# C_2006312EN.01001801.xml

| 19.12.2006 | EN | Official Journal of the European Union | C 312/18 |
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19.12.2006

EN

Official Journal of the European Union

C 312/18

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REPORT

REPORT

on the annual accounts of the European Agency for Reconstruction for the financial year 2005 together with the Agency's replies

(2006/C 312/04)

CONTENTS

| 1-2 | INTRODUCTION |
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1-2

| 3-6 | STATEMENT OF ASSURANCE |
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3-6

| 7-11 | OBSERVATIONS |
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7-11

Tables 1 to 4

The Agency's replies

The Agency's replies

INTRODUCTION

| 1. | The European Agency for Reconstruction (hereinafter the Agency) was established by Council Regulation (EC) No 1628/96 (1), as amended by Council Regulation (EC) No 2068/2004 (2). When it was set up in 2000, the Agency was responsible for managing the EU's aid programmes in Kosovo. Its mandate was later extended to Serbia and Montenegro and the former Yugoslav Republic of Macedonia. The Agency's head office is in Thessalonica and it has operational centres in Belgrade, Podgorica, Pristina and Skopje. It implements programmes to foster institution-building and good governance, to promote the development of a market economy and essential infrastructure and to consolidate civil society. Its mandate is scheduled to end on 31 December 2006 (3). |
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1.

The European Agency for Reconstruction (hereinafter the Agency) was established by Council Regulation (EC) No 1628/96 (1), as amended by Council Regulation (EC) No 2068/2004 (2). When it was set up in 2000, the Agency was responsible for managing the EU's aid programmes in Kosovo. Its mandate was later extended to Serbia and Montenegro and the former Yugoslav Republic of Macedonia. The Agency's head office is in Thessalonica and it has operational centres in Belgrade, Podgorica, Pristina and Skopje. It implements programmes to foster institution-building and good governance, to promote the development of a market economy and essential infrastructure and to consolidate civil society. Its mandate is scheduled to end on 31 December 2006 (3).

1

2

3

| 2. | Table 1 summarises the Agency's competences and activities. Key information from the financial statements drawn up by the Agency for the financial year 2005 is presented in Tables 2, 3 and 4. |
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2.

Table 1 summarises the Agency's competences and activities. Key information from the financial statements drawn up by the Agency for the financial year 2005 is presented in Tables 2, 3 and 4.

Table 1

Tables 2, 3 and 4

STATEMENT OF ASSURANCE

| 3. | This Statement of Assurance is addressed to the European Parliament and the Council in accordance with Article 185(2) of Council Regulation (EC, Euratom) No 1605/2002 (4). It was drawn up following an examination of the Agency's accounts, as required by Article 248 of the Treaty establishing the European Community. |
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3.

This Statement of Assurance is addressed to the European Parliament and the Council in accordance with Article 185(2) of Council Regulation (EC, Euratom) No 1605/2002 (4). It was drawn up following an examination of the Agency's accounts, as required by Article 248 of the Treaty establishing the European Community.

4

| 4. | The Agency's accounts for the financial year ended 31 December 2005 (5) were drawn up by its Director, pursuant to Article 8(2) of Council Regulation (EC) No 2667/2000 (6), and sent to the Court, which is required to give its opinion on their reliability and on the legality and regularity of the underlying transactions. |
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4.

The Agency's accounts for the financial year ended 31 December 2005 (5) were drawn up by its Director, pursuant to Article 8(2) of Council Regulation (EC) No 2667/2000 (6), and sent to the Court, which is required to give its opinion on their reliability and on the legality and regularity of the underlying transactions.

5

6

| 5. | The Court conducted an audit in accordance with its policies and standards, which are based on international auditing standards that have been adapted to the Community context. The audit was planned and performed to obtain reasonable assurance that the accounts are reliable and the underlying transactions are legal and regular. |
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5.

The Court conducted an audit in accordance with its policies and standards, which are based on international auditing standards that have been adapted to the Community context. The audit was planned and performed to obtain reasonable assurance that the accounts are reliable and the underlying transactions are legal and regular.

| 6. | The Court has thus obtained a reasonable basis for the Statement below. |
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6.

The Court has thus obtained a reasonable basis for the Statement below.

Reliability of the accountsThe Agency's accounts for the financial year ended 31 December 2005 are, in all material respects, reliable.Legality and regularity of underlying transactionsExcept for the cases referred to in paragraph 9, the transactions underlying the Agency's annual accounts, taken as a whole, are legal and regular.

Reliability of the accountsThe Agency's accounts for the financial year ended 31 December 2005 are, in all material respects, reliable.Legality and regularity of underlying transactionsExcept for the cases referred to in paragraph 9, the transactions underlying the Agency's annual accounts, taken as a whole, are legal and regular.

OBSERVATIONS

| 7. | The role and tasks of the internal auditor are not sufficiently defined and do not always correspond to the duties assigned to this post (7). The internal audit work carried out in 2005 is not formally reported to management. |
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7.

The role and tasks of the internal auditor are not sufficiently defined and do not always correspond to the duties assigned to this post (7). The internal audit work carried out in 2005 is not formally reported to management.

7

| 8. | Following the Court’s observations raised in the 2003 and 2004 annual reports, the Agency took measures to improve the way contracts are awarded. This resulted in increased transparency in various areas; for instance, important decisions made during the evaluation process which affect the contract award are better documented. This in turn has improved the overall discipline over the evaluation and contract award procedures. |
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8.

Following the Court’s observations raised in the 2003 and 2004 annual reports, the Agency took measures to improve the way contracts are awarded. This resulted in increased transparency in various areas; for instance, important decisions made during the evaluation process which affect the contract award are better documented. This in turn has improved the overall discipline over the evaluation and contract award procedures.

| 9. | Notwithstanding the above, the Court noted several cases where anomalies were due to the fact that the selection criteria chosen are unrealistic as they are ill-suited to the circumstances in which the Agency is operating. |
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9.

Notwithstanding the above, the Court noted several cases where anomalies were due to the fact that the selection criteria chosen are unrealistic as they are ill-suited to the circumstances in which the Agency is operating.

| 10. | The Court welcomes the progress made in the area of tendering and encourages the Agency to further intensify its efforts in order to ensure that the contracts awarded fully comply with all regulatory provisions. |
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10.

The Court welcomes the progress made in the area of tendering and encourages the Agency to further intensify its efforts in order to ensure that the contracts awarded fully comply with all regulatory provisions.

| 11. | In its 2004 report the Court noted, in a review of operations entrusted to the United Nations Mission in Kosovo (UNMIK), an absence of adequate financial control by the Agency in making payments and serious difficulties in closing operations, mainly due to an absence of adequate accounts for the projects and of sufficient justification for the expenditure. Although the Agency made significant efforts in 2005 to resolve the situation, the problems for closing operations remained. The audits carried out by private audit firms on behalf of the Agency on a number of projects confirmed that funds had to be recovered from beneficiaries, an issue the Agency has not yet addressed. These problems could be resolved if the Agency ensured that the terms of the agreement applicable to the management of these funds were complied with (8). |
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11.

In its 2004 report the Court noted, in a review of operations entrusted to the United Nations Mission in Kosovo (UNMIK), an absence of adequate financial control by the Agency in making payments and serious difficulties in closing operations, mainly due to an absence of adequate accounts for the projects and of sufficient justification for the expenditure. Although the Agency made significant efforts in 2005 to resolve the situation, the problems for closing operations remained. The audits carried out by private audit firms on behalf of the Agency on a number of projects confirmed that funds had to be recovered from beneficiaries, an issue the Agency has not yet addressed. These problems could be resolved if the Agency ensured that the terms of the agreement applicable to the management of these funds were complied with (8).

8

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 28 September 2006.

For the Court of Auditors

Hubert WEBER

President

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(1)  OJ L 204, 14.8.1996, p. 1.

1

(2)  OJ L 358, 3.12.2004, p. 2.

2

(3)  Article 1(4) of Regulation (EC) No 2068/2004.

3

(4)  OJ L 248, 16.9.2002, p. 1.

4

(5)  These accounts were drawn up on 11 July 2006 and received by the Court on 21 July 2006.

5

(6)  OJ L 306, 7.12.2000, p. 7.

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(7)  He also advises the management.

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(8)  Financial and Administrative Framework Agreement (29 April 2003).

8

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Table 1

European Agency for Reconstruction (Thessalonica)

| Areas of Community competence deriving from the Treaty | Competences of the Agency as defined in Council Regulation (EC) No 2667/2000 of 5 December 2000 | Governance | Resources available to the Agency in 2005

  (2004) | Activities and services provided in 2005 |
| --- | --- | --- | --- | --- |
| The Community shall carry out, within its spheres of competence, economic, financial and technical cooperation measures with third countries. Such measures shall be complementary to those carried out by the Member States and consistent with the development policy of the Community.

  (Article 181a) | Objectives:

  To provide EU assistance:






  (i) | for reconstruction and the return of refugees and displaced persons; |

Areas of Community competence deriving from the Treaty

Competences of the Agency as defined in Council Regulation (EC) No 2667/2000 of 5 December 2000

Governance

Resources available to the Agency in 2005

(2004)

Activities and services provided in 2005

The Community shall carry out, within its spheres of competence, economic, financial and technical cooperation measures with third countries. Such measures shall be complementary to those carried out by the Member States and consistent with the development policy of the Community.

(Article 181a)

Objectives:

To provide EU assistance:

(i)

for reconstruction and the return of refugees and displaced persons;

| (ii) | to promote sound administration, stronger institutions and the rule of law; |
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(ii)

to promote sound administration, stronger institutions and the rule of law;

| (iii) | to support the development of a market economy and investment in essential physical infrastructure and environmental measures; |
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(iii)

to support the development of a market economy and investment in essential physical infrastructure and environmental measures;

| (iv) | to support social development and consolidate civil society. |
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(iv)

to support social development and consolidate civil society.

Application:

The agency manages the principal aid programmes in Serbia and Montenegro (Republic of Serbia, Kosovo and Republic of Montenegro) and in the Former Yugoslav Republic of Macedonia (FYROM). Beneficiaries may include States, bodies under UN administration, federated regional and local bodies, public and semi -public bodies, both sides of industry, business support organisations, cooperatives, mutual companies, charities, foundations and NGOs.

Tasks:

| — | to advise the Commission of priority needs, |
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—

to advise the Commission of priority needs,

| — | to devise programmes for reconstruction and the return of refugees and displaced persons, |
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—

to devise programmes for reconstruction and the return of refugees and displaced persons,

| — | to take every possible step to implement EU assistance. |
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—

to take every possible step to implement EU assistance.

1. Governing Board

Comprises one representative from each Member State, two representatives from the Commission and an observer from the European Investment Bank.

2. Director

Appointed by the Governing Board on a proposal from the Commission.

Operational Centres in Belgrade, Pristina, Podgorica and Skopje with a high level of management autonomy.

3. External control

Court of Auditors.

4. Discharge Authority

The Parliament following a recommendation from the Council.

Final Budget:

307,5 million euro (374,6 million euro)

Staff at 31 December 2005:

114 (114) TA posts listed in the establishment plan

TA posts occupied: 88 (88)

Other posts:

Local staff: 170 (195) posts of which 162 (173) were occupied.

Contract staff: 28 (0) posts of which 26 (0) were occupied.

Total staff: 276 (261)

Responsible for

Operational tasks: 169 (184)

Administrative tasks: 107* (77)

* includes all staff in Administration, Finance, and IT.

By operational centre (main developments):

KOSOVO: a) Start-up grants, loans, training and business advice for small businesses; b) Assistance for vulnerable persons, including minorities and returnees; c) Management of loans provided earlier from EAR credit schemes; d) Rehabilitation of the heating sub-station in Mitrovica; e) Another six bridges reopened between Pristina and the border crossing with FYROM; f) Support in the areas of JHA and public administration reform.

SERBIA: a) Draft laws in public administration reform; b) Supply of equipment to border police; c) Rehabilitation and supply of equipment to courts; d) Rehabilitation programme for hospitals; e) New jobs created due to loans from the Revolving Credit Fund; f) Training support for enterprises; g) Regional training centres for adults; h) Conclusion of rehabilitation of Sloboda bridge (Danube, Novi Sad) and of the Horgos border crossing point with Hungary; i) Renovation of municipal infrastructures; j) Reform of the statistics office; k) Support for foreign direct investment management; l) Support for active labour measures to secure employment and reduce unemployment; m) Support for European integration activities; n) Support for vulnerable groups such as refugees and internally-displaced persons.

MONTENEGRO: a) Completion of waste management master plan; b) Border crossing with Croatia completed within the framework of assistance with integrated border management; c) Central IT database of the Ministry of the Interior; d) Agency for Human Resources Management, regional centres for vocational education and training; e) New Roads Directorate and transport laws; f) Electric utility unbundling/restructuring, energy efficiency strategy.

FYROM: a) Assistance with the strengthening and creation of new public administration institutions (internal audit function, Data Protection Agency); b) Police reform; c) Strengthening of veterinary and phytosanitary services; d) Assistance with decentralisation of competences to municipalities; e) Upgrade of municipal infrastructure; f) Training of civil servants, mainly ethnic Albanians, to become public servants; g) New jobs created and jobs preserved due to loans to SMEs from the Revolving Credit Fund.

Source: Information submitted by the Agency.

EUROPEAN AGENCY FOR RECONSTRUCTION

Source: Agency data — These tables summarise the data provided by the Agency in its annual accounts.

Table 2

Implementation of the budget for the financial year 2005

| (1000 euro) |
| --- |
| Revenue | Expenditure |
| Source of revenue | Revenue entered in the final budget for the financial year | Revenue collected | Allocation of expenditure | Available appropriations | Appropriations carried over from the previous financial year |
| entered | committed | paid | carried over | cancelled | balance for commitment | commitments carried over | paid | cancelled | outstanding commitments |
| Community subsidies | 306 200 | 97 800 | Title I
  Staff | 18 481 | 17 155 | 16 660 | 495 | 1 360 | — | 317 | 283 | 34 | — |
| Other grants and counterpart funds | 0 | 1 637 | Title II
  Administration | 6 831 | 5 299 | 4 799 | 500 | 1 532 | — | 1 073 | 1 011 | 62 | — |
| Remaining funds | 1 312 | 1 312 | Title III
  Operating activities | 282 200 | 78 551 | 18 879 | 59 672 | 0 | 203 649 | 345 342 | 186 474 | 13 307 | 145 561 |
| Miscellaneous revenue (re-use) | p.m. | 617 | Sub-total | 307 512 | 101 005 | 40 338 | 60 667 | 2 892 | 203 649 | 346 732 | 187 768 | 13 403 | 145 561 |
| | | | Appropriations carried over from 2004 | 309 139 | 143 049 | 34 040 | 166 090 | 4 749 | 170 838 | 0 | 0 | 0 | 0 |
| Total | 307 512 | 101 366 | Total | 616 651 | 244 054 | 74 378 | 226 757 | 7 641 | 374 487 | 346 732 | 187 768 | 13 403 | 145 561 |

(1000 euro)

Revenue

Expenditure

Source of revenue

Revenue entered in the final budget for the financial year

Revenue collected

Allocation of expenditure

Available appropriations

Appropriations carried over from the previous financial year

entered

committed

paid

carried over

cancelled

balance for commitment

commitments carried over

paid

cancelled

outstanding commitments

Community subsidies

306 200

97 800

Title I

Staff

18 481

17 155

16 660

495

1 360

—

317

283

34

—

Other grants and counterpart funds

0

1 637

Title II

Administration

6 831

5 299

4 799

500

1 532

—

1 073

1 011

62

—

Remaining funds

1 312

1 312

Title III

Operating activities

282 200

78 551

18 879

59 672

0

203 649

345 342

186 474

13 307

145 561

Miscellaneous revenue (re-use)

p.m.

617

Sub-total

307 512

101 005

40 338

60 667

2 892

203 649

346 732

187 768

13 403

145 561

Appropriations carried over from 2004

309 139

143 049

34 040

166 090

4 749

170 838

0

0

0

0

Total

307 512

101 366

Total

616 651

244 054

74 378

226 757

7 641

374 487

346 732

187 768

13 403

145 561

Table 3

Revenue and expenditure account for the financial year 2005 (1)

| (1000 euro) |
| --- |
| | 2005 |
| Operating revenue |
| Community subsidies | 261 009 |
| Other subsidies/revenue | 1 832 |
| Total (a) | 262 841 |
| Operating expenditure |
| Staff | 15 727 |
| Administration | 7 212 |
| Operating activities | 243 442 |
| Total (b) | 266 381 |
| Economic result (c = a — b) | –3 540 |

(1000 euro)

2005

Operating revenue

Community subsidies

261 009

Other subsidies/revenue

1 832

Total (a)

262 841

Operating expenditure

Staff

15 727

Administration

7 212

Operating activities

243 442

Total (b)

266 381

Economic result (c = a — b)

–3 540

Table 4

Balance sheet at 31 December 2005 and 31 December 2004 (2)

| (1000 euro) |
| --- |
| | 2005 | 2004 |
| Assets |
| Fixed assets | 1 276 | 1 652 |
| Long-term assets | 40 002 | 61 619 |
| Receivables | 164 859 | 118 118 |
| Cash accounts | 57 917 | 223 860 |
| Total | 264 054 | 405 249 |
| Liabilities |
| Cumulative surplus/deficit | 166 840 | 166 840 |
| Economic result for the year | –3 540 | 0 |
| Commission advances | 74 169 | 205 933 |
| Current liabilities | 26 585 | 32 476 |
| Total | 260 054 | 405 249 |

(1000 euro)

2005

2004

Assets

Fixed assets

1 276

1 652

Long-term assets

40 002

61 619

Receivables

164 859

118 118

Cash accounts

57 917

223 860

Total

264 054

405 249

Liabilities

Cumulative surplus/deficit

166 840

166 840

Economic result for the year

–3 540

0

Commission advances

74 169

205 933

Current liabilities

26 585

32 476

Total

260 054

405 249

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(1)  Data for the financial year 2004 are not shown as they are not comparable with data for 2005 because of the change in the accounting principles applied.

(2)  Data for the financial year 2004 have been restated to allow for comparison with those for 2005.

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THE AGENCY'S REPLIES

| 7. | The Agency has been a pioneer in establishing an Internal Audit Capability, a function that does not yet exist in most of the Agencies. The role and responsibilities (as per Article 38.4 of the FR) follow the evolution of the Commission's approach to the subject. The new regulatory framework will lead to a further formalisation of this work. This function, however, contributed to the improvement of the internal controls in the Agency. |
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7.

The Agency has been a pioneer in establishing an Internal Audit Capability, a function that does not yet exist in most of the Agencies. The role and responsibilities (as per Article 38.4 of the FR) follow the evolution of the Commission's approach to the subject. The new regulatory framework will lead to a further formalisation of this work. This function, however, contributed to the improvement of the internal controls in the Agency.

| 8. | The Agency appreciates the acknowledgements of the improvements. |
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8.

The Agency appreciates the acknowledgements of the improvements.

| 9. | Further refinements of the selection criteria are being continuously implemented in order to have consistently realistic and verifiable criteria in tender documents. This also facilitates the preparation of compliant offers by tenderers. |
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9.

Further refinements of the selection criteria are being continuously implemented in order to have consistently realistic and verifiable criteria in tender documents. This also facilitates the preparation of compliant offers by tenderers.

| 11. | To the extent that this was allowed by the applicable provisions of the Financial and Administrative Framework Agreement between the EC and the UN, and by the administrative situation on the ground, the Agency followed a stricter approach that often led to refusing or delaying payments in the absence of adequate justification or proof of expenditure. Audit reports are rendered obligatory, and the UNMIK or other UN instances concerned are firmly reminded that final payments on accomplished projects will only be made up to the amount certified by a valid external audit. For advanced funds which have not been used in accordance with the provisions of the relevant grant agreement, the recovery process has been launched. |
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11.

To the extent that this was allowed by the applicable provisions of the Financial and Administrative Framework Agreement between the EC and the UN, and by the administrative situation on the ground, the Agency followed a stricter approach that often led to refusing or delaying payments in the absence of adequate justification or proof of expenditure. Audit reports are rendered obligatory, and the UNMIK or other UN instances concerned are firmly reminded that final payments on accomplished projects will only be made up to the amount certified by a valid external audit. For advanced funds which have not been used in accordance with the provisions of the relevant grant agreement, the recovery process has been launched.

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