AMENDING LETTER No 1 TO THE PRELIMINARY DRAFT BUDGET FOR 2004 - VOLUME 1 GENERAL STATEMENT OF REVENUE - VOLUME 4 STATEMENT OF REVENUE AND EXPENDITURE BY SECTION - Section III - Commission

(presented by the Commission)

Having regard to:

- the Treaty establishing the European Community, and in particular Article 272 thereof,

- the Treaty establishing the European Atomic Energy Community, and in particular Article 177 thereof,

- the Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities [1], and in particular Article 34 thereof,

[1] OJ L 248, 16.9.2002, p.1.

The European Commission hereby presents to the budgetary authority the amending letter No 1 to the preliminary draft budget for 2004 for the reasons set out in the explanatory memorandum.

***

TABLE OF CONTENTS

EXPLANATORY MEMORANDUM

1. Introduction

2. Heading 4 - External Actions: Aid for Rehabilitation and Reconstruction of Iraq

3. Heading 5 - Administration: non-differentiated appropriations carried over automatically from 2003

4. Heading 6 - Reserves: Impact of enlargement on the Guarantees

5. Headings 3 and 4: tasks resulting from Commission's prerogatives at institutional level

6. Adjustment of the establishment plan for Research and Development - indirect actions

7. Revision of the Community participation in the capital increase of the European Investment Fund

SUMMARY TABLE PER HEADING OF THE FINANCIAL PERSPECTIVE

GENERAL STATEMENT OF REVENUE

The general statement of revenue will be forwarded separately.

STATEMENT OF REVENUE AND EXPENDITURE BY SECTION

VOLUME 4 - Book I

EXPENDITURE

VOLUME 4 - Book II

REVENUE

ESTABLISHMENT PLANS

ANNEXES

Part II of the budget - Borrowing and lending operations guaranteed by the General Budget

EXPLANATORY MEMORANDUM

1. INTRODUCTION

The present Amending Letter No 1 to the Preliminary Draft Budget for year 2004 covers six elements:

- the creation of a new article under Heading 4 of the Financial Perspective, with the provision of supplementary appropriations, for the support to the rehabilitation and reconstruction of Iraq,

- the creation of a new article under title 26 (administration), under Heading 5 of the Financial Perspective, to facilitate the implementation in 2004 of the non-differentiated appropriations contracted in 2003 and carried over automatically to 2004,

- the adjustment of the headings of item 01 04 01 10 (expenditure, under Heading 6 of the Financial Perspective) and article 831 (revenue), concerning the guarantee provided by the Community to the European Investment Bank for loans, to adjust for the change of status of those Central and Eastern European Countries which become members in 2004,

- the addition or modification of budget remarks to a number of budget lines covering tasks resulting from the Commission's prerogatives at institutional level, where the appropriate reference is missing in the remarks included in PDB 2004,

- the adjustment of the Commission's establishment plan, table for research and technological development - indirect action, in application of article 47 of the new Financial Regulation.

- the revision of the Community participation in the capital increase of the European Investment Fund, under Heading 3 of the Financial Perspective, resulting in the withdrawal of the appropriations requested in PDB 2004 for this item.

The first element is based on the Commission's communication "The European Union and Iraq: Approach to the Madrid Ministerial Conference, 24 October 2003" on the role that the EU intends to play in the rehabilitation and reconstruction of Iraq. The Commission is amending its PDB 2004 in order to include EUR 160 million in commitment and EUR 128 in payment appropriations on a new dedicated budget line to finance rehabilitation and reconstruction actions in Iraq. This amount is part of a Community's package of EUR 200 million to be implemented in 2003-2004, with EUR 40 million in 2003 and EUR 160 million in 2004.

The second element is linked to the ABB structure of PDB 2004 and its consequences on the implementation of appropriations carried over from 2003: a number of budget lines covering administrative appropriations have been shared in PDB 2004 between the different titles of the budget, but the commitments registered in 2003 under the current nomenclature cannot be shared without great technical complexity. It is therefore proposed to create a temporary line, valid for 2004 only and acting as a 'receiving structure' for these carry-overs.

The third element, under Heading 6 of the Financial Perspective, is linked to the enlargement and the change of status of acceding countries as regards EIB loans. The guarantee that the Commission has provided to the EIB needs to be covered even after the adhesion whereas the heading of the budget item refers only to "non-member" countries. It is proposed to amend the headings accordingly.

The fourth element stems from the fact that a number of budget lines, under Headings 3 and 4 of the Financial Perspective, are implemented without legal basis in application of the Financial Regulation, article 49, paragraph 2 (tasks resulting from Commission's prerogatives at institutional level), and are listed as such in the Working Document, part IV, accompanying PDB 2004, but do not show the appropriate reference to the Financial Regulation in budget remarks. In order to avoid any uncertainty when implementing these lines, it is proposed to adjust the budget remarks accordingly.

The fifth element results from the application of article 47 of the new Financial Regulation, allowing institutions to modify their establishment plans within certain limits. The Commission has proposed a modification of the establishment plan for research and technological development - indirect actions, for the year 2003. This change having a permanent effect, the table included in PDB 2004 is modified accordingly so as to ensure the consistency with the establishment plan for 2003.

2. HEADING 4 - EXTERNAL ACTIONS: AID FOR REHABILITATION AND RECONSTRUCTION OF IRAQ

The EU summit in Thessaloniki invited the Commission to submit proposals for an EU contribution to the multilateral effort to assist Iraq's transition. In response to this invitation, the Commission has adopted a Communication which provides a common approach for the participation of the European Union in the Madrid Ministerial Conference, as well as setting out the Community's contribution to rehabilitation and reconstruction until the end of 2004.

The Communication proposes that three broad conditions need to be satisfied if the European Union and its Member States are to make an effective contribution to the reconstruction of Iraq: an improvement in the security situation in Iraq, a clear commitment to the establishment of a sovereign Iraqi government and the creation of a transparent and operational multilateral framework for reconstruction. It notes that a further important factor in the success of the European Union's efforts will be the involvement of Iraq's neighbours in the reconstruction process.

For 2004, priorities for Community assistance should build on the work of ECHO in Iraq and include support in areas such as health, water and sanitation, education, employment, a social safety net, institutional and capacity-building, particularly in the area of macroeconomic management including trade policy, as well as the strengthening of civil society, and the protection and promotion of human rights and democracy.

As for the Community's contribution itself, the Commission has made a realistic assessment of the availability of resources under Heading 4 of the Financial Perspective. It therefore proposes that the Community share of the European contribution amounts to EUR 200 million over the 2003-2004 period, with EUR 40 million mobilised in 2003 and EUR 160 million in 2004. This amount is additional to the EUR 100 million that ECHO is implementing in 2003.

Considering the importance of such pledge, the Commission is proposing to create a new budget line dedicated to fund the rehabilitation and reconstruction in Iraq. This will allow to respect the policy expressed by the Budget Authority, in particular the European Parliament, as regards transparency when the Community is contributing to the financing of reconstruction action (Afghanistan, Kosovo, East Timor).

The following nomenclature and title is proposed:

19 08 07 "Aid for rehabilitation and reconstruction of Iraq" (B7-433 under traditional nomenclature)

Since no credits have been included in the PDB 2004, the Commission proposes to endow this new dedicated article 19 08 07 with EUR 160 million in commitment appropriations by mobilizing the margin of the PDB under Heading 4, amounting to EUR 86 million, and the flexibility instrument up to the EUR 74 million above the ceiling of Heading 4. As for payments, it is estimated that EUR 128 million will be necessary, corresponding to 80% of the credits to be committed in 2004.

3. HEADING 5 - ADMINISTRATION: NON-DIFFERENTIATED APPROPRIATIONS CARRIED OVER AUTOMATICALLY FROM 2003

Article 9(4) of the Financial Regulation reads: "Non-differentiated appropriations corresponding to obligations duly contracted at the close of the financial year shall be carried over automatically to the following financial year only".

In the nomenclature of PDB 2004 for section III Commission, most of the lines corresponding to administrative appropriations have been broken down by policy area ("XX" lines). The automatic carryover of the 2003 budget appropriations for expenditure on these lines creates an extremely complex technical situation (involving a breakdown between the different 2004 policy areas of commitments booked in 2003 under the old nomenclature).

And then certain lines which carried non-differentiated appropriations in the former Part A will become lines carrying differentiated appropriations in the ABB nomenclature in 2004. This too will be a technical problem for monitoring automatic carryovers (the commitment is determined when it is created by reference to the budget line and its value is maintained until it is finally cleared).

In order to resolve these problems, the Commission is proposing in this amending letter that a budget line 26 01 49 (2003 administrative appropriations carried over automatically) be created in policy area 26 "Administration" under heading 5, which will accommodate the 2003 administrative appropriations for these lines carried over automatically to 2004. It carries a dash ("-") as no appropriation is to be entered in 2004; it is the structure to accommodate the implementation of 2003 appropriations carried over automatically.

This article will cover all the 2003 commitments carried over corresponding to the administrative appropriation lines which have been broken down by policy area in 2004 those on lines which have become differentiated appropriations. However, it will be divided up internally so that it will be possible to monitor implementation by reference to the nomenclature of the old lines.

As the appropriations carried over from 2003 will automatically lapse if payments have not been made at the end of 2004, this line will exist only in the 2004 budget.

For lines other than those referred to above, any automatic carryover of 2003 administrative appropriations will be to the corresponding specific budget line in the 2004 nomenclature.

4. HEADING 6 - RESERVES: IMPACT OF ENLARGEMENT ON THE GUARANTEES

The EU has provided a guarantee to the EIB for loans to central and eastern countries becoming members of the EU on the 1st May 2004. The existing structure covering this guarantee is the item 01 04 01 10 - "European Community guarantee for European Investment Bank loans to non-member countries in central and eastern Europe and the Western Balkans". The guarantee that the European Union is providing to the EIB will still exist and needs to be covered by an adequate budget structure. It is therefore proposed to amend the heading of this item by deleting the words "non-member" in order to cover the guarantee even after adhesion. That change implies also a modification of the heading of the chapter 83 of the statement of revenue. No change is required as regards figures, remarks and legal basis.

5. HEADINGS 3 AND 4: TASKS RESULTING FROM COMMISSION'S PREROGATIVES AT INSTITUTIONAL LEVEL

The Financial Regulation, under article 49, paragraph 2 (c), provides for the possibility to implement without a basic act, "actions carried out by the Commission by virtue of tasks resulting from its prerogatives at institutional level". In the Working Document, part IV (pages 131-133), transmitted to the budgetary authority in complement to PDB 2004, the Commission listed the budget lines and appropriations implemented under this possibility.

The appropriate reference to the Financial Regulation or to another budget line whose budget remarks refer to the Financial Regulation, was however not systematically included in the budget remarks of the relevant lines. It is proposed to complete the budget remarks in question, so as to avoid any uncertainty when implementing the appropriations under these budget lines.

The lines concerned are the following:

07 01 04 01 - Legislation, awareness-raising and other general actions based on the Community action programmes in the field of the environment - expenditure on administrative management

07 02 01 - Contribution to international environmental activities

14 01 04 01 - Implementation and development of the internal market - expenditure on administrative management

21 01 04 04 - Evaluation of the results of Community aid, follow-up and audit measures - expenditure on administrative management

21 01 04 07 - coordination and promotion of awareness on development issues - expenditure on administrative expenditure

In addition, it is proposed to add the same reference in the budget remarks of article 02 04 01 (operation and development of the internal market, particularly in the fields of notification, certification and sectoral approximation), which is not included in the list of the Working Document, part IV, but is similar to budget line 12 02 01, as both lines derive from the same line (formerly B5-3000) implemented as a 'task resulting from Commission's prerogative at institutional level.'

6. ADJUSTMENT OF THE ESTABLISHMENT PLAN FOR RESEARCH AND DEVELOPMENT - INDIRECT ACTIONS

The Commission plans to transform 70 scientific and technical posts (50 A category and 20 B category) into 70 administrative posts within the indirect research establishment plan of the year 2003 in accordance with the article 47 of the Financial Regulation (EC, Euratom) n° 1605/2002 of 25 June 2002 applicable to the general budget of the European Communities. This article allows institutions to modify their establishment plans under certain conditions and limits provided that the budgetary authority is informed three weeks in advance.

As the proposed new staff regulation abolishes the distinction between "scientific" and "administrative" posts, this measure is anticipating on the new structure of the indirect research establishment plan.

As there is no change in the structure by category and grade, this modification fulfils the conditions laid down in the article 47 of the Financial Regulation (Grades A1, A2 and A3 are not modified; volume of appropriations not affected; total posts authorised in the establishment plan unchanged; posts modified are less than the 10% of the total posts authorised in this establishment plan).

Table 1 compares the new establishment plan to the establishment plan requested in the PDB.

Table 1

>TABLE POSITION>

This modification, announced to the Budgetary Authority for 2003, will have permanent effects. To ensure consistency with 2003, the Budgetary Authority is invited to consolidate the modifications, intended for 2003, in the establishment plan of the year 2004.

7. REVISION OF THE COMMUNITY PARTICIPATION IN THE CAPITAL INCREASE OF THE EUROPEAN INVESTMENT FUND

The Business Plan 2003-2005 of the European Investment Fund (EIF), which was discussed in the Board of Directors of the EIF in December 2002, indicated that the EIF would run out of own resources before mid-2005. Therefore, the EIF management proposed that a capital increase take place end-2004. The Community was expected to contribute to the capital increase with EUR 100 million to be paid over four years.

As a consequence, the Commission proposed a reserve of EUR 25 million in the 2004 preliminary draft budget (PDB) for the possible Community participation in the capital increase of the EIF.

Based on the business plan projections presented to the Board meeting in July, it became clear that there is no prospect of Board agreement on an EIF capital increase effective from end-2004. The minutes of the July meeting, which were approved by the Board at its meeting on 15 September 2003, concluded that "for the time being the only proposal contained in the paper that should go forward would be the increase in Risk Capital Mandate; that other items be reviewed in the light of future discussions".

Therefore, the reserve foreseen in the 2004 budget becomes redundant. It is proposed to withdraw the appropriations amounting to EUR 25 million, requested in PDB 2004 in reserve (chapter 31 02) for the line 01 04 09 01 (European Investment Fund - Provision of paid up shares of subscribed capital).

SUMMARY TABLE PER HEADING OF THE FINANCIAL PERSPECTIVE

>TABLE POSITION>

VOLUME 4 - Book I

SECTION III - COMMISSION

EXPENDITURE

TITLE 01

ECONOMIC AND FINANCIAL AFFAIRS

CHAPTER 01 04 - FINANCIAL OPERATIONS AND INSTRUMENTS

ARTICLE 01 04 01 - European Community guarantees for lending operations

Item 01 04 01 10 -- European Community guarantee for European Investment Bank loans to non-member countries in central and eastern Europe and the Western Balkans

Modify the Heading as follows:

Item 01 04 01 10 -- European Community guarantee for European Investment Bank loans to countries in central and eastern Europe and the Western Balkans

ARTICLE 01 04 09 - European Investment Fund

Item 01 04 09 01 - European Investment Fund - Provision of paid up shares of subscribed capital

>TABLE POSITION>

TITLE 02

ENTERPRISE

CHAPTER 02 04 - GETTING STILL MORE FROM THE INTERNAL MARKET

ARTICLE 02 04 01 - Operation and development of the internal market, particularly in the fields of notification, certification and sectoral approximation

Legal basis:

Add the following paragraph:

Task resulting from the Commission's prerogatives at institutional level, as provided for in Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, Article 49, paragraph 2 (OJ L 248, 16.9.2002, p.1).

TITLE 07

ENVIRONMENT

CHAPTER 07 01 - ADMINISTRATIVE EXPENDITURE OF POLICY AREA ENVIRONMENT

ARTICLE 07 01 04 - Support expenditure for operations of policy area Environment

Item 07 01 04 01 - Legislation, awareness-raising and other general actions based on the Community action programmes in the field of the environment - expenditure on administrative management

Legal basis:

Modify the paragraph as follows:

See article 07 04 02.

CHAPTER 07 02 - GLOBAL ENVIRONMENTAL AFFAIRS

ARTICLE 07 02 01 - Contribution to international environmental activities

Legal Basis:

Add the following paragraph:

Task resulting from the Commission's prerogatives at institutional level, as provided for in Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, Article 49, paragraph 2 (OJ L 248, 16.9.2002, p.1).

TITLE 14

TAXATION AND CUSTOMS UNION

CHAPTER 14 01 - ADMINISTRATIVE EXPENDITURE OF POLICY AREA TAXATION AND CUSTOMS UNION

ARTICLE 14 01 04 - Support expenditure for operations of policy area Taxation and Customs Union

Item 14 01 04 01 - Implementation and development of the internal market - Expenditure on administrative management

Add the following paragraphs:

Legal basis:

Task resulting from the Commission's prerogatives at institutional level, as provided for in Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, Article 49, paragraph 2 (OJ L 248, 16.9.2002, p.1).

TITLE 19

EXTERNAL RELATIONS

CHAPTER 19 08 - RELATIONS WITH THE MIDDLE EAST AND SOUTH MEDITERRANEAN

ARTICLE 19 08 07 Aid for rehabilitation and reconstruction of Iraq

New article

Figures (differentiated appropriations)

>TABLE POSITION>

This appropriation is intended to cover Community operations in the framework of the Iraqi reconstruction process. It may be supplemented by expenditure committed under other chapters and articles, notably chapter 23 02 (Humanitarian aid), chapter 21 02 (Food aid), chapter 19 04 (Human Rights and Democratisation) and article 19 02 05 (Rapid intervention mechanism).

The Commission will monitor compliance with the conditions for the Community contribution to this process, notably full implementation of the framework agreed at the Madrid Conference. It will keep the budgetary authority informed on its findings and conclusions.

Legal basis

Council Regulation (EEC) No 443/92 of 25 February 1992 on financial and technical assistance to and economic cooperation with developing countries in Asia and Latin America (OJ L 52, 27.2.1992, p. 1).

Council Regulation (EC) No 2258/96 of 22 November 1996 on rehabilitation and reconstruction operations in developing countries (OJ L 306, 28.11.1996, p. 1).

TITLE 21

DEVELOPMENT AND RELATION WITH ACP COUNTRIES

CHAPTER 21 01 - ADMINISTRATIVE EXPENDITURE OF POLICY AREA DEVELOPMENT AND RELATION WITH ACP COUNTRIES

ARTICLE 21 01 04 - Support expenditure for operations of policy area Development and Relation with ACP Countries

Item 21 01 04 04 - Evaluation of the results of Community Aid, follow-up and audit measures - Expenditure on administrative management

Add the following paragraphs:

Legal basis:

Task resulting from the Commission's prerogatives at institutional level, as provided for in Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, Article 49, paragraph 2 (OJ L 248, 16.9.2002, p.1).

Item 21 01 04 07 - Coordination and promotion of awareness on development issues - Expenditure on administrative management

Remarks:

Modify the last paragraph as follows:

This appropriation is intended to cover administrative expenditure under Article 21 04 02.

TITLE 26

ADMINISTRATION

CHAPTER 26 01 - ADMINISTRATIVE EXPENDITURE OF POLICY AREA COMMISSION'S ADMINISTRATION

Article 26 01 49 -- 2003 administrative appropriations carried over automatically

New article

>TABLE POSITION>

Remarks

This article is intended to accommodate the 2003 administrative appropriations carried over automatically in accordance with Article 9(4) of the Financial Regulation which correspond to lines broken down by policy area in 2004 or lines in the former Part A which have become lines carrying differentiated appropriations. As the appropriations carried over from 2003 will automatically lapse if payments have not been made at the end of 2004, this line will exist only in the 2004 budget.

TITLE 31

RESERVES

CHAPTER 31 02 - RESERVES FOR FINANCIAL INTERVENTIONS

ARTICLE 31 02 41 - Differentiated Appropriations

Item 31 02 41 01 - Differentiated Appropriations (non-compulsory expenditure)

>TABLE POSITION>

Delete the following paragraph:

>TABLE POSITION>

VOLUME 4 - Book II

REVENUE

TITLE 08

BORROWING AND LENDING OPERATIONS

CHAPTER 83 - Revenue resulting from the European Community guarantee for loans granted by financial establishments in non-member countries

Modify the Heading as follows:

CHAPTER 83 - Revenue resulting from the European Community guarantee for loans granted by financial establishments in non-member countries and member states

Article 831 - European Community guarantee for European Investment Bank loans to non-member countries in central and eastern Europe and the Western Balkans

Modify the Heading as follows:

Article 831 -- European Community guarantee for European Investment Bank loans to countries in central and eastern Europe and the Western Balkans

ESTABLISHMENT PLANS

Research and technological development - Indirect action

>TABLE POSITION>

ANNEXES

Part II of the budget - Borrowing and lending operations guaranteed by the General Budget

X. EUROPEAN COMMUNITY GUARANTEE FOR LOANS GRANTED BY THE EUROPEAN INVESTMENT BANK TO NON-MEMBER COUNTRIES IN CENTRAL AND EASTERN EUROPE AND THE WESTERN BALKANS

Modify the Heading as follows:

X. EUROPEAN COMMUNITY GUARANTEE FOR EUROPEAN INVESTMENT BANK LOANS TO COUNTRIES IN CENTRAL AND EASTERN EUROPE AND THE WESTERN BALKANS