OPINION No 4/94 of the Court of Auditors on a proposed council Regulation (EC, ECSC, Euratom) amending the financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (94/C 383/02)

THE COURT OF AUDITORS,

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 Community, and in particular Article 209 thereof,

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

Having regard to the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (), as last amended by Council Regulation (ECSC, EC, Euratom) No 2730/94 of 31 October 1994 (), and in particular Article 127 thereof,

Having regard to the proposal from the Commission of 22 July 1994 (),

Having regard to the Council`s request for an opinion on this proposal, dated 16 August 1994,

HAS ADOPTED THE FOLLOWING OPINION:

PART ONE: OBSERVATIONS

1. Preliminary observations

1.1. It is not possible to understand the new budgetary system envisaged for the JRC merely by reading the Commission proposal. A series of other documents must also be taken into consideration ()()()()()(). These texts form a coherent whole and some have already been adopted in anticipation of a revision of the Financial Regulation along the lines proposed by the Commission. Under these circumstances, the prospects of the Court of Auditors` observations, which come almost at the end of this process, being taken into account in the revision of the Financial Regulation appear seriously compromised. The Court must reject such a procedure of drafting new legislation through the production and then the adoption of legal texts the legislative bases of which are still non-existent.

1.2. The Court is of the opinion that the presentation of the budget from 1988 onwards, in the part of the budget relating to the JRC`s appropriations has been in breach of the Financial Regulation. The Commission has again proposed for 1995 a preliminary draft budget on the same basis. The proposal of the Commission does not correct this fault.

1.3. The Commission`s proposal is to revise the provisions of the Financial Regulation that apply to the JRC, and not those relating to research as a whole. Accordingly, the Court has limited its observations and recommendations to the same extent.

1.4. An explanatory diagram is included in the opinion to show, in global terms, how the budgetary structure proposed by the Court compares with that already included in the Preliminary Draft Budget for 1995 (see Appendix).

2. The Court`s position

2.1. The Court takes the view that any increase in the commercial dynamism of the JRC constitutes progress, as does also the assimilation, at least partially, of its relations with other Commission departments, within the framework of scientific and technical support activities, to genuine customer-contractor relationships open to competition. The Court has expressed this view on several previous occasions (). The Court now welcomes the fact that the Commission, after having strongly opposed these suggestions in the past in its replies to the Court`s observations (), is now introducing a proposal that will reinforce the JRC`s move to a more competitive approach.

2.2. The Court also considers that, with a view to improving the scientific efficiency and the commercial competitiveness of the JRC, the latter ought to be given greater flexibility in the management of staff and other resources and the apportioning of the corresponding budgetary appropriations between these resources.

2.3. It should also be given a considerable degree of freedom as far as its competitive activities are concerned, especially its services to third parties. It is the responsibility of the JRC to identify promising market sectors and to seek out and select its clients. This freedom must also be extended to the determination of the content of 'exploratory research`, which is itself essential to keep abreast of progress and 'open up new avenues` (), which cannot, by their nature, be programmed in advance.

2.4. On the other hand, regarding the objectives of the specific programmes, which result from policy decisions, the Commission should not be given greater freedom of choice and adaptation than it has for any other common policy. As the policy decisions have been laid down by the responsible authority, the Commission must confine itself to 'implementing the budget within the limits of the appropriations` (Article 205 of the EC Treaty).

2.5. In accordance with Article 93 (1) of the Financial Regulation, the budgetary nomenclature concerning the JRC`s activities must be 'based on the purpose of the expenditure in achieving research and technological development objectives or in the other activities of the JRC`. This is an application of the principle of defining appropriations in terms of objectives. For reasons of both effectiveness and transparency, this principle must be upheld without exception.

3. Analysis of the Commission`s proposal

3.1. Main features of the budgetary system proposed by the Commission

The new budgetary system envisaged for the JRC would consist of:

(a) the opening to competition of a proportion of the activities of scientific and technical support for other Commission departments (which hitherto have been carried out exclusively by the JRC);

(b) the introduction of a genuine 'customer-contractor` relationship for these 'competitive support activities`, the management of the corresponding appropriations being removed from JRC responsibility and entrusted to the customer departments;

(c) retaining another part of the support activities for the Commission departments ('institutional support activities`) in a situation where they are protected from competition, with the corresponding appropriations remaining the responsibility of the JRC;

(d) the option, for the JRC, of participating in shared-cost research projects, like any other third party;

(e) the option, for the JRC, of contributing, in return for payment and on a basis of competition, to the implementation of Community policies;

(f) the Commission to be regarded as an outside body in relation to the JRC in these new competitive activities (the revenue which the JRC derived from these activities would be treated as revenue from activities for outside bodies or individuals);

(g) exclusion from the budget of certain specific headings (exploratory research, institutional support, contribution to the implementation of Community policies using appropriations entered outside the research subsection);

(h) increases in the Commission`s powers concerning transfers of appropriations and resources pertaining to the JRC (without authorization from the budgetary authority);

(i) the retention of a hybrid budget nomenclature (appropriations that are allocated in some cases for research objectives and in others for resource categories).

3.2. Observations on the Commission`s proposal

3.2.1. Positive aspects of the proposal

The Court fully approves the new provisions which tend in the directions indicated in (a), (b), (d), (e) and (f) above. These new provisions mainly reiterate previous recommendations made by the Court in favour of a more competitive approach.

3.2.2. Shortcomings in the organisation of the customer-contractor relationship

3.2.2.1. The proposed method by which the research appropriations earmarked for support would be shared between the customer departments would still be of an administrative and extra-budgetary nature. Following the Council`s conclusions of 26 April 1994 (), the management of appropriations designated for institutional support would appear to retain the present system of management by the JRC and not by the customer department. In the case of competitive support, by contrast, the customer DGs would be declared to be the managers and authorizers of these appropriations. The Court understands the Commission`s intentions to be as follows: the appropriations for institutional support activities would be apportioned in the same way as the appropriations for scientific and technical support for the Commission`s departments have been hitherto, namely by the inter-DG committee chaired by the JRC`s Director of programmes. The JRC would thus continue to evaluate the relative priorities of the projects put forward by the various departments; there would be no customer-contractor relationship in this area. In the case of appropriations allocated for competitive support activities, it would be the Secretary General of the Commission who would arbitrate between the requests put forward by departments - a solution which is a slight improvement on the previous one, in that it allows for the more objective assessment of priorities. It is in fact the budget that should define the resources allocated to each common policy and it is the customer departments that should be the authorizers. Even in this case, care must be taken to ensure that the JRC will really be treated on an equal footing with other outside bodies, given that, in reality, the JRC and the Commission are not independent from each other.

3.2.2.2. The proposal also makes no mention of the possibility that the departments which administer the appropriations for the dissemination and exploitation of research might commission certain work from the JRC. The present impossibility of doing that, on the grounds that the Commission departments are not outside bodies in relation to the JRC, has been criticised by the Court (). The Financial Regulation should state specifically that in future exploitation work could be entrusted to the JRC by way of funding from the appropriations concerned (amendment No 2).

3.2.2.3. The content of the institutional support has been frozen for four years in the scientific annex of the Commission proposal for a specific programme (EC) for the JRC (1995-98) (). However, demand for scientific and technological support is, by nature, difficult to predict and is ill-suited to rigid multiannual planning. There should be provision for the possibility of submitting proposals for new work at any time. The system under consideration must, therefore, be replaced by the introduction of a budget heading with separate appropriations (amendment No 1).

3.2.2.4. The institutional support activities would still not be subject to competition, their appropriations continuing to be managed by the JRC rather than the customer DGs. The 'neutrality` and 'independence` of the JRC, which are often cited () to justify maintaining a 'protected sector` for certain support activities, in reality play no part. Instead, by virtue of the fact that the JRC has technical expertise in certain areas, it is being awarded an effective monopoly over these activities that is devoid of any considerations of competitiveness. The scientific annex to the proposal for a specific programme (EC) of the JRC for 1995-98 () clearly shows that research and institutional support activities cover the same scientific areas and that these correspond to the JRC`s areas of expertise. Whilst agreeing that the JRC`s transition to a more competitive approach needs to be gradual, the Court considers that it is desirable, at least in the long run, for the customer-contractor relationship to be improved, even in the case of the institutional support activities.

3.2.2.5. The proposed wording of Article 92 (1e) and (3) appears, however, to preclude any possibility that a Directorate-General might commission non-institutional support work from the JRC by private treaty, without exposing it to any competition. In fact, in its Title IV, the Financial Regulation sets out the basic principle that 'contracts shall be concluded after an invitation to tender has been issued` (Article 56 (1) first subparagraph) and then goes on to provide for the exceptions, where contracts may be made by private treaty in a limited number of cases (Article 56 (1), second subparagraph and Article 58). These provisions are general in scope and are therefore also applicable to research, including the relations between DGs and the JRC, which in future will be deemed to be an outside body in relation to the DGs concerned. The provisions of Article 92 must therefore be supplemented with a reference to Title IV of the Financial Regulation (amendment No 4).

3.2.3. Increasing the portion of the JRC`s resources which is protected from any binding objective

3.2.3.1. The Commission`s freedom of management of the JRC has been extended as a result of the introduction of an increasing number of provisions which have legislated for increasingly radical departures from basic budget principles. Until 1987 the JRC budget nomenclature was, in accordance with the Financial Regulation of the time, drawn up in terms of 'the purpose of the expenditure resulting from the realization of research and investment objectives or from the other activities` of the JRC (Article 89, first paragraph, of the Financial Regulation in the version then in force). From 1988, in breach of this provision, the Commission introduced in its preliminary draft budgets a heading for (JRC) expenditure relating to 'persons associated with the institution`, thus removing part of the appropriations from the definition by objectives in favour of a definition in terms of the nature of the resources used. In December 1988, in its proposal for a general revision of the Financial Regulation (), the Commission tried to get this practice ratified, by merely stating by way of justification that 'the proposed new nomenclature ... takes into account the presentation for 1988 and 1989`. This is tantamount to claiming that a continuing irregularity, by the very fact of its existence, can form the basis for a change in the law.

3.2.3.2. Once this exemption had been ratified [Article 93(2) of the new version of the Financial Regulation] (), the Commission introduced, in the preliminary draft budget for 1991, a new derogation, which was just as irregular. Three separate budget headings were created, relating this time to the 'implementation` resources (administrative and technical infrastructure, scientific and technical support and major installations). All that was left in the appropriations defined by objectives were the so-called 'direct operating appropriations`, earmarked for expenditure via procurements and contracts. The total expenditure relating to the management of existing resources was transferred to headings that were defined without any reference to objectives. Taking matters still further, the Commission merged the aforementioned three headings into a single heading as of the 1993 financial year. Thus, in one way or another, the budgetary nomenclature pertaining to the JRC has been constantly irregular from 1988 onwards.

3.2.3.3. The present situation therefore is that more than three-quarters of the JRC appropriations (both commitments and payments) are unaffected by any budgetary definition of objectives. The table of equivalence in Annex I of the budget (as required by Article 94 of the Financial Regulation) does indeed provide a breakdown of appropriations by objectives and by nature of resources. The Commission, however, regards this annex as merely indicative (except, of course, for the amounts which repeat directly the allocations entered against the budget headings). An examination of the 1995 preliminary draft budget confirms that the Commission`s proposal would preserve this system intact. The fact that the annex is indicative needs to be confirmed in the Financial Regulation (see amendment No 6).

3.2.3.4. As the Court emphasised in its Opinion No 1/89 of 9 February 1989 (), the creation of budgetary headings linked to specific resources 'will jeopardise the survival of the system of management by objectives. This system, in fact implies that all expenditure .. must be covered by objectives`. The Court therefore recommends a change in the budgetary structure of the JRC so that there would be no separate budget headings for personnel costs and 'implementation` resources. Instead appropriations shown at present under these headings would be distributed amongst the headings for scientific programmes and other activities. The Court is strongly of the view that the Financial Regulation should be amended in line with this (amendment No 5). In this way, with no need to give greater details, the Commission will enjoy every freedom to transfer allocations within a given budget heading between all the different resources available (i.e. human and 'implementation` resources and so-called 'direct operating appropriations`).

3.2.4. Increased freedom for the Commission to effect transfers

3.2.4.1. Its determination to increase its freedom in managing the JRC has led the Commission to propose amendments to the Financial Regulation, which accentuate the anomalous nature of the JRC`s system of appropriation transfers. Until 1990 it was the budget which set out each year, in accordance with the Financial Regulation [Article 94 (2)], the limits to the Commission`s power to transfer appropriations from one article to another and from one item to another within the headings relating to direct action. Successive budgets have limited this power, by specifying the budget headings to which this right applied and by limiting the extent of this right to a percentage of the primary budgetary allocation affected by the transfer. In the case of specific programme headings, the percentage rose to 7 % by 1984, 10 % by 1987, and has reached 15 % since then. With the introduction of exploratory research in 1989, the latter allocation could not be increased by more than 5 % of the total allocation for all the specific programmes. The 1990 reform of the Financial Regulation () froze these percentages, thus excluding them from the budgetary procedure. However, the reform increased the Commission`s powers of transfer in another way. The Commission`s margin for manoeuvre, which, until 1990, was limited to transfers from specific programme to specific programme, within the same article, was extended to the level of transfers from one chapter to another (whereas the specific programmes were located at the item level), thus making possible a redistribution of resources between the main fields of science and technology.

3.2.4.2. The present proposal would constitute a further increase in the Commission`s powers regarding transfers between budget headings which concern the JRC:

(a) the percentage limits of 15 % and 5 % would be increased to 22 % and 6 % respectively;

(b) these percentage limits would concern only the commitment appropriations, because the right of transfer would be granted without limitation in the case of payment appropriations;

(c) the Commission`s powers would be extended to include transfers from one title to another and this power would include staff appropriations and implementing resources, which would link all the JRC appropriations.

3.2.4.3. In the Court`s view, any provisions by virtue of which the Commission would enjoy wider powers of transfer should be confined to competitive activities, to which it would be appropriate to add exploratory research. On the other hand, the Court sees no reason to extend this power to direct action programmes and institutional support (amendments Nos 8, 9 and 10). The Commission should not have greater freedom to make transfers in this field than it has for indirect action programmes.

3.2.5. Further increases in the Commission`s freedom to transfer appropriations from one category of resources to another

3.2.5.1. An examination of the other documents referred to in paragraph 1.1 above reveals that the Commission is succeeding in increasing its freedom to transfer resources allocated to the JRC using other approaches than a revision of the Financial Regulation. In the preliminary draft budget for 1995 there is no separate heading for institutional support activities or for exploratory research. The reader is therefore obliged to refer to the scientific annex to the proposed specific JRC programme (EC) for the period 1995-98 (), which subdivides each scientific field into 'institutional research activities` and 'institutional, scientific and technical support activities`. Exploratory research is merely mentioned, without any financial specifications, in a recital and in Article 4 (1). But, in the financial annex, resources are only broken down in terms of scientific fields. Neither institutional support nor exploratory research are given distinct resources in this text.

3.2.5.2. Institutional support and exploratory research are thus to be financed from the same headings as the research programmes, that is to say from 'persons associated with the institution`, 'implementation` resources and the various headings for direct operating appropriations corresponding to the specific objectives broken down by research field. Neither the budget nor the specific programmes would then provide the means to identify the amounts provided for institutional support and exploratory research.

3.2.5.3. The Commission would thus acquire, in the absence of any transparency, an unlimited freedom to allocate and redistribute financial resources between research proper, institutional support and exploratory research. It is true that the Commission`s proposal would continue to limit transfers towards exploratory research to 6 % (Article 95, sub-paragraph 2). This makes no sense, however, in the context of a budget without a heading for 'exploratory research`, since transfers, within the meaning of the Financial Regulation, can only be carried out from one budget heading to another.

3.2.5.4. It thus follows that the Commission has always used two main ways of widening its management freedom. On the one hand, it has tried in the Financial Regulation to increase its freedom to make transfers. This, whilst open to criticism, is at least transparent. On the other hand, it has also merged several budget headings with heterogenous purposes. The appropriations of the new heading are then shared out or redistributed between these purposes, during the course of the financial year, by means of internal administrative procedures. These procedures are not subject to the decision-making and budgetary authorities.

3.2.5.5. Articles B6-291 and B6-391, of the 1995 Preliminary Draft Budget which provide for (EC) and (Euratom) allocations for 'the participation of the Joint Research Centre in shared-cost action projects` do not disclose the total amount assigned to the JRC for this participation. Contributions are also to come from the 'staff expenditure` and 'implementation` resources headings. But no amounts are specified in the preliminary draft budget, the framework programme or the proposed specific JRC programme.

3.2.5.6. The financial resources allocated to the various JRC activities must be identified separately, using separate budget headings (amendments Nos 1 and 2). As a result, the existing limitations on the Commission`s own powers of transfer would apply to these activities (amendments Nos 8 and 9).

4. Conclusion

Certain of the amendments proposed by the Commission - those leading to a greater competitiveness at the JRC and those introducing a genuine customer-contractor relationship between the JRC and the other DGs - are very appropriate. These amendments were also necessary in order to ensure that the Financial Regulation would be in accordance with the Council`s conclusions of 26 April 1994. However, the Commission has added other amendments, which introduce an increased amount of management freedom. This increased freedom is acceptable as far as competitive activities are concerned. However, the Court is strongly of the opinion that the activities of implementation of the specific programmes, which are subject to the policy objectives of the decision-making authorities, should not enjoy the same freedom.

PART TWO: SPECIFIC OBSERVATIONS

In the following synoptic table the Court sets out its proposed amendments to the Commission`s proposal, with additional comments on their justification.

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This Opinion was adopted by the Court of Auditors at the Court meeting of 8 December 1994.

For the Court of Auditors

André J. MIDDELHOEK

President

() New outlook for the Joint Research Centre, Doc. COM(87) 491 final/2 of 20 April 1988, p. 9.

() The Council Conclusions of 26 April 1994 on the role of the Joint Research Centre (JRC), OJ No C 126, 7. 5. 1994, p. 1.

() OJ No L 356, 31. 12. 1977, p. 1.

() OJ No L 293, 12. 11. 1994, p. 7.

() Doc. COM(94) 338 final and OJ No C 237, 25. 8. 1994, p. 3.

() The Council Conclusions of 26 April 1994 on the role of the Joint Research Centre (JRC), OJ No C 126, 7. 5. 1994, p. 1.

() Decision No 1110/94/EC of the European Parliament and of the Council of 26 April 1994 concerning the fourth framework programme of the European Community for activities in the field of research and technological development and demonstration (1994 to 1998), OJ No L 126, 18. 5. 1994, p. 1.

() The Council Decision of 26 April 1994 concerning a framework programme of Community activities in the field of research and training for the European Atomic Energy Community, Decision 94/268/Euratom, OJ No L 115, 6. 5. 1994, p. 31.

() The Proposal for a Council Decision adopting a specific research and development programme to be carried out for the European Community, - on the one hand, by means of direct action (JRC), and on the other, by means of activities within the framework of a competitive approach and intended for scientific and technical support to Community policies (1995-1998), Doc. COM(94) 68 final, OJ No C 228, 17. 8. 1994, p. 219, Proposal amended by Doc. COM(94) 243 final, OJ No C 262, 20. 9. 1994, p. 30.

() The Preliminary draft general budget of the European Communities for the financial year 1995, especially Volume 4. COM(94) 400, 15. 6. 1994.

() Council Decision of 21 November 1994 concerning the rules for the participation of undertakings, research centres and universities in research, technological development and demonstration activities of the European Community, OJ No L 306, 30. 11. 1994, p. 8.

() - Annual report on the financial year 1989, OJ No C 313, 12. 12. 1990, paragraphs 9.23-9.26, 9.28, 9.32, 9.34, 9.37, 9.38 and 9.48-9.54.

- Annual report on the financial year 1991, OJ No C 330, 15. 12. 1992, paragraphs 13.6, 13.15-13.26, 13.44, 13.47.

- Special report No 2/91 on the exploitation of research results, OJ No C 133, 23. 5. 1991, paragraphs 3.48 and 5.41-5.45.

() - Annual report on the financial year 1989, OJ No C 313, 12. 12. 1990, replies to paragraphs 9.23-9.25.

- Special Report No 2/91 on the exploitation of research results, OJ No C 133, 25. 3. 1991, replies to paragraphs 5.41-5.45.

() New outlook for the Joint Research Centre, Doc. COM(87) 491 final/2 of 20 April 1988, p. 9.

() Special report No 2/91 on the exploitation of research results, OJ No C 133, 23. 5. 1991, paragraphs 3.48 and 5.44.

() - New outlook for the JRC [see Note on p. 16], p. 34.

- Conclusions of the Council of 26 April 1994 concerning the role of the JRC, OJ No C 126, 7. 5. 1994, paragraph 2 and Annex 1.1 (b).

- Explanatory memorandum to the Commission proposal, p. 1.

() Doc. COM(88) 838 final, 21.12.1988 and OJ No C 115, 8. 5. 1989, p. 1.

() Council Regulation (Euratom, ECSC, EEC) No 610/90 of 13 March 1990, amending the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities, OJ No L 70, 16. 3. 1990, p. 1.

() OJ No C 72, 20.3.1989, p. 7, paragraph 8.1.

() The Proposal for a Council Decision adopting a specific research and development programme to be carried out for the European Community, - on the one hand, by means of direct action (JRC), and on the other, by means of activities within the framework of a competitive approach and intended for scientific and technical support to Community policies (1995-1998), Doc. COM(94) 68 final, OJ No C 228, 17. 8. 1994, p. 219, Proposal amended by Doc. COM(94) 243 final, OJ No C 262, 20. 9. 1994, p. 30.

APPENDIX

ANNEX 1

of the preliminary draft budget for 1995

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