OPINION No 3/97 on the draft Financial Regulation applicable to development finance cooperation under the Fourth ACP-EEC Convention amended by the Agreement of 4 November 1995 (97/C 223/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

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

Having regard to the Fourth ACP-EEC Convention, signed at Lomé on 15 December 1989 (1), amended by the Agreement signed in Mauritius on 4 November 1995 (2),

Having regard to the Internal Agreement on the financing and administration of Community aid, signed at Brussels on 20 December 1995, and in particular Article 32 thereof, which provides for the Court of Auditors to be consulted (3),

Having regard to Council Decision 91/482/EEC of 25 July 1991 on the association of the overseas countries and territories with the European Economic Community (4),

Having regard to the Commission's proposal of 13 December 1996 (5),

Having regard to the Council's request of 10 March 1997 for the Court's opinion on the said proposal,

HAS ADOPTED THE FOLLOWING OPINION:

PART ONE 1. PRELIMINARY OBSERVATIONS

Budgetization of the European Development Fund

1.1. This opinion is presented at a moment when discussions on the EDF's inclusion in the General Budget are well advanced, so that the possibility exists that the Financial Regulation for the eighth EDF could be applicable for a limited period. The Court notes that many of the issues arising from this draft Financial Regulation also arise in relation to the Commission's proposals for changes to the main Financial Regulation applicable to the General Budget, on which the Court is currently preparing its opinion.

Previous Court recommendations taken up

1.2. The Court notes with satisfaction that a number of recommendations made in its opinion on the draft Financial Regulation applicable to the seventh EDF have been taken up in the draft Financial Regulation applicable to the eighth EDF (6). These recommendations concern the distinction between 'primary commitments` to the final beneficiary and 'secondary commitments` involving contracts with third parties (Articles 20 and 24); the separation of the accounting and authorizing officer services, with the former being responsible for accounting of allocations, primary commitments and establishing the financial statements (Articles 11, 15, and 21 (2)); and some clarification of the role of the Financial Controller as regards commitments and payments (Articles 14, 17 (3), 18, 20 (1), 22, 23, 30, 35 (3) and 39 (2) - 39 (5)).

The role of the National Authorizing Officer and the relationship to the Chief EDF Authorizing Officer

1.3. Even though EDF resources are managed by the Commission and to some extent by the European Investment Bank, the implementation of programmes and projects is the responsibility of the ACP States and the overseas countries and territories (OCT) which are the beneficiaries of this financing. Under the Convention itself, National and Regional Authorizing Officers are accorded an important role in the financial field, for example with regard to the authorization and validation of expenditure (7). To give an example, approximately half of the movements recorded in the accounts annually are payments that are validated, authorized and executed locally, before being entered in the EDF accounting system.

1.4. The EDF Financial Regulation has to be adopted by the Council of Ministers of the European Community, a body of one of the two 'Contracting Parties` referred to in Article 1 of the Convention (the other Party being the ACP States). As a result, it is legally binding only on the European Union and not on the beneficiary States and their delegates.

1.5. The National and Regional Authorizing Officers are thus required 'indirectly` to comply with the provisions of the Financial Regulation: 'The Chief Authorizing Officer shall take all measures to ensure that National or Regional Authorizing Officers perform the tasks for which they are responsible by virtue of the Convention, and in particular Articles 312 to 315 thereof, and that they comply with the provisions of this Financial Regulation` (Article 64 (1)).

1.6. In order to reinforce the binding nature of the provisions of the Financial Regulation as regards National and Regional Authorizing Officers, it is, in the Court's opinion, necessary for both the Chief Authorizing Officer and the National or Regional Authorizing Officer to sign an agreement (at the signing of the national or regional indicative programme, for instance) recognizing that they must comply with the provisions in question.

1.7. The draft Financial Regulation considerably extends the powers of the Chief Authorizing Officer in cases where the National or Regional Authorizing Officer is unable to fulfil his or her role ('failure to perform duties correctly`): 'Where the Chief Authorizing Officer of the EDF becomes aware of delays in the carrying out of procedures relating to management of EDF resources, he shall, in conjunction with the National or Regional Authorizing Officer, make all contacts necessary to remedy the situation and take any steps appropriate. These may include the temporary replacement by the Chief Authorizing Officer of the National or Regional Authorizing Officer should they fail to perform their duties correctly.` (Article 64 (2)).

1.8. In the Court's opinion the concept of failure to perform duties correctly should be clarified.

Financial management and internal control

1.9. The Financial Controller has a key role to play in the internal control system of the Commission, whose overall objective is to ensure that Community funds are properly managed and used for the purposes and in the manner foreseen. With the clarifications and the modifications now proposed in the Financial Regulation that affect the role of the Financial Controller, the Commission has moved away from the principle of a priori controls on all operations, in line also with the 'SEM 2000` Initiative, to a mixture of a priori and a posteriori controls, depending on the type of operation concerned (8). However, since no consideration is given to the overall role of the Financial Controller, there is a risk that the reduction in the role of the a priori approval will not be compensated by an increase in the impact of the a posteriori audits on which he should be expected to concentrate in future.

1.10. In order to strengthen the internal control function, the role of the Financial Controller should be extended explicitly to cover areas such as risk analysis and implementation of controls to mitigate the risks thus identified, checking that key controls and procedures are identified and implemented, checking that procedures are carried out on a timely and efficient basis, carrying out in-depth audits of certain projects or topics as and when required.

1.11. The change in the role of the Financial Controller has implications for the roles of the Authorizing and Accounting Officers, since these will no longer be able to rely on the checks made by the Financial Controller on individual transactions before they are carried out.

1.12. The Authorizing and Accounting Officers will therefore need to reconsider the control system and institute new arrangements within their services to ensure that expenditure is legal and regular, that funds are used in a sound manner for the purposes foreseen and that such errors as may occur are identified and corrected.

The structure of the Financial Regulation and the nature of its provisions

1.13. As regards the nature of the proposed rules, the Court notes that, as in the case of previous Financial Regulations, this draft contains provisions of very different natures, ranging from detailed technical instructions to principles governing the policy of cooperation. Article 54 (1) is an example of the latter: 'Support for structural adjustment programmes provided under the Convention shall be implemented in accordance with Article 248 of the Convention and the following principles: ...`.

1.14. In this connection the Court considers that the Financial Regulation, which should lay down the procedures for the management of the Fund, does not constitute an appropriate instrument for the definition of the principles governing development aid already set out in the Convention, because it is unilateral in character while the Convention is a multilateral instrument.

1.15. As in the case of previous Financial Regulations, the draft Financial Regulation proposed for the eighth EDF could be structured more logically and more homogeneously:

(a) powers of the various parties: the grant of powers to the Financial Controller, for example, is dispersed over approximately twenty articles;

(b) Title IV, 'Executive agents`: if one compares the proposed Financial Regulation with the Regulation applicable to the seventh EDF, the Head of Delegation no longer features, while other proposed provisions bear witness to the decentralization of authority to the Commission Delegations (9). Since the Regulation applicable to the sixth EDF, the National Authorizing Officer has not been included as an 'executive agent`. However, the power of National and Regional Authorizing Officers and their deputies to act as signatories in respect of paying agent accounts is confirmed in this draft Regulation, for the first time (Article 7).

PART TWO 2. FUNDAMENTAL OBSERVATIONS

Presentation and management of appropriations

2.1. In its Opinion on the draft Financial Regulation applicable to the seventh European Development Fund (10), the Court concluded that 'the EDF Financial Regulation should expressly state how and under which authorities the appropriations are managed and how account of this management is to be rendered`. Throughout the past few years the procedures for the management, monitoring and presentation of appropriations have been the subject of the Court's observations, within the framework of the financial audit conducted in respect of the accounts of the EDF (11).

2.2. As regards the procedures for the management of appropriations, the Court would observe that, contrary to the provisions of Article 1 of the draft Regulation, the 'rules of transfer` are not laid down in a precise fashion by the Convention, the Overseas Countries and Territories Decision or the Internal Agreement (12); the designation of competent authorities and the procedures to be followed are still not sufficiently clear.

2.3. The keeping of accounts in respect of appropriations and changes in them will from now on be subject to the authority of the Accounting Officer, which is in line with the Court's wishes (13). However, there is still a contradiction between Article 15 (3) (a), which makes the Accounting Officer responsible for maintaining the accounts in respect of appropriations, and Article 67 (1) (a), which stipulates that the relevant table forms part of the revenue and expenditure account, which is drawn up by the Authorizing Officer, albeit in consultation with the Accounting Officer.

2.4. In conclusion, the Court considers that on this particular point the proposed new provisions concerning the presentation and management of appropriations are insufficient and that part of the recommendation which it made in its previous opinion still stands.

Management, control and reporting on use of Stabex (Articles 55 - 58), Structural Adjustment Support (Article 54) and Counterpart Funds

Stabex

2.5. The Financial Regulation covers the procedures, responsibilities of various Commission officials and reporting of expenditure up to the point where disbursements are made from the EDF accounts. However, for those instruments where this initial disbursement is only the first step in the utilization of the monies by the final beneficiaries, the Regulation ignores the responsibilities of the Commission and the National Authorities as regards the management, utilization and reporting on the subsequent use of those monies, as well as the accountability of the recipient for using the monies towards the ends foreseen.

2.6. Although the Commission provides information on the use of Stabex transfers (14), the situation whereby Stabex transfers are considered to belong to the ACP country concerned, but where utilization is subject to EDF rules and procedures (15), has not been clarified.

2.7. The explicit responsibilities of the Commission and the ACP authorities as regards the management, utilization and reporting on the use of Stabex monies, as well as the EDF rules and procedures that apply in the mobilization of these monies should be clarified.

Structural adjustment support

2.8. The introduction of direct budgetary support under the revised Lomé IV agreement (eighth EDF) structural adjustment support programmes, and which has been practised already by the Commission under the seventh EDF (16), emphasizes the importance of the need for a legal framework for managing, controlling and reporting on the use of these monies, especially given the issues of sovereignty of the ACPs and fungibility of the support provided.

2.9. The questions should be addressed in the Financial Regulation, in consultation with the ACPs, bearing in mind the present unilateral nature of the Financial Regulation (see paragraphs 1.3 - 1.8). The role of the Commission Services and National Authorities in the preparation, implementation and monitoring of programmes in the sectors targeted, and subsequent ex-post assessment of the expenditure needs special mention. In line with Article 250 (3) of the Convention (17), the monies initially paid out of the EDF should be treated and accounted for as advances until that moment when the Commission is satisfied that the monies have been used as required and conditions for the clearance of the advance to final expenditure have been achieved (18).

Counterpart funds

2.10. The Commission now collects and publishes information on the counterpart funds (19) generated in the context of Stabex, structural adjustment support and import programmes.

2.11. The provision of this information needs to be formalized in the Financial Regulation, together with the responsibilities of the Commission and the National Authorities as regards the creation, management and utilization of these counterpart funds (20).

Maintenance of accounts and presentation of advances granted on contracts

2.12. The presentation of advances granted on contracts has been the subject of repeated observations by the Court (21). Although the Commission does not view the payment of an advance as a final transaction, the Financial Regulation does not provide for advances to be presented in a distinctive manner (22).

2.13. In this connection the Court is of the opinion that the Financial Regulation should make it unequivocally clear that advances paid which remain to be justified should be accounted for and presented in the balance sheet separately from final transactions.

The system for commitment of expenditure

2.14. The system for commitment of expenditure is characterized by two major changes:

(a) the distinction made between 'commitments of expenditure`, where financing decisions taken by the Commission are concerned (Article 20), and 'assigned funds`, which concern contracts concluded by the beneficiary (Article 24);

(b) the financing decisions have a time limit for the start and implementation of operations (Articles '9.1 - 9.2).

Distinction between commitments and assigned funds

2.15. Under the Lomé Convention, the endorsement of the Commission, represented by the Head of Delegation, is required for contracts and estimates (and any riders thereto) authorized by National and Regional Authorizing Officers (23). According to the draft Financial Regulation (Article 24 (1)), the record of such contracts in the accounts is termed 'assigned funds`.

2.16. Although the proposed distinction between commitments and assigned funds is in line with certain observations made by the Court (24), the following remarks are due:

(a) apart from the provision concerning the recording in the accounts of the assigned funds in ECU 'at the equivalent of the value of the contracts and estimates concluded` (Article 38 (2)), the draft Financial Regulation proposes no rules governing authorization, accounting for and monitoring of 'assigned funds`, which are recorded only for management purposes;

(b) the draft Financial Regulation (Article 38 (3)) considers that the payments charged to the EDF are made 'under the projects and programmes referred to in Part 3, Title III of the Convention` (25), rather than in the contractual framework of the contracts and estimates concluded by the EDF beneficiary OCT and ACP States;

(c) although the Financial Regulation does not give details of the procedures for the approval, recording and monitoring of contracts concluded, the articles it contains governing the validation of expenditure (Articles 25 - 26) and the authorization of expenditure (Articles 27 - 30) relate always to the verification of the contractual regularity of the payments.

2.17. The Court considers that the Financial Regulation should set out explicitly the rules and procedures concerning the authorization, accounting for and monitoring of contracts and estimates, in order to complete the legal framework formed by the Convention and related Decisions of the ACP-EC Council.

Recording the value of 'assigned funds`

2.18. The draft Financial Regulation (Article 38 (2)) stipulates that the equivalent value of the contracts and estimates that is recorded should, where appropriate, include provision for reimbursable expenses, for the revision of prices and contingencies, and for exchange rate fluctuations.

2.19. In the Court's opinion this provision conflicts with the sound management of EDF resources, because variations resulting from the implementation of contracts and estimates should be evaluated as they occur, justified in a more concrete manner and recorded immediately.

Definition of the period of implementation of activities

2.20. The draft Financial Regulation provides that financing decisions taken by the Commission, as well as financing agreements, should include a time limit for starting implementation of projects; beyond this date, the decision and the agreement 'no longer apply` (Article 9 (1)).

2.21. Financing decisions would also include a time limit for the implementation of operations. Continuation of the operation beyond this date must be justified by the beneficiary and accepted by the Commission before the implementation time limit expires (Article 9 (2)).

2.22. In contrast to Article 9 (1), which concerns financing decisions and financing agreements, Article 9 (2) relates only to financing decisions taken by the Commission. From a legal point of view these decisions are binding on the Commission but not on the beneficiary countries. Under such conditions it is difficult to imagine a legal basis on which constraints such as the provision of justification for the continuation or, even, the stopping of an operation could be imposed on third party beneficiaries.

2.23. In order to avoid any ambiguity, Article 9 (2) of the draft should be clarified.

Cancellation of expenditure

2.24. Although financing decisions and financing conventions would no longer apply once the time limit for the implementation of an operation has expired (Article 9 (2)), the proposed Financial Regulation does not specify the procedures to be followed in cancelling the expenditure in question.

2.25. Definition of the procedures for cancelling expenditure also affects the question of the treatment and presentation in the accounts of operations which do not reflect economic reality ('inactive` commitments) (26).

2.26. In the Court's opinion the system of expenditure commitments should be supplemented by a definition of the procedures for the cancellation of expenditure.

EIB managed operations (Articles 39 and 60 - 62)

Commission responsibilities concerning EIB managed operations

2.27. Under the terms of the Internal Agreement (27), the management of EDF-financed risk capital operations and interest rate subsidies on loans from the EIB's own resources is entrusted to the EIB. At present, the Commission accounts for such operations on the basis of information provided by the Bank. However, for the EDF interest rate subsidies on the loans from the Bank's own resources, no effective checks are carried out to ensure that the amounts recorded for commitments and payments are reasonable and correct (28). The Commission considers that it has no obligation to verify the accuracy of these amounts, on the basis that the operations concerned are managed by the EIB on behalf of the Community, and that it is responsible only for the funds it manages (29). The changes thus proposed to the Financial Regulation (non-application of Title II to EIB-managed operations under Article 10, with the exception of Articles 15 (3) (c) and 39 dealing specifically with the EIB) are apparently made with the intention of avoiding any obligation on the Commission's part for ensuring that all EIB-managed amounts it records in its accounts are correct and due.

2.28. While the EIB carries out the operations concerned on behalf of the Community, the latter is represented by the Commission, which has the overall responsibility for ensuring that the Community aid policy is implemented (Internal Agreement, Article 11). The fact of the EIB acting as agent does not therefore absolve the Commission from carrying out controls on these operations. Furthermore, a distinction has to be made between the legal commitments made by the EIB under mandate, and the corresponding accounting commitments made by the Commission. The latter are the basis for budgetary execution (payments), for which the Commission has full responsibility over the EDFs, as it has under Article 205 of the EC Treaty over Community expenditure.

2.29. Consequently, the Financial Regulation should clarify that the Commission has the ultimate responsibility for all amounts recorded in the EDF accounts, and therefore the responsibility for ensuring the validity and the accuracy of the amounts of the EIB-managed operations. The provisions of Article 10 and the related articles that apply only to the EIB should be eliminated from the Financial Regulation. Equally, in the French text of Article 74 (1), the limitation to the Commission's budgetary responsibility introduced by the words 'l'exécution financière des opérations du FED dont la Commission assure la gestion pour l'exercice écoulé, conformément à l'article 33 paragraphe 3 de l'accord interne` (translation: execution of the financial management of EDF operations managed by the Commission for the preceding financial year, in accordance with Article 33 (3) of the Internal Agreement) should also be deleted.

Audit powers of the Court of Auditors

2.30. In accordance with Article 188C (1) of the EC Treaty, as interpreted by the first Statement concerning the Treaty of 22 July 1975 amending Certain Financial Provisions of the Treaties establishing the European Communities and of the Treaty establishing a Single Council and a Single Commission of the European Communities, the Court of Auditors has 'jurisdiction to audit the operations of the European Development Fund`. This power, which is a general one, is not dependent on the manager of the operations in question.

2.31. The EDF Financial Regulation should, in line with the Financial Regulation applicable to the general budget (Article 105 (3)), recognize unambiguously that the management of EDF operations by the EIB does not affect the Court's audit powers, recognized on the level of the Treaty, with regard to these operations.

This Opinion was adopted by the Court of Auditors in Luxembourg at the Court meeting of 14 May 1997.

For the Court of Auditors

The President

Bernhard FRIEDMANN

(1) OJ No L 229, 17. 8. 1991.

(2) Not yet ratified.

(3) Not yet in force.

(4) OJ No L 263, 19. 9. 1991.

(5) Document COM(96) 676 final.

(6) Opinion No 1/91 on the draft seventh EDF Financial Regulation, paragraphs 2.4 and 2.5 - 2.11 (OJ No C 113, 29. 4. 1991), and Special Report in support of the Statement of Assurance for the activities of the Sixth and Seventh European Development Funds in 1994, paragraphs 3.52 - 3.54 (OJ No C 352, 30. 12. 1995).

(7) Fourth Lomé Convention, Article 313 (1) (f).

(8) For example, a priori approval of proposals for commitment of expenditure (Article 20 (1)) and monitoring of local payments after they are effected or entered in the accounts (Article 35 (3)).

(9) Decentralization of the authority of the Authorizing Officer: Articles 13 (2) and 35 (1); decentralization of the authority of the Accounting Officer: Articles 35 and 44.

(10) Opinion No 1/91, paragraph 2.16 (OJ No C 113, 29. 4. 1991).

(11) See Annual Report 1993, paragraphs 15.20 - 15.29 (OJ No C 327, 24. 11. 1994); EDF DAS report 1994, paragraph 3 (2) (a) (OJ No C 352, 30. 12. 1995); EDF DAS report 1995, paragraph 3.1 (OJ No C 395, 31. 12. 1996).

(12) The rules of the Internal Agreement (Articles 1 (2) (ii) and 34 (1) laying down the procedures for the transfer of appropriations from previous EDFs.

(13) Opinion No 1/91, paragraph 2.11.

(14) Commission report required under Internal Agreement Article 31 (3); Note to the EDF financial statements since 1994 on the situation of Stabex monies paid out, actually used and counterpart funds generated.

(15) Special report No 2/95 on Stabex in the context of the Fourth Lomé Convention, Chapter 9 and paragraph 11.9 (OJ No C 167, 3. 7. 1995).

(16) Court of Auditors' Annual Report 1995, Chapter 12 on EDF structural adjustment support, use of counterpart funds (targeting), paragraphs 12.53 - 12.61; supervision of the programmes, 12.89 - 12.93; conclusion 12.106 (OJ No C 340, 12. 11. 1996).

(17) Lome IV, Article 250 (3): '... Such funds will be considered as an advance to be cleared by the submission of justification of the use of funds`.

(18) EDF DAS report 1994, paragraph 3.42 (OJ No C 352, 30. 12. 1995).

(19) By way of notes to the EDF financial statements since 1994.

(20) Opinion No 1/91 on the seventh EDF Financial Regulation, paragraph 2.20 (OJ No C 113, 29. 4. 1991).

(21) See EDF DAS report 1994, paragraph 3.45; EDF DAS report 1995, paragraph 3.52.

(22) Commission reply to EDF DAS report 1995, paragraphs 3.51 - 3.53.

(23) Fourth Lomé Convention, Article 317 (j).

(24) See Opinion No 1/91, paragraph 2.25; EDF DAS report 1994, paragraphs 3.29 - 3.39.

(25) Namely financing decisions and agreements.

(26) See EDF DAS report 1994, paragraphs 3.30 - 3.33 (OJ No C 352, 30. 12. 1995) and EDF DAS report 1995, paragraphs 3.41 - 3.45 (OJ No C 395, 31. 12. 1996).

(27) Internal Agreement, Articles 10 and 15.

(28) EDF DAS report 1995, paragraphs 3.9(c), 3.69 and 3.77

(29) EDF DAS report 1995, Commission replies to paragraphs 3.9 (c), 3.69 and 3.77