure`.

() 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 harmonization of the compilation of GNP (OJ L 49, 21.2.1989).

() It is important to note the differences between 'appropriations for commitment` and 'commitment appropriations` and between 'appropriations for payment` and 'payment appropriations`. The two terms 'commitment appropriations` and 'payment appropriations` are used exclusively in the context of differentiated appropriations.

() Articles 78d ECSC, 205 EC, 179 Euratom and 22(2) of the Financial Regulation.

() Articles 21 to 55 and 73 to 77 of the Financial Regulation.

() 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).

() Article 96(2) of the Financial Regulation.

() Article 7(2)(a) of the Financial Regulation.

() Article 7(1)(b) of the Financial Regulation.

() Articles 7(1)(a) and 7(3) of the Financial Regulation.

() ) Articles 7(1)(a) and 7(2)(b) of the Financial Regulation.

() Article 7(6) of the Financial Regulation.

() Article 7(7) of the Financial Regulation.

() Article 7(6) of the Financial Regulation.

() Article 7(7) of the Financial Regulation.

() Articles 32 of the Financial Regulation and Articles 15 and 16 of Council Regulation (EEC, Euratom) No 1552/89 (OJ L 155, 7.6.1989).

() Articles 78 to 82 of the Financial Regulation.

() 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.

() Articles 78g ECSC, 206bEC, 180b Euratom.

() Article 89 of the Financial Regulation.