REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL - Commission's report on the follow-up to 2001 Discharges

TABLE OF CONTENTS

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the follow-up to 2001 Discharges

I. European Parliament Resolution on General Budget

a) Accounting, Treasury, Recovery

b) Eurostat, Fight against fraud

c) Externalisation

d) Budget Underimplementation / SAPARD, Structural Funds

e) Enlargement

f) Agriculture & Food

g) European Social Fund

h) Environment, public health and consumer policy

i) Penalty payments

j) External Policies

k) Financial Instruments

l) Other remarks

m) OLAF

II. European Parliament Resolution on EDF

III. European Parliament Resolution on ECSC

IV. European Parliament Resolution on Agencies

V. Recommendation of the Council on General Budget

a) Commission reform

b) Own resources

c) Common Agricultural Policy

d) Structural measures

e) Internal policies

f) External actions

g) Pre-accession aids

h) Administrative expenditure

i) Financial instruments & banking activities

j) Statement of Assurance

PREAMBLE

1/Scope of the Follow-up Report

Article 276 of the EC Treaty and Article 180b of the EAEC Treaty determine the discharge procedure. These articles state that the "Commission shall take all appropriate steps to act on the observations in the decisions giving discharge and on other observations by the European Parliament relating to the execution of expenditure, as well as on comments accompanying the recommendations on discharge adopted by the Council. At the request of the European Parliament or the Council, the Commission shall report on the measures taken in the light of these observations and comments and in particular on the instructions given to the departments which are responsible for the implementation of the budget. These reports shall also be forwarded to the Court of Auditors".

As far as implementation of the General Budget for the 2001 financial year is concerned, the Commission, acting on requests from the Council and Parliament, accordingly produces the present Follow-up Report, which relates to the Council recommendation of 7 March 2003 and the Resolution voted by the European Parliament on 8 April 2003.Compared with the previous years this Follow-Up Report also relates to the Discharges given in respect of implementation of the budget of the sixth, seventh and eighth European Development Funds and the ECSC for the 2001 financial year.

Lastly, the Report also deals with the follow-up to recommendations to the Commission relating to Discharges given to the European Coal and Steel Community (ECSC) and to the following agencies: Cedefop, Eurofound & Ear

2/Objective of the follow-up report

In accordance with the Treaties, the objective of this Follow-up Report is mainly to present the action taken by the Commission or action it intends to take in response to the comments contained in the discharge resolutions in respect of implementation of the general budget of the European Union for the financial year 2001, the budget of the sixth, seventh and eighth European Development Funds and the ECSC for the 2001 financial year.

3/Methodology

For the sake of clarity and to avoid a very lengthy document, this is a summarised version of the requests expressed by the Budgetary Authority. The requests can be found in full in the attached recommendations issued by the EP and the Council.

To make for quick location of the original requests in the Discharge recommendations, the cross-references to the original requests are presented in brackets after each summarised request. Each cross-reference starts with the name of the rapporteur responsible for a given Discharge recommendation (e.g. Casaca 52 stands for the request presented under paragraph 52 of the 2001 General Budget Discharge recommendation). The same proceeding applies for the other recommendations, i.e.:

Sorensen - stands for the 2001 EDF Discharge recommendation;

Langenhagen - stands for the 2001 ECSC Discharge recommendation;

Council - stands for the 2001 Council Discharge recommendation.

The measures taken by the Commission in respect of each request/recommendation are described in the boxes.

I. European Parliament Resolution on General Budget

a) Accounting, Treasury, Recovery

1. Present by the end of 2003 a multiannual plan containing a timetable and a step-by-step plan for obtaining a positive declaration of reliability in respect of the whole budget; (Casaca - 5)

Commission's reply:

Following the administrative reform, the Commission is gradually setting up the structure needed to give such an assurance. Concerning the accounting aspect, a new accrual accounting framework based on international accounting standards for the public sector is planned for 2005, in conformity with the Financial Regulation of 25 June 2002 and the implementing rules. Such international public sector accounting standards have only recently been agreed. The Court of Auditors has nevertheless consistently indicated that the accounts have over the years faithfully reflected the Communities' revenue and expenditure, except for 4 minor technical qualifications.

As regards the reform of financial management in the Commission, the standards expected of the internal control systems are clearly established and a major effort is being made by the Directorates-General to achieve full compliance as far as possible with the baseline requirements of the 24 Internal Control Standards by the end of 2003 (See Action 5.4.5. of the 2002 Synthesis of the Annual Activity Reports and declarations of the Directors-General and Heads of Services of the European Commission, - COM (2003) 391 of 9.7.2003). The Commission has also taken steps to deal with the risk of irregularity in operations which it does not manage directly. For instance:

- regarding shared management, an interdepartmental group is considering possible measures to involve the Member States more closely;

- as regards shared-cost programmes, a plan of action adopted on 10.1.2003 is now operating to generate greater consistency between Directorates-General in contract management. Several Directorates-General have adopted corrective measures to reduce the risk of errors to the minimum;

- regarding co-financed programmes in general, an interdepartmental group is to work from the end of 2003 on the possibility of introducing flat-rate components in grants and subsidies, with a uniform control methodology.

Finally, given the Court's continuing concern regarding such risks, the Commission will examine the feasibility of formalising benchmarks for the measures taken in each sector of its activities concerned, and of reporting on its attainment of these benchmarks.

2. Plan of the approach to be adopted by the end of 2003 by each individual DG, in the context of decentralisation, stating how and when the DG will obtain a declaration of reliability; (Casaca - 5)

Commission's reply: The Commission attaches the utmost importance to the achievement of a positive DAS. But in the system laid down by the Treaty (Article 248 EC), the Directorates-General are not supposed to obtain a declaration of reliability. It is at the Commission level that such an assurance is to be given. For this purpose, remedial measures to all detected weaknesses are being carried out, either at the services' and at the Commission's level, as it is indicated in the action plan attached to the 2001 and 2002 Synthesis of the Annual Activity Reports and declarations of the Directors-General and Heads of Services of the European Commission.

Since the entry into force of the Treaty of Nice, the statement of assurance can be supplemented by specific assessments for each major area of Community activity. In future the Commission will encourage the Court of Auditors to identify landmarks so as to measure the Commission's progress in complying with obligations in terms of sound financial management. In the meantime the Court's observations will gradually be taken into account through case-by-case improvements in each Directorate-General's internal control systems.

3. Reconciliation of the data in the accounting system to be treated urgently and frequently; (Casaca - 6)

Commission's reply:

Financial data for 2002 have been reconciled between the two sub-systems of SINCOM2. In March 2003 a team was established to monitor the consistency of the two systems on an ongoing basis. This is currently done on the basis of weekly reports comparing the two systems.

4. Take the high turnover of administrative staff in high ranking and crucial posts, as well as the deficit of qualified staff in accounting and auditing, as a top priority in its human resources policy; (Casaca - 11)

Commission's reply:

In principle and as a general rule, the Commission is committed to a policy of mobility for its high-ranking officials. Since the current Commission came into office, a number of mobility exercises have taken place amongst the A1 (Directors general or equivalent) and A2 (directors or equivalent) populations, the most recent took place in November 2002. The Commission believes that such a policy is in the interest of the institution and contributes to increased motivation and professionalisation of its senior staff, and is in no way detrimental either to the continuity or to the quality of the leadership. In its appointments the Commission ensures the best possible match between the qualifications of an official and the requirements and importance of the post.

The Commission has encountered difficulties in the short-term recruitment of a large number of internal auditors and managers internally and externally by means of competitions. The current supply on the employment market does not satisfy the considerable demand for this type of profile. So far a large proportion of requirements have been met by organising several specialised grade A competitions. A long-term policy based on the planned management of requirements and competitions, the organisation of competitions every year and the conversion of staff through appropriate training has enabled the Commission to develop a capacity for providing staff for these highly specialised posts.

5. Provide an answer to EP statement that closure of 2001 Accounts was carried out in violation of the Financial Regulation; (Casaca - 13)

Commission's reply: The accounts for 2001 were prepared by the relevant departments in the Budget Directorate General and were presented, under the responsibility of the accounting officer in office on 31 December, to the Director-General of DG Budget and then to the Commissioner for the Budget, who adopted them on behalf of the Commission on 30 April, as empowered to do so by the Members of the Commission.

Article 18 of the Commission Regulation laying down detailed rules for the implementation of certain provisions of the Financial Regulation does not provide for approval to be given by the Financial Controller.

Given the deadlines for the closure of the annual accounts, the accounts for 2001 were not submitted by the accounting officer to the Financial Controller prior to adoption.

6. Asks for the maximum restraint on earmarking of funds within budgetary lines - especially in Chapter A-30 (Community subsidies); (Casaca - 14)

Commission's reply:

The Commission welcomes the wishes of the European Parliament to restrain earmarking. This is in line with the approach of the new financial regulation. Earmarking in the budgetary remarks of Chapter A-30 is never proposed by the Commission in its PDB. In the past, when the Budgetary Authority decided to place earmarking in the remarks through amendment of the Commission's PDB, the Commission agreed to take into account the earmarking as a manifestation of a political priorities of the Budgetary Authority, as long as it was compatible with its responsibility in executing the budget. In 2004 and later years, the new legal bases for the Chapter A-30 grants currently being discussed by the legislator will clarify the situation.

The Commission has always advocated the principle of tendering for grants and this principle is now explicitly mentioned in the Financial Regulation. The Commission has proposed appropriate legislation ready for the introduction of ABB in 2004 and for cases in which a specific beneficiary has to be designated [COM(2003) 275 final and COM(2003)276 final].

7. External audit carried out by the end of 2003 on its treasury system and to report the results thereof to Parliament (Casaca - 16)

Commission's reply:

On 13 May 2003, the Commission asked its external auditors, the European Court of Auditors, whether it could undertake an audit of the Commission's treasury system before the end of 2003. In its reply of 23 May 2003, the Court indicated its willingness to consider such an audit, which would take account of the audits already undertaken by the Commission's Internal Audit Service. The Court stated that it would not be able to complete this task before the end of 2003.

8. Define clearly its understanding of "full accrual accounting"; (Casaca - 17)

Commission's reply:

Accrual accounting is defined by the IFAC in its International Public Sector Accounting Standards (IPSAS) (and therefore understood by the Commission) as: "A basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses."

Under accrual accounting, operations are therefore entered in the account for the year to which they relate, regardless of the date of payment or receipt.

Article 125 of the new Financial Regulation similarly refers to the accrual accounting principle as the requirement that "...the financial statements shall show the charges and income for the financial year, regardless of the date of payment or collection."

9. SAP/R3 modules 'accounts payable' and 'accounts receivable' to be brought into use by the end of 2003; (Casaca - 18)

Commission's reply: The Commission already uses these modules but a new structure is being analysed under the framework of the accounting reform. A group established under the accounting reform has examined how client and suppliers' accounts can be enhanced and the conclusions from this work are now being finalised which will allow the Commission to ensure that both accounting and user DG requirements are met. Once this group reports, it will be possible to take charge of the translation into the operational system. .

10. Principle of double-entry accounting be respected and Discharge authority be informed of the transition towards this system at least in quarterly intervals; (Casaca - 19 and 20)

Commission's reply:

The principle of double-entry accounting is accepted and has been used for the general accounts for many years. Although the use of double-entry bookkeeping in the budgetary accounts is not required by Article 137 of the Financial Regulation, nor under the International Public Sector Accounting Standards (IPSAS), the Commission is examining whether it is feasible to introduce it within its project for the modernisation of its accounting system. If it proves feasible, and of demonstrated added value, it will also be introduced in 2005.

The Commission's general accounts are already kept by double-entry bookkeeping, in accordance with the requirements of Article 134 of the Financial Regulation.

The Commission will inform the Discharge Authority quarterly on the issue of accounting modernisation. Ms Schreyer presented to the COCOBU on 8 July the first "Information Note from Commissioner Schreyer to the Commission - Progress Report concerning the modernisation of the Accounting System of the European Commission.

11. Experts from ECA to participate, in an advisory capacity, on the new Accounting Standards Committee; (Casaca - 22)

Commission's reply:

Two members of the Court's staff attend the meetings of the Accounting Standards Committee as observers, and give advice in a personal capacity.

12. Lack of integration in current automated accounting system and failure to ensure either the required level of secure access or reliability of data input from different parts of the system; failed to ensure either the required level of secure access or reliability of data input from different parts of the system; (Casaca - 25)

Commission's reply:

The architecture of the current SINCOM2 system requires that data are reconciled to ensure consistency of the sub-systems. This has been done for 2001 and 2002. Data for 2003 are being examined weekly to ensure consistency. This activity will continue until such time as a new integrated accrual accounting system is put in place under the provisions of the ongoing accounting reform project.

Access to SINCOM2 is granted on the basis of the Internal Rules of the Commission and of validated requests from the superiors responsible. The access of system administrators has been severely restricted - no administrator to the system has a permanent access to the system and access is only granted for a limited period for defined tasks of a technical nature. All actions are logged in the system. A revised security policy has been developed for SINCOM2 in line with recognised international standards and this has been applied since July 2003.

13. Cost-benefit analysis of the two alternatives expressed in options 2 ('single standard package') and 3 ('new integrated system')for the development of the computerised accounting system; (Casaca - 26)

Commission's reply:

The Commission has studied both options, and has concluded that option 3, an integrated central system receiving accounting information from a number of local systems, is the only means of introducing accrual-based accounts by the 2005 deadline. Once the new central system is fully operational, it will undertake a cost/benefit analysis of each local system before deciding whether it should be integrated into the central system.

14. Prior to decision to be made, detailed and comprehensive audit by external experts of the Commission's plans to improve the accounting framework (detailed characteristics Casaca - 23) and the related IT systems (detailed characteristics Casaca - 28). Results to be reported and discussed at a hearing before the Committee on Budgetary Control; (Casaca - 29)

Commission's reply:

On 13 May 2003, the Commission asked its external auditors, the European Court of Auditors, whether it could undertake an audit of its project for the modernisation of its accounts. In its reply of 23 May 2003, the Court stated that such an audit by the Court would be premature, given the degree of the project's implementation. To meet Parliament's concern, the Accounting officer of the Commission asked external consultants to do a feasibility study of the Communication of December and of the implementation of the project. This study was completed in early July and its conclusions presented to the COCOBU by Mrs Schreyer on July 8th. Also see answer to point 10.

15. Provide complete explanations of accounts and references to their legal basis, including the various volumes and tables; (Casaca - 32)

Commission's reply:

The consolidated annual accounts of the European Communities for 2001 are drawn up in accordance with Articles 78, 80 and 81 of the Financial Regulation of 21 December 1977, applicable to the general budget of the European Communities, amended last by Council Regulation No 762/2001 of 9 April 2001. They are drawn up each year by the European Commission and record the budgetary and accounting data of all the European institutions.

The annual accounts of the Communities are presented in four volumes, as follows:

. Volume I - The Commission - Analysis of financial management,

. Volume II:

-Tome I: The Commission - statement of budgetary implementation,

-Tome II: The Commission and EURATOM Supply Agency financial statements,

. Volume III - The European Parliament, the European Council, the Court of Justice, the Court of Auditors, the Economic and Social Committee, the Committee of the Regions and the Ombudsman financial statements,

. Volume IV - Consolidated statements on budgetary execution and the consolidated financial statements

16. Make an assessment of the reliability and accuracy of figures included in volumes I and IV of financial statements; (Casaca - 33)

Commission's reply:

The 2001 figures have been audited by the ECA, which has confirmed their reliability in the DAS Chapter 9 of their Annual Report under the heading "Reliability of the accounts": "III. Except for the effects of the observations summarised in indents (a) to (d) below and the remark made in paragraph IV, the Court is of the opinion that the accounts of the financial year closed on 31 December 2001, as published in the Official Journal, faithfully reflect the Communities' revenue and expenditure for the year and their financial position at the year-end..."

17. Use certified figures from the financial statements as the only source for any official release of budgetary figures; (Casaca - 34)

Commission's reply:

The figures released by the accounting services to the Court of Auditors are official as are those sent to the discharge authorities.

Such legal reporting is based on the source data included in the accounting system.

18. Establish a pilot programme introducing information on dates of invoices and payments in the beneficiaries' notifications; (Casaca - 38)

Commission's reply:

A pilot project relating to DG EMPL programmes will be conducted in 2003. Grant beneficiaries will be informed of payments they are to receive as soon as the request for payment has been made by the authorising officer. The information beneficiaries are requested to supply in return should ensure actual payment times. This new procedure will be evaluated in the light of the interest shown by beneficiaries for this advance information.

19. Present a detailed action plan in July 2003 to include in the budget the use of interest paid on advance payments and of recoveries (Casaca - 43), see also Casaca - 40 and 42);

Commission's reply:

All interest received by the Commission is entered in the budgetary accounts. In its planned modernisation of the accounting system, the Commission is examining the best means of also recording interest earned on pre-financing and on recoveries, but not yet received by the Commission.

As for the 20% deduction from recoveries collected under Council Regulation (EEC) 595/91, the COCOBU was informed by letter (AGRI 10440 dated 13/4/2003) that the amounts corresponding to the 20% deduction are booked under specific budget headings. The COCOBU had also been informed about the detailed amounts booked. As for the use of these amounts in the MS it was explained in the same letter that these amounts are resources of the MS and that the Commission therefore makes no enquiry into the specific use of these amounts.

As for the interest earned on SAPARD accounts a letter was sent to the COCOBU (AGR 7132 dated 7 March 2003) in which the specific question concerning the use of these amounts was addressed. The Commission stated in that letter that both the receipt and the use of interest is reported by the candidate countries. Interest generated on SAPARD accounts is subject to budgetary control and, in particular, the clearance of accounts process. The legislation applicable to the SAPARD programme (Commission Regulation (EC) No 2222/2000) stipulates that the interest credited to the SAPARD account should be used exclusively for the programme (Article 11(3)), and that the clearance of the SAPARD agency account also covers clearance of the SAPARD EUR account and the interest credited to it (Article 13(3)).

b) Eurostat, Fight against fraud

Eurostat

20. IAS to examine by summer 2003 the legality and regularity of all contracts concluded by Eurostat since 1999 and to include in the investigation those contracts concluded by other Commission services on Eurostat's recommendation; (Casaca - 57)

Commission's reply:

In specific response to Parliament's request, on 11 June 2003 the Commission tasked its Internal Audit Service with an examination of the awarding of contracts and grants in Eurostat or on the recommendation of Eurostat in other Commission services. This examination was carried out on an agreed-upon procedures basis.. The results of this examination were transmitted in confidence, on the basis of Annex III, Article 3.2 of the Framework Agreement, to Parliament on 24 October 2003.

21. Full implementation of the recommendations from the Audit report on EUROGRAMME, including that related to Article 24 of the Staff Regulations. (Casaca - 58)

Commission's reply: The measures taken to follow up the recommendations made during analysis of the Prodcom dossier may be summarised as follows:

(1) "Better methods for checking the criteria laid down in Council Directive 92/50, and in particular Articles 31 and 32, should be implemented".

The manual on calls for tenders, regularly updated and most recently in 2003, has stepped up the checks of these criteria.

Eurostat now carries out a tighter check of the financial statements provided by companies.

To boost financial awareness, the training course on the Expenditure Life Cycle was attended by 56 persons in 2001, 36 persons in 2002 and 12 persons in 2003.

(2) "In obvious cases of misrepresentation in information given to the Commission, Article 29(g) may be applicable".

Eurostat managers considered that the information at its disposal was not such as to justify the application of Article 29(g) of Directive 92/50. Eurostat managers interpreted the further information provided by Eurogramme at Eurostat's request as showing that the information originally supplied was incoherent rather than false.

OLAF examined the case at the end of 1999 and concluded, on the basis of the information available at the time, that there was then no justification for stopping payment or the award of contracts to Eurogramme.

OLAF decided on 2 December 2000 to open an external investigation, and on 5 July 2002 to forward information to the Luxembourg judicial authorities.

OLAF's final investigation report was recently sent to the Secretariat-General of the Commission, which immediately forwarded it to DG ESTAT. OLAF will inform the Commission of action taken by the judicial authorities.

(3) "DG ESTAT should include in the project management procedures a clear statement that no assistance should be given to contractors in recruitment of staff, even if it would be in concern of the success of the project".

(7) "Clear instructions and rules on management of externalised projects, including project files, should be implemented, and training in project management should be intensified".

Clearer and more concise rules have been drawn up for the management of projects and, in particular, the management of outsourced activities. Project managers receive training on a regular basis.

These include instructions to project managers not to help contractors recruit staff.

Meanwhile, there has been more general training on project management. Around 100 persons attended these training courses in 2001 and 2002.

(4) "Considering the settlement proposal from the Head of Unit, the final payment should be executed, in spite of the breach of contract".

The final payment to Eurogramme (EUR192 250, compared with EUR250 000 in the initial contract) reflects a management decision which takes account of the work actually done.

(5) "Contractual obligations, such as deadlines and quality of deliverables, should be better followed up and respected".

The financial reporting for contracts has been improved. The rules on the management of projects and outsourced activities will reinforce and formalise the follow-up measures.

(6) "Clear instructions in cases of breach of contract should be implemented". &

(12) "Clear instructions for procedures related to renewals of contracts should be implemented".

Eurostat has amended its internal manuals on calls for tenders, commitments and grants in line with the new Financial Regulation, the implementing rules and the recommendations of the Internal Audit Service.

These manuals entered into force on 1 January 2003.

(8) "Article 24(1) of the Staff Regulations should be taken into account when replying to the contractor's note of 14 September 2000".

Article 24 of the Staff Regulations had been invoked by the Eurostat Project Officer for Prodcom, Mrs Schmidt-Brown, in connection with a libel action against the contractor Eurogramme that she had brought before the High Court in London. Mrs Schmidt-Brown asked in particular for financial assistance from the Commission, in relation to the costs incurred for the libel action in London. However, Mrs Schmidt-Brown has subsequently informed the Commission that the case in London had come to a settlement and that, as a consequence, the case before the High Court had been closed.

This settlement means that Mrs Schmidt-Brown's request as originally formulated did not retain its relevance.

Against this background, the Commission has subsequently (in May 2003) made clear in writing to Mrs Schmidt-Brown that her professional conduct has always been of high quality. The Commision has also recognised that her case may not have been dealt with in a way that fully accords with the high standards that the Commission is seeking to set for itself.

The Commission has therefore supported Mrs Schmidt-Brown.

(9) "All management of confidential data should be internalised.",

(10) "Internalisation of the PRODCOM project should be considered." and

(11) "All databases and applications should comply with Commission standards".

A new manager was appointed for the Prodcom project in September 2001. One of his responsibilities was to internalise the activities which used to be entrusted to outside firms (the last company to win this contract was Eurogramme).

These activities consisted of:

- Processing data from the Member States by using a system developed and maintained by Eurogramme;

- Analysing the data;

- Preparing the data for distribution.

Internalisation is achieved by developing internally a computer system to receive and process the data from the Member States which are then processed by another Eurostat database for the purposes of production, analysis and distribution.

The data for 2001 have already been processed under the new system which complies with Commission standards.

22. Revise all contracts with and payments to EUROGRAMME, suspend the granting of contracts to that firm and assure the compliance of the stockholding transfer to a new company with the Financial Regulation (Casaca - 59)

Commission's reply:

Given the uncertainty about the exact nature of the transaction between Eurogramme and Calethon and the lack of complete information on the financial and operational capacity of Calethon, Eurostat decided to suspend all payments under current contracts to Eurogramme and to Calethon on a precautionary basis. However, the Commission remains liable for payments relating to work effectively carried out.

An exhaustive analysis of the amounts contractually due compared to the work carried out until now was undertaken before proceeding to any payment. The same decision is being applied by other Commission departments concerned.

In addition, following the undertaking given by the Commission to the COCOBU on 28 February 2003, the Commission has served notice to the company of termination of contracts with work in progress related to statistical activity, pursuant to Art.7.1 of the General Conditions of the contracts.

The two bank accounts held by EUROGRAMME listed in the "Third Party File" were flagged in the Early Warning System on 31/03/2003, following a formal request transmitted by OLAF.

Consequently, as from this date (31/03), any Authorising Officer scheduling a payment for one or the other of these bank accounts is informed "on-line" of this situation and can/has to contact a designated OLAF official.

Furthermore, the IAS has undertaken an examination covering the award procedures of a sample of commercial contracts and grants. It is based on commitments authorised in the financial years 1999 to 2002, awarded by Eurostat or on its recommendation.

Fight against fraud

23. Review the information procedure between OLAF and Commission and necessary steps in order to remedy the fact that Commission ignores OLAF complaints to national judicial authorities (Casaca - 60)

Commission's reply:

The evaluation of OLAF carried out under Article 15 of the relevant regulation had already identified the need to improve exchanges of information on internal and external investigations with due respect for all the rules applying to the Office's activities.

Steps are being taken to improve the working relationship between OLAF and the Commission. Operational instructions issued by OLAF to its investigators concerned with informing the Commission of internal investigations within the Commission came into force on 23 June 2003. These instructions will first operate for a trial period of six months at which point it will be decided on the basis of the experience gathered whether their use will be extended to the other institutions, agencies and bodies.

Furthermore, a draft memorandum of understanding between the Commission and OLAF concerning a code of conduct to ensure the timely exchange of information between OLAF and the Commission with respect to OLAF internal investigations in the Commission was approved by the Commission on 25 July 2003. The draft document has been transmitted by the Commission to the European Parliament and by the Director General of the European Anti-Fraud Office to the OLAF Supervisory Committee for their observations.

The President of the Commission gave an undertaking on 25 September to the Conference of Presidents to propose a plan of action with recommendations for improvements with a view to consolidating the reform and guaranteeing full autonomy of OLAF within a clear political frame.

It is OLAF which has contacts with the national judicial authorities. OLAF has a unit staffed with magistrates from the Member States, one of whose tasks is to ensure an improved judicial follow up of cases transmitted by it to the national judicial authorities.

It is for OLAF to provide the Commission with the information needed for measures to be adopted when OLAF refers a case to the national judicial authorities. Article 10.3 of the relevant regulations allows OLAF to inform the institution concerned during internal investigations.

24. Ensure that Member States have proper accounting, audit and control systems, set up anti-fraud units with OLAF and improve co-operation with ECA. (Casaca - 67)

Commission's reply: The Commission already verifies on a regular basis that Member States have adequate control and audit systems. The manner in which the Member States organise their administrations is a matter of national competence although the Commission favours clearly identified horizontal anti-fraud structures. OLAF cooperates regularly with all the services responsible for the fight against fraud against the Community budget in the Member States. In addition, OLAF and the Court of Auditors have a memorandum of understanding on the mutual exchange of information.

Between November 2002 and January 2003, OLAF carried out a joint audit with the Directorates General responsible for the Structural Funds on the implementation by the Member States of the provisions of Regulation (EC) No 1681/94 of the Commission concerning the systems and procedures for the notification and follow up of irregularities as well as the application of Article 8 of Regulation (EC) No 438/2001. The conclusions of this audit will be transmitted to the Member States, the Council, the European Parliament and the European Court of Auditors.

c) Externalisation

PERSONNEL POLICY

25. Establish a code of conduct for its personnel that ensures transparency and separation between private and public interests. (Casaca - 44)

Commission's reply:

An administrative guide has been drawn up and published on the Commission's intranet giving guidance to officials as regards their obligations in general and the need for them to ensure separation between their private and public interests.

According to the internal control standards the Commission has adopted (specifically control standard No.1 concerning 'ethics and integrity'), DGs and services have made several documents available to staff (among others Staff regulations, Code of good administrative behaviour).

The application of these rules is supervised by the management and by the IAC.

These issues will be repeated in a notice to staff to increase awareness, ongoing attention and sensitivity.

26. Closely monitor the granting of leave on personal grounds and to review its past decisions. (Casaca - 45)

Commission's reply:

The Commission, in the context of the reform process, has decided to encourage external mobility to enable officials to acquire new skills and knowledge which are of benefit both to the officials themselves and to the institution. However, the Commission also considers that in the interest of transparency, the provisions governing permission to engage in an outside activity should be incorporated in a single measure indicating in detail which factors have to be taken into account when taking a decision on such permission.

The Commission therefore intends to adopt new rules on the authorisation of external activities by end 2003 - early 2004. These revised rules will make a clearer link between the authorisation of external activities and the authorisation of leave on personal grounds.

These rules will apply also to leave already granted when the time comes for annual renewal.

27. Amend its proposals to review the staff regulation about the cost of the pension weightings. (Casaca - 47)

Commission's reply:

On 19 May 2003 the Council adopted a "Presidency Proposal for the Revision of the Staff Regulations" including the following political agreement with regard to the correction coefficients for pensions:

"Weightings (correction coefficients) will not be applied to pension rights accumulated after the entry into effect of the new Staff Regulations. Acquired rights of existing officials who retire to their state of origin will be respected by applying country-based coefficients (which cannot be less than 100 percent, including for current pensioners) to the part of the pension resulting from pension rights accumulated until the entry into effect of the new Staff Regulations."

The Commission supports the compromise reached in Council and will integrate it into its modified proposals to be submitted to Council in the autumn of this year.

OUTSOURCING POLICY

28. Make a rigorous analysis of the need and added value of the administrative functions it will perform prior to the decision to create any executive agency. (Casaca - 51)

Commission's reply:

The preparation of any decision to create an executive agency is the responsibility of the DG concerned; the dossier comprises a "cost-benefit" analysis which could cover the action referred to in point 28. Article 3 of Regulation 58/2003 laying down the statute of executive agencies contains precise provisions on the cost-benefit analysis. Before the Commission can take a decision on the creation of an executive agency it has to submit the draft text to a regulatory committee. The committee has all the elements of a cost-benefit analysis. DG Budget is consulted during the interdepartmental consultations initiated by the other DGs and Services. As it is responsible for the committee procedure for the executive agencies and has drawn up the framework regulation on the statute of these agencies (No 58/2003), DG Budget also contributes its know-how and assistance to the sound preparation of dossiers.

The Commission is considering the establishment of an executive agency to replace the Technical Assistance Offices which have still been retained on a transitional basis. The final decision on setting up this agency will not be taken until the conclusions of a feasibility study and a cost/benefit study commissioned from an outside consultancy have been taken into consideration.

29. Launch a careful review of policy of outsourcing of activities, with particular reference to the principle of budgetary annuality. (Casaca - 52)

Commission's reply:

Since 1999, the Commission has undertaken a reorganization of its externalisation policy, re-focusing on its core tasks and activities and reassuming effective control of executive and support activities by means of more closely controlled structures endowed with the necessary skilled staff.

New externalisation instruments have been designed to implement this policy and take over tasks performed by TAOs. The new regulation on executive agencies, adopted by the Council last December, is a decisive part of this package. However, adopting legal instruments and implementing them has taken and will still take some time. In the meantime, the Commission decided to adopt measures to rectify the situation regarding the tasks entrusted to some of the TAOs.

Externalisation of the management of community programmes can take a number of forms, according to the sectors or activities to which it is applied. Certain limits and constraints must be observed when tasks are externalised. In particular, externalisation cannot relieve the Commission of the responsibilities conferred on it by the Treaties, by virtue of either implementing powers delegated to it by the Council (Article 202) or its responsibility for implementing the budget (Article 274). Its public-authority tasks, in particular, cannot be devolved to private bodies.

The externalisation body must be designed in such a way as to preserve the continuity of the chain of responsibility between the Commission and the bodies to which it delegates powers and to give the Commission effective control of the tasks it devolves to outside agencies.

The decision to externalise tasks must always be made on grounds of good management, accompanied where appropriate by a simplification and clarification of management procedures, and because it is more cost-effective than direct centralised management.

The tasks entrusted to external private-sector entities or bodies other than those, which have a public-service mission, are technical expertise tasks and administrative, preparatory or ancillary tasks involving neither the exercise of public authority nor the use of discretionary powers of judgement.

These principles are enshrined in the new financial regulation, which specifies in Article 54, that the Commission cannot entrust to third parties its executive powers involving a large measure of discretion implying political powers. The same article also defines "indirect central management" and allows for externalisation. Furthermore, Article 57 also recalls the main constraints on outsourcing tasks to the private sector.

Three forms of externalisation of the management of programmes have been implemented.

Executive tasks which are the responsibility of the public authorities, or for which there is no truly competitive market, can be dealt with by:

(i) devolution, i.e. delegating executive responsibilities to Community public bodies (executive agencies) conceived as part of an expanded Community administrative architecture;

(ii) decentralising, i.e. delegating executive responsibilities to national bodies, with a public service mission backed by the State, to act as partners in implementing some Community policies.

Some tasks requiring technical expertise and various preparatory or auxiliary administrative tasks, not inherently belonging to the domain of the public authorities nor requiring the exercise of discretionary powers, could be handled by:

(iii) outsourcing through contracts given to the private sector. The relationship between the Commission and the service provider is defined in a private law contract, usually in the form of a service contract following a tendering procedure. The services concern specific tasks during the life cycle of operations when implementing a Community programme. The Commission remains responsible for ensuring the tasks have been duly performed according to the stated terms of reference.

30. Quantify as soon as possible the externalisation of administrative tasks, broken down by Commission department; according to the number of tenders and tendering procedures, number of contracts and list of leading recipients of the contracts by financial value. (Casaca - 53)

Commission's reply:

In 2000, the Commission underwent a thorough assessment of existing and planned TAOs and reassessed their tasks in the light of the criteria setting the scope and limits of various forms of externalisation. The information available for quantifying the externalisation of administrative tasks relates to the technical assistance offices (TAOs) listed in the annex to letter of amendment N° 1 of 4 September 2000 to the preliminary draft budget (PDB) for 2001.

This Letter of Amendment listed 124 contracts with TAOs that the Commission was using or planned to use. The related aggregate annual expenditure was estimated at some EUR133.6 million.

TAOs could be kept on if the tasks subcontracted are strictly limited to technical expertise and administrative, preparatory or ancillary tasks involving neither the exercise of public authority nor the use of discretionary powers of judgment.

The letter of amendment provides for the retention of 24 TAOs. The list is regularly updated by the Commission and then sent to the committees responsible in the European Parliament. It contains precise information on the number of TAOs closed down, the remaining TAOs and the dates on which their contracts end.

For TAOs failing to meet the minimum criteria for the delegation of responsibilities in acceptable conditions, the Commission proposed alternative solutions. For most of the TAOs, the identified long-term solution proved to be the setting-up of executive agencies. Pending the adoption of the regulation on executive agencies, which only came at end-2002, the Commission devised an orderly transitional scheme to allow a speedy phasing out of TAOs, as requested by the budgetary authority. This implied a progressive re-incorporation of tasks in the Commission's departments, while preserving programme continuity and minimising the risk of contractual conflicts.

In practice, the Commission has been implementing the following transitional solutions on a case-by-case basis:

- either temporarily returning the tasks to the relevant Commission department, at headquarters or in delegations in third countries, who should be able to recruit intra muros outside contract personnel charging the cost to the budgetary BA headings for the programmes concerned;

- or extending existing contracts and providing - if necessary - more restrictive terms for tasks to be performed.

In 2002, payments amounted to EUR28.1 million, showing a drastic reduction compared to what was announced in 2000. This trend is still more impressive in commitments (with some 16 million committed in 2002).

The figures, updated to 3 July 2003, are as follows: the total number of TAOs has fallen to 12. This means that 114 TAOs have been closed down and others will disappear once the conditions are met for setting up an executive agency in accordance with Council Regulation (EC) No 58/2003 of 19 December 2002 laying down the statute for executive agencies to be entrusted with certain tasks in the management of Community programmes. [1]

[1] Published in OJ L 11, 16.1.2003, p.1.

The rules for subcontracting tasks of technical and administrative assistance in the implementation of Community programmes have been tightened up, [2] in particular Article 57 of the new Financial Regulation [3] under which:

[2] - Communication from Ms Schreyer and Mr Kinnock on orientations for the externalisation policy, SEC(1999) 2051/7 of 14 December 1999;

[3] Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities, published in OJ L 248, 16.9.2002, p.1.

1. The Commission may not entrust measures of implementation of funds deriving from the budget, including payment and recovery, to external private-sector entities or bodies, other than those which have a public-service mission under Article 54(2)(c).

2. The tasks which may be entrusted by contract to external private-sector entities or bodies other than those which have a public-service mission are technical expertise tasks and administrative, preparatory or ancillary tasks involving neither the exercise of public authority nor the use of discretionary powers of judgment.

To ensure that these provisions are respected, the Commission consults the Directorate-General for the Budget before subcontracting technical assistance services.

31. Make an overall study of activities currently deployed by various Community bodies that may overlap or serve the same goals in order to propose appropriate solutions including possible mergers of agencies. (Casaca - 54)

Commission's reply:

The possible overlap or duplication between the work of the ETF and CEDEFOP has been assessed both in the external evaluation of Cedefop carried out in 2001 as well as in the external evaluation of the ETF (COM(2003)287 final). The external evaluations have confirmed that there is no overlap between the two Agencies which have a separate geographical coverage and quite different missions and tasks: Cedefop contributes to the Community's vocational training policy through transnational cooperation within the EU, while the ETF supports the Commission in the design and implementation of VET reform activities in third countries as part of the Community's external policies' framework.

The Commission in recent years has ensured that tools are in place for the Agencies to achieve maximum synergy and complementarity (e.g. a framework for cooperation decided in 2001, a joint annex to each Agency's annual work programme, establishment of an ETF/CEDEFOP working group, etc).

It should also be pointed out that the structure of the Management Boards for CEDEFOP and the ETF are of quite different nature: whereas CEDEFOP has a tripartite board as an Agency working for the vocational training policy, the ETF has a board made up exclusively by Member States. Representatives on the Board of CEDEFOP should have experience and skills relating to the vocational training policy area, while the ones on the Board of the ETF should also have an external relations and third country aid programme experience. The profile of the members of each Board required for the efficient functioning of the Board and fulfilling its tasks should therefore be quite different.

There is a list of Community bodies currently operating, out of which four would be the more obvious candidates for examination for possible overlapping, that is the European Centre for the Development of Vocational Training (CEDEFOP) in Thessaloniki and the European Training Foundation (ETF) in Turin, as well as the European Foundation for the Improvement of Living and Working Conditions in Dublin and the European Agency for Safety and Health at work in Bilbao.

As regards the European Foundation for the Improvement of Living and Working Conditions and the European Agency for Safety and Health at work, the two Agencies have already signed a Memorandum of Understanding on 7 February 2001 and from 2003 the two agencies have extended (June 2003) their areas of collaboration and agreed on an action plan with concrete actions and activities for cooperation, in a spirit of maximising the synergies and removing the possibilities of duplication of activities.

32. Set targets and a timetable to reduce the level of administrative expenditure as part of total expenditure in agencies. (Casaca - 55)

Commission's reply: Decentralised Community bodies have specific missions according to their respective founding regulations, which are adopted by the legislative body of the EU, that is the Council and in several cases, the Council in codecision with the European Parliament.

The Agencies carry out these missions as independent legal personalities, adopting their work programme strictly based on the tasks foreseen in their founding regulations. In order to implement their work programmes, the Management Boards of the Agencies adopt their annual budgets, taking into account the Community subsidies adopted by the budgetary authority of the EU for the funding of decentralised bodies.

In a series of cases the legislator has foreseen that these Agencies are to carry out labour-intensive tasks, and no or few tasks involving the implementation of operational appropriations. Whenever the tasks given to the Agency mainly involve manpower, and therefore the respective salaries and office space, these costs fall under Titles 1 and 2 'staff and administrative expenditure' of the Agencies' budgets. It would be misleading to compare administrative expenditures to the so-called 'operating expenditure' (title 3 of the Agencies' budget), and conclude that Agencies, which have a higher percentage of 'Administrative expenditure' are less efficient and productive then those with a higher percentage of 'Operating expenditure', as such a comparison can only indicate that the nature of the work differs.

As indicated, it is neither in the Agencies' nor the Commission's competence to chose the tasks to be carried out by the Agencies, but the will of the legislator is being transposed via the annual work programme and the corresponding budget.

33. Existing agencies could be entrusted with more operational tasks. Make appropriate proposals by 30 June 2003 before creating any further executive agencies (Casaca - 56)

Commission's reply:

In adopting the framework regulation on executive agencies, the legislature has already created an instrument to provide the necessary assistance for programme management. The proposal to create an instrument of this type answered the need to clarify the sort of body which was to implement or support Community policies (the decentralised agencies mentioned in the White Paper on European governance, executive agencies or offices).

This reasoning led to a general preference for using an executive agency under the Commission's control rather than a decentralised agency for programme management. One consideration was the fact that the decentralised agencies are placed under the authority of management boards on which the Commission is in a minority; this fact would complicate the idea of liability, in particular financial liability, for which the Commission would still be responsible if work was outsourced. In addition, decentralised agencies are not normally located in places where the Commission has an office, while executive agencies are based in the same place as the Commission and its departments.

As regards the executive agency planned for DG EAC, the feasibility study states that the cost/benefit study (provided for by the framework regulation of December 2002) should take account of the existence of two decentralised agencies in the field of education and culture when examining the assistance required by the DG.

As indicated in response to point 32, activities carried out by decentralised Community bodies are set out in their founding regulations. Any modification and/or addition of tasks would require an amendment to the legal act setting up the Agency. However, this would not seem to be the appropriate way forward, as the reason for the planned creation of Executive Agencies is to respond to different needs for financial management:

Council Regulation 58/2003 lays down the statute for executive agencies, which are to be entrusted with certain tasks in the management of Community programmes.

Council Regulation 58/2003 provides that Executive Agencies, to which the Commission may entrust part of the management of Community programmes, is to implement these appropriations under the responsibility of the Commission. The nature of executive agencies therefore differs fundamentally from traditional agencies, which implement their budgets under the responsibility of the Agency's Directors.

Article 5(1) of Council Regulation 58/2003 also provides for the location of executive agencies, stating that "An executive agency shall be located at the place where the Commission and its departments are located, in accordance with the Protocol on the location of the seats of the institutions and of certain bodies and departments of the European Communities and of Europol." This principle diverges from the location throughout the European Union of centralised community bodies.

These points highlight the conceptual differences between decentralised Community bodies and executive Agencies, which make it difficult to see existing decentralised Community bodies taking over the tasks of future executive Agencies.

However, the Commission may decide to set up an executive Agency only after a prior cost-benefit analysis (see Article 3 of Council Regulation 58/2003).

d) Budget Underimplementation / SAPARD, Structural Funds

SAPARD

34. Take into consideration the situation of candidate countries in areas such as access to credit and the lack of a property market (Casaca - 78)

Commission's reply:

The assertion that in Bulgaria access to credit is non-existent does not take recent developments into account. In that country the State Fund Agriculture and the executive directors of 14 commercial banks signed, on 14 March 2002, a Memorandum of Understanding on joint action in implementing the SAPARD Programme. Through them, the banks undertook to extend some EUR150 million as co-financing credits to SAPARD funded projects. It is, however, correct that some potential beneficiaries may face particular problems in access to credit. In order to seek to mitigate these problems the Commission, with the aid of PHARE funds, supports a project to improve access to credits of SMEs in candidate countries. The Commission is further examining the possibility of ensuring that this "facility" is taken up more widely.

On the issue of pre-financing of projects, one of the principles upon which SAPARD is based is that beneficiaries obtain aid from the Community only after they have incurred costs. This is for reasons of sound financial management. The Community does not, however, require the project to be completed before such aid may be granted although many of the beneficiary countries (including Bulgaria) have chosen to require project completion before any aid is granted. This has an inevitable burden on beneficiaries in terms of their cash flow, but does have advantages including that of less burdensome management and administrative costs for the national authorities as required by Parliament in 80.

On the issue of the property market, especially on aspects related to private ownership, potential beneficiaries who do not have clear title or property use claims, face problems especially for certain investments in particular but not only those involving buildings. The Community has already given considerable support through PHARE to all countries to help develop property markets. It is however inevitable that this help cannot solve all problems of ownership in cases such as when all of the inheritors cannot be located or where for whatever reason they are unable to agree on future use of the land.

35. As regards the derogation to the rule n+2 provide monitoring in the implementation of the new ruling and early warning to Parliament in case of appropriations cancellations; (Casaca - 79)

Commission's reply:

The Commission monitors closely implementation of the new rule. In autumn 2002 it launched an exercise of reporting the amounts committed by each SAPARD Agency to final beneficiaries, based on information from the Candidate Country. This, together with information received during the Monitoring Committees, in the annual reports and in the payment application, enable the Commission to provide early warning to the Candidate Countries. Moreover, the information obtained was provided by Commissioner Fischler to the Budgetary Control Committee on 10/3/2003, and he subsequently, on 2/4/2003, wrote to all beneficiary countries warning them of the risks of cancellation (and set out options that might overcome them).

It is planned that from time to time Parliament will be updated on the risk of cancellation. The last update was provided on 11 June 2003 by a letter from Commissioner Fischler to Ms Theato and Mr Casaca.

36. Prioritise the structural adaptation of agriculture in candidate countries by giving adequate financial help to farmers while ensuring that adequate controls are in place and that control structures and administrative costs are in proportion to money allocated; (Casaca - 80)

Commission's reply:

The Commission too would have preferred that the impact of European assistance to structural reform of agriculture in the candidate countries was already greater. It is not, however, evident that what has been achieved causes serious prejudice to the enlargement process or to the image of enlargement in the EU. On the contrary, what has been achieved via SAPARD is to build systems so that, irrespective of the levels of expenditure recorded, all countries already now have systems capable of managing aid to foster structural adaptation of their agriculture. Those systems include desk and on-the-spot checks before contracting and payment phases, and are finally supplemented by an ex-post follow-up of the investment, in conformity with criteria set out in the Multi-Annual Financing Agreement (MAFA). All beneficiary countries receive considerable financial help from the Community, the level of which is determined in the budget procedure, to help, inter alia, farmers faced with the challenges of integration. The Commission considers that all such help is subject to adequate control systems that have to be in place prior to any funds being released, and that these control structures and administrative costs are in proportion to money allocated, taking into account the levels of risk involved.

37. Provide at the earliest opportunity guidance notes for SAPARD in the languages of the candidate countries (Casaca - 81)

Commission's reply:

SAPARD is implemented on a fully decentralised basis. The Commission points out that on all occasions it is the candidate country concerned that is responsible for preparing documentation in its language. The Commission is not aware that this has caused any problems, nor is it aware of any unfulfilled requests for guidance notes.

STRUCTURAL FUNDS

38. Make proposals for the next Structural Funds reform to prevent long delays in implementation without harming political priorities while respecting principles set out by the Parliament (few clear priorities, administrative simplification, improved distribution of funds and smooth changeover to new programming periods). (Casaca - 63, 65 and 72)

Commission's reply:

The Commission regrets the delay in negotiating the programming documents at the start of the 2000-2006 programming period and the resulting consequences for the start of implementation. This is the reason why the Commission will be presenting its legislative proposals for the period after 2006 as early as possible in 2004 so that all the legislation will be introduced before the start of the next programming period (1 January 2007). The Commission is considering a new system of implementation based on a more decentralised, more simple and more effective system of programming, management and control. It is also planning a substantial simplification of the number of stages in the programming.

To ensure a smoother transition to the future programming period, the Structural Funds and Cohesion Fund regulations, the implementing rules, and the multiannual financial framework for the period after 2006 must be adopted early enough to ensure that the preparations for the adoption of measures, allocation of funds, adoption of guidelines, presentation of proposals, etc., are virtually completed by the end of 2006.

39. Divide in the next programming period the programming periods for objective programmes and Community initiatives. (Casaca - 63)

Commission's reply: The Commission takes note of the suggestion to divide the programme periods for structural operations by objectives and Community initiatives. The system of a single programming period for all the Structural Funds is linked to the mechanism of the financial perspective which is fixed for a period of several years.

40. Improve payment forecasts together with Member States. (Casaca - 64)

Commission's reply: It is true that so far Member States' forecasts have been very inaccurate and have tended to overestimate expenditure. They have also been very volatile, i.e., often the same Member State produces relatively good estimates one year and very bad estimates the next year or vice versa.

Although so far the forecasts have been of limited value for budgeting, the Commission believes that forecasting retains its potential to become a very useful budgeting tool in order to simplify the preparation and execution of the Structural Funds budget. Accordingly, it has already taken several measures aimed at improving the forecasts.

The Commission has begun informing the budgetary authority regularly about the forecasting exercise. On 12 November 2002, it sent a first working document on the provisional results for 2002 to the BA. Further analysis, including a final analysis of the 2002 exercise, were sent to the budgetary authority with the working paper (Commission, DG BUDG) "Analysis of the budgetary implementation of the Structural Funds in 2002. More recently, the Commission sent to the budgetary authority a qualified analysis of Member States' forecasts for 2003 and 2004.

Forecast requests are now also forwarded for information to the management authorities of the different programmes rather than only transmitted to the Permanent Representations as used to be the case. It is hoped that this will make the Member States' forecasting task easier to accomplish effectively.

Finally, in November 2002 the Commission sent a questionnaire to the Member States on their experiences with the 2002 forecasting exercise. The feedback received was helpful to further improve the procedure. This was already reflected in the reminder letter sent in 2003 to the Member States, with streamlined instructions for the collection and transmission of the 2003 forecasts.

The Commission corrects the forecasts received from Member States in the light of its own information. For 2004 the amounts in the budget are smaller than those returned by the Member States in their forecasts.

Despite the fact that Member States' forecasts have systematically overestimated significantly the need for funds, they remain an information source to be considered by the Commission as it comes from sources closer to the execution of the programmes on the ground. This is a consequence of shared management.

41. Implement simplified measures proposed in October 2002 in order to increase rate of implementation of payment appropriations. (Casaca - 66)

Commission's reply: The Commission has already implemented most of a package of simplification measures adopted in 2003 (communication of 25 April 2003 (COM(2003)1255). The package includes both amendments to legislation (Regulations 1685/2000 and 438/2001) and changes in practices that do not require changes to legislation.

An example of measures in the package that will help increase the rate of implementation is the more flexible procedure for calculating the co--financing rates for interim payments. The Commission has also introduced an early warning system for Member States at risk under the M+18 (reimbursement of advances) and N+2 (decommitment) rules.

42. Introduce a single audit model. (Casaca - 68)

Commission's reply: Concrete steps will be taken to promote convergence of audit methodologies and processes between Directorates-General and Services operating under shared management arrangements. Specific attention will be paid to the development of common standards, taking into account well-established best practices, complementary control and audit processes, at Community and national levels, and assurance protocols with member States. The single audit approach involves greater cooperation between the Commission and the Member States in auditing the Structural Funds. The Commission and the Member States thereby coordinate their audit plans to avoid overlap and use one another's audit information, and the Commission takes into account to a greater extent on the work done by national audit bodies. The single audit concept is already being implemented by all Structural Funds departments under the audit coordination protocols. A further development now under discussion with the Member States is a "contract of confidence" which the Commission would enter into with Member States for particular programmes or all programmes in the country concerned, whereby the Member State would guarantee a satisfactory level of audit of management and control systems for the Structural Funds allowing the Commission to reduce its own audits.

This audit strategy was given a favourable reception by the national delegations and the representative of the Court of Auditors. It takes into account and integrates with the methodological approach for all the Structural Funds set out and updated in early 2003 in the Funds' manual for the audit of the management and control system.

43. Consider for the 2005 budgetary procedure alternative methods bringing payment appropriations into line with Member States' absorption capacity. (Casaca - 69)

Commission's reply: It is difficult to base payments appropriation only on "absorption capacity" as the EP also request to keep a link between payments and commitments. The later are defined as target expenditure.

So far, implementation of the Structural Funds programmes has indeed trailed below expectations in some countries. The payments appropriations for 2000-2006 programmes were in line with the absorption capacity in 2002 and likely 2003 where the problems are concentrated on the closure of 1994-1999 programmes. In the PDB 2004, the approach adopted was to determine the level of the payment appropriations requested on the basis of implementation in 2002 and not on the basis of the forecasts received from the Member States.

For 2004 the Commission estimated the level of payments on the basis of experience acquired up to end-2002. This approach produced a level of payments below that resulting from Member States' forecasts. The Commission will therefore continue to refine its forecasts on the basis of the analysis of past experience.

44. Provide more guidance to Member States on the reporting of irregularities and inform Parliament of it. (Casaca - 71)

Commission's reply: The Commission Structural Fund departments and OLAF have carried out an enquiry into the reporting and follow-up of irregularities in the Structural Funds in all 15 Member States. The enquiry was carried out in late 2002 and early 2003. A report on the results of the enquiry will be published in the autumn of 2003. Parliament will be informed. A general result has already been the clarification of Member States' obligations and better coordination between them and OLAF.

45. Profound changes to be made in the next Structural Funds programme in keeping with the proposals in the Commission White Paper on EU Governance; (Casaca - 72)

Commission's reply: This White Paper applies to all Community policies; therefore, the principles and objectives set out in it will be reflected in the Commission's proposals for the next Structural Fund programme period.

46. In the context of the European convention, set up audit structures proportionate to money allocated. (Casaca - 73)

Commission's reply: Audit structures should be sized according to the budget being managed and the risk profile, which may depend on other factors such as indirect management or the complexity of the legislation. The audit structures required in the Member States under Structural Funds regulations already take account of the volume of funds being managed. Under shared management the Member States are principally responsible for the control and audit of the Structural Funds. Within the Commission, the Structural Funds services have generally reinforced their audit capacity to be able to verify the adequacy of national systems.

e) Enlargement

47. PHARE and ISPA: improve the implementation rate. (Casaca - 82/83)

Commission's reply: As far as ISPA is concerned, the implementation rate of 58% was relatively high for an instrument that has only been available since 2000. Projects that have been prepared during the last two years for ISPA, are now reaching the implementation stage; therefore the Commission is confident that the implementation rate for the forthcoming years will improve (in 2002, the rate increased to 78%). The Commission is closely monitoring project preparation and provides - also with a view to future accession- continuous support through Technical Assistance funds for improving the preparation of projects and for strengthening the administrative capacity in the ISPA beneficiary countries for implementation. The activities covered include technical preparation of projects, environmental impact assessments, feasibility studies, training on procurement, on public-private-partnerships, financial management and control.

The Court of Auditor's Annual Report 2001 complimented the Commission on its "high" implementation for PHARE (81.6 %)..

48. TACIS: Indicate proportion of local companies selected for projects and design call for tenders so that they get a fair chance of winning. (Casaca - 84)

Commission's reply: TACIS is a programme of technical assistance whose objective is to promote the transition of the beneficiary countries towards well-functioning market economies and to reinforce democracy and the rule of law.

The assistance is, in general, delivered in the form of grants financing technical assistance contracts.

When a project is launched a contractor is selected to deliver services to the beneficiary organisation.

The selected contractor is generally an organisation from the Member States, mainly from the private sector but also from the public sector or a non-profit organisation.

The contractor is normally the final recipient of the EU funds while the final beneficiary, receiving the assistance, is normally a government institution in the TACIS country.

The services delivered by the contractor aim to transfer know-how in eligible areas of cooperation which are:

- support for institutional, legal and administrative reform

- support to the private sector and assistance for economic development

- support in addressing the social consequences of transition

- development of infrastructure networks

- promotion of environmental protection and management of natural resources

- development of the rural economy

- support for nuclear safety

The forwarding of technical assistance implies the selection of contractors with a specific know-how that has been identified as not being available in the targeted beneficiary countries. This explains why selection of local companies in TACIS project is very exceptional.

However, the Commission would like to stress that the enforcement of the principle of equality of potential eligible contractors (including from beneficiary countries) has always been applied in TACIS procurement rules.

No statistics are held on the origin of the contractors, as the phenomenon of association of contractors and the constitution within consortia would not make these sufficiently relevant.

49. Ensure that candidate countries have proper accounting, audit and control systems, set up anti-fraud units with OLAF and improve co-operation with ECA. (Casaca - 85)

Commission's reply:

The pre-accession instruments and the certification of management systems which they required have given the candidate countries considerable practice in managing EU funds and applying its legislation. Before accession the Commission is checking that the management and control systems being put in place in the candidate countries come up to the standards laid down in Regulations 438 and 448/2001 (Structural Funds) and 1386/2002 (Cohesion Fund). The Commission has developed and implemented a monitoring and counselling strategy to ensure that these countries fulfil the requirements of the acquis in relation to accounting, control and internal audit (chapters 28 and 29) before the date of accession. A comprehensive monitoring report on the progress achieved is due for 1 November 2003. It should be noted, however, that although the monitoring actions have given a clear and rather unproblematic picture of the situation in the various accession countries, a real performance audit can only be meaningfully carried out once these countries have joined the Union.

As far as fraud prevention is concerned, the Commission is ensuring that each of the countries has a clearly identified administrative service responsible for the protection of the Communities' financial interests and fighting fraud against the Community budget, which is also capable of cooperating directly with OLAF. In Poland, this service has been reinforced by the presence of an agent from OLAF in 2001 and 2002. The Commission committed EUR15 million of the PHARE budget in 2002 in a special programme dedicated to supporting anti-fraud structures in the PHARE countries thereby making them more effective.

f) Agriculture & Food

Management and control systems

50. Harmonise and simplify IACS requirements across the EU (Casaca - 88)

Commission's reply:

The Commission seeks to harmonise and simplify administration, control and sanctions when necessary and possible. The IACS Regulation 2419/2001 was recast with this objective in mind and is regarded as having provided significant benefits both for national administrations and for farmers alike.

Articles 6 (area aid applications) and 10 (livestock applications) of Commission Regulation (EC) No. 2419/2001 specify the information required in the applications to enable eligibility for aid to be established. However, it is left to Member States to decide on the exact composition of these forms (subject to the regulatory requirements). Furthermore, Article 11 of the same Regulation allows for the applications to be transmitted electronically, as well as in paper form. Therefore, there is no "common" form used by Member States, and the Commission sees no advantage in introducing one at the moment.

51. Common standards for measuring eligible areas (Casaca - 87)

Commission's reply:

On the basis of art. 22 of Regulation 2419/2001, guidelines were issued in May 2003 in respect of on-the-spot controls. A document of the Joint Research Centre (JRC) on specific tolerances for different types of measuring equipment has also been distributed. Together these documents should ensure that common standards are applied throughout the Community. Moreover, the Commission is currently in the process of proposing amendments to the Regulation in this respect.

52. Ensure before the end of 2003 that Greece fully implements the IACS system (Casaca - 89)

Commission's reply:

The Commission is fully aware of the delays in Greece in implementing IACS. The Greek paying agency has been subject to regular and close supervision, both in terms of institutional structure and actual scheme implementation, since the deadline for achieving IACS expired in January 1997. For these reasons the Director-General for Agriculture formally reserved his position on the matter in the AAR 2002.

To complement the already on-going audit work, and to take full account of the unsatisfactory situation in Greece, DG Agriculture instigated, in late 2002 / early 2003, an enhanced action plan to supervise and monitor progress. According to this plan, Greece's new paying agency, OPEKEPE, provides regular progress updates and, already in the first half of 2003, on-the-spot audit missions have been undertaken in the context of the Commission's clearance of accounts procedure in the arable crops, animal premiums, olive oil, textiles and dry grapes sectors.

Any resulting financial corrections are based not only on deficiencies established in respect of IACS, but must also correspond to a reasonable estimate of the real risk of undue charge on the Community budget. On this basis, the Commission has until now decided annual corrections at a rate of 5% or more for arable crops, at least 5% for sheep and goat premiums and 10% for bovine premiums. Furthermore, a clearance of accounts procedure is currently ongoing in respect of bovine premiums claimed in 2000 with the possibility of a very high financial correction. In addition the Commission services are contemplating a very important financial correction for certain other aid schemes.

In 2002 the Commission also brought a case against Greece before the Court of Justice under Article 226 of the Treaty because of its failure to introduce a management and control system.

Finally, it should be noted, that the responsibility for implementing the IACS in Greece lies with the Greek authorities. The Commission cannot "ensure", as asked by the EP, the implementation of IACS. The Commission can only take legal action against a Member States not complying with the acquis and ensure that any financial risk to the Community budget is covered within the clearance of account procedure.

53. Operational Bovine Identification System by the end of 2003 in all Member States (Casaca - 90)

Commission's reply:

The bovine identification system as laid down in Council Regulation (EC) No 820/97 followed by Regulation (EC) No 1760/2000 of the European Parliament and of the Council of 17 July 2000 establishing inter alia a system for the identification and registration of bovine animals comprises the following elements: eartags, passports, holding registers and computerised database. According to Article 5 of those Regulations the bovine identification system should have been operational in all Member States since 31 December 1999, by which date the computerised database set up by the competent authority should have been fully operational.

Having regard to Article 6(3)of the Regulations, the Commission has, on request from the Member States concerned, recognised the fully operational character of the databases for bovine animals for the following Member States: Austria, Belgium, Denmark, Finland, Luxembourg, Netherlands, Sweden, France, Germany and Northern Ireland (United Kingdom). As far as the remaining Member States (Portugal, United Kingdom as regards Great Britain, Italy, Ireland, Spain and Greece) are concerned, the situation is being analysed within the Commission services with a view to the requested recognition. This analysis takes into account the reports from the series of missions on traceability and labelling of beef and minced beef carried out by the Food and Veterinary Office in all Member States. This has included an evaluation of the operation of bovine identification databases in the Member States. This series of missions was finished by the end of 2002. Reports of individual missions are available on the SANCO-FVO website, and provide information on outstanding issues regarding the implementation of these systems. The Commission is currently examining the lessons to be learned from this series of missions, and is preparing an overview report of the situation, which will be made available both to the Parliament and on the above website in 2003.

54. Level of controls: propose as soon as possible clearly defined and objectively controllable indicators (Casaca - 92).

Commission's reply:

The development of verifiable indicators of Good Farming Practices has been difficult. Nevertheless, updated guidelines, worked out with the Member States, were issued in 2002 and the system is now up and running. One of the purposes of Agenda 2000 was to allow the CAP to adapt better to local circumstances or priorities. Thus, the criteria for Good Farming Practice, and controllable indicators, are set at national or regional level. Considering the huge variety of situations between and within Member States, the Commission does not wish to propose harmonised, Community wide criteria or indicators as it would not allow local conditions to be taken into account.

The Commission attaches high importance to the environmental impact of farming in the EU. The CAP reform - a long-term perspective for sustainable agriculture - foresees, as regards direct aids, a cross compliance with environmental rules. In the preparation of the implementing rules, the Commission takes into account the necessity, underlined by the Parliament, of defining objective control obligations.

55. Produce a report by November 2003 on higher IT-security among paying agencies (Casaca - 86)

Commission's reply:

The Commission is preparing a report on higher IT-security among paying agencies which will be made available to the EP.

Sugar CMO

56. Make a careful internal analysis of the reasons for the failure of the CMO reform (Casaca - 94).

Commission's reply:

In May 2001, the Council decided, in accordance with the opinion of the European Parliament, that the sugar CMO would be maintained up to the 2005/06 marketing year. On 23 September 2003 the Commission transmitted a communication to the Council and the European Parliament. The Communication fulfils the Commission's commitment to report to the Council in 2003 on the EU sugar regime and its prospects, as laid down in Article 50(2) of Council Regulation (EC) No 1260/2001. It outlines three options for the future of the sugar sector. The Communication "Accomplishing a sustainable agricultural model for Europe through the reformed CAP - the tobacco, olive oil, cotton and sugar sectors", can be found on the Internet at:

http://europa.eu.int/comm/agriculture/ capreform/com554/index_en.htm

The complexity of the sector and the various challenges it faces, both domestically and internationally, as well as the potential impact of various options, are documented in the accompanying Extended Impact Assessment (EIA) of the sugar sector. The EIA has been made with the help of an Interservice Steering Group (ISG) where 14 Directorates-General were represented and a broad consultation of stakeholders was organised. The EIA of the sugar sector can be found on the Internet at:

http://europa.eu.int/comm/agriculture/ publi/reports/sugar/index_en.htm

57. Withhold as soon as possible export refunds for sugar exports to countries enjoying duty free access to the European market (Casaca - 98);

Commission's reply:

This issue was part of one of the reservations (risk of "carousel" business) that the Director-General for DG Agriculture made to his annual declaration. The reservation was followed up by the implementation of an action plan to address the identified weaknesses. One part of the measures taken has concerned export/import of sugar to/from the countries of the Western Balkans. Hence, for export licences delivered as from 8 March 2003, the Commission ceased the granting of refunds for sugar exported to five countries of the Western Balkan (Albania, Bosnia & Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, and Serbia & Montenegro, including Kosovo). See Commission Reg. No 430/2003, 431/2003 and 432/2003.

Another of the measures taken concerns the provisional suspension for 3 month, as from 8 May 2003, of the preferential import arrangements for duty free sugar imports from Serbia- Montenegro, .following OLAF's report on serious shortcomings in the customs controls (for the certification and control of the preferential origin of sugar) in this country (see Regulation (EC) No 764/2003 - OJ L 109, 1.5.2003). The provisional suspension measure was extended for a further 6 months until 8 February 2004 (see Regulation (EC) No 1343/2003 - OJ L 189, 27.7.2003.

Export refunds

58. Evaluate all export refunds schemes and their impact on world hunger as well as corresponding increase in food aid (Casaca - 99).

Commission's reply:

The Commission is examining how to ensure the requested evaluation. It will be integrated into the Commission's working program for evaluations. A comprehensive evaluation project takes a considerable time (project definition, call for tender, selection procedure, project implementation, report examination).

Fisheries

59. Significantly increase both on-the-spot checks and record-based audits (Casaca - 100).

Commission's reply:

"Joint enterprise" projects will be systematically checked during control missions. Following Parliament's request, "joint enterprise" projects have already been checked during 2003 in three Member States.

All the files relating to payment requests directly managed by the Commission for joint enterprise projects will also be exhaustively checked to ensure compliance with the rules applicable.

Others

60. Make public a list of subsidies to export refunds and surplus disposal measures under CAP mechanisms (Casaca - 102).

Commission's reply:

On the basis of Regulations (EC) No 1663/95 and (EC) No 2390/1999 amended by Regulation (EC) No 419/2002 the Commission receives from Member States accounting information. This information is, pursuant to Article 2(1) of Regulation (EC) No 2390/1999, to be used only to carry out its functions in the context of the clearance of accounts as well as to monitor developments and to provide forecasts in the agricultural sector.

Article 2(3) of the same Regulation imposes on the Commission the obligation to keep the accounting information confidential and secure.

The Commission can only provide aggregated statistics which do not allow the identification of individual beneficiaries. The Committee on Budgetary Control has recently received such information regarding export refunds.

61. Take action against companies involved in large scale adulteration of food product, especially milk products (Casaca - 103/104).

Commission's reply:

Adulterated butter case:

Any penalties which might be imposed in the adulterated butter case are a matter for the national judicial authorities concerned. OLAF assisted the judicial authorities in Italy and France and was associated with the administrative inquiry in Germany. At this stage the enquiries (criminal) are continuing in Italy and France. In addition, the competent Belgian authority filed cases against two Belgian companies with the courts at the beginning of October 2003 in which they requested to intervene as "partie civile" (i.e. to bring a civil action for damages as part of the criminal proceedings).

g) European Social Fund

62. Inform Parliament as soon as results are available of investigations results and actions taken under Regulation (EEC) 4523/88. (Casaca - 105)

Commission's reply:

The Commission regularly applies the procedures referred to in Article 24 of Council Regulation (EEC) No 4253/88, as amended, when following up its audits and controls and those carried out by the Court of Auditors or when national control finding have not been followed up. However, the procedures for obtaining a net reduction in Community assistance requires a certain amount of time before the irregularity can be formally confirmed and the grounds established for taking a decision to make a net financial correction; in several cases the Member State agrees to carry out the financial correction without requiring a formal decision to reduce the assistance. The Commission will forward the list of decisions taken in 2002 and 2003. The financial closure of the programmes for 1994/1999 provides also an opportunity for clearing those cases which are still open (either by deducting expenditure from the applications for payments of balances or by means of a net reduction).

63. Clarify how ESF objectives could be reached while avoiding inefficient procedures, fraud and mismanagement. (Casaca - 107)

Commission's reply: Achieving ESF objectives while avoiding inefficient procedures, fraud and mismanagement was one of the aims of the simplification exercise the Commission has launched in 2002. This exercise is based on the guiding principles of simplification, clarification, coordination, flexibility and proportionality for which the Commission adopted the Communication on the simplification, clarification, coordination and flexible management of the structural policies 2000-06 [4]. However, Regulation 1260/99 will not be modified. The Commission believes that the simplification package will contribute to a better management of the Funds, reducing the risk of inefficiencies and mismanagement. Since the structural funds rely on a shared management system, based on the principle of decentralisation, Member States themselves must make an effort to streamline their internal procedures and simplify the programming at national and/or regional level.

[4] C(2003) 1255 of 25.04.2003.

(See also the reply to 141).

64. Close as soon as possible the Madrid ESF funding case of mismanagement and clarify the situation. (Casaca - 108)

Commission's reply:

In the IMEFE/Madrid City Hall case, Commission departments sent the Member State, on 30.07.03, official notification of their intention of suspending payment of the entire amount still outstanding in the programme in question.

The member State was also informed that Commission departments intended to carry out a series of audits to determine definitively the level of error or irregularity in measures managed by IMEFE over the period 1994/99. Prior to this and in order not to interfere with measures covered by the ongoing judicial investigation, OLAF must get in touch with its contacts in Spain and provide a list of the measures involved so that they can be eliminated from the audit.

65. In the light of ECA's special reports 3/2002 and 4/2003, reflect on the reform of aid irrespective of specialist sectors. (Casaca - 109)

Commission's reply: The Commission is currently reflecting on the reform of its budgetary support instruments in the framework of its proposal for the new financial perspective. It has taken into consideration the experience of Integra and has applied the Court's considerations when designing the Integra successor, EQUAL (ESF community initiative 2000-2006). The lessons drawn during the running of Integra were applied to EQUAL.

As concerns evaluation, dissemination and capitalisation of results, the Commission has already undertaken a number of initiatives in the area of innovative actions: evaluation of preparatory measures projects 2000 and of 2001 projects (underway), overall thematic evaluation of local development (underway), external evaluation of the projects in the field of Social Dialogue (underway). The dissemination of information is being improved through a variety of materials: a Local Development Forum, held on 15-16 May 2003 jointly with the Parliament and the Council Presidency, the publication of a project directory, a Vademecum on the development of local employment strategies which will be prepared to provide local actors with a practical tool.

A study on performance indicators on local employment will propose common quantitative and qualitative indicators to improve exploitation of results.

66. Seek a solution with relevant Member States to remedy for the failure to use the instrument of 'social risk capital'. (Casaca - 110)

Commission's reply:

The intermediary bodies, which are responsible for the management of the small grants, must fulfil certain requirements listed in article 27 of Regulation 1260/99. These requirements limit the number of intermediary bodies which can manage small grants. Furthermore, the decentralisation of responsibilities adds extra levels to the decision-making hierarchy. This makes it more difficult to ensure compliance with audit and control obligations and delays the start-up of projects.

Taking into account the decentralisation of Structural Funds management and delivery, and the variety of administrative structures in the Member States, a one-size-fits-all approach for the implementation of the small grants provision would be neither operational nor desirable.

The Commission believes that the delays and administrative complexities in some Member States in implementing the small grants provisions under the ESF should be dealt with individually by the Member States and/or Managing Authorities concerned. The Commission has pleaded for more simplification in this domain, but - in line with the principle of subsidiarity - the Commission has no authority over national or administrative mechanisms. It cannot replace the Member States in their organisational or administrative choices.

67. Pay more attention to promoting women's participation in the knowledge society. (Casaca - 112)

Commission's reply: The new regulatory framework and the European Employment Strategy have helped raise the profile of gender equality in the new Structural Funds' programming period. The new CSFs/SPDs are developing a more comprehensive equality strategy than in the past, based on the dual approach of gender mainstreaming and specific actions.

The percentage of funding devoted to policy field E "Women's access to and participation in the labour market", varies across Member States, but only three Member States devote more than the EU average to this policy field.

As the Commission Communication (2002) 748 "Gender mainstreaming in the Structural Funds" puts it: "Within the ESF, policy field E receives only 6% of the total support, which is the smallest part of assistance compared to the other fields". Moreover, "some Member States with a large gender gap spend significantly less than other Member States where the employment gap is much smaller". However, it is also worth saying that "a Member States' relatively low level of funding in this area may not necessary reflect a low concern for gender issues but might indicate that activities to promote gender equality are funded under the other policy field".

Gender mainstreaming in the Structural Funds, and in the European Social Fund in particular, involves integrating a gender perspective into every stage of the process, the planning of measures and interventions, their implementation, their monitoring and evaluation.

The abovementioned Communication represents the Commission's answers to this, formulating recommendations to both improve the situation and address current obstacles.

In particular, the Communication indicates investment in human and social capital in the knowledge society as one of the priority fields, recommending that future interventions should focus on preventing the exclusion of women from this areas, promoting high quality training and employment for women in the ICT and R&D sectors.

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