Proposal for a COUNCIL REGULATION (EC, ECSC, Euratom) on the financial regulation applicable to the general budget of the European Communities

(presented by the Commission)

CONTENTS

EXPLANATORY MEMORANDUM

1. INTRODUCTION

2. ASPECTS OF THE PROPOSAL RELATING TO FORM

3. ASPECTS OF THE PROPOSAL RELATING TO SUBSTANCE

Proposal for a COUNCIL REGULATION (EC, ECSC, Euratom) on the financial regulation applicable to the general budget of the European Communities

PART ONE: COMMON PROVISIONS

TITLE I - GENERAL PROVISIONS

CHAPTER 1 - PRINCIPLE OF UNITY

CHAPTER 2 - PRINCIPLE OF ANNUALITY

CHAPTER 3 - PRINCIPLE OF EQUILIBRIUM

CHAPTER 4 - PRINCIPLE OF UNIT OF ACCOUNT

CHAPTER 5 - PRINCIPLE OF UNIVERSALITY

CHAPTER 6 - PRINCIPLE OF SPECIFICATION

CHAPTER 7 - PRINCIPLE OF SOUND FINANCIAL MANAGEMENT

CHAPTER 8 - PRINCIPLE OF TRANSPARENCY

TITLE II - ESTABLISHMENT AND STRUCTURE OF THE BUDGET

CHAPTER 1 - ESTABLISHMENT OF THE BUDGET

CHAPTER 2 - STRUCTURE AND PRESENTATION OF THE BUDGET

TITLE III - IMPLEMENTATION OF THE BUDGET

CHAPTER 1 - GENERAL PROVISIONS

CHAPTER 2 - METHODS OF IMPLEMENTATION

CHAPTER 3 - FINANCIAL ACTORS

Section 1: Principle of separation of duties

Section 2: Authorising officer

Section 3: Accounting officer

Section 4: Imprest administrator

CHAPTER 4 - LIABILITY OF THE FINANCIAL ACTORS

Section 1: General rules

Section 2: Rules applicable to accounting officers and imprest administrators

CHAPTER 5 - REVENUE OPERATIONS

Section 1: Making available of own resources

Section 2: Estimate of amounts receivable

Section 3: Recovery order

Section 4: Recovery

CHAPTER 6 - EXPENDITURE OPERATIONS

Section 1: Commitment of expenditure

Section 2: Validation of expenditure

Section 3: Authorisation of expenditure

Section 4: Payment of expenditure

Section 5: Time-limits for expenditure operations

CHAPTER 7 - INFORMATION ON THE IMPLEMENTATION OF

THE BUDGET

CHAPTER 8 - IT SYSTEMS

CHAPTER 9 - INTERNAL AUDITOR

TITLE IV - PROCUREMENT

CHAPTER 1 - GENERAL PROVISIONS

Section 1: Scope

Section 2: Publication

Section 3: Procurement procedures

Section 4: Exclusion from procurement procedures

Section 5: Award of contracts

Section 6: Submission, opening and evaluation of tenders

Section 7: Security

CHAPTER 2 - SPECIFIC PROVISIONS APPLICABLE TO CONTRACTS AWARDED BY THE COMMUNITY INSTITUTIONS ON THEIR OWN ACCOUNT

TITLE V - GRANTS

CHAPTER 1 - GENERAL PROVISIONS

CHAPTER 2 - AWARD PRINCIPLES

CHAPTER 3 - AWARD PROCEDURE

CHAPTER 4 - PAYMENT

CHAPTER 5 - IMPLEMENTATION

TITLE VI - KEEPING AND PRESENTATION OF THE ACCOUNTS

CHAPTER 1 - PRESENTATION OF THE ACCOUNTS

CHAPTER 2 - ACCOUNTS

CHAPTER 3 - PROPERTY INVENTORIES

TITLE VII - EXTERNAL AUDIT AND DISCHARGE

CHAPTER 1 - EXTERNAL AUDIT

CHAPTER 2 - DISCHARGE

PART TWO - SPECIAL PROVISIONS

TITLE I - EUROPEAN AGRICULTURAL GUIDANCE AND GUARANTEE FUND, GUARANTEE SECTION

TITLE II - STRUCTURAL FUNDS

TITLE III - RESEARCH

TITLE IV - EXTERNAL ACTIONS

CHAPTER 1 - GENERAL PROVISIONS

CHAPTER 2 - IMPLEMENTATION OF ACTIONS

CHAPTER 3 - AWARD OF CONTRACTS

CHAPTER 4 - AWARD OF GRANTS

CHAPTER 5 - AUDITING OF ACCOUNTS

TITLE V - OFFICE FOR OFFICIAL PUBLICATIONS OF THE EUROPEAN COMMUNITIES

TITLE VI - EUROPEAN ANTI-FRAUD OFFICE

TITLE VII - ADMINISTRATIVE APPROPRIATIONS

PART THREE - TRANSITIONAL AND FINAL PROVISIONS

TITLE I - TRANSITIONAL PROVISIONS

TITLE II - FINAL PROVISIONS

ANNEX: CORRELATION TABLE

ANALYTICAL INDEX (By Article

EXPLANATORY MEMORANDUM

1. INTRODUCTION

The Commission has made administrative reform an essential priority. As the Financial Regulation contains the rules governing financial management, control and audit, the recasting of the Financial Regulation is inextricably linked to this process. The main planks of the reform, such as the assertion of the responsibility of authorising officers, under the supervision of the internal audit service, and, in return, the dropping of centralised ex ante controls (in particular the Financial Controller's approval of commitments and payments) cannot be implemented without substantially amending the Financial Regulation.

The recasting exercise, however, goes further than the goals identified by the internal reform of the Commission. Its scope encompasses all the areas covered by the present Financial Regulation - the instrument which lays down rules for all aspects of the general budget of the European Communities from establishment to discharge.

The present text of the Financial Regulation was adopted over twenty years ago, since when times have changed enormously with a series of enlargements, a financial perspective forming a framework for the development of the budget and changes to the institutional structure resulting in the European Union. The 1977 text has been amended fourteen times to take account of institutional changes (Maastricht and Amsterdam Treaties, joint financing by the EFTA countries for the EEA) and also to tighten up the management of Community finances.

In any event, the present Article 140 states that the Financial Regulation should be examined at three-year intervals to keep it constantly up-to-date with the institutional environment and management requirements.

The Commission has also responded to the Court of Auditors' concern - expressed in Opinion No 4/97 - that the time for making piecemeal amendments to the Financial Regulation is over and a proposal should now be presented for a general overhaul.

In view of the technical complexity and scale of the task, which concerns all areas of Community activity and all the institutions, the Commission decided that the best approach was to present a working document (the "working document") intended to launch an interinstitutional discussion on the solutions envisaged by the Commission (SEC(1998) 1228 final, 22 July 1998), before producing the present proposal.

This approach was welcomed by the European Parliament, the Council and the Court of Auditors. The Council and Parliament have made major contributions to the debate [1] alongside the Court of Auditors' Opinion No 4/97.

[1] Council Conclusions of 25 January 1999, doc. 13807/98 and the Dell'Alba report (PE 229.419, 17 March 1999).

2. ASPECTS OF THE PROPOSAL RELATING TO FORM

A. Simplification of the Financial Regulation

The Commission believes that the Financial Regulation should focus on essential principles and that reference should be made to lower-ranking regulations for matters of detail.

This proposal was endorsed by the European Parliament in its resolution on the second report of the Committee of Independent Experts. It should enhance the effectiveness of interinstitutional operation, by leaving the legislative authority to focus on the essential rules while the Commission would look after the technical rules in close consultation with the other institutions. In addition it improves the readability of the instruments and reduces the risks of duplication or contradiction between rules.

The Commission is proposing reorganising and improving the connection between the Financial Regulation and the Regulation laying down detailed rules for the implementation of certain provisions of the Financial Regulation (implementing rules) in order to obtain a more logical and stricter division between the two instruments. The first lays down the basic rules and the second specifies the concrete implementing rules.

The main criterion for the division between the basic instrument (Financial Regulation) and the implementing regulation is as follows: the Council Regulation must be confined to laying down the general principles and essential aspects of the matters in question. The detailed technical rules and additional implementing or operational arrangements for the Council Regulation must be placed in the implementing rules which are adopted by the Commission under the powers delegated to it by the Council.

The exact demarcation between what belongs to the basic regulation and what belongs to the implementing regulation is not always easy to determine. For this reason the Commission has, when in doubt, opted to leave certain provisions in the Financial Regulation.

In applying this criterion, the Commission has:

(a) complied with the Treaty, in that this requires certain matters to be dealt with in the Financial Regulation proper (e.g. second and third paragraphs of Article 271, Article 277 or the first paragraph of Article 271);

(b) treated the exceptions to the basic budgetary principles (unity and annuality) as essential aspects;

(c) kept in the Financial Regulation the rules concerning the institutions as such, in particular the institutional relations in order to safeguard the balance between the institutions as deriving from the Treaty.

To comply with this criterion and these limits the Commission's proposal substantially slims down the title of the Financial Regulation dealing with implementation of the budget (distribution and exercise of the duties of the financial actors). On the other hand very little is transferred - from the present Financial Regulation - to the implementing rules in areas concerning budget principles, the procedures for establishing the budget and for presenting and auditing the accounts.

B. Improving presentation and clarity

As regards the structure of the text, the proposal divides the Regulation into three parts. Part One contains the provisions constituting the ordinary law (budget principles, establishment, implementation and control of the budget, procurement, grants, keeping and presentation of the accounts), while special provisions (research, external aid, EAGGF, Structural Funds, OLAF, administrative appropriations and the Publications Office) are in Part Two. Part Three contains the transitional and final provisions.

Title I of Part One, concerning the general principles, adopts a more explanatory approach by first stating the principles and then setting out the exceptions. The drafting has been revised in the light of the Council resolution on the quality of drafting of Community legislation and Declaration No 39 attached to the Amsterdam Treaty on the same subject (elimination of repetitive parts, division into Titles, Chapters, Sections, Articles and paragraphs). For ease of consultation, the text is preceded by a table of contents.

Imprecise wording: the Commission has eliminated ambiguous expressions ("in principle", "in particular", "as a rule", etc.) except where they concern an exception to a principle, an example required for the sake of explanation or the difficulty of defining a de facto situation in legal terms.

C. Improved coordination between the Financial Regulation and the other financial provisions

The Commission suggests retaining the present format of the Regulation, which will therefore incorporate neither:

-the "own resources" regulation [2] (which deals with a specific matter),

[2] Council Regulation No1150/2000 of 22 May 2000 implementing the Council Decision on the system of the Communities' own resources.

-nor the interinstitutional agreements, except for the agreement on legal bases and the 1975 declaration on the conciliation procedure, the substance of which is incorporated into the proposal,

-nor the sectoral rules. There is, however, now a clear link to their specific features in Part Two of the proposal.

3. ASPECTS OF THE PROPOSAL RELATING TO SUBSTANCE

As regards matters of substance, the proposal contains changes to the current Financial Regulation in six areas, which correspond to the topics covered by the Commission working document and to new points raised during the interinstitutional consultations and then in the work on administrative reform.

-Statement of the principles of budget law

-Implementation of the budget, covering the role of the actors, externalisation and shared or decentralised management, commitments, payment times and recovery orders

-Procurement, grants

-Keeping and presentation of the accounts

-External action

-Other matters: EAGGF Guarantee, Structural Funds, research, creation of the Anti-fraud Office, administrative appropriations and transitional provisions.

A. Statement of the principles of budget law (Part One, Titles I and II of the proposal)

A. 1. The issues

The Treaty distinguishes 7 principles of budget law [3] which govern the establishment of the budget and its execution:

[3] In its Opinion 4/97 the Court of Auditors quoted the principles of unity, universality, annuality and specification, and added the principles of equilibrium and transparency.

-unity of the budget (Article 268: "all items of revenue and expenditure of the Community ... shall be shown in the budget");

-annuality (Article 271: "The expenditure shown in the budget shall be authorised for one financial year.");

-equilibrium (Article 268: "The revenue and expenditure shown in the budget shall be in balance.");

-unit of account (Article 277: "The budget shall be drawn up in the unit of account ...");

-universality of the budget (Article 268: "all items of revenue and expenditure of the Community ... shall be shown in the budget");

-specification (Article 271, third paragraph: "Appropriations shall be classified under different chapters ... and subdivided, as far as may be necessary");

-sound financial management (Article 274: "The Commission shall implement the budget ... having regard to the principles of sound financial management. Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management").

In most cases, however, the Treaty does allow exceptions to these principles, except for that of sound management, which is absolute. The Treaty may itself specify the exceptions or it can refer to "the regulations made pursuant to Article 279", i.e. the Financial Regulation.

The first title of the Financial Regulation accordingly sets out the various principles and the exceptions to them.

The various exceptions to the principles, made as a result of a long series of amendments to the Financial Regulation, have, as the Court of Auditors points out, mean that "a good many 'facilities' have been arranged, or allowed to emerge; these discretionary arrangements are regarded as useful for managers - a view which still has to be proved on a case-by-case basis - but tend to run counter to a disciplined approach and hugely complicate the accounting and financial management, especially its computerised aspects" (Opinion 4/97, point 14). The present Financial Regulation does not define the principles and does not clearly stipulate that some of the implementation techniques which it authorises (re-use, repayment of payments on account) are exceptions and must therefore be interpreted restrictively.

Among these exceptions, the following in particular should be mentioned:

-negative amounts: negative revenue and expenditure and negative reserves are a means of artificially keeping the total budget below the sum of the allocations for the individual items;

-the proliferation and complexity of carryovers is contrary to the principle of annuality.

The Commission has therefore re-examined the merits of each exception and questioned them where appropriate.

A. 2. The proposal

(a) Exceptions to the principle of unity

The Commission would repeat that it is keen to see the European Development Fund entered in the budget. It is not proposing this in the Financial Regulation applicable to the general budget, however, as this Regulation is not the appropriate instrument to provide for budgetisation. The same applies to the ECSC operating budget.

Borrowing and lending operations are already mentioned in the Financial Regulation in connection with transparency (establishment of the budget: Article 20; revenue and expenditure account: Article 135). The Commission does not consider it appropriate to make a move in the direction of entry of these operations in the budget: only the loan guarantee is entered in the budget.

It is proposed that it be specified that the Financial Regulation applies to expenditure on the common foreign and security policy (CFSP) and the justice and home affairs pillar (JHA) when it is charged to the Community budget, thus bringing the Financial Regulation explicitly into line with the Amsterdam Treaty (second paragraph of Article 268 of the EC Treaty).

There are good reasons for making the establishment plans of the Agencies subject to the budgetary authority. The agencies are indeed decentralised bodies, with their own legal personality, which enjoy budgetary autonomy. The Commission therefore feels that the operations of the agencies should not be incorporated into the framework of the general budget of the Communities in order not to compromise this budgetary autonomy. The agencies do, however, represent a recurring cost to the budget in the shape of the balancing subsidies that most of them receive. Decisions on the charges and fees which constitute the resources of certain agencies are taken by the legislative authority, which also adopts their staff regulations. So even though the employers' pensions contributions of some of the self-financing agencies are borne by their budgets, their establishment plans should be submitted to the budgetary authority so that it is aware of any increase in the number of Community officials and of their budgetary impact.

The inclusion of the agencies' establishment plans in the general budget will mean at the same time amending the regulations applicable to each of the agencies.

(b) Exceptions to the principle of universality

It is proposed that the various exceptions to this principle be rationalised and simplified. It is suggested that earmarked revenue be retained but repayment of payments on account be discontinued, since it is a rather fuzzy technique [4] which makes it possible, by Commission decision, to reallocate substantial amounts to the item from which the initial payment was made. They will continue to be possible, by way of exception, for the structural policies. In this area the appropriations constitute an expenditure target and the sectoral regulations therefore allow for payments on account which are repaid to the budget to be re-used. In other areas, any payments on account that are repaid will be treated as miscellaneous revenue.

[4] This is particularly the case with regard to the concept of "recipients of Community aid" referred to in the present Article 7(7).

The practice of re-use can serve as an incentive to authorising officers to issue a recovery order when they know that the sum recovered can be re-used. This exception is strictly limited and is generally applied transparently, since most instances of re-use must be provided for in the budget remarks (the present Article 27(5) Fin. Reg.).

However, the Commission feels that the same result could be achieved, with even more transparency, by the "earmarked revenue" mechanism, which requires the budgetary authority to enter an item on the revenue side to accommodate the revenue which may be earmarked. It is therefore proposed that re-use be dropped and replaced by earmarked revenue, without prejudice to the rules applicable to the Structural Funds [5]. At the same time the current instances where re-use is possible are reduced [6].

[5] In this area the appropriations constitute expenditure targets and the relevant regulations provide for recovered funds to be re-used.

[6] To leave the cases of payments made in error (present Article 27(2)(a)), proceeds from supplies to third parties (present Article 27(2)(b)), insurance claims and payments connected with lettings (present Article 27(2)(c) and (d)) and revenue from the sale of publications and films (present Article 27(2)(e)).

(c) Exceptions to the principle of specification

The Commission feels that it should be given the necessary flexibility in the management of operational appropriations, especially with the new integrated presentation of the allocation of financial and administrative resources by purpose (activity-based budgeting). This presentation of the budget by policy areas and activities would mean removing the present reference in the Financial Regulation to the division of the budget into Parts A and B.

This structure would make it possible to present the real cost of each policy and to provide better information about the resources allocated to each policy area.

The new structure would have titles corresponding to policy areas broadly mirroring the organisational structure of Directorates-General. Each title would be divided into chapters (about 200 in all) corresponding as a rule to the activities of Directorates-General and Services. One of these chapters in each title would contain the administrative resources allocated to the policy area in question.

The chapters would themselves be divided into articles. In the case of the chapters devoted to administrative resources, the structure would be the same for all the titles and would involve four articles: appropriations for regular staff, appropriations for outside staff and other decentralised expenditure, appropriations for buildings and infrastructure expenditure and appropriations of an administrative nature currently appearing in Part B such as appropriations for expenditure on technical experts. The other chapters contain only operational appropriations and are divided into articles corresponding to programmes and other financial interventions.

In return for this presentation of the budget by Community policies the Commission would have to be authorised to transfer administrative appropriations with the same heading between titles. Similarly, the Commission must be enabled to make transfers between chapters within the same title up to a maximum of 10% of the appropriations entered on the operational lines. Transfers of administrative appropriations under different headings (e.g. rent v computer equipment) or representing over 10% of an operational line will continue to require a decision by the budgetary authority.

This system will allow both suitable management of administrative resources and their presentation by policy area.

As regards the sections of the budget for the other institutions, it is proposed that the procedure for the transfer of administrative appropriations be harmonised between all the institutions: transfers between titles will be a matter for the budgetary authority, while within titles they will be for the institution.

The budgetary authority would be allowed to constitute reserves in two instances only: where there is no legal basis and where it is not certain that appropriations are adequate or necessary. The Commission should also be given the possibility of blocking, as a safeguard measure, all or part of an appropriation which is not being used satisfactorily.

The negative reserve provided for in Article 19(5) of the present Financial Regulation will be preserved. It belongs to the "Commission" Section of the budget; it is limited to EUR 200 million and should be used before the end of the year by means of transfers. The negative reserve was introduced by the budgetary authority as a negotiating tool to facilitate the conclusion of an agreement between the institutions involved in the budgetary procedure and it has proved useful.

Finally the institutions should be given some flexibility in the management of their establishment plans, which continue to impose a limit as regards both the amount of appropriations and the total number of posts allocated, but within which the institution could make adjustments without exceeding 10%, with grades A1 and A2 always excepted from such facilities.

(d) Exceptions to the principle of annuality

It is proposed that differentiated appropriations be used in all areas. They will therefore also be used for the EAGGF, which will continue to have its own management rules (see F2 below).

The carryover arrangements, an essential management tool provided by the Treaties, would be simplified with the abandoning of non-differentiated appropriations within the budget. Decisions on the carryover of commitment appropriations will continue to be taken by the Commission; these appropriations will have to be used by 31 March of the current year.

Decisions on the carryover of payment appropriations will also be taken by the Commission. They are authorised only to cover existing commitments and where the appropriations for the lines concerned in the budget for the following year do not cover requirements. The Commission would first use the new appropriations in order to avoid any snowballing of successive carryovers.

The additional periods would be abandoned in order to speed up the presentation of accounts except for the EAGGF, where the additional period allowed runs to 31 January of the following year. Maintenance of this additional period for the EAGGF Guarantee Section is justified by the specific features of the payment system (prefinancing of expenditure by the Member States) operating in this area. An additional month is necessary to enter EAGGF Guarantee expenditure in the accounts because of the time required to transpose to the Community level the figures sent in by the Member States and to make the necessary end-of-year transfers.

The arrangement for making appropriations available again after they have been decommitted is dropped as a general exception in a bid to simplify procedures, increase transparency in financial statements and impose greater discipline in planning and implementing programmes. It is retained, however, in the title on the Structural Funds in the cases provided for in the Commission declaration attached to the Structural Funds Regulation, i.e. in the event of a mistake by the Commission and force majeure.

(e) Principle of transparency

It is proposed that this principle be added to the above seven principles and be put into practice at all stages from the early publication of the budget adopted by the European Parliament, within a strict deadline of two months, to the keeping of accounts and the procedures for presenting accounts (see E below). This principle is also reflected in the provisions concerning procurement and grants, which are subject to collective selection procedures and ex ante and ex post publicity.

The publication of information on borrowing and lending operations and the operations of the Guarantee Fund for external actions in an Annex to the budget also comes under this principle of transparency.

It is also proposed that the negative expenditure which still exists in agriculture be converted into earmarked revenue in order to make for more transparency in the presentation of the budget and the accounts without reducing the amount of agricultural spending. This negative expenditure is provided for in the sectoral agricultural regulations and divides up into five categories:

-amounts recovered in cases of fraud or irregularity (EUR 60 million in 1999);

-corrections to advances based on paragraph 15 of the IIA on budgetary discipline (EUR 126 million in 1999);

-"profits" on sales from public storage (EUR 286 million in 1999);

-the supplementary milk levy (EUR 498 million in 1999);

-the financial impact of clearance of accounts decisions (EUR 606 million in 1999).

The Financial Regulation will therefore provide in future for two categories of earmarked revenue: that defined in the Financial Regulation itself and that provided for in specific regulations, such as the present negative revenue. A proposal should be made for amending Council Regulation 1258/1999 (EAGGF) in parallel with the proposal for the recasting of the Financial Regulation.

Paragraph 10 of the Interinstitutional Agreement of 6 May 1999 on budgetary discipline states that the financial perspective does not take account of budget items financed by earmarked revenue within the meaning of Article 4 of the Financial Regulation. The proposal to abandon negative expenditure would therefore not pose any problems for financing agriculture. For the sake of clarification, the Commission would ask Parliament and the Council to adopt a declaration confirming that the second subparagraph of paragraph 10 of the Agreement applies to this newly created earmarked revenue.

Finally negative revenue, amounts representing the collection costs deducted by Member States from traditional own resources (currently 10%, and 25% in the draft new decision on own resources), will be dropped.

The purpose of this technique is to show that these amounts cannot be treated as expenditure, as they are deducted from revenue at source by the Member States and are shown in the budget only for information purposes. To treat these amounts as expenditure would artificially increase the overall volume of the budget.

It is therefore proposed that the budget should show only net revenue. In order to provide a legal basis for this presentation, an appropriate provision should be entered in the Financial Regulation which guarantees transparency as regards revenue deducted by way of collection costs.

(f) Principle of sound financial management

This principle is defined in the proposal by reference to economy, efficiency and effectiveness.

In operational terms it will be based on the definition of verifiable objectives which can be monitored by means of measurable indicators, in order to change from means-based management to results-oriented management.

Generally speaking, the role of evaluation throughout a programme cycle will be stepped up, to make it clear that evaluation has to be carried out not only ex ante but also mid-term and ex post. For this, with the help of ABB, the allocation of resources to activities will have to define the cost of these activities and define their objectives.

(g) Principle of equilibrium

The proposal explains what this principle means in concrete terms, namely that the Communities may not raise loans to finance a budget deficit. It is specified, however, that the Communities may borrow in order to invest in immovable assets for the use of the institutions. The interest and capital repayments relating to these loans would be charged each year to the budget.

B. Implementation of the budget (Part One, Title III of the proposal)

B. 1. Role of the actors

The Commission has made the improvement and modernisation of financial management and the development of a new culture focusing on the results obtained from the use of Community funds a key element of its internal reform.

The Commission's management and ex ante control systems are not well suited to the nature and number of operations it has to handle. The management, audit and financial control system will be entirely reformed, updated and brought into line with best practice. Authorising officers must assume full responsibility for the quality, correctness and efficiency of their management. Generating a genuine sense of responsibility for sound financial management means defining the tasks to be accomplished and integrating quality controls into the management process. Management results must also be measured against the risks involved in the operations concerned and this in an integrated way against the expected results and the objectives set.

The existing ex ante financial control system involves centralised verification and approval of financial operations by reference to rules that are essentially procedural. Authorising officers are therefore given a false sense of security, leading to a culture that "deresponsibilises" managers. The same applies to the control by the accounting officer that payments actually discharge the Commission from its obligations, which means that the right amounts are paid to the right recipient.

For similar reasons of making authorising officers responsible for their acts, the centralised examination by the Advisory Committee on Procurement and Contracts is also discontinued (see C.1 below).

The present Financial Regulation also gives the financial controller responsibility both for the ex ante examination of individual operations ("approval") and for ex post evaluation of systems ("audit"). This dual function could be the source of a conflict of interests and does not ensure optimum balance between the two nor a high degree of specialisation in the two functions. The Commission has therefore already proposed by a separate fast-track procedure that these duties be segregated and an independent auditor be appointed who would have responsibility for auditing internal control systems.

The amendments proposed are designed to give authorising officers the entire responsibility for the internal controls in their departments and for the financial decisions they take in the exercise of their functions

It is also proposed that an internal auditor be appointed in each institution to take charge of the internal audit service and ensure that the internal control systems operate properly.

The internal auditor will provide an independent opinion about the quality of management and control systems put in place by authorising officers and the results of management measured against the level of risk involved in the operations and make recommendations for improving the efficiency and effectiveness of operations and promoting appropriate use of resources in relation to objectives. The internal auditor will perform the duties of financial controller within the meaning of Article 279 of the EC Treaty in accordance with the Financial Regulation.

Finally, having fair and secure means of dealing with infringements of the rules is the essential corollary of enhanced responsibility of the financial actors.

As regards financial liability, the existing Financial Regulation contains rules (Articles 73 to 76) defining misconduct of authorising officers and accounting officers who may be held liable to disciplinary action and payment of compensation. On the other hand, reference is made to the Staff Regulations for procedures and penalties. As one of the key features of the reform is to broaden the powers of authorising officers, it would not be right to suggest that special liability is incurred in financial matters, especially as implementation of procedures to give effect to officials' liability under the Staff Regulations will be properly highlighted and may lead to significant financial penalties for the officials concerned. The general rule will therefore continue to be that disciplinary action will be taken against staff in cases of negligence and they may be required to pay compensation in cases of serious misconduct.

The Financial Regulation now provides for the possibility of suspending authorising officers, accounting officers or imprest administrators.

There is, however, a case for retaining by way of examples the cases of misconduct of accounting officers and imprest administrators in view of the nature of their duties (e.g. implementation of payments and management of bank accounts); the conditions and procedures for applying this liability are those laid down in the Staff Regulations.

B. 2. Commitment

The present definition of commitment is a constant source of difficulties for budget implementation and accounts. The proposal contains a clearer definition of the concept of budget commitment (reservation of appropriations) and legal commitment (obligations to third parties). Budget commitment is the first step in an expenditure operation. The concept of commitment is used at two different stages of this operation. The first stage (global commitment) reflects the intention to perform an operation where the beneficiary has not been identified or which covers a series of individual commitments even where the beneficiaries are known. At the second stage (individual commitment) the beneficiary has been identified. The global commitment provides an instrument for budget programming. The Commission therefore proposes retaining this instrument but with a stricter time limit for concluding individual legal commitments than is set by the current Article 36(2) of the Financial Regulation. They are to be concluded by no later than the end of the following year (N + 1).

For the area of external action alone, the period for concluding individual legal commitments (except for contracts relating to control and evaluation) to implement financing agreements could be extended to the end of year N + 3. Financing agreements are treated as individual legal commitments and will have to be concluded before the end of the year following the budget commitment in accordance with Article 71(2).

The proposal also retains the possibility of dividing budget commitments into instalments where this technique is allowed by the relevant legal basis, namely the sectoral regulations applicable to the Structural Funds and the fisheries agreements.

B. 3. Externalisation

For the sake of sound financial management and in order to clear up the difficulties connected with technical and administrative assistance offices, the proposed regulation defines the various possible methods of implementing Community appropriations, both for internal policies and for external action.

The proposal defines as methods of implementation:

-centralised management by the Commission, directly by its departments or indirectly by externalisation, the limits on which are clearly set,

-shared management with the Member States, in particular on agriculture and the Structural Funds, or by the states receiving external aid.

In the Community system, externalisation comes up against the following limitations:

-the institutions must assume directly their "prerogatives", i.e. tasks of public authority deriving from the Treaty which involve a large measure of judgment implying political choices. Any delegation of such tasks to outside bodies would upset the balance of powers between institutions and breach the related guarantees;

-some tasks involving the exercise of public authority, including budget implementation, may be delegated but only to public-law bodies or bodies which have a public-service mission guaranteed by the Member States, and in compliance with the fundamental principles of legality, transparency and sound financial management.

This category includes executive agencies, bodies under Community law whose status will be specified and clarified in a separate regulation as part of the current administrative reform. These new structures could be entrusted with all or part of the implementation of the cycle of a programme without the Commission losing control of their operation. The Commission could thus continue to be accountable to the budgetary control authorities for the correct use of Community funds.

In this context external private-law bodies, other than those which have a public-service mission guaranteed by the Member States, should not be involved in measures of implementation of the Community budget. They may be entrusted with technical assistance tasks and administrative, preparatory or ancillary tasks (technical expertise or repetitive jobs) involving neither the exercise of public authority nor the use of discretionary powers of judgment.

Finally, any outside body undertaking missions for the Commission will have to ensure transparency, which means in particular having transparent procurement systems, effective internal control systems and accounts which are kept separately from those for their other activities. They will be subject to audits by the Commission and the Court of Auditors. The Commission may recognise the equivalence between the control, accounting and procurement procedures of the delegatees and those of the Commission. It may then take account of this equivalence when performing its own controls.

B. 4. Shared management

With the gradual extension of the Commission's tasks, the enlargement of the Union and the growing budgets to be administered, the Commission has had to develop different forms of management, one of the major examples being shared management. [7]

[7] According to the second report of the Committee of Independent Experts, shared management can be defined as "the management of those Community programmes where the Commission and the Member States have distinct administrative tasks which are inter-dependent and set down in legislation and where both the Commission and the national administrations need to discharge their respective tasks for the Community policy to be implemented successfully".

Shared management receives only partial recognition in the Treaty, which nevertheless provides that, "The Commission shall implement the budget... on its own responsibility", although it adds that, "Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management" (Article 274, formerly Article 205). Discharge is granted to the Commission alone (Article 276, formerly Article 206).

It is this formulation of the principle of cooperation with the Member States which governs the exercise of shared management, the arrangement used to spend the lion's share of the budget for the EAGGF Guarantee Section (48% of the budget) and the Structural Funds (36% of the budget). However, although shared management has long been practised, it is regulated solely by secondary legislation - a whole set of regulations laying down, for each sector, the respective roles of the Commission and the national authorities.

The Court of Auditors has insisted that Member States should be involved more closely in improving shared management and the European Parliament has called for Member States to be specifically required to cooperate with the Commission throughout the discharge procedure. The Independent Experts, in their second report, raised the question of principle of the balance between the Commission's responsibilities and the legal and material means which it has available to exercise its responsibilities.

Shared management appears in the present Financial Regulation in the title on the EAGGF Guarantee Section. It would also appear in the proposed new title on the Structural Funds and the amended title on external audit and discharge. In Title III of Part One on implementation of the budget, the proposal enshrines the principles of clearance of the accounts or financial corrections in cases of shared management.

The Commission is fully aware of what is at stake here. As the Treaty confers on it responsibility for implementing the budget, whatever forms of management are used, the Commission proposes that the provisions on discharge in the Financial Regulation be used to increase Member States' involvement. Moreover, this approach is in keeping with certain Treaty provisions, reinforced by the Amsterdam Treaty, which require Member States to combat fraud (Article 280) and cooperate with the Commission with a view to sound financial management (Article 274).

The first measure is to incorporate the provisions of Article 274 of the Treaty into Article 48 of the proposal.

It is also proposed that, in the title on discharge:

-the Member States should in future have to reply to comments on shared management in the Court of Auditors' annual report; these replies will be sent to the Court via the Commission which, because of its responsibility for implementing the budget, will remain the Court's only direct contact;

-the Member States should cooperate with the Commission throughout the discharge procedure;

-they should also inform the Commission of the measures they have taken in response to the comments accompanying the discharge decision so that it can take them into account in its follow-up reports.

B. 5. Forms of payment

A number of instruments of financial legislation use the terms advance and payment on account interchangeably. The two concepts need to be clarified as the distinction is essential for the accounts (does the amount paid still count as a Community asset-) and interest generated (interest on amounts which are still the property of the Commission are entered in the budget).

For this reason it is proposed that the vague terms "advances" and "payments on account" be abandoned and that four types of payment be distinguished:

-payment of the entire amount due,

-prefinancing,

-interim payment as reimbursement of eligible costs,

-payment of the balance, on the basis of supporting documents, to clear the budget commitment.

A distinction will have to be made in the accounts between these various types of payment and the payment of prefinancing, which does not involve transfer of ownership of the funds to the beneficiary, will be entered on the assets side of the balance sheet.

Any amounts not used will generate interest for the budget until such time as they have been paid to the final beneficiaries, except where the payments are managed by the authorities of the Member States.

The Commission will take to see that this typology and the concept of supporting documents are endorsed by the Court during the legislative procedure.

B. 6. Payment times

The proposal adds a provision, which was announced in the communication on payment times, that payment operations must be made within a certain time limit which will be laid down in the implementing rules. Beyond this time limit, default interest will be due from the institution.

B. 7. Recovery orders and waiving of entitlements

The proposal retains the possibility for the authorising officer to waive an established entitlement provided that the criteria of sound financial management are respected. The implementing rules will specify the cases in which an entitlement can be waived (emergence of new facts, cost of recovery exceeding the amount of the entitlement, insolvency of the debtor) and will add that the waiver decision can only be taken by an authorising officer by delegation (who, in the Commission, is as a rule a Director-General) who may refer the matter to a higher authority if in doubt.

C. Procurement and grants (Part One, Titles IV and V of the proposal)

C. 1. Procurement

(a) The issues

The proposal is deliberately confined to the main principles governing contracts, which are already covered by sometimes incomplete provisions scattered between a number of titles in the current Financial Regulation.

(b) Structure of the title on procurement

The title on procurement defines the scope and then sets out the general principles and procedures applicable to all public contracts (Chapter 1).

Chapter 2 then sets out the specific provisions applicable to the institutions when acting on their own account.

The specific case of external aid contracts continues to be dealt with in the special provisions in the Title on external actions.

(c) Content of the title on procurement

The Commission has chosen, in this area too, to confine itself to the essential principles which all institutions must observe; as regards the details, it refers to the implementing rules of the Financial Regulation.

In addition, the Commission notes that the Community directives must apply to the public contracts awarded by the institutions themselves, and that the principles deriving from these directives must also apply to the contracts the Commission awards as the agent of external recipients of Community funds.

The Community Directives relating to public contracts cannot, by their legal nature, be directly applicable; they must be transposed. This transposal, which will provide an opportunity for simplifying and putting together principles contained in several texts, will be made by means of two legal instruments, namely the Financial Regulation itself and the implementing rules, which will be adopted as soon as possible at a later stage. The Financial Regulation and the implementing rules will therefore together constitute the full transposition of the directives which will then apply as clearly to the Community institutions as they do to the Member States.

This proposal therefore takes over the provisions of the Community Directives relating to works, [8] [9] supply [10] and service contracts [11] which the institutions will have to observe. Chapter 1 sets out rules which are broadly based on these directives and which apply to all contracts financed wholly or partly by the Community budget. As required by the specific needs of the Community institutions, these rules can go beyond what the Directives lay down.

[8] Council Directive 93/37/EEC of 14 June 1993 concerning the coordination of procedures for the award of public works contracts.

[9] These three Directives were amended by European Parliament and Council Directive 97/52/EC of 13 October 1997 amending Directives 92/50/EEC, 93/36/EEC and 93/37/EEC concerning the coordination of procedures for the award of public service contracts, public supply contracts and public works contracts respectively.

[10] Council Directive 93/36/EEC of 14 June 1993 coordinating procedures for the award of public supply contracts.

[11] Council Directive 92/50/EEC of 18 June 1992 relating to the coordination of procedures for the award of public service contracts.

In response to the criticism about the lack of definitions and uncertainty about the meaning of a number of terms, definitions are also included for "contracts" (Article 1 of the new Title) and the different award procedures. Other definitions will be contained in the implementing rules of the Financial Regulation.

In the general context of empowerment of authorising officers and the dropping of ex ante approval of their budget implementation measures, the Commission is also proposing that the Advisory Committee on Procurement and Contracts be wound up. Institutions ought to set up in their departments an information counter which would provide authorising officers with technical support on matters of procurement.

Finally, strict and sound financial management demands a greater effort to combat practices aiming at or leading to the diversion of Community funds. As part of the efforts to prevent irregularities and to combat fraud and corruption, the Financial Regulation will contain a measure to exclude candidates or tenderers who have been guilty of fraud or corruption. This type of provision already features in the code of conduct forming part of the manual of procedures relating to the "Simplification of the management systems for the award of contracts in the framework of the cooperation programmes".

Similarly, this measure will also be applied to conflicts of interest.

C. 2. Grants

(a) The issues

Grants have gradually become an important instrument for Community action, both within and outside the Union. The present Financial Regulation contains no provisions on the award of grants, which have evolved without any proper regulatory framework.

Aware of this gap, the Commission drew up a Vade-mecum for internal departmental use in 1998. [12] It is now essential to provide within the Financial Regulation a general framework to regulate the award and supervision of grants. The recasting exercise provides an opportunity to remedy these shortcomings by introducing a specific title on grants.

[12] Vade-mecum on grant management, 14 July 1998.

(b) Content of the title on grants

The title sets out first of all to establish a clear distinction between procurement and grants and then to establish a framework providing for the award, payment and implementation of the use of grants in a context of transparency.

To meet these requirements, the title is structured around the following points:

-definition of the concept of a grant as a direct contribution by the Communities to an action or an organisation whose purpose is to promote a Union policy or which is of general European interest, including international organisations. This definition covers financial contributions, but excludes expenditure on the Community institutions' staff, loans and shareholdings, and contracts;

-statement of the principles of transparency and equal treatment, via programming and publication of grants paid, and the collective nature and grounds for award decisions;

-statement of the principles that grants may not be cumulative or be awarded retrospectively and must involve co-financing;

-imposition of the same exclusion criteria as for contracts, i.e. in particular in cases of fraud or conflict of interest;

-finally, in addition to the Court of Auditors' monitoring of grant recipients, introduction of evaluation of programmes by each institution.

The terms under which these principles and rules are applied in practice will be spelt out in the implementing rules.

Exceptions to the procedures are also allowed as regards the principle of annual programming and calls for proposals when the urgency, nature of the action or status of the beneficiary make it impossible to respect them. This applies in particular to humanitarian aid.

D. Keeping and presentation of the accounts (Part One, Title VI of the proposal)

The Commission wishes to take the opportunity offered by the recasting of the Financial Regulation to improve the accounting rules applicable to the general budget of the Communities.

In this context the Commission wishes to enhance the transparency of the economic and financial information that the Communities produce both for the control bodies and for the general public, so that all the information on the use of public money and on the assets of the institutions can be provided in a clear and comprehensible form.

To achieve this objective the accounting information underlying the financial statements must be drawn up using internationally accepted accounting methods, the parties responsible for managing the accounts must use the same methods and the composition and structure of the financial statements must be adapted to the readers.

The concern for harmonisation is covered by the role assigned to the Commission's accounting officer who is responsible for laying down the accounting standards (accounting and consolidation methods) to apply to the accounts of all the institutions.

In addition, all the accounting standards to be applied by the Communities must be based on internationally accepted accounting principles for the public sector which are listed in the proposal, namely:

-the going concern principle: the accounts should be presented as a reflection of on-going activities, which means that information from previous financial years should be included and the balance sheet should contain comparative data from the previous financial year;

-the principle of prudence, meaning that assets should not be overstated and liabilities should not be understated;

-the principle of consistent accounting methods, meaning that the same rules should be applied whatever the area and should not be changed from one financial year to the next. Any changes should be brought to the attention of the readers of the financial statements to enable them to identify and understand what has changed;

-finally, the information presented should be comprehensive, relevant and understandable so as to provide readers with a true and fair view of the financial situation and the result for the year.

The principles of no netting, independence of financial years and substance over form are also included.

As regards accounting methods, the proposal clearly states that techniques will differ depending on the information they are providing.

On the other hand, the general accounts, which record operations for the establishment of the Community balance sheet, are based on accrual accounting.

The proposal lays down clear indications of what information is to be supplied and who it is intended for, in order to define the composition of the financial statements and the process for presenting them.

The financial statements are the revenue and expenditure account, the balance sheet and Annexes, each with their own specific objectives: the revenue and expenditure account records the implementation of the budget, the balance sheet shows the Communities' assets (using as far as possible the format laid down by the Fourth Council Directive) and the Annexes contain all the information required for a better understanding of the data contained in the balance sheet.

For the presentation of the financial statements, the proposal stipulates that the accounting officers of each of the institutions shall draw up their own and send them to the Commission's accounting officer for consolidation. It is these consolidated statements which will be examined by the Court of Auditors and the discharge authority and which will, after any corrections have been made in the light of the Court of Auditors' observations, be published in the Official Journal by 30 November together with the statement of assurance and the report of the Court of Auditors.

E. External action (Part Two, Title IV of the proposal)

The proposal simplifies the title on external actions, setting out only the exceptions to the ordinary rules of Community management. It brings it into line with the recent Council regulations designed to decentralise aid management in order to prepare the applicant countries for accession and make them accountable.

The proposal clarifies the various methods of managing external actions, whereas the present Financial Regulation deals only with centralised management by the Commission, with the possibility of delegation to beneficiary states after prior approval of the actions. It specifies the different types of ex ante or ex post controls applicable to the management of actions delegated to non-Member States receiving aid or international organisations.

In all cases of delegation (see Article 53 of the proposal) the agreements concluded with the Commission may provide that procurement procedures and the arrangements for internal control and audit of the co-signatories may apply to the use of Community funds, provided that the minimum standards agreed with the Commission are respected.

The proposal authorises total or partial decentralisation of management of external aid to the beneficiary states, provided that they can demonstrate to the Commission that certain minimum standards of sound management are complied with (existence of transparent procurement procedures, an efficient internal control system and presentation of separate accounts, external audits, all under the responsibility of the beneficiary state).

Contracts concluded either directly by the beneficiary states or by an organisation empowered by them or by the Commission on their behalf and for their account must comply with the general principles and procedures laid down for Community contracts, subject to special rules in particular concerning eligibility of tenderers and thresholds, which will appear in the implementing rules. As financing agreements must be preceded by a global budget commitment, which will reserve appropriations, there is no reason for invitations to tender to include a suspensory clause concerning the availability of appropriations.

F. Other matters

F. 1. Discharge (Part One, Title VII, Chapter 2)

The proposal takes account of the framework agreement on relations between the European Parliament and the Commission.

F. 2. EAGGF Guarantee Section (Part Two, Title I)

Title I of Part Two contains the special provisions applicable to the differentiated appropriations of the European Agricultural Guidance and Guarantee Fund, Guarantee Section (Title VIII of the present Financial Regulation). These special rules are as follows:

-commitment appropriations are equal to payment appropriations, with automatic carryover to the following year of unused payment appropriations in order to cover earlier commitments;

-expenditure is pre-financed by the Member States and repaid by the Commission;

-the management timetable allows an additional period and the possibility of transfers of appropriations up to 31 January of the following year.

Management of the appropriations for rural development, however, will be subject to the ordinary management rules from the end of the period covered by the present financial perspective, i.e. from 1 January 2007.

The references to the sectoral rules are also adapted.

F. 3. Structural Funds (Part Two, Title II)

The sectoral regulations concerning structural and cohesion operations contain financial provisions which lay down specific rules which differ from the general rules laid down by the Financial Regulation. This concerns commitment (in annual instalments), the payment arrangements, the repayment of payments on account, decommitments and appropriations made available again and the system of transfers.

The Financial Regulation must take account of these specific features. In order to improve the links between the sectoral regulations and the Financial Regulation, the proposal therefore includes in Part Two a new title "Structural Funds".

The sectoral regulations must be consistent with the Financial Regulation. The Commission will ensure that consistency is maintained when proposals for sectoral rules are made.

F. 4. Research (Part Two, Title III)

Title III of Part Two on the special provisions applicable to research and technological development appropriations (Title VII of the present Financial Regulation) has been simplified enormously now that the presentation of the budget by activities has been made the general rule. The 15% flexibility allowed by the present Financial Regulation for transfers of JRC operational appropriations (Article 95 Fin. Reg.) is, however, retained

The procurement rules in Title IV of Part One are not applicable to the JRC in its activities for third parties. The Council decision adopting the framework research programme also contains the rules on the recruitment of experts paid from the research appropriations.

The provisions of the current Article 92(4), which treat certain JRC appropriations as revenue from services for third parties - hence earmarked revenue - are not retained in the proposal. However, as the new Financial Regulation will not enter into force until after the expiry of the 5th framework programme, this programme can be implemented on the basis of the present Financial Regulation, including Article 92.

F. 5. OLAF (Part Two, Title VI)

With the creation of the European Anti-Fraud Office (OLAF) by the Commission Decision of 28 April 1999 [13] and the Council Regulation of 25 May 1999, [14] and Regulations (EC) No 1073/1999 of the European Parliament and the Council [15] and (Euratom) No 1074/1999 of the Council, [16] special arrangements were introduced for the establishment of the budget - OLAF's appropriations are presented separately in an Annex to the Commission section of the budget - and for the implementation of the appropriations made available to OLAF to guarantee its autonomy. These special arrangements must be reflected in the Financial Regulation.

[13] Commission Decision 352/1999 of 28 April 1999 (OJ L 136, 31.5.1999, p.20).

[14] Council Regulation 1074/1999 of 25 May 1999 (OJ L 136, 31.5.1999, p.8).

[15] OJ L 136, 31.5.1999, p.1.

[16] OJ L 136, 31.5.1999, p.8.

For this purpose, it is proposed that a new Title be inserted, which would provide for the budgetary structure to accommodate the OLAF appropriations (detailed budget line in an Annex, establishment plan), the special arrangements regarding budget implementation (delegation of implementing powers to the Director of OLAF, rules on transfers) and the presentation of OLAF's accounts.

F. 6. Administrative appropriations (Part Two, Title VII)

The proposal contains a new title containing the special rules for administrative appropriations: commitments for routine administrative expenditure (present Article 8(2)) and advance payment for expenditure on items such as rents (present Article 8(3)), commitment appropriations to be equal to payment appropriations and the possibility of charging to the budget for the current financial year administrative expenditure contracted for a period extending beyond that financial year (present Article 1(3)).

F. 7. Titles deleted

Title IXa of the present Financial Regulation on provisions applicable to fines imposed on Member States with excessive deficits is deleted, as these fines are already included as earmarked revenue under Article 17.

Title X of the present Financial Regulation (Special provisions applicable to the management of appropriations relating to staff serving in offices and suboffices in the Community and in delegations outside the Community) merely contains a reference to the implementing rules for the award of contracts, the keeping of inventories, the system of accounts and the imprest accounts. This reference is now superfluous, as the provisions dealing with these matters in the Financial Regulation already refer to the implementing rules. This title is therefore deleted.

Part 2 of the present Financial Regulation (Provisions applicable to borrowing and lending operations by the European Communities) is also deleted. Articles 134 and 135 are incorporated in Title VI (Accounts) of Part One and Article 137 is added to the provisions on the powers of the Court of Auditors in Title VII (External audit and discharge) of the same Part. Article 136 on the internal audit of these operations by the financial controller is deleted in connection with the new internal control arrangements.

F. 8. Part Three

Part Three (Transitional and final provisions) contains two transitional provisions The first relates to the monetary reserve, which is to be discontinued as announced in the proposal for a regulation on budgetary discipline currently in the process of being adopted. The second transitional provision makes the rural development appropriations subject to the special EAGGF Guarantee Title in line with the current financial perspective (2000-06) without prejudging the arrangements which will apply to them after 31 December 2006.

The final provisions take over the present Articles 138 to 143 with two adjustments. The first concerns the repeal of the Financial Regulation of 21 December 1977, since the proposal is for a recasting. The second expands the reference to the conciliation procedure made in the present Article 140. The provisions of the Joint Declaration of the European Parliament, the Council and the Commission of 4 March 1975 on the introduction of a conciliation procedure are incorporated into Article 174.The Commission would recall that in its opinion on the Intergovernmental Conference it suggested that the Financial Regulation should in future be adopted by the codecision procedure.

Proposal for a

COUNCIL REGULATION (EC, ECSC, Euratom)

on the financial regulation applicable to the general budget of the European Communities

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 279 thereof,

Having regard to the Treaty establishing the European Coal and Steel Community, and in particular Article 78h thereof,

Having regard to the Treaty establishing the European Atomic Energy Community, and in particular Article 183 thereof,

Having regard to the proposal from the Commission [17],

[17] OJ C

Having regard to the opinion of the European Parliament [18],

[18] OJ C

Having regard to the opinion of the Court of Auditors [19],

[19] OJ C

Whereas:

(1) Since times have changed enormously since the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities [20] was adopted, in particular as a result of a series of enlargements, a financial perspective forming a framework for the development of the budget and changes to the institutional structure, that Financial Regulation has been substantially amended several times. Since further amendments are necessary to take account, in particular, of the requirements of simplification in legislative and administrative matters and the tightening up of management of Community finances, the Financial Regulation of 21 December 1977 should be recast in the interests of clarity.

[20] OJ L 356, 31.12.1977, p. 1; Regulation as last amended by Regulation (EC, ECSC, Euratom) No 2673/1999 (OJ L 326, 18.12.1999, p. 1).

(2) This Regulation should be confined to stating the broad principles and basic rules governing all budgetary matters referred to in the Treaty and the detailed provisions should be moved to a Regulation laying down rules for the implementation of this Regulation (hereinafter: "the implementing rules") in order to produce a better hierarchy of rules and make the Financial Regulation easier to read.

(3) As regards budget principles, the establishment and implementation of the budget should respect the four fundamental principles of budgetary law (unity, universality, specification, annuality), and the principles of sound financial management, equilibrium, unit of account and transparency.

(4) This Regulation should reassert those principles, keep exceptions to an absolute minimum and impose strict conditions on those exceptions.

(5) As regards the principle of unity, this Regulation should state that it also applies to expenditure on the common foreign and security policy and cooperation in the field of justice and home affairs where this is charged to the budget. Decisions on the establishment plans of the Community agencies should be taken by the budgetary authority as part of the budgetary procedure in view of their impact, present or future, on the number of European civil servants and on the general budget, via subsidies paid or planned by those agencies, or the pensions which will be paid to their staff.

(6) As regards the principle of universality, the practices of repayment of payments on account and re-use should be discontinued; in some cases they should be replaced by earmarked revenue. These amendments should not affect the special rules applicable to the Structural Funds.

(7) As regards the principle of specification, the Commission should be given some degree of management flexibility for transfers of staff and administrative appropriations between titles relating to different policy areas and between chapters for operational expenditure. This Regulation should allow integrated presentation of the allocation of financial and administrative resources by purpose. The procedures for transferring administrative appropriations should be harmonised for all the other institutions so that transfers between titles are a matter for the budgetary authority and those within titles a matter for each institution. The budgetary authority should be allowed to constitute reserves in only two cases: where there is no legal base and where it is not certain that appropriations are adequate or necessary.

(8) As regards annuality, differentiated appropriations should be used in all areas, although the technical arrangements applied at present to appropriations of the European Agricultural Guidance and Guarantee Fund (EAGGF) should be retained. Decisions on carryovers of commitment and payment appropriations should be taken by the institution concerned as a result of the simplification brought about by the abandoning of non-differentiated appropriations. The additional periods should be restricted to cases which are absolutely necessary, namely EAGGF payments.

(9) As regards transparency, the aim is to improve information on implementation of the budget and the accounts. A strict deadline should also be set for the publication of the budget. Negative expenditure and negative revenue should also be eliminated, the former now being treated as earmarked revenue.

(10) Finally, the principle of sound financial management should be defined by reference to the principles of economy, efficiency and effectiveness, and compliance with those principles checked by means of measurable indicators in such a way that results can be assessed. Provision should be made for evaluation throughout the cycle of a programme.

(11) As regards the establishment and presentation of the budget, budgetary procedures should be harmonised and simplified by elimination of the distinction, which has no practical impact, between supplementary budgets and amending budgets.

(12) The Commission section of the budget should present appropriations and resources by purpose (activity-based budgeting), with a view to enhancing transparency in the management of the budget with reference to the objectives of sound financial management and in particular efficiency and effectiveness.

(13) The Commission should enjoy a measure of flexibility in the management of its staff complement in relation to what is authorised in the budget, especially as the emphasis in management is now to be on results and not on means. This freedom will, however, continue to be restricted by the dual limit of budget appropriations and the total number of posts allocated; in addition there will be no latitude as regards grade A1 and A2 posts.

(14) As regards implementation of the budget, there should be clarification of the various possible methods of implementing the budget, either on a centralised basis by the Commission or on a shared basis with the Member States or on a decentralised basis with third countries receiving external aid. It should be possible for centralised management either to be performed directly by Commission departments or to be delegated to national, international or Community public-law bodies, in particular executive agencies set up by the Communities. Those agencies should be able to implement all or part of a programme under the responsibility and control of the Commission.

(15) As the Commission is responsible for implementation of the budget, it may not delegate any tasks of public authority involving the use of discretionary powers of judgment. This Regulation should restate this principle and specify the scope of the tasks that may be delegated. It should also be stipulated that private-law bodies, other than those which have a public-service mission guaranteed by the Member States, should not be able to undertake any budget implementation measure but only provide specialist technical or administrative services or perform preparatory or ancillary tasks.

(16) For the sake of compliance with the principles of transparency and sound financial management, the public-law bodies or bodies with a public-service mission guaranteed by the State to which implementing tasks are delegated on behalf of the Commission should have transparent procurement procedures, effective internal controls and a system for presentation of the accounts which is separate from their other activities and an external audit.

(17) As regards the role of the different actors, authorising officers should be given more responsibility by dropping centralised ex ante controls, and in particular advance approval by the financial controller of revenue and expenditure operations and verification by the accounting officer that payment does constitute discharge of all liability. In return, the function of internal auditor of management and internal control systems set up by authorising officers should be developed. The internal auditor should be the financial controller within the meaning of the Treaties.

(18) The liability of authorising officers, accounting officers and imprest administrators is not different from that of other officials and staff and should be subject, under the Staff Regulations of Officials of the European Communities and the Conditions of Employment of Other Servants of those Communities (hereinafter: "the Staff Regulations") to the application of the existing disciplinary and financial compensation measures. On the other hand, certain specific provisions identifying specific cases of misconduct of accounting officers and imprest administrators given the nature of their duties should be retained; they will no longer have any special allowance or insurance. This Regulation should also refer to the provisions in force on the protection of the European Communities' financial interests and on the fight against corruption involving officials of the European Communities or officials of Member States of the European Union.

(19) The concepts of budget and legal commitment of expenditure and the conditions of application should be defined. In order to limit in time the potential budget impact of Commission decisions and to restrict the volume of dormant commitments, the period during which individual legal commitments may be made on the basis of global budget commitments should be limited.

(20) This Regulation should define the typology of payments which may be made by authorising officers.

(21) This Regulation should stipulate that the operations of validation, authorisation and payment must be completed within a time limit which will be set in the implementing rules and that in the event of failure to respect this time limit creditors will be entitled to default interest to be charged to the budget.

(22) As regards procurement, the Directives of the European Parliament and of the Council coordinating the procedures for the award of public supply, service and works contracts should apply to public contracts concluded by the institutions acting on their own account; their principles should also govern the rules applicable to all contracts awarded on behalf of third parties.

(23) In order to prevent irregularities and to combat fraud and corruption and promote sound and efficient management, the award of contracts to candidates or tenderers who have been guilty of such acts or have conflicting interests should be ruled out.

(24) For the sake of transparency, candidates and tenderers should be informed in appropriate manner about the award of contracts.

(25) Finally, as part of the process of increasing the responsibility of authorising officers, the current Advisory Committee on Procurement and Contracts should be dispensed with.

(26) As regards grants, a framework for the award and monitoring of Community grants which implements the principles of legal basis, transparency, programming, co-financing, collective assessment and control should be put in place.

(27) In order to avoid any cumulation, it should not be possible for grants to be awarded to finance the same action twice or to finance actions which have already been completed before the application for the grant is made.

(28) In a similar maner to the rules concerning the award of public contracts, grounds for excluding certain parties from the award of grants should be laid down in order to have appropriate means of combating fraud and corruption.

(29) So that the rights and obligations of the institution and of the beneficiary are clear, the grant award should be the subject of a written agreement.

(30) When a grant is awarded, the authorising officer should monitor the use made of it and carry out an overall evaluation of the results obtained for each programme.

(31) As regards the keeping and presentation of accounts, it should be stipulated that the accounts comprise general accounts and budget accounts and it should be added that the general accounts are based on a system of accrual accounting whereas the budget accounts are intended to draw up the revenue and expenditure account and the reports on implementation of the budget.

(32) The principles on which the general accounts are based and the financial statements are presented should be defined by reference to internationally accepted accounting principles and the Council Directives on the annual accounts of certain types of companies, where they are relevant, in the context of the public service.

(33) The provisions on the supply of information concerning implementation of the budget should be adapted to extend this information to the use of appropriations carried over, made available again and re-used and to improve the arrangements for providing monthly figures and the report on implementation which will be sent three times a year to the budgetary authority.

(34) The accounting methods employed by the institutions should be harmonised and, in this field, the Commission's accounting officer should have the right of initiative.

(35) It should be specified that the use of computerised financial management systems should in no way restrict the Court of Auditors' rights of access to supporting documents.

(36) The rather vague concepts of advance and payment on account should be dropped; payments should be made in the form of pre-financing, interim payments and payments of the final balance, when the entire amount is not paid in one instalment, and it should be stipulated that interest generated by amounts paid as pre-financing constitute budget revenue.

(37) As regards external audit and discharge, although the Commission is fully responsible for implementation of the budget, the importance of management shared with the Member States or decentralised management with third countries requires their full cooperation throughout the audit procedure by the Court of Auditors and the discharge by the budgetary authority.

(38) In order to improve interinstitutional operation, the Commission should present to the European Parliament, at its request, any information relating to the year in question required for the smooth application of the discharge procedure, with due respect for fundamental human rights, the protection of business secrecy, the provisions governing judicial and disciplinary proceedings and the interests of the Union.

(39) Special provisions should be laid down for certain Community policies to ensure this Regulation is consistent with sectoral rules.

(40) As regards the EAGGF, the specific management features, relating in particular to the fact that commitment appropriations and payment appropriations are equal and to the carryover arrangements, should be maintained, although the appropriations for rural development will not be covered with effect from 1 January 2007.

(41) In order to guarantee the overall amount of appropriations available, earmarked revenue from the EAGGF Guarantee Section should be assigned to it in full.

(42) Provision should be made for the possibility of advance commitments from 15 November preceding the financial year in question.

(43) As regards the Structural Funds, the provision for repayment of payments on account and making appropriations available again as provided for in the [unpublished] Commission declaration annexed to Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds should be retained.

(44) As regards research, the presentation of the budget should be harmonised with the provisions concerning activity-based budgeting.

(45) As regards external action, decentralisation of management of external aid should be authorised provided that the Commission is given guarantees of sound financial management and the beneficiary state is accountable to the Commission for the funds paid to it.

(46) Financing agreements or contracts signed with the beneficiary state or a national, Community or international public-law body or natural or legal persons governed by private law should comply with the general principles on the award of contracts laid down in Title IV of Part One and Title IV of Part Two of this Regulation as regards external actions.

(47) As regards the European Anti-Fraud Office (OLAF), a separate title should contain the special rules for management of OLAF, in particular in terms of information contained in Annex to the budget and definition of the powers delegated to the Director.

(48) A separate title should also contain the special rules applicable to administrative appropriations.

(49) As a transitional measure, provision should be made for the maintenance of the special EAGGF monetary reserve until the entry into force of the Regulation on budgetary discipline and, as regards rural development programmes and accompanying measures, provision should be made for the special EAGGF Guarantee Section arrangements for appropriations to apply only until the end of the current programming period,

HAS ADOPTED THIS REGULATION:

PART ONE

COMMON PROVISIONS

TITLE I

GENERAL PROVISIONS

Article 1

This Regulation lays down the rules for the establishment of the general budget of the European Communities, hereinafter referred to as "the budget" and the implementation of revenue and expenditure. It also contains the rules for the keeping of accounts, procurement and the award of grants by the Communities. It determines the rules and methods for supervising the liability of the authorising officers, accounting officers and internal auditors. It lays down the arrangements for external control and the discharge procedure.

For the purposes of this Regulation, the Economic and Social Committee, the Committee of the Regions and the Ombudsman shall be treated as Community institutions.

Article 2

The establishment and implementation of the budget shall comply with the principles of unity, annuality, equilibrium, unit of account, universality, specification, sound financial management and transparency as set out in this Regulation.

Chapter 1

Principle of unity

Article 3

1. The budget is the instrument which forecasts and authorises the revenue and expenditure of the Communities each year.

2. The revenue and expenditure of the Communities shall comprise:

(a) the revenue and expenditure of the European Community, including administrative expenditure for the common foreign and security policy and for cooperation in the field of justice and home affairs and the related operational expenditure where this may be charged to the budget;

(b) the administrative expenditure of the European Coal and Steel Community and the related revenue;

(c) the expenditure and revenue of the European Atomic Energy Community.

3. The budget shall record the guarantee for borrowing and lending operations entered into by the Communities and payments to the Guarantee Fund for external actions, the operations of which are shown in the Commission's revenue and expenditure account and balance sheet.

Article 4

1. Subject to Article 69, no revenue shall be collected and no expenditure effected unless booked to an article in the budget.

2. No expenditure may be committed or authorised in excess of the authorised appropriations.

Chapter 2

Principle of annuality

Article 5

The appropriations entered in the budget shall be authorised for one financial year.

Article 6

1. The budget shall contain differentiated appropriations, which shall consist of commitment appropriations and payment appropriations.

Commitment appropriations shall cover the total cost of the legal obligations entered into for the current financial year.

Payment appropriations shall cover payments made to honour the legal commitments entered into in the current financial year and/or earlier financial years.

2. Paragraph 1 is without prejudice to the special provisions of Titles I and VII of Part Two. It shall not prevent appropriations being committed globally nor budgetary commitments being made in annual instalments.

3. Appropriations shall be shown in the budget as follows:

(a) the commitment appropriation authorised for the financial year in question and the payment appropriation for the same financial year shall be entered on the appropriate budget line;

(b) the estimated annual payment appropriations required for the subsequent financial years shall be set out against the commitment appropriations in an indicative schedule in the remarks column.

Article 7

1. The financial year shall run from 1 January to 31 December.

2. The revenue of a financial year shall be entered in the accounts for the financial year on the basis of the amounts collected during the financial year. However, the own resources for the month of January of the next financial year may be paid in advance pursuant to the Council Regulation implementing the Decision on the system of the Communities' own resources.

3. The entries in respect of value added tax own resources, the additional GNP-based resource and any financial contributions may be adjusted in accordance with the Regulation referred to in paragraph 2.

4. The appropriations authorised for a given year may be used solely to cover expenditure committed and paid in that financial year, save as otherwise provided in Title I of Part Two, and to cover amounts due against commitments from preceding financial years.

5. Commitments shall be entered in the accounts on the basis of the legal commitments entered into up to 31 December.

6. Payments shall be entered in the accounts for a financial year on the basis of the payments effected by the accounting officer by 31 December of that year at the latest.

7. By way of derogation from paragraphs 5 and 6, the expenditure of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF) shall be entered in the accounts for a financial year in accordance with the rules laid down in Title I of Part Two.

Article 8

1. Commitment appropriations and payment appropriations which have not been used at the end of the financial year for which they were entered shall lapse.

However, they may be carried over to the next financial year only, by a decision taken by the institution concerned by 15 February at the latest, in accordance with paragraphs 2 and 3.

2. Commitment appropriations may be carried over in respect of:

(a) amounts corresponding to commitments which have been virtually concluded at 31 December; or

(b) amounts which are necessary when the legislative authority has adopted a basic instrument in the final quarter of the financial year and the Commission has been unable to commit the appropriations provided for this purpose in the budget by 31 December.

The amounts referred to in the first subparagraph must be committed by 31 March of the following year.

3. Payment appropriations may be carried over in respect of amounts needed to cover existing commitments or commitments linked to commitment appropriations carried over, when the appropriations provided for the relevant lines in the budget for the following financial year do not cover requirements. The institution concerned shall first use the appropriations authorised for the current financial year and shall not use the appropriations carried over until the former are exhausted.

4. The institution shall inform the European Parliament and the Council ("the budgetary authority") by 15 March at the latest of the carryover decision taken and shall state, for each budget item, how the criteria in paragraphs 2 and 3 have been applied to each carryover.

6. Appropriations placed in reserve and appropriations for staff expenditure may not be carried over.

Article 9

Revenue not used and appropriations available at 31 December arising from the earmarked revenue referred to in Article 17 shall be carried over automatically. Earmarked revenue must be used first.

Article 10

When commitments are cancelled, as a result of total or partial non-implementation of the actions for which they were earmarked, in any financial year after that in which the appropriations were entered in the budget, the appropriations concerned shall lapse.

Any amounts which have been wrongly paid shall be recovered, subject to Title II of Part Two.

Article 11

The appropriations entered in the budget may be committed with effect from 1 January, once the budget has been finally adopted, save as otherwise provided in Title I and Title VII of Part Two.

Article 12

1. If the budget has not been finally adopted at the beginning of the financial year, Article 273 of the EC Treaty, Article 78b of the ECSC Treaty, and Article 178 of the Euratom Treaty shall apply to commitment and payment of expenditure approved in principle in the last budget duly adopted.

An item of expenditure shall be considered as having been approved in principle in the last budget duly adopted if it could have been charged to a specific budget line for the financial year concerned.

2. Commitments may be entered into in respect of any chapter, for up to one quarter of the total appropriations authorised for the relevant chapter in the preceding financial year, account being taken of all transfers, plus one twelfth for each completed month.

The commitments may not exceed the appropriations provided for in the draft budget or, in the absence thereof, in the preliminary draft budget.

The global provisional commitments of the Guarantee Section of the EAGGF referred to in Title I of Part Two shall be treated as commitments for the purposes of the first subparagraph.

3. Payments may be made monthly in respect of any chapter up to one twelfth of the total appropriations authorised for the relevant chapter in the preceding financial year, account being taken of all transfers.

The measure provided for in the first subparagraph may not have the effect of placing at the disposal of the Commission, for any month, appropriations in excess of one twelfth of those provided for in the draft budget or, in the absence thereof, in the preliminary draft budget.

4. If the continuity of Community activities and management needs so require:

(a) for expenditure necessarily resulting from the Treaties or from acts adopted in accordance therewith, the Council acting by a qualified majority may, at the request of the Commission and after consulting the European Parliament, authorise simultaneously two or more provisional twelfths for both commitments and payments in addition to those automatically made available under paragraph 2;

(b) for expenditure other than that necessarily resulting from the Treaties, or from acts adopted in accordance therewith, the third paragraph of Article 273 of the EC Treaty, the second subparagraph of Article 78b (2) of the ECSC Treaty, and the third paragraph of Article 178 of the Euratom Treaty shall apply.

The additional twelfths shall be authorised in whole.

The annual total authorised for each chapter by reason of the twelfths may not exceed the total for the corresponding chapter of the preceding year's budget, account being taken of transfers, nor may it exceed the total for the corresponding chapter of the draft budget or, in the absence thereof, the preliminary draft budget.

5. If, for a given chapter, the authorisation of two or more provisional twelfths granted in the circumstances provided for in paragraph 4 is not sufficient to cover the expenditure necessary to avoid a break in continuity of the Communities' activity in the area in question, authorisation may exceptionally be given by the procedures provided for in the first subparagraph of paragraph 4 to exceed the total provided for in the third subparagraph of paragraph 4. In this case the overall total of the appropriations available in the budget of the preceding year may not be exceeded.

Chapter 3

Principle of equilibrium

Article 13

1. Budget revenue and payment appropriations must be in balance.

2. The Communities may not raise loans to cover a budget deficit. They are, however, authorised to raise loans for the sole purpose of investments in immovable assets.

Article 14

The balance from each financial year shall be entered in the budget for the following financial year as revenue in the case of a surplus or payment appropriation in the case of a deficit.

The estimates of such revenue or payment appropriations shall be entered in the budget during the budget procedure and, where appropriate, in a letter of amendment submitted pursuant to Article 31. They shall be drawn up in accordance with the Council Regulation implementing the Decision on the system of the Communities' own resources.

After the presentation of the accounts for each financial year, any discrepancy with the estimates shall be entered in the budget for the following financial year through an amending budget.

Chapter 4

Principle of unit of account

Article 15

The budget shall be drawn up in euro.

Chapter 5

Principle of universality

Article 16

1. Total revenue shall cover total payment appropriations, subject to Article 17.

2. All revenue and expenditure shall be entered in full without any adjustment against each other, subject to Article 18.

Article 17

1. Revenue in the following categories provided for in this Regulation shall not be used for any other purpose:

(a) financial contributions from Member States to certain research programmes pursuant to the Council Regulation implementing the Decision on the system of the Communities' own resources;

(b) interest on deposits and the fines provided for in the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure;

(c) revenue earmarked for a specific purpose, such as income from foundations, subsidies, gifts and bequests;

(d) contributions to Community activities from third countries or various bodies;

(e) revenue from third parties in respect of goods, services or work supplied at their request;

(f) revenue arising from the repayment of amounts unduly paid;

(g) proceeds from the supply of goods, services and works for other institutions or bodies, including refunds by other institutions or bodies of mission allowances paid on their behalf;

(h) insurance payments received;

(i) revenue from payments connected with lettings;

(j) revenue from the sale of publications and films, including those on an electronic medium;

Revenue which is earmarked for a specific purpose in accordance with the applicable legal basis shall also not be used for any other purpose.

The budget shall carry items to accommodate the categories of revenue referred to in the first and second subparagraphs and, wherever possible, an estimated amount shall be entered.

2. The Commission may accept any donation made to the Communities, such as foundations, subsidies, gifts and bequests.

The Commission may accept donations which may involve some financial charge only with prior authorisation from European Parliament and the Council, which shall act on the matter within two months of the date of receipt of the request from the Commission. If no objection has been made within that period, the Commission shall take a final decision in respect of acceptance.

Article 18

1. The rules for the implementation of this Regulation (hereinafter: "the implementing rules") may specify the cases where certain revenue may be deducted from invoices or requests for payment, which shall then be passed for payment of the net amount.

2. The cost of products or services provided to the Communities incorporating taxes refunded by the Member States pursuant to the Protocol on the Privileges and Immunities of the European Communities shall be charged net to the budget.

3. Adjustments may be made in respect of exchange differences occurring in the implementation of the budget. The final gain or loss shall be included in the balance for the year.

Chapter 6

Principle of specification

Article 19

Appropriations shall be earmarked for specific purposes by title and chapter; the chapters shall be further subdivided into articles and items.

Article 20

1. Subject to the arrangements set out for the Commission, each institution may, within its own section of the budget, propose to the budgetary authority transfers from one title to another.

Proposals made by the other institutions for transfers from one title to another shall be forwarded by the Commission to the budgetary authority for its decision. The Commission may attach its own opinion to such proposals.

2. Subject to the arrangements set out for