OPINION No 3/96 of the European Court of Auditors on the European Guarantee Fund to promote cinema and television production (96/C 338/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular the second indent of Article 188c (4) thereof,

Having regard to Council Decision No 94/375/EC of 6 June 1994 authorizing the Community to become a member of the European Investment Fund,

Having regard to the Statutes of the European Investment Fund (EIF), as adopted by the Board of Governors of the European Investment Bank on 25 May 1994 (1),

Having regard to the proposed Council Decision No 95/281(CNS) of 14 November 1995, submitted by the Commission with a view to setting up a European Guarantee Fund to promote cinema and television production,

Having regard to the Council of the European Union's request for the Court's opinion on the said proposal,

HAS ADOPTED THE FOLLOWING OPINION:

PART 1

Observations and comments 1. Given that the audiovisual Guarantee Fund will not have a separate legal identity and its accounts will be an integral part of those of the Union, these features could be mentioned in the text of the proposal for a Decision.

2. The fact that the Fund will not be a legal entity in its own right will have several consequences.

In the first place, the Fund will receive appropriations from the Community budget for the creation of a reserve.

Subsequently, this reserve will increase or diminish by the amount of the balance resulting from the operations of the Fund.

For this reason, the Court feels that the term 'capital`, as used in Article 5 of the proposal, is inappropriate because the funds entered in the special account are in essence budgetary appropriations and will be used to create a 'reserve`. The term 'capital` should only be applied to an autonomous legal entity with its own distinct legal identity.

Secondly, as the funds in question are budgetary appropriations, the Court of Auditors wishes to point out that it intends to exercise its auditing rights over them, in accordance with its prerogatives under the Financial Regulation and Article 188c of the Treaty (2). This audit will be both a financial audit (verification of the reliability and the legality/regularity of the revenue and expenditure) and an examination of the efficiency of the financial management, even if the financial management has been delegated.

The fact that, in the context of guarantee operations or particular agreements, third parties may themselves contribute to the special account at the EIF in no way limits the Court's audit powers as regards either the amounts paid out by the Union or new resources generated by the operations of the Fund.

3. It seems that the notion of a 'European work` could be conditioned by, for example, the nationality of the production or distribution company (for a definition of 'European company`, see in that case the second indent of Article 2 (2)). Nevertheless, the concept of 'European fictional work` certainly ought to be clarified separately so as to provide an independent and detailed definition of its content.

4. Any production or distribution company, whatever its form, provided only that it is controlled directly or indirectly and in a continuous fashion by public or private legal entities from a Member State or by natural persons who are European Union citizens, could receive money from the Fund.

As the second indent of Article 2 (2) talks of majority shareholdings, the notion of control must be understood in its wider sense, as referring to a direct or indirect ownership of more than 50 % of the shares. It would thus certainly be preferable to cleave to the legal notion of a subsidiary and not to the definition of 'control` taken in isolation, which is sometimes framed with reference to the concept of management authority or actual management (which can be taken for granted above a certain percentage of voting rights, see certain provisions of Council Directive No 83/349/EEC on consolidated accounts).

Moreover, shares are held either directly or indirectly, in other words, the notion of 'majority shareholding` is to be understood as including participations held by intermediate legal entities. In the Court's view, however, the second indent of Article 2 (2) confuses the concept of majority shareholding with the way in which shares are held, which may be direct or indirect.

In order to forestall any abuse of rights and distortion of the legislation, the registered office of the beneficiary company could be situated as a binding condition within the borders of the Union.

5. Under the first indent of Article 3 (2) of the proposed Decision, the Fund is entitled to grant guarantees to individual operations or portfolios of projects.

Given that a portfolio of projects generally consists of a catalogue containing several operations managed by the same company, the Fund may be led to stand security for considerable sums, because the guarantee would then apply to a group of projects with no overall ceiling. In fact, Article 4 only provides for upper ceilings as regards individual operations and, in any case, the only limit that would exist for the financing of portfolios of projects would be the sum of the upper ceilings for the various individual operations in the catalogue, or partial catalogue, in receipt of funding.

In sum, the Fund could find itself disproportionately committed towards certain distributors or producers.

In the interests of sound management and the sharing-out of risks, the Court suggests that Article 4 should be amended to include an upper ceiling for portfolios of projects.

6. Guarantees may also be granted for short-term credit operations - which may be quasi-advances on revenue - as well as for medium-term and long-term loans.

Nevertheless, and without prejudice to the Fund's rules of sound management, guarantees should be granted first and foremost to loans on which no real guarantee could be obtained or which are not guaranteed by prime-ranking guarantees. Similarly, subordinated loans, which are the last to be repaid but which may, at any moment, be transformed into an equity share, might not be given priority access to assistance from the Fund because, in the event of difficulties, the lender reserves the right to take control of the borrower.

In any case, in the event of default, the Fund will be subrogated to the recovery rights of the financial intermediary that granted the loan, up to the amount covered by the guarantee.

7. Given the management and intervention procedures, the proposed decision (in Article 4 in particular) provides that the risks shall be shared, as far as possible, between the European Guarantee Fund to promote cinema and television and the European Investment Fund.

However, unlike the European Guarantee Fund to promote cinema and television, the European Investment Fund does have a separate legal identity from that of its members (partly the European Union but also the EIB and various other financial institutions and banks) (1).

Because of this, the EIF's decision-making and management bodies (i.e. the Annual General Meeting or, in the event of a delegation of powers, the Supervisory Board or the Financial Committee) will bear the sole responsibility for joint intervention decisions on the part of the European Guarantee Fund to promote cinema and television and the EIF. The proposed Decision may therefore encourage joint interventions but may in no circumstances provide for them in advance or decide on the relevant procedures.

Moreover, should the EIF intervene in concert with the audiovisual guarantee Fund, care will have to be taken to ensure that the distribution of risk between the participants is systematically applied to all files, so as to ensure that the agent - in this case the EIF - confines itself to guaranteeing only those proposals that appear immediately viable and even profitable. In this connection, the formulae for sharing out the risks between the two Funds could be settled in an agreement to be submitted for approval to the Commission (where appropriate, after the opinion of the consultative committee) and the authorized organs of the EIF.

8. In order to facilitate the Fund's administration, the Union has decided to delegate some of its powers to the European Investment Fund, which will have a mandate to act on its behalf.

This mandate will be partial because any decision to grant security will ultimately be the responsibility of the Commission and, as things stand, the EIF will, above all, be responsible for appraising applications. On the other hand, it would seem that Article 6 is premature in laying down provisions for the said mandate, the terms for which have yet to be agreed with the Commission and cannot therefore be defined in advance. Similarly, it would appear that some of the rights listed in this Article are no more than the normal attributes of administration by proxy (the possibility of entering into commitments with third parties, for example).

9. Moreover, it is questionable whether it is appropriate to hand the administration of budgetary appropriations over to a third party (the EIF, in this case).

Similarly, any profits generated by the Fund should, logically speaking, become budgetary appropriations, if not completely, then at least partially (as in the case of joint funding).

However, the Guarantee Fund's self-funding system offers no guarantee that these profits will revert to the Union in the form of budget revenue.

Direct management of these appropriations would perhaps be more transparent, and, at the same time, would not exclude third-party participation since budgetary procedures that are suitable for receiving and administering external contributions of this sort already exist for both expenditure and revenue.

PART 2

Proposed amendments 10. The tables below show the amendments and the comments that the Court feels appropriate by way of amendment of the proposal for a Council Decision in question.

This Opinion was adopted by the Court of Auditors in Luxembourg at the Court meeting of 11 July 1996.

For the Court of Auditors Bernhard FRIEDMANN President

(1) OJ No L 173, 7. 7. 1994, p. 1.

(2) This right is, moreover, expressly mentioned in the last recital.

(1) In this sense, Council Decision No 94/375/EC of 6 June 1994 was intended only to authorize the Community to participate as a Member of the EIF.

OPINION OF THE COURT OF AUDITORS ON THE EUROPEAN GUARANTEE FUND TO PROMOTE CINEMA AND TELEVISION PRODUCTION

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