TABLE OF CONTENTS

1........... Budget procedure........................................................................................................... 4

1.1........ Financial framework....................................................................................................... 4

1.2........ Preliminary Draft Budget (PDB) 2010............................................................................. 5

1.3........ Draft Budget (DB) 2010................................................................................................. 5

1.4........ Amending Letter (AL) 2010........................................................................................... 5

1.5........ The adoption of the 2010 Budget.................................................................................... 5

2........... Management of appropriations........................................................................................ 6

2.1........ Management of Commitment appropriations.................................................................... 6

2.1.1..... EAFRD operational programmes.................................................................................... 6

2.1.2..... Technical assistance........................................................................................................ 6

2.2........ Management of payment appropriations.......................................................................... 6

2.2.1..... EAFRD operational programmes.................................................................................... 6

2.2.2..... Technical assistance........................................................................................................ 7

3........... The implementation of the 2010 EAFRD budget.............................................................. 7

3.1........ Introduction.................................................................................................................... 7

3.2........ Implementation of commitment appropriations................................................................. 8

3.2.1..... EAFRD operational programmes.................................................................................... 8

3.2.2..... Technical assistance........................................................................................................ 9

3.3........ Implementation of payment appropriations....................................................................... 9

3.3.1..... EAFRD operational programmes.................................................................................... 9

3.3.2..... Technical assistance...................................................................................................... 13

3.4........ Analysis of expenditure declared by axis and by measure............................................... 13

3.5........ Implementation of EAFRD programmes........................................................................ 15

4........... Control measures.......................................................................................................... 18

4.1........ Introduction.................................................................................................................. 18

4.2........ Integrated Administration and Control System (IACS)................................................... 19

5........... Clearance of accounts................................................................................................... 20

5.1........ Financial clearance........................................................................................................ 20

5.1.1..... Introduction.................................................................................................................. 20

5.1.2..... Financial clearance for financial year 2009..................................................................... 20

5.1.3..... Financial clearance for financial year 2008..................................................................... 20

5.2........ Conformity clearance – audits and decisions adopted in 2010........................................ 21

5.2.1..... Introduction................................................................................................................. 21

5.2.2..... Conformity clearance – audits and decisions adopted in 2010........................................ 21

5.3........ Recoveries................................................................................................................... 22

5.4........ Appeals brought before the Court of Justice against clearance decisions......................... 22

6........... Relations with Parliament and the European Court of Auditors....................................... 23

7........... Basic rules governing the EAFRD and amendments made in 2010................................. 23

7.1........ General........................................................................................................................ 23

7.2........ Recent modifications..................................................................................................... 23

7.3........ Declarations................................................................................................................. 24

7.4........ Checks......................................................................................................................... 24

7.5........ Clearance of accounts................................................................................................... 25

1. Budget procedure 1.1. Financial framework

CAP expenditure is funded within the current financial framework as agreed in the Inter-institutional Agreement between the European Parliament and the Council in May 2006, amended to take into account the Galileo-programme in 2007, the reprogramming of rural development in 2008 and the European Economic Recovery Package (EERP) in 2009. CAP expenditure is part of Heading 2: Preservation and management of natural resources. A specific sub-ceiling has been decided for market related expenditure and direct aids within this heading.

To take account of the transfer of amounts to rural development due to compulsory modulation (including the increase from the CAP Health Check), to the reform of the cotton, tobacco and wine sectors as well as to the voluntary modulation decided for the UK, the expenditure ceiling for market measures and direct aids had to be reduced accordingly.

The CAP amounts included in heading 2 of the financial framework (2007-2013) are:

(In EUR million current prices

HEADING 2. Preservation and Management of Natural resources || 2007 || 2008 || 2009 || 2010 || 2011 || 2012 || 2013

TOTAL a), b) || 55 143 || 59 193 || 56 333 || 59 955 || 60 338 || 60 810 || 61 289

of which :

- Rural development a), c), d) || 10 902 || 13 303 || 14 002 || 14 364 || 14 436 || 14 617 || 14 817

- Market related expenditure and direct aids, c) || 44 753 || 44 592 || 44 887 || 44 276 || 44 467 || 44 710 || 44 939

a) After reprogramming of rural development (1 469 Mio €).

b) After transfer of EUR 1 600 million to Galileo in 2007 and of EUR 2 000 million to the European Economic Recovery Package in 2009.

c) After transfer into Rural Development of the lower expected expenditure resulting from the reforms of the tobacco, cotton and wine CMOs and from the compulsory and voluntary modulation (UK), art 136 of regulation 73/2009 and reduction due to financing of the EERP (D 237/2010 EU). d) Including the reinforcement of Rural Development by EUR 1 020 million included in the European Economic Recovery Package, of which EUR 600 million is financed in 2009 within heading 2 while, for 2010, EUR 420 million has been allocated to Rural Development on the basis of Commission Decision 2006/636/EC.

1.2. Preliminary Draft Budget (PDB) 2010

The 2010 Preliminary Draft Budget (PDB) was adopted by the Commission and proposed to the Budgetary Authority on 29 April 2009.

The proposal for the European Agricultural Fund for Rural Development (EAFRD) under heading 2 of the Financial Framework 2007-2013 totalled EUR 13 970 million in commitment appropriations and EUR 12 648 million in payment appropriations (of which EUR 300 million entered in reserve for the European Economic Recovery Package -EERP).

Budget Item || Commitment appropriations (in €) || Payment appropriations (in €)

05.040501 (Rural dev. programmes) || 13 947 136 182 || * 12 639 000 000

05.040502 (Technical assistance) || 22 548 451 || 9 000 000

*EUR 300 000 000 entered in reserve for the EERP

1.3. Draft Budget (DB) 2010

The Council adopted the 2010 Draft Budget in July 2009. The payments appropriations for EAFRD programmes were reduced by EUR 98.0 million as compared to the PDB.

1.4. Amending Letter (AL) 2010

In October 2009 the Commission adopted Amending Letter No 2 to the 2010 PDB. Even though the Amending Letter exercise mainly concerns the EAGF, the commitment appropriations for EAFRD programmes were modified to reflect an additional funding for a total net amount of EUR 388.4 million. This net amount relates to the second part of the EERP, the non application of voluntary modulation in Portugal and a minor adjustment of compulsory modulation in Spain. Payment appropriations decreased by EUR 32.8 million to take account of the non application of volontary modulatin in Portugal.

1.5. The adoption of the 2010 Budget

The Council second reading, adopted on 20.11.2009, did not involve any modification of the EAFRD appropriations proposed in the Amending Letter.

The European Parliament adopted the 2010 budget in its plenary session of December 2009.

The voted EAFRD budget amounted to EUR 14 358 million in commitment appropriations and EUR 12 615 million in payment appropriations.

Budget Item || Commitment appropriations (in €) || Payment appropriations (in €)

05.040501 (Rural dev. programmes) || 14 335 536 182 || 12 606 200 000

05.040502 (Technical assistance) || 22 548 451 || 9 000 000

2. Management of appropriations 2.1. Management of Commitment appropriations 2.1.1. EAFRD operational programmes

In 2010 the available commitment appropriations amounted in total to EUR 14.59 billion. Of this amount, EUR 14.34 billion corresponded to the approved budget and EUR 252 million were appropriations carried over from 2009. The carryover decision, adopted in February 2010, concerned part of the EERP appropriations that could not be committed in 2009 due to the late submission of some revised rural development programmes from the Member States.

The total amount of appropriaitons available for EAFRD programmes in 2010 was committed (EUR 14.59 billion).

Management of commitment appropriations in 2010 – EAFRD || Budget Item 05.040501 (amounts in €)

Appropriations at the beginning of 2010 || 14 335 536 182

Carry-over from 2009 || 252 029 757

Appropriations available in 2010 || 14 587 656 939

Appropriations used in 2010 || 14 587 565 939

2.1.2. Technical assistance

Article 69, 2nd paragraph of Council regulation (EC) No 1698/2005 stipulates that 0.25% of the resources for Community support to rural development shall be devoted to technical assistance for the Commission. In the 2010 budget, the amount available for this purpose was EUR 22.5 million. At the end of 2010, the total amount committed was EUR 4.9 million.

2.2. Management of payment appropriations 2.2.1. EAFRD operational programmes

In 2010 the initial payment appropriations amounted to EUR 12.6 billion. In view of the revised payment forecast submitted by the Member States in September 2010, the appropriations were reduced by EUR 1 160 million through the global transfer procedure. Once the Member States submitted their declarations of expenditure for the third quarter, an additional surplus of EUR 330 million was identified and proposed for reduction in a draft Amending Budget. However, as this Amending Budget was finally not adopted, those payment appropriations remained unused at the end of the year. The unused amount reflects the fact that declarations of expenditure for the third quarter were slightly below the revised forecasts; and the fact that part of the payment requests for the thrid quarter submitted by several Member States could not be reimbursed because of the exhaustion of the available commitment appropriations. The unused appropriations were carried over to 2011.

The total amount paid to Member States for EAFRD programmes in 2010 reached EUR 11.1 billion.

Management of payment appropriations in 2010 – EAFRD || Budget Item 05.040501 (amounts in €)

Appropriations at the beginning of 2010 || 12 606 200 000

Global transfer || -1 160 000 000

Appropriations available in 2010 || 11 446 200 000

Appropriations used in 2010 || 11 116 180 326

Unused amounts and carry over at the end of 2010 || 330 019 674

2.2.2. Technical assistance

In the 2010 budget, the amount for payment appropriations was EUR 9 million. This amount was reduced by EUR 2.5 million through the global transfer. At the end of the year, the total amount of payments was EUR 4.4 million, leaving EUR 2.1 million unused.

3. implementation of the 2010 EAFRD budget 3.1. Introduction

Financial year 2010 mostly represented a consolidation period where many rural development programmes attained their cruising speed. However, this was an uneven situation as several programmes showed significant implementation difficulties because of the economic and financial crisis which had an effect on the Member States' ability to provide the national co-financing and might have caused beneficiaries to hesitate to enter into any commitments; the late approval of certain programmes; and the lack of sufficient previous experience of some Member States in the implementation of Rural Development programmes.

3.2. Implementation of commitment appropriations 3.2.1. EAFRD operational programmes

The table below shows the amounts committed per Member State in 2010 and the allocation established by Commission decision 2006/636/EC (modification of April 2010 still in force at the end of the year).

In 2010, the commitment appropriations available for EAFRD programmes amounted to EUR 14.59 billion. This amount included EUR 14.34 billion corresponding to the 2010 allocation as established in Decision 2006/636/EC and EUR 252 million carried over from 2009. All the available appropriations were committed during the year (EUR 14.34 billion).

Commission Decision 2006/636/EC (last version in force end of 2009) vs. the amounts committed end of 2010:

Budget item: 05.040501 || || (in €)

MS || Commission Decision 2006/636/EC – EU funds 2010 || Amounts carried over for commitment in 2010 || Amounts committed in the budget year 2010

|| (a) || (b) || (c=a+b)

AT || 586 983 505 || 0 || 586 983 505

BE || 70 637 509 || 1 110 000 || 71 747 509

BG || 412 748 664 || 19 500 000 || 432 248 664

CY || 23 911 507 || 0 || 23 911 507

CZ || 415 632 774 || 21 000 000 || 436 632 774

DE || 1 311 256 553 || 14 229 104 || 1 325 485 657

DK || 85 052 762 || 0 || 85 052 762

EE || 104 667 353 || 0 || 104 667 353

ES || 1 400 090 047 || 49 871 207 || 1 449 961 254

FI || 313 973 134 || 126 846 || 314 099 980

FR || 1 091 752 155 || 165 200 || 1 091 917 355

GR || 492 922 509 || 28 720 000 || 521 642 509

HU || 529 160 494 || 28 440 000 || 557 600 494

IE || 363 518 252 || 17 680 000 || 381 198 252

IT || 1 256 577 236 || 38 596 000 || 1 295 173 236

LT || 253 855 536 || 0 || 253 855 536

LU || 13 838 190 || 0 || 13 838 190

LV || 153 226 381 || 0 || 153 226 381

MT || 10 964 212 || 0 || 10 964 212

NL || 87 111 293 || 0 || 87 111 293

PL || 1 935 872 838 || 0 || 1 935 872 838

PT || 592 619 895 || 0 || 592 619 895

RO || 1 401 644 651 || 0 || 1 401 644 651

SE || 280 491 463 || 13 820 000 || 294 311 463

SI || 134 100 946 || 0 || 134 100 946

SK || 266 600 239 || 14 700 000 || 281 300 239

UK || 746 326 084 || 4 071 400 || 750 397 484

Total || 14 335 536 182 || 252 029 757 || 14 587 565 939

3.2.2. Technical assistance

The table below shows the commitment appropriations for technical assistance consumed in 2010. The most important part is related to European Network for Rural Development.

Technical assistance – Implementation of commitment appropriations

Budget Item: 05.040502 || (in €)

Description || Amount committed

Contact point of the European Network for Rural Development (ENRD) || 4 061 754

Information technology || 219 730

Thematic working groups ENRD || 350 754

Experts committee on the evaluation of rural development programmes || 200 000

Publications || 100 387

Total || 4 932 625

3.3. Implementation of payment appropriations 3.3.1. EAFRD operational programmes

In the 2010 budget the amount for payment appropriations was EUR 12.61 billion. The global transfer reduced this amount by EUR -1.16 billion so that the appropriations of the year finally amounted to EUR 11.45 billion.

At the end of 2010, the total amount paid for EAFRD programmes was EUR 11.12 billion. The difference between the appropriations of the year (EUR 11.45 billion) and the total amount paid is EUR 330 million, which represents an under-execution of 2.88%. It should be noted that the payments made in 2010 increased more than 35% compared to 2009.

The table below shows the breakdown of payments made in 2010 by declaration period :

Payments 2010 – EAFRD operational programmes million €

Reimbursement of payment claims Q3 2009 || 127.31

Reimbursement of payment claims Q4 2009 || 2 947.20

Reimbursement of payment claims Q1 2010 || 2 124.25

Reimbursement of payment claims Q2 2010 || 2 073.00

Reimbursement of payment claims Q3 2010 || 3 443.28

Advances || 401.15

Total 2010 || 11 116.18

The reimbursement of 3rd quarter 2010 for 5 EAFRD programmes was totally or partiality on hold at the end of the year because the outstanding commitment appropriations for these programmes were fully exhausted by the payment of previous claims. The table below shows the 5 EAFRD programmes and the corresponding amounts. The payment had to wait until the annual commitments for 2011 were made.

EAFRD Programs– Nº CCI || Q3 2010 (in€)

Vlaanderen (2007BE06RPO001) || 6 655 665

Bayern (2007DE06RPO004) || 29 517 043

Ireland National (2007IE06RPO001) || 32 730 873

Bolzano (2007IT06RPO002) || 990 232

Luxembourg (2007LU06RPO001) || 262 045

Total || 70 155 858

The monthly consumption of payment appropriations during the year (January to December 2010) is represented in the graph below. The rhythm of consumption is linked to the calendar for sending the four payment declarations (31 January, 30 April, 31 July and 10 November for the payment claims corresponding respectively to Q4 2009, Q1 2010, Q2 2010 and Q3 2010).

The breakdown per Member State and per declaration period of the amounts paid by the Commission in budget year 2010 is shown in the following table. The amounts from column Q3 2009 relate to the EAFRD programmes that exhausted their commitment appropriations for 2009 and had to wait until 2010 to have their amounts reimbursed with the 2010 commitment appropriations.

Payments effectively made between 01/01/2010 and 31/12/2010 || || || (in €)

MS || Q3 2009 || Q4 2009 || Q1 2010 || Q2 2010 || Q3 2010 || Advances || Grand Total

AT || || 455 569 614 || 43 672 108 || 44 906 450 || 37 674 070 || 7 987 420 || 589 809 662

BE || 6 425 513 || 5 218 982 || 10 904 604 || 26 499 701 || 16 734 243 || 4 821 180 || 70 604 223

BG || || 10 833 902 || 99 737 836 || 109 667 733 || 55 280 536 || 2 320 500 || 277 840 508

CY || || 5 844 859 || 4 092 969 || 3 006 340 || 3 221 705 || 142 800 || 16 308 673

CZ || || 71 116 190 || 219 606 417 || 92 176 063 || 55 446 653 || 2 940 000 || 441 285 322

DE || 10 634 843 || 449 653 563 || 137 650 080 || 90 433 394 || 374 027 292 || 67 702 460 || 1 130 101 633

DK || || 22 509 479 || 11 031 696 || 8 301 380 || 9 257 104 || 9 328 060 || 60 427 719

EE || || 11 014 279 || 52 150 110 || 12 978 492 || 16 374 090 || 635 460 || 93 152 431

ES || 2 506 310 || 219 017 075 || 146 477 779 || 148 788 488 || 290 719 234 || 58 741 200 || 866 250 086

FI || 98 743 || 79 327 737 || 13 676 425 || 12 679 542 || 181 220 600 || 5 256 020 || 292 259 068

FR || || 186 049 035 || 130 073 442 || 92 283 874 || 382 352 635 || 79 977 240 || 870 736 226

GR || || 39 973 082 || 12 150 331 || 119 315 280 || 233 200 744 || 13 924 680 || 418 564 116

HU || || 146 605 566 || 114 137 436 || 112 972 138 || 77 779 633 || 3 797 360 || 455 292 132

IE || 107 643 643 || 87 587 253 || 55 583 262 || 38 086 416 || 81 473 859 || 10 823 820 || 381 198 252

IT || || 175 925 287 || 77 580 985 || 126 397 795 || 235 683 411 || 48 564 040 || 664 151 518

LT || || 60 891 489 || 73 440 397 || 56 368 010 || 49 387 045 || 1 570 380 || 241 657 321

LU || || 5 362 753 || 5 090 031 || 1 385 947 || 3 765 284 || 344 400 || 15 948 416

LV || || 33 969 622 || 45 596 012 || 25 735 665 || 51 538 859 || 928 200 || 157 768 358

MT || || 1 937 682 || 1 439 925 || 2 877 517 || 10 853 260 || 71 400 || 17 179 784

NL || || 17 739 157 || 17 108 137 || 13 801 790 || 16 761 310 || 7 467 320 || 72 877 714

PL || || 329 716 307 || 477 616 176 || 283 114 658 || 337 768 509 || 11 822 300 || 1 440 037 950

PT || || 43 519 546 || 33 409 884 || 137 575 894 || 232 644 503 || 9 078 860 || 456 228 687

RO || || 60 250 707 || 64 728 636 || 279 349 875 || 349 034 410 || 7 118 580 || 760 482 207

SE || || 114 003 289 || 37 089 368 || 21 201 521 || 112 977 181 || 8 918 980 || 294 190 338

SI || || 43 330 855 || 12 979 172 || 36 286 031 || 18 819 694 || 1 100 820 || 112 516 573

SK || || 154 336 375 || 75 990 280 || 72 653 554 || 72 766 745 || 1 924 300 || 377 671 253

UK || || 115 891 789 || 151 235 571 || 104 153 251 || 136 518 327 || 33 841 220 || 541 640 158

Total || 127 309 052 || 2 947 195 476 || 2 124 249 066 || 2 072 996 797 || 3 443 280 935 || 401 149 000 || 11 116 180 326

Of the total amount paid in 2010 EUR 10.72 billion, relates to reimbursements and EUR 401 million to advances.

The table in the next page compares, for each Member State, the EAFRD payments made in 2010 with the payments in 2009. While interim payments in 2010 increased by 30.5% compared to 2009 (EUR 10.72 billion vs. 8.21 billion), total payments increased by 35.4% (EUR 11.12 billion vs. 8.21 billion) due to the impact of the supplementary advances paid during the year.

Payments made to Member States - Comparison 2010 vs 2009 || || || || (in €) ||

MS || 2009 || 2010 || Difference 2010 vs. 2009

Interim payments || Prefinancing || Total || Interim payments || Prefinancing || Total || ( in €) || ( in %)

AT || 550 352 330 || || 550 352 330 || 581 822 242 || 7 987 420 || 589 809 662 || 39 457 332 || 7.2%

BE || 57 909 148 || || 57 909 148 || 65 783 043 || 4 821 180 || 70 604 223 || 12 695 075 || 21.9%

BG || 127 052 991 || || 127 052 991 || 275 520 008 || 2 320 500 || 277 840 508 || 150 787 517 || 118.7%

CY || 16 161 768 || || 16 161 768 || 16 165 873 || 142 800 || 16 308 673 || 146 904 || 0.9%

CZ || 340 175 929 || || 340 175 929 || 438 345 322 || 2 940 000 || 441 285 322 || 101 109 393 || 29.7%

DE || 930 186 410 || || 930 186 410 || 1 062 399 173 || 67 702 460 || 1 130 101 633 || 199 915 223 || 21.5%

DK || 53 861 495 || || 53 861 495 || 51 099 659 || 9 328 060 || 60 427 719 || 6 566 224 || 12.2%

EE || 95 121 150 || || 95 121 150 || 92 516 971 || 635 460 || 93 152 431 || -1 968 719 || -2.1%

ES || 618 592 973 || || 618 592 973 || 807 508 885 || 58 741 200 || 866 250 086 || 247 657 113 || 40.0%

FI || 191 126 077 || || 191 126 077 || 287 003 048 || 5 256 020 || 292 259 068 || 101 132 991 || 52.9%

FR || 779 806 772 || || 779 806 772 || 790 758 986 || 79 977 240 || 870 736 226 || 90 929 454 || 11.7%

GR || 174 132 448 || || 174 132 448 || 404 639 436 || 13 924 680 || 418 564 116 || 244 431 667 || 140.4%

HU || 497 184 388 || || 497 184 388 || 451 494 772 || 3 797 360 || 455 292 132 || -41 892 256 || -8.4%

IE || 329 171 422 || || 329 171 422 || 370 374 432 || 10 823 820 || 381 198 252 || 52 026 830 || 15.8%

IT || 356 692 296 || || 356 692 296 || 615 587 478 || 48 564 040 || 664 151 518 || 307 459 221 || 86.2%

LT || 247 493 642 || || 247 493 642 || 240 086 941 || 1 570 380 || 241 657 321 || -5 836 321 || -2.4%

LU || 12 910 511 || || 12 910 511 || 15 604 016 || 344 400 || 15 948 416 || 3 037 905 || 23.5%

LV || 104 463 393 || || 104 463 393 || 156 840 158 || 928 200 || 157 768 358 || 53 304 965 || 51.0%

MT || 3 357 534 || || 3 357 534 || 17 108 384 || 71 400 || 17 179 784 || 13 822 250 || 411.7%

NL || 36 071 974 || || 36 071 974 || 65 410 394 || 7 467 320 || 72 877 714 || 36 805 741 || 102.0%

PL || 1 043 825 682 || || 1 043 825 682 || 1 428 215 650 || 11 822 300 || 1 440 037 950 || 396 212 268 || 38.0%

PT || 235 563 950 || || 235 563 950 || 447 149 827 || 9 078 860 || 456 228 687 || 220 664 737 || 93.7%

RO || 565 927 879 || || 565 927 879 || 753 363 627 || 7 118 580 || 760 482 207 || 194 554 328 || 34.4%

SE || 105 868 407 || || 105 868 407 || 285 271 358 || 8 918 980 || 294 190 338 || 188 321 932 || 177.9%

SI || 100 732 462 || || 100 732 462 || 111 415 753 || 1 100 820 || 112 516 573 || 11 784 110 || 11.7%

SK || 289 286 329 || || 289 286 329 || 375 746 953 || 1 924 300 || 377 671 253 || 88 384 924 || 30.6%

UK || 346 343 895 || || 346 343 895 || 507 798 938 || 33 841 220 || 541 640 158 || 195 296 263 || 56.4%

Total || 8 209 373 256 || 0.00 || 8 209 373 256 || 10 715 031 326 || 401 149 000 || 11 116 180 326 || 2 906 807 070 || 35.4%

3.3.2. Technical assistance

In the 2010 budget the amount for payment appropriations was € 9 million. The table hereafter presents the payments for technical assistance for a total amount of EUR 4.4 million. The most important part is related to European Network for Rural Development.

Technical assistance – Implementation of payment appropriations

Budget Item: 05.040502 || (in €)

Description || Amount paid

Seminar on the implementation of rural development programmes || 107 687

Contact point of the European Network for Rural Development (ENRD) || 3 928 213

Thematic working groups ENRD || 205 202

Experts committee on the evaluation of rural development programmes || 76 784

Publications || 88 516

Total || 4 406 402

3.4. Analysis of expenditure declared by axis and by measure

The table below shows the payment claims declared by Member state and by axis/measure for rural development in 2010 (Q4 2009 to Q3 2010), the cumulative declared expenditure from 2007 to 2010 (Q4 2006 to Q3 2010) and also the financial plans of EAFRD programmes (2007-2013; EU27).

In 2010, the expenditure continues to be concentrated in axis 2 (50.9%), followed by axis 1 with 35.4%, axis 3 with 9.10% and axis 4 with 2.5%. This repartition of expenditure still significantly diverges with the repartition in the financial plans for the 2007-2013 programming period (33.6%, 44.4%, 13.3% and 6% for axis 1 to 4 respectively).

Axis 2 measures mainly involve annual payments (e.g. agro-environmental measures) whilst Axis 1, 3 and, to a lesser extent, Axis 4 mainly relate to multi-annual measures that require longer proceedings for their approval and implementation (e.g. investment projects).

Compared with the average for the first 3 years (2007-2009), the expenditure in 2010 is more balanced among axes and the share of each axis tends to get closer to the share in the financial plans. For instance, Axis 2 decreases from 57.8% in 2009 to 50.0% in 2010 while Axis 1 increases from 32.0% in 2009 to 35.4% in 2010.

EAFRD declared expenditure 2010 (Q4 2009-Q3 2010) & Total cumulative expenditure (Q4 2006 to Q3 2010)

compared with Financial Plans

|| Declared expenditure 2010 (Q4 2009 to Q3 2010) || Cumulative declared expenditure (Q4 2006 to Q3 2010) || Financial Plans 2007-2013

EAFRD Axis / Measure || (million €) || (%) || (million €) || (%) || (million €) || (%)

111 Vocational training and information actions || 78.9 || 0.7% || 156.5 || 0.6% || 1 089.2 || 1.1%

112 Setting up of young farmers || 345.9 || 3.2% || 838.1 || 3.1% || 2 887.5 || 3.0%

113 Early retirement || 351.7 || 3.3% || 1 040.1 || 3.8% || 2 853.0 || 3.0%

114 Use of advisory services || 11.0 || 0.1% || 19.7 || 0.1% || 440.1 || 0.5%

115 Setting up of management, relief and .... || 2.5 || 0.0% || 4.0 || 0.0% || 93.5 || 0.1%

121 Modernisation of agricultural holdings || 1 728.3 || 16.2% || 3 537.9 || 12.9% || 10 667.0 || 11.1%

122 Improvement of the economic value of forest || 32.5 || 0.3% || 80.1 || 0.3% || 653.7 || 0.7%

123 Adding value to agricultural and forestry... || 585.3 || 5.5% || 1 016.0 || 3.7% || 5 647.3 || 5.9%

124 Cooperation for development of new products || 12.4 || 0.1% || 18.0 || 0.1% || 349.3 || 0.4%

125 Infrastructure related to the development … || 406.3 || 3.8% || 753.9 || 2.7% || 5 129.4 || 5.3%

126 Restoring agricultural production potential || 49.1 || 0.5% || 104.9 || 0.4% || 477.5 || 0.5%

131 Meeting standards based on Community... || 2.9 || 0.0% || 45.0 || 0.2% || 103.9 || 0.1%

132 Participation of farmers in food quality… || 9.5 || 0.1% || 16.5 || 0.1% || 294.1 || 0.3%

133 Information and promotion activities || 8.0 || 0.1% || 12.9 || 0.0% || 206.4 || 0.2%

141 Semi-subsistence farming || 130.9 || 1.2% || 391.0 || 1.4% || 993.9 || 1.0%

142 Producer groups || 23.2 || 0.2% || 56.2 || 0.2% || 327.9 || 0.3%

143 Direct Payment (BG + RO) || 1.1 || 0.0% || 1.7 || 0.0% || 131.8 || 0.1%

144 Holdings undergoing restructuring || - || 0.0% || - || 0.0% || 17.0 || 0.0%

Axis 1 || 3 779.3 || 35.4% || 8 092.6 || 29.5% || 32 362.5 || 33.6%

211 Natural handicap payments to farmers in ... || 1 003.8 || 9.4% || 3 163.9 || 11.5% || 6 240.9 || 6.5%

212 Payments to farmers in areas with handicaps... || 1 026.7 || 9.6% || 3 269.3 || 11.9% || 7 241.4 || 7.5%

213 Natura 2000 payments and payments linked .. || 23.0 || 0.2% || 55.7 || 0.2% || 476.7 || 0.5%

214 Agri-environment payments || 2 897.4 || 27.1% || 8 960.3 || 32.6% || 22 231.3 || 23.1%

215 Animal welfare payments || 62.4 || 0.6% || 143.1 || 0.5% || 543.0 || 0.6%

216 Non-productive investments || 34.6 || 0.3% || 54.7 || 0.2% || 591.1 || 0.6%

221 First afforestation of agricultural land || 179.9 || 1.7% || 636.6 || 2.3% || 2 295.0 || 2.4%

222 First establishment of agroforestry systems... || - || 0.0% || - || 0.0% || 16.4 || 0.0%

223 First afforestation of non-agricultural land || 18.9 || 0.2% || 37.2 || 0.1% || 347.8 || 0.4%

224 Natura 2000 payments || 3.7 || 0.0% || 7.0 || 0.0% || 102.0 || 0.1%

225 Forest-environment payments || 4.9 || 0.0% || 13.1 || 0.0% || 271.4 || 0.3%

226 Restoring forestry potential and … || 132.4 || 1.2% || 323.6 || 1.2% || 1 609.7 || 1.7%

227 Non-productive investments || 49.4 || 0.5% || 113.5 || 0.4% || 808.9 || 0.8%

Axis 2 || 5 437.2 || 50.9% || 16 778.0 || 61.1% || 42 775.5 || 44.4%

311 Diversification into non-agricultural activities || 100.1 || 0.9% || 165.2 || 0.6% || 1 488.9 || 1.5%

312 Business creation and development || 107.2 || 1.0% || 149.8 || 0.5% || 2 208.8 || 2.3%

313 Encouragement of tourism activities || 78.6 || 0.7% || 127.5 || 0.5% || 1 291.0 || 1.3%

321 Basic services for the economy and rural … || 219.9 || 2.1% || 320.4 || 1.2% || 3 120.2 || 3.2%

322 Village renewal and development || 330.0 || 3.1% || 487.3 || 1.8% || 3 107.9 || 3.2%

323 Conservation and upgrading of the rural.... || 104.7 || 1.0% || 194.8 || 0.7% || 1 314.6 || 1.4%

331 Training and information || 9.6 || 0.1% || 16.9 || 0.1% || 147.5 || 0.2%

341 Skills acquisition, animation and implement... || 17.4 || 0.2% || 35.2 || 0.1% || 150.0 || 0.2%

Axis 3 || 967.4 || 9.1% || 1 497.2 || 5.5% || 12 829.0 || 13.3%

411 Implementing local development strategies... || 16.8 || 0.2% || 26.4 || 0.1% || 471.9 || 0.5%

412 Implementing local development strategies... || 1.5 || 0.0% || 2.3 || 0.0% || 167.0 || 0.2%

413 Implementing local development strategies.... || 155.5 || 1.5% || 212.5 || 0.8% || 3 877.5 || 4.0%

421 Implementing cooperation projects || 2.6 || 0.0% || 3.3 || 0.0% || 278.6 || 0.3%

431 Running the local action group, acquiring ... || 93.3 || 0.9% || 121.5 || 0.4% || 959.8 || 1.0%

Axis 4 || 269.8 || 2.5% || 366.0 || 1.3% || 5 754.7 || 6.0%

511 Technical Assistance || 124.6 || 1.2% || 288.0 || 1.0% || 1 876.9 || 2.0%

611 BG RO Direct Payments || 98.7 || 0.9% || 438.2 || 1.6% || 645.6 || 0.7%

Grand total || 10 677.0 || 100.0% || 27 460.0 || 100.0% || 96 244.2 || 100.0%

3.5. Implementation of EAFRD programmes

Graph 1 on the next page presents the financial implementation rate of rural development programmes (from the beginning to 2010, including Q4 2010) compared with the 2007-2010 appropriations. The average EAFRD financial implementation rate for all EAFRD programmes is 72.4%.

Graph 1 shows that most Member States have absorbed more than 60% of the 2007-2010 appropriations.

The ranking would be sligtly different in terms of absortion rate, i.e. payments made from the beginning to 2010 (including Q4 2010) compared with the 2007-2013 allocation to be paid until end of 2015. The average absortion rate for all EAFRD programmes is 39.5%.

Graph 2 reflects the absortion rate per Member State. Up to 2010, most Member States have absorbed more than 30% of their 2007-2013 allocation.

.

4. Control measures 4.1. Introduction

The EU legislation provides for a comprehensive system of management and controls which relies on four levels:

(a) compulsory administrative structure at the level of Member States, centred around the establishment of paying agencies and an accreditation authority at high level which is competent for issuing and withdrawing the agency’s accreditation. The decision for issuing the accreditation is based on a detailed review by an external audit body;

(b) detailed systems for controls and dissuasive sanctions to be applied by those paying agencies. Article 9(1) of Regulation (EC) No 1290/2005[1] provides for the general obligation of Member States to ensure that transactions financed by the EAGF and the EAFRD are carried out and executed correctly, to prevent and deal with irregularities and to recover amounts unduly paid. In complement to this general obligation, for each aid scheme there is a system of controls and dissuasive sanctions of final beneficiaries which reflects the specific features of the scheme and the risk involved in its administration.

(c) ex-post controls by independent audit bodies on the paying agencies' annual accounts and the functioning of their internal control procedures (under Regulation (EC) No 885/2006[2]) and by special departments on aid measures other than direct payments covered by the IACS (checks based on Regulation (EC) No 485/2008[3]);

(d) clearance of accounts through the Commission (both annual financial clearance and multi-annual conformity clearance).

These four levels establish a comprehensive system for the management and control of agricultural expenditure. It includes, on the one hand, all the necessary building blocks to guarantee a sound administration of the expenditure at Member States’ level and, on the other hand, allows the Commission to counter the risk of financial losses as a result of any deficiencies in the set-up and operation of those building blocks through the clearance of accounts procedure.

Council Regulation (EC) No 1698/2005[4], as amended, contains the rules on support for rural development by EAFRD; Commission Regulations (EC) No 1974/2006[5] and (EC) No 1975/2006[6], as amended, lay down the rules for the application and control of rural development support measures.

The control rules provided by Regulation (EC) No 1975/2006 take into account the characteristics of the measures under Axis 2 i.e. timing for the submission of the payment claims aligned with the deadline set for the first pillar, payments made after the finalization of the controls, cross-compliance respect, and a detailed sanction system. As of 1/01/2011, the rules are laid down in Regulation (EC) No 65/2011.

4.2. Integrated Administration and Control System (IACS)

EAFRD : Axis II - Council Regulations and (EC) No. 1122/2009[7] which contain the rules on the IACS are also applicable to rural development support under Axis 2 as far as area - and animal - related measures are concerned.

A fully operational IACS consists of: a computerised database, an identification system for agricultural parcels and farmers claiming aid, a system for identification and registration payment entitlements, aid applications and integrated controls system (claim processing, on-the-spot checks and sanctioning mechanisms) and a system for identifying and registering animals where applicable. The IACS is fully automated and provides highly efficient controls by maximising the use of computerised and remote controls.

This system foresees a 100% administrative control covering the eligibility of the claim, complemented by administrative cross-controls with standing databases ensuring that only areas or animals that fulfil all eligible requirements are paid premium and by a minimum 5% of on-the-spot checks to check the existence and eligibility of the area or the animals claimed. If the on-the-spot controls reveal a high number of irregularities, additional controls must be carried out. The sample of transactions is determined on a risk and/or random basis.

The use of standing databases, which are appropriately updated, is well adapted to the schemes whereby aids are directly paid to the farmers and based on the surfaces or on the number of animals, in that the risk can be reduced to the lowest levels.

For the financial year 2010, the IACS covers around 49.8% of payments made under the EAFRD for mesures including inter alia, agri-environment and animal welfare mesures, less-favoured areas and areas with environmental restrictions and afforestation of agricultural land. The Commission services verify the effectiveness of Member States' IACS and homogenous implementation by means of both on-the-spot auditing and general supervision based on annually supplied financial and statistical data. The Commission continues to consider that the IACS is generally an effective control system for limiting the risk of error or irregular expenditure, provided that it is properly applied.

5. Clearance of accounts 5.1. Financial clearance 5.1.1. Introduction

The financial clearance covers the accounts and control systems set up by the paying agencies. Within this framework, DG AGRI pays particular attention to the certification bodies’ conclusions and recommendations (where weaknesses are found), following their reviews of the paying agencies’ management and control systems. As part of this review, the DG AGRI departments also cover aspects relating to the accreditation criteria for the paying agencies and protecting the financial interests of the EU as regards the advances paid, securities obtained and intervention stocks.

The Commission adopts an annual clearance of accounts decision clearing the paying agencies' annual accounts on the basis of the certificates and reports from the certification bodies, but without prejudice to any subsequent decisions to recover expenditure which proves not to have been in accordance with the EU rules. The Commission must clear the accounts and adopt its clearance decision by 30 April of the year following the financial year in question.

5.1.2. Financial clearance for financial year 2009

At the end of November 2010, the Commission adopted three further decisions clearing the 2009 annual accounts of 8 Paying Agencies, which had been initially disjoined, in respect of their expenditure funded by the European Agricultural Guarantee Fund (EAGF), the European Agricultural Fund for Rural Development (EAFRD) and the Temporary Rural Development Instrument (TRDI).

The outstanding accounts of 4 paying agencies (EAFRD) were cleared by a Commission Decision adopted in April 2011.

By means of these decisions, it cleared amounts of EUR 1 121 million for the EAFRD (around 14% of total annual expenditure) and EUR 3 million for the TRDI (around 7%). Consequently, all the accounts have now been cleared for financial year 2009.

5.1.3. Financial clearance for financial year 2008

The two remaining paying agencies for which the 2008 accounts are still outstanding are Bayern (Germany) for EAFRD and OPEKEPE (Greece) for both EAGF and EAFRD. The total amount concerned is 351 EUR million for EAFRD (5.8% of total expenditure for the financial year in question).

These accounts will be cleared in the course of 2011.

5.2. Conformity clearance – audits and decisions adopted in 2010 5.2.1. Introduction

It is primarily the Member States' responsibility to satisfy themselves that transactions are carried out and executed correctly. Where Member States fail to meet this requirement, the Commission applies financial corrections to protect the financial interests of the EU.

The conformity clearance relates to the legality and regularity of transactions. It is designed to exclude expenditure from EU financing which has not been effected in compliance with EU rules, thus shielding the EU budget from expenditure that should not be charged to it (financial corrections). In contrast, it is not a mechanism by which irregular payments to beneficiaries are recovered, which according to the principle of shared management is the sole responsibility of Member States.

Financial corrections are determined on the basis of the nature and gravity of the infringement and the financial damage caused to the EU. Where possible, the amount is calculated on the basis of the loss actually caused or on the basis of an extrapolation. Where this is not possible, flat-rates are used which take account of the severity of the deficiencies in the national control systems in order to reflect the financial risk for the EU.

Where undue payments are or can be identified as a result of the conformity clearance procedures, Member States are required to follow them up by recovery actions against the final beneficiaries. However, even where this is not possible because the financial corrections only relate to deficiencies in the Member States' management and control systems, financial corrections are an important means to improve these systems and thus to prevent or detect and recover irregular payments to final beneficiaries. The conformity clearance thereby contributes to the legality and regularity of the transactions at the level of the final beneficiaries.

5.2.2. Conformity clearance – audits and decisions adopted in 2010

Audits

In 2010, 37 conformity missions were carried out in respect of the EAFRD of which all enquiries for Axis 2 in EU 27 included the agri-environment measures.

Conformity decisions

During the financial year 2010, three conformity decisions were adopted which had a financial impact in the year. These decisions resulted in the exclusion from EU financing of EAFRD expenditure:

· Decision 2009/721/EC of 24 September 2009 – 31st Decision excluding EUR 350 800.

· Decision 2010/152/EC of 11 March 2010 – 32nd Decision excluding EUR 39 244.

· Decision 2010/399/EC of 15 July 2010 – 33rd Decision excluding EUR 69 466.32.

5.3. Recoveries

Regarding financial year 2010, Member States reported the information about irregularity cases by 1 February 2011. The Member States recovered EUR 21.7 million during financial year 2010, and the outstanding amount still to be recovered from beneficiaries at the end of that financial year was EUR 31.6 million. The amounts recovered can be reused by the Member States under the same rural development programme. Regulation (EC) No 1290/2005 introduced an automatic clearing mechanism for non recovered irregular payments after 4 years or, in case the recovery is challenged in national courts, 8 years after the establishment of the irregularity. The financial consequences of non recovery are shared by the Member State concerned and the EU on a 50 %-50 % basis. Since under EAFRD, these provisions are applicable only after the closure of the rural development programme, this automatic clearance mechanism did not apply on the cases reported by the Member States for financial year 2010.

5.4. Appeals brought before the Court of Justice against clearance decisions

Judgments handed down

In the financial year 2010 no judgements have been handed down by the Court in appeals brought by the Member States against clearance decisions with regard to EAFRD.

New appeals

In the financial year 2010 3 new appeals were brought by the Member States against clearance decisions:

• T-486/09 brought by Republic of Poland on 4 December 2009.

• T-215/10 brought by Hellenic Republic on 11 May 2010.

• T-453/10 brought by Northern Ireland Department of Agriculture and Rural Development on 24 September 2010.

Appeals pending

The situation as at 31 December 2010 with regard to appeals pending is shown, together with the amounts concerned, in the table below:

Appeals against clearance of accounts decisions pending on 31 December 2010 (for EAFRD)

Case number || Member State || Challenged amount (EUR)

T-214/07 || GR || -67 732.00

T-86/08 || GR || -1 331 047.00

T-232/08 || LU || -964 488.00

T-486/09 || PL || -11 077 828.30

T-215/10 || GR || -18 523 716.00

T-453/10 || GB || -1 230 832.24

TOTAL || || -33 195 643.54

6. Relations with Parliament and the European Court of Auditors

The relevant information about the relations with the Parliament and the European Court of Auditors is available in "section 11" of the Commission staff working document accompanying the 2010 financial report on the EAGF.

7. Basic rules governing the EAFRD and amendments made in 2010 7.1. General

Basic legislation

– Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) (OJ L 277, 21.10.2005, p.1.); as last amended by Regulation (EC) No 473/2009 of 25 May 2009 (OJ L 144, 9.6.2009, p.3.).

– Commission Regulation (EC) No 1974/2006 of 15 December 2006 laying down detailed rules for the application of Council Regulation (EC) No 1698/2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) (OJ L 368, 23.12.2009, p.15); as last amended by Regulation 482/2009 of 8 June 2009 (OJ L 145, 10.6.2009, p.17.).

– Commission Regulation (EC) No 1975/2006 of 7 December 2006 laying down detailed rules for the implementation of Council Regulation (EC) No 1698/2005, as regards the implementation of control procedures as well as cross-compliance in respect of rural development support measures (OJ L 368, 23.12.2006, p.74); recasted by Regulation (EC) No 65/2009 of 27 January 2011 (OJ L 25, 28.1.2011, p.8).

7.2. Recent modifications

The Treaty on the Functioning of the European Union (TFEU) makes a clear distinction between the powers delegated to the Commission to adopt non-legislative acts (delegated acts) of general application to supplement or amend certain non-essential elements of the legislative act as laid down in Article 290 on one hand, and the powers conferred on the Commission to adopt implementing acts under Article 291, on the other.

The alignment exercise of Regulation (EC) No 1698/2005 on new rules of the Treaty was based on a classification on the basis of the new philosophy- a sorting between measures of implementing nature and measures of delegated nature- of the current Commission implementing powers which were adopted on the basis of Regulations (EC) No 1974/2006 and No 1975/2006.

Following this exercise, a proposal for amendment of Regulation (EC) No 1698/2005 has been presented to the European Parliament and to the Council. In the same context some simplification proposals like the reduction of the strategic reporting requirements, facilitating more tailor-made use of advisory services and the lighter follow-up of non-compliances of cross-compliance were introduced, as well as other elements like the extension of the coverage of producer groups, enlarging the eligibility of Natura 2000 to the stepping stones areas and the introduction of the incentive element for agricultural aid schemes.

Commission Regulation (EC) No 1975/2006 laying down detailed rules for the implementation of Council Regulation (EC) No 1698/2005, as regards the implementation of control procedures as well as cross-compliance in respect of rural development support measures, lays down the detailed control rules for rural development.

Regulation (EC) No 1975/2006 had many cross-references to Regulation (EC) No 796/2004 laying down the control rules for direct payment schemes. As this regulation had been recast and replaced by Regulation (EC) No 1122/2009, there was a need to update these cross-references. Furthermore, as part of the Commission Staff Working Paper on Simplification it was indicated that the rural development control regulation would be recast and the rules laid down would be clarified and simplified. Therefore a total recast of this regulation was carried out resulting to Commission Regulation (EC) No 65/2011.

7.3. Declarations

– Commission Regulation (EC) No 883/2006 of 21 June 2006 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the keeping of accounts by the paying agencies, declarations of expenditure and revenue and the conditions for reimbursing expenditure under EAGF and EAFRD (OJ L 171, 23.6.2006, p. 1); as last amended by Commission Regulation (EC) No 482/2009 of 8 June (OJ L145, 10.6.2009, p. 17).

7.4. Checks

– Council Regulation (EC) No 73/2009 of 19 January 2009 (OJ L30, 31.1.2009, p. 16) establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers, amending Regulations (EC) No 1290/2005, (EC) No 247/2006, (EC) No 378/2007 and repealing Regulation (EC) No 1782/2003 as last amended by Regulation (EU) No 360/2010 of 27 April 2010 (OJ L 106, 28.4.2010, p. 1).

– Commission Regulation (EC) No 1122/2009 of 30 November 2009 (OJ L 316, 2.12.2009, p. 65) laying down detailed rules for the implementation of Council Regulation (EC) No 73/2009 as regards cross-compliance, modulation and the integrated administration and control system, under the direct support schemes for farmers provided for that Regulation, as well as for the implementation of Council Regulation (EC) No 1234/2007 as regards cross-compliance under the support scheme provided for the wine sector and repealing Commission Regulation (EC) No 796/2004 of 21 April 2004 (OJ L 141, p. 18); as last amended by Regulation (EU) No 173/2011 of 23 February 2011 (OJ L 49, 24.2.2011, p. 16).

– Council Regulation (EC) No 1698/2005 of 20 September 2005 (OJ L 277, 21.10.2005, p. 1) on support for rural development by the European Agricultural Fund for Rural Development (EAFRD); as last amended by Regulation (EC) No 473/2009 of 25 May 2009 (OJ L 144, 9.6.2009, p. 3).

– Commission Regulation (EC) No 1974/2006 of 15 December 2006 (OJ L 368, 23.12.2006, p. 15) laying down detailed rules for the application of Council Regulation (EC) No 1698/2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD); as last amended by Regulation (EC) No 108/2010 of 8 February 2010 (OJ L 36, 9.2.2010, p.4).

– Commission Regulation (EC) No 1975/2006 of 7 December 2006 (OJ L 368, 23.12.2006, p. 74) laying down detailed rules for the implementation of Council Regulation (EC) No 1698/2005, as regards the implementation of control procedures as well as cross-compliance in respect of rural development support measures; as last amended by Regulation (EC) No484/2009 of 9 June 2009 (OJ L 145, 10.6.2009, p. 25).

7.5. Clearance of accounts

– Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ L 209, 11.8.2005, p. 1); as last amended by Regulation (EC) No 473/2009 of 25 May 2009 (OJ L 144, 9.6.2009, p. 3).

– Commission Regulation (EC) No 885/2006 of 21 June 2006 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the accreditation of paying agencies and other bodies and the clearance of the accounts of the EAGF and of the EAFRD (OJ L 171, 23.6.2006, p. 90); as last amended by Regulation (EC) No 1034/2008 of 21 October 2008 (OJ L 279, 22.10.2008, p. 13).

[1] OJ L 209, 11.08.2005, p. 1.

[2] OJ L 171, 23.6.2006, p. 90–110.

[3] OJ L 143, 3.6.2008, p. 1–9.

[4] OJ L277, 21.102005, p 1

[5] OJ L368, 23.12.2006, p.15

[6] OJ L 368, 23.12.2006 p.74

[7] OJ L 316, 2.12.2009, p.65