Annual report concerning the financial year 1990 together with the institutions' replies
Date: 1991-11-30
Institutions: European Court of Auditors
Subjects: European Court of Auditors, European Development Fund, balance-sheet analysis, financial management, fund (EU), report













EUR-Lex - 31991Y1213(04) - EN






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31991Y1213(04)

Annual report concerning the financial year 1990 together with the institutions' replies  


Official Journal C 324 , 13/12/1991 P. 0001 - 0316 





ANNUAL REPORT  concerning the financial year 1990 VOLUME IThe report, together with the institutions'  replies to the Court'sobservations, was transmitted to the authorities responsible for  givingdischarge and to the other institutions by 30 November 1991Aldo ANGIOI (President) André  J. MIDDELHOEKJohn CAREYJosep SUBIRATSCarlos M. MORENORichie RYANFernand HEBETTEOle Joergen  WARBERGKonstantinos ANDROUTSOPOULOSDaniel STRASSERBernhard FRIEDMANNMaurice THOSS FOREWORD 1.  This 14th annual report (on the financial year 1990) of the Court of Auditors of the European  Communities is in two volumes.  2.The first volume contains observations on the operating budget of the Commission and on the  consolidated accounts of the European Communities, along with observations on the European  Development Funds. The Commission's replies to the Court's observations conclude this first  volume.  3.The second volume contains all the observations that concern the administrative appropriations  of the institutions. Three chapters are each devoted to one institution and are followed by the  replies received from the institution concerned. The last chapter deals with the European Schools.  This volume contains, in addition, a list of reports and opinions that have been adopted by the  Court of Auditors over the last five years, together with a financial and statistical annex.  4.The key to the abbreviations and symbols used in this report is given on the first page of Annex  II (Volume II).  5.The references to the Official Journals in which the annual reports in respect of previous  financial years were published are listed below: - 1977: OJ C 313, 30.12.1978- 1978: OJ C 326, 31.12.1979- 1979: OJ C 324, 31.12.1980- 1980: OJ C  344, 31.12.1981- 1981: OJ C 344, 31.12.1982- 1982: OJ C 357, 31.12.1983- 1983: OJ C 348,  31.12.1984- 1984: OJ C 326, 16.12.1985- 1985: OJ C 321, 15.12.1986- 1986: OJ C 336, 15.12.1987-  1987: OJ C 316, 12.12.1988- 1988: OJ C 312, 12.12.1989- 1989: OJ C 313, 12.12.1990 6.Unless  otherwise stated, the observations set out in this report refer to the Financial Regulation of 21   December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977)  as amended by Council Regulations (EEC) N° 1252/79 of 25  June 1979 (OJ L 160, 28.6.1979, p. 1), N°   1176/80 of 16 December 1980 (OJ L 345, 20.12.1980, p. 23), N°  1600/88 of 7 June 1988 (OJ L 143,  10.6.1988), N°  2049/88 of 24 June 1988 (OJ L 185, 15.7.1988, p.  3) and N° 610/90 of 13 March 1990  (OJ L 70, 16.3.1990, p. 1). >TABLE> Annual report of the Court of Auditors concerning the financial year 1990   INTRODUCTION  (*)(*) The Commission's replies are on page 211. DEVELOPMENT OF THE COMMUNITY0.1. It is inherent in the role of the Court of Auditors that most of  the observations in its annual reports have a retrospective character. The present report is no  exception. This introductory chapter, however, brings together certain observations which in the  Court's view are of relevance to the future development of the Community's institutions and  policies. 0.2. Several factors combine to make an assessment of this sort timely. In the first place, the  Community has, in the wake of the Single European Act and with a view to the establishment of the  internal market by 1993, recently decided to speed up the progress towards political and economic  union. Achievement of a sufficient degree of economic convergence, which is one of the key elements  of progress, will depend inter alia on the Community's ability to spend money wisely. It is in any  case now clear - and some signs of this are apparent in the present report - that the Community  budget is entering an extremely difficult period, in which the agricultural guideline policy which  was established in 1988 will be put under severe pressure. 0.3. Simultaneously, major international developments such as the unification of the two Germanys  and the opening up of Central and Eastern Europe are of potentially great significance for the  Community budget. As Chapter 12 of this report shows, the Community's cooperation and active  fostering of the process of transition in these countries towards a market economy will require the  real needs of their economies to be evaluated and administrative inefficiencies to be overcome, if  Community financial resources are to be used both economically and effectively. SUBSIDIARITY0.4. Efforts to maximize the share of responsibility borne by national (and where  appropriate local) authorities for day-to-day implementation of Community policies are in many  cases commendable from the point of view of sound financial management. The Court has previously  drawn attention to the risk that the doctrine of subsidiarity will be used to excuse inadequate  performance by the Commission. It is essential that the Commission, as the Community's unique and  central executive agency with political responsibility for the use made of taxpayers' money, should  ensure that Member States provide it with sufficient information to monitor the quality of their  day-to-day management and should be ready to initiate remedial action as necessary. 0.5. The chapter in the present report (Chapter 9) about compensatory allowances paid under the  EAGGF (Guidance) regime provides a vivid illustration of the possible consequences when the  Commission adopts a passive approach to the management of the structural Funds. The original target  of the aid was a minority of the farming population in less-favoured areas who suffered from  certain specific handicaps, such as poor-quality terrain. However, the areas have been extended and  the number of beneficiaries has been increased to the point where the aid is no longer fulfilling  its original objective and is having a perverse impact on other Community objectives, for example  in connection with the environment. 0.6. Subsidiarity implies, inter alia, a state of affairs in which Member States devote equal care  and attention to the safeguarding of Community and national assets, and perceive the Commission as  a source of guidance and advice in optimizing their use of Community funds. An observation in  Chapter 3 (3.45-3.47) shows that relations between the Commission and Member States are still some  way from this ideal condition. In the case in question, the Commission imposed a heavy financial  correction on a Member State for weak administration of a Community sheep and goat premium scheme,  although the Member State's difficulties were partly due to a failure by the Commission to exercise  its own role as supervisor and counsellor. 0.7. The Court's observations on the structural Funds (7.18-7.22) provide another illustration of  the reasons why subsidiarity is a difficult principle to put into practice. Here the Court  concludes that the concept of partnership, which is vital to the successful reform of the  structural Funds, has yet to be developed in a satisfactory manner. SOUND FINANCIAL MANAGEMENT0.8. The Treaty confers on the Commission, as the institution  responsible for implementing the budget, a trusteeship role. This role has now been made more  explicit by Article 2 of the Financial Regulation which came into effect in March 1990. This  Article specifies economy and cost-effectiveness as two guiding principles for implementing the  budget. This provision has important implications for all the institutions. Where budgetary  objectives are defined in terms of ceilings on expenditure, as is the case with the agricultural  guideline, it will not be permissible to treat such ceilings as targets. Decisions to increase  expenditure in certain markets, as the Commission did in 1990 (3.4) when the guideline was in no  danger of being breached, will need very convincing justification in future if their legality is to  be above question. More generally, the availability of appropriations on a budgetary line can never  in itself be sufficient justification for using those appropriations without due regard to the  principles of sound financial management. 0.9. An important element in the Community's structural policies has been the concept of  'additionality` which is the subject of observations in Chapter 6 of this report. The common  interpretation of this concept appears to be based on the principle that more means better, which  is the negation of Article 2 of the Financial Regulation.  The decision to double the amount of  money available for the structural Funds by 1993 will only achieve its objective of reducing the  differences in economic performance between the regions if the funds are spent with due regard to  the principles of sound financial management. The Court underlines the importance of its  recommendation (6.45) that the Commission should give more precision to the concept of  additionality. 0.10. If the effectiveness of aid is to be properly measured, suitable quantitative and financial  criteria have to be fixed by appraisal prior to the start of projects or programmes. Monitoring and  evaluation can then be carried out by comparison with these criteria. 0.11. Point 6.20 of this report draws attention to the virtual lack of prior appraisal in the  reform of the structural Funds and to the implications of this lack for future evaluation. Point  7.48 notes that Member States rarely present quantified objectives in their regional development  plans; even when they do, the validity of these objectives in terms of the proposed development  strategy is not always clear. 0.12. In Chapter 10 the Court reports that it was unable to satisfy itself that the economic and  industrial development objectives of an NCI loan project had been achieved, due to the absence of  verifiable criteria. The chapter on aid to Central and Eastern Europe makes it clear that a large  quantity of food aid, which was delivered to Poland without any prior analysis of needs, was not  actually required. 0.13. The chapters of this report dealing with development cooperation highlight the weaknesses in  the management and control of financial resources which can arise when third parties (for example  non-governmental organizations, the EIB, the ACP Secretariat) are involved in the implementation or  administration of development programmes. The years ahead are likely to see substantial increases  in the funds available for development cooperation, for example as a result of the revised  Mediterranean policy, the new policy framework for Asia and Latin America and the fourth Lomé  Convention. A similar increase can therefore be expected in the involvement of third parties. The  Commission's role should be to ensure that any such third party is capable of managing and  reporting on the use of funds it receives, and that the Commission itself has the resources,  procedures and systems to prepare sound proposals, to manage the physical and financial  implementation of development projects, and to monitor effectively the actions undertaken by  beneficiaries. Otherwise, the principles of sound financial management will not be satisfied, and  the objectives of the Community's policy in this area will not be achieved. 0.14. The Commission should do much more to ensure that Community funds are not committed without  adequate prior appraisal, that results are evaluated in terms of objectives and that the lessons  learned are used to correct ongoing programmes and improve the design of future ones. THE PERSISTENCE OF WEAK FINANCIAL MANAGEMENT0.15. Numerous observations in this report refer to  similar observations in previous years, for example those concerning non-Annex II products in  Chapter  4; less-favoured areas (EAGGF-Guidance); recovery of sums wrongly disbursed by the Social  Fund; co-financing with NGOs of development aid projects; management of bursaries by the EDF; and  execution of Sysmin projects. To some extent this is also the case for EAGGFGuarantee -  manipulation of the Guarantee budget, negative expenditure, inadequate discharge of  responsibilities by the paying agencies and the particular problems associated with the sheep and  goat premium. 0.16. In order to determine the extent to which observations made in past years remain valid, the  Court examined the system established by the Commission for following the action taken in order to  remedy deficiencies pointed out by the Court. The Commission's system of follow-up0.17. In its replies to the 1985 Court of Auditors' annual  report, the Commission stated: 'Follow-up action to comments made by the supervisory authorities - by the European Parliament in  its resolution accompanying the discharge decision and by the Court of Auditors in its annual  report and special reports - is of constant concern to the Commission. The Commission considers it essential to respect its undertakings to these institutions. Thus, in  order to have an overall view of the action taken and, where appropriate, to make the necessary  adjustments, the Commission has set up an internal procedure to keep it informed each year of the  undertakings given to the supervisory authorities, the measures planned or already in force by way  of follow-up action and the schedule for their implementation. This procedure was first applied in  spring 1986.`It has reiterated its position in replies to the Court's subsequent annual reports. 0.18. Following its system-based approach the Court has examined the Commission's follow-up  procedures in order to find out whether and to what extent this system can be used as a reliable  basis for the review of actions taken by the Commission as a result of the Court's observations. 0.19. The procedure was operated by three staff of a unit within Directorate-General XIX (Budgets),  responsible for, inter alia, obtaining information on follow-up from the other Directorates  General. The exact nature of the system has not been easy to establish given that no documentation  describing it exists. 0.20. When compiling reports on measures taken, Directorate-General XIX relied on information,  submitted at its request, from the other Commission departments. However, some Directorates-General  failed to provide it with all the information requested. Often what was received was late,  incomplete and in need of clarification. Directorate-General XIX does not have the staff to carry  out an in-depth analysis of such information it receives. There is no comprehensive inventory of  the undertakings given to the Court and thus no check that they are being met. Effectiveness of the follow-up procedure0.21. The Court has attempted to evaluate the  effectiveness of the follow-up system in the context of EAGGFGuarantee. A selection of 50  observations was taken from the Court's annual and special reports covering the period 1983-88. A  questionnaire was sent to Directorate-General VI (Agriculture). The answers given were incomplete  and sometimes of very limited value. It was unclear what action, if any, had been taken to redress  the weaknesses indicated. In many cases the undertakings themselves had been couched in extremely  vague terms. 0.22. Given the deficiencies of the system, the Commission has recently decided to abandon it  entirely. Attempts during the past five years to develop a computerized system have so far come to  nought. The Commission needs a system which: (a)includes a comprehensive inventory of all undertakings given and the extent to which they have  been met, such as measures taken by the Commission, by Member States, implementation dates, reports  regarding the effectiveness of the measures, etc.; (b)comprises clear practical instructions to be carried out by DG XIX and other  Directorates-General;  (c)checks the consistency of the undertakings given in replies to the Court of Auditors' reports  with those given to the Parliament; (d)includes an assurance that the different services take the necessary measures; (e)provides access to the system for the Court of Auditors. 0.23. Whilst the Court is able to conduct its own research into measures taken, this would imply  repeating the work of its earlier enquiries, which is neither practical nor desirable. On the basis  of its examination of the Commission's system, the Court was unable to determine whether the  Commission has respected the undertakings given. CHAPTER  1  (*) Financial audit of the Commission's revenue, operating expenditure and  financial accounting and the consolidated accounts >TABLE>THE IMPLEMENTATION OF THE  BUDGET IN 1990The adoption and presentation of the budgetAdoption of the budget1.1. The general  budget for the financial year 1990 was finally adopted on 13  December  1989, the budgetary  procedures having been completed within the time-limits specified in the Treaties. At that time,  the amount fixed for appropriations for commitment was 48  846,5  Mio  ECU, whilst the amount for  appropriations for payment was 46  716,8  Mio  ECU. These amounts were subsequently modified by  three supplementary and amending budgets on 16  February  1990, 11  July  1990 and 12  December   1990, as a result of which the appropriations for commitment were increased progressively to 49   207,9  Mio  ECU and the appropriations for payment to 46  928,2  Mio  ECU. Presentation of the budget1.2. For the record, the Court wishes to point out that the true volume  of budget authorizations is larger than the above figures indicate, if the revenue that is entered  in the form of negative expenditure (1  366,4  Mio  ECU of agricultural co-responsibility revenue,  intra-Community compensatory amounts and the EAGGF Guarantee Section clearance) and the expenditure  entered as negative revenue (1  514,8  Mio  ECU for the costs of collecting own resources) are  taken into account. The total volume of funds available for payment that emerges from a study of  the general budget is in fact 49  809,4  Mio  ECU. The utilization of appropriationsRates of utilization of the available appropriations1.3. Using  the information on which the Commission's revenue and expenditure account is based, the Court  compiled a number of tables setting out in detail the changes in and utilization of appropriations  for the year. These figures are published in Tables  1.1 and 1.2. An analysis of the main areas of  activity is given in the introductions to the various specialized chapters. The utilization rates in the light of the financial perspective1.4. The Court also grouped  together, in Table  1.3, the figures for budget implementation with reference to the 'financial  perspective`. >TABLE>>TABLE>>TABLE>Carry-overs of appropriations1.5. In the  sphere of the EAGGF Guarantee Section, 407  Mio  ECU were carried over to 1991 with the approval of  the budgetary authority, although the Court's scrutiny showed that not all the basic conditions  laid down in Article  7(1) and (3) of the Financial Regulation had been satisfied (for further  details see paragraphs  3.14-3.17). 1.6. In the case of the ESF, of the 217,8  Mio  ECU carried forward to 1991, 200  Mio  ECU were for  the operational programmes ready for commitment or decided at the end of 1990, but the list used to  validate the carry-overs does not tally with the programmes finally committed against the  appropriations that were carried over. Furthermore, these appropriations were committed for  measures that had already been carried out in 1990, whereas the relevant operating rules, contained  in Council Regulation (EEC) N°  4255/88 of 19  December  1988 (OJ  L  374, 31.12.1988, p.  21),  provide that the Commission is to rule on aid applications before the measures are started. The use of national currencies to implement appropriations authorized and booked in ecus1.7.  Examination of the implementation of the Commission decisions relating to the adaptation of fishing  capacity (see paragraphs  5.17-5.18) revealed a rather confused situation in the accounts, due to  the fact that the decisions are adopted in budgetary ecus, whereas the eligible expenditure is  effected in national currencies. Fluctuations in the various exchange rates used at the times when  payments are validated and then effected make it impossible to predict the amounts that will be  finally paid to the Member States, as they are sometimes greater and sometimes less than the  amounts actually due. This problem is common to most of the operations financed by the budget (see  in particular paragraphs 6.22-6.34). In its opinion on the amendment to the Regulation laying down  detailed rules for the implementation of certain provisions of the Financial Regulation, the Court  stated that it was in favour of implementing the budget in ecus to the fullest extent possible, so  as to prevent this type of distortion, which also affects the monitoring of commitments (need for  periodic revaluation), the implementation of appropriations (the effect of the revaluation) and the  accounting. Administrative expenditure charged to the section of the budget devoted to operating  expenditureBackground to the enquiry1.8. Over a period of several years, the Court has noticed in  the course of its audits that administrative expenditure (staff expenditure, official travel  expenses, purchases of equipment, etc.) has been charged to operating appropriations, which, in  turn, has gradually had an effect on the observance of the principle of budget specificity, on  which the budgetary authority depends for the exercise of its powers. The object of this principle  is to ensure that the appropriations made available are not diverted from their objectives. 1.9. For a long time this phenomenon, which is commonly known as 'mini-budgets` and by definition  does not appear in the accounts, remained marginal. The Court confined itself to mentioning the  anomalies encountered, especially as this practice has gradually come to be covered by ad  hoc  budget remarks at the initiative of the Commission, or sometimes of the budgetary authority  itself. 1.10. In 1989 the Court decided to carry out an audit in order to quantify this phenomenon. The  results of that audit are set out in the paragraphs which follow. Quantification of the mini-budgets1.11. Up till the end of 1990, the administrative expenditure in  question was posted to headings to which operating expenditure (subsidies, projects, etc.) was also  booked, so that it was not possible to identify it, or a  fortiori the accounting system, from the  budget classification. The Commission did, however, endeavour to develop a system of booking codes  and analytical codes to make it possible to extract administrative expenditure from the operating  expenditure accounts by computer. The Court carried out certain checks which gave rise to the  following observations. 1.12. Whilst the remarks against item B9960, which refer to Council Regulation (EEC) N°  3906/89 of  18  December  1989 (OJ  L  375, 23.12.1989, p.  11), do authorize the charging of costs related to  the initial period of operation of the measures financed, they do not provide authority for  charging administrative expenditure of the 'mini-budgets` kind to these appropriations, even after  the appropriations had been increased by supplementary and amending budget N°  2. This item is,  however, mentioned in the list of budget headings including mini-budgets which followed the  Internal Regulations adopted by the Commission on 22  May  1990 with the intention of providing a  formal framework for the mini-budgets. It gave rise to commitments totalling some 3,4  Mio  ECU,  which were thus effected without authorization in either the budget or the Regulation. The  Financial Controller noticed this, but considered that the list of mini-budgets compiled by the  Commission constituted an adequate legal base. 1.13. The Internal Regulations prescribed, for each budget heading and mini-budget, an upper limit  for the amount to be charged to operating appropriations. These upper limits have not always been  respected and the procedure for adjusting them has not always been followed either. For example,  the upper limit against item B4702 was exceeded by at least 0,9  Mio  ECU of commitment  appropriations. Similarly, within Title  6, the limits against Chapters 63, 66 and 67 were exceeded  by 0,075  Mio  ECU, 0,786  Mio  ECU and 4,589  Mio  ECU respectively. 1.14. Conversely, the revenue and expenditure account for 1990 (pp.  345-347) shows an amount of  201,360  Mio  ECU for mini-budget commitment appropriations implemented, whereas the Commission's  estimates give a figure of 276,452  Mio  ECU. This is equivalent to an overall utilization rate of  72,8%, which is rather low. 1.15. This same rate is particularly low (10,6%) in the case of the support measures for the  development of the single financial market (Item  B7752). In the case of the European Social Fund  (Item  B6000), the rate is 4,8%, as only 0,593  Mio  ECU of commitment appropriations were used,  compared with the upper limit of 7,8  Mio  ECU. In Chapters 64 and 68 the respective limits were  12,7  Mio  ECU and 2,2  Mio  ECU, of which only 7  Mio  ECU and 1,5  Mio  ECU were used up. 1.16. This state of affairs is not satisfactory. It raises questions concerning the way in which  the upper limits were estimated and the accounting system operated, as it is not possible to use  the latter to identify mini-budget expenditure correctly. 1.17. In this respect the value of the estimates for Articles  940, 990 and 995 is particularly  doubtful. They predicted that 100% of the expenditure would be charged by way of mini-budgets,  which is surprising in itself, as, logically, the mini-budgets must be additional to expenditure on  the measures for which the mini-budget appropriations provide back-up support. Moreover, in the  lists published on page 347 of Volume II of the revenue and expenditure account, the execution of  these headings - contrary to the indications given by the Commission in its reply - mainly takes  the form of intervention expenditure. 1.18. As for the question of identifying mini-budgets through the accounting system, the  Commission's use of booking codes and analytical codes remains arbitrary and the accuracy of the  data thus produced cannot be guaranteed. Throughout 1990 the Commission modified the contents of  the booking codes and analytical codes, rendering them increasingly complex. The codes entered by  the authorizing officers in the accounting documents (proposals for commitment and payment orders)  do not always tally with those which appear on the lists sent to the Court. Finally, it was  frequently observed that intervention expenditure was mixed with mini-budget expenditure. This was  especially apparent in the case of subsidies (expenditure on various Community measures) and  supplies of services (mini-budget expenditure). For example, for Items B3010, B3870, B4702, B6310,  B6320, B6472, B9300, B9304, B9311 and B9360 personnel expenditure was posted to operational codes.  For items B6451 and B6751 costs arising from translation work, meetings, press conferences and the  hire of meeting rooms were booked to operational codes. 1.19. A further aspect dealt with in the study concerns the application of the Commission's  Internal Regulations to mini-budget expenditure financed from carried-over appropriations,  appropriations made available for re-use, or payment appropriations belonging to financial years  following the one during which the commitment was entered into. The Commission's Internal  Regulations do not make it clear whether they apply to these categories of appropriations. The  Directorate-General for Budgets takes the view that they do not. In practice, however,  mini-budgets, some of them representing substantial amounts, receive finance from these  appropriations (Chapter  60 provides an example of revenue available for re-use: 3,5  Mio  ECU).  Most of the mini-budgets are grafted onto headings which comprise differentiated appropriations,  but if the application of the Internal Regulations is confined to the appropriations for the year,  the heterogeneity of mini-budget expenditure becomes a problem: some of the expenditure is governed  by the Internal Regulations (booked to the appropriations for the year) and some is not (posted to  other types of appropriations). 1.20. The conclusion that inevitably follows from all these findings is that in 1990 the system  established by the Commission in order to identify and control mini-budgets was unreliable. On the  other hand, as the Court was not given sufficient access to the Sincom system (see paragraphs   1.109-1.116) it had to rely on the Commission to extract the mini-budget data from the accounts. It  was not possible, from the Court's checks on the listings forwarded, for it to verify their  validity, or, in consequence, that of the listings published in the revenue and expenditure  account. Nevertheless, in the informatics field, the Court did, in another context, examine in  greater detail (see Volume  II, paragraphs 17.32-17.35) an amount of 25,8  Mio  ECU of expenditure,  including 10,7  Mio  ECU for services, financed by appropriations from Part  B of the budget. This  amount should be compared with the 42,4  Mio  ECU, including 9  Mio  ECU for services, financed by  appropriations from Part  A of the budget. The comparison illustrates the extent of the mini-budget  phenomenon. 1.21. For the record, in the 1991 budget the total for the mini-budgets, which are specifically  identified in the interests of transparency, represents 9,634  Mio  ECU in Part  A and 183,325  Mio   ECU in Part  B. To these amounts are to be added the administration-related appropriations  required for the realization of the Community research objectives (i.e. a total of more than 300   Mio  ECU) and an undefined volume of appropriations concerning the mini-budgets associated with  some of the structural Funds (the European Social Fund in particular). The infrastructure quotient1.22. In view of the increasing volume of personnel costs financed by  means of mini-budgets, the Commission departments responsible for the institution's administration  have been obliged to place an ever-increasing volume of infrastructure resources (premises,  furnishings, telephones, electricity, etc.) financed from Part  A of the budget at the disposal of  these people. The corresponding Part  A appropriations have not, however, increased at the same  rate and quickly proved inadequate. In order to satisfy the demand, the Commission introduced a  method of financing based on budget headings supporting mini-budgets. 1.23. In order to do this, the Commission calculated an infrastructure quotient (equal to the total  infrastructure costs normally booked to Part  A divided by the number of persons working for the  institution). For 1990 the quotient was fixed at 13  433  ECU per person. The Commission decided  that, on this basis, each operating appropriation heading used to finance outside personnel should  support 89,887% of the infrastructure cost thus calculated, multiplied by the number of persons  identified as being financed from these operating appropriations. This corresponded to an amount of  12  074  ECU for every person concerned. In some cases the Commission has not always been logically  consistent. For example, it posted 805  980  ECU to the appropriations for the countries of Eastern  Europe, i.e. 100%, instead of the 89,887% of the infrastructure quotient, on the basis of 60   posts, half of which were still unoccupied at the year-end, which was in contradiction with the  Internal Regulations, which prescribed that the actual situation as regards staff employed at the  end of the year should be taken into account. 1.24. This procedure is irregular. For example, as a result of these methods part of the rent of  the Berlaymont building and substantial removal costs were financed from the Phare programme  without following the criteria for breaking expenditure down which the Commission itself  established when instituting the infrastructure quotient. In order to comply with the Financial  Regulation, the Commission should have initiated a transfer procedure, with the approval of the  budgetary authority, so as to furnish Part  A with the necessary appropriations, and should then  have committed and charged this infrastructure expenditure. Observance of the financial perspective1.25. Both the mini-budget phenomenon and the mechanism of  the infrastructure quotient raise the question of the limits on administrative costs imposed by the  financial perspective. After the 1990 revision, item  5 of the financial perspective (see Table   1.3) set a mandatory upper limit of 4  930  Mio  ECU for appropriations for commitment. It is clear  that had the administrative expenditure openly charged to Part  B of the budget (mini-budgets) and  the administrative expenditure that was charged to it without budgetary authorization (the  quotient) been taken into account as administrative costs, the upper limit for item  5 would have  been exceeded in the 1990 financial year. It is impossible to exclude the possibility that the  extent of the mini-budget phenomenon is due, indirectly, to the imposition of the ceiling for item   5. The management of mini-budget expenditure1.26. It should also be noted that very decentralized  management methods have evolved alongside the use of mini-budgets and have, to a large extent,  escaped control by both the central departments responsible for administrative expenditure and the  Financial Controller, with the result that, for example, computer equipment has been purchased, but  in some cases has not been inventoried. 1.27. In the context of personnel management, and having regard to the relevant budget remark and  the provisions of Article  3(a) of the Conditions of Employment of Other Servants of the European  Communities, which defines temporary staff as being paid out of the global appropriations entered  for that purpose, Item  A1110 is the only one which can be used to provide financing for auxiliary  staff. This category is, however, mentioned specifically in the schedule in Annex  1 of the  Internal Regulations and has, for a long time, been financed partly from the mini-budgets in Part   B of the budget. 1.28. The case of auxiliary staff also illustrates the problems engendered by the variety of  categories in which appropriations may be classified. Some auxiliary staff are managed by the  Directorate-General for Personnel and Administration using Part  A appropriations, which may not be  carried over. Others are under the management of the operational Directorates-General concerned,  using appropriations, in some cases differentiated ones, which are subject to more flexible  carry-over rules. In consequence the management procedures (recruitment, management, payment, etc.)  applied to this category of staff are not uniform. Conclusion1.29. The Financial Regulation was amended in 1990 and the Community legislative  authority specified in Article  19(1) that 'the Commission section [of the budget] shall consist  of: - a 'Part  A` for the staff and administrative expenditure of that institution ... - a 'Part  B` for operating expenditure ...`. 1.30. It is true that paragraph  (2) of the same Article  19 continues to provide that within each  section the items of revenue and expenditure are to be classified according to their type or the  use to which they are assigned. The retention of this Article in the revised Financial Regulation  must not, however, be allowed to weaken the import of paragraph  (1). 1.31. Taking a strict interpretation of Article  19(1) of the Financial Regulation, mini-budgets,  in legal terms, cease to be exceptions justified by the existence of covering remarks in the budget  and become cases of failure to comply with the Financial Regulation. This state of affairs is  aggravated by the fact that, in terms of budget implementation, the mini-budgets are currently  managed according to the rules governing the underlying appropriations (differentiated or  non-differentiated appropriations, compulsory or non-compulsory expenditure), especially where  transfers and carry-over are concerned, whereas if they appeared in Part  A the only rules  applicable to them would be the specific provisions relating to staff or administrative  expenditure. Under those rules appropriations relating to remunerations and allowances payable to  the staff of the institution may not be carried over (Article  7(1) of the Financial Regulation). 1.32. These shortcomings are such that it is not possible to exploit the positive aspects of the  mini-budget system (the advantages of decentralized management, the allocation of administrative  resources according to operational objectives). 1.33. In the interests of transparency, the budgetary authority made certain changes to the layout  of the 1991 budget, where most of the mini-budgets are specifically identified, but it appears  highly likely that the weaknesses that have been found thus far in the mechanisms for identifying  the expenditure to be booked by way of mini-budgets will radically affect this transparency. The  case of the priority publications programme, though posing certain problems of its own, illustrates  some aspects of this suggestion rather well. The specific case of the priority publications programme1.34. Each year the Commission draws up  its publications programme for the following year. Since 1988 the programme has been broken down  into an 'ordinary` programme and a 'priority` programme, the object of the latter being to put the  Commission's priority political activities into published form. 1.35. From the beginning, the resources allocated to the priority programme have been centralized,  whereas the appropriations for the ordinary programme continue to be handled by the various  originating departments. The mechanism used for financing the programme owes its origins to the  fact that the budget does not provide any appropriations for this purpose. The division of  appropriations between the ordinary programme and the priority programme 'does not follow a  budgetary approach but a purely administrative one, whereby the various budget headings which could  bear publications expenditure are tapped, in the context of the annual publications programme  approved by the Commission, of a fraction of their available resources for the purposes of the  priority programme`. This tapping of resources provides the mechanism whereby the financial  resources are in fact centralized under the authority of the Secretary-General, but without  formally depriving the authorizing officers for these various headings of their authorizing powers.  It involves a number of budget headings, mainly in Part  B of the budget (operating expenditure),  the remarks for which provide that they may be used for administrative purposes. As can be seen,  these are, in part, mini-budget headings. 1.36. Chapter  34 (Article  341) of Part  A (Commission - Administrative appropriations) of the  general budget for the financial year 1990 provided appropriations to cover expenditure on the  publication, publicity and promotion of the Commission's publications. In 1990 these appropriations  amounted to 2,8  Mio  ECU. However, if the expenditure associated with the priority publications  programme (PPP) had been booked to this Article, quite regularly, the appropriations would have had  to be augmented by 3,6  Mio  ECU, which is tantamount to under-estimating the requirements by  approximately 56%. 1.37. The mechanism which has been established makes it possible for the Commission, with all the  resources it obtains by tapping operating appropriations, to publish, at will, the documents which  it considers have political priority, whether or not they are related to the general objective of  the budgetary heading to which they are being booked. The irregularities to which this mechanism  gave rise in 1990 concerned a total of 3,4  Mio  ECU and are detailed in Table  1.4. The table is  based on an analysis of the orders placed for implementation of the priority programme. 1.38. Centralized at the administrative level, but decentralized in budgetary terms, the system for  managing the priority publications programme appropriations has not been efficient either. The  dispersion of responsibility for authorization, implementation and supervision has made it  impossible to monitor them in a way which might have satisfied internal and external control  requirements. Thus: >TABLE>(a)the Commission department responsible for coordination of the PPP was not able  to provide financial statements covering its implementation at a moment's notice; (b)no-one noticed that there was no delegation of signature for two budget headings in the  department responsible for placing orders (Publications Office); (c)as the Commission itself admits, the majority of the Directorates-General concerned have not  accepted this form of financial 'solidarity`, which has accordingly remained non-existent at the  level of budgetary implementation. 1.39. For 1990 the PPP initially provided financing for 34 publications. Work started on only 15.  Of those 15, five were completed after 16 months of work (position at the end of April  1991). 1.40. At the end of 1990 the PPP coordinating committee decided to amend the initial Commission  Decision of December 1989 by adding 17 new publications to the initial programme and deleting  others. The expenditure commitment that had been passed before the initial decision was not amended  to take account of the new titles that had been inserted. This sort of approach once again proves  that the choice of budget headings within the operating part of the budget is made with a total  disregard for whether or not the title of a publication bears any relation to the wording of the  items concerned. 1.41. In general terms, if the way a priority programme is implemented does not reflect its  priority nature as initially defined, it may be asked whether such a programme is not justified by  its financing 'facilities`. 1.42. The details supplied by the Commission were somewhat vague, but a rough estimate (see Table   1.5) showed that payments effected in 1990 amounted to no more than about 19% of the orders placed  and that substantial carry-overs of appropriations were to be expected, whereas if the payments had  been booked to administrative appropriations correctly such carry-overs would have been excluded  under Article  7 of the Financial Regulation. 1.43. The Commission's Financial Controller played an active role in operating the PPP mechanism,  through his membership of the corresponding interdepartmental committee. Furthermore, in most cases  he gave his approval for taking funds from the operating appropriations to finance administrative  expenditure, on condition that the remarks against these items included a comment providing a broad  justification for this type of action. Using this approach, the entering of miscellaneous remarks  makes it possible to charge to a particular heading expenditure which has nothing to do with the  meaning and scope of the heading itself. The role of the Financial ControllerWithholding of approval by the Financial Controller and the  overruling of such refusal>TABLE>1.44. During 1990 the Court noticed, in a document  which was sent to the Council, a reference to the withholding of approval by the Financial  Controller. In this case the Financial Controller had refused to approve an operation which sought  to regularize the anomaly mentioned by the Court in paragraph  1.113(a) of its 1989 annual report,  by booking the operation retrospectively to the 1989 financial year. Apart from this instance, the  Court is not aware of any cases in which approval has been withheld. Due to the limitations on the  Court's access to the Commission's computerized accounting system (Sincom) (see paragraphs   1.109-1.116) and data-bases, it was not possible to check whether the Court's information was  complete. 1.45. If this information proved to be accurate, however, and if only one operation was the object  of approval being withheld during 1990, that would be somewhat surprising, given the number of  operations subject to scrutiny by the Financial Controller and the numerous cases of irregularity  noted by the Court in the present chapter where the Financial Controller ought to have refused to  approve the operations submitted to him (in particular, mini-budgets, priority programme,  observations on the legality and regularity of the operations passed to the accounts during the  year). On the other hand, this state of affairs would confirm the fears expressed by the Court in  the annual report concerning the financial year 1988, where it noted (paragraphs  3.13 and  3.14)  that 'the tendency for the Financial Controller to give an opinion on all decisions prior to  commitment in the accounts ... clearly entails a risk ... that of having to criticize decisions to  which he had previously given his approval, ... the outcome of his technical checks is  compromised`. 1.46. Moreover, in some cases the Financial Controller approved 'as exceptions` operations which he  considered irregular in respect of the principle of budgetary specificity, justifying ex post his  final position with considerations of overall sound financial management. This attitude comes down  to agreeing to render the principle of budgetary specificity devoid of meaning (Articles  202 of  the EEC Treaty and 26 of the Financial Regulation). In addition, it undermines the system of  approval in the same way as the practice of granting 'conditional approval`, which the Court  criticized in the annual report concerning the financial year 1979 (paragraph  4.35) and which is  now expressly prohibited by Article  38(2) of the Financial Regulation. 1.47. In addition, the Court has not been formally notified of any cases in which a refusal of  approval has been overruled. OBSERVATIONS ON THE LEGALITY AND REGULARITY OF THE OPERATIONS PASSED TO THE ACCOUNTS DURING THE  YEARSupporting documents used to validate operations passed to the accounts1.48. Generally  speaking, the Commission does not observe the statutory time-limits for forwarding supporting  documents to the Court. This omission seriously affects the possibility of the Court's auditing  them. For example, the supporting documents for December 1990 operations, which the Commission  acknowledged represented 30% of the payment volume, were not forwarded until the end of May  1991,  by which time the Court had virtually finished drafting the observations which it was required to  send to the institutions by 15  July  1991. In the Court's view, the Commission would not have any  problem in meeting the statutory deadlines if it established a more easily manageable system for  forwarding accounting documents at monthly intervals. 1.49. The Court has access to individual files on the spot, but that does not justify sending  incomplete supporting documents to the Court. Scrutiny of the documents that were forwarded  revealed the following main weaknesses: (a)in the case of the EAGGF Guidance Section and the ERDF, the Court is frequently not in a  position to audit payments satisfactorily, as the payment orders are all too often accompanied by  documents which do not provide valid support for the payments made or do not provide an adequate  basis for appraisal of the terms on which transactions were effected. There were even cases in  which payment orders were forwarded without any supporting document; (b)in the case of aid to non-member countries, examination of a sample of renewable advances for  local project costs revealed a number of payments which did not have adequate supporting documents.  The latter should normally provide details of the advances used previously and furnish evidence of  such use. This was frequently not the case. Traditional own resourcesImplementation of the separate accounting system1.50. According to the  provisions of Article  6(2) of Council Regulation (EEC, Euratom) N°  1552/89 of 29  May  1989, the  Member States must keep accounts of established entitlements and must also keep separate accounts  of established entitlements that have not been recovered and for which no security has been  provided. They may follow similar procedures where established entitlements for which security has  been provided have been challenged. In plain terms, the traditional own resources are covered by  two accounting systems: the main accounting system in the case of established, recovered or secured  and unchallenged entitlements, and a separate system in the case of the other established  entitlements. Every Member State is required to send the Commission a monthly statement for the  main accounts and a quarterly statement for the separate accounts. 1.51. Although the Regulation has been in force since 1  January  1989, some Member States did not  begin to send quarterly statements for the separate accounts until 1990. The Commission received  nine statements for the fourth quarter of 1990. Denmark informed the Commission that it did not  have any separate accounts and Spain and the Netherlands did not provide any statement. 1.52. The breakdown of the data supplied varies from one Member State to another. Only two  statements followed the standard form proposed by the Commission. In some statements either  information was missing or there were differences in the carry-over of established entitlements  that had not been recovered. 1.53. At the beginning of March  1991, the Commission undertook to record entitlements notified to  it in the statements for the separate accounts. For this purpose it made out 12 recovery orders,  three of which, however, for the reasons given above, did not include any amount; in spite of that,  it did not take any corrective action vis-à-vis the three Member States concerned. 1.54. The Court wishes to point out that the object of the separate accounts is to make it easier  for the Commission to monitor the action taken by Member States to recover own resources which have  been established but not recovered or guaranteed. Article  78 of the Financial Regulation states  that the revenue and expenditure account is to include a table of revenue containing, inter alia,  all the entitlements established in the course of the financial year and the amounts still to be  collected at the end of the year. These obligations cannot be properly discharged unless the  accounts made up and forwarded are clear and reliable. The EAGGFThe EAGGF Guarantee SectionNational controls over expenditure1.55. Payments made by the  Member States are entered in the Commission's revenue and expenditure account on the basis of the  Member States' monthly declarations. In its Annual Report concerning the financial year 1989, the  Court commented on the inadequacy of certain paying agencies' controls over guarantee expenditure  in Belgium and Spain, in respect of measures for which the responsibility for verifying and  authorizing claims does not rest with the paying agencies. The Court's findings in Italy confirm  that such deficiencies are common to several Member States, and can, and do, result in the  disbursement of significant sums in response to ineligible claims (see paragraphs  3.31-3.44). 1.56. Council Regulation (EEC) N° 729/70 of 21 April 1970 requires Member States to keep  sufficient records to allow the Commission to monitor the expenditure. However, this Regulation,  while providing a statement of principles, does not contain sufficient guidance with regard to the  question of practical application, and, in cases where powers are delegated to bodies other than  the paying agencies, it is not clear which body is responsible for keeping the records. The  Commission should propose an implementing regulation which will define the paying agencies'  responsibilities with more precision (see paragraphs  3.45-3.47). 1.57. In the context of the control on processed agricultural products, France refused to provide  the Court with all of the results of the controls laid down by the applicable Community regulations  (see paragraph  4.1.33). Central accounts for expenditure1.58. In 1990, the Commission was unable to commit the expenditure  declared by the Member States within the two months stipulated by Article 100 of the Financial  Regulation because problems with its new computerized accounting system, Sincom, delayed input of  data from Member States' declarations. As a result, at the end of July 1990 some 8  190  Mio  ECU  of expenditure had not been committed on time. Coordination of checks on elements common to guarantee and guidance expenditure1.59. An  examination of the compensatory allowances paid by the EAGGF Guidance Section to farmers in certain  less-favoured areas (see paragraphs 9.40-9.41) has shown that  many of the problems associated with  the administration of that scheme are similar to those experienced with several guarantee  measures. 1.60. The allowance can be paid per animal or per hectare of land cultivated, two formulas widely  used under the Guarantee Section. The essential control in both cases consists of verifying the  actual situation on the farm by means of on-site inspection or an administrative control which will  offer the guarantee of an adequate level of reliability. The responsibility for, and the extent and  depth of, the inspection are factors that vary from Member State to Member State. It is also  possible for some farmers to escape inspection entirely if the Member State adopts a system that is  limited to claimants making a declaration (see paragraph 9.26). 1.61. No coordination exists to ensure that optimum use is made of resources dedicated to  inspection tasks, so that the absurd situation may arise in which the same farm is inspected on a  number of occasions under different guarantee and guidance schemes. No account is taken of the  proportion of all income derived from the EAGGF that is received by individual farmers when  selecting which holdings to inspect. 1.62. Without a system of identification for all animals eligible for Community aid and a  comprehensive and up-to-date land registry system, the effectiveness, and hence the validity, of  the aid payments will continue to be called into question. The Court's previous observations on  the suckler cow premium and the set-aside scheme also illustrated these problems. The EAGGF Guidance Section1.63. The reimbursement corresponding to expenditure effected on the  basis of national legislation which derogates from the Community regulations (aid for deer,  allowance on the basis of pasture areas and not on the number of livestock units) cannot be  considered regular, even if such measures have been approved by the Commission, nor can  reimbursements in respect of expenditure effected on the basis of an unconventional interpretation  of Article 15(1)(b) of Council Regulation (EEC) N°  797/85 of 12  March  1985 (OJ  L  93,  30.3.1985, p.  1) for areas under cereals intended for animal fodder (see paragraphs  9.15-9.17) be  considered regular either. Veterinary measures1.64. Examination of the last two commitments for the year concerning the  veterinary measures charged under Articles 380 and 381 (allocated 1,750 Mio ECU and 41,123 Mio ECU  respectively) shows that the commitment procedures normally applied during the year were not  observed and that the amounts committed corresponded exactly to the amounts of the appropriations  still available, whereas each of these accounting commitments in fact corresponded to larger  commitments: 88  000  ECU out of an actual commitment of 700  000  ECU for Article 380 and 3,1  Mio   ECU out of an actual commitment of 10,2 Mio ECU for Article 381. 1.65. Examination of the 933 000 ECU paid out in 1990, from the commitments carried over from 1989,  against Article 380 in respect of varroa-mite disease in bees shows that there was no legal basis  for these payments, since the basic regulation had not been adopted, even though appropriations for  this type of measure had been entered in the budget since 1986. 1.66. Two decisions, concerning 970 000 ECU committed against heading 380, under Council Decision  89/455/EEC of 24 July 1989 on pilot projects for the control of rabies, served to finance pilot  projects which were already completed or under way before they were forwarded to the Commission for  approval, which is in breach of the provisions of Article 4 of the aforementioned Decision. Fisheries1.67. Article 36 of the Financial Regulation provides that 'all measures which give rise  to expenditure chargeable to the budget must be preceded by a proposal for commitment of  expenditure from the relevant authorizing officer`. In contrast, the proposals for commitment  concerning the financial consequences of the fisheries agreements are drawn up after the decisions  or regulations which, since they finalize these agreements, effectively commit the Community  vis-à-vis non-member countries. In this respect, the Court would point out that, in several  previous annual reports, it has raised the problem posed by the heterogeneity and the excessive  flexibility of the Commission's practices in matters of commitments in respect of the provisions of  Article 36 (previously Article 32) of the Financial Regulation. 1.68. The Commission made the first payments in respect of four new or renewed fisheries agreements  after the deadline dates laid down in these agreements, because they had been drawn up very late  and even, in one case, after the deadline in question. 1.69. Where the fisheries agreement with Greenland is concerned, in 1990 the Commission not only  paid the financial compensation of 34,25 Mio ECU in respect of 1990 but also paid out in advance  the 34,25 Mio ECU due in respect of 1991. In order to make this payment, which constitutes a  transfer of expenditure from one financial year to the previous one, it had to have 14,5 Mio ECU  transferred from Chapter 100. 1.70. According to Articles 26(2) and 24(2)(a) of Council Regulation (EEC) N° 4028/86 of 18   December  1986 (OJ  L  376, 31.12.1986, p.  7), only 50% of Member States' expenditure in respect  of the laying-up of vessels measuring not less than 12 metres in length is refundable. Three  payments for reimbursements of premiums for final withdrawal amounting to around 40  000  ECU were  irregular, since the vessels concerned did not meet this condition. 1.71. Still on the subject of the reimbursement of premiums for the final withdrawal of fishing  vessels, it should be noted that the authorizing officer did not observe that, in 1989, Italy  submitted a second application in respect of three vessels for which a first application had  already been submitted and the reimbursement executed. This entailed the payment of 320  000  ECU  twice over, and the undue payment should be recovered. The social field1.72. In the ESF field, the 'accounting officer` determines the due date for  recoveries, 'after` the Financial Controller has given his approval, whereas Article 28(2) of the  Financial Regulation states that the purpose of the Financial Controller's approval shall be to  'establish` that the due date is indicated by the 'authorizing officer`. 1.73. Furthermore, the cancellation of commitments which have become superfluous because the  measures concerned have not been carried out, or have only partly been carried out, is not  undertaken until long after the event. In 1990 there was no record of any cancellation of  commitment having been identified either before or after appraisal of the applications for final  payment submitted to the ESF.1.74. Lastly, financing of 230  000  ECU for the Fondation Europalia Internationale was provided in  1990 on the basis of a Commission commitment of 17 April 1990 and a contract of 30 May 1990. This  financing was for an event that had already been organized in Brussels in 1989 (Europalia Japan)  and in fact amounted to a commitment to make good the final deficit. However, the explanatory  report provided for in the contract is not included in the dossier. A press dossier, which predates  the contract, has been substituted for it. Since it is impossible to justify this 1989 expenditure  under the 1990 budget, the Financial Controller ought to have withheld his approval. Research and energy1.75. For certain research programmes, COST and Téléman in particular, and for  measures in the field of information technology and telecommunications, a certain number of  researchers are paid for by other research programmes, e.g. the radiological protection and Esprit  programmes. The revenue and expenditure account does not therefore give a true picture of the real  costs of these programmes. 1.76. The monitoring of commitments is not satisfactory. A sample taken of 29 commitments in  respect of the 'Esprit  I` programme showed that 18 commitments to a value of 2,76 Mio ECU ought to  have been cancelled at the end of 1990. Operations under Title 9Aid to non-member countries1.77. The total volume of outstanding  commitments doubled between the end of 1985 and the end of 1990, rising from 1  256,6  Mio ECU to 2  685,6 Mio ECU. A total of 595 commitments amounting to 301,6 Mio ECU, or 26,5% of the total  outstanding by way of commitments entered into from 1978 to 1988, gave rise to no payments in 1989  and 1990: (a)95% of these 'dormant` commitments concern Chapters 93 (Asia and Latin America) and 96  (Mediterranean); (b)for Chapter 93, a single dormant commitment was cancelled, whereas examination of a sample of 51  entries totalling 27,7 Mio ECU showed that 30 commitments to the value of 6,3 Mio ECU should have  been cancelled (e.g. 0,242 Mio ECU for a supply of fertilizers which was completed in 1987; 0,898  Mio  ECU for a solar energy programme in Pakistan which has in theory been completed since 1986;  0,150 Mio ECU in operating aid for the Indian commercial office in Brussels in 1983 and, lastly,  0,755 Mio ECU concerning three measures in agricultural advisory work in Zimbabwe which have been  finished since 1987); (c)twelve entries concern 'blocked` commitments, some of which date from 1985 and 1986 and on  which, for various reasons, a start had still not been made by the end of 1990. 1.78. The Court observes that the departments responsible for cooperation with non-member countries  have no adequate system for identifying dormant commitments, and no regular procedures for showing  balances, although these tasks are major responsibilities for the authorizing officer in the  management and control of the utilization of budgetary appropriations. 1.79. Examination of the transactions charged to Title 9 also leads the Court to recommend the  introduction of an individual code for 'third parties` concerned by cooperation measures. Such a  code would allow individual files to be drawn up and would thus facilitate the evaluation of the  overall relations between the Commission and any one contractor who receives financing under  several budget headings. This would also improve coordination with other sources of financing. Aid to the countries of Eastern Europe1.80. The Commission decided, in a perfectly regular manner,  in December 1989 and January 1990 to grant emergency medical aid to Romania totalling 11,12 Mio  ECU. In the three Commission Decisions concerning this matter, it is expressly laid down that this  aid is to be charged to Article 950 of the 1990 budget, 'Aid to disaster victims in developing and  other third countries`. The commitment proposals were correctly charged to Article 950 in January  and February 1990. 1.81. At the time of the extension of the Decision concerning economic aid on behalf of Hungary and  Poland to other countries of Central and Eastern Europe, however, the Commission re-charged the  commitments and payments in respect of this emergency aid to Article 996, 'Aid for the economic  restructuring of Poland and Hungary`. The Court takes the view that re-charging this expenditure to  Article  996 lays the Commission open to censure. 1.82. In fact, Article 2 of the Council Regulation concerning the extension of economic aid to  other countries of Central and Eastern Europe stipulates that this Regulation is to enter into  force on the third day following its publication in the Official Journal, i.e. on 24 September  1990. This Regulation can therefore not have any retroactive effect. There is, therefore, no legal  basis for the emergency medical aid, which was decided before this Regulation came into force.  Moreover, no provision for re-charging expenditure is made in the Financial Regulation or in its  implementing procedures. 1.83. To the extent that the aim of this re-charging was to allow new measures in the field of aid  to developing and other third countries, appropriations should have been transferred from one  chapter to another. The budgetary authority should have taken the transfer decision in order to  comply with the principle of budgetary specificity. OBSERVATIONS ON THE PRESENTATION AND KEEPING OF THE ACCOUNTSThe financial balance sheet of the  Communities1.84. One of the principles used in drawing up a consolidated balance sheet is that  intergroup balances cancel out at group level. The amounts thus shown in the balance sheet relate  solely to external transactions. The Commission does not follow this principle when preparing the  consolidated balance sheet. There is no consolidation adjustment for items which have been included  in the reciprocal account of one institution but have not been included by the other. A number of  these debtor (2,5 Mio ECU) and creditor amounts (0,2 Mio ECU) could not be eliminated at the time  of consolidation this year. It is recommended that the reconciliation of the balances on the  reciprocal accounts be improved so that the amounts completely cancel out or that an adjustment on  consolidation be made which ensures that the balance sheet is clear of interinstitutional  transactions. The keeping of the accounts in the Commission's balance sheet1.85. Preliminary to the audit of the  balance sheet for 1990, the Court studied some of the Commission's main accounting systems in order  to update its permanent audit files. For example, it prepared a documented description of the  internal control systems relating to payments, receipts, personnel advances and liaison accounts.  An evaluation of these systems and of those of the JRC has given rise to the following  observations. Treasury management1.86. An important aspect of treasury management is that of cash conservation  and one of the objectives in this area would be the maintenance of minimal bank balances. This will  only be achieved if the treasury section is operating in accordance with a definite and well  thought- out policy of fund management. 1.87. In practice the official who determines the level of funds held in each of the Commission's  bank accounts relies on his experience and some hand-written notes, passed on by his predecessor.Information concerning payments1.88. Treasury management implies collecting information and  processing it to produce timely decisions. Accurate information is required regarding the amounts  which will be required for expected future payments and the relevant payment dates. 1.89. It was observed at Directorate-General XIX (and also at Ispra) that such information is  lacking. Often the first intimation the treasury section receives that a large payment is due is  when the payment order is presented for execution. If a number of such payment orders arrive  simultaneously, the result can be seriously depleted balances which have to be replenished  hurriedly, or balances which are too high because a safety margin must be maintained to cope with  such eventualities. 1.90. It is to be recommended that the information flow from the initiators of payments to the  section responsible for their execution should be improved. The information regarding payment  proposals validated by authorizing officers, which is available from Sincom, should be used for  this purpose. Cash transmission1.91. One component of funds management is cash transmission, using techniques  which minimize total cost and reduce transmission risks. Transmission risk will be minimized if  internal controls such as the segregation of duties are adhered to. Where computer systems are  involved, it is imperative that security of the system should be maintained. 1.92. An official in the treasury section has, amongst other tasks, the responsibility for  arranging transfers of funds. During the year, in the interests of the efficient processing of  payments, he operated the transmission system, to which he should not have had access because he  has no password. Restricted access through password protection is an integral feature of a secure  system, which should not be circumvented whatever the circumstances. If it is deemed necessary that  the official should have access, taking other facets of the principle of segregation of duties into  consideration, this use should be formalized. Reconciliation of accounting systems1.93. The accounting system operated by the treasury section  is a stand-alone system, i.e. not a module of Sincom. The accounting entries for payment orders are  made in detail to the bank accounting system and thereafter posted at a lesser level of detail to  the general accounts. 1.94. This situation requires regular reconciliations of the two systems to be carried out, to  ensure that entries are correctly reflected in both systems. At the time of the Court's review of  the system, this reconciliation was four to five months behind schedule. This procedure is  important from both an accounting and a management information point of view. The task should be  assigned to a specific official or section and carried out systematically. Balance-sheet items1.95. At Ispra, the inventories have not been physically verified in recent  years, if at all. This has a direct impact upon the balance sheet of Ispra. The accounts affected  are 'Furniture and equipment`, 'Office furniture` and 'Scientific and technical materials`. For  these accounts the value in the balance sheet is taken directly from the inventory listings at the  year end. If these figures are unreliable, the accounts figures are equally so. For 1990 the  balances account for 43,58% of Ispra's total assets. The consolidated balance sheet of the  Communities is also affected as follows: (a)Furniture and equipment at Ispra accounts for 19,68% of the 'Tangibles` heading within 'Fixed  assets`; (b)'Office supplies` and 'Scientific and technical materials` make up 7,3% of the 'Inventories`  figure. 1.96. While it is the task of the Commission in general to see that the Financial Regulation is  being respected, Directorate-General XIX has responsibility for the production of the balance sheet  and, as such, should ensure that systems are put in place which will provide reliable accounting  data for processing. 1.97. In addition, this year an important posting error occurred whilst entering balances relating  to NCI and Euratom operations. The relevant balance sheet items are on the liabilities side under  the heading 'accrued expenses`: (a)'interest accrued but not due on borrowings, lines of credit and swaps` reads 99  698  014,90   ECU for the NCI when it should read 16  720  228,25  ECU, (b)the 'other` heading under 'accrued expenses` shows an amount of 16  720  228,25  ECU for NCI  swap operations instead of the correct figure of 99  698  014,90  ECU. This error also has an impact on any comparison made with last year's values and note 5.28 in the  consolidated balance sheet. The revenue and expenditure account: recording of payments, payments on account and advances1.98.  In its report on the financial year 1987, the Court, when it came to discuss the mechanisms for  recovering payments on account, urged the Commission 'to adapt its system and accounting procedures  so that it will be able to grasp immediately the legal nature of the payments made, so that it is  possible at any time to distinguish between final and non-final payments`. Later, in its Opinion N°   1/89 of 9  February  1989 concerning a proposed general revision of the Council Regulation  amending the Financial Regulation of 21  December  1977 applicable to the general budget, the Court  expressed the view that accounting systems ought to supply consolidated statements of the financial  situation, in which it would be possible to single out immediately those sums that corresponded to  final expenditure and those that corresponded to operations that had not yet been settled. In this  annual report the Court wishes to take its thoughts on this matter further. 1.99. Article  45 of the Financial Regulation states: 'The payment order shall be accompanied by  the original supporting documents ... certified in respect of or accompanied by a certificate  confirming ... the receipt of the supplies and the performance of the service...`. 1.100. Article  46 of the same Regulation also provides as follows, in paragraph  1: 'The  authorizing officer may make payments by instalment in accordance with the rules governing the  policy concerned or in accordance with contractual provisions. Where this occurs, the first payment  order shall be accompanied by documents establishing the creditors claim to payment of the  instalment in question.` In paragraph  2, it is stated that 'the authorizing officer may grant  advances to personnel...`. 1.101. Lastly, Article  71 provides as follows: 'Except for the advances referred to in Article  99  [EAGGF-Guarantee advances] any advance (...) shall be entered in a suspense account and settled at  the latest during the financial year which follows the payment of this advance`. 1.102. There is confusion in how these provisions are applied because in the various applicable  texts, in particular the operating rules and the contracts, the terms 'payments`, 'payments made on  account` and 'advances` are sometimes used as if their semantic content were identical and on other  occasions as if it were different. 1.103. A strict interpretation of the aforementioned rules, based on the premise that the Financial  Regulation is consistent, should lead to the conclusion that a payment is a different thing from a  payment made on account, which, in turn, is different from an advance. It therefore requires  disbursements to be classified in one of these three categories according to the particular  characteristics in each case. Payments and payments on account are entered as budgetary expenditure  chargeable to the financial year during which they are made. Advances are entered in a suspense  account outside the budgetary accounts, and are charged to the budgetary accounts at such time as  the proof that they have actually been utilized is provided. 1.104. In practice, because of the contents of the operating rules or of the agreements and  contracts signed by the Commission, the confusion alluded to in paragraph  1.102 is such that  transfers of funds with no effective counterpart are described either as payments on account or as  advances, but are treated as payments on account and entered directly in the budgetary accounts for  the year during which they are made. 1.105. Sampling of the operations entered in the 1990 revenue and expenditure account reveals that  these transfers to the bank accounts of the recipients (Member States, non-member States or private  individuals) are found mainly in the fields of the structural Funds and development aid, where they  accounted for around 6  000  Mio  ECU paid out in 1990 (see Table  1.6). In order to obtain an idea  of the volume represented by these operations at the end of the financial year 1990, a probably  equally substantial sum should be added to this figure for the balances outstanding from previous  financial years. 1.106. In practice, each authorizing department has set up a more or less reliable system for  recording and monitoring transactions which have not yet reached a final state (payments on account  or advances). 1.107. The Court recommends a re-examination of the provisions of the regulations concerning  payments on account and advances so as to ensure that the current confusion does not persist. This  concerns: (a)in the first instance, the Financial Regulation itself, which, in this respect, is still  burdened with the lack of consistency that betrays its origins, namely, the merging of a regulation  applicable to the centralized management of administrative expenditure (including the provisions  concerning payments and advances) with specific financial rules applicable to the non-centralized  management of various common policies; (b)secondly, it also concerns the various rules concerning the operational policies, of which the   provisions that apply to advances and payments on account are not always coordinated. 1.108. In any case, the Court considers that the Commission should reorganize its accounting  information system without delay so that it allows non-final operations (advances, but also  payments on account, in so far as they concern operations still outstanding) to be identified  quickly, so as to ensure that they are properly monitored and to provide information on the  implementation of Community policies. The computerized budgetary accounting system (Sincom)1.109. The budgetary accounts for the  financial year 1990 are the first to have been entirely produced using a computerized system  (Sincom). The system has not yet been in use for long enough for the Court to make any general  observations. However, certain specific observations may already be made. 1.110. The Sincom accounting system, which was launched one year after the first appropriations  were made available again, was not modified so as to ensure separate monitoring of appropriations  which have been made available again, which are lumped together indistinguishably under the label  'commitment appropriations not automatically carried over`. Annex B2 of Volume II of the revenue  and expenditure account, which presents a statement of payments made in respect of the  appropriations which were made available again in 1990, is the result of an ex-post analysis  carried out by Commission staff. This anomaly seemed to have disappeared by 1991. 1.111. Nor is the Sincom system adequately structured for recording the appropriations entered  following a contribution from third parties. Thus, in the case of the Community programme in  education and training for technology project (Comett  II), which is open to EFTA members, those  countries' contributions (4,9 Mio ECU) are entered as revenue under the revenue item which is  provided for this purpose. At the same time, in the Sincom system, they entail entering an  appropriation for the same amount under expenditure Item B6310, 'Cooperation between universities  and industry: training in new technologies`, in an account corresponding to the appropriations  which are managed by external offices and carried over to the following financial year by the  budgetary authority. In the 'Report on the implementation of the budget`, this amount is presented  as deriving from transfers. In both cases, the accounting statements misrepresent the real  situation. 1.112. This anomaly in the system is aggravated by the fact that, in at least one case, the  appropriation entered following a contribution from a third party is not shown in the revenue and  expenditure account. This is the case with an appropriation for 0,566 Mio ECU entered under heading  A3052 which gave rise to a commitment of 0,495 Mio ECU and a payment of 0,187 Mio ECU (including a  subsidy of 0,185 Mio ECU for the 'The Wall` concert in Berlin). >TABLE>1.113. Likewise, the consistency checks carried out by the Court's staff to  ensure that they understood the part of the Sincom database to which the Court was given access  identified discrepancies between the sum of the transactions recorded as entered in the accounts  (the only ones accessible to the Court) and the balances shown in the accounts. These errors, which  were found in the old system of the central accounting unit (CAU), are usually subject to  correction after the revenue and expenditure account is published. When brought to the Commission's  attention, they were corrected, since the anomaly had disappeared in the final accounts. Since the  Court does not have access to all the information contained in the Sincom system, and particularly  not to operations which have been refused by the system or by the managers of the system  (authorizing officer, Financial Controller, accounting officer), it is not currently in a position  to identify and evaluate these anomalies and the corrections which were made. 1.114. In this respect, the conditions on which the Court is granted access to Sincom remain  unsatisfactory. While the Commission has undertaken to allow the Court open access to the computer  programs and other components of the Sincom system, it has adopted a restrictive approach where  access to the data contained in the system is concerned. 1.115. In spite of an initial promise, in October  1989, that the Court could have access to all  the Sincom data in consultation mode, the Commission reneged on this promise when the system  started to operate. In response to a formal request for the authorized Court officials to be  allowed to consult, without restriction, all data prepared and stored on Sincom CB/D magnetic  data-carriers, the Commission suggested in July  1990 that access for the Court should be granted  selectively, and the parameters of the system were arranged in such a way that the Court could not  access all the data it contained, and particularly not the data amended or rejected by the system. 1.116. This attitude breaches the first paragraph of Article 87(1) of the Financial Regulation,  which provides that all 'documents and data created or stored on a magnetic medium` should be  placed at the Court's disposal. In particular, however, experience has shown that this is a very  real hindrance to the Court's work: (a)it deprives it of the information which would allow it to check that the internal control  procedures of the system are working properly; (b)it can lead the auditors to make misguided assessments, since they are not informed when data  are missing from amongst those to which they are given access; (c)it obliges the auditors to identify, by deduction,  whole slabs of information which are  absolutely necessary for their work and to submit the corresponding requests for these one by one; (d)it does not allow all the search and sort procedures inherent in the system to be made available  to the Court; (e)and, generally speaking, many of the Court's officials have to cope with anomalous reactions  from a system which was initially designed to provide open access (the 'function forbidden for  non-EEC` and 'unauthorized` messages are displayed). CHAPTER 2  (*) Revenue >TABLE>IMPLEMENTATION OF THE BUDGET2.1. As  can be seen from Table 2.1, the out-turn for revenue for the financial year 1990 was 99,0  %: (a)in the case of traditional own resources, customs duties collected were 90,6  % of the total  forecast and agricultural levies 101,6  %. Customs duties recovered in 1990 were 9,4  % down on the  forecasts. This shortfall was due to the fall in the value of the dollar, the main invoicing  currency, which neutralized the effects of any price rises or increases in the volume of imports; (b)the VAT and GNP-based own resources for the year were collected as anticipated in the budget,  with due regard for the amendments made by the supplementary and amending budgets (SAB) (see  paragraph 2.2); the GNP-based resources recovered on the basis of the initial budget were refunded  subsequent to SAB N° 2, when it was decided that these resources need not be called up; (c)an amount of 1 527,8 Mio ECU was recovered on the basis of Member States' annual VAT statements  for the financial year 1989 (1  191,2  Mio ECU) and the Commission's controls of those relating to  previous years (336,5  Mio  ECU); (d)in the case of VAT relating to the 1989 financial year, the balances referred to in (c) and  remaining to be recovered in December 1990 (1 191,2 Mio ECU) were established in terms of the  assessment bases mentioned in the annual statements; the results of the Commission's controls were  not taken into account when the balances were established in 1990; it was noted that two Member  States were late sending their statements (12  September and 9  November) and that as of the  year-end the Commission had made control visits to only four Member States; (e)as regards the statements for previous years, there were 16 unresolved 'reserves` according to  the list which the Commission now keeps, following the observations made by the Court of Auditors  in the annual report concerning the financial year 1988. 2.2. The method of establishing the amount remaining to be financed by the third and fourth  resources, as well as the incidence of that amount on the calculation and recovery of the  resources, gave rise to the following observations: >TABLE>(a)regarding the surplus from the preceding financial year: pursuant to Article 7  of the Council Decision of 24  June 1988 relating to the system of the Community's own resources  and Article 32 of the Financial Regulation, the balance from each financial year is to be entered  in the budget for the following financial year; in fact, the surplus of 5  080,1  Mio  ECU from the  1989 financial year was entered successively: - in the initial budget, to the extent of 2 598 Mio ECU, of which 819 Mio ECU was the surplus of  own resources resulting from the transfer from the EAGGF Guarantee Section chapters to the EAGGF  monetary reserve; - in SAB N° 1 for the same amount; - in SAB N° 2 for 4  300  Mio  ECU, as the GNP resource was to be called up only to the extent of  the amount of financial compensation to the United Kingdom, where it exceeded 1,4  % of the VAT  assessment base (four Member States: Belgium, Denmark, Greece and Italy); - in SAB N° 3 to the extent of 4  464,2  Mio  ECU, in order to finance an additional VAT refund to  the Kingdom of Spain; (b)regarding the incidence of the 1989 surplus on the calculation of VAT resources: when SAB N° 2  was being established it became clear that, having regard to the financing requirements, there was  no need to call up the GNP resource and that, furthermore, after re-estimating the United Kingdom  correction at 2  285  Mio  ECU, instead of 2  432,3  Mio  ECU, the budget could be balanced by  raising to 4  300  Mio  ECU the 1989 surplus that had been entered in the 1990 budget, thus leaving  a balance of 780 Mio ECU which was not transferred to 1990; this latter amount thus represents a  call on VAT resources in excess of requirements; (c)regarding the EAGGF monetary reserve: faced with a surplus of resources, the Commission budgeted  for the EAGGF monetary reserve to be financed by means of the VAT resource, without first amending  the calculation of the resource; in the budget, however, the breakdown of the amounts of reserve  financing to be borne by the Member States was calculated in terms of their VAT assessment bases,  capped where appropriate, not in terms of their GNP. The result of this method of calculation was  that an amount of 1  024 Mio ECU for the EAGGF monetary reserve was included in the resources  provided in the budget by way of VAT; because this amount was not needed to balance the budget and  was therefore not taken into account when the monthly twelfths were finally determined, the VAT  resources were reduced by 1  024  Mio  ECU. 2.3. The above techniques gave rise to the following observations: (a)some reservations may arise regarding the legality of the various partial entries of the 1989  surplus, and their effect is seriously detrimental to budgetary transparency. In the case of  surpluses like that for 1987 or deficits like those for 1984 and 1985, the practice of spreading  the entries for the balances over several budget years contravenes the principles of universality  and annuality; (b)in draft SAB N° 2 the Commission made the amount of own resources accruing from VAT coincide  with the amount to be financed by the third and fourth resources by carrying over only part of the  surplus from the previous year, on the assumption that a theoretical surplus of resources must be  neutralized by a partial carry-over, without making a reduction in the uniform VAT rate; SAB N° 2  is at present the subject of an action by the Council before the Court of Justice, which  demonstrates the necessity for greater legal and budgetary transparency; in fact, the regulations  do not specify explicitly whether, or how, the calculation is to be adjusted in cases where the  full amount of the VAT-based own resource is not needed to cover expenditure fully; (c)the Decision of 24 June 1988 on the system of own resources is based on the assumption that the  VAT own resource is not sufficient to cover all expenditure. This in turn has repercussions on the  financing of the monetary reserve, which is called up only if it is needed to meet EAGGF  requirements; by virtue of Article 10 of Council Regulation (EEC, Euratom) N°  1552/89 of 29  May   1989 implementing the Council Decision of 24 June 1988 concerning the system of Community own  resources, on the one hand, the additional resource - to the exclusion of the own resources for  the EAGGF monetary reserve - is credited on the first working day of each month, and, on the other  hand, at the end of the financial year, each Member State is debited the amount resulting from the  application to its GNP of the uniform rate used for the preceding financial year, as amended in the  light of the use of the EAGGF monetary reserve; the deduction of the resources earmarked for the  EAGGF monetary reserve from the VAT resources does not correspond to a correct implementation of  the Regulation and has consequently led to the application of a uniform VAT rate which is not in  accordance with Article 2(4) of the Council Decision of 24 June 1988. 2.4. With regard to the refunds of a pro rata proportion of the VAT and GNP resources to Greece,  Spain and Portugal, which were entered in Chapter 86 of the budget, it was noted that: (a)the amounts relating to the provisional twelfths were in fact refunded directly, whereas those  relating to the balances and adjustments are simply a book-keeping device, in that the Member  States concerned make the amounts available net of these balances and adjustments; (b)during 1990 the Commission nevertheless requested that the amounts paid should include the  balances and adjustments, pending an increase in the appropriations available; one Member State  refused this request and paid a net amount of 310 Mio ECU, instead of the 547 Mio ECU due; (c)in order to regularize the situation, the appropriations for Chapter 86 were increased by SAB N°   3; this increase was not, however, sufficient to allow the refund to this Member State, namely 236   Mio  ECU, to be taken fully into account; settlement of 96 Mio ECU was carried forward to the  financial year 1991; the result was that only 451  Mio ECU (instead of 547 Mio) were entered as  revenue in 1990. 2.5. These practices call for the following comments: (a)despite the fact that the amounts of the adjustments and refunds concerned were known at the  time when SAB N° 3 was drafted, the Commission did not propose including the necessary amounts for  expenditure and revenue in that budget; (b)the payment orders for the refund were made out after the net amount had been recovered, thereby  obscuring the netting-out of revenue and expenditure. THE VAT RESOURCEProcedure for making the resource available and the Court's enquiry2.6. The  amounts due in respect of the VAT resource are made available in several stages: (a)the amounts entered in the budget for each Member State are paid over in the form of monthly  twelfths; (b)in the course of the following year, the final situation is established on the basis of the  Member States' annual statements (corrected, if necessary, after checks by the Commission) and sums  still due or paid in excess are paid over or refunded, as appropriate; (c)in subsequent years, further payments or refunds are made if such adjustments become necessary  as a result of the additional corrections made following discussion of the annual statements. 2.7. The object of this section is to examine the factors entering into the calculation process  relating to: (a)the VAT revenue collected in the Member States and the techniques employed in passing it to the  accounts; (b)the corrections made to the above revenue in order to ensure uniform treatment of the revenue  base with a view to establishing the figures for corrected revenue; (c)the compensations made to the intermediate base, or assessment base (obtained by dividing the  corrected revenue by a weighted average rate), in order to obtain, finally, a harmonized definitive  assessment base. 2.8. The Court examined the statements of each of the 12  Member States. It did not investigate the  calculation of the weighted average rate (WAR), which will be examined at a later date, although,  in order to assess the pertinence of certain corrections and compensations, it did refer to  documents provided by the Member States which showed how the weighted average rates were  calculated. The revenue collected2.9. The Community's VAT own resources are calculated on the basis of the net  revenue collected by the Member States in the course of each calendar year, the latter being  dependent on the particular characteristics of the national systems. Amounts collected to be taken into consideration2.10. In most cases the amounts to be taken into  account are not immediately identifiable in the Member States' accounts for the execution of the  budget. For example: (a)in the central accounts, VAT revenue from miscellaneous sources is not always identified  separately, and in some cases it is grouped with other revenue or with VAT revenue that is to be  disregarded under the regulations; (b)where the accounts relating to the implementation of the budget do not correspond to the  calendar year or - more often - where the accounts for the budget year have not been finalized by  31 July following the end of the financial year, the Member States provide interim figures which  sometimes prove to be lower than the final revenue; (c)some Member States (France, in particular) identify in the form of 'corrections` amounts  collected and to be included in or excluded from the calculation of the harmonized base, whilst  others apply a direct correction to the amounts of revenue collected; (d)in one Member State (Denmark), which does not have a cash-based accounting system, the amount  collected has to be reconstructed. 2.11. These features are sources of error and may have the effect of concealing amounts collected  that should be taken into account. For example: (a)an adding-up error slipped into the amount declared in one annual statement for 1988; it was  notified by the Member State concerned (Spain) in October  1989 and in 1990 gave rise to the  recovery of 110 Mio ECU of resources; (b)in the case of another Member State (Italy), there have, since 1982, been difficulties in  accounting for revenue collected following steps taken to settle outstanding VAT debts. Not until  1990 did the Commission recover an amount of 6,9 Mio ECU relating to revenue collected in 1986,  1987 and 1988. Despite the fact that the Court had already raised this problem in its annual report  concerning the financial year 1984, the Commission has been unable to recover more substantial  sums relating to the years 1982 to 1985. Delays in passing VAT revenue to the accounts2.12. Delays of between several days and six months  in entering VAT revenue in the accounts were observed. Although the longest delays occurred in the  Member States in which collection is not centralized, a similar situation was sometimes also  observed in Member States with centralized collection systems: (a)some Member States (in particular, France, Ireland, Portugal and the United Kingdom) were slow  to cash the cheques sent to them, or entered them for dates after the date of encashment; (b)in cases where payments were effected by means of bank transfers, other Member States (including  Belgium and Greece) entered the revenue for the date on which the credit advice was received; (c)in cases where financial institutions were responsible for collection (including Spain and  Italy), they could be authorized to retain revenue for several days before it was transferred; (d)in cases where collection was carried out at local level, it was noted that, in addition to  straightforward delays in centralizing the revenue, there were variations in the entering of  amounts collected but not verified at central level; (e)finally, in cases where the revenue was collected by autonomous regions there was frequently no  effective centralization of the revenue collected and the amounts to be entered were established  according to the national financing rules in those regions. 2.13. These delays cannot be ignored, for the simple reason that they could result in the same  carry-overs being made every year. In fact they may occur at irregular intervals and vary from year  to year: (a)one Member State (France) experienced a strike in the VAT collection agencies at the end of  1989, and the same thing had occurred in others (Italy and the United Kingdom) in previous years; (b)in one Member State (Italy) it was found that from one year to another the amount of revenue  collected and not yet transferred to the Treasury had doubled, causing an unjustified postponement  of own resources in 1990 estimated at 275  Mio  ECU. 2.14. These postponements are a drain on the own resources by reason of the mere fact that they  delay the entering of these resources and also because of the losses that may arise from the effect  of monetary depreciation on the amounts carried over. Furthermore, other data used in the resources  calculation change from year to year: for example, the weighted average rate, the solutions and  modifications adopted by the Member States in determining the assessment base and the rate applied  to that base and the GNP which determines whether it is to be capped or not. Changes to the collection systems2.15. Application of the principle whereby net revenue is to be  collected over a calendar year poses particular problems in cases where a Member State makes  significant changes to its VAT collection systems during the year. In the absence of adequate  transitional provisions, these changes are frequent sources of controversy between the Member  States and the Commission. 2.16. In 1990 the Commission recovered the sum of 22,2  Mio ECU of VAT resources from the Kingdom  of Spain by an ad hoc reconstruction of the VAT base in order to take account of 12 months of  collection in 1986 instead of the 11 months or three quarters actually collected. 2.17. Problems occurred in the case of two other Member States which had modified their collection  schedules: (a)in the case of the first (Italy), the 13th monthly payment collected in 1988 after the payment  dates had been brought forward was deducted by the Member State concerned from the revenue declared  for 1988; an adjustment of 175 Mio ECU was recovered by the Commission in 1990; (b)in the second case (Denmark), the dates of VAT refunds to exporters were brought forward,  thereby leading to a reduction in the net revenue collected during the 1988 financial year. 2.18. As Regulation (EEC, Euratom) N° 1553/89 of 29  May  1989 concerning the definitive system for  the collection of VAT own resources opted beyond any doubt for the so-called 'revenue method`,  based on revenue actually collected during the calendar year, it is now important that the  Commission and the Member States abide by this rule so as to ensure the proper functioning of the  own resources system. Corrections and compensationsIntroduction2.19. For the financial year 1989 the Court identified  170 corrections or compensations; when translated into assessment bases and added to the  compensations the corrections represent a total (minus the sum of 14  816  Mio  ECU of French VAT  refunds, see paragraph 2.10(c)) of around 146  000  Mio ECU, or 6% of the total assessment base.  Table 2.2 gives the amounts for these corrections and compensations, negative or positive as the  case may be. >TABLE>>TABLE>General observations2.20. The Sixth Directive and the other  texts on value-added tax leave the Member States a very wide margin of autonomy as far as the  assessment bases are concerned. It is important to note that the derogations provided for by the  Sixth Directive were of a provisional nature, but most of them were still in force at the time of  the enquiry. The figures in Table 2.2 demonstrate the extent of this absence of harmonization. 2.21. Still more significant is the fact that some corrections and compensations (29 were counted)  owe their origin to situations for which the regulations had made no provision. Most usually, the  object of these adjustments was to neutralize the effect of exemptions or unorthodox calculations,  as well as refunds wrongly made. 2.22. The large number of corrections and compensations, along with the variety of situations which  give rise to them, make the establishment of the uniform base a highly complex matter. In addition,  correct collection of the VAT own resource calls for accuracy in calculating the adjustments, but  the peculiarities of the national systems often impair the homogeneity of such calculations; in  addition, the methodological information and the statistical and fiscal data contained in the  annexes to the statements vary widely in degree of detail and explanatory value from one Member  State to another. 2.23. The considerable scope for estimates may have a significant effect on the values recorded.  The final incidence of such calculation errors, is, however, undoubtedly less significant than  failure to collect the tax, because the former partly cancel each other out. Nevertheless, because  of the size of the sums involved, corrections to the assessment basis must be given full attention,  even if examination of them is only one stage of a necessary investigation of Member States'  collection systems. 2.24. These general observations serve to underline the fact that harmonization of the collection  bases must continue to be the Commission's permanent objective and a matter of more definite  concern on the part of the Member States. The concepts of 'solutions` and 'authorizations`2.25. In calculating these adjustments, a  distinction, based on Council Regulation (EEC, Euratom) N° 1553/89 of 29  May  1989 has evolved  between 'solutions` based on precise figures and 'authorizations` which allow the use of  approximate data or, even, allow certain operations to be disregarded. The possibility of  obtaining an authorization concerns only the adjustments mentioned in the Regulation. 2.26. The Court found that this is, in fact, an artificial distinction: (a)depending on the Member State, an identical adjustment may take the form of a solution or an  authorization, even in cases where the figures, methods and sources used are identical (see for  example positive compensations relating to the telecommunications sector (Annex F.5 to the Sixth  Directive)); (b)the precision postulated by the regulations is frequently impracticable and many 'solutions` are  in reality based on approximations. This is the case with positive compensations under the system  applicable to small and medium-sized undertakings (SMUs) with turnover in excess of, or less than,  10  000 ECU, as well as the positive compensations arising from the exemption for supplies of land  and buildings (Annex F.16). Harmonization of calculation methods2.27. The use of different methods for calculating identical  types of adjustment is frequently justified by the special situations encountered in the Member  States; convergence of methods ought, therefore, to make it possible to minimize the risk of  non-harmonization. 2.28. A 'horizontal` examination of certain adjustments shows just how difficult it is to achieve  this objective of convergence. One example, a significant one in terms of the amounts involved, is  provided by the calculation of the negative compensation that results from the restriction on the  right to deduct VAT on certain business expenditure (cars, petroleum products, leasing,  maintenance). Nine Member States restrict the right to deduct VAT for this type of expenditure in  varying degrees, invoking the possibility available under Council Regulation (EEC, Euratom) N°  1553/89 of calculating their VAT assessment basis as though there were no limitations on this  right. This results in substantial corrections of the assessment basis in some Member States (see  Table 2.2). Examination of this compensation shows that: (a)one Member State (Belgium) calculated a correction to its VAT revenue, whereas the regulations  clearly provide for compensation to the base; (b)seven Member States used their national accounts as the main basis of calculation; two others  (Belgium and Greece) used VAT returns; (c)certain Member States (in particular Belgium, Denmark, Greece, Ireland and the United Kingdom)  introduced into the calculation various flat-rate coefficients corresponding to private use of  company cars; others (in particular France) do not do this, as they consider that the correction is  already an integral part of the ESA national accounts; in the case of two Member States (France and  Italy), the Commission expressed a reservation in respect of the figures submitted since 1983, as  it has been unable to clarify this point. 2.29. A harmonized approach to adjustments implies placing the Member States on an equal footing  and treating similar situations in an identical manner. Situations have arisen, however, when the  Commission, with no apparent justification, has allowed the use of different ratios by comparable  Member States (see the level of deduction for overheads in the positive compensation for securities  management under Annex F.15). Lack of precision in the Community regulations2.30. It may happen that differences of approach in  calculating adjustments are clearly the result of omissions or lack of precision in the  regulations. This problem was highlighted in a Court of Justice ruling of 23  May  1990. It  concerns the positive compensation designed to incorporate in the VAT resources base certain exempt  services in the telecommunications sector (item 5 of Annex F to the Sixth Directive). The ruling  upholds the use by a Member State (FR Germany) of a particular calculation method which, compared  with the method recommended by the Commission, has the effect of reducing the amount of  compensation markedly. According to the method adopted by the Commission and followed by the other  Member States concerned (Ireland, Italy, Luxembourg and the Netherlands), the assessment base had  until then been established without subtracting from the turnover the amount of VAT input. 2.31. Two Member States (Luxembourg and the Netherlands) have already aligned their methods with  that upheld by the Court of Justice. In addition, since the principle of this latter method can be  transposed to other adjustments, some Member States (notably Belgium and the Netherlands) have  expressed reservations regarding compensations effected in earlier years. One of these Member  States (Belgium) merely intended to reduce the amount of its compensations relating to Annex F,  with effect from 1981. The Commission introduced a reservation for this Member State, on a negative  compensation relating to Annex E of the Sixth Directive, in respect of the financial years 1987,  1988 and 1989. 2.32. The effect of allowing Member States the freedom to choose their method of calculation is  clearly not neutral in terms of the result. As the compensation system operates at present, there  is a continuing risk that the Member States will minimize their contributions. This problem can  only get worse, unless the Commission puts forward suitable proposals to make up for the lack of  precise rules regarding the methods of calculation to be applied. The quality of the estimates2.33. The Court observed a number of cases where the quality of the  estimates could be improved, disregarding the question of whether or not their use was justified by  an 'authorization`: (a)Some elements of the calculation are obsolete, namely: - as part of the negative compensation for petroleum products (see paragraph 2.28) one Member State  (Denmark) based some of its calculations on statistical series for 1979 that are updated annually  by means of prices and quantity indices; a special study carried out in 1989 showed that at after  10 years the under-estimate produced by this method was of the order of 60% of the compensation; - in calculating the various positive compensations intended to include in the VAT assessment base  the exempt operations specified in Annex F to the Sixth Directive, one Member State (Greece)  systematically used 1980 input-output tables; - another Member State (Luxembourg) determined its positive compensation for passenger transport  (Annex F.17) by assuming that the percentage of turnover accounted for by sales of tickets to  taxable persons had been the same each year since 1980; - in one Member State (Belgium) the negative compensation for excluding from the VAT assessment  base services provided by travel agents for journeys outside the Community (Annex E.15 to the  Directive) was estimated using information dating from 1981. (b)The quality of some sources was inadequate, or the sources could not be checked, for example: - when calculating the positive compensation for funeral services (Annex F.6), one Member State  (Denmark) calculated the average added value on the basis of a telephone survey of a sample of  undertakers; - the figures for agricultural production supplied by some Member States (Belgium and Luxembourg)  were taken from unofficial statistics, even though the ESA statistics were available; - in order to calculate the positive compensation for admission to sporting events (Annex F.1),  confidential specialist statistics held by sports federations were used (Ireland); - one Member State (Spain) which exempts its imports of military equipment from VAT produced a  flat-rate estimate of them as a certain percentage of the defence ministry's capital expenditure,  as the exact figures could not be disclosed. 2.34. The laxity with which some adjustments are calculated is occasionally reflected in  spectacular variations in amounts. For example, in the case of the negative compensation for  petroleum products (see paragraph 2.28), one Member State (Greece) submitted an amount for 1989  three times higher than that for 1988, which was 10 times lower than the 1987 figure; in the same  Member State the compensation for cars in 1988 was half that for 1987 and 1989. Another Member  State (Italy), which until 1986 based its calculation of the positive compensation for funeral  services (Annex F.6) on statistics, reduced the amount by around 70% from 1987 onwards by basing  the calculation on tax returns. Conclusion2.35. The main burden of budget financing has been borne by the VAT resource. In view of  the expected growth in expenditure in future years, the upper limit of 1,4  % of VAT makes it  imperative that the assessment bases be determined properly. Leaving aside the question of whether  the tax is collected correctly in the Member States - a matter which urgently requires attention -  the Court's observations illustrate the serious deficiencies in the harmonization of the assessment  bases. Not only are they unlikely to promote the free flow of traffic required by the wider market,  but because they are so disparate, it is impossible to have adequate guarantees of fair treatment  of the various Member States. 2.36. The practices which were observed to be detrimental to the correct determination of the VAT  resource concern the collection of revenue: the concept of net revenue collected is interpreted  differently by the Member States; there are delays in entering revenue in the accounts; the  assessment basis is reconstructed artificially in cases where the statistics for the revenue for a  given calendar year are unavailable. 2.37. These practices also affect the charging of corrections to the VAT revenue and the charging  of compensation to the intermediate bases, in response to the necessity of creating a collection  basis that is as uniform as possible. The Court's examination highlighted the diversity of the  corrections and compensations, the far-reaching nature of their effects and the complexity of the  national situations which they reflect. A precise executive framework for the calculation of  corrections and compensations must therefore be provided in the form of suitable regulations. 2.38. The Court recommends that the effort towards harmonization should be pursued in the following  ways: (a)improving the comparability of the statistics needed for determining the VAT resource; (b)ensuring that all national legislation is compatible with the Community legislation; (c)promoting the creation of a genuinely common VAT collection system, leading ultimately to the  abolition of the complex system of corrections and compensations. Such harmonization will also further equality of treatment for the Member States and ensure that  the VAT resource is correctly recovered in its entirety. IMPORTS OF MOTOR VEHICLESIntroduction2.39. The Court selected this industrial sector for a  product audit because of certain of its characteristics: the significance of the automobile sector  (6% of GNP in the Community; 7% of industrial employment), the importance of imports of motor  vehicles and parts (20  514  Mio  ECU in 1989), the relatively high level of customs duties (10% in  the case of cars and, depending on the tariff classification, 11% to 22% for transport vehicles, 5%  to 7% for spare parts), the amount of customs revenue involved (1 135  Mio  ECU in 1989, i.e. 10%  of customs duties - see Table 2.3). The regulations governing imports of motor vehicles are not significantly different from the  general rules. 2.40. Among the main supplier countries there are some which have duty-free access to the Community  market by virtue of preferential agreements (including Sweden, Austria and Yugoslavia) or the  system of generalized preferences (including Brazil and Mexico), whereas others do not have the  benefit of any preferential arrangements (notably Japan, the United States and the USSR). The level  to which these countries have pen- etrated the European motor vehicle market varies significantly  from one importing Member State to another; in the extreme case of Japanese vehicles, this rate of  penetration ranges from 1% (Italy) to 44% (Ireland), with an average of around 10% for the  Community as a whole. 2.41. The Commission has no precise financial data for the amount of customs duty recovered on  imports for free circulation, or deferred or subject to exemption under suspension systems or  preferential arrangements. It is thus not possible to use the import statistics and customs tariff  rates as a basis on which to verify the accuracy, or even the probability, of the global recovery  figures. The figures quoted in paragraph 2.39 were reconstructed on the basis of these statistics,  and are given merely by way of indication. The Court's enquiry2.42. The Court's enquiry covered the Commission and six Member States  (Belgium, Germany, Ireland, Italy, the  Netherlands and the United Kingdom). It revealed certain  weaknesses in the customs procedures; three aspects attracted attention: suspension systems,  customs value and customs controls. Suspension systems2.43. The duty suspension systems to which the Court paid particular attention  during its enquiry were temporary storage, warehousing and inward and outward processing. Temporary storage2.44. Temporary storage is a preliminary stage and, within a period of between 15  and 45 days according to the type of transport, must be followed by the assignment of  customs-approved treatment or use. The customs use the summary declaration (manifest), which is  presented when the goods arrive, to ensure that this rule is complied with. The Court found one  instance where the documents were checked only once a year, when the manifest was compared with the  corresponding specific declarations (Teesport, United Kingdom). It also found a case where the  45-day time limit allowed by the regulations was not being respected (Dublin, Ireland). Warehousing procedure2.45. The Community regulations on the warehousing procedure allow the Member  States a great deal of latitude, in view of the lack of precision concerning the designation of  authorized premises, entry and exit procedures, the types of handling authorized and the obligation  to keep stock accounts. Furthermore, no economic justification for using this system is required. 2.46. The Court noted a number of situations that were unsatisfactory, especially from the  viewpoint of Community finance: (a)importers were authorized to convert cars into utility vehicles in the warehouse, which is  contrary to the definition of 'usual forms of handling`, and despite the fact that the duty rate  for utility vehicles is higher (11% instead of 10%), which resulted in a loss of some 89  000  ECU  on 2  100 vehicles over a period of 12 months (Ireland); >TABLE>(b)the use of open warehouses was authorized (Netherlands) with the result that  the duty was suspended on stocks of vehicles held by authorized dealers; (c)there were very wide variations between Member States in the way in which the customs used  inventories as a way of checking warehouses' stock accounts: the frequency and extent of the checks  were variable, and in some cases checks were virtually non-existent. Inward and outward processing2.47. In the case of inward processing (where goods are imported for  processing with relief from duty and the resultant products are subsequently re-exported), the  conditions on which the grant of authorization depends include the provision that the essential  interests of Community producers must not be affected. This provision is deemed to have been  satisfied if the value of any one type of goods, per operator per annum, does not exceed 200  000  ECU. In Belgium the term 'type` was interpreted very liberally (for each of the 30  000 or so items  likely to be imported by the firm concerned), which effectively deprived the idea of economic  conditions of any significance. Moreover, at the time of the audit, the customs had not checked  that the limits were being respected, and in the case of some spare parts they had, in fact, been  exceeded. 2.48. As regards outward processing, the Court observed that the regime was very diversely utilized  (see paragraph 2.59 et seq.).Use of suspension systems2.49. In the light of the horizontal approach to the customs procedures  applied in respect of motor vehicles, the above findings raise certain questions regarding the use  of suspension systems. Such systems are not economically neutral, especially if, depending on the  decisions taken by national governments, they allow beneficiaries to obtain suspension of VAT and  excise duties, as well as relief from customs duties. This applies particularly to the warehousing  system, which is widely used by motor-vehicle importers. Under these circumstances the system may  be inconsistent with the objective of promoting economic activity among Community enterprises. In  fact the ultimate effect of these systems could be to outweigh any advantage by promoting the  activities of non-Community enterprises and enabling them to export their goods to the Community  under optimum conditions, which are not available to European companies. This is why, in this area  in particular, it was considered necessary to envisage the production of product-by-product  descriptions by the Commission. It would then be possible, on the basis of an evaluation of the  real effects of the common external tariff and the other Community foreign trade measures, to  define the objectives to be pursued in the economic sector concerned as regards the use of  suspension systems and to standardize the terms on which these procedures are authorized, as well  as the nature of the benefits themselves. Customs value2.50. Various methods are used to determine the customs value, allowing for certain  characteristics of the sale. In general, where motor vehicles are concerned, the customs value is  the transaction value specified in Article 3 of Regulation (EEC) N° 1224/80), i.e. the price  invoiced and paid at the time of importation, adjusted as appropriate if the buyer and the seller  are related undertakings. Procedures for checking declared values2.51. As regards the procedures for checking declared  values, the Court found that: (a)Customs declarations had been accepted without the supporting invoices (Antwerp, Belgium) or DV  1 forms (Scarborough, United Kingdom) required by the regulations, which made it impossible to  check the value; (b)the nature of the related undertaking was not mentioned (Turin, Italy) or was wrongly stated  (Brescia, Italy) in the DV 1 documents submitted. This omission was particularly regrettable  because the DV  1 provides the basis for post-clearance checks on the customs value; (c)in many instances the DV 1 documents were not produced because of statutory exemptions. Although  this situation is the result of simplified administrative procedures, it robs the customs of very  useful and readily available data, so that they are dependent on the importer's initiative, for  example, where the commercial conditions of the sale are changed. Value reductions2.52. The customs' acceptance of value reductions gave rise to the following  observations: (a)In Germany value reductions were allowed in order to take account of the repair costs borne by  an importer after a vehicle was released for free circulation if repairs had to be carried out  under the guarantee given to the purchaser. These repair costs were covered by a non-Community  manufacturer (Japan) under guarantee agreements. In the past, value reductions have given rise to  direct remission of duty; at present flat-rate deductions are applied to the values invoiced at the  time of importation and they are then adjusted on the basis of the actual costs; their effect is to  reduce the customs duties by an amount which varies between 6  ECU and 11 ECU on each vehicle  imported. This raises questions regarding the uniformity with which Community legislation is  applied and the compatibility of the application procedures with the provisions of Regulation (EEC)  N° 1224/80, especially the concept of value at the time of importation. This situation requires  further enquiry, and was brought to the Commission's attention on 12 July 1990; (b)The grant of reductions is legal in cases where vehicles are damaged during transport. There was  found to be a substantial divergence in approach between Member States - resulting in unequal  treatment for importers. Whereas in one country (Italy) no concrete examples were found, in others  the damage had to be assessed by an expert (Belgium) or evaluated on a case-by-case basis according  to the circumstances (United Kingdom, Ireland). Flat-rate reductions were also applied (Germany and  the Netherlands) with post-clearance verification; it was found, for example, that rates of 20 ECU  (Germany) and 10 ECU (Netherlands) were applied for identical vehicles. One particular case was  noted where compensation for damage incurred during maritime transport was paid in the Member State  where the vehicle was released for free circulation (Germany), whereas the damage had been repaired  under warehouse arrangements in the Member State where the vehicle was unloaded (Netherlands). Second-hand vehicles2.53. During the Court's on-the-spot visits, commercial imports of second-hand  vehicles were found in only one Member State (Ireland). The customs used two methods to establish  the customs value: in calculating the customs duties they took the transaction value as the  reference point; for the calculation of excise duty it was the recommended retail price that was  taken into consideration, after adding certain additional costs and making deductions for the age  of the vehicle. In one of the current cases examined, for example, the two methods gave a taxable  base of 1  936  ECU (customs duties) and 6  198  ECU (excise duty) respectively. Evaluation exercises2.54. The above observations should be viewed in the generally very liberal  context surrounding the transaction value of the imported product. The margin of discretion  available to importers in determining the customs value and the limited opportunities for disputing  that value that remain to the customs under the Community regulations make it all the more  important for the accounting and commercial data to be checked on the undertakings' premises,  particularly where sales between related undertakings are involved. However, substantial  differences were found in the conduct of the evaluation exercises in the Member States visited,  both as regards their frequency and the methods used and the results obtained. Centralized  information and coordination of control are needed, under the aegis and guidance of the  Commission. Customs controls2.55. The Court also looked into the checks and monitoring undertaken by the  customs authorities. The Court noticed a number of weaknesses, of varying degrees of gravity,  affecting the frequency, extent and quality of control and monitoring by the customs, including  operations which involve importers' computer systems. Data-processing systems2.56. In the case of some large-scale importers, the customs clearance  operations are carried out by computer using applications which are integrated with the commercial  management of the undertaking (Belgium, the Netherlands and the United Kingdom). Effective control  would require the customs to approve the software used and to supervise any changes to it. This  latter requirement was not being applied at the time of the Court's survey. In one case it was even  found that the customs had not vetted the tariff classification file used by the undertaking and  that the file could be modified unilaterally by the staff of the undertaking. Post-clearance checks  revealed serious classification errors. In all these cases, the customs were content to exercise  traditional methods of checking the documents produced by computer. This being the case, it is  imperative that customs control methods be modernized. Traditional documentary checks2.57. Several anomalies in the traditional documentary checks were  found: (a)due to staff shortages it was impossible to check that the summary monthly statement used as  part of the simplified procedure was complete, although such a check would have ensured that all  the vehicles delivered had in fact been cleared (Krefeld, Germany); (b)lack of sample checks on customs value and the calculation of duties (Krefeld, Germany), absence  of records of any checks that might have been made (Cologne-Rheinau and Deutz, Germany); (c)a system of control was established and documented and the key control points established only  after the Court's visit (Scarborough, United Kingdom); (d)authorization to deduct amounts of interest due under a financing agreement from the customs  value, without verifying the conditions applicable to such deductions (Ireland); (e)grouping parts falling under different subheadings of the tariff under a single heading, on the  grounds that in the event no duty was due by virtue of the system of generalized preferences  (Italy);(f)failure to evaluate the possible effect on own resources of a number of errors and problems that  were discovered in relation to the monthly declarations for free circulation (Netherlands); (g)weaknesses in the documentation and coordination of control activities relating to warehousing  operations (Netherlands). Conclusion2.58. The enquiry made it possible to draw a number of conclusions concerning the  substantial improvements that are required in the established systems: (a)the need for the Commission to have fuller and more detailed information, including information  of a financial nature; (b)the desirability of coordinated studies of vehicle value and European-level harmonization of the  conditions relating to value reduction; (c)the importance of establishing customs control techniques suited to the management methods  currently employed by large undertakings, particularly in the computer field; (d)the need for rationalizing the customs treatment of operations covered by suspension systems; (e)the highly desirable evaluation at Community level of economic conditions and the real effects  of the so-called suspension systems. THE OUTWARD PROCESSING SYSTEMIntroduction2.59. Outward processing relief arrangements (OPR) are  customs procedures whereby goods may be temporarily exported from the territory of the Community  and the products manufactured with such goods (compensating products) may subsequently be  reimported with full or partial relief from the duties owed. The relief applies to the amount of  duty which would have been applicable to the goods that were exported initially if they had been  imported at the same time and with the same origin as the compensating products. The latter are  therefore, as it were, subject to taxation on the difference, involving the processing and goods  added outside the Community. The triangular traffic arrangements allow compensating products to be  reimported into a Member State other than that from which they were exported. 2.60. The value of OPR trade in 1989 is shown in Table  2.4. The foreign trade statistics show a  total of 5  364  Mio  ECU of exports declared under the OPR scheme and a total of 6  330  Mio  ECU  of imported compensating products, from which the value of the components which were exported  temporarily has been deducted, in order to calculate the notional taxable value. Assuming that the  trade flows took place simultaneously, the taxable value taken to represent the added value would  therefore be 966  Mio  ECU. This is, however, a purely theoretical assumption: the duties that were  recovered were not calculated on the basis of the added value; a large proportion of textile  imports enjoy relief from duty under tariff quotas and, for various reasons, a proportion of the  goods exported are never declared on reimportation. >TABLE>2.61. Although statistics for the value of this trade are available, there are no  figures for actual recoveries and the corresponding relief from own resources. This situation makes  it impossible to carry out a representative check of recoveries under the arrangements. On the  basis of a rate of 11% for textiles and 6% for other products, imports would give rise to own  resources of 488  Mio  ECU, if it were not for the OPR. In fact the waived duties corresponding to  the customs value of the temporarily exported components would amount to 401  Mio  ECU and the  duties to be collected to 87  Mio  ECU (estimated figures). The Court's enquiry2.62. The Court's enquiry was concerned primarily with the general operation of  the arrangements. It was carried out by means of questionnaires, which were sent to all the Member  States, and on-the-spot visits to Denmark, the FR of Germany, France, the Netherlands and the  United Kingdom. These Member States account for a total of 80% of Community OPR traffic. Evaluation of the economic conditions2.63. Article 6 of Council Regulation (EEC) N°  2473/86  provides that use of the OPR arrangements must not be authorized if the proposed operations are  likely to cause serious damage to the essential interests of Community processors. The Member  States are required to send to the Commission every month a list of the OPR applications that have  been rejected on this score. The Commission has never, so far, received any information concerning  the rejection of an OPR application for economic reasons. 2.64. In fact, the Community regulations do not give any indication of the nature of Community  processors' essential interests, or of the situations which might have a serious effect on them.  The Member States follow their own procedures and pay scant attention to this aspect of the  authorization of OPR arrangements. For example: (a)in the Netherlands and the United Kingdom, the economic aspects were not taken into account at  all when OPR applications were examined; (b)in the FR of Germany, the economic conditions requirement was deemed to have been satisfied  automatically if the proposed operation involved the 'differential method`, entailing an increase  in the value of the product obtained. Accordingly the duty was calculated on the basis of that  value; this was the situation in most cases; (c)in Denmark, the applicant was required to state the reasons for using the OPR arrangements, but  no use was made of this information; (d)in France, Italy and Portugal the customs authorities had been instructed to examine the  economic aspects, but no precise criterion had been specified, other than optional consultation of  the ministry responsible; (e)in Ireland, Spain and Greece, OPR applications were examined centrally. 2.65. These miscellaneous procedures clearly indicate that, in the absence of specific guidelines,  the economic aspects - at Community level - of OPR operations cannot be evaluated fully in the  Member States, whether at local level, where the resources are not available, or at central level,  where the national interest tends to predominate. Suffice it to say, moreover, that those Member  States that account for a total of 60% of OPR traffic (FR of Germany, the Netherlands and the  United Kingdom) do not even consider this aspect. It is apparent, however, that there may be some  problems as regards the protection of the Community's economic interests. By their very nature, in  fact, the OPR arrangements essentially promote employment outside the Community. Nevertheless, in  addition to providing opportunities for widening Community sales, it is also a factor in reducing  European undertakings' production costs. The choice, therefore, is between achieving the lowest  possible costs, and prices, by subcontracting to non-member countries, or confining the business to  the Community, thereby jeopardizing the competitiveness of its undertakings. This is a choice which  clearly can only be made at a high level after detailed enquiry. In the final analysis, although  the rules rightly require the Community's economic interests to be satisfied, an examination of the  facts only gives ground for a kind of 'favourable presumption` that this is the case, which can in  no way replace an evaluation of what is really at stake at Community level. Procedure for authorizing the arrangements2.66. The regulations provide that OPR operations must  be authorized in advance. The only exception is repair work of a non-commercial nature. 2.67. This procedure has been implemented in various ways in the Member States: (a)in the Netherlands, the majority of authorizations were issued without any quantitative limit  and for an unlimited period; (b)this was frequently the case in Germany as well and, in addition, the technical terms of the  operation (rates of yield, identification of goods, etc.) were frequently not determined until the  reimportation stage was reached; (c)in Denmark and Portugal copies of the applications were sent to the central customs  directorates; (d)in France it was found that the practice was to issue repeated authorizations of the same type  that were valid for six months. 2.68. In these ways the primary objective of prior authorization - the assessment of the economic  desirability of the proposed operation - is ignored and all that happens is that the framework and  technical conditions of the authorized OPR operations are formally established. Method of calculating duty2.69. According to the regulations, the amount of duty due on the  reimported compensating products is calculated by applying the customs tariff rates to the value of  the products; from this amount a sum is subtracted corresponding to the import duties which would  have been due on the goods initially exported and subsequently incorporated at the same time and  from the same country as the compensating products; the relative size of the deduction takes  account of the accepted rate of yield for the operation. 2.70. This formula implies that for every declaration on reimportation of compensating products,  the values, quantities, tariff headings and rates of yield for every component of Community origin  are known precisely. In cases where an operator is involved in a continuous flow of trade, which is  generally the case, the various initial export declarations also have to be cross-checked against  the reimport declarations. 2.71. These complications have inevitably led to the adoption within the Member States of  procedures that are intended to simplify things, whereby, for example, average rates of duty are  used for the exported goods, or the duties owing on the reimported compensating products are, de  facto, simply calculated on the declared added value: a method of calculation which is contrary to  the provisions of the regulations. Customs controls2.72. Although some precautions are taken as a result of the prior authorization  system, there are still a number of checks which have to be completed either on or after  reimportation of the compensating products. 2.73. Given the complexity of the operations, the usual primary and post-clearance control  structures responsible for this difficult work are overstretched and are confronted with a choice  between carrying out very detailed checks that are out of all proportion to the financial risk, or  ignoring this area. In effect the risk lies not only in the declared OPR operation, i.e. the  operators who officially use the arrangements and submit specific OPR declarations. There is also a  risk in the case of those operators who are operating outside the system in a de facto OPR  situation, but without official authorization. At the point where the manufactured goods are  reimported these operators present the customs with invoices for the added value only (i.e. they  deduct the value of the components that are of Community origin), whereas, since they have not  applied for OPR, they should declare the full value of the imported products and pay customs duty  accordingly. Conclusion2.74. The OPR arrangements constitute a system of customs relief that was designed to  promote Community industrial and commercial activities. In practice there are two kinds of  obstacles to its satisfactory operation: the evaluation of the economic conditions of the proposed  operations and the administrative complexities of managing the system. In order to rectify this and  to preserve the justification for the arrangements, improvement should be sought in the following  directions in particular:    (a)facilitating the obligatory evaluation of economic conditions on a  case-by-case basis at national level, by laying down Community criteria of a macroeconomic nature; (b)simplifying the prior authorization procedures, and the calculation of duty in particular, in  cases where there is no significant effect on the amount of own resources recovered; (c)defining control standards which take account of the complexity of the system and its effects  and stepping up preventive measures and general information. FINES, PERIODIC PENALTY PAYMENTS AND OTHER PENALTIES2.75. The Court of Auditors carried out an  audit of operations coming under Article 710 'Fines, periodic penalty payments and other penalties`  imposed by decision of the Commission on undertakings which contravene the principles of free  competition. The enquiry covered the establishment, recovery and entering in the accounts of the  revenue. In 1990, 593 608,9 ECU were recovered; at the end of the year a total of 154,6 Mio ECU was  outstanding following appeals (13  decisions concerning 87 undertakings). An appeal does not impede  recovery, but it has become established practice for recovery to be suspended if the person to whom  the decision is addressed accepts that the sum he owes will incur interest charges and provides an  acceptable guarantee to cover the debt, including principal, interest and any increases. As a  general rule payment must be effected within three months of the date of the notification. 2.76. There were certain deficiencies in the operation of the established system, which prevented  operations from taking their normal course: (a)it was noted that there were delays in formally notifying decisions and, consequently, in the  time required for recovery; (b)sometimes the recovery procedure was initiated on the date receipt of the registered letter was  acknowledged, in other cases it was the date on which the addressee returned the Commission's  formal acknowledgement of receipt; frequently the department concerned delayed forwarding these  acknowledgements to the authorizing officer; in most of the cases noted, the recovery orders were  issued two to four months after the decision, sometimes on a date very close to the due date. There  was one case in which 14 recovery orders reached the accounting officer, after approval by the  Financial Controller, on the actual expiry date, even though some undertakings had already paid  their debts; in another case the recovery order was made out 14  months after the due date; (c)the making out of supplementary recovery, reduction or cancellation orders following judicial  decisions was subject to similar delays in transmission to the authorizing officer by the  departments concerned; it was found that one recovery order had been issued pursuant to a judgment  12  days after the fine had been paid; (d)the rulings of the Court of Justice or of the Court of First Instance are not notified to the  accounting officer systematically, even though such rulings  terminate the suspension of recovery  granted by the Commission. 2.77. As long ago as 1977, the Financial Controller drew attention to some of the abovementioned  weaknesses. Despite the new internal rules, there has not been any fundamental change in the  situation. 2.78. As for the transparency of the accounts, it was noted that the guarantees provided in cases  where recovery had been suspended were not shown in the Commission's financial statements, or in  the annexed financial information. In turn, there were no separate accounting entries for interest  on arrears; furthermore the interest was entered in the accounts only when it was collected. CHAPTER 3  (*) European Agricultural Guidance and Guarantee Fund, Guarantee  Section (EAGGF-Guarantee): Management and budgetary control >TABLE>BUDGETARY  DISCIPLINEIntroduction3.1. Financial information on the implementation of the guarantee Funds is  presented in Tables 3.1 to 3.4, and the value of intervention stocks in Table 3.5. 3.2. In its Decision 88/377/EEC of 24  June  1988 concerning budgetary discipline, the Council  limited the rate of increase of EAGGF expenditure to 74% of the rate of increase in Community gross  national product. The 1988 base of expenditure from which the agricultural guideline is to be  calculated was 27  500  Mio  ECU. Guarantee expenditure charged to Titles 1 and 2 of the general  budget in 1990 totalled 25  048,0  Mio  ECU (see Table 3.3), 18% less than the limit in the  guideline for 1990, which amounted to 30  630  Mio  ECU. 3.3. 564,3  Mio  ECU of agricultural expenditure was charged to Chapter 81 for the depreciation of  stocks held at the beginning of the year. The cost of depreciating existing surplus agricultural  stocks had been fully met by the end of 1990, two years ahead of the 1992 deadline set in the above  Decision. 796,4  Mio  ECU was also charged to Chapter 81 for the reimbursement to the Member States  of the cost of butter disposal incurred in 1987 and 1988,  1  600  Mio  ECU remained outstanding. >TABLE>>TABLE>>TABLE>>TABLE>Early-warning  system3.4. Actual expenditure in 1990 was in total 5,3% below the total appropriations voted in  the initial budget, although nine of the 18 chapters in Titles 1 and 2 showed overruns of the  initial appropriations (see Table 3.2). These overruns were financed by transfers from chapters  with surplus appropriations. 3.5. Article 6 of Decision 88/377/EEC on budgetary discipline requires the Commission to avert cost  overruns in each chapter, by establishing an 'early warning system` based on the monthly comparison  between actual expenditure and the forecast profile of expenditure for each chapter, and by using  its management powers to remedy overruns of the profiles. The budgetary authorities are to be kept  informed of the development of expenditure through monthly reports on EAGGF Guarantee Section  expenditure established by the Commission. >TABLE>3.6. As required by the decision, the forecast monthly rates of expenditure  (profiles) are calculated by reference to the monthly expenditure over the three preceding years.  To determine the profile for each chapter, the Commission calculates the proportion of annual  expenditure which was, on a three-year average, spent in each month. When calculating the profiles  for 1990, the Commission took account of certain significant changes in circumstances, in  particular changes in the basis of charging the depreciation of intervention stocks, in the payment  of advances for sheep and goat premiums, and in the pattern of exports in the sugar sector. 3.7. The monthly comparison of actual expenditure against the profiles has proven to be of limited  value for ensuring control over costs in the current budgetary year. Given that prices, which  dictate the rates of aid, are set long before the aid is paid, it takes some time before a change  in prices will influence the level of quantities produced. Furthermore, the rates of export refunds  may be fixed well in advance and paying agencies take up to three months to process claims. The  expenditure declared in any one month therefore reflects decisions taken a considerable time  earlier. A decision aimed at reducing expenditure taken when a profile is exceeded will take the  same length of time to be effective in reducing the expenditure declared by the Member States. 3.8. The only significant attempt to limit expenditure in recent experience, concerning the tobacco  market, illustrates this time-lag. Expenditure began to exceed the profile in early 1989, largely  because of increasing production in Italy. In 1990, the Commission launched an enquiry into the  Italian market and identified the main contributory factor as the rapidly increasing production of  one hybrid variety. It proposed measures under the stabilizing regime to limit aids for this  variety, and a reduction in the intervention purchase price. These measures entered into effect in  the 1990/91 marketing year. The reduction in the level of guarantee expenditure was not expected to  occur until 1991. Furthermore, such time-lags can be increased given the nature of the Community  decision-making process: for example deficiencies in the control over intervention stocks, pointed  out by the Court in its special report published on 8  September  1988 were to some degree  corrected by measures taken by the Council and the Commission in 1990 which became effective as  from 1  October 1990, i.e. in the 1991 guarantee year. 3.9. In 1990, with the exception of the tobacco sector, the Commission took few management measures  aimed at limiting expenditure. Most measures, taken in the light of the conditions in particular  markets, had the effect of increasing expenditure and hence the need for transfers of  appropriations (see Table 3.6). For example, the quantities of beefmeat allowed into intervention  storage were increased, the levels of aids aimed at disposing of stocks of milk products were  raised, and the payment of advances for sheep and goat premiums was authorized. 3.10. The accuracy of the Commission's forecasts of the requirements for appropriations is  significantly reduced by the inaccuracy of the information received from the Member States  regarding the dates when expenditure is expected to be disbursed, and the amounts concerned.  Throughout 1990, the Member States consistently underestimated in their monthly declarations the  expected disbursements over the following three months. Whilst their estimates of the next two  months' expenditure proved reasonably realistic, that for the third month did not, as is shown in  Graph 3.1. These inaccuracies contributed significantly to the need for last minute transfers of  appropriations: whilst the guarantee financial year ended on 15  October  1990, the Commission  requested transfers between chapters of 1  175  Mio  ECU on 19  October  1990 and 55  Mio  ECU on  19  December  1990. Transfers of 910  Mio  ECU requested on 13  September  1990 had thus very  rapidly proven insufficient. There is also much scope for increasing the flow of information on  expenditure from the Member States in order to provide the Commission with a sound basis for  analysing expenditure trends (see the 1989 Annual Report, paragraphs 3.5-3.8). >TABLE>3.11. The Commission has complemented the early-warning system specified in the  Council's decision by improving its cost forecasting system which is now based on a regular review  and update of the assumptions underlying the budgetary estimates regarding quantities, and rates of  aid. It then re-evaluates the expected expenditure in each budget line (rather than merely at  chapter level as in the case of the profiles). As from the 1991 EAGGF year, its revised forecasts  of costs are communicated monthly, in summary form, to the budgetary authorities, as required since  13  March  1990 by Article 99(2) of the Financial Regulation. 3.12. The monthly re-estimate of the requirements for appropriations in each budget line gives the  Commission the elements to forecast likely cost overruns well before they are signalled by the  early-warning system specified in the Council's decision on budgetary discipline. Adherence to the  profiles should now become for the first time a realistic objective for the Commission in its  management of guarantee expenditure. 3.13. Forecasts are however not enough: the Commission needs the support of the Council if its  proposed corrective measures are to be adopted and to have any significant effect on the budget  before the end of a year of adverse circumstances in which there is a real risk of agricultural  expenditure exceeding the limits set in the Council's decision. Furthermore, the Commission should  evaluate ex post the actual financial effect of the management measures taken, which is not yet the  case. MANAGEMENT OF APPROPRIATIONSCarry-overs3.14. As required by Article 100 of the Financial  Regulation, the Commission commits each month exactly the amount of guarantee expenditure declared  by the Member States. Appropriations remaining uncommitted at the year end are normally cancelled  except in isolated special cases, such as the carry-over from 1989 to 1990 of negative  appropriations totalling 57,4  Mio  ECU and concerning uncollected milk levies. 3.15. In January 1991, however, the Commission proposed the carry-over to 1991 of 685,5  Mio  ECU  of unused appropriations in six chapters. The Council approved the proposal in March 1991. Article  7 of the Financial Regulation states that 'a decision may be taken to carry over ... appropriations  still uncommitted at the close of the financial year, where the appropriations made to the headings  in question in the budget of the next financial year are not sufficient to cover requirements ...  The carry-over of such appropriations can be proposed only for exceptional reasons in order to cope  with compelling needs which cannot be met by appropriations from the next financial year. In  principle, such carry-overs are intended to cover needs normally coming under the previous  financial year but which, due to delays for which the authorizing officer was not responsible,  could not be used in due time`. 3.16. The following carry-overs do not fulfil these criteria: (a)the carry-over of 127  Mio  ECU for olive-oil production aid was stated to be justified by  delays in payments in Italy: however the payment delays in 1990 were similar to those in the  previous four years, and in fact the backlog of certain payments (to non-associated producers),  once reaching up to seven years, has been reduced to some two years; (b)a carry-over of 280  Mio  ECU to provide budgetary cover for part of the European Council  Decisions of 14 and 15  December 1990 concerning the provision of 250  Mio  ECU of food aid to the  Soviet Union and 100  Mio  ECU of emergency aid in the form of food and medical supplies to Romania  and Bulgaria. The enabling regulation was adopted on 5  March  1991. Under no circumstances could  this cost have been related to the 1990 guarantee year which ended on 15  October  1990.  Furthermore, there was little firm evidence at the date of the proposal for the carry-overs that  1991 appropriations for the relevant intervention storage budget headings would be exceeded,  particularly as the exact products to be delivered had not yet been determined. 3.17. The practical effect of granting these carry-overs is to increase by 685,5  Mio  ECU the  Guarantee Fund's resources available in 1991, a year in which the Commission feared that the  agricultural guideline might be exceeded. In previous years, the Court has criticized practices  designed to maintain the semblance of a balanced budget (most recently in paragraph 1.9 of the 1987  Annual Report). Corrections of previous years' expenditure3.18. Substantial sums of expenditure declared by the  Member States are being disallowed by the Commission under the clearance of accounts procedure:  377,9  Mio  ECU were credited to the 1990 accounts through the recovery of  expenditure charged in  1987, and on 30  November  1990 the Commission disallowed 575  Mio  ECU declared in 1988, the  recovery of which will be recorded in the 1991 accounts. Such recoveries are credited to Article  290 in the guarantee year in which the decisions are taken, as required by Article 102(3) of the  Financial Regulation. 3.19. Rather than being caused by the Guarantee measures in force, an overrun of the expenditure  profile in a particular market (see paragraph 3.5) may be partly due to irregular expenditure by  the Member States which is corrected in a later year through the clearance decision. For example,  the amount received as a result of the clearance decision regarding the 1988 year for expenditure  in the milk products sector was 233  Mio  ECU, little less than the 247  Mio  ECU overrun of the  initial appropriations for that sector in 1988. In 1990, whilst expenditure in Chapter 20 regarding  the milk products market exceeded the initial appropriations by 615,9  Mio  ECU, 285,2  Mio  ECU  was recovered from the 1987 expenditure concerning the same market. Utilization of the corrections3.20. Article 290, to which clearance adjustments are entered, has a  token entry in the budget. After the clearance decision it is decided if and to what extent the  corrections will be used to cover the financing of current year's actions through transfers from  Article 290. Such decisions are at present taken on an ad hoc basis. In 1990, when there were  receipts of 377,9  Mio  ECU, the Commission transferred appropriations totalling 119 Mio ECU: 4,0   Mio  ECU for interest payments to Member States (Article 294) and, curiously, 115  Mio  ECU for a  reduction of the negative appropriations for additional milk levies (Item 2071), (see paragraphs   3.21-3.24). The balance of the receipts (i.e. 258,9 Mio ECU) was cancelled. The Court recommends  that the Commission proposes to the budgetary authorities guidelines governing the use of the  appropriations corresponding to income arising from clearance decisions. Negative expenditure3.21. Within the guarantee budget, receipts from levies in the cereals and  milk sectors, recoveries under clearance of accounts decisions and income from monetary  compensatory amounts are shown as negative expenditure. The Court has long maintained its opinion  that the practice of including negative items in the expenditure budget contravenes the budgetary  principle, recognized in Article 4(1) of the Financial Regulation, that there should be no offset  between income and expenditure. 3.22. In 1990, the Commission further compounded its non-respect of this principle by offsetting  113,7  Mio  ECU of expenditure against income from additional levies received in the milk sector  (Item 2071). The total levies actually received were 148,3  Mio  ECU, but the Commission's accounts  show only the net sum, 34,6  Mio  ECU. Expenditure is thus being offset against income which is  itself shown as negative expenditure!Expenditure charged against negative expenditure3.23. The  abovementioned 113,7  Mio  ECU was incurred by the FR  of  Germany in 1990 for the repurchase of  milk quotas following a decision by the Commission within the clearance of the 1987 year's  expenditure. In fact, the Commission, when it came to take its decision on the clearance of the  1987 accounts, adjusted by 187,5  Mio  ECU the amount of the additional levy on milk production  owed by the FR of Germany. The 113,7  Mio  ECU which the Commission authorized the FR of Germany to  use to finance a national quota repurchasing programme concerned part of this adjustment. A similar  operation took place under the 1988 clearance. 3.24. This decision is based largely on a liberal interpretation of the provisions of Council  Regulation (EEC) N°  857/84 of 31 March 1984, which implicitly authorizes such re-uses only in  respect of the financial year during which the sums were recovered, and then only in so far as the  Member State has distributed quotas which do not exceed the guaranteed national quantities. The ad  hoc arrangement agreed upon by the Commission and the Member State, authorizing the latter to  initiate a repurchase programme up to 31  March  1991 in connection with the recovery of  expenditure declared in 1987 and 1988, contravenes the principle of annuality. Furthermore, this  amounts to charging actual expenditure in 1990 against a negative expenditure budget item with  which it has no direct connection, thus calling into question the principle of the specific nature  of appropriations. NATIONAL CONTROLS OVER GUARANTEE EXPENDITUREIntroduction3.25. Of the expenditure charged to the  Guarantee Fund in 1990, all except 11,2  Mio  ECU (0,04%) was disbursed by the paying agencies of  the Member States, which forward to the Commission monthly declarations of the total spent under  each budget heading and a statement of intervention stock movements. They also forward annual  declarations which contain further information, in summary form. Practically all the documents  supporting the legality and regularity of guarantee expenditure are kept in the Member States, as  is all detailed information on the verification of claims. 3.26. As required by Article 4 of Council Regulation (EEC) N° 729/70 of 21  April  1970, each  Member State has designated one or more agencies which they empower to effect guarantee  expenditure. These bodies are subject to audits conducted within each Member State's national  framework of financial controls, by external auditors and, in some bodies, by internal audit  departments. The verification of the eligibility of claims, in particular physical inspection, is  carried out either by the paying agency itself or by external bodies such as the customs  departments, provincial agricultural departments or producer organizations. 3.27. In 1989, the Court embarked on a programme of audits in the Member States, aimed at examining  the national controls over guarantee expenditure, and at testing the accuracy of the declarations  and the adequacy of supporting documents. The Member States concerned in 1989 were Belgium and  Spain. This programme was continued in 1990, in Italy, the Netherlands and Portugal, which  disbursed respectively 15,7%, 11,2% and 0,8% of guarantee expenditure. Controls over paying agencies3.28. In four of the Member States visited, all the paying agencies  are managed under the direct responsibility of government services. In the Netherlands, however,  seven of the nine paying agencies are 'Produktschappen` (Commodity Boards), which are public bodies  governed by representatives of the agricultural sector for which the organization is competent. The  representatives are drawn from amongst farmers, processors, traders, and the employees of each. As  well as disbursing Guarantee Funds, the organizations promote the agricultural sectors' interests  and products. The risks inherent in such conflicts of interest are mitigated by the imposition of a  regular audit by the Ministry of Agriculture of each organization's management of Guarantee Funds.  (The situation in France is comparable; the majority of the commodity boards' directors are  representatives of the agricultural trades; the boards have the status of public bodies under the  authority of the government, which appoints the chief executive.)3.29. The Directorate for the  Implementation of Regulations, a department of the Ministry of Agriculture, is one of the two  government-managed paying agencies in the Netherlands. The monthly declaration of guarantee  expenditure could not be readily reconciled to the Directorate's accounting records, principally  because the expenditure declared may be recorded in the records for months different from that of  the declaration. Furthermore, the Directorate was late in executing payments regarding three EEC  measures (premiums for suckler cows, for bulls and for the set-aside of land). 3.30. In Portugal, the Court found that the authorities have established a close level of control  over the two paying agencies, there being a number of internal and external departments responsible  for the audit of guarantee expenditure. However, as each audit body focused its work on the same,  more financially significant measures, other measures had not been examined. Improved coordination  between the bodies concerned would reduce duplication of effort and increase the audit coverage of  guarantee measures. Verification of the eligibility of claims 3.31. In its annual report on the financial year 1989  (paragraphs 3.26-3.41) the Court commented on the insufficiency of certain paying agencies'  controls over guarantee expenditure in Belgium and Spain, concerning measures for which the  responsibility for verifying and authorizing claims does not rest with the paying agencies. The  Court's findings in Italy indicate that such deficiencies are not confined to these Member States,  and can, and do, result in the payment of significant sums for ineligible claims. 3.32. For a claim against Guarantee Funds to be eligible, a number of conditions have to be  fulfilled depending on the measure concerned, for example time-limits, the size of a producer's  flock of sheep, the minimum length of time animals must be kept, the variety of a crop sown and the  quality of raw materials to be processed. The conditions are laid down in regulations specific to  each market, as are the requirements for physical verification of the claims by the Member States,  which range from 100% of all claim details (e.g. oilseeds) to a minimum of 5% of claims (e.g. sheep  and goat premiums). Advances may be paid pending the submission of evidence of eligibility, but  these are in most cases secured by bank guarantees until all documents are submitted. 3.33. In the Court's view, the paying agencies should ensure that the relevant conditions have been  fulfilled before paying a claim, and the supporting evidence should be available on file to both  national and Community auditors. This was not always the case, particularly in 'Azienda di Stato  per gli interventi nel mercato agricolo` (AIMA), the main paying agency in Italy. Whereas for some  measures, in the wine sector for example, supporting evidence was available in AIMA, for other  measures, the payment files contained only lists of the amounts to be paid, with no other  supporting documents. These are measures under which a large number of claims are made, in  particular premiums for sheep and goats, production aid for durum wheat and calf birth premiums.  Responsibility for approving and verifying these claims has been delegated to the local  agricultural services of each region, which forward lists of approved claims to AIMA. All  supporting documentation is kept in the provincial departments. 3.34. The act of delegation is not questioned, provided that the Member State, which is responsible  for ensuring that transactions financed by the Guarantee Fund are correctly executed, is able to  demonstrate that it has set up procedures necessary to verify this execution. Responsibility may be  delegated to departments which are technically equipped to appraise and process the claims, but if  there is no supervision of the execution of the delegated responsibility, the paying agency can  have no assurance that the conditions laid down in the EEC regulations have been respected: its  role is reduced to that of a cashier, disbursing Community funds on the simple request of outside  bodies. 3.35. AIMA could present no evidence of supervision, or indeed any information on the controls  exercised over claims under the measures mentioned in paragraph 3.33 above. This implies that it  had executed the payments requested by the local agricultural services without any knowledge of  their justification. Furthermore, unlike a cashier, AIMA was unable to demonstrate that the  official who had authorized the payment request was empowered to do so, or that the signature was  indeed his. 3.36. By a national law passed on 14  February  1985, the Italian Government instructed AIMA to  set up an inspection department, to be responsible for monitoring, in particular, the execution by  external bodies of their duties under the mandates given by AIMA. This department was however not  staffed until 1989, and at the end of 1990, had only 20 staff. It requires considerable  strengthening if it is to examine the implementation of all financially significant aid measures  within a reasonable time-scale. 3.37. The effect of AIMA's lack of supervision was particularly striking in the sheep and goat  sector. The Court's officials found, when inspecting the records in a number of provinces, that  each had adopted different interpretations of the Community regulations when determining the number  of animals eligible for premiums, in particular different interpretations of: (a)the documentary evidence to be submitted with each claim, some requiring none at all; (b)the nature of the evidence accepted to support the  existence of lambs and the age at which they  had been sold (which is required to exceed two months); (c)the proportion of claims to be verified by physical inspection, which ranged from 5 to 100%; (d)the amount payable in the event of discrepancies between the result of the physical inspection  and the number claimed (none applied the condition that a significant discrepancy entails the  refusal of all aid); (e)the documentary record of the inspection results and of the conclusion drawn (ranging from clear  reports to pencilled notes on the claim form). 3.38. When examining a selection of claim files in each province visited, the Court's auditors  found that a significant number of claims had been authorized and paid despite evidence to suggest  that the lambs had not been kept for the stipulated two months, their weight when sold being well  below the norm for their supposed age. 3.39. The differences in interpretation of the EEC requirements between the provinces not only led  to the payment of ineligible sums, but also to inequity between beneficiaries, who would receive  very different amounts depending on the area in which they lived. AIMA had given some instructions  to the regional authorities, but these contained no guidelines useful to the inspectors when faced  with the practical difficulty of appraising the evidence supplied by producers. 3.40. Furthermore, through lack of central supervision and coordination, there were no cross-checks  to ensure that producers, in particular those established near the border between two provinces, do  not submit claims to two provinces for the same flock. 3.41. For many other measures, even when its files contained some supporting documents, AIMA could  not present the Court's officials with evidence that it had monitored the implementation of the  control requirements of Community regulations. Such monitoring is particularly important in the  cases of claims which are verified and certified by producer or professional organizations, which  have a conflict of interest between the discharge of the control responsibilities delegated to them  by AIMA and the prosperity of their members. 3.42. When the Court could trace, either in AIMA or when visiting the provinces, reports on  inspections carried out, these inspections were in some cases too late to be effective (calf birth  premiums) or incomplete, for example lacking evidence that the minimum price had been paid to  producers (compulsory distillation of wine products). AIMA was unable to present to the auditors a  report on its own verification of oilseed processors' records for the 1989 marketing year, although  the results of these verifications form the basis of the release of guarantees securing advances  for production aid claimed. 3.43. The Court is not alone in commenting on the delegation of AIMA's duties. The national audit  authorities reported similar conclusions in 1988 and 1989, and the Commission has disallowed a  significant proportion of the expenditure declared by Italy, in particular for sheep and goat  premiums. 3.44. In both the Netherlands and Portugal, the Court found that the paying agencies accepted  certificates attesting the nature and quality of products attracting subsidies which had been  issued by the laboratories of the claimants. In order to avoid all conflict of interest, only  certificates established by independent bodies should be accepted. Community regulations3.45. Under Council Regulation (EEC) N°  729/70 of 21  April  1970, the  Member States are required to designate the authorities and bodies which they empower to effect  guarantee expenditure and to ensure that these credits are used solely for the purposes laid down  (Article 4), to satisfy themselves that transactions financed by the Guarantee Fund are actually  carried out and executed correctly, and to prevent and deal with irregularities (Article 8). These  provisions imply an important central role for the Commission, as is made clear in Article 9, which  requires Member States to keep sufficient records to allow inspectors appointed by the Commission  to check: (a)that administrative practices are in accordance with Community rules; (b)that the requisite supporting documents exist for each transaction financed; (c)the conditions under which transactions financed are carried out and checked. 3.46. These provisions presuppose that the Commission will evaluate the records presented and will  be ready to take steps as necessary to remedy any inadequacies in the quality of information  provided by Member States' paying agencies. The Court's financial audits in Member States to date  suggest that the Commission has not taken sufficient action to: (a)evaluate the information presented by the Member States; (b)inform the Member States of the shortcomings found; (c)take remedial action to prevent deficiencies in the control over the disbursement of Community  funds. 3.47. Regulation (EEC) N°  729/70 provides a statement of principles but contains insufficient  guidance with regard to practical application. For example, it is not clear which body is  responsible for keeping records: they were not present in AIMA for a considerable number of  transactions examined by the Court. This Regulation was adopted in 1970 and the provisions  concerning the paying agencies' responsibilities have remained unchanged since then. In view of the  vague definition of paying agencies' responsibilities, it is not surprising that certain have  eschewed responsibility for verifying the soundness of claims paid. The Court recommends that the  Commission should propose implementing rules which will define paying agency responsibilities with  more precision. Olive-oil production aid3.48. The unclear, onerous and complex provisions regarding the  calculation and verification of olive-oil production aid claims lead to the considerable  difficulties noted by the Court which have been experienced by the paying agencies in administering  this measure. The difficulties experienced in Spain were mentioned in paragraphs 3.29-3.39 of the  Court's annual report on the financial year 1989. 3.49. In Portugal, there was a two-year delay in processing claims under this measure, and there  were overpayments totalling 0,6  Mio  ECU for the only marketing year paid (1986/87) at the date of  the Court's enquiry. 3.50. In Italy, a register of all olive groves has been under preparation since 1981, when a  contract was awarded for the compilation of the register from aerial photography, land tenure  records and physical inspections. The contractual date for completion of the register was 1987, but  this time-limit was extended by the Italian authorities to July 1990. The cost of this work is  charged to the Community budget and amounts to some 140  Mio  ECU, of which 20  Mio ECU is for the  work completed during the time extension. In the meantime, and largely because of the delay in  completing the register, there are considerable delays in the authorizing of payments to  non-associated producers. Some 240  Mio  ECU were paid to these producers in 1989, reducing payment  delays from seven years to two years, but these producers are still experiencing longer delays in  the settlement of their claims than members of producer organizations. Reports on national controls3.51. The Community relies heavily on national controls over guarantee  expenditure, and in particular on the audits carried out by both internal and external audit  bodies. The national authorities are required to forward to the Commission detailed information on  the nature, extent and results of these audits. 3.52. Commission Regulation (EEC) N° 295/88 of 1  February  1988 requires the submission of  detailed information on the audit work performed on the records of the paying and authorizing  departments. Italy has not yet given any relevant information on the audits of expenditure  disbursed by AIMA and by the 'Intendenza di Finanza di Roma`, which disburse 83 and 13%  respectively of all payments in Italy. The reports so far submitted by Portugal were incomplete,  containing no information on audits conducted by the Finance Ministry, even though these were the  keystone of national controls over the paying agency. 3.53. Directive 77/435/EEC of 27 June 1977 (replaced from 1  January  1990 by Regulation (EEC) N°  4045/89) requires a report on the audits of the records of producers and traders which have  benefited from Community aids. Portugal had, at the time of the Court's enquiry, yet to submit any  report on these audits. Reports from Italy were submitted two years late. Physical checks on exports3.54. Under Commission Regulation (EEC) N° 2030/90 of 17  July  1990,  the Member States are required from 1  October  1990 to physically verify at least 3% of goods  attracting export refunds. This percentage is to be progressively increased to 5% in 1992. As the  Court found in the Netherlands, a considerable effort will be required to raise the rate from the  1% of exports passing the port of Rotterdam which were previously examined. The Court recommends  that the inspections which aim at meeting this requirement be targeted in particular at high-value  and high-risk exports and that the paying agencies be required to record which export refund  payments have been the subject of a physical check so that the rate of inspection may be readily  determined.  Graph 3.1 - EAGGF-Guarantee 1990: comparison between monthly expenditure in  1990 and the  estimates communicated by the Member States>REFERENCE TO A FILM>>START OF GRAPHIC><?þ><?Ð7><?±> <?×03><?©><?¨>Amount<?²><?×02><?©><?¨>(000 Mio ECU)<?±><?°><?ý><?Ð8><? 3><?©><?©><?©><?©><?©><?AE2> <?×34>|<?¡> <?Ý><?×24><?¤><?£><? 8><?ae><?¹><? 3><?ý><?©><?©><?©><?¨>4,4 <?½><?þ><?þ><?©><?©><?©> <?¨>4,2 <?½><?þ><?þ><?©><?©><?©><?¨><?oe>4<?oe>,4 <?½><?þ><?þ><?©><?©><?©><?¨>3,8 <?½><?þ><?þ><?©><?©> <?©><?¨>3,6 <?½><?þ><?þ><?©><?©><?©><?¨>3,4 <?½><?þ><?þ><?©><?©><?©><?¨>3,2 <?½><?þ><?þ><?©><?©><?©> <?¨><?oe>3<?oe>,3 <?½><?þ><?þ><?©><?©><?©><?¨>2,8 <?½><?þ><?þ><?©><?©><?©><?¨>2,6 <?½><?þ><?þ><?©><?©> <?©><?¨>2,4 <?½><?þ><?þ><?©><?©><?©><?¨>2,2 <?½><?þ><?þ><?©><?©><?©><?¨><?oe>2<?oe>,2 <?½><?þ><?þ><?©> <?©><?©><?¨>1,8 <?½><?þ><?þ><?©><?©><?©><?¨>1,6 <?½><?þ><?þ><?©><?©><?©><?¨>1,4 <?½><?þ><?þ><?©><?©> <?©><?¨>1,2 <?½><?þ><?þ><?©><?©><?©><?¨><?oe>1<?oe>,1<? 8><?þ><?Dmt0500><?Cmt> 1 <?¾> 2 <?¾> 3 <?¾>  4 <?¾> 5 <?¾> 6 <?¾> 7 <?¾> 8 <?¾> 9 <?¾> 1 <?¾> 0 <?½>1 <?¾> 1 <?½>1 <?¾> 2 <?½><?ý>              <?±>Month<?þ><?ý><?²>Note: <?±>Month  1 includes the depreciation at the beginning of  the year. <? 3><?þ><?þ><?þ><?þ><?×10><?©>Key: <?í><?ue> = actual expenditure in month <?²>n<?±> <?í> <?½><?×10> <?©>+ = estimate communicated in month <?²>n  P 3<?±><?mt><?Â"END OF GRAPHIC> CHAPTER 4  ()  European Agricultural Guidance and Guarantee Fund, Guarantee Section  (EAGGF-Guarantee): Organization and management of markets  Page 4.1.Export refunds for non-Annex  II goods654.2.Operation of the common organization of markets in the sugar and isoglucose  sector83** *4.1.Export refunds for non-Annex II goods >TABLE>INTRODUCTION4.1.1. The  institutional prices fixed by the Community for about 90% of its agricultural production in order  to support farm incomes and to achieve equal prices for the same products throughout the Community,  are frequently higher than the prices prevailing on the world markets for the most important basic  agricultural products or substitutes of them. Thus producers of processed agricultural goods incur  higher costs for agricultural input than their competitors in third countries. As a consequence  processed agricultural goods are at a comparative cost disadvantage when exported. 4.1.2. In order to safeguard the overall benefits of exporting processed agricultural goods (i.e.  the higher added value of such goods compared to their basic components, the retention of  employment in the processing industries situated within the Community, the positive effects on the  Community's foreign trade balance, and higher consumption of Community-produced basic products),  the Community compensates the exporter of processed agricultural goods for the higher cost of raw  materials included in the producer price of such goods. 4.1.3. In fact there are two distinct schemes available, one for 'certain goods obtained by  processing agricultural products` and one for 'cereals exported in the form of certain spirituous  beverages`. These goods are known as non-Annex II goods because they are not included in Annex  II  of the Treaty establishing the European Economic Community (hereinafter referred to as the Treaty)  and therefore they are not subject to the mechanisms of a common market organization. 4.1.4. Such goods cover a wide variety of manufactured agricultural products and range from beer to  baby-food from couscous to chocolate and even further to certain pharmaceutical products. Indeed,  the goods concerned are almost limitless in that they are processed goods manufactured from either  cereals, sugar and isoglucose, eggs, milk products or any combination of them. REFUNDS PAID ON CERTAIN PROCESSED GOODS4.1.5. The compensation scheme for 'certain goods obtained  by processing agricultural products` (hereinafter referred to as processed goods) is based on  Council Regulation (EEC) N°  3035/80 of 11  November 1980 which followed the initial Council  Regulation (EEC) N°  160/66 of 27  October 1966 and its various amendments. The scheme provides  for refund payments on the actual quantity of basic Annex  II products used in the manufacture of  the processed goods when exported to third countries. 4.1.6. The export refund rates applied are those fixed for the basic products. Thus, a biscuit made  from flour, butter, sugar, skimmed-milk powder, etc. will have export refunds granted on each of  the eligible basic agricultural ingredients actually used. For certain goods of a relatively  standard composition (which are listed in Annex  C of the Regulation  (1)), a 'simplified` system  is used whereby export refunds are based on a presumed composition of the goods. However, the  number of processed goods to which this simplified system applies is relatively small. 4.1.7. Hence, the Community has adopted an export refund system for processed goods with an almost  infinite number of composite refund rates, because it has to compensate the trader for cost  differences of the precise quantity of basic products used in various combinations in the exported  goods. Payment calculations and controls of payments and goods exported are therefore more complex  than those for 'normal` basic products. 4.1.8. It should be noted that as refunds for processed goods are paid on the ingredients which are  often altered or lost during the production process, chemical analysis on its own of the exported  product is in many cases not a reliable method to determine the quantities of the basic products  used. An example of the difficulties of verification is in the production of penicillin, where all  of the basic product (sugar) is consumed during the production process and is therefore no longer  identifiable in the final product. The control of processed goods must therefore be especially  tailored to meet the specific verification problems of these particular goods. Budgetary execution4.1.9. Table 4.1.1 shows the expenditure on refunds for processed agricultural  goods. The large differences between the budgeted and actual refunds in 1989 and 1990 are mainly  due to higher world prices and consequently lower rates of refund on the basic products contained  in the processed goods. The accuracy of budgetary forecasting would however be improved if the  Commission services were able to use the information on tonnages of basic products exported in the  form of processed goods, which Member States are now required to supply. This is not at present  possible due to the very late submission of data by Greece and Italy. 4.1.10. Table 4.1.2 shows the expenditure by Member State. Due to administrative difficulties in  processing claims in the United Kingdom in 1988 and France in 1989, certain payments could not be  made and had to be held over to the next year. Between 1987 and 1990, Member States incurred  expenditure in the following order of importance: Netherlands  25%; FR of Germany 15%; United  Kingdom 12%, France 11%; Italy 11%; Denmark 9% and Ireland 8%. The Court's audit4.1.11. The purpose of the Court's enquiry was: (a)to assess whether the Commission's and the Member States' control systems provide adequate  assurance that expenditure on agricultural processed goods is in accordance with Community  regulations and that they ensure sound financial management; (b)to examine whether payments for export refunds on processed goods are based on the ingredients  actually used to produce the goods; >TABLE>(c)to examine whether the notional compositions fixed for certain exported  products listed in Annex C of the Regulation are correct. 4.1.12. The audit which re-examines an area of expenditure last examined by the Court in 1979, was  carried out in Denmark, the FR of Germany, France, Ireland, the Netherlands and the United Kingdom.  The audit concentrated on controls in the processing industries specific to the processed goods and  did not especially deal with customs controls at export. The latter controls were covered in  paragraphs 3.37-3.41 of the Court's Special Report N°  2/90 of 31  May 1990. The application of the systems in the Member States4.1.13. Neither Regulation (EEC) N°  3035/80  setting out the control system for export refunds on processed goods, nor the horizontal Regulation  (EEC) N° 3665/87 give detailed guidance concerning the checks to be carried out for non-Annex II  goods. Article  8(1) of Regulation (EEC) N°  3035/80 requires inter alia: (a)when the goods are to be exported, 'the party concerned must declare the quantities of basic  products ... which have actually been used`; (b)'the party concerned shall, in support of his declaration, supply the competent authorities with  all documents and information which the latter consider relevant`; and(c)'the competent  authorities shall verify the accuracy of the declaration made to them by any appropriate means`. 4.1.14. In addition, Article 8(2) states that 'where the party concerned does not draw up the  declaration or does not provide satisfactory documentation in support of his declaration, he shall  not be entitled to a refund`. The Regulation does however allow exporters who are not manufacturers  (and thus may not know the precise composition of the goods) to claim a minimum refund on certain  goods where the percentage of each ingredient can easily be found by analysis. The goods concerned  are listed in Annex D of the Regulation. 4.1.15. In all other cases the exporter must declare the quantities of eligible basic products  which have been used in the manufacture, each time he exports the goods. This may be done either by  declaring the eligible ingredients each time he exports or by declaring and registering his  manufacturing formula (hereinafter referred to as the 'recipe`) with the paying agency before  exporting the goods, and referring to it each time goods are exported. >TABLE>4.1.16. In view of the general statement cited under 4.1.13(c) above, it is of  little wonder that the Member States, having been left to their own devices, have adopted a variety  of methods to control the regularity of their payments. The Court examined the checks applied by  the Member States in order to establish whether they are sufficient or whether weaknesses exist.Registration of recipes4.1.17. There is no requirement in Regulation (EEC) N°  3035/80 to  formally register recipes. However, its usefulness is evident. Especially when integrated in a  central database, the recipe register can be used to identify, inter alia, goods where basic  products can easily be misdescribed with little risk of detection and those goods receiving large  payments. This information can then be used to develop and implement control programmes based on  risk analysis. 4.1.18. Table 4.1.3 shows that not all Member States have adopted this approach, because some of  them were not able to indicate even the number of recipes recorded. In fact, administrative  practice in Member States varies considerably between central recording of recipes and completely  decentralized systems with only local recording. The following paragraph illustrates the systems  implemented. 4.1.19. In Ireland, the Netherlands and the United Kingdom recipes are registered centrally with  the appropriate paying agency and the amounts paid for each recipe could be identified. In Denmark  and the FR of Germany, this could not be done as the amounts are not recorded by recipe but only by  exporter. In France, many recipes are recorded centrally by the different paying agencies, but  there is a higher proportion of individual export declarations of processed goods where no recipe  has been prior-lodged but where the basic products used are declared on the export form. As each  export is not grouped under a recipe heading in the paying agencies' central systems, each has to  be considered as an individual recipe to be checked. In addition, manual payments (which for one  trader alone amounted to 37,4  Mio  FF) were not included in the records of payments for each  recipe. Regular review of recipes4.1.20. The Court considers that it is most important to establish  whether a recipe is in use and up to date because in addition to the registration of new products,  manufacturing processes change to adapt to technological advances, customer tastes and requirements  and raw material prices. However, Table 4.1.3 also shows that some Member States were unable to  furnish information on the number of extant recipes and thus they could not identify the recipes  which should be considered for verification. >TABLE>4.1.21. In the FR of Germany and the Netherlands recipe declarations are only  valid for one year and must be renewed annually. In Ireland, an annual review is carried out of all  recipes in regular use and a new recipe is lodged where necessary. In the United Kingdom, recipes  are registered for an indeterminate period but annual notices are sent to all exporters listing the  recipes registered and requiring a declaration from the exporter that the recipes are still  correct. However, an exporter failing to reply to the document will continue to be paid on the  registered recipes. The United Kingdom authorities have informed the Court that they are taking  steps to improve this procedure. In Denmark, no action is taken to ensure that recipes are up to  date. As such, errors will only be identified when the exporter is visited in connection with an a  posteriori audit which may be several years later. 4.1.22. In France, one of the paying agencies, 'Office national interprofessionnel du lait et des  produits laitiers` (Onilait) requires each exporter to declare each year the composition of  recipes. The other two agencies (ONIC and FIRS) concerned with making payments for processed goods  do not require the renewal of recipe declarations. While the 'Office national interprofessionel des  céréales` (ONIC) has indicated its willingness to introduce such a system of up-dating, 'Fonds  dintervention et de régularisation du marché du sucre` (FIRS) has indicated that it has neither the  manpower not the EDP resources to fulfill such a task. Thus, at present, there is insufficient  assurance that the recipes declared to FIRS and ONIC and used for payment are correct. Verification of recipes4.1.23. The Court considers that selection for verification should be made  following risk analysis. The recipes thus selected should then be checked against production  records at the manufacturing premises. These documentary checks should be supplemented by a  programme of sampling and chemical analysis. 4.1.24. Chemical analysis can provide some assurance that recipes are correctly stated. Indeed, in  some cases chemical analysis of original or intermediate products may provide the main basis for  making refund payments. Continuous (non-batch) production, computer-controlled processes and the  production of intermediate compound products create particular control problems. It is generally  not possible to identify the actual quantities of raw materials used to produce a particular  processed good. In this case, such checks as can be made on production must be supplemented by  chemical analysis of the finished exported goods. No Member State had identified products which  posed such control problems nor developed solutions to deal with them. 4.1.25. The customs services of the Member States sample agricultural goods and arrange for  chemical analysis as part of their normal export checks on descriptions and Export Refund  Nomenclature (ERN) headings. The results of such checks on processed goods are a useful input to  the planning of checks on recipes. But in Denmark, France and the Netherlands there was little  liaison between the paying agency responsible for checking recipes and the customs services. Thus  the results of the analysis of samples taken by customs were not used in the planning of control  work. At present verification is carried out in the following manner in each of the Member States  audited. Denmark4.1.26. In Denmark, there is no central control programme to ensure that risk products are  identified and checked. There was no organized system of sampling and analysis to support the  documentary checks. The Danish authorities totally rely on a posteriori controls which are  frequently part of 'integrated controls`, i.e. audits not only of non-Annex II payments, but also  of other export refunds, VAT, customs duties and levies, income tax and excisable transactions.  Such audits give the Danish control authorities (the customs) the basis for forming an overall view  of the traders' transactions. They do not however allow a conclusion to be reached on the accuracy  of a particular recipe for goods actually exported. Thus reliance is placed on checks, frequently  some years after the dates of export, which only give an overall impression of whether the  composition of goods has been correctly declared. FR of Germany4.1.27. According to the internal administrative instructions in the FR of Germany  all recipes are required to be checked annually by on-the-spot visits to exporters or  manufacturers. However, the audit was unable to establish to what extent this was achieved in each  region as there were no records either centrally or regionally of checks to be undertaken and  actually carried out and of the results obtained. 4.1.28. The checks undertaken by the German authorities only permit an overall comparison of the  production with recipes declared, rather than an assurance that a particular recipe actually used  for export was correctly stated and that certain quantities of basic products had been exported as  processed goods. 4.1.29. Although some sampling takes place under local customs initiative, there is no centrally  laid down programme of sampling and analysis of processed goods to support the documentary checks  carried out at the exporters' premises. This is all the more necessary given the type of controls  made by the authorities. France4.1.30. In France each paying agency has adopted different control procedures. ONIC has no  system for verifying that the recipes declared to it are correct - a situation that the Court finds  unacceptable. FIRS, with some 14  000 registered recipes (about a third of which are in use) has a  team of four control staff whose job it is to check the veracity of recipe declarations by  on-the-spot checks. While the quality of the checks carried out in the presence of the Court's  staff was satisfactory, it was clear that the resources allocated to the task were insufficient.  Representatives of the paying agency admitted that payments would be made in respect of recipes  which would not be checked. Furthermore there is little chance that ingredients declared on  individual exports of goods, will ever be checked by the paying agency due to the large number  concerned. 4.1.31. Onilait the third paying agency has an agreement with Interlait an 'interprofessionnel`  body, whose inspectors may be required to carry out checks on recipes declared. However, the audit  showed that the verification programme was not selected according to any recognizable risk  analysis, and that furthermore Interlait had not been asked to carry out checks during the 12  months prior to the Court's audit. 4.1.32. Thus in France recipes are not selected for verification based on risk analysis and  subjected to a regular programme of control by each paying agency. Furthermore, the French  authorities have not laid down any programme of sampling and chemical analysis to support or  supplement the weaknesses of documentary checks. Indeed although the paying agencies in France are  aware that the customs authorities sample and analyse goods to verify export declarations of, inter  alia, nomenclature, they do not receive all results to enable them to establish a control programme  based on risk analysis. 4.1.33. From the preceding paragraphs it is clear that the checks carried out by the paying  agencies in France are insufficient. The French authorities have indicated that there are to a  certain extent 'compensatory controls` as part of the a posteriori audit carried out under Council  Regulation  (EEC) N°  4045/89 of 21 December 1989, previously Council Directive  77/435/EEC of 27   June 1977. The Court cannot accept that control of processed goods should entirely rely on the  scrutiny of commercial documents, carried out for other purposes. Indeed, the Court was  dissatisfied with the coverage and quality of work carried out as part of the audit as three out of  the five companies visited by the Court's auditors were not applying the recipes registered.  Furthermore, the French authorities denied the Court access to their reports of the audit work  undertaken providing only names, the year in which the expenditure arose, recipes checked and  results. The Court cannot accept the non-compliance of the French authorities with their obligation  under Article 206a of the Treaty. Ireland4.1.34. In Ireland there are only 280 recipes in use submitted by 53 traders. This enables  the paying agency (the Department of Agriculture) to organize detailed checks. Before goods are  exported the trader supplies a sample for classification of ERN. The recipe established is based on  the actual use of raw materials during a trial period of about three months. Exporters have to  submit annual accounts of their usage of raw materials which are examined by control staff. Between  30 and 40 of these are verified by on-the-spot visits at least once a year. During these control  visits raw materials are sampled and analysed. There is, however, no sampling programme of finished  processed goods. In general the Court was satisfied with the checks carried out by the Irish  authorities based on production records. The Netherlands4.1.35. In the Netherlands exporters (rather than recipes) are selected for  verification. The selection is based on the size of the company and the total value of the export  refund claims being made for processed goods. Approximately 100 exporters are checked annually by  the Agricultural Inspectorate (AID), the selection being based on a limited risk analysis, using  company turnover and total amounts of non-Annex  II refunds. Exporters are given a rating 'a` to  'e` to reflect the frequency of control where those companies in category 'e` will be checked only  once every three years. 4.1.36. The controls adopted in the Netherlands like those in the FR of Germany only permit an  overall comparison of the total production and recipes declared. Furthermore, there was no  organized system of sampling and analysis to support the documentary checks. The United Kingdom4.1.37. The United Kingdom has a well-developed system for verifying the  accuracy of recipes. At present all recipes declared and registered with the paying agency  Intervention Board (IB) are referred to the local customs control officer for verification against  production records. The Court was not always satisfied that the customs staff have sufficiently  checked production data. The United Kingdom authorities have undertaken to remind all control staff  of the need to check recipes against production details. In addition, they have developed a  programme of recipe control by sampling and analysis. These checks, which the Court considers to be  based on objective risk criteria, ensure that all important recipes are regularly selected and  analysed in order to establish that the composition of the final product is in agreement with the  declared ingredients. The programme requires that other risk-based sampling is carried out by  customs at export to ensure that all exporters have at least one of their main export goods sampled  and analysed once every three years. Production losses4.1.38. In its former report on 'Export refunds on products not listed in Annex  II` the Court stated that 'procedures for allowing for losses in manufacture are not specifically  laid down, although these losses may reach 30% in weight of the basic product`. The Commission's  view then was that 'it is extremely difficult to introduce simple Community rules without unfair  discrimination between different products and industries ... losses should be dealt with ... case  by case`. 4.1.39. Since the remarks of the Court a new basic Council Regulation (EEC) N°  3035/80 has been  adopted. Unfortunately, the practices identified during the previous audit remain true, as well as  the disparity of treatment between the Member States. The German authorities allow only those  losses which cannot be recovered or commercialized (i.e. 'cooking` losses) to be claimed for  refund. In Ireland, France and the Netherlands by-products (i.e. products which can be sold) are  excluded from eligibility for refund. 4.1.40. The Danish authorities accept any losses in the manufacture of the goods exported as being  admissible for export refund payments. In the United Kingdom traders depositing a recipe are  required to state the percentages of basic products which have been totally lost in processing,  recovered but of no commercial value and recovered and sold (by-products). However, having required  this information the United Kingdom authorities pay on all basic products entering the production  process. They have explained that as the export refund system is aimed at compensating for the  higher prices of raw materials a similar trading 'advantage` would be available to a manufacturer  operating at world prices. The Court considers that there is no valid justification for granting  export refunds on goods commercialized within the Community. The Commission should re-examine the  matter with a view to introducing general guidelines. The Commission's central managementCoefficients applied to processed goods containing  cereals4.1.41. Refund rates for exports of agricultural products, contained in Annex  II of the  Treaty are fixed by the Commission and currently published in the Official Journal. The products  concerned are basic agricultural products and products derived from first processing. The  relationship between the refund rates for basic products and those for products of first processing  leads to an implicit coefficient which expresses the physical equivalence between the two products,  e.g. between maize and maize flour. However, if a cereal product of first processing is used as an  ingredient of a non-Annex  II good, the current refund rate for this ingredient does not apply.  Instead the refund rate applied is the one for the basic product, after having converted the  quantity of the ingredient into a quantity of the basic product by using a coefficient fixed in the  relevant Council Regulation (EEC)  N°  2744/75 of 29  October 1975. 4.1.42. The Court noted that the coefficients used in the refund calculation for exports of  processed goods differ from the implicit coefficients derived from the currently published refund  rates. From documentation prepared by the Commission, it is clear that substantial differences  occur. For some products the difference is as high as 75%, thus creating considerable incentives  for traders to carry out some minor processing in order to receive substantially higher refunds on  cereal ingredients of processed products than they would receive when exporting the ingredient in  its unaltered stage. 4.1.43. The Court was informed by the Commission services that one exporter had taken advantage of  these coefficients by exporting processed maize pellets falling under the CN heading 'prepared  foods obtained by the swelling or roasting of cereals or cereal products` as processed goods and  received a refund approximately 75% higher than he would have otherwise received. The Commission,  recognizing that the rate was too high, adopted a reduced refund rate for the product under  Commission Regulation (EEC) N°  3873/90 of 28  December 1990 which, while leaving the coefficient  unchanged, aligned the refund rate with that applicable to the pellets exported in the unaltered  state. The introduction of the new refund rates has closed this loophole but the trader has  switched his attention to other goods where favourable coefficients still exist. Standard composition of goods4.1.44. Annex C of Regulation (EEC) N°  3035/80 sets out the  quantity of basic products contained in certain simple processed goods. The Court requested the  responsible Commission service to provide evidence showing the basis for the rates used: none was  available. The audits on the spot in the Member States revealed that the standard quantities in  Annex C of the Regulation needed urgent review. Examples of products which require less raw  materials than indicated in Annex C are: penicillin, beer, pasta and D-glucitol where the  variations were found to be between 8 and 10%. Monitoring Member States' control procedures 4.1.45. Article 8(6) of Regulation (EEC) N°  3035/80   (13) requires each Member State to inform the Commission of the controls which it applies for the  various kinds of goods exported, and that 'the Commission shall inform the other Member States  thereof`. This requirement was only complied with in respect of Ireland and Portugal who both  supplied information in 1989. The only other information provided on Member States' systems was for  the United Kingdom and was dated 1979. This failure on the part of the Commission to monitor  control procedures means inevitably that overall control is weakened. The Commission should ensure  that information concerning the different control procedures in force in the Member States is  regularly received and examined in order to evaluate whether the control procedures adopted are  indeed sufficient and whether new control measures should be proposed. Conclusions4.1.46. The Court's audit revealed that refund rates for certain products of first  processing are higher when these products are used in manufacturing a processed good than when  exported as such. There is no objective reason for this to be so. The steps taken to adopt ad hoc  measures to adjust refund rates and to close the gaps have not been sufficient until now. 4.1.47. Similarly, the presumed standard compositions of goods contained in Annex C of the  Regulation should be reviewed as these too may, in certain cases, lead to the payment of more  refund than justified. There is a need for such matters to be closely monitored to ensure sound  financial management. The Commission should seek powers from the Council to enable it to react  quickly to prevent unjustified payments. 4.1.48. The Commission, during the 12 years since the Court's last audit of this subject, has not  succeeded in ensuring coherent treatment of production losses, and this has led to unjustified  advantages for some traders and consequently to payments of export refunds in some Member States  which were based on goods not exported, which is exactly the situation which the Commission sought  to avoid. 4.1.49. At present there is no general assurance that recipes are up to date. There should be a  requirement that they be re-lodged annually with the paying agency, with penalties, such as  non-payment of refund, introduced for non-compliance. 4.1.50. The absence of a central database for recipe control purposes in some Member States renders  controls less efficient, as these Member States are not able to select recipes for verification  according to an overall risk assessment and to provide for adequate staff resources to check the  recipes so selected. These checks should include an examination of production records and be  supplemented by chemical analysis where necessary. 4.1.51. The different quality of controls carried out in different Member States leads to  considerably different levels of assurance that refund payments are based on correctly declared  basic products and therefore privileges companies in some Member States. 4.1.52. The Court believes that it is the Commission's task to direct and organize the framework of  control. Thus the Commission should lay down clear guidelines for the Member States, the  application of which it should monitor by ensuring that Member States supply up-dated descriptions  of their control systems. REFUNDS ON CEREALS EXPORTED IN THE FORM OF CERTAIN SPIRITUOUS BEVERAGES4.1.53. Despite its formal  title this expenditure concerns export refund payments on cereals which are later exported in the  form of whiskies. Under the general rules granting export refunds, goods have to be placed under  customs control and exported within a set time-limit, which depends on the goods concerned but  which normally may not exceed eight months. This rule, although necessary for control purposes,  disadvantages certain spirituous beverages distilled from cereals, such as whisky, which must  remain in cask for a minimum of three years in order to qualify for the name Scotch whisky or Irish  whiskey. Other spirits such as gin, geneva, schnapps and grain which are made from cereals but  which do not need ageing receive export refund (as non-Annex II processed goods) at the time they  are exported. 4.1.54. When the United Kingdom and Ireland joined the European Community the disadvantage for  whisky was recognized and Protocol  19 to the 'Act of Accession` stated that the Council should  'decide the necessary measures to facilitate the use of Community cereals in the manufacture of  spirituous beverages obtained from cereals, and in particular whisky, exported to third  countries...`.  It was foreseen that measures could be taken under the common organization of the  market in cereals or under the intended common organization of the market in alcohol. 4.1.55. In the event, no common organization of the market in alcohol was introduced. However, in  1981 the disadvantage noted for whisky was dealt with and a new system of granting refunds was laid  down for spirits such as whisky. This scheme is managed within the framework of the common market  organization for cereals, and based on Council Regulation (EEC) N°  1188/81 of 28  April 1981 and  Commission's Implementing Regulation (EEC) N°  1842/81 of 3  July 1981. 4.1.56. The means by which such export refunds are granted is a broad-based one. Each year the  Commission fixes coefficients which reflect the percentage of cereals distilled which will be  exported at some later date in the form of whisky. There are a number of elements which should be taken into account when setting the coefficients. In  essence they express the ratio of exports of whisky to general releases onto the market, adjusted  to take account of trends in exports and in production and stocks. A coefficient is fixed for Irish  'A` whiskey, Irish 'B` whiskey, United Kingdom malt whisky and United Kingdom grain whisky. Thus  national coefficients are set which are applied to all cereal purchases by all the different  distilleries in the appropriate Member State. Therefore some distillers will receive export refunds  on cereals when less of their production than indicated by the coefficient is exported.  Correspondingly other distillers will export more than they are compensated for. Budgetary execution4.1.57. Until 1990, the expenditure was only made by two Member States, Ireland  and the United Kingdom the traditional Community manufacturers of whiskies. Since 1990 the  Community also pays for Spanish whisky. >TABLE>4.1.58. As shown in Table 4.1.4 the appropriations have increased from 34  Mio   ECU in 1987 to 60  Mio  ECU in 1990. Average actual expenditure during that period was 41,8  Mio  ECU (84% of the budgeted amount). The fluctuations in expenditure mainly arise as a result of  changes in world market prices of cereals. 4.1.59. As shown in Table 4.1.5 the United Kingdom is the most important whisky producer and  accounts for approximately 98% of export refunds with Ireland accounting for the remaining 2% of  expenditure. 4.1.60. The expenditure shown for the Netherlands relates to export refund expenditure on  non-whisky products which should have been properly included under budget Article  251. The error  was identified during the Court's audit and had existed since 1982 when the first payments were  made under the scheme. The total amount incorrectly accounted for is 1,2  Mio  ECU. The Dutch  authorities notified the appropriate Commission service of the correct details in December 1990. The Court's audit4.1.61. The purpose of the Court's enquiry was: (a)to examine the basis of the aid for whisky and the elements used in its calculation; and (b)to  assess whether the Commission's and the Member States' control systems provide adequate assurance  that expenditure for whisky is in accordance with the Community regulations and that they ensure  sound financial management. The control of cereal export refunds for whisky is an integral part of the Member States' excise  control of distilleries and excise warehouses. Where the Court identified weaknesses in a  particular aspect of refund  control it examined excise duty controls in order to establish whether  other compensating checks existed. The application of the system in the Member States4.1.62. Claims by a distillery for export  refunds for whisky are made firstly by declaring a quantity of cereals put under control and then,  within one year, declaring their distillation into spirit. The date of putting under control fixes  the rate of refund, while the quantity of cereals eventually distilled after the coefficient has  been applied, determines the amount of the refund. The claims, which are certified by customs, are  passed to the paying agency for payment. There are approximately 100 distilleries in the United  Kingdom and two in Ireland which make claims every two to four weeks at the end of each of their  excise duty accounting periods. >TABLE>4.1.63. Member States are required to verify the data used for setting the  coefficients which are applied for the calculation of refunds. This means that checks must be made  on the volume of total releases to the market and of exports and trends in these volumes. In  addition, the quantity, quality and moisture content of grain or malt put under control must be  verified by the authorities together with its eventual distillation. Taking cereals under control4.1.64. Regulations (EEC) Nos  1188/81 and 1842/81 foresee checks on  the quantity of cereals taken under control and on their subsequent distillation. The United  Kingdom authorities informed the Commission by letter dated 15.6.83 that cereals are taken under  control at the 'mash tun` (where the cereals are steeped with water). However, on the United  Kingdom payment declaration form the declarant states his intention to place under control on a  certain date all the cereals to be used in a given distilling period. The result is that: (a)cereals have been certified by customs as taken under control which are not at the distillery  and in extremis may not be in the Member State and thus may not be in free circulation at that  time; (b)the type of cereals, their condition and moisture content are declared by the distiller and  certified by customs when they cannot be known. 4.1.65. This practice does not comply with the relevant Regulations, in particular Articles 3(5)  and 6(2) of Regulation N°  1188/81  (18), and Articles 1(2) and 2(1) of Regulation N°  1842/81   (19). 4.1.66. A sample of 20 claims was examined; nine showed that the cereals apparently put under  control were not all distilled. The overall discrepancy was 16%, but one distillery showed a 45%  difference between the quantity put under control and the quantity 'distilled`. There is no  regulatory procedure for taking cereals out of control. In addition, as refund rates change  regularly, the distiller could take an undue advantage from increases in refund rates. The Court is  satisfied that no irregularities occurred in respect of the claims examined, but considers that the  opportunity should be removed. 4.1.67. In Ireland the cereals are taken under control at remote stores. Bulk grain is put under  control when the distiller is satisfied that the rate of refund is at a favourable level. Malt is  put under control at the malting premises when the distiller considers there is a need to do so.  However, in neither case are the cereals segregated or identifiable from the other cereals stored.  In such circumstances they cannot in fact be under control. The only official check that is made is  by the customs officer in whose area the store is sited, to check that sufficient cereals are in  fact present in store. 4.1.68. In addition there is a problem of security of the cereal between the store and the  distillery silos. The distiller maintains records of receipts of cereals at the distillery. After  distillation, selected distillery receipt notes are returned by customs to the customs officer for  the originating store to check that they correctly appear in the store's records. Under this system  there can be no assurance that all cereal loads despatched actually reach the distillery nor that  the loads once arrived, are tipped into the distillery silos and eventually distilled. The Court  considers that cereals can only satisfactorily be put under control at the distillery. Such a  system is also simpler and easier to manage. The Irish authorities and the distiller have indicated  their willingness to introduce such a system. Certification of distillation4.1.69. The Regulation requires that distillation of cereals  previously put under control is certified by the responsible authorities. In both Ireland and the  United Kingdom, customs control staff do this based on declarations from the distiller. Normally no  further checks are made at that stage. 4.1.70. In Ireland the distiller declares the quantities of different cereals distilled in each  distilling period and these are written-off against the cereal stocks under control. In the United  Kingdom where the quantities of cereals put under control are limited to distilling periods,  certificates of distillation have been frequently signed without comment by customs control  officers although the quantities of cereals distilled were less than the quantities accepted under  control. Following the Court's criticisms the authorities have agreed that control officers will  certify the actual quantity of cereals distilled and give an explanation where this is different  from the quantity taken under control following a detailed examination of traders' records. Sampling4.1.71. The cereals are required to be of sound, fair and merchantable quality. The rate  of refund is set for given moisture contents (7% malt, 16% cereals and between 43% and 47% green  malt). The refund must be decreased by the paying agency when the moisture contents are more than  these norms, thus it is important to ascertain the moisture content of the cereals at the time the  cereals are put under control. 4.1.72. In the United Kingdom customs staff are required to take samples at least three times a  year from different consignments of cereals put under control for subsequent analysis of moisture  content. At two of the five distilleries visited on the spot, no sample had been taken in the first  nine months of 1990, at a third, none had been taken during 1989 and 1990. 4.1.73. Furthermore, the sampling undertaken by customs control staff is of doubtful use as it is  not necessarily representative of the cereals put under control during the entire distilling period  of up to one month. The United Kingdom authorities have agreed to review procedures to ensure that  samples are representative. Control staff will in future examine distillers' tests of moisture and  use official tests to ensure that they are accurately recording and declaring moisture content when  cereals are taken under control. 4.1.74. In Ireland a cereals inspector of the Department of Agriculture samples and arranges tests  on cereals put under control. While the method of sampling is satisfactory, the fact that the  cereals taken under control cannot be identified, limits its effectiveness. Verification of distillation4.1.75. Given the relatively superficial checks performed when cereals  are put under control and distilled other checks need to be carried out in order to verify that the  cereals have in fact been distilled. In Ireland there is a permanent presence of several customs  staff at the distillery and key points in the distillery are under official locks. However, there  are no checks on the cereals entering the mash tun. In order to verify the quantities distilled,  customs control staff examine the distillers' monthly production statement which contains a  detailed analysis of inputs and outputs. The main element examined as part of the check is the  yield calculation (i.e. litres of pure alcohol produced from the cereals input). However, the  control staff do not record the checks carried out or the results of their examination. In  addition, as there are no officially laid down tolerances between the expected yield and the actual  yield, follow-up action relies on the individual control officer's judgement. The Irish authorities  have undertaken to introduce the necessary control procedures and record the results. 4.1.76. The United Kingdom customs do not maintain a permanent presence at the distilleries. The  checks carried out are aimed at providing an overall assurance that the distillery is operating  properly and that irregularities will be identified. This revenue control will also give some  assurance that cereals put under control have been distilled. In addition, customs control staff  are required to select a minimum of two distilling periods a year for verification of the cereal  refund claims (the paying agency envisages a frequency of three to five periods a year). These  verifications require inter alia an examination of cereal stock records, records of weighing of  cereals into the mash tun, predictable and actual yields, the draff produced (residue after  mashing) and a check that the cereal is in free circulation. 4.1.77. Such verifications were not carried out during 1989 and 1990 at four of the five  distilleries examined by the Court's auditors on the spot. The absence of such controls, given the  relatively superficial checks performed when cereals are put under control and when distilled,  calls into question the basis for paying aid. The United Kingdom authorities have informed the  Court that they will introduce a review procedure to ensure that regular verifications are carried  out. Particular control weaknesses4.1.78. At one of the five United Kingdom distilleries visited the  Court found that although a new scheme of control had not been introduced, a previous scheme had  been abandoned six months previously as being out of date, and thus, at the time of the Court's  audit, no effective scheme of control was being applied. Written evidence of checks was unavailable  at the time of the audit. This, taken together with the fact that the customs control officer  stated that official action was limited to receiving claims and stamping, certifying and forwarding  them to the United Kingdom paying agency, calls into question the control and certification  procedures adopted at that distillery and consequently the basis for paying aid. The United Kingdom  authorities have informed the Court that they have taken steps to rectify matters. A posteriori controls4.1.79. The Court examined the work carried out by the United Kingdom paying  agency under the terms of the Community audit Regulation. The Court found that under these  national audits not all relevant records had been examined at the distilleries nor had there been  an examination of financial records as required by the Regulation. Furthermore, control weaknesses  which the Court had identified had not been discovered during the national audits. The Court  believes that this was a serious weakness; the United Kingdom authorities have informed the Court  that they have taken measures to ensure proper coverage in future. The coefficient4.1.80. The basis for calculating the coefficient is laid down in Regulation (EEC)  N°  1188/81. Article 3(2) states that the coefficient reflecting the ratio between exports and  releases of whisky has to be adjusted where: (a)significant changes occur in the proportion of IPR cereals (i.e. cereals imported and processed  under inward processing relief from duty) and Community cereals; (b)foreseeable export trends show a tendency to change significantly; (c)stocks vary inordinately. 4.1.81. The adjustments required by the Regulation had not been taken into account by the United  Kingdom authorities and thus had not been notified to the Commission, although the following  changes have occurred: (a)the use of IPR by the distilling industry has decreased and in 1990 was nil; (b)the trends in export are examined over a six year period although current average storage  periods before export are about eight  years; 4.1.82. In addition, no account had been taken of duty-free sales nor has there been any review of  the component parts of blended whisky (i.e. malt and grain whisky) which, for the purpose of  calculating the coefficients, is still assumed to contain one-third malt and two-thirds grain  whisky although currently more malt whisky is used. Furthermore, in performing these calculations  and advising the Commission services, the United Kingdom authorities have not taken full account of  the effect of the accession of Greece, Spain and Portugal. The entry of new Member States has the  effect of decreasing the volume of exports when calculating the trend for future years. 4.1.83. The Court, while accepting that final responsibility for setting correct coefficients must  rest with the Commission, considers that the failure of the United Kingdom authorities to review  the components used in the coefficient calculation is regrettable as they can substantially affect  the coefficient and consequently the amounts of refund paid. The result of the inclusion of sales  of duty-free whisky and of the use of a higher percentage of malt whisky in blends would be to  increase slightly the overall amount of refund due. However, the Court has calculated that the  adoption of a trend figure over an eight-year period would lead to a cut of 12% in the malt whisky  coefficient and 10% in the grain whisky coefficient for the 1990/91 marketing year (a total  financial effect of about 4  Mio  ECU). Taking full account of the effect of accession of the three  Member States would have led to a cut of about 6% in the coefficients for the 1986/87 marketing  year. These figures will vary from year to year but in that year would have had an effect of about  2,6  Mio  ECU. 4.1.84. In Ireland the authorities rely on the main distiller to provide detailed commercial  information concerning exports and the proportion of A and B whisky in the spirit released. This  information is used in determining the coefficients. The Irish authorities should have carried out  more detailed checks on the information provided, to ensure that it is correct, in particular: (a)the period of storage; (b)the percentages of A and B whiskey exported and released onto the market; and(c)stocks of  whiskey. The Court found that the failure of the Irish authorities to assemble and check statistics had led  to errors in the coefficient. Releases onto the market of whisky used in the production of liqueur  and releases from other sources (bonded warehouses etc.) had been omitted. The result of these  omissions was to grant higher coefficients than justified since the commencement of the scheme,  with consequent overpayment of refund. The Irish authorities have informed the Court that they will  take the necessary measures to ensure that the data used is accurate. The Commission's central managementThe budget4.1.85. The Court examined the manner in which the  Commission services prepare the budget forecasts. There were a number of weaknesses caused by a  general ignorance on the part of the Commission services of the way the scheme is applied in the  Member States and, as a consequence, the use of incorrect data. 4.1.86. The budget is compiled using an annual average of cereals and malt put under control in the  United Kingdom during the previous 10 years. To this is applied the latest known coefficients for  grain and malt whisky. These final tonnages then have the appropriate forecast export refund rates  applied to them. However, as the tonnages put under control in the United Kingdom are not the  tonnages actually distilled on which refund is paid, there is an in-built overestimate of refund  which in the sample claims examined was  16%. 4.1.87. The element in respect of Irish exports is arrived at by comparing the Irish production of  litres of pure alcohol with the United Kingdom production. The figure arrived at (which is 2%), is  then applied to the United Kingdom forecast refunds to arrive at the figure in respect of Irish  exports. Thus, as the United Kingdom figure is inaccurate, the Irish one has the same percentage  distortion. A further 2% of the United Kingdom figure is added to account for other eligible  spirituous beverages (i.e. from 1990 Spanish whisky was eligible) but is similarly inaccurate. The  Commission should take the necessary measures to improve the budget forecasts. Monitoring the system4.1.88. Under Articles 16 and 17 of Regulation (EEC) N°  1842/81, Member  States are required to communicate annually and, where available, quarterly: (a)the quantities and types of cereals and malt in free circulation placed under control; (b)the quantities and types of whisky exported and released onto the market; (c)similar details concerning production from IPR cereals; (d)annual stock figures. The Court examined the information provided by Member States to the Commission services under the  implementing rules contained in the Commission Regulation, to establish whether it was sufficient  and whether it was used for market management. 4.1.89. As the coefficients are calculated for each type of whisky a requirement to supply general  information on annual stock levels is insufficient to be used for market management. Furthermore,  as the cereals figures required by the Commission are the quantities put under control rather than  those distilled, their use would lead to inaccuracies. The Commission services could not identify  the use to which the quarterly information was put, nor any need for it. No analyses had been  prepared. In its market management function it is normal for the Commission services to provide  market management reports for the management committee. None could be identified relating to  management of this scheme. Indeed, as the cereals figures are based on quantities put under control  rather than distilled, their use as a management tool is limited. Relationship between barley and malt4.1.90. Article  10 of Regulation (EEC) N°  1842/81  (23) lays  down a barley equivalent for malt of 1,33 (i.e. 133  kg of barley are required to make 100  kg of  malt). The Court has examined this relationship. Modern malting processes have better returns on  malting (taking account of moisture contents) than are indicated by this ratio. An up-to-date  figure would be in the region of 1,21; the rate of aid for malt used to produce whiskies is thus  about 9% higher than justified (approximately 1,5  Mio ECU). The barley equivalent should be  reviewed by the Commission. Economic importance of the aid4.1.91. Although the annual expenditure under this particular budget  article is low when compared to several others, 479,4 Mio ECU have been expended during the past 10  years on a measure which is without doubt of key importance to the industry concerned. It is clear  from the audit carried out in the Member States that distillers treat the export refund system for  whisky as a production aid. Distillers' accounts show that the refund represents about 6 to 8% of  the production cost per litre of pure alcohol for malt whiskies (the highest value whisky spirit),  it will be substantially more for other whiskies. Expressed in terms of its importance for  quantities subsequently exported it can represent up to 30% of production values of grain whisky  spirit. As such it is an important element in ensuring that Community producers of whisky can  compete fairly on the world market with manufacturers of competing products who are able to  purchase their raw materials at world prices. Conclusions4.1.92. Although the aid system operated by the Community is a broad-based one, leading  to distillers being over or undercompensated for their whisky exports, the Court recognizes the  practicality of the method used. However, the audit found that some 10 years after the introduction  of the scheme the Commission services had not set out guidelines either for themselves or for the  Member States as to what changes should trigger an adjustment to the coefficients. As indicated,  the Court has calculated that taking account of these various factors would have led to materially  lower coefficients. 4.1.93. Indeed, the Commission services have not made a critical examination of the data provided  by Member States and the preparation of the coefficients. In particular they have taken no account  of changes in: (a)patterns of trade concerning IPR cereals and cereals in free circulation; (b)average storage periods; (c)the composition of blended whiskies; (d)the composition of the Community which should have led to alterations in the statistics used. 4.1.94. Furthermore the Commission has not examined the working of the aid system from a sound  financial management viewpoint. Its failure to assess the control procedures has led to weaknesses  in control and the payment of more refund than justified. 4.1.95. The audit revealed that the regulations are not being properly applied when cereals are  taken under control. Nevertheless, the Court believes that the basis for the aid should be changed.  Economy, efficiency and effectiveness would be better served if the aid was based solely on  quantities distilled during a given period which logically should be tied to the 'excise distilling  periods`. Tests on moisture and quality would be maintained at the point of intake, which the Court  considers is the only point where an accurate account can be taken. Such a system would obviate the  need for a declaration of cereals under control and simplify procedures to agree with current  practices. Refund rates could be fixed by using either advance fixing or by applying the rate  applicable on the first day of the period. 4.2.Operation of the  common organization of markets in the sugar and isoglucose sector >TABLE  POSITION>INTRODUCTION4.2.1. In its report on the financial year 1988, the Court set out its  observations on the procedures used by certain Member States in the management and control of  export refunds in the sugar sector, as well as on the way in which the Commission presented the  relevant expenditure and revenue in its accounts. Regarding the system of central accounts, which  was looked at more particularly from the point of view of the objective of self-financing, the  Court observed that the accounting system, as at present conceived, did not allow for any ex post  facto checks on the extent to which the abovementioned objective had or had not been achieved. 4.2.2. During 1990 discussions took place with a view to renewing the five-year arrangement then in  force, which was due to expire on 1  July  1991. In the end, in accordance with the provisions of  Council Regulation (EEC) N°  305/91 of 4  February  1991, the arrangements were broadly extended  for a period of two years, i.e. until 1  July  1993. 4.2.3. The Court has just adopted  special report N°  4/91 on the operation of the common  organization of the market in the sugar and isoglucose sector. In this report it attempted to make  an economic evaluation of the organization of this market, with reference, in particular, to the  principles enshrined in Articles  39 and 40 of the EEC Treaty and those others, which gained ground  during the 1980s, concerning the need to bring agricultural surpluses and the related expenditure  under control. The Court also drew the consequences of the features highlighted in its report, as  they touch upon the public finances of the Community. In particular, in order to satisfy the  request voiced by the Council in its recommendations on the discharge for 1988, and in accordance  with the Parliamentary resolution on the same discharge, the question of self-financing was looked  at in greater detail in this context. 4.2.4. The main conclusions of this special report are reiterated in paragraphs  4.2.8-4.2.27,  following an analysis of the implementation of the budget in 1990. The renewal of the main features  of the sugar and isoglucose regime, which was referred to above, is obviously not enough to solve  the problems raised by the Court: they will therefore have to be looked at again in 1992. BUDGETARY IMPLEMENTATION4.2.5. The year 1990 saw a fall in expenditure on this common market  organization, on account of changes both within the Community and on the world market. The average  intervention price of 54,18  ECU per 100  kg for the 1988/89 marketing year fell to 53,10  ECU in  1989/90. Community consumption increased (particularly in the Federal Republic of Germany, as a  result of purchases of processed products by the East Germans), while there was a considerable  decrease in exports of quota sugar receiving Community aid. On the other hand, there was a very  significant increase in non-quota sugar exports (those receiving no Community subsidy) which, due  to the continuing deficit on the world market and a rise in the world market price from 28,4  ECU  per 100  kg in 1988/89 to 31,2  ECU in 1989/90, has more than compensated for the fall in quota  sugar exports. These factors resulted in 1990 in a reduction in gross budgetary expenditure - in  respect of refunds and intervention - on sugar and isoglucose. As can be seen from Table  4.2.1,  this expenditure amounted to 1  388,3  Mio  ECU, as opposed to the 2  125,0  Mio  ECU earmarked for  it in the original budget and the 1  979,9  Mio  ECU of actual expenditure in 1989. >TABLE>4.2.6. The sector's so-called 'self-financing` mechanism automatically produced a  corresponding drop in revenue from the levies paid by the industry in respect of exports of surplus  quota sugar, as illustrated by Table  2.1 in Chapter  2 of the annual report, which shows that  actual revenue in respect of sugar and isoglucose traditional resources for the financial year 1990  was 35% down on the budgetary estimates and on the revenue for the previous year (actual revenue in  1990: 910,7  Mio  ECU; original budget: 1  384,6  Mio  ECU; actual revenue in 1989: 1  381,6 Mio   ECU). The net sum charged to the budget, comprising gross expenditure less the above-mentioned  levies, thus fell to 477,6  Mio  ECU in 1990, compared with an average of 540  Mio  ECU for the  years 1981-89. 4.2.7. The favourable economic factors obtaining during the 1989/90 marketing year, which were  reflected in the budgetary out-turn for the financial year 1990, do not appear, however, to have  persisted during the marketing year 1990/91, which was marked by the appearance on the market of  several major Asian exporting countries and a return to a supply surplus. The relatively evenly  balanced market situation in 1989/90 was exceptional. Such situations are cyclical and often  coincide with periods when it is expected that there will be a review of the Community sugar  scheme. The equilibrium of 1989/90 is thus likely to be replaced by a rapid return to the surpluses  which have become customary in this sector. A SEEMINGLY COHERENT SYSTEM4.2.8. By comparison with other agricultural markets, the sugar market  is, in principle, relatively easy to manage and monitor. Sugar consumption is homogeneous and the  product does not come in different qualities, any variations being a question of different ways of  presenting it. The raw material obtained from agriculture is processed industrially. For technical  and economic reasons, the processing is carried out in a very limited number of plants (of the  order of 200), through which the product has to pass. 4.2.9. Sugar is a heavy industry, requiring substantial investment, and one where policy needs to  be developed according to clear long-term guidelines. But the limited number of companies concerned  (fewer than 100 at present, and the number is falling) makes it easier for the producers to unite  in defence of their interests, to the point where their market position could become so dominant as  to jeopardize competition. 4.2.10. The management mechanism used in this market presents manifest peculiarities by comparison  with other common market organizations, whilst nevertheless sharing certain customary features,  such as the prices system and the system of levies on imports and refunds on exports. These  peculiarities are the following: (a)a simple, general system of production quotas, namely a basic quota, known as the A quota, and a  specialization quota, or B quota; any sugar produced over and above these quotas is known as 'C   sugar` and receives no form of Community price guarantee; (b)the cost of disposing of the excess of production over consumption is usually fully financed  from production levies which are fixed at different rates for A sugar and B sugar; (c)a system of equal distribution of storage costs between the sugar producers and the main sugar  stockholders. These peculiarities can be partly attributed to historical reasons, such as the existence, when the  sugar common market organization (CMO) was being set up, of a problem of surpluses and disparities  between the constituent sugar-producing economies, and partly also to the specific structure of the  market. Taken together, these measures, both traditional and special, constituted one of the  potentially strongest and most effective mechanisms for ensuring the regulation and control of a  common market organization. A SYSTEM ADRIFT4.2.11. After 22 years of common organization of the markets in the sugar sector it  must be concluded that the experiment of organizing these markets on a Community basis has failed.  The way the system has developed has run counter to the very concept of a common market, as  presented in Article 40 of the EEC Treaty, and several of the essential objectives assigned to the  common agricultural policy by Article 39 of the EEC Treaty have not been achieved. The fact is that  while certain principles proclaimed by this Article (increased productivity and security of supply)  were achieved long ago, the same cannot be said of certain others (the rational development of  agricultural production, the stabilization of the market and reasonable prices for consumers).  Furthermore, an additional objective which came to the fore in the 1980s, namely the control of  production and thus of the expenditure linked to surpluses, is especially far from being achieved  in the sugar market, where oversupply is of the order of 150% and total spending from the Community  budget is of the order of 2  000  Mio  ECU. 4.2.12. As things stand at the moment, the European market in sugar is anything but a common  market: it is no more than the sum of the individual national markets. Production is tied to the  territories of the Member States by production quotas which are set individually, for each Member  State. More effective forms of production cannot be developed because less efficient forms of  production are being protected. The initial disparities which existed when the CMO was set up, or  when new members joined, are still there. So-called 'transitional` measures have played a large  part in this process because they have been kept in place beyond the periods for which they were  originally intended to function. The then Member of the Commission with responsibility for  Agriculture, who was a Vice-President of the Commission, made the following comments in a speech to  the Economic and Social Committee on 28  September  1967, and therefore right in the middle of the  preparatory stages of the sugar CMO: 'There are grounds for fearing that at some time in the future  the Council will agree upon a system whereby after a certain period it will no longer be possible  to achieve a common market in sugar (...). All the measures that we must take should be such as to  make it possible to open frontiers after the transitional period, resulting in specialization in  the production of sugar. This question deserves particular attention, since it is the first time  that we have encountered such difficulties and that national interests have been defended so  vigorously.`4.2.13. In fact, the system of production quotas, which has been a major idiosyncrasy  of this market since it was set up and is, in theory, an effective means of controlling and funding  production, is the factor in the equation that has led to the ossification and failure to achieve  optimum results which are the distinguishing characteristics of this market today. Instead of  allowing backward regions to adapt and making it easier for overall production to develop towards a  macroeconomic optimum, with a common market as the ultimate aim, the way in which the system has  actually been implemented by the political authorities has tended rather to move the sugar market  in the opposite direction, away from its objectives. The quota instrument has been systematically  extended with every change in the system, in order to safeguard the position of producers who were  less efficient from the start, especially in Italy, and subsequently to satisfy new Member States,  whether their natural conditions were suited to growing sugar beet or not, so as to make them at  least self-sufficient. This instrument has also been used both to offer guarantees to the former  Commonwealth countries that their exports of raw sugar to the United Kingdom will be maintained and  to ensure this supply of raw material for the British refining industry. The quota mechanism has  even prevented isoglucose, which costs less to produce, from competing with sugar. 4.2.14. The quota system has thus produced the opposite result to what was initially planned. If  one considers that it is principally the nationalization of the quotas which has made this  instrument ineffective, and even counterproductive, the conclusion is inescapable that a production  management system based on a system of production quotas, especially on generous price conditions  (see paragraph  4.2.20), is bound to fail if it takes the form of quotas defined for and managed by  each Member State and then perpetuated indefinitely, de  facto if not de jure, as can be seen in  the case of sugar. 4.2.15. The system thus implemented has allowed the common market in sugar to reach a rate of  oversupply averaging 150% over the last 10 years. This market thus boasts the greatest surplus of  all the common agricultural markets. Given that this surplus has to be disposed of on the world  market, where the level of prices averages roughly half of the guaranteed Community price - a  particularly unfavourable ratio - and that around two thirds of these exports receive refunds to  make up for this difference, the result is an extremely expensive mechanism, particularly in  relation to other markets. The truth is that sugar beet sowing in the Community could be reduced by  a minimum of 20% at no risk to the internal market supply. This situation is far from the principle  of economy which - the Court is bound to point out - is an integral part of sound financial  management. 4.2.16. One of the objectives that the creation of a common market was supposed to achieve was  regional specialization. It has to be observed that this has not been achieved, for the following  reasons: (a)In the first place, with each successive enlargement, to include countries that were not all  equally well-suited to sugar-beet cultivation, national quotas have been allocated which have, in  fact, allowed these countries to become more or less self-sufficient in sugar. From the very  beginning, certain measures included in the basic regulation and perpetuated thereafter, such as  derived prices, mixed prices and national aids, have made up for a lack of economic efficiency on  the part of the national producers concerned; (b)Originally, the B quotas, as specialization quotas, were by nature essentially mobile (the term  'migratory quotas` was used). On the one hand, they have been gradually nationalized and, on the  other, the levy intended to finance exports of B quota products has ceased to be selective. The  fact is that the institutional price is so generous that B sugar is produced even in the regions  that are least suited to the production of sugar beet, and the collection of differentiated A and B  levies, in varying proportions from one Member State to another, amounts to a mechanism for the  sharing-out among the Member States of the costs that arise from exports of quota sugar. B sugar is  produced with almost the same confidence as A sugar. 4.2.17. In actual fact, C sugar has become the real specialization sugar. This non-quota sugar,  which receives no Community guarantees and must be sold on the world market at world market prices,  is produced in quantities far in excess of the level of variations attributable to climatic  vagaries. The production of these quantities is not without its effects on the budget. In fact, the  volume of C sugar exports helps to depress the world price and therefore tends to increase the cost  of exports of quota sugar. Furthermore, when the world rate is favourable, producers give  preference to exports of C sugar, to the detriment of quota sugar. The combined financial effects  of these phenomena amount (according to a detailed analysis of this subject, see paragraphs   3.8-3.20 of special report N°  4/91) to several tens of millions of ecus a year, which have to be  met from the Community budget. 4.2.18. The volume of production and exports of C sugar can only be explained by the level of  return obtained from C sugar production, thanks to generous institutional price conditions. Further  advantages are obtained from specific measures, such as the right to carry over part of the C sugar  to the following marketing year as A sugar and receive a storage allowance on the stocks concerned.  In current market conditions, such facilities are no longer economically justifiable. 4.2.19. It is clear from the preceding paragraphs that the present guarantee level (quantities and  prices) is too high. The B quotas are seen as self-financing export quotas, whereas in fact they  amount to a surplus which ought to be competitive on the world market without the need for aid. In  this way the Court considers that the overall amount of guaranteed quantities could be reduced. A  large proportion, and even the totality, of the B quota could be treated on the same basis as C  sugar is at present, although there would still be a distinction in terms of the level at which the  levy would be set, and therefore one of pricing between A and B sugar within this reduced ceiling.  This would allow production to be guided geographically towards an economic optimum, whilst the  disposal costs, similarly reduced, could still be financed.  4.2.20. In sharp contrast to the remarkable oversupply of sugar, the supply of the alternative,  cereal-based sweetener, in the form of isoglucose, has been frozen at a minimal level of 2% of the  maximum quota. Technically speaking, around 25% of all sugar used could be replaced by isoglucose.  The Court also notes that while the countries of the south are more suited to the production of  high-quality cereals than to sugar beet cultivation, they have been slow to explore this  interesting possibility. 4.2.21. Around one third of the Community's raw sugar exports, or 1,5  Mio  tonnes, is intended to  balance out preferential imports of raw cane sugar, the bulk of which comes from the countries of  Africa, the Caribbean and the Pacific (ACP). While this practice could originally be explained by  the existence of a sugar-refining industry in the United Kingdom and Portugal when they joined the  Community, it is harder to justify in the long term, especially as the Community A sugar quota,  which ACP sugar is regarded as being equivalent to for guarantee purposes, is still sufficient to  meet the Community's domestic consumption needs. To the extent that this aid for the production of  ACP sugar is in the nature of development aid, it ought to be treated as such in the Community  budget. Furthermore, if this aid has to be for sugar specifically, the Court wonders whether a  simple price guarantee system could not be set up for producers in the ACP countries concerned,  thus obviating the need for the costly physical to-ing and fro-ing of the product itself. 4.2.22. In view of the relative importance of Community sugar exports on the world market,  accounting, as they do, for about one quarter of the market as a whole and around one half of  exports of white sugar, the impact is undeniable. This depressive effect constitutes an advantage  for the often poor importer countries which procure their supplies on this market, but it is also  an economic obstacle for the producer countries, particularly the developing countries among them,  which are sometimes greatly dependent on this kind of production in their attempts to find  profitable export outlets. A re-examination of the system would seem to be indicated, in the  context of the current trade discussions taking place under the Uruguay Round. SUBSTANTIAL COSTS4.2.23. The characteristics of internal or external macroeconomic management  generate substantial costs for the Community finances: (a)the very high cost of the structural surplus (1  987  Mio  ECU, corresponding to more than one  third of the value of internal Community consumption), which is borne both by the budget and by the  final consumer (see Table  4.2.2, which has been prepared by the Court on the basis of the  financial flows in green ecus, per marketing year); (b)the budgetary cost of the preferential imports, which, in the Court's opinion, constitutes an  unnecessary burden on the CAP budget; (c)the specific effects of the production and export of C sugar entail invisible additional  expenditure chargeable to the Community budget. To all of this must be added the pretence of the so-called self-financing principle, as will be  indicated below. 4.2.24. Bearing in mind all its constituent parts, the sugar market is a relatively simple one to  control and the administrative organization in place at Community and national level presents a  fairly well-ordered picture. The management procedures are generally competently implemented, on  the strength of relatively reliable data and very regular contacts between Community and national  departments. There is, nevertheless, one major shortcoming. As regards the accounts, more  specifically as regards the so-called self-financing mechanism, there is no ex post facto audit of  the actual operation of this mechanism, as defined in the basic regulation, or of the extent to  which it achieves its objectives, as set out in the recitals to the regulation, whereas the  principles of sound financial management require such a check. 4.2.25. This concept of self-financing, or 'budgetary neutrality`, boils down to the principle  affirmed since  1968 but fully adopted only since 1981 of the financing of the costs of disposing  of the excess of Community production over consumption by production levies. In spite of its  apparent simplicity, this concept calls for some qualification: (a)In the first place, this does not mean that the entire Community surplus supply is covered by  this mechanism: part of it is still a structural charge on the budget. This is mainly the cost of  exporting the equivalent of the imports, a sum of around 535 Mio ECU a year. Finally, not including  the equal distribution of storage costs, which is a whole system in itself, 'self-financing` covers  distinctly less than half of the market cost. (b)Next, the net burden on the budget that results, as with other CMOs, from the application of two  ECU exchange rates (the agricultural rate for converting unit amounts and the budgetary rate for  entering the financial consequences of such conversion in the accounts) should be highlighted: it  has amounted to an average of about 44  Mio  ECU over the last six years, but it has run at around  100  Mio  ECU these last two years. (c)Lastly, even though the part of the costs that is covered by production levies is paid by sugar  producers, this cost is passed on to the consumer through the level at which the institutional  price is set; the nub of the self-financing system is thus the fact that the consumer, rather than  the taxpayer, bears a considerable proportion of the cost of the system: it is perhaps this  expedient which sustains the mistaken idea that this market is self-financing and constitutes no  charge on the budget or even costs the Community nothing. 4.2.26. Beyond these initial findings, the Court's analyses, while revealing that no conclusive  reconciliation of the accounts is feasible within the current accounting system, nevertheless  raises doubts, especially as to the accuracy of the amounts used and included in the calculation of  the levies, as regards the cost of export refunds. Considering the laborious nature of these  analyses, on the one hand, and in view of the importance of transparent, verifiable management, on  the other, it would be desirable to provide for specific references to each marketing year in the  system for the declaration of revenue and expenditure by the Member States. This could be readily  achieved, especially as the Member States already have this information at hand for their own  management needs. 4.2.27. The sugar market, which accounts for 2  000  Mio  ECU of the Community budget for  expenditure relating to this CMO and approximately 1  200  Mio  ECU for revenue, costs the  Community and the consumer much more than it should. This is the consequence, in particular, of  non-specialization and over-supply under artificial conditions and is, more generally, a result of  the tendency to short-term thinking, national protectionism and optimistic evaluation which has  always characterized the process of policy-making when the system has come under review and the  market has been enlarged. Indisputably, there are lessons to be learned from the past for the next  revision of the CMO, which is due in 1993, at the end of the present system which has just been  decided by the Council of Ministers. >TABLE>CHAPTER  5  (*) Common policy on fisheries and the sea > TABLE POSITION>INTRODUCTION5.1. The appropriations for the common policy on fisheries and the  sea come under four chapters of  Title  4 (Chapters 40, 41, 42 and 47) of the general budget (see  Table 5.1). 5.2. The appropriations from Chapter 40 entitled 'Fisheries Guarantee Fund` are examined in Chapter   1 of this report. 5.3. The observations concerning legality and regularity are contained in Chapter  1 of this  report. 5.4. The observations contained in the following paragraphs concern the structural measures under  Chapter 47. They represent 52,0% of the commitments made in 1990. The two main headings concerned  by these observations would be Items 4701, 'Redeployment of fishing activities` and 4702,  'Adaptation and modernization`, which represent 78,3% of the commitments under Chapter 47 and 40,8%  of the commitments under Title  4. OBSERVATIONS CONCERNING BUDGETARY MANAGEMENTUtilization of appropriations5.5. Table 5.1 shows  that 443,2  Mio  ECU was committed for these four chapters in 1990, an increase of 29,8% compared  with 1989, and that 325,5  Mio  ECU was paid out, 24,2% more than in 1989. The table shows a high  overall level of utilization of commitment appropriations (100% of the appropriations available  originally, 95,1% of the final appropriations), comparable to that seen in 1989. The rate of  utilization of payment appropriations represented 79,3% of the final appropriations available, a  15-point increase on 1989. This increase was mainly due to the growth of expenditure to finance  international fisheries agreements, regardless of the phenomenon mentioned in Chapter 1 (see  paragraph  1.74) of advance payment of the financial compensation to Greenland. Outstanding commitments5.6. At the end of the financial year 1989, the outstanding commitments  amounted to 399,2  Mio  ECU, while, at the end of December 1990, the amounts payable against  commitments from the financial year 1990 and previous financial years amounted to 487,4  Mio  ECU.  This latter amount takes account of the cancellation, in early 1990, of 27,4  Mio  ECU of  commitments from 1987 which had not been used. Table  5.2 shows the situation of outstanding  commitments at the close of the financial year 1990. At the rate of execution of payments for 1990,  the commitments outstanding at the end of the financial year represent 9,8 years' expenditure under  Chapter 41, 4,4  years' expenditure under Council Regulation (EEC) N°  4028/86 of 18 December 1986,  and 5,1 years' expenditure under the other budget headings of Chapter 47. Even if the commitments  for the financial year are excluded in establishing these ratios, the expected periods of execution  are still 3,7 years for Chapter 41, 2,3 years for the Regulation (EEC) N° 4028/86 expenditure and  2,1 years for the other budget headings, respectively. These findings illustrate how slowly the  measures in question are being executed. Thus, under Regulation (EEC) N°  4028/86, 175,7  Mio  ECU  of payments had been effected on 31 December 1990, out of the 800  Mio  ECU provided for the period  1987-91. OBSERVATIONS ON THE IMPLEMENTATION OF THE STRUCTURAL MEASURES5.7. The Court carried out an inquiry  with a view to assessing the extent to which the implementation of the Community measures intended  to improve and adapt the capacities of the fishing fleets to the available fisheries resources is  likely to achieve the objectives assigned to these measures. In this connection, investigations  were carried out at the Commission concerning certain procedures for the implementation of these  measures. The inquiry is also being carried on in a number of Member States and, for experimental  purposes, includes joint controls carried out in liaison with the national audit institutions. Applicable regulation5.8. The structural measures adopted under the common fisheries policy, where  the improvement and adaptation of fishing fleets and aquaculture in the Community are concerned,  come under Regulation (EEC)  N°  4028/86. This Regulation provides in particular for the need to  continue the restructuring of the Community fleets by renewal or economically appropriate  modernization and a measure, to be implemented at the same time, with the aim of eliminating  fishing overcapacities. Accordingly, applications for Community financing are for construction or  modernization projects or measures to encourage the temporary laying-up of vessels or the final  cessation of fishing. Admissibility conditions for applications for aid and reimbursement5.9. To qualify for Community  aid, regardless of any technical criteria, applications for financial contributions for  construction projects must be received by the Commission before the date of commissioning of the  vessel concerned by the application, while applications for financial aid in respect of  modernization projects must be filed with the competent authority in the Member State before the  work concerned by the application begins. Bearing in mind their definitions as laid down in the  regulations, these admissibility conditions allow projects to be begun and executed some time  before the Commission's decision to award the subsidy. The Community structural aid is thus  sometimes reduced to reimbursement of expenses relating to work which was completed as long as two  years previously. 5.10. In practice, the Court observes that the Commission  is less than strict in applying the  admissibility conditions: (a)Article 37(1) of Commission Regulation (EEC) N°  4028/86, which provides that 'Aid applications  to which no grant has been awarded for lack of funds shall be carried forward once only, to the  following budgetary year`, was not observed where certain projects for construction and  modernization carried over from 1987 to 1989 were concerned. Thus, of a total of 344,2  Mio  ECU  corresponding to projects being considered or reconsidered, it was not possible to grant 280,8  Mio   ECU of aid because there were no budgetary resources available. (b)In spite of the insertion since 1989 of a standard clause in decisions awarding aid, which  stipulates that applications for reimbursement must be submitted within six months of completion of  the work, the Commission attaches no importance, when authorizing the payment of aid, to  recipients' failure to observe this provision. 5.11. Taking the budgetary resources available into account, the effect of the definition of the  admissibility conditions for applications for financial aid contained in the regulations and the  practice followed in this respect by the Commission is to reduce the impact of the investment on  the achievement of the objectives pursued by the aid policy. In fact, since it is not in a position  to influence the planning of investments, i.e. to intervene at the time when the operations are  actually being decided on, the Commission is effectively denying itself the possibility of taking a  decisive initiative in this area. The effectiveness of the aid granted in terms of the objectives  of the structural policy would be enhanced by a review of the admissibility conditions laid down in  the regulations and by more rigorous application of the provisions which already establish a link  between the granting of public aid and the period in which the investment is effected. Prior  granting of aid by the Commission would create a clearer link between the planned investment and  structural policy requirements. Aid for modernizing vesselsReasons for not taking certain projects into consideration5.12. The  system of aid for modernizing fishing vessels does not provide for the Commission to take  individual decisions by project, but for a global decision to be taken for each Member State for  all the projects submitted during the six-month reference period. An examination of the decisions  taken by the Commission during the financial years 1987 to 1990 showed that it was not always  possible for all the investment projects put forward for Community aid by the Member States to be  taken into account for  grants of aid, although no clear reasons were given for their omission.  Thus, of 126,3 Mio ECU of aid applications for the period in question, the projects which were  rejected represented 51,4  Mio  ECU. Considering that only projects entailing investment in line  with the common structural policy are eligible for public aid (Community or national), decisions to  reject any of them should in all cases be justified by reference to the structural objectives of  the common fisheries policy. Such reasons need to be given so as to open the door to national  financing for such projects in the absence of a Community contribution. Off-setting of cost items within a project5.13. Applications for aid are examined by the competent  authorities in the Member States, which pass them on to the Commission after breaking the planned  investment down into seven headings. Article  4(2) of Commission Regulation (EEC) N°  894/87 of 27   March 1987, laying down rules for the application of the system of aid for modernization,  stipulates that 'changes planned in modernization projects for which Community aid has been granted  must be referred to and approved by the competent authorities of the Member State before their  implementation`. The Court's examination of the supporting documents enclosed with the payment  orders for the modernization aid revealed that, in certain cases, the investment provided for under  one heading had only partially been carried out, while the expenditure listed under another heading  was distinctly in excess of the provision. Following this hypothesis, unlike many construction  projects, the practice followed with regard to the payment of modernization aid allows off-setting  between items on which there is under- and overspending, within the limit of the eligible sum for  the project indicated in the decision, and only a brief comment is offered to explain the  difference between the estimate and the real figure. The Court considers that the Commission should  adopt a clear, uniform practice in this matter and, in every single case, should require the Member  State to enclose with the application for payment a certificate to the effect that any changes made  were subject to explicit approval by the competent authorities in the Member State prior to their  execution, in accordance with the provisions of Article  4(2), as cited above. Rate of execution of payments5.14. Article  4(1)(c) of Commission Regulation (EEC) N°  1116/88  provides that the overall aid granted under a decision 'shall be payable as a rule in not more than  four instalments`. In practice, the decisions, which embrace several score of projects,  occasionally provide for a more limited number of payments - even though this provision is, in  fact, not always observed when the payments are executed. In practice, such measures can penalize  certain recipients. On top of the periods necessary for the national authorities to establish and  check the records of expenses presented by the recipient, there may be a further, variable, but  nevertheless considerable, delay. The time involved in this depends on the completion of other  projects, which determines when the Member State can apply to the Commission for a part payment  combining the repayments due to several recipients: actual payment to the beneficiary may thus  occur several quarters later than the completion of the works. In order to correct this situation,  the Court considers that the Commission ought to devise a new system for paying modernization aid.  This could draw on the provisions made for the reform of the structural Funds, which provide for  down payments and payments to be effected according to the observed rate at which the projects are  executed. This approach corresponds to the logic of delegating responsibilities to the national  authorities which to a large extent underlies aid for modernization, provided that the provision of  these down payments is subject to strict compliance with the regulations on the forwarding of  information on the monitoring of the execution of modernization programmes. Aid for the adjustment of fishing capacities5.15. Title VII of Regulation (EEC) N°  4028/86 lays  down the general framework within which the Member States and the Commission implement the measures  to adjust capacities in the form of aid for the laying up and permanent withdrawal of fishing  vessels. These measures are executed at the initiative and on the responsibility of the Member  States, which can obtain reimbursement of their expenses up to a limit of 50% of the scale defined  by the Community regulations. Failure to comply with the period for adopting decisions and with the rule of budgetary  annuality5.16. Each year, before 1  February, the Member States forward to the Commission an  estimate of their planned expenditure on laying-up and final withdrawal premiums. If, after  examining the estimates, it finds that the conditions for a Community financial contribution have  been met, by 1 April the Commission should determine the maximum amount of eligible expenditure per  Member State according to the regulations. In fact, since 1987, every decision has been taken after  1 April and has generally been followed by one, or even two, amending decisions towards the end of  the year or even after the close of the financial year to which the initial decision referred. This  approach is not provided for by the Regulation and, where amendment effected after the close of the  financial year is concerned, has allowed the Commission to breach the bounds of budgetary  annuality. The situation is even more serious where temporary laying-up premiums are concerned:  from 1988 to 1990, the maximum amount of expenditure eligible for Community reimbursement in this  respect was only determined in the amending decision at the end of the year, which makes for  uncertainty for the Member States concerned. Conditions for committing and effecting expenditure5.17. Article 48(2) of Regulation (EEC) N°   4028/86 lays down that the amounts in ecus specified in the scales applicable to the temporary  withdrawal and final cessation premiums are to be converted into national currencies at the  agricultural conversion rates in force on 1  January of the year in which the premiums are granted.  The application of this provision, combined with that of Article  26(2) concerning the Member  States' forwarding of an estimate of their expenditure, ought to determine the maximum amount of  the expenditure eligible for reimbursement in national currency. Likewise, the financial obligation  towards each Member State, which is equal to 50% of this amount, ought also to be denominated in  national currency, in line with the practice observed for the other kinds of aid granted in the  context of Regulation (EEC) N°  4028/86. In fact, the Commission draws up its aid decisions (and  the amending decisions) mentioned in paragraph  5.16 above in budgetary ecus, which gives rise to  the problems discussed in Chapter 1 of this report (see paragraph  1.7). In any case, such problems  should not arise in future if the Court's opinion of 25 April 1991 on the draft Commission  regulation laying down procedures for implementing certain provisions of the Financial Regulation  are put into effect, in so far as it recommends the general use of the ecu for the implementation  of the budget in accordance with uniform rules for all operations. It is true that the basic  regulations fixing the Commission's obligations in this respect would then have to be harmonized  with the principles declared by the Financial Regulation. 5.18. As a result of the practice adopted by the Commission in this regard, the Court found that,  in 1987, the Commission had reimbursed to Germany a sum larger, both in national currency and in  ecus, than the Commission had decided was due to it. In the same year, the amount repaid to Greece  in national currency was greater than the sum in national currency which corresponded to that  mentioned in the decision. In contrast, the authorizing officer made one repayment to Denmark in  1989 subject to a ceiling because it was more than the amount estimated and committed, whereas in  fact the repayment effected did not amount to the sum laid down by the decision in either ecus or  the equivalent in national currency. 5.19. Where the procedures for effecting reimbursements to the Member States are concerned, further  to those already mentioned in paragraphs 1.72 to 1.76  of Chapter  1 of this report, the following  points should be made: (a)a single payment order may be used to reimburse temporary laying-up and final cessation without  any  breakdown of the respective sums in the accounts; (b)the information forwarded to the Commission for the reimbursement of final cessation premiums  does not allow a check to ensure that the sum of each premium paid complies with the limits laid  down by the Community scale, since the figures for several vessels are often lumped together. The Court's recommendations5.20. The Court considers that the management of expenditure on  capacity adjustment should be improved by the adoption of the following measures: (a)A statement of the amounts to be paid to the Member States should be added to the Commission's  decisions on capacity adjustment premiums. The recent amendment of the Regulation, which provides  for variable reimbursement rates, makes such detail necessary.  This would allow a direct control  to be carried out on the correspondence between the decisions and the accounting commitments  relating to these and thus avoid occurrences such as that observed in 1989, when an accounting  commitment was made for 500 000 ECU less than the sum obtained from the Commission decision. (b)Although there is only one single decision for both types of aid and for all the Member States  concerned, the accounts should present a specific accounting commitment for each measure and each  Member State and these should effectively be followed up separately. (c)Where the premium for the temporary laying-up of fishing capacities is concerned, the Commission  has still not drawn up the detailed rules for this aid provided for in Article 23(5) of Regulation  (EEC) N°  4028/86. Defining clear rules in this respect, particularly where the drafting of  withdrawal plans is concerned, would considerably facilitate the implementation of this measure. (d)The Commission ought to publish an annual list of vessels withdrawn from service. Furthermore,  in view of the fact that this aid is granted not only to vessels which are actually scrapped but  also to fishing vessels which are exported outside the Community or assigned to other activities,  the Court considers that publication in the Official Journal should be backed up by publicity in  the trade publications of specific details, such as transmission frequencies and fishing vessel  type codes, in addition to any characteristics which have already been published. This publicity  would serve to reinforce the effectiveness of the measures, by preventing any reassignment of these  vessels to fishing activities in Community waters. >TABLE>>TABLE>CHAPTER 6  (*) The reform of the structural  Funds >TABLE>INTRODUCTION6.1. The Single European Act, which entered into force on 1  July 1987, listed among the Community's objectives the need to reduce regional imbalances. To this  end, it was decided to reform the structural Funds, namely the European Regional Development Fund  (ERDF), the European Social Fund (ESF) and the Guidance Section of the European Agricultural  Guidance and Guarantee Fund (EAGGF-Guidance) in order to increase their effectiveness and to ensure  improved coordination of the Community financial instruments. At the same time, the amount of money  allocated to the structural Funds was to be doubled over a period of five years in order to  increase the impact of structural spending on the economic and social cohesion of the Member  States. 6.2. The reform which entered into force on 1  January  1989 comprised three levels of legislation:  a basic Regulation, defining the organization of Community intervention in this field and the five  objectives of the structural Funds; a horizontal Regulation, specifying the ways in which the  various financial instruments of the Community were to be coordinated; and, finally, for each of  the structural Funds, a specific regulation laying down implementing provisions. 6.3. The European Investment Bank (EIB) and the other Community financial instruments (the European  Coal and Steel Community (ECSC) and the New Community Instrument  (NCI)) are required to work  together in accordance with the provisions governing their activities in order to realize these  objectives. Co-ordination of the Funds, the EIB and the other financial instruments is organized by  the horizontal regulation and is specified by agreements between the Commission and the Bank, as  well as by ECSC guidelines. BASIC PRINCIPLES OF THE REFORM6.4. The reform is intended to improve the effectiveness of  Community intervention by the implementation of certain key principles, namely increasing and  concentrating the Funds' resources, establishing partnership relations, coordinating and planning  the operations, as well as monitoring and assessing them. The Commission and the Member States are  also required to check the additionality of the aid, in order to ensure that the Community  contribution has a heightened real economic impact, particularly in respect of the reduction of  differences in levels of development. 6.5. The basic regulation assigns five priority objectives to the Funds with the aim of  strengthening the economic and social cohesion of the Community: (a)Objective 1: to promote the development and structural adjustment of less-favoured regions, (b)Objective 2: to convert regions affected by industrial decline, (c)Objective 3: to combat long-term unemployment, (d)Objective 4: to facilitate the occupational integration of young people, (e)Objective 5: to speed up the adjustment of agricultural structures (5a) and to promote the  development of rural areas (5b). 6.6. The leading role in the realization of these objectives lies with Directorate-General XVI  (Regional Policy) for Objectives 1 and 2, Directorate-General  V (Employment, Industrial Relations  and Social Affairs) for Objectives 3 and 4, and Directorate-General VI (Agriculture) for Objectives  5a and 5b. The other Funds or financial instruments contribute to the realization of one or more of  these objectives (more specifically, the ERDF for 5b, the ESF for Objectives 1, 2 and 5b, and the  EAGGF-Guidance for Objective 1). 6.7. With the exception of part of the Objective 5a measures, for which there are special  provisions, the Community action is executed in three stages. During an initial stage, the Member  States put forward plans for each of the objectives, setting out their priorities, how they plan to  proceed and the expected size of the Community contribution. In the case of Objectives 3 and 4, the  Commission establishes general guidelines, valid for at least three years, before plans are  submitted by the Member States. 6.8. During the second stage, after having considered the plans put forward, the Commission draws  up Community support frameworks (CSFs) for each plan and each Member State concerned, in agreement  with the latter. The Community role in each measure is guided by these CSFs for the duration of the  measure, which may vary between three and five years. The CSFs define the priority objectives of  each measure, and the form it should take, as well as the financial planning (Community and  national contributions, loans where relevant) and the duration of the operations. 6.9. The Commission may also propose that the Member States submit applications for assistance in  respect of certain measures, known as Community initiatives (CIs), which are of particular interest  for the Community and which are not covered by the national plans. The CSFs should also take  account of all CIs that have been approved.  6.10. The final stage specifies which operations are planned by the CSFs. Such operations are to  be carried out largely in the form of operational programmes (OPs) proposed by the Member States.  These OPs must be made up of coherent sets of multiannual measures. Where several Funds are jointly  involved in an operation which is being administered on an integrated basis, this is referred to as  an 'integrated operational programme` (IOP). 6.11. The regulations lay down the follow-up, monitoring and assessment procedures for the CSFs and  the OPs. The various stages, from conception to the final assessment of results, are carried out  within the framework of a partnership between the Commission, the Member States and the regional or  local authorities designated by the latter. COMMUNITY SUPPORT FRAMEWORKS AND DECISIONS TO GRANT AID6.12. For each of the objectives, the plans  provided for in the legislation governing the reform were presented to the Commission by the Member  States between March and November 1989. The various CSFs were adopted over the period from October  1989 to June 1990, as shown in Table  6.1, which summarizes the chronology of the Objective 1  decisions. In all, 11 CSFs have been approved for Objective 1, 54 for Objective 2, 9 for Objectives  3 and 4 and 44 for Objective 5b. In general, the CSFs have also included sums allocated for the  continuation of measures, programmes and projects that are already under way. 6.13. The Regulation stipulated that the Council must, by 31 December 1989, adapt the common  EAGGF-Guidance measures so as to achieve the objectives of the reform. Of the 20 measures of this  type that were still in force in 1990, only six have been adapted and formally attached to the  realization of Objective 5a. 6.14. As regards the 14 others, it was considered that no adaptation was necessary either because  they were close to expiry or because of their nature, which meant that they were attached de facto  to Objective 1 or 5b, even if the geographical areas they covered did not always coincide with the  eligible zones for these objectives. 6.15. In practice a large proportion of EAGGF-Guidance expenditure will continue to concern  measures decided on before the reform. 6.16. For all the objectives, the adoption of the decisions to grant aid, principally in the form  of OPs designed to implement the CSFs, took place mostly in 1990. During the financial year 1989,  and with the exception of several aids relating to Objectives 1 and 2, application was mainly  concentrated on transitional provisions allowing operational programmes to be presented before the  CSFs had been established. A considerable part of the management during 1989 and 1990 moreover  concerned the implementation of decisions taken during previous financial years. For the ESF,  financing by programmes constituted an important change in its working methods, since previous  procedures for granting aid involved such financing only exceptionally. 6.17. On 31 December 1990, the total number of financial contributions from the three Funds to OPs  could be estimated at 526: 158 from the ERDF, 329 from the ESF and 39 from the EAGGF-Guidance. The  actual number of OPs is significantly lower than this total, but neither the statements of account  nor the other Commission financial statements available at the end of 1990 provided enough  information to compile a register of them on a uniform, consistent basis, since these documents do  not specify whether the intervention of a Fund represents all the Community aid to a given OP, or  whether aid chargeable to other Funds should also be included. The first issue of the information  bulletin mentioned by the Commission in its reply (see also its replies to paragraphs 6.33 and  6.34) was not published until July 1991, or more than six months after the end of the period  audited by the Court. Attempts to improve coordination should include drawing up appropriate  documentation, which would make it possible to follow the overall development of an OP, in its  various components: current methods are too closely modelled on the former procedures. 6.18. Nor is it possible, using these statements, to distinguish the various types of programmes  concerned by the integrated approach. The integrated operational programmes proper (IOPs), i.e.  those involving several Funds which contribute jointly to an operation that is administered on an  integrated basis at the level of sub-programmes and individual measures, are at present very  limited in number. The Commission has usually preferred the formula of multi-fund operational  programmes (MOPs), made up of sub-programmes each of which is managed by a Fund, and in which there  is far less interaction between the Funds involved. 6.19. There is, therefore, still a considerable amount of work to be done to improve integration of  the operations, which is the main objective of the reform, and thus to ensure their coherence.  Furthermore, little progress has been noted as regards the task of improving the accounting for  cases where aid is combined with a loan. Additional information on coordination is given in later  chapters of this report, in particular Chapters 7 and 10, which relate, respectively, to the  implementation of Objective  1, which is the most advanced, and to the management of loans. >TABLE>6.20. The very tight deadlines for implementing the various stages of the reform  have been detrimental to its effectiveness in one important regard: there is virtually no ex-ante  assessment of Community operations, which undermines the value of any future ex-post assessment. In  addition, little use has been made of the appropriations available for possible technical  assistance; on the one hand, the potential recipients were not fully informed about the  possibilities open to them, and on the other hand the Commission's methods of implementing these  appropriations were poorly defined. In order to resolve these problems, the Commission has taken  the step of drawing up a vade-mecum and distributing it widely. This is a laudable initiative, but  its effectiveness is unfortunately likely to be very limited, because of its belatedness. 6.21. The Commission has also adopted several CIs relating to various fields (the environment,  peripheral regions, research and development, etc). These are initiatives which, because of the  time needed to draw them up, could not be included in the CSFs. As of 31  December  1990, only one  of the proposals made by the Member States for the implementation of these CIs had resulted in a  decision to grant aid by the Commission. FINANCIAL PLANNING AND THE USE OF THE ECU6.22. Article 12 of the basic regulation provides for the  commitment appropriations allocated to the structural Funds to be doubled, in real terms, between  1987 and 1993. The Funds' resources should increase, still in real terms, from 7 200 Mio ECU in  1987 to 14 500 Mio ECU in 1993, the increase amounting to 1  300  Mio  ECU for each year from 1989  to 1992. 6.23. All these guidelines have been included in the financial perspective of the 1988  Interinstitutional Agreement on budgetary discipline, which is intended to bring the growth of  Community expenditure under control. On the basis of these two estimates, the growth of commitment  appropriations, as it should have been at 1988 prices, is given in Table  6.2. 6.24. The method used, during the drafting of the budget, to convert these forecasts in constant  prices into their equivalent in current prices is based on provisional estimates of inflation which  have so far proved to be lower than the subsequent rise in prices. For this reason, this method has  resulted, for the three Funds and for the financial years 1988-90, in an undervaluation, which, on  31 December 1990, on the basis of the Commission data and subject to any subsequent corrections,  amounted to  291  Mio  ECU at 1988 prices and 321  Mio  ECU at 1990 prices. Compared with the  ceilings for all the structural measures covered by the Interinstitutional Agreement, the  corresponding amounts here are 299 and 330  Mio  ECU. 6.25. Table 6.3 reconstitutes the budgetary implementation of Titles 3, 5 and 6, which mainly cover  the EAGGF-Guidance, the ERDF and the ESF respectively. Whilst, on the whole, the final  appropriations differ only slightly from the appropriations included in the initial budget, this  situation is the result of a reduction in the appropriations allocated to Title 5 (Regional  development and transport) and Title 6 (Social field), and an increase in those for Title 3 (EAGGF  Guidance Section and specific agricultural measures). The reductions for Titles  5 and  6 have  resulted in an increase in the implementation rate of final appropriations in respect of these two  titles. In the case of the whole of Title 3, the increase in appropriations has not been  accompanied by an enhanced rate of utilization, since the commitment and payment appropriations  ultimately proved to be less than the initial allocations because of the low rate of execution of  the specific agricultural measures. For the EAGGF-Guidance proper the rate of execution of final  appropriations was 99,9  %>TABLE>6.26. Overall, for the three titles referred to above,  there was a slackening of the rate of implementation of the appropriations in 1990, compared with  the previous financial year. This fall in the rate may be attributed to the difficulties inherent  in implementing the reform. For the three Funds proper, the fall in the implementation rate  concerns the commitment appropriations. In fact, the rate of utilization of final appropriations  was 93,8  % in the case of commitment appropriations and 99,3  % in the case of payment  appropriations, whilst in 1989 the corresponding rates were 99,1  % and 96,8  % respectively. >TABLE>6.27. Article 22 of the horizontal regulation stipulates that Community  decisions, commitments and payments shall be denominated and carried out in ecus, in accordance  with procedures to be adopted by the Commission. The procedures concerning the use of the ecu in  the budgetary implementation of the structural Funds, which the Commission adopted on 2 July 1990  by its Regulation (EEC) N° 1866/90, state that financing plans for CSFs and for grants shall be  drawn up 'at constant prices in ecus`. 6.28. The use of the ecu at constant prices entails numerous administrative problems which the  Commission has not yet properly solved, although 18 months passed between the adoption of the two  regulations referred to above. 6.29. Denominating the grants in ecus has had only a limited effect on the use of the ecu. The  Member States have the option of presenting their applications for aid in national currency (in  which case the Commission carries out the conversions) or in ecus. During the period to 31   December  1990, the Member States only took up the first option, because of the absence of  implementing procedures for the second. In addition, the national administrations responsible for  the allocation of Community funds are generally not legally entitled to hold ecu accounts and  therefore have to convert the sums through commercial channels. 6.30. Keeping the accounts in constant prices should be seen in the light of the desire to double  in real terms the volume of commitment appropriations allocated to the structural Funds. If this  approach were used for all the programming of measures financed by the Funds, management might well  be made considerably more complicated. Moreover, accounting in constant prices reduces, but does  not eliminate, the risks inherent in loss of purchasing power, particularly in the event of a  significant time-lapse between the commitment and the payment, as well as in the event of a  divergence between changes in the Community price index and changes in prices in national currency  in the Member States. A measure of adaptation may, in principle, take place through the variations  in the ecu exchange rate, but this is rarely concomitant with the implementation of measures  receiving aid. In addition, it is not clear that the methodology of indexing programmes will double  the structural Fund allocations in real terms, in particular in the event of delay in the  implementation of the annual tranches, as the latter always retain the indexing of the starting  year. 6.31. Greater attention should also be paid to the methods used by the Member States for drawing up  financing estimates for their plans, particularly with regard to their consistency in respect of  price forecasts. The Court even found a case of a Member State which, acting on its own initiative,  had adjusted the data supporting an application for payment in order to take account of inflation,  which does not comply with the obligation to declare only expenditure actually incurred.  Difficulties may also arise when a Member State has to refund all or part of a quantity of  Community aid it has advanced to a third party in national currency. 6.32. The procedures to be followed in order to index the CSF financing plans and programmes had  not been adopted by the Commission by the end of 1990. The price revisions that programming in  constant prices implied during the financial year thus remained provisional, pending the adoption  of a definitive procedure.6.33. As far as financial planning is concerned, it should also be noted that the reform extends  the system of commitment by annual instalments and payment of advances to all the structural Funds.  The Court drew attention in paragraphs 7.20-7.37 of its annual report concerning the financial year  1989 to the shortcomings of such a system, which ought to be supplemented with information that  will make the accounts more transparent and, in particular, will make it possible to establish the  total financial obligations borne by the Community which will have to be met from future budgets.  6.34. In response to the comments referred to above, the Commission has repeatedly said that it  will provide information on its potential obligations and liabilities. The Court notes with regret  that the 1990 accounts provide no such information. On the basis of a summary assessment, total  legal obligations resulting from decisions already approved and not yet recorded in the accounts  amount to about 27 000 Mio ECU at 1989 prices, i.e. somewhat more than 30 000 Mio ECU at current  prices. ADDITIONALITY OF THE AID6.35. The idea of the additionality of aid emerged in 1975 in relation to  the ERDF. It has taken a more precise form over the course of time and is at present defined in the  reform's horizontal regulation which, in Article  9, extends it to embrace all the structural  Funds. This regulation specifies that the Commission and the Member States shall ensure that  increases in the appropriations allocated to the Funds have a genuine additional economic impact in  the regions concerned and result in at least an equivalent increase in the total volume of official  or comparable structural aid in the Member State concerned, bearing in mind the macroeconomic  circumstances in each case. Increasing the volume of aid in the regions concerned is not  necessarily enough to guarantee an additional economic impact, as this may also depend on the  general situation and on an improvement in the quality of the administration, such as is expected  to result from the reform as a whole. 6.36. Since the introduction of the concept, the Commission has met with the greatest difficulties  in ensuring that it is correctly and effectively applied. Additionality has often been reduced to a  simple transfer of resources, which facilitates the relaxation of budgetary constraints, with  positive effects on budgetary equilibrium, fiscal pressure or the redeployment of economic and  social policies but without having any impact on the resources devoted to regional development.  Since the early 1980s, moreover, there has been a tendency for the Member States to reduce their  expenditure on regional aid, even though these years have, in general, seen an upturn in the  economic cycle. 6.37. The additionality principle is of prime importance because the effectiveness of Community  measures in terms of structural development is dependent on the application of it. Without it, the  Community contribution takes the place of contributions by the Member States and has no additional  effect on the regions. Nevertheless, the efforts made by the Commission during the period 1975 to  1988 did not provide the means to check, even summarily, the effectiveness of the additionality  aspect. The reform Regulations, which enshrined in law the obligatory nature of additionality and  extended it to all the structural Funds, ought to provide the Commission with an opportunity to  develop a more all-embracing assessment methodology which would apply to all the structural Funds.  A considerable effort remains to be made, especially as neither the RDPs nor the CSFs give any  indications as to the approaches adopted for such an assessment. 6.38. In August 1990, and on the basis of the provisions of the horizontal regulation and of those  contained in the CSFs, the Commission sent the Member States a request for information that would  enable it to check the presence of additionality on the ground, together with an explanatory note  on the purport of the regulation: according to this, the additionality requirement has been met if  the Community contribution constitutes an addition to the sum which could normally be expected to  be spent out of national resources on the objectives of the reform. In that case, additionality may  take the form of an increase in the scale of the operations planned, an increase in the speed at  which they are carried out, or new measures, thus increasing total eligible expenditure by the  Member States to a level at least equal to the Community contributions. According to the note  mentioned above, the geographical scope, the duration and the nature of the expenditure that is to  be taken into account for the purpose of checking additionality are factors that are separately  determined for each CSF. 6.39. This kind of interpretation is in line with the Regulations but constitutes a minimalist view  of additionality. What it implies, in effect, is that the additional structural effort may be  reduced to the Community contribution alone, without any corresponding contribution by the Member  States, whose only obligation, ultimately, is to keep their own development effort constant. This  approach is feeble when looked at in the light of the concern expressed in the Regulations to  strengthen the economic impact of structural measures and in the light of the importance which the  Single European Act ascribes to the objectives of economic and social convergence and cohesion. 6.40. This minimalist interpretation ought to urge the Commission to check particularly carefully  that the additionality requirement is being respected. However, in the absence of an ex-ante  assessment, as required by the regulations, the checks which the Commission is currently  attempting, even if they succeed, risk only confirming the actual established facts, without  offering any real possibility for making corrections. 6.41. At the practical level, it is difficult to measure additionality because it is difficult to  decide what amount of expenditure could normally be expected. This latter figure may fluctuate  according to the economic situation or to budgetary constraints, and variations in regional  expenditure in respect of the reference period are often no more than indicators, with little  probative value. In this respect, the Commission chose 1988 as the reference year, a year which, as  indicated above, is in harmony with the general trend that has been observed since the beginning of  the 1980s whereby the regional aid granted by the Member States is reduced. 6.42. In the case of several Member States, replies to the Commission's request for information  were still being prepared when this report was being written. The replies that had been received  were generally not very satisfactory and the Commission was planning to send out additional  requests for information. The Commission has ruled that the principle of additionality should apply  at the level of the CSFs but it has not yet clearly indicated which of its departments will be  responsible for checking this. CONCLUSION6.43. The reform aims to increase the effectiveness of the measures, principally by a  more concentrated and convergent approach by the structural Funds and by Community policies in  general. To this end, it introduces changes to the Funds' activities which concern the main aspects  of management. Coordination must none the less be strengthened, so as to ensure that the  organization which the reform seeks to bring about is not modelled on traditional administrative  methods, which would put it at risk of being reduced to somewhat superficial elements and which  would add to the existing methods without really modifying and improving them. 6.44. The technical aspects of the planning procedures must be proportional to the expected  benefits. It would be regrettable if Commission departments whose work would be completely taken up  with complex administrative procedures could no longer, ultimately, pay sufficient attention to  other especially fundamental aspects such as ex-ante and ex-post assessment. 6.45. Additionality and improved management are the prerequisites for achieving the increased  impact sought by the reform of the Funds. The doubling of the Funds is the concrete manifestation  of the importance which the Commission and the Member States attach to social and economic  coherence and convergence. The concept of additionality, introduced as long ago as 1975 to the  provisions concerning the Community structural policy, should have been given verifiable  operational effect to a greater extent than has been the case. CHAPTER 7  (*) The promotion of the development and structural adjustment of  underdeveloped regions (Objective 1 of the reform of the structural Funds) >TABLE> INTRODUCTION7.1. Objective 1 of the reform of the structural Funds is directed towards promoting  the development and structural adjustment of regions whose development is lagging behind. This is  the major objective in financial terms: in fact, nearly two-thirds of the resources of the Funds,  and 80% of those of the European Regional Development Fund (ERDF) in particular, have been devoted  to achieving that objective during the period 1989-93. The regions which are eligible for Objective  1 (Objective 1 regions) can also receive Community aid under Objectives 3, 4 and 5a of the reform,  which are sectoral. 7.2. What is more, this is also the objective which is closest to being fully achieved, which is  why the Court considered it would be useful to analyse the Commission's actions for the  implementation in the context of Objective 1 of such essential principles for the reform as the  concentration of aid, partnership, coordination and programming of measures and the monitoring and  assessment of them. IMPLEMENTATION OF OBJECTIVE 1Financial implementation7.3. The Court of Auditor's concern was to  establish what progress had been made in the implementation of Objective 1 for 1990 and for the  period 1989-90. However, the Commission was only in a position to provide the data which allowed  Tables 7.1 and 7.2 to be drawn up some days before the finalization of this report and,  accordingly, the Court has not yet been able to verify these data, which are presented here for  information only. It should be noted that around one-half of the commitments for the period 1989-90  relate to measures which were launched before the reform. For the same period, the commitments  entered into under the Community support frameworks (CSFs) were validated to the extent of 61%,  while the rate for the ERDF, at 56%, was slightly higher than that for the advances agreed when the  instalments were committed (50% of commitments). 7.4. The operational programmes (OPs) decided since 1989, which represent the bulk of the new  assistance decided in the context of the reform, absorbed 25% of the commitments in respect of  Objective 1 in 1989 and 64% of those in 1990, or 49% for the period 1989-90. The 49% average  conceals a range of very different situations, according to which Fund is concerned. Thus, while  the weight of commitments for these same OPs under the ERDF (48%) is average, it is distinctly  lower for the EAGGF (7%), both for reasons of the conditions for the implementation of this Fund  and the importance of continuing earlier measures. The high rate for the ESF (99%) is explained by  the fact that 1990 was the first year this Fund was affected by the reform and by the fact that the  majority of earlier contributions concerned short-term measures. The OPs approved during the period  1989-90 were 52% disbursed. This rate, which is barely higher than that forecast for the payment of  the first advance, reflects the fact that the CSFs for Objective 1 could not be approved before  late October 1989, which had repercussions on the rate of commitments and particularly on payments  in respect of the new programmes. Selection of eligible regions and allocation of aid7.5. The characteristic feature of the reform  is the concentration of the aid on the most disadvantaged regions. Thus, areas of France, Italy and  the United Kingdom which were formerly eligible for ERDF are no longer considered under Objective  1. In contrast, Greece, which has the lowest per capita gross domestic product (GDP) in the  Community, has become eligible in its entirety. 7.6. The Council decided on the list of Objective 1 regions at the same time as Regulation (EEC) N°  2052/88, to which it is annexed. This Regulation also provides that the regions concerned by  Objective 1 are in principle those with a GDP of less than 75% of the Community average. First, it  should be noted that this criterion is not on a par with that taken for the definition of  disadvantaged regions for the purposes of the application of Article 92.3(a) of the Treaty  concerning areas which are eligible for regional aid in the context of the competition rules. 7.7. In addition, examination of the figures for the period 1983-88 contained in the last two  periodic reports on the situation of the regions and those published by the Statistics Office  suggests that four regions (Community of Valencia, Asturias, Corsica and Abruzzo) do not satisfy  the criterion of Regulation (EEC) N°  2052/88. 7.8. Lastly, it should be noted that, up to 1990, a considerable part of the autonomous Community  of Valencia had received nothing under any regional aid arrangements. Likewise, the Commission  decided to re-examine the Abruzzo region's eligibility for regional aid before the end of 1990, but  the results of this examination were not available on that date. These observations would indicate  that the preferred course in certain cases was to apply the less restrictive provisions of the  Regulation instead of rigorously pursuing the objective of concentrating aid. 7.9. The per capita GDP criterion is by nature global and only takes very indirect account of the  factors that are of importance for assessing structural problems, such as employment, the quality  of agricultural structures or whether or not the regions concerned are situated in frontier areas  or on the periphery of their countries. 7.10. Community aid foreseen in the CSFs has not been allocated on the basis of the gravity of the  regions' specific problems, as was intended by the framework Regulation: instead, it has been  distributed between the Member States on the basis of their populations and the average per capita  GDP for the whole of their eligible regions, as well as on their per capita gross national product  (per capita GNP) at national level. In theory, such an approach takes account of the relative  prosperity of the Member States and, therefore, of their capacity to solve their regional problems  unaided. Furthermore, the Commission adjusted the allocation to suit the circumstances of each  Member State, using the GDP/GNP ratio at national level. This correction only produced a  significant difference in the case of Ireland, which has a GNP 12% lower than its GDP, primarily  due to substantial repatriations of profits, as a result of the tax concessions extended to foreign  firms. 7.11. An analysis carried out by the Court which includes indicators on employment and agricultural  structures shows that the level of need is manifestly highest in Greece and Portugal and, to a  lesser extent, in Ireland. Spain, Italy, France and the United Kingdom follow. The distribution of  Community aid per head of population in the Objective 1 regions, however, is entirely different:  Ireland receives the most aid (1  037  ECU), ahead of Greece and Portugal (724  and 722  ECU),  which are followed by France (564  ECU) and the United Kingdom (506   ECU), certain regions of  which (the overseas departments of France and Northern Ireland) face acute problems and, finally,  Spain (419  ECU) and Italy (365  ECU). 7.12. Community aid has essentially been allocated by Member State and not at regional level. The  regional distribution of aid derives from the breakdown presented by the Member States in the  Regional Development Programmes (RDPs). Thus, in the case of Italy it is based on the national  provisions, which are heavily biased towards criteria of population and surface area. In the case  of France, on the other hand, it was the Commission which arbitrated between the requests expressed  in the RDPs for the regions concerned. 7.13. In practice, Community aid seems to have been allocated among the underdeveloped regions  essentially in proportion to their populations (see Graph 1). 7.14. A graph comparing Community aid per capita and the per capita GDP in the Objective 1 regions  (see Graph  2) does not point to any precise conclusions regarding the ratio between the intensity  of the aid and the degree of development of the region as measured by its per capita GDP. 7.15. In fact, Graph 2 clearly shows that, for equivalent levels of development as measured by  regional per capita product (represented on the horizontal axis), the dispersion of per capita  Community aid (represented on the vertical axis) can vary in a proportion of one to five. Attempts  to explain this, taking criteria such as the rate of unemployment, agricultural employment or the  remoteness of the location, have not produced any clearer conclusions. 7.16. Lastly, the characteristics of the Objective 1 regions are very variable: their population  can vary from 100  000 inhabitants to nearly seven million. Furthermore, since the vastest regions  often present marked contrasts at subregional level, a more discriminating geographical approach  would enhance the effectiveness of Community measures and would take a more faithful account of  local requirements when allocating regional aid. 7.17. Of course, the Commission cannot rely solely on the  criterion of requirements: it must also  take account of the development potential of the regions and of their capacity effectively to  mobilize the available resources so as to guarantee optimum efficiency in the attainment of  Objective 1. It ought, however, to have taken greater care to make the criteria it selected for  granting aid more consistent and more transparent. Partnership7.18. Partnership, defined as the closest possible form of collaboration between the  Commission, the Member State concerned and the national, regional and local authorities, is an  essential principle of the reform and should be achieved at every level of structural measures. It  is in fact a manifestation of the principle of subsidiarity, according to which the Commission,  while assuming responsibility for Community policies, must coordinate its actions with those of the  Member States so as to concentrate its efforts in those areas where it can contribute real added  value. In the case in hand, partnership is meant to allow those who are administratively,  economically and socially responsible to slot their measures into national and Community  strategies. If it is to be effective, partnership must take effect at the various stages of  programming, monitoring and assessment. 7.19. Now, an examination of the RDPs shows that they are often culled from plans or programmes  which have already been decided by the Member States, substantial sections of which are sometimes  not translated into regional terms. For example, the RDP for Portugal is essentially an adaptation,  for the purposes of formally meeting the requirements of the regulations, of a national programme  in which the sectoral dimension is predominant, and it makes hardly any concessions to regional  concerns. Moreover, the very short regulation deadlines did not allow an effective partnership to  be organized. At the level of the RDP, therefore, there is a tendency for partnership to be reduced  to a procedure for informing the parties concerned after the event. Thus, although the local  authorities in Portugal play an important role in implementing the measures, they have not been  sufficiently involved in the preparation of the RDP and the  CSF. 7.20. The Commission has tried to make up for these shortcomings by establishing contact with the  authorities, with a view to giving a more regional cast to the proposals for the RDPs. These  efforts have had varying degrees of success: the share of the expenditure provided in the CSFs for  regional measures in the strict sense of the term can range from zero, as in Ireland, to a little  over 50% in Italy, a country in which regional structures are nevertheless well developed. 7.21. These shortcomings recur at the other levels of the reform. In Ireland, there is no  representative of the regions on the committee for monitoring the CSF; various sectoral OPs in  Ireland and Italy make no provision for the representation of regional or local authorities on  their monitoring committees. Of course, considerations of administrative effectiveness occasionally  call for centralized administration of the measures, but the regional partners should be given an  appropriate role to play in such cases. An indication of the somewhat intangible nature of  partnership is to be found in the fact that only in a very limited number of cases do the CSFs for  Objective 1 provide for any assistance in the form of global subsidies, which require very broad  involvement of the driving forces in the regions.  Graph 1 - Community aid and population of the Objective 1 regions>REFERENCE TO A FILM>>START  OF GRAPHIC><?þ><?þ><?þ><?þ><?þ><?Ð8><?±><?©><?©><?©>Community aid <?²>(1  000 Mio ECU)<?±><?þ> <? 3><? 5><?÷>8 <?½><?þ><?þ><?ue>7 <?½><?þ><?þ><?ue>6 <?½><?þ><?þ><?ue>5 <?½><?þ><?þ><?ue>4 <?½><?þ><?þ> <?ue>3 <?½><?þ><?þ><?ue>2 <?½><?þ><?þ><?ue>1 <?½><?þ><?þ><?ue>0 <?½><?÷><? 8><?þ><?¨><?¦>0<?©><?©><?©> <?¦>1<?©><?©><?©><?¦>2<?©><?©><?©><?¦>3<?©><?©><?©><?¦>4<?©><?©><?©><?¦>5<?©><?©><?©><?¦>6<?©><?©> <?©><?¦>7<?©><?©><?©><?¦>8<?©><?©><?©><?¦>9<?©><?©><?©><?¦>10<?©><?©><?©><?¦>11<?AE2><? 3><?©><? |>  <?Ý><?«8>  <?½><?ae><? 8><? 9><?þ><?þ><?ý><? 8><?Ð6><?±><? 9><?AE2><?©><? ue><?oe><?oe><?Dz3><?©><?º> <? |><?ae><?»><?ý><? ue>5 <?½><?Cz3><?»><? ue><?Cp04><?¥> <?Ý><? ><? 9><?AE2><?©><?ú><?Dz3><?©><?©><?©> <? ue><? ue><? û><?º><? |><?ae><?»><?ý><? ue><? û>10 <?½><?Cz3><?»><? ue><?Cp04><?¥> <?Ý><? ><? 9><?AE2> <?©><?ú><?ù><?÷><?Dz3><?©><?©><?©><?©><?©><? ue><?º><? |><?ae><?»><?ý><? ue><? û>15 <?½><?Cz3><?»><? ue> <?Cp04><?¥> <?Ý><? ><? 9><?AE2><?©><?ú><?ú><?ú><?Dz3><?×09><?©><? ue><? ue><?º><? |><?ae><?»><?ý><? ue> <? û>20 <?½><?Cz3><?»><? ue><?Cp04><?¥> <?Ý><? ><? 9><?AE2><?©><?ú><?ú><?ú><?ú><?Dz3><?×18><?©><?¨> <? ue><?º><? |><?ae><?»><?ý><? ue><? û>25 <?½><?Cz3><?»><? ue><?Cp04><?¥> <?Ý><? ><? 9><?AE2><?©><?×16> <?ú><?oe><?Dz3><?×33><?©><? ue><?º><? |><?ae><?»><?ý><? ue><? û>28 <?½><?Cz3><?»><? ue><?Cp04><?¥> <?Ý> <? ><? 9><?©><?Cp04><?¥><?¥><? 9><?©><?¨><? ue><?oe><?÷><?Cp04><?¥><? 9><?©><?©><?ù><?÷><?Cp04><?¥> <? 9><?©><?©><?¨><? ue><?ù><?oe><?Cp04><?¥><?oe><? û><?Cp04><?¥><? 9><?©><?©><?©><?©><?¦><?ú><?oe><?oe> <?Cp04><?¥><? 9><?©><?©><?©><?©><?¨><? ue><?ú><?Cp04><?¥><? 9><?©><?©><?©><?©><?©><?ú><?oe><?÷> <?Cp04><?¥><? 9><?©><?©><?©><?©><?©><?©><?¦><?ú><?ù><?oe><?oe><?Cp04><?¥><? 9><?©><?ú><?ù><?÷><?©> <?©><?©><?©><?©><?¦><?Cp04><?¥> <?Ý><? 9><?©><?ú><?ù><?oe><?oe><?©><?©><?©><?©><?©><?©><?¨><? ue> <?Cp04><?¥> <?Ý><? 9><?©><?ú><?ú><?ù><?oe><?©><?©><?©><?©><?©><?©><?©><?©><?¦><? û><?Cp04><?¥> <?Ý> <? 9><?©><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?×11><?©><? ue><? ue><?Cp04><?¥> <?Ý><? 9><?©><?ú><?ú><?ù> <?oe><?oe><?×12><?©><?Cp04><?¥> <?Ý><? 9><?©><?ú><?ú><?ù><?oe><?oe><?×13><?©><?Cp04><?¥> <?Ý><? 9><?©> <?ú><?ú><?ú><?ù><?×16><?©><?¨><?Cp04><?¥> <?Ý><? 9><?©><?ú><?ú><?ú><?ú><?ú><?ú><?×22><?©><? ue> <?Cp04><?¥> <?Ý><? 9><?©><?×15><?ú><?ù><?÷><?×30><?©><? û><?Cp04><?¥> <?Ý><? 5><?¨><?¦> <?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue> <?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue> <?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ> <?½><? 8><?ú><?ú><?ù><? 8><?©><?©><?©><?©> <?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe> <?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦> <?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe> <?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦> <?DLV200002N> <?½><?ý><?ý><?ue>Population <?î><?²>(Mio)<?±> <?¾><?þ><?þ>(thousands) <?¾><?þ><?©> <?©><? ©><?²><?«8> <?½><? 3><?DlA0900><?DlC0303><?ý><?ue><?Ð8>  <?©><?©>Regions<?«0>Population  <?©> <?©>Regions<?«0>Population  <?©><?©>Regions<?«0>Population<?©><?©><? ©><?²><?«8> <?½><?ý> 1.  Melilla 55,00 10. Murcia 1 004,70 19. Cast.-L. 2 603,00 2. Ceuta 65,00 11. Extremadura 1  068,30 20. Galicia 2 844,90 3. Guyana 100,00 12. Asturias 1 122,10 21. Ireland 3 640,60 4.  Corsica 245,70 13. Abruzzo 1 252,10 22. Valencia 3 738,60 5. Molise 333,80 14. Canaries 1  454,60 23. Apulia 4 015,70 6. Martinique 335,00 15. Northern Ireland 1 566,80 24. Sicily 5  098,20 7. Guadeloupe 337,00 16. Sardinia 1 641,00 25. Campania 5 060,80 8. Reunion 570,00 17.  Cast.-M. 1 679,50 26. Andalusia 6 770,30 9. Basilicata 619,50 18. Calabria 2 135,40 27. Greece 9  934,80     28. Portugal 10 207,90<?÷><?²><?©><?©><? ©><?«8> <?½><?AE2><? 8>   <?©><? |> <?½>  <?©> <? |> <?½><?ae><?Â"END OF GRAPHIC> Graph 2 - Per capita Community aid and per capita GDP in the  Objective 1 regions>REFERENCE TO A FILM>>START OF GRAPHIC><?þ><?þ><?þ><?þ><?þ><?Ð8><?±> <?Dmt0600><?Cmt><?DlB2600><?ClB> <?½>Per capita Community aid <?í><?²>(1 000 ECU)<?±><?þ><? 3><?÷> 1,1 <?½><?þ><?ý>1 <?½><?þ><?ý>0,9 <?½><?þ><?ý>0,8 <?½><?þ><?ý>0,7 <?½><?þ><?ý>0,6 <?½><?þ><?ý>0,5  <?½><?þ><?ý>0,4 <?½><?þ><?ý>0,3 <?½><?þ><?ý>0,2 <?½><?þ><?ý>0,1 <?½><?÷><? 8><?þ><?¨><?¦><?©><?©> 30<?Di0608><?Ci> <?Ý>50<?Di0608><?Ci> <?Ý>70<?Di0608><?Ci> <?Ý>90<?AE2><? 3><?¨><?¦><?©><? |> <?Ý> <?«8> <?½><?ae><? 9><?Ð6><?±><? 9><?¨><?¦><?©><?©><?©><?©><?©><?ù><?oe><?÷><? ÛA01406C>  1 <?Ý><?ù> <?oe><? ÛA01406C>  2<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?oe><?÷><?©><?©><?©><?©><?¦> <? ÛA01406C>  3 <?Ý><?ú><?ù><?oe><?oe><? ue><? ÛA01406C>  4<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù> <?oe><?oe><?©><?©><?©><?©><?©><?¨><? ue><? ÛA01406C>  5<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?oe> <?oe><?©><?©><?©><?©><?©><?©><?©><?¨><? ÛA01406C>  6<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù><?©> <?©><?©><?©><?©><?©><?©><?©><?¨><? ÛA01406C>  7<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú> <?ù><?oe><?×08><?©><? ue><? ue><? ÛA01406C>  8<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ù><?×09><?©><?¨><?¦> <? û><? ÛA01406C>  9<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù><?×10><?©><? ÛA01406C>  10<? 9><?¨> <?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ù><?oe><?÷><?×10><?©><? ÛA01406C>  11<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ú><?ù><?×11><?©><?¨><? û><? ÛA01406E> <?í>12<? ò><? ÛA01406C>  13<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ú><?ú><?×11><?©><?¨><?¦><? ÛA01406C>  14<? 9><?¨><?¦><?©><?×13><?ú><?oe><?÷><?×12><?©><?¨> <? ÛA01406C>  15<? 9><?¨><?¦><?©><?ú><?oe><?×12><?©><?¨><?¦><? ÛA01406C>  16<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ù><?×14><?©><?¨><? ÛA01406E> <?í>17<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?oe><?×14><?©> <?¨><?¦><? ÛA01406C>  18<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?×15><?©><? ÛA01406C>  19<? 9><?¨><?¦> <?©><?ú><?ú><?ú><?oe><?oe><?×15><?©><?¦><? ÛA01406E> <?í>20<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú> <?oe><?oe><?×15><?©><? ue><? ÛA01406C>  21<? 9><?¨><?¦><?©><?ú><?ú><?ú><?oe><?oe><?×15><?©><?¨><?¦> <? ÛA01406C>  22<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?oe><?oe><?×16><?©><? ue> <? ÛA01406C>  23<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù><?×16><?©><?¨><?¦><? ÛA01406C>  24<? 9> <?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?oe><?×16><?©><?¨><? ue><? ÛA01406C>  25<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ú><?ú><?ú><?ú><?ù><?oe><?×17><?©><? ue><? ÛA01406C>  26<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú> <?ù><?oe><?×17><?©><? ue><? ÛA01406C>  27<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ù><?×19><?©><? ÛA01406C>   28<? 3><?¨><?¦><?¨><?¦><?¦><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý> <?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N>  <?Ý><?þ><?ý><?DLH200002N> <?Ý> <?Ý><?þ><?ý><?DLH200002N> <?Ý> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?þ>  <?½><? 8><?oe><?oe><?¨><?¦><?©><?Di0104><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý> <?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý> <?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci>  <?Ý><?DLV200002N> <?Ý> <?½><?Ð8><?¨><?¦><?þ><?þ><?ý>Per capita GDP in 1985 (EUR 12 = 100) (<?ó> 1<?ò>) <?½><?þ><?²><?«8> <?½><? 3><?©><?º> 1. Ceuta<?×14><?©><?º>15. Ireland<?»> 2. Melilla<?»> 16. Canaries<?»> 3. Guyana<?»>17. Sicily<?»> 4. Reunion<?»>18. Cast.-L. <?»> 5. Guadeloupe<?»>19. Valencia<?»> 6. Extramadura<?»>20. Campania<?»> 7. Martinique<?»>21.  Corsica<?»> 8. Portugal<?»>22. Apulia<?»> 9. Andalusia<?»>23. Basilicata<?»>10. Greece<?»>24.  Sardinia<?»>11. Cast.-M.<?»>25. Northern Ireland<?»>12. Murcia<?»>26. Molise<?»>13. Calabria<?»> 27. Asturias<?»>14. Galicia<?»>28. Abruzzo<?÷><?²><?«8> <?½><? 8><?AE2><? 3><?×14><?©><? |> <?½> <?ae> <?½><?þ><?þ><?þ><?Ð7><?±>--------- <?í>(<?ó>1<?ò>) <?º>The data used for this graph were  extracted from the 26th edition of the <?²>Basic statistics of the Community<?±> published in 1989  (Regional per-capita gross domestic production corrected by standard purchasing power). <?mt><?Cl0><?Â"END OF GRAPHIC>7.22. However, although the results fell below expectations, the  Commission has laid the foundations for future cooperation between the various decision-making  levels which should be taken further in the implementation of operational measures and when the  time comes to make adjustments to the CSFs in order to extract maximum benefit from the  concentration of effort to reduce development discrepancies. Coordination7.23. Partnership can only be fully effective if it is accompanied by coordination of  the various Community and national policies, whether these are macro- or micro-economic, general or  specific. The aim of coordination is to combine the use of the instruments in such a way that they  make the optimum contribution to achieving the objectives. At the very least, it requires a  wide-ranging exchange of information between the managing departments, which should lead to  harmonization of procedures and criteria so as to increase the impact of the various measures and  thus result in integration. In this respect, coordination is of prime importance if the additional  resources deployed by the Community to achieve regional development are to produce a multiplier  effect on the growth of the regions. 7.24. The regulations provide that the regional programmes should take account of the other  Community and national policies, and that the CSFs should co-ordinate the various financial  instruments for structural purposes. 7.25. Generally speaking, the RDPs presented by the Member States are a juxtaposition of sectoral  proposals, with no real coordination or integration of the operations envisaged in them. More often  than not, they may be considered to be no more than applications for category aid, with no great  desire to make the fullest use of possible synergies between the planned measures. This is  particularly noticeable in the case of agricultural measures, which more often than not are  conceived independently of other measures. 7.26. The Commission has made an effort to improve coordination during the preparation and  discussion of the CSFs. To this end, it has introduced new procedures which, while they have not  always produced the expected results, will make it possible to intensify coordination and make it  more thorough. 7.27. Thus, it has attempted to locate the CSFs within the context of the macroeconomic policies of  the countries concerned, particularly those for which Community aid carries significant weight. The  overall economic context is in fact an important element when assessing the impact of structural  measures, particularly in terms of additionality. This initiative has had little effect, inasmuch  as the CSFs tend to take over the Member States' assumptions. 7.28. The coordination Regulation allows the coexistence of different objectives for a single  region. This does not make for optimum coordination. Thus, in the Objective 1 regions, the European  Social Fund (ESF) can intervene autonomously under Objectives 3 and 4, and EAGGF-Guidance under  Objective 5a. This phenomenon is far from negligible, since the proportion of ESF aid which is  allocated to Objectives 3 and 4 in the Objective 1 regions represents more than 50% of the aid from  this Fund in the majority of the Objective 1 regions, and in certain cases can rise to over 75%.  There is no coordination between certain ERDF programmes provided for in the CSFs, such as those  for training equipment, and the ESF, even though the benefits would seem to be obvious. An  examination of the OPs decided for Objective 1 in which the ERDF and the ESF operate simultaneously  reveals scant synergies between the two Funds. 7.29. Nearly three-quarters of the expenditure provided by the EAGGF Guidance Section in the  Objective 1 regions for the period 1989-93 will be effected on measures decided before the reform. 7.30. Thus, the CSFs for Objective 1 only provide for five Integrated Operational Plans (IOPs),  which are the type of assistance which entail the greatest degree of integration. Another sign of  the Commission's difficulties in ensuring coordination between Funds is to be found in the time  lags for the adoption of the sections relating to the various Funds participating in IOPs when, in  certain cases, these are only another reworking of proposals for integrated development operations  presented in the context of the previous ERDF Regulation. In practice, moreover, it is often  difficult on the basis of the regulations to determine whether programmes are integrated or not. As  an examination of decisions taken in 1990 shows, the Commission uses the terms IOP or Multi-fund  Operational Plan (MOP) indiscriminately to describe the same programme even though there are  differences in the nature and degree of the coordination in these programmes. 7.31. The Commission also takes the view in certain cases that the existence of a single monitoring  committee for the Funds concerned is an adequate administrative structure at national, regional and  local level for the purpose of ensuring the integrated implementation of a programme. The  Commission's past experience has demonstrated the difficulties involved in integrated operations.  This therefore raises the question of whether the monitoring committees are in a position to carry  such difficult and delicate measures to a conclusion in view of the technical and administrative  constraints to which they are subject and which limit their decision-making powers and their  management capacity. 7.32. In practice, coordination between Funds is more a matter of an exchange of information than  real cooperation, much less integration. In spite of the advances already achieved and under way in  terms of the harmonization of the Funds, therefore, coordination between the structural Funds seems  to be more a matter of  presentation and procedural formalities than actual reality. 7.33. Although some limited success has been achieved, the coordination with the other Community  policies is the area that reveals the most serious shortcomings. Thus, during the process of  negotiating the CSFs, the Commission was able to push through its objectives as regards research  and development and ensure that greater efforts were made in this area. It also included clauses in  the CSFs concerning compliance with the Community guidelines for important sectoral policies, such  as the industrial and markets policies, the environment, transport, agricultural policy or policy  on behalf of disadvantaged groups. 7.34. These clauses are more a matter of information than real coordination, however. Thus, the  CSFs hardly reflect either the volume or the location of the projects which are included in the  Community's medium-term programme for transport infrastructures and implemented by various specific  decisions.7.35. Thus, the transport infrastructures programme assigns major priority to the improvement of  the Belfast-Dublin rail link. Yet neither the CSF for Ireland nor the one for Northern Ireland  provide for any measures in this connection, mainly because of the problems of security on this  line. In Spain, the national transport policy gives priority to the Madrid-Seville rail link,  whereas the only project specifically mentioned by the CSF concerns the improvement of the railway  network in the Community of Valencia. In the case of Sicily, only the Messina-Palermo road is cited  in the CSF, while the Community priorities are distinctly more ambitious. Moreover, as the Court  has already stressed, in its previous report, there are persistent inconsistencies between the  financing terms offered by the ERDF Regulation and those of the specific measures for transport  infrastructures. 7.36. Coordination with the Community loan instruments, particularly with the European Investment  Bank (EIB), is also laid down in the regulations. At the RDP stage, the Member States hardly took  any account of the possibilities of financing by Community loans. 7.37. The Commission has attempted to correct this situation, but the estimates of loans available  from the EIB and the European Coal and Steel Community (ECSC) in the CSFs seem to fall far short of  a straightforward continuation of the trends observed in the past, except in the case of Greece. Of  course, the EIB's range of activity may not coincide exactly with the priority lines contained in  the CSFs. Nevertheless, the partial, imprecise description of the EIB's operations in the Objective  1 regions cannot fail to reduce the effectiveness expected of the coordination between the Bank and  the structural Funds. The roots of this situation are to be found partly in the project-based  approach adopted by the EIB and the ECSC, which is difficult to harmonize with the programme-based  approach recommended by the reform. 7.38. In order to minimize these disadvantages, the Commission has entered into agreements with the  EIB in order to avoid excessive Community financing, particularly in the case of public service  infrastructures of a commercial nature, and also to involve the bank as closely as possible in its  decision-making and monitoring procedures. It has also drawn up guidelines for the ECSC, in order  to improve the integration of its loans in the programming of measures. Rather than real  coordination, however, this is more a matter of measures aimed at preventing excessive Community  financial cover for certain operations. 7.39. At the level of the OPs, the coordination rules jointly decided by the Commission and the EIB  are not always observed. Thus, they provide that Community financing in the form of subsidies or  loans may not, in principle, represent more than 75% of the total cost of operations. This  indicative ceiling is rarely observed. The Italian multiregional 'Telecommunications` programme,  for example, will be 94% financed from Community resources, although this is a sector that  generates substantial revenue. For Spain as a whole, the rate of Community loan and subsidy cover  for financing hydraulic infrastructures averages 90%. For the 'railway` measures, the rate is 80%.  In Greece, the 'railway` measures are being financed at a rate of 79%. In other cases, the loan  offers mentioned in the CSFs are not taken up in the OP financing programmes ('Water`, 'Energy` and  'Industrial Areas` multiregional OPs in Italy). 7.40. Generally speaking, the Commission should encourage coordination at every level at which the  reform is to be implemented so as to optimize any possible synergies between the instruments it  deploys. Thus, one specialized department of the Commission has expressed surprise at the  inadequate extent to which the measures which it manages are taken into account in the CSFs and  yet, when consulted on a proposed OP in the area which concerns it, it offered no opinion. 7.41. The Commission should also offer constant encouragement to the Member States to improve the  co-ordination of their administrations among themselves and with the Community guidelines in order  to give it more substance. In Italy, for example, it emerged that the regional authorities were  very poorly informed on the content and, a fortiori, the implementation of the multiregional  measures, even though they represent nearly 50% of the expenditure planned for Objective 1 and the  greater part of the planned operations can be localized. 7.42. The CSFs represent a major attempt by the Commission to achieve a complete, global view of  its structural measures. It is important to ensure that they are not reduced to a simple, more or  less exhaustive financial framework. The main obstacle in this respect is an approach to structural  policy as a juxtaposition of sectoral policies. Therefore, when it comes to make the half-way  assessment of the CSFs which it has itself laid down, the Commission ought to make every effort to  make coordination in the CSFs, and the measures which follow on from them, more specific. Programming7.43. The reform has made the programme-based approach the rule in the Community's  structural measures. This change is intended to allow the Commission to concentrate more on the  results to be obtained by the measures in which it plays a part. In actual fact, the  programme-based approach does not make Community assistance subject to the execution of specific  projects, but allows flexibility in their management so as to take better account of the  development of the economic and social context and thus guarantee the coordination of the means  deployed and the achievement of the objectives pursued. It must be noted that the Funds have very  different histories in this respect: this approach was already being applied by the ERDF and the  EAGGF-Guidance before the reform; in contrast, it is a novelty in the case of the ESF, which  continued to apply the earlier regulations in 1989. As for the EIB and the ECSC, the nature of the  loan activities they are involved in and their dependency on the markets make precise programming  of their financing activities difficult. Neither did the deadlines imposed by the regulations make  the Commission's and the Member States' work any easier, even though they do not account for all  the shortcomings observed. Regional development programmes7.44. The first stage of programming consists of the drawing-up by  the Member States of RDPs which are supposed in particular to describe the lines chosen for  regional development and the measures to be applied to this end. Furthermore, they should state the  priorities chosen and the measures for which Community aid is being requested, plus the forms of  assistance and amounts involved. 7.45. The Member States have adopted different approaches to the task of drawing up their RDPs. As  a general rule, as authorized by the regulation, these include substantial multiregional aspects  which, as already pointed out, do not always allow the effective application of partnership terms. 7.46. In certain cases, such as France, Italy or Portugal, the RDPs derive from programmes which  have already been decided. For this reason, since the nature and volume of the measures proposed  for Community financing have already been decided, it is hard to see how the Community action has  any impact on the stepping-up of the Member States' regional development effort, since, in the end,  it is only their financing conditions which have changed. 7.47. The RDPs should clearly highlight, on the one hand, the Member States' own commitments  against the objectives which they expect to achieve, independently of any Community aid and, on the  other, the additional efforts envisaged in the light of the possibilities of assistance from the  Community instruments. The individual and combined contributions of the various measures to  attaining the objectives should also be analysed in the RDPs. Such a presentation would allow  optimum exploitation of these programmes and would be a fundamental factor in the quality of  planning at the CSF stage and during the operational measures. 7.48. While, generally, the socio-economic analysis carried out in the RDPs may be considered to be  satisfactory, the same cannot be said for the other aspects. The objectives are rarely specified  and it is often difficult to see to what extent the proposed lines of development contribute to  their attainment. Such shortcomings obviously only allow a very summary and general assessment of  the effectiveness of the planned measures and do not allow priorities to be chosen. 7.49. Very few Member States present quantified objectives. In the few cases where such objectives  exist, it is hard to check their validity against the proposed development strategies. Thus, the  RDP for Ireland has set the target of creating 35  000 jobs each year, or 175  000 for the duration  of the programme: 100  000 of these jobs are to be provided by the industrial sector and 25  000 by  the tourism sector. That leaves 50  000 jobs to be created on which the RDP remains silent, beyond  mentioning the possibility of creating 4  400 in the fisheries area, which is a risky proposal  given the situation of this sector. A more thorough analysis of the problems is called for,  especially as the attainment of the objective, which takes no account of the possible shedding of  jobs, would not cover the unemployment recorded in 1988 alone, nor would it allow even the natural  increase in the workforce, estimated at 25  000 units per annum, to be absorbed. 7.50. The priorities often remain unclear and only in rare cases, such as the RDP for Martinique,  are they explicitly stated. 7.51. Other than the general provisions contained in the regulations, the Commission did not  adequately inform the Member States on the principles and methods which it wished to see applied  for drawing up the RDPs. They therefore tend to amount to no more than global aid applications  aimed at obtaining the maximum Community contribution and do not necessarily correspond to precise  commitments on the part of the Member States. This marks a regression from the previous provisions,  which provided for a common scheme, backed by a recommendation from the Commission, as well as  information on development budgets, broken down into regional terms, and on the execution of the  regional development programmes. 7.52. In fact, the RDPs have more often than not been drawn up as a formal response to the  requirements of the regulations and hardly permit any assessment of the impact of Community  measures, particularly as regards their additionality. Moreover, even though the CSFs draw on the  RDPs, the regulations do not provide for any repercussions on the CSFs from amendments made to the  RDPs. Community support frameworks7.53. The CSFs are drawn up by the Commission on the basis of the RDPs  and approved by it after the Member States have agreed their contents. They are required to define  the objectives, priorities, means and forms of assistance and specify the Commission's methods of  managing and assessing their realization. 7.54. There is still considerable room for progress on these various aspects. The regional  development objectives set out in the CSFs are couched in general terms which do not allow any  clear relationship to be established between the means deployed and the results expected. The  priorities are not clearly stated. 7.55. While, overall, the resources of the structural Funds and of their national counterparts are  clearly indicated in the CSFs, the shortcomings in coordination have sometimes impeded a full view  of the Community effort: it seems that the possibilities of loans from the EIB and the EEC have  been underestimated and other measures, such as the specific measures in support of transport  infrastructures, seem to have been overlooked. 7.56. The regulations also state that the CSFs should take Community initiatives into account, but  this provision is still not being complied with. This is partly to be attributed to the time needed  to prepare them. 7.57. In more technical terms, the presentation of the CSFs leaves something to be desired and  lacks transparency. The financial tables, for example, often mix data at current prices and  constant prices, which is contrary to the fundamental rules of economic statistics. Certain data  for Greece are missing. Furthermore, the available information hardly allows important parameters  for assessment of the CSFs to be analysed, particularly as regards the impact on growth and  employment in the disadvantaged regions. 7.58. It is difficult to judge on the basis of the CSFs the financial weight of continuing measures  which pre-date the reform. However, greater transparency in this area would allow a better  assessment of the room for new initiative afforded by the doubling of the Funds. An analysis of  past experience would have been useful in order to anticipate the problems of implementing new  measures and possibly to improve the effectiveness of the earlier measures by adapting them to the  principles of the reform. 7.59. The programming of the aid is absolutely inadequate: the only calendars available are drawn  up at too global a level to allow effective monitoring of the CSFs and of the measures which derive  from them. 7.60. The effort made on behalf of productive activities is hard, if not impossible, to measure,  even though this is one of the Commission's major guidelines. Summary estimates do not show  progress in relation to the previous situation, which was itself very far short of the objective of  allocating 30% of the aid to the productive sector which was planned and then abandoned by the  ERDF. Thus, less than 15% of the aid for Spain is going to industry and less than 20% in Italy. 7.61. The reform provides that, in principle, the total cost of an operational programme in which  the ERDF is involved should reach 100 Mio ECU for the Objective 1 regions. However, various OPs in  Spain, Greece, Portugal and the United Kingdom cost considerably less than this sum and, given the  number of measures they include, there is no small risk of dispersion of efforts similar to what  has been observed in the past. 7.62. The regulations provide that every CSF should include an outline of the forms of assistance  to be implemented which, especially for the OPs, is to include the specific objectives and the main  types of measure planned. Most usually the CSFs go no further than a brief comment on the forms of  assistance to be implemented and sometimes this is vague and imprecise, as in the case of the CSF  for Spain. As for a description of the specific objectives and main measures of the OPs, when it is  given, it is often insufficient. 7.63. It is sometimes hard to establish the link between the strategy set out in the CSFs and the  priorities chosen. The CSF for Molise, in accordance with the RDP, makes the improvement of the  road network a priority, in order to open up the region. Yet the only measure planned in this  respect consists of building country roads, which play no part in opening up the region, and it has  already attracted a comment from the Court. Operational programmes7.64. The forms of assistance should give some operational content to the  priorities set out in the CSFs. In the overwhelming majority of cases, the form of assistance  chosen is the OP, which often reproduces the shortcomings already cited as regards partnership and  co-ordination. 7.65. Often, objectives and priorities are not clearly defined. In Northern Ireland, the  'Transport` OP describes its objectives in general terms and the explanations given on the  projects, some of which will not be operational at the end of the OP, do not allow any clear  conclusions to be reached on their respective priorities, their effects in terms of traffic  increase or, by extension, on economic growth. Furthermore, investment in the transport system in  Northern Ireland can only have any effect on the opening up of this region through coordination  with the efforts made in the adjacent regions. Yet the OP makes no mention of this aspect. 7.66. In many cases, the grounds stated for projects and the information regarding them contained  in the OPs are unsatisfactory. In Greece, one OP for exploiting thermal resources on the island of  Ikaria forecast a disproportionate number of jobs in relation to the island's population. The same  OP provides for major extensions to the industrial areas of Heraklion, Patras and Tripoli whereas,  as the Court already noted in previous controls, these are little used and, in the case of  Heraklion, insufficiently equipped. 7.67. Lastly, it must be observed that the first OPs decided by the Commission in late 1989 refer  to provisions which still had to be drafted, particularly those concerning the use of the ECU and  the recovery of undue payments. This situation shows how unprepared the Commission is for the  specific procedures for implementing the regulations, even where long standing problems are  concerned. For example, the problem of recovering unwarranted payments is inherent in any financing  granted to third parties and the Commission acquired experience of the problems posed by the use of  the ecu when the Community interest programmes provided by Regulation (EEC) N° 1787/84 were  implemented. 7.68. In general terms, the Commission, in conjunction with the Member States, should improve the  content of programming at every level, paying particular attention to making objectives and  priorities specific and to the relation between the results to be obtained and the means to be  deployed to that end. Monitoring, control and assessment7.69. If it is to be effective, the programming of structural  measures must be accompanied by monitoring and assessment so that the execution and the results can  be appraised against physical and financial indicators. The latter should highlight the progress of  the measures and any problems in their implementation, thus allowing a check as to whether the  objectives pursued are being achieved. The monitoring should allow some flexibility in programming  so that it can be adjusted to any new circumstances that may arise. Concurrently, a control  mechanism should be instituted to check the compliance and regularity of measures which are  financed by the Community. It must be pointed out that the regulations do not require either  monitoring or assessment for the RDPs, which reduces their scope and does not make it easy to pick  out priorities. 7.70. At the level of the CSFs, the aim of monitoring should be to coordinate all the Community and  national operations and propose any adjustments to the CSFs. This activity should be carried out by  a monitoring committee on which the Commission, the Member State and the EIB are represented as  partners and which has considerable powers to amend the CSFs. This monitoring activity should be  completed by the drafting of annual reports by the Member States. A monitoring system for the OPs  follows the same principles. 7.71. It must be observed that, as of the end of 1990, the Commission had still not submitted the  specific reports on the activities of the structural Funds which are laid down in the context of  the reform, and by the co-ordination Regulation in particular. 7.72. Two observations may be made on this monitoring structure which requires participation and a  considerable effort from the Commission. In the first place, its effectiveness depends on the  capacity of the monitoring committees actually to influence the behaviour of the administrations  concerned, in order to avoid any deflection of Community assistance from its proper targets. 7.73. Secondly, the quality of the work of the monitoring committees is highly dependent on the  quality of the information which is communicated to them. In the regulations, the CSFs and the OPs,  the Commission has taken steps to specify the nature of the information which it wishes to receive.  It should ensure that these conditions are strictly applied, particularly those concerning the  production of progress reports. 7.74. Difficulties and delays are coming to light in the appointment and operation of some  monitoring committees, although their role in the starting-up stage is essential for ensuring the  optimum implementation of the assistance subsequently. While in certain countries, such as  Portugal, the monitoring committee has already been able to meet on several occasions, it was more  than a year after the approval of the CSFs before the monitoring committees for Spain, France and  Italy met for the first time. 7.75. An examination of the documents on the monitoring committees' activities revealed  considerable omissions. As far as partnership is concerned, in Ireland there is no regional  representation on the monitoring committees for the CSF and such important OPs as those for  industry and tourism. The same holds for the committees to monitor multiregional OPs in Italy. 7.76. The effort that goes into coordination at the level of the monitoring committees is still  inadequate. In certain cases, managing departments play very little, if any, part in these  committees' activities. Thus, as far as the involvement of Community bodies is concerned, the EIB  has only been on the monitoring committees for the CSFs concerning Italy and Portugal. Yet its  participation should be considered indispensable, in view of the delicate problems posed by the  combination of subsidies and loans and the failings observed in this area at the programming stage.  The problem of the execution and the coordination of Objectives 3 and 4 with the other objectives  in the Objective 1 regions is practically never raised. 7.77. The documents and reports to be produced by the monitoring committees, when they exist, do  not always provide information on the financial and physical progress of the measures, and even  less information on their impact at the level of the CSFs or the OPs. Thus, the first meetings were  largely concerned with questions of procedure, and it is a fact that, one year after the approval  of the CSFs and the first OPs, the monitoring committees have only estimates and no hard figures on  how they are advancing.7.78. Member States' compliance with the provisions of the CSFs in terms of the appointment of the  monitoring bodies and the description of the monitoring systems is less than adequate, even though  the OPs are required to provide a full description of the control and financial management  mechanisms to be implemented. It is regrettable that the Commission did not make the practical  procedures of the principles of management and checking laid down in the regulations more specific,  particularly in the form of a common control system included in the CSFs or the OPs. Since no  thought was given to the application of the regulations beforehand, there is a serious risk that  different solutions will be adopted by the Community or national departments concerned and that  these will be less than satisfactory in the end. Including a detailed control plan at the CSF stage  would have helped the national administrations, which are often ill informed in this regard, better  to meet the requirements of the controls carried out or required by the Community authorities: it  would have been all the more useful since the make-up of the monitoring committees has left little  room for the national and Community control authorities. 7.79. Assessment seeks to appraise the expected results or actual achievements of a measure more  than the execution or conformity of the measure. If it is to have any real meaning, assessment has  also to be carried out ex ante so as to allow for comparison with the results which emerge in the  course of, or on completion of, the measures. 7.80. For the purposes of the regulations, assessment should take place at three levels: in terms  of the economic and social cohesion of the Community, at the CSF level and lastly at the  operational measures level. 7.81. In theory, the principles of and procedures for assessment should be defined by the CSFs. The  first observation to be made is that it will be hard, if not impossible, to assess the results  obtained by the CSFs. There are no precise objectives set out in the CSFs to serve as a reference  by which to evaluate any progress made. Moreover, the directions on ex-ante assessment contained in  the CSFs are more concerned with problems of conformity and administrative and economic feasibility  than with an assessment which would determine the results expected as a function of the resources  deployed. 7.82. Where the assessments to be carried out subsequently are concerned, the CSFs contain only  general considerations, giving no precise indication of what lines should be followed. To date, the  Commission has not been able to adopt a method for assessing the CSFs. In fact, a substantial part  of the assessment work was assigned to external consultants and the Commission did not receive the  final results of the studies until after the CSFs had been adopted. It is also hard to see to what  extent their often very critical assessments were taken into account in the CSFs. 7.83. At the level of the OPs, the Commission has tried to make its intentions more specific,  particularly by drawing up lists of indicators which are likely to help in the assessment. For the  OPs which had already been adopted, however, the ex-ante assessments have not been carried out  systematically. Such a situation would certainly make the assessment of the results more difficult  and, in the absence of predefined objectives, would reduce the significance of the ex-post  assessments, on which practically everything remains to be done, since the OPs usually contain only  general methodological information on this subject. 7.84. In this respect, the hitherto low level of utilization of the appropriations reserved in the  CSF for technical assistance is to be regretted, because these could usefully have helped the  administrations in charge to improve the content, the monitoring and the assessment of the measures  and could also have made the programming more effective. CONCLUSION7.85. The regulations on the reform of the Funds may be considered to constitute a step  forward inasmuch as they have irreversibly established fundamental principles for the effectiveness  of Community measures. However, it is important that these advances should take the form of a  correct implementation of the regulations, failing which the intentions behind the Community  legislation will be rendered devoid of meaning. In this respect, our appraisal of the first two  years of the reform points to certain successes and reveals failings which the Commission ought to  make its best efforts to reduce as quickly as possible. 7.86. The first principle of the reform is the concentration of aid on the poorest regions.  Progress has been made in concentrating the resources of the Funds in the Objective 1 regions.  However, it is to be regretted that the Commission has not taken sufficient account of the specific  situations of the regions in allocating its aid. 7.87. A second principle is that of partnership between the various levels of decision-making  involved in devising and implementing structural policy. This is the area in which the greatest  difficulties arise because it involves the greatest innovation of the reform, which affects deep-  rooted patterns of behaviour. In spite of the Commission's efforts, the regional and local  authorities, and of course other important agents of local development such as both sides of  industry, are at present still insufficiently involved at the various levels of the structural  measures. The Commission ought to continue to ensure that this partnership is thoroughly  established at every level, and its effectiveness thus guaranteed. 7.88. The third principle, the natural consequence of the previous one, is that of coordination  between the various Community and national instruments and policies. Coordination between the  structural Funds should be taken beyond its current stage of development, which tends to reduce it  to a consultation procedure, so as to achieve real integration. More particularly, the Commission  should ensure that the resources of the ERDF, the ESF and the EAGGF-Guidance, are coordinated in  the Objective 1 regions so as to guarantee that the Community measures achieve the maximum  effectiveness. Particular attention should be paid to coordination with the loan instruments,  especially the EIB, so as to bring market forces to bear in the regional development effort.  Coordination cannot be left solely to the Community. On the contrary, for as long as Community  policy is drawn up on the basis of proposals from the Member States, without effective coordination  at national level, coordination at Community level can only be an illusion. 7.89. The fourth principle is extending the programme-based approach to every Community structural  measure. In theory, this should allow the Commission to concentrate its efforts on the definition  of objectives and the selection of priorities for the realization of the Community's goals while  leaving the national administrations a large degree of autonomy in the actual implementation of the  measures to which it lends its support. Unfortunately, all too often the objectives and priorities  remain vague, the links between the ends pursued too unspecific and the timetables ill defined. To  avoid the effort which goes into programming being reduced to a presentational expedient, the  Commission should take particular care to define the objectives and priorities and grade them  precisely, failing which the Community's efforts will be vitiated by an absence of management  disguised as flexible management. 7.90. Programming is futile unless it is accompanied by a fifth principle, which is effective  monitoring and assessment by the Commission. The principle of subsidiarity, which allows the  physical management of the measures supported by the Commission to be delegated to the Member  States, should not result in the Commission's abandoning its responsibilities for their correct  execution and their effectiveness. Therefore, while respecting the latitude left to the managers to  ensure the flexibility of any large-scale multiannual measure, the Commission should strengthen the  monitoring, control and assessment of the measures and implement them strictly. There are numerous  gaps in this area and assessment, in particular, has still not been adequately developed. The  Commission should be sure to make the provisions of its regulations as workable and as effective as  possible. 7.91. The success of the reform and, in the longer term, the success of the Community's structural  policy depend on the application of all of these essential principles and their elaboration. The  very short deadlines imposed by the regulations have not allowed the Commission to implement the  principles of the reform fully. There is still room for progress in numerous areas as fundamental  as  additionality (see paragraphs 6.35 to 6.42 of this report). The difficulties and problems  encountered in the past show that giving substance to the spirit of the reform is a long and  exacting task, which calls for perseverance and close attention from the Commission and the Member  States if the mistakes of the past are not to be repeated. 7.92. In this respect, it is important that the Commission should ensure maximum transparency in  terms of information on the progress of the measures decided in the context of the reform,  particularly as regards the financial information relating to their implementation. The conditions  of management by instalment and their inherent flexibility, which was further augmented at the end  of 1990, actually mask the difficulties encountered on the ground, as the Court has already  explained in its previous annual report (see paragraphs 7.58-7.60). 7.93. The Court hopes that the Commission will be able to make the changes which are needed when it  comes to assess the structural policies, a task which, in its first report on the implementation of  the reform, it announced it would undertake by the end of 1991, particularly since this general  assessment coincides with the specific in-depth assessment provided for in the Community support  frameworks. Moreover, this seems to be the only conceivable approach in view of the precise  provisions of the very regulations governing the reform, which call for a report on the 'extent to  which the Community has become cohesive and the impact of the implementation of Community policies`  before the completion of the internal market, i.e. before the end of 1992. >TABLE>>TABLE>CHAPTER 8  (*) Social field >TABLE  POSITION> (*) The Commission's replies are on page 267. INTRODUCTION8.1. The chapter on the social field sets out, firstly, observations on the  winding-up of the former European Social Fund (paragraphs 8.4-8.34) and, secondly, observations  relating to Community measures within the framework of the Erasmus programme (paragraphs 8.35  -8.78). IMPLEMENTATION OF THE BUDGET8.2. Table 8.1 shows how many appropriations were available under  Title  6 as well as the use that was made of them. 8.3. The main observations concerning the legality, regularity and procedures for the accounting  presentation of the financial operations carried out in 1990 are contained in Chapter 1. WINDING-UP OF THE FUND WHICH ENTERED INTO FORCE ON 23  OCTOBER 1983Introduction8.4. Whilst the  financial year 1990 saw the first ESF financial operations carried out in accordance with Council  Regulation (EEC) N°  4255/88 of 19  December 1988 laying down provisions for implementing Council  Regulations (EEC) Nos 2052/88 of 24  June 1988 and 4253/88 of 19  December 1988, it was also  marked by the financial operations governed by Council Decision 83/516/EEC of 17  October 1983,  amended by Council Decision 85/568/EEC of 20 December 1985. Thus, during this financial year, the  former Fund gave rise to 964,1  Mio ECU of payments of final amounts and 100,7  Mio ECU of  established entitlements. Commitments for the new Fund amounted to 3  545,8  Mio ECU, while  payments of first and second advances were 1  705,4  Mio ECU and 557,3  Mio ECU respectively. 8.5. Table 8.2 reveals that the winding-up of the former Fund was far from finished at 31  December  1990. 8.6. The former Fund will not be truly wound up until the problem of outstanding claims has been  resolved, without which it risks being hampered by a serious burden of the past. In view of its  continuing importance, the Court has once again examined this problem. Moreover, the discharge  authorities urged 'the Commission to reduce the period required to recover advances wrongly paid by  the Social Fund`. 8.7. The audit carried out by the Court was based on an updating and an analysis of Community and  national procedures. It was also based on a sample of files and on audit visits to Belgium, Spain,  Italy and Portugal. With regard to the problem of outstanding claims, the audit made it possible to  establish how far the Court's main observations made in the past have been taken into account or  are still relevant, more especially as regards the Commission measures set out in its memorandum of  25 May 1988. >TABLE>>TABLE>Outstanding commitments8.8. Column (e) of Table 8.2 shows that  at 31  December 1990 the volume of outstanding commitments for the former Fund, i.e. 1 282,6  Mio  ECU, was higher than the corresponding amounts at 31  December of the four previous years. Column  (c) of the same table shows, moreover, the absence in 1990 of decommitments in respect of  commitments for the previous financial years. The financial year 1990 has therefore not proved to  be effective as regards the settlement of the former Fund's commitments. 8.9. The Court specifically examined the oldest outstanding commitments. For the financial years  1985, 1986 and 1987, they still amounted to 129  Mio ECU at 31 December 1990. The majority of  files examined showed late decommitments. 8.10. In Belgium, Spain and Italy the Court noted quite a considerable number of applications for  final payment in respect of which the Commission had still not made known its decision and had not  requested any additional information or in respect of which the decision was late - possibly even  after additional information had been obtained - without any apparent reason for these delays. 8.11. In Portugal, several bodies in receipt of ESF aid were audited by the Portuguese authorities  following presumed irregularities (for example, sums received for professional training being used  for the day-to-day running of undertakings and invoices from other undertakings within the same  group being charged to ESF files). The Dafse, the national body responsible for managing ESF  operations, thus blocked the payment of final amounts for the 1986 and 1987 files of these bodies  in order to check them, even though they had already been formally approved by the Dafse and the  Commission. For the financial year 1987, this involved 140  files out of a total of about 1 200.  The Commission also suspended payments in respect of these files. 8.12. The Court's on-the-spot audit revealed that many of the blocked Portuguese files brought  together measures initiated by different promoters. Even the sections of the files that were in  order remained blocked as were those which had received a favourable report from the national audit  authorities. The Commission has only gradually set up an information procedure enabling it to  monitor the audits carried out by the Portuguese authorities. Recovery of unwarranted payments8.13. The volume of claims in respect of advances paid under the  former Fund (1984-89) has continued to increase and will, in the end, amount to over 800  Mio ECU.  The amount of the claims is not inconsiderable, both in absolute value terms and in comparison with  the payments of advances amounting to 8  131  Mio ECU. The same applies to the commitments  concerned, which total over 1  600  Mio ECU, compared with the total of 16  438  Mio ECU of  commitments entered into for approved measures under the former Fund.  >TABLE>8.14. Since 1986 a characteristic feature of outstanding claims has been their  volume, as illustrated by Table  8.3. Settlement is slow and usually fails to respect the due date  fixed. Table  8.4 shows the settlement in 1989 and 1990 of claims outstanding as at 31 December  1988. The Court would like to point out that 56% of advances paid in error, not recovered as at 31  December 1988 - and relating to 405  claims in respect of authorizations for 1986 and previous  financial years - had still not been repaid over four years after the advance had been disbursed. 8.15. Above all since 1988, there has been a problem of disputed claims. Although the problem of  contested files has not been fully clarified (see paragraph 8.23), it may be estimated that around  100 claims established before 31  December 1989, amounting to approximately 28  Mio ECU and still  outstanding as at 31  December 1990, were contested by the Member States or by the bodies concerned  by the claims. Belgium, Italy and the Netherlands are involved for 7%, 91,4% and 1,4% respectively  of the estimated overall amount. A considerable part of the claims still contested covers the  financial years 1984 and 1985. There are also 10 organizations that are either bankrupt or in  liquidation which are involved in 25 claims worth 1,3 Mio ECU and four organizations which have  given rise to judicial proceedings and which are involved in seven claims worth 0,4  Mio ECU.  Whether these claims will ever be recovered is a moot point. Weaknesses in the establishment of entitlements8.16. The procedures for appraising and checking  the applications for final payment have not substantially changed, do not differentiate between  those applications showing excess payments in the form of advances and others, and do not give  priority to the establishment of entitlements. They can therefore do nothing to prevent the fact  that many entitlements are never established. The audit revealed that a considerable number of  debit notes had still not been issued at the time of the audit or had been issued very late, even  for the applications for final payment which showed a debit balance and often without there being  any explanation for these delays. 8.17. Many recovery orders could have been issued earlier had the Commission been notified without  delay of any change in the circumstances on which the decision approving assistance was based, in  accordance with Article 5 of Commission Decision 83/673/EEC of 22  December 1983. It has in fact  been found that the Community regulations and decisions still do not provide for sanctions for  failure to comply with the abovementioned obligation. It appears, moreover, that the Commission has  not sent the Member States the statement, referred to in its reply to the Court's annual report for  the financial year 1988, to remind them of this obligation. The Court again notes that the  Commission has only sporadically been notified without delay of these changes and that the national  procedures for monitoring measures and notifying the ESF of the differences between the measures  implemented and the forecasts have hardly changed. >TABLE>8.18. The Commission recommended in its statement of 25  May 1988 that the  authorizing officer should 'issue a recovery order as soon as possible in cases where the recipient  recognizes, in his application for final payment, that the advance or a part thereof should be  repaid`. It was noted, however, that few recovery orders had been drawn up automatically on the  basis of the applications for final debt payments. 8.19. In 1990 the ESF drew up only a few recovery orders making possible the immediate  regularization in the accounts of unrequested repayments, even though this measure had also been  recommended by the Commission. Without this regularization, the revenue accounts do not, however,  correspond to reality; it thus appears that for the ESF the balance of the suspense account  amounted to 39  Mio ECU at 31  December 1990, i.e. 78% of the total balance of the suspense account  whereas it had been 4  Mio ECU at 31  December 1987, 24  Mio ECU at 31  December 1988 and 6  Mio  ECU at 31 December 1989. Observations on the settlement of claims8.20. The practical measures recommended by the Commission  in its statement of 25 May 1988, which aimed at rapid settlement of outstanding claims, have still  not been applied systematically or satisfactorily. 8.21. For example, the Commission has not formally reminded the national authorities of the  'recipients` obligation to repay advances obtained in error, without waiting to be asked to do so  by the Commission'. Consequently, the volume of unrequested repayments is still low and some  Member States - such as France and Spain - refuse to make this type of repayment or to encourage  it. 8.22. As for the task of 'giving priority to attempts to recover major claims`, the accounting  officer continues to send general reminders to certain Member States, but on a rather unsystematic  basis. As regards the service of notice on individual debtors and the invoking of the secondary  liability of the Member States concerned, the accounting officer relies entirely on the authorizing  officer and the Commission's Legal Service. He cannot act until the ESF has decided, for each case  in turn, on the confirmation, amendment or cancellation of the recovery order and has notified the  Member State of its decision. Outstanding claims, whether disputed or otherwise, are thus discussed  solely by the ESF's geographical departments and the national authorities. The accounting officer  takes no part in these discussions, is unaware of the reasons for the dispute and does not have  access to the files concerned. In practice, as at 31  December 1990, the accounting officer had  served notice on only a small number of debtors and had invoked the Member States' secondary  liability for only five litigious debtors. 8.23. In 1990 the Fund's departments have mainly devoted themselves to clarifying the problem of  outstanding claims and, in so doing, have identified a large number of disputed or litigious  claims, as well as those which have not been repaid and have no special features but none the less  constitute the majority of outstanding claims. The audits carried out by the Court have shown that  by 31  December 1990 the Fund's departments had not managed to determine the precise amount of  contested claims: some so-called 'disputed` claims were not in fact disputed, others had been  repaid or concerned files for which the final amount had been paid, and, finally, some claims which  were really disputed had not been recorded as such. 8.24. The Court noted that where claims were disputed by the Member States it was very often only  on formal grounds, but resulted, nevertheless, in repayments being blocked. 8.25. Little attempt has been made to settle the disputed files. Prior to 31  December 1990 they  had not given rise to appeals to the secondary liability of the Member States concerned or to the  service of notice on debtors. Only some reminders had been sent to the Member States concerned. It  would have been advisable for the Commission to inform Belgium officially of its position as  regards this Member State's Community obligations, which would have undoubtedly helped save time  in settling disputed and litigious claims. Moreover, it should be pointed out that there is a risk  that the claims may become barred by lapse of time if national legislation is applied in the  absence of precise Community rules. The Court again noted that the Commission has not officially  stipulated the way in which the secondary liability applies, although the Legal Service clarified  this matter at internal level at DG  XIX's request. 8.26. Pursuant to Article 29(1) of the Financial Regulation the accounting officer 'shall exercise  all due diligence to ensure that the resources ... are recovered at the due dates indicated in the  recovery orders`. The authorizing departments and the accounting officer did not, however, give  priority treatment to claims that were undisputed but which failed to observe the due date and  which in some Member States (such as Italy, Belgium and Spain) represented significant sums. The  setting-off procedure should have been applied more extensively. 8.27. The accounting officer was instructed, 'in conjunction with DG  V`, to make 'more frequent  use of the procedure of recovering claims by setting them off against debts`. It was further noted  that the accounting officer depends entirely on the ESF's initiative: the setting-off operations  are proposed by its geographical departments. Moreover, in practice, in the absence of any formal  rule, the ESF has chosen to use the setting-off procedure solely for the sums to be paid as final  payments, contrary to the Court of Auditors' observation that the setting-off procedure should also  concern advances. As at 31 December 1990 the setting-off procedures carried out still concerned  only 12  debtors for 58  unwarranted payments relating mainly to the period 1984-87, spread over  Belgium, Italy and the Netherlands for an amount of 5,4  Mio ECU which represents barely 2% of  total outstanding claims as at 1  January 1990 plus entitlements established in 1990. 8.28. The Court considers, however, that the setting-off procedure could have been applied more  extensively and earlier. In Belgium and Spain (although for Spain no setting-off procedure had been  envisaged by the Commission prior to 31  December 1990), for example, internal setting-off  procedures had been carried out by the authorities responsible for factual and accounting  certification. Final amounts paid by the Commission were blocked in accounts opened by national  authorities pending an internal agreement on setting-off and then followed by a repayment to the  Commission after an administrative procedure which was in some cases lengthy (Spain). Setting-off  procedures could have been considered earlier by the Commission for major national professional  training bodies such as INEM (Spain) and Forem (Belgium), enabling the quick recovery of relatively  high amounts. 8.29. The accounting officer did not apply interest on late payment prior to the entry into force  of Commission Regulation (EEC) N° 1865/90 of 2  July 1990. Since then, in some cases, he has  notified the Member States concerned of a new deadline for old unrecovered claims and has informed  them that interest on late payment will be charged if they fail to pay by the set deadline. These  notifications have not, however, been followed up. The Court notes here that Commission Regulation  (EEC) N°  1865/90 applies only to claims referred to in Article 24(3) of Regulation  (EEC) N°  4253/88 and regrets that there is still no legal basis for the application of interest on late  payment for claims relating to the former Fund's authorizations. Re-use of revenue8.30. In 1989 an amount of 73  Mio ECU was committed for files on which an  authorization decision had already been taken on 22  March 1989. According to the ESF, the files  chosen were priority, had to be characterized by optimum implementation and be capable of absorbing  this additional instalment. An examination of a sample of files revealed that the majority reached  a level of implementation which barely made it possible to absorb the initial authorization. In  1990 an amount of 45,6  Mio ECU in revenue to be re-used was allocated - at the same time as 91   Mio ECU of appropriations made available again - to the 1990 instalment of 49  operational  programmes. Conclusions8.31. Certain recommendations made by the Court in its annual report on the financial  year 1988 (paragraph 9.86) for speeding up the identification of unwarranted payments and the  settlement of claims have not been followed by the Commission. These recommendations were that the  Commission should introduce procedures for issuing and sending out debit notes more quickly,  systematically apply the setting-off procedure, propose charging interest on late payments in order  to reduce the period for which unduly paid sums are held and provide a more precise definition of  the idea of guaranteeing the successful completion of operations and that of secondary liability,  which is closely related. Thus the ESF's financial management has not proved to be effective in  this field. 8.32. In order to prevent the creation of a fresh burden of the past, the Commission should ensure  that: (a)the authorizing departments monitor the files until they are really closed, i.e. until the  recovery of claims; (b)there is real coordination between the Commission departments concerned (DG  V, DG  XIX, DG  XX  and the Legal Service); (c)it makes systematic use of all the means available to resolve the problem of disputed claims and  to recover undisputed claims quickly. 8.33. With regard to the Fund which entered into force on 1  January 1989 the Commission should  use the lessons learnt from past experience in order to prevent a recurrence of the weaknesses  found in the winding-up of the former Fund. 8.34. More effective recovery procedures, involving quicker recovery of claims, would save the  Community the unnecessary financial cost caused by the blocking of the corresponding resources in  the Member States. Such a procedure would, moreover, enable new appropriations to be made available  without delay and thus be better utilized. COMMUNITY MEASURES WITHIN THE FRAMEWORK OF THE ERASMUS PROGRAMMEIntroduction8.35. The European  Community Action Scheme for the Mobility of University Students (Erasmus) was implemented as from 1   July 1987 by Council Decision 87/327/EEC of 15  June 1987. The amounts allocated for carrying out  the programme totalled 153,7  Mio ECU for the years 1987 to 1990. 8.36. By its Decision 89/663/EEC of 14  December 1989, which was applied as from 1  January 1991,  the Council laid down new rules for applying the Erasmus programme for a second phase of five  years. The 'amount considered necessary` for the first three years of the second phase was 192  Mio  ECU. 8.37. The objectives of the Erasmus programme as defined by Article  2 of Council Decision  87/327/EEC are as follows: (a)to achieve a significant increase in the number of students from universities spending an  integrated period of study in another Member State; (b)to promote broad and intensive cooperation between universities in all Member States; (c)to harness the full intellectual potential of the universities in the Community by means of  increased mobility of teaching staff; (d)to strengthen the concept of a People's Europe; (e)to ensure the development of a pool of graduates with direct experience of intra-Community  cooperation. 8.38. In order to achieve these objectives, four kinds of action were defined by Council Decision  87/327/EEC: (a)the establishment and operation of a European university network (action  1), including study  visit grants for teaching staff; (b)the student grants scheme (action  2); (c)measures to promote mobility through 'academic recognition` (action  3); (d)complementary measures (action  4). 8.39. The actions as expressed during the first phase of application of the programme  (1987/88-1989/90) and the corresponding Commission measures are summarized in Table  8.5. 8.40. The rules on granting the aid available under the Erasmus programme were laid down in general  terms in a document drawn up by the Commission department responsible in 1987. This basic document  was slightly amended for the academic year 1989/90. 8.41. As Table  8.5 shows, the actions of the Erasmus programme which are described by the Council  Decision are grouped together by the Commission in several measures. The observations below relate  in particular to three of these measures: the interuniversity cooperation programmes (ICPs), the  student grants and the study visit grants for teaching staff. There are also comments on the  management by Erasmus Bureau, the Commission's contractor, and on the monitoring of expenditure by  the Commission's Task Force. 8.42. Given that the first phase of the programme, set up as from the academic year 1987/88, was  completed in 1989/90, the Court's audit inquiries were able to deal with the measures relating to  all this first phase. The checks on records and on the spot were made at the Commission and Erasmus  Bureau and in four Member States: Germany, France, Greece and the United Kingdom. In connection  with this, 35 ICPs were checked on the spot. The Erasmus programme's management system8.43. The department responsible for carrying out the  Erasmus programme is the Commission's Task Force for Human Resources, Education, Training and  Youth, which is a separate unit not attached to a Directorate-General. The Task Force, whose  director is the deputy authorizing officer for expenditure, has laid down in this respect  administrative procedures which are very diversified and in some cases complex. 8.44. Management of the programme has for the most part been entrusted to the European Cultural  Foundation, a private, non-profit-making foundation under Dutch law which, acting as a  subcontractor, manages the programme by means of its Erasmus Bureau located in Brussels. Relations  between the Commission and the Foundation are regulated by annual contracts for the provision of  services (see paragraph  8.62). Erasmus Bureau draws up lists of potential recipients of aid under  each measure. These lists are submitted for approval to the Task Force, which remains the  authorizing officer for expenditure. The Task Force transfers the necessary appropriations, as a  global payment, to Erasmus Bureau, which then distributes the aid. Even though the Task Force is  the authorizing officer, in practice it is Erasmus Bureau that examines the final claims presented  by the aid recipients and determines the expenditure. It is also this Bureau that monitors the  implementation of the programme and draws up the management reports to be sent to the Commission.  For each measure managed by Erasmus Bureau, there are special administrative rules drawn up by the  Bureau on behalf of the Commission. >TABLE>8.45. Some expenditure is managed directly by the Commission's Task Force,  namely some of the aid under the complementary measures (see Table  8.5) and some items of  operating expenditure on administration and staff. Table  8.6 shows the implementation of the  Erasmus programme for the period 1987-90. Aspects of the implementation of the Erasmus programmeInter-university cooperation programmes  (ICPs)8.46. The European university network (see Table  8.5) is composed of universities which, in  the framework of the Erasmus programme, conclude agreements and organize ICPs, programmes which  provide for exchanges of students and teachers with universities of other Member States and ensure  full recognition of study periods thus accomplished outside the home university. 8.47. Whatever the number of universities taking part in a single ICP (the number is generally  three or four universities), a single aid application has to be submitted by one of the  universities, which will act as the coordinator on behalf of all the participants. Where aid is  granted, it is paid to the coordinating university, which must take responsibility for managing it  and for distributing it to the participating universities. The coordinating university administers  the financial aid allocated for the implementation of the ICP within the framework of a contractual  agreement with Erasmus Bureau. The financial aid to the universities which cooperate under an ICP  is allocated for one year and may be renewed on the basis of information supplied in each new aid  application. >TABLE>8.48. Through Erasmus Bureau, the Commission publishes aid application forms  which are distributed every year to the interested circles. The latter must send in their aid  applications by 31  January of the year in which the academic year begins. As of the academic year  1990/91, however, the deadline set has been earlier, namely 31  October of the year n   P  1. 8.49. Given that the selection or priority criteria published by the Commission have not been  sufficiently transparent for the selection of the ICPs, a great many aid applications are received  every year (868 for the academic year 1987/88, 2  041 for 1988/89, 2  223 for 1989/90). The main  difficulty encountered by the Commission and Erasmus Bureau is therefore the selection of the ICPs  and the fixing of the level of the individual amounts of aid. Added to this difficulty is the fact  that all the applications are based on estimates and not on actual data. Furthermore, in the  absence of any precise criteria, appraisal becomes more and more difficult. For 1989/90, of the 2   223 aid applications received, corresponding to 56  Mio ECU, the Commission accepted only 1  507   ICPs (68%), corresponding to aid worth 16  Mio ECU (29%). 8.50. When a project is accepted, Erasmus Bureau makes aid contracts, on behalf of the Commission,  with the universities coordinating the ICPs. The payments by cheque, which are made out to the  coordinating university,  are sent direct to the coordinator (the professor), however, and not to  the coordinating university which is the contractor. With this method of payment there is the risk  that appropriations may be managed outside the official accounts of the universities and that they  may be used for purposes other than those planned by the Erasmus programme. A safer method would be  to use bank transfers, with a copy of the notification being sent to the coordinating professor. 8.51. The coordinating university is responsible for managing the grants. Some universities have  divided up the grants between the partner universities, others have centralized all the payment  operations. At the time of the on-the-spot checks, it was not always possible to inspect all the  supporting documents at the coordinating university. For mission expenses declared, for example,  some universities have not kept the travel tickets as supporting documents. In this case, there is  always the risk of the travel being financed twice over, as these expenses could be declared under  other measures. 8.52. In order to obtain the maximum Community aid, some universities are tempted to increase the  expected number of students for the exchange and/or the number of months of study abroad. As a  result, the aid granted corresponds to measures which the audit revealed consisted of fewer  exchanges than planned. 8.53. For example, one ICP was allocated Community aid of 78  500 ECU. It was a cooperation project  between five European universities (two of which in a peripheral country), with a view to  organizing exchanges of 110 students for a total of 470 months of study. In the end, only 20  students, all from the same university, spent a total of 80 months of study in a single other  university. Despite the low rate of implementation, the Community aid was paid virtually in full. Student grants8.54. The student grants (see Table  8.5) are managed by the National Grant Awarding  Authorities (NGAA), with which Erasmus Bureau makes contracts every year. It is therefore these  authorities that deal with the distribution of the student grants at national level. Community  appropriations are divided up between the Member States according to the total number of students  at universities and the total number of 18  to 25-year-olds in each Member State. The number of  students taking part in the ICPs was not taken into consideration in the first phase of the  programme. Table  8.7 shows that the level of grants allocated varies considerably from one Member  State to another. According to Erasmus Bureau's calculations, the lowest grants are those allocated  to Irish students (106 ECU/month) and the highest those for Portuguese students (367 ECU/month). 8.55. The Commission first pays the Community appropriations to Erasmus Bureau, which in turn  transfers them to the respective national authorities. The latter make contracts with the  universities participating in an ICP and distribute the appropriations to them. The universities  then have to pay the appropriations to the students who are to receive the grants. For this  purpose, the universities made grant contracts with the students and the individual transfers were  usually made between Christmas and the following May. This is why most students did not receive  their grants until they had already completed a considerable part of their studies abroad. Because  of the excessively lengthy administrative procedures, many of the students were obliged to find  advance financing for their studies. This problem has been aggravated by special difficulties which  were brought to light by the on-the-spot checks: (a)accommodation has become a major problem in all the countries visited. For Erasmus students, it  is very difficult to find accommodation on the market at reasonable prices; (b)the Erasmus grants are distributed without always taking the cost of living in the host Member  State into consideration; (c)exchange with some countries is difficult because of limited knowledge of the respective  languages. 8.56. In the FR of Germany, a 'Bafoeg` State grant system has been set up, enabling study abroad to  be financed for students whose parents have low incomes. Of these students, however, many receive  only part of the national grants in so far as the amount of the latter is fixed in accordance with  the parents' income. These two categories of students, for which the Erasmus grant is limited to  100  DM (±50  ECU) per month, are thus in a less-favourable situation than those who, even though  better off, are entitled to a far higher Erasmus grant (between 410 and 718  DM/month, i.e. between  200 and 350 ECU/month). 8.57. There are no rules governing the use to be made of the interest accruing from the investment  of Erasmus programme appropriations by the national authorities. In Germany, for example, these  appropriations earned interest amounting to 291  220  DM (±142  000 ECU) between 1988 and 1990.  Similarly, in the United Kingdom, the interest corresponding to the academic year 1988/89 amounted  to 36  500 ECU. In both countries, the respective amounts were not declared to the Commission. >TABLE>8.58. With regard to student mobility in 1988/89, the Commission report of  December 1989 on the Erasmus programme relates to 15  000 students and 102  710 months. According  to the national authorities' data, the rate of implementation for the same period was 10  634  students (71%) and 57  913 months of study (56%). In the FR of Germany, for example, the rate of  implementation of projects inspected on the spot (on the basis of the number of students) was 78%,  in France 59% and in the United Kingdom 53%. 8.59. Council Decision 89/663/EEC provides, amongst other things, for new criteria for distributing  the grants as from 1990. An amount of 200  000 ECU is thus allocated to each Member State for the  first phase, whilst during the second phase the remainder is distributed on the basis of a number  of factors (such as the total number of students, the number of 18 to 25-year-olds in each Member  State, the cost of the journey between the student's country of origin and the host country, etc.).  Even though the Commission has laid down very complex methods of calculation for dividing up the  appropriations, disparities in the level of grants between the Member States none the less  persist. Study visit grants for teaching staff8.60. The objective of this measure is to enable teaching  staff in higher education to carry out visits to other universities, one of the purposes being to  make or extend an agreement to organize an ICP, or for short lecture visits (see Table  8.5). The  total duration of a study visit may not exceed the equivalent of four weeks. 8.61. For all types of visit, the maximum aid granted is 1  500 ECU per person, an amount which  usually proves to be insufficient to finance all the travel expenses. Despite this, there is  considerable interest in this type of Community aid (2  377  applications in 1987/88, 3  510 in  1988/89 and 3  777 in 1989/90). The aid is granted to the recipients personally. The recipient is  obliged to present a declaration of costs and a report on the subsidized visit. The fact that  Erasmus Bureau does not require supporting documents to be submitted for payment of the subsidy  could mean that there was a risk of duplicate financing. Remarks concerning Erasmus Bureau8.62. As stated in paragraph  8.44, the European Cultural  Foundation (ECF), entrusted with management of the programme, provides its services, through  Erasmus Bureau, on the basis of contracts for the supply of services concluded annually by the  Commission (see Table  8.6). According to the terms of the contracts, Erasmus Bureau carries out  the following tasks: (a)management of subsidies under the Erasmus programme (including transfer of appropriations to the  aid recipients); (b)the organization and carrying-out of information activities; (c)work on 'academic recognition`; (d)continuous assessment, monitoring and general development of the programme; (e)general administrative back-up. 8.63. Erasmus Bureau has set up and developed a large administrative structure which is external  to, but dependent upon, the Commission. The current contract for the supply of services provides  for the possibility of a review in the event of the number of aid applications for the ICPs  exceeding 3  500 the first year or in the event of an increase of over 10% in the Bureau's  financial forecasts or in the financial estimates for the measures. Furthermore, according to  Article  3 of the contract, in the event of the contract being broken off by the Commission, the  latter will take responsibility (without limit) for all Erasmus Bureau's legal obligations. The  Court must emphasize that such a breach of contract (unless it was due to the unsatisfactory  quality of the services rendered) would have serious financial consequences for the Community. 8.64. Moreover, a check made by the Commission's Financial Controller concerning the administrative  expenditure between 1  May 1988 and 31  January 1989 showed that, according to the service  contract, Erasmus Bureau should, at the Commission's request, have presented all the documents  required to enable the Commission to recover the VAT paid in the context of carrying out the  contract. However, the Commission has never followed this procedure. The Court considers that, for  the first three years of the Erasmus programme, the resultant amount to be recovered was around 700   000 ECU. 8.65. The contracts for the provision of services drawn up between the Commission and Erasmus  Bureau lay down that the latter must present its financial report to the Commission every year by a  certain date. Table  8.8 shows the financial operations declared by Erasmus Bureau for the  programme's various measures. The Court of Auditors has found that the deadlines for presenting the  reports were not met. 8.66. It has been found that the accounts kept by Erasmus Bureau in respect of contracts are no  more than a mere statement of banking transactions. As the accounting system does not include  financial transactions on contract, it is very difficult to check the overall situation regarding  the contracts against the bank accounts and to establish a comprehensive financial position. 8.67. In 1989, the Commission recovered a total of 817  071,26 ECU from Erasmus Bureau. These were  appropriations from the academic year 1987/88 which had been repaid by the final recipients to the  European Cultural Foundation in Amsterdam, which at that time kept the accounts of Erasmus Bureau  in Brussels. The Commission recovered the amount in question by means of setting-off, i.e. by  making an equivalent reduction in the appropriations corresponding to the academic year 1989/90. As  of that date, Erasmus Bureau in Brussels had an overdraft because the Bureau had not received the  amount from the central department in Amsterdam. Erasmus Bureau's deficit was covered by new  Commission appropriations, intended for the Erasmus programme. >TABLE>8.68. This resulted in a temporary misuse of Community funds and gave rise to  expenditure which the Community had to bear because for the academic year 1988/89 bank charges of  ±10  000 ECU, relating to the abovementioned deficit, were booked to the Community by Erasmus  Bureau. The Commission also lost income arising from the interest, because the amounts used  temporarily to finance the deficit were not invested. The Court considers that the amount of  interest lost was some 50  000 ECU in 1990. 8.69. The Court points out that, depending on the kind of annual contracts for the provision of  services, Erasmus Bureau makes payments on behalf of the Commission as an intermediate department.  At the close of each financial year, the Commission should ask for a statement of the financial  transactions and should incorporate these transactions into the Community accounts, according to  the budgetary rules. When the checks were made, however, no sign of any such transactions was  found. Inadequacy of the auditing8.70. The Task Force, the Commission department responsible, has not set  up a satisfactory system for auditing the expenditure of the Erasmus programme. With regard to the  use made of the appropriations managed by Erasmus Bureau, the Commission accepts the Bureau's  statements. Erasmus Bureau's work is mainly confined to approving the final statements of costs  received from the aid recipients. There are few checks on the use made of the aid by the  recipients. 8.71. At national level, the grant-allocation authorities are not all subject to suitable audits.  In France, for example, the national authority is subject to audit by the French 'Cour des  comptes`; in Germany, the authority is audited by an external audit firm; in the United Kingdom, on  the contrary, no audits are performed on this subject.Conclusions8.72. For managing the Erasmus programme, the Commission is for the most part assisted  by the European Cultural Foundation, through its Brussels unit, Erasmus Bureau. The administrative  procedures for implementing the programme have proved to be complex. The Commission, as authorizing  officer for the expenditure, ought to lay down a better framework for the measures and improve its  auditing of the Bureau's activities. 8.73. The financial responsibility of the coordinating university should be better defined.  Moreover, in several of the universities visited, there is a tendency to overestimate the number of  potential recipient students in the aid applications. The Commission should improve its monitoring  of the implementation of the ICPs in order that better account can be taken of data on actual  mobility when new applications for aid are being appraised. 8.74. Throughout the first phase of the Erasmus programme, the lengthiness of the administrative  procedures relating to the transfers made to students was detrimental to the effectiveness of the  aid measure itself. These delays put students who did not have sufficient personal funds in advance  to pay for their studies in a difficult position. Moreover, the difficulty of finding reasonably  priced accommodation, the cost of living abroad and language problems are further obstacles to  mobility. 8.75. At the level of Erasmus Bureau, the management must be strengthened by setting up a suitable  accounting system and by improving the existing system for selecting and monitoring aid  recipients. 8.76. The Commission must set up a satisfactory system of auditing the Erasmus programme, all the  more so since it has chosen a management system which is carried out by a subcontractor. 8.77. At Member State level, it has been found that the message and objectives of the programme  have not been received in the same way. The countries which are most famous for their university  education and for the internationality of their languages have benefited more from the programme  than the other countries where implementation of the programme has been laborious and where there  have been a number of obstacles to overcome. 8.78. Despite the fact that there was a considerable disparity between the achievements and the  forecasts for the measures relating to the whole of the first phase (see paragraph  8.58), the  Commission's report on the implementation of the first phase of the Erasmus programme states only  the forecasts. CHAPTER 9  (*) European Agricultural Guidance and Guarantee Fund, Guidance  Section (EAGGF-Guidance): The compensatory allowance granted to farmers in less-favoured areas > TABLE POSITION>INTRODUCTION9.1. The main observations concerning the legality, the regularity or  the procedures for the presentation in the accounts of the operations charged to the part of the  budget concerning the Guidance Section of the EAGGF (EAGGF-Guidance) are set out in Chapter  1 of  this report (see, more particularly, paragraphs  1.54 and  1.68). 9.2. The situation regarding commitments and payments for the financial year compared with the  appropriations allocated to the original budget and the final appropriations available is  summarized in Table  9.1. 9.3. Given the very limited effects of the reform of the structural Funds on expenditure chargeable  to the EAGGF Guidance Section during 1990, the Court concentrated its audit activity on one  'classic` measure, the compensatory allowance, which is now part of a measure aimed at achieving  Objective 5a. THE COMPENSATORY ALLOWANCELegal framework and content9.4. The compensatory allowance, which is  governed by Articles 13-15 of Council Regulation (EEC) N° 797/85 of 12 March 1985 on improving the  efficiency of agricultural structures, and by Articles 1-3 of Council Directive 75/268/EEC of 28  April 1975 on mountain and hill farming and farming in certain less-favoured areas, is a form of  financial aid which the Member States may choose to pay once a year to farmers in certain  less-favoured agricultural areas in order to correct the effects of permanent natural handicaps.  Depending on the regions concerned, the EAGGF-Guidance reimburses between 25 and 65% of Member  State expenditure in this field.  Financial significance9.5. In 1990, Community expenditure on the compensatory allowance, which  amounted to 441,9 Mio ECU, represented 55% of expenditure under Regulation (EEC) N° 797/85 (808,2  Mio ECU in total) and 24% of total expenditure chargeable to the EAGGF-Guidance (1  825,3  Mio   ECU). The breakdown of expenditure by Member State is shown in Table  9.2. >TABLE>National provisions9.6. The Member States enjoy considerable discretionary power  in the adoption of the national provisions, which supplement and give specific form, according to  the local situation, to the general criteria established by the Community legislation. The  Commission, for its part, has to check that the national provisions, which it examines and approves  in accordance with a specific procedure laid down in Articles  24 and  25 of Regulation (EEC) N°   797/85, conform with this legislation. >TABLE> >TABLE>Less-favoured areas9.7. The less-favoured farming areas for  which the compensatory allowance may be granted are set out in the lists adopted by the Council by  means of specific directives. Only areas of land corresponding to one of the following categories  may be included in these lists: (a)mountainous areas which are handicapped for reasons of altitude and climatic conditions and/or  because the land is steeply sloping; (b)areas in danger of depopulation where there is a need to conserve the countryside. These areas  must exhibit all of the following characteristics: low agricultural productivity, results that are  appreciably below average for the main indices of the economic aspects of agriculture, and a low or  dwindling rural population; (c)areas where there is little arable land, which are affected by specific handicaps and where  farming must be continued in order to conserve the countryside and to protect the coastline or to  preserve the tourist potential of the area. Recipients of the aid9.8. The compensatory allowance may be granted to farmers who are farming a  usable agricultural area (UAA) of at least three hectares and who undertake to pursue farming  activity for at least five years from the first payment of the allowance. The minimum UAA is  reduced to two hectares in the case of the Italian Mezzogiorno, the French overseas departments and  in Spain and Greece, to one hectare in mainland Portugal, and to half a  hectare in the Azores and  Madeira. If the farmer is in receipt of a retirement pension, expenditure on the compensatory  allowance is not eligible for reimbursement by the EAGGF. At present some 1,2  million farmers are  receiving the compensatory allowance (Table  9.3 shows the breakdown by Member State). Amount of the aid9.9. The amount of the compensatory allowance is fixed by the Member States  according to the severity of the permanent natural handicaps affecting farming activities and can  be adjusted in the light of the economic situation of each farm and the farmer's income. The  Regulation fixes the minimum and maximum amounts. The minimum amount applies only in mountainous  areas, where the allowance may not be less than 20,3 ECU per livestock unit (LU, defined in the  Annex to the Regulation) or, where appropriate, per hectare. Subject to certain special conditions  set out in the Regulation, the maximum amount is 102 ECU per LU in the case of the production of  cattle, equine animals, sheep and goats, and 102 ECU per hectare of land farmed in the case of  other types of production. In areas that are affected by particularly serious permanent natural  handicaps, the maximum allowance that may be granted is 121,2 ECU per LU or, where appropriate, per  hectare. If the recipient has converted an area of open land that is used as the basis for the  calculation of the allowance into woodland this area may still be taken into account for the  calculation. However, in the case of areas of land which have undergone afforestation since 18 June  1989, the farmers receive an annual premium instead of the compensatory allowance. Objectives of the aid9.10. The objectives of the aid are defined in the following terms in Article  1 of Directive 75/268/EEC: - to ensure the continuation of farming, thereby maintaining a minimum population; - to conserve the countryside; - to raise farm incomes. The Court's audit9.11. The Court has already commented previously on the compensatory allowance,  in a 1980 special report on Directive 75/268/EEC and in the annual report concerning the financial  year 1984. Problems relating to the extension of the less-favoured areas were considered in the  annual report concerning the financial year 1985. In view of the increasing volume of Community  expenditure, the high number of recipients and the increase in the surface area of less-favoured  areas, in 1990 the Court examined the way in which the measure was being applied in several regions  in six Member States (Germany, Spain, France, Ireland, Portugal and the United Kingdom). 9.12. The present audit looked at the Commission's role in approving national provisions, the  extension of the less-favoured areas, the national administration systems and the effectiveness of  the measure. OBSERVATIONSNational provisions9.13. Not one Member State has made use of the provision contained  in Regulation (EEC) N°  797/85 which makes it possible to adjust the amount of the compensatory  allowance in the light of the economic situation of the farm and the farmer's income. None the  less, the national legislation of some Member States has adapted the rates of the allowance  according to the specific handicaps of the various sectors into which a large less-favoured area  may be subdivided. In the case of Lower Saxony, however, the Court noted that the Commission had  approved a piece of national legislation which provided for the allowance to be granted at one  single rate under identical conditions for the entirety of the less-favoured area, which is  definitely not in harmony with the spirit of the Community legislation. 9.14. Outside mountainous areas, dairy cows can only be taken into account (up to 20 per farm) in  areas where the production of dairy products accounts for a large part of farming activity. This  restriction makes it necessary to delimit, within non-mountainous less-favoured areas, those areas  where dairy production constitutes a large part of farming activity. This has been done in France,  by specific prefectoral orders. In Germany, on the other hand, the national legislation merely  provides for the permitted number of dairy cows to be taken into account throughout the  less-favoured area. The national legislation in Portugal refers to subsequent administrative  provisions, which were adopted, for continental Portugal only, in April 1991. In spite of the  absence of these provisions, dairy cows were taken into account for the purpose of awarding the  compensatory allowance, as the Court was able to observe in the Azores. 9.15. According to Article 15, paragraph 1(a), of Regulation (EEC) N° 797/85, 'in the case of  production of cattle, sheep, goats and equines, the allowance shall be calculated in relation to  livestock numbers`. Using a table annexed to this Regulation, cattle, equines, sheep and goats - to  the exclusion of all other animals - can be converted into livestock units. In the case of  'production  other than cattle, equine, sheep and goat production`, the compensatory allowance is  calculated according to the area of agricultural land. Article 15, paragraph 1(b), states that the  land used to produce fodder for these animals must in that case be deducted from the calculation  base. The aim is to ensure that animal production which the Community legislation has not seen fit  to include amongst the eligible categories of production is not encouraged by basing the  calculation of the allowance on areas of land that are used to produce fodder. 9.16. However, this is not how the legislation on the deduction of land areas used to produce  livestock fodder has been carried over into the national legislation, where the view was taken that  only those animals already taken into account for the purpose of calculating the livestock units  should be included. Interpreting the Community legislation in this way makes it possible for the  compensatory allowance to be granted for land areas used to produce livestock fodder, which does  not qualify for the allowance, and, in particular, as the Court has found, for land used to grow  cereals intended for intensive pig farming. Within the framework of the current common agricultural  policy guidelines, the market situation, together with the need to protect the environment, are  factors that militate against encouraging this type of farming. The Community's attitude is clearly  expressed in the text of Regulation (EEC) N° 797/85, which imposes very strict conditions for  investment aid relating to the pig production sector and which does not include pigs in the list  of types of animal production which may be considered for the compensatory allowance. It is  surprising that the Commission, by approving the above interpretation, should allow the  compensatory allowance to be granted to a type of farming which was not contemplated by the  legislation on the allowance. 9.17. As regards land areas, the Court also found that the Baden-Wuerttemberg legislation allowed  the compensatory allowance to be granted, in mountainous areas, on the basis of areas used for  extensive grazing. Since these pastures are intended for cattle and sheep farming, the compensatory  allowance should only be granted in terms of the number of LUs belonging to the farmer. As a result  of the special method applied in this Land, the limits fixed by the Community legislation have been  exceeded. For example, a farmer with 12,4  LUs and 40,12 hectares of extensive grazing used  exclusively for feeding these 12,4  LUs receives an allowance calculated on the basis of the 40,12   hectares of grazing, resulting in a sum that is considerably bigger than an allowance based only on  the number of LUs, as required by the Community legislation. 9.18. The local provisions in this same Land also allow  deer, a species not included in the  Community legislation, to be taken into account for the payment of the compensatory allowance.  These provisions therefore depart from the conditions set out in the Community legislation and  should not have been allowed by the Commission. Community reimbursements9.19. Reimbursements of expenditure effected as above, on the basis of  national provisions which in the Court's view do not comply with Community legislation, cannot be  considered to be regular. 9.20. In Lower Saxony and Portugal, the gross amounts granted to recipients are subject to a  deduction (0,6% in Lower Saxony and 0,5% in Portugal) intended to meet part of the administrative  costs of the public financial institutions which act as paying agents for the allowance.  Applications for reimbursement are based on the gross amounts, which also correspond to the  appropriations allocated to the financial institutions in question from the regional or national  budget for the purpose of disbursing the compensatory allowances. Regulation (EEC) N° 797/85 does  not prohibit the EAGGF-Guidance from accepting statements of expenditure other than those  corresponding to the net amounts received by the beneficiaries; however, in order to ensure that  all the Member States are treated in the same way, and to facilitate an exact assessment of the  final destination of Community reimbursements, the Commission should define, by means of rules of  application, the circumstances in which such expenditure may be included in the annual applications  for reimbursement. Less-favoured areas9.21. The total surface area of the less-favoured areas, expressed as a  percentage of the usable agricultural area (UAA) of the Community, went up from 45,4% in 1985 to  53,4% in 1990, following an increase due to the accession of Spain and Portugal and to repeated  extensions in other Member States. The Court had already noted a significant increase in the  surface area of less-favoured areas in its annual report concerning the financial year 1985. Since  then, there have been other extensions, principally concerning the FR of Germany (from 33,1 to  50,9% of UAA in 1986 and from 50,9 to 53,5% in 1989) and France (from 40 to 45,1% of UAA in 1989). 9.22. The continuous growth of the less-favoured areas raises the following points: (a)The extensions essentially concern non-mountainous areas, whose handicaps are determined using  statistical criteria relating to national averages (productivity of the land, economic results of  farms, population density, etc). The less-favoured areas can be extended by relaxing the criteria  (e.g. the land productivity rating, below which a handicap situation is considered to exist, can be  raised) or by modifying the classification of 'normal` regions each time new statistical data are  made available which show that the development of these regions is negative in comparison with the  national average; (b)Classification as a less-favoured area makes it possible to qualify for the compensatory  allowance and has other advantages too, such as a more favourable rate of aid for farming  investment, exemption from the dairy co-responsibility levy and a higher ewe premium. It is  therefore understandable that there should be growing pressure from both farming and political  circles in the Member States for a continuous extension of the less-favoured areas, aimed more at  increasing the number of farmers able to benefit from certain financial advantages than at  compensating for specific handicaps. In this context, the aim of offering German farmers some  compensation for the loss of revenue they have suffered as a result of the revaluation of the  Deutschmark's green rate has certainly played a role in the very considerable extension of the  less-favoured areas in Germany, which was decided in 1986 and criticized by the European  Parliament. More generally, the more recent requests to extend the less-favoured areas have also  been motivated, according to the information which the Court has obtained from the national  authorities, by the financial consequences of current adjustments in market policy (quotas,  agricultural stabilizers, etc) on farmers' incomes; (c)The continuous extension of the less-favoured areas is inevitably bringing with it a gradual  reduction in the differences between these areas and 'normal` areas, as far as general averages are  concerned. At the level of individual farms, on the other hand, very large less-favoured areas  cover very varied individual situations and the degree of handicap in relation to farms in the  'normal` area can vary considerably. Moreover, the development of very large areas cannot be  homogenous: the possibility cannot be ruled out that a regular assessment of the actual level of  handicap in all the less-favoured areas of the Community will lead to the discovery that, in  certain parts of these areas, there are no longer any handicaps left. Administration of the measureThe national administration systems9.23. The main problems in  administering the compensatory allowance are due to the very large number of recipients and to the  fact that this aid is not paid out in response to a specific act, such as making an investment, but  is based on the mere fact of a situation declared to exist by the applicant (occupation as a  farmer, possession of a certain number of animals, availability of a certain agricultural area). It  is only possible to verify the declarations made by the applicants for aid properly if the national  administration is sufficiently well organized and uses effective methods of control. 9.24. The most essential task in the administration of the compensatory allowance is the monitoring  of the applicants' declarations. With effect from 1990, Regulation (EEC) N°  797/85 requires  Member States to 'make provision for effective monitoring`, including 'on-the-spot controls to  verify that the information contained in the application corresponds to the true situation`.  However, the actual verification procedures used are at present determined solely by the Member  States: the result is significant variations in the quality of the checks carried out. For other  types of aid (the suckler cow premium, the ewe premium, the special premium for bulls and the  set-aside premium) which, from an administrative point of view, are similar to the compensatory  allowance, the Commission legislation stipulates specific monitoring procedures. There is no reason  why the compensatory allowance should be treated any differently. In view of the growing number of  types of Community aid that are granted according to the number of livestock units held or surface  area of land farmed, it would, moreover, be a good idea if the Commission were to propose the  adoption of a harmonized and rationalized Community verification system, to include, in particular,  the drawing-up by the Member States of a register of agricultural holdings. This register should  provide information on factors such as the number of livestock units held and the surface area of  land farmed, both of which serve as a base for the calculation of several types of aid. 9.25. Among the Member States visited, the Court thus uncovered two different systems, as described  below: (a)In Ireland and in the United Kingdom, each farm is subject to regular, systematic on-the-spot  controls in order to check the accuracy of the factors that  determine the amount of aid granted,  i.e. in these two countries, the number of livestock units declared. This type of control, which in  Ireland is carried out annually for sheep and every two years for cattle and in the United Kingdom  is carried out every two years for cattle and every four years for sheep, involves a body of field  officers who are  geographically spread out over the whole less-favoured area; (b)In the other Member States the Court visited the system is based on the administration's trust  in the farmers' declarations, even though a very limited number of applicants, for the most part  selected at random, may be subjected to a more or less in-depth, on-the-spot check. The  administration systems of the Member States differ from each other in the level at which the checks  on the applications for aid are carried out. These checks may be limited to an assessment of the  plausibility of the applications or may include cross-checking using supporting documents. Even in  those cases where a documentary check is carried out it never covers the determining factor for  calculation of the amount to be paid, i.e. the number of LUs or the number of hectares farmed and  the types of crop grown. 9.26. The administrations of those Member States which do not carry out exhaustive controls  consider that the cost of setting up such a system would be exorbitant in relation to the financial  benefits (recoveries and rectifications) that it would bring. There is undoubtedly some truth in  this claim, but it should also be remembered that whenever in-depth controls are carried out, a  number of irregularities and inaccuracies are detected. There are, in addition, cases such as the  one discovered by the Court in the Portuguese province of Entre Douro e Minho, where the  differences between the statistical estimates and the data on payment of allowances should lead to  more detailed controls. The verification procedures available and the use made of themSupporting documents9.27. The  simplest way of checking the accuracy of applications for aid is to ask the applicants to provide  supporting documents where they exist, such as for the amount of land available to a farmer. During  its on-the-spot audits in Ireland, England, Wales and Castile-la-Mancha, for example, the Court  found that applicants are systematically required to present or supply documents which prove their  right to farm the land (title deeds, written farm tenancy contracts, certificates based on official  registers, etc). In the other regions visited no supporting documents were requested, for reasons  that were given time and again in connection with aid based on the amount of land: the land  registers are not up to date, land is traditionally rented by word-of-mouth agreement, etc. Such  tolerance is not however justified, since all the Member States have legal means of proving title,  ownership or other rights in respect of land. Proof could therefore also be furnished for the  purposes of receiving aid. Cross-checks9.28. The data contained in the application for the compensatory allowance can be  compared with those from other sources. In order to carry out cross-checks, it is absolutely  essential that the compensatory allowance application form should itself be fairly detailed. In  this respect, it has been found that, except in the case of Ireland, where such an identification  system for cattle does exist, the numbers for each animal have to be quoted in the application for  the suckler cow premium or for the special premium for bulls, but not in the application for the  compensatory allowance. As for land areas, the information required varies, according to the  region, from a mere total of hectares eligible for aid to a detailed list of the types of crop and  the location of the land. The land registry coordinates for each piece of land are never asked for,  however. 9.29. Of the Member States visited which do not carry out exhaustive on-the-spot controls, none  have set up a comprehensive administrative control system using existing sources of information  available within the national administration to check all the information essential to the  application for the allowance. The extent of the control carried out often depends on the  organization and initiative of the local departments responsible for granting the allowance. In  France, for example, in the four departments visited, the applicants' declarations are checked  using computer lists from the mutual agricultural association. These show whether the farmer is  working or retired and the amount of land for which he subscribes. In three French departments out  of the four visited, moreover, there is also a cross-check with any applications for other types of  aid for livestock. In Germany, on the other hand, the local departments visited do not carry out  systematic checks of applications for aid by cross-checking with other sources of information. 9.30. The administrative cost of systematic manual cross-checking is high because of the large  number of farmers in receipt of the compensatory allowance. Using computers, on the other hand,  cuts the costs considerably, whilst at the same time increasing the rapidity and effectiveness of  the control. In this connection, the German and French authorities have objected that national  legal standards concerning data protection prevent databases from being used for any purpose other  than that for which the data were originally acquired. No such problem exists in the other Member  States: in Portugal, a comparison is made by computer between the list of recipients of the  compensatory allowance and the list of retired persons receiving State pensions, whilst in Ireland  the departments granting the compensatory allowance are allowed to consult the computer files of  veterinary surgeons. On-the-spot controls9.31. A wide variety of approaches to on-the-spot controls was also observed.  For the year under consideration, with the exception of Ireland and the United Kingdom, the number  of controls carried out varies, according to the local departments visited, between 0 and a maximum  of 5% of applications. Furthermore, even the number of controls carried out is not, in itself, an  indication of efficiency: the results of controls also depend on the experience and qualifications  of the controllers. It has been found that controls are sometimes entrusted to persons who lack any  specific technical qualification, or even to persons employed on a temporary basis solely for the  purpose of carrying out these controls. Effectiveness of the measureContinuation of farming activities and maintenance of the  population9.32. In most of the regions visited, the number of farms continues to diminish, in the  less-favoured areas just as much as in the 'normal` areas, but without there being any reduction in  the total surface area of land farmed, since land which is abandoned by one farmer is usually taken  over by those who are left. The compensatory allowance system is based on the principle that, if  the continuation of farming activity in the less-favoured areas is to be encouraged, the farmers  must be induced to stay by means of a compensatory allowance paid in return for a commitment to  continue farming for at least five years. It is by no means certain that such a method actually  contributes to the continuation of farming activity. The best guarantee of the continuation of  farming is in fact profitability: in the least-favoured areas, i.e. in mountainous areas and areas  of low altitude with similar pedological features, the farmer has to make up for the reduced  productivity of the land by farming larger areas of land. In a large part of the less-favoured  areas, particularly in Ireland, Portugal and certain parts of Spain, increasing the size of the  farms, as part of the development of agricultural structures, is a constant necessity. To attempt  to thwart this development by encouraging the short-term survival of unviable farms, at the expense  of building up economically more sound farms, does not constitute a contribution to the long-term  continuation of farming activity. 9.33. Some less-favoured areas in Wales and the West of Ireland show similar natural production  conditions (notably non-arable land used as permanent grassland) and type of agriculture (extensive  sheep and cattle farming). The situation in the United Kingdom differs from that in Ireland in that  the farming population is remarkably stable, incomes are higher than the Community average, and the  average surface area of a farm is 10 times that in Ireland. This latter factor plays a much more  important role in the stability of agricultural structures in the less-favoured areas of Britain  than does the payment of the compensatory allowance, because it allows economically viable forms of  farming to be carried out. 9.34. Most of the Member States visited excluded farmers who were in receipt of a retirement  pension from the benefit of the compensatory allowance; in some Member States, however, farmers of  retirement age may be found who do not receive such a pension. The compensatory allowance is not in  such cases an adequate substitute for an old-age pension, and at the same time is not a very  effective means of maintaining viable farming activity. Moreover, whilst the compensatory allowance  encourages farmers of retirement age to continue their farming activity, instead of releasing the  land for younger farmers, it constitutes a hindrance to the establishment of young farmers,  something which is recommended by the same Regulation (EEC) N° 797/85. 9.35. Less-favoured areas which are not mountainous and not pedologically comparable to mountain  areas include, as a result of repeated extensions, more and more arable land, as well as land where  the type of farming activity carried out is the same as that in 'normal` areas. In these areas,  where, ex hypothesi, the continuation of farming activity is under threat, the financial  encouragement to continue this activity, represented by the compensatory allowance, is accompanied  by a far more powerful encouragement to suspend production, represented by set-aside aid. Even  taking into account the fact that set-aside lands are not all eligible for the compensatory  allowance and that set-aside status ought to be reversible, one may ask whether, in areas where the  continuation of farming activity is in question, it is sensible and appropriate to offer, as  results from the maximum limits set by the Community legislation, a form of aid that is six times  greater for the suspension of the activity than for its continuation. 9.36. The extension of less-favoured areas has also resulted in the inclusion of areas with a less  pronounced agricultural character, classed as areas threatened with depopulation. Thus, some  less-favoured areas include areas with a varied economy where the maintenance of the population  depends on the existence of a balanced network of economic activities, rather than on the  continuation of farming activity. In these areas, where farms are often managed on a part-time  basis, the continuation of farming activity is linked more to the possibility for the farmer or his  family of obtaining income from non-agricultural sources than to the payment of a compensatory  allowance. This extension of the less-favoured areas has also resulted in the appearance,  particularly in Germany, of areas which are close to the towns but which are still classed as being  'in danger of depopulation`. In these areas there is absolutely no question of maintaining a  minimum population by means of the continuation of farming activity; here, as the Court has found,  the very size of the non-farming population puts special obstacles in the way of farmers. Conservation of the countryside9.37. It should be noted that, up to 1990, there was no mention of  conserving the countryside in any of the conditions for granting the compensatory allowance. With  effect from 1991, the Member States are free to adjust the amount of compensatory allowance in line  with the use of farming methods that are compatible with the need to protect the environment and to  conserve the countryside. It is therefore left to the discretion of the Member States to decide  whether or not to contribute to the achievement of this important Community objective. 9.38. On-the-spot inspections have shown that the compensatory allowance does contribute to the  pursuit of a form of farming activity that is favourable to the environment in the original  less-favoured areas, which are characterized by non-arable permanent grasslands intended for  extensive farming. However, in one part of these areas, a natural extension of the forest would be  the only consequence of abandoning farming activity. This would not have a negative effect on the  countryside and would be in keeping with the Community objective of encouraging the afforestation  of agricultural areas (see paragraph  9.9 above). In the enlarged less-favoured areas, on the other  hand, the compensatory allowance, as noted in paragraph  9.16 above, may benefit those types of  agriculture or intensive farming which are identical with those in the 'normal` areas and which  carry the same environmental risks. Improvement of farmers' incomes9.39. As the compensatory allowance is paid according to the  surface area of the land farmed and the number of head of livestock owned, and as the Member States  do not adjust the amount according to farmers' incomes (see paragraph  9.13 above), those farmers  who already have better production resources, and thus a higher income, benefit more from it. Such  a linear improvement of incomes is in contradiction with the objective of maintaining the farming  population, because it is obvious that the temptation or the need to give up farming is inversely  proportional to the income made from it. 9.40. In less-favoured areas affected by serious natural handicaps, where extensive breeding for  meat production predominates, the improvement in income due to the compensatory allowance is  analogous with that due to other types of aid that are mainly granted to this type of farming, i.e.  the suckler cow premium. In this case, there are no substantial differences between the  'structural` aid and aid provided by the common market organizations; the basis for the calculation  (number of livestock), the administration and the economic effects of these types of aid are in  effect much the same. In the rest of the less-favoured areas, the compensatory allowance is also  additional to aid provided within the framework of the common market organizations but, the crops  and types of production being just as varied here as in the 'normal` areas, it is more difficult to  compare the improvement in income due to the compensatory allowance with that due to other  subsidies. 9.41. The reduction of differences between 'normal` and less-favoured areas, following the  extension of the latter, leads one to wonder whether an improvement in income is necessary for all  the less-favoured areas. In Germany, in 1987/88, the average income of farms receiving the  compensatory allowance exceeded that for farms in 'normal` areas. Moreover, the recent measures to  provide income support, adopted at both Community and national level, are intended for farmers  with particular income problems, irrespective of whether they are in a less-favoured area or a  'normal` area. Other similar measures are forecast within the framework of a reorientation of the  CAP: generally applicable income support, adjusted according to the needs of the farmers, could  improve incomes as well, if not better, than the present compensatory allowance. CONCLUSIONS9.42. In the Court's opinion, the Commission should play a much more active role in the  administration and monitoring of the compensatory allowance. The Commission should: (a)require the Member States, when examining and approving national provisions, to abide strictly,  in both form and content, by the conditions laid down in the Community legislation; (b)propose and set up a system for reviewing the situation of less-favoured areas which may lead  with equal probability to those areas being either reduced or extended; (c)establish, so as to avoid excessively large distortions in the quality of the controls carried  out by the Member States, minimum control standards to be respected when checking applications for  aid or carrying out on-the-spot controls, similar to the standards provided for in respect of other  types of aid (the suckler cow premium, the ewe premium and the set-aside premium); (d)propose, bearing in mind, on the one hand, the number of different types of Community aid  granted on the basis of the number of livestock units or the amount of land farmed, and, on the  other, the need to ensure the follow-up and control of this aid, that the Member States set up  standardized computer records on farms, livestock and land areas; (e)give some thought to the usefulness of the compensatory allowance and draw up proposals for the  necessary amendments. In fact, in view of the extension of the less-favoured areas, the  compensatory allowance is, in many cases, no longer a form of compensation for specific handicaps  and has become a general aid for the countryside, an addition to the other subsidies provided for  under the CAP. 9.43. Finally, the Court notes that the reform of the structural Funds does not affect the validity  of the above comments. In fact, as the Court has already pointed out in its annual report  concerning the financial year 1989, the reform of the structural Funds has not resulted in any  significant modification to the measures provided for in Regulation (EEC) N° 797/85 which, as  measures to achieve Objective 5a, continue to be applied in the same way. CHAPTER  10  (*) Loans, borrowings and interest-rate subsidies >TABLE> INTRODUCTION10.1. Under the Treaties and other legislative provisions, the Commission of the  European Communities is empowered to contract borrowings in order to finance New Community  Instrument (NCI) loans, European Atomic Energy Community (Euratom) loans and balance of payments  (BP) loans. The Commission enjoys similar powers in the case of  European Coal and Steel Community  (ECSC) loans and borrowings carried out in accordance with the terms of the ECSC Treaty. The Court  of Auditors produces a separate report on the ECSC activities. The borrowing and lending  operations concerning the countries of Central and Eastern Europe are dealt with in Chapter 12. 10.2. As part of the annual budget procedure, the budgetary authority includes in the general  budget the amount of interest subsidies relating to NCI loans and loans made by the European  Investment Bank (EIB) from its own resources for reconstruction measures in the regions of Greece  and Italy affected by earthquakes. The budgetary authority also decides whether to include the  budgetary guarantee for borrowing transactions in the form of token entries. 10.3. The Community loans and borrowings are set out in the balance sheets of the European Economic  Community and the ECSC respectively. 10.4. The Commission has a direct legal obligation to service and repay borrowings contracted by it  on behalf of the Community. For this purpose the following Articles, which represent a budgetary  guarantee for the above-mentioned Community borrowing mechanisms, are included in the 1990 general  budget as a precaution against any possible default by beneficiaries of the primary loans: (a)Article  830: EEC guarantee for Community loans raised for  balance of payments support; (b)Article  831: EEC guarantee for Euratom loans raised; (c)Article  832:  EEC guarantee for loans raised to promote investment in the Community; (d)Article  833: EEC guarantee for Community borrowings and for EIB loans to finance large-scale  infrastructure projects of Community interest. In addition, Article  969 of the budget includes an EEC guarantee for loans granted by the EIB to  third countries. 10.5. EEC guarantees are currently identified in the general budget as 'p.m.` entries. The Court  expects the Commission to assess the level of risk attached to its loan operations and to provide  full disclosure of this information. SUMMARY OF FINANCIAL INFORMATION10.6. Tables 10.1 and 10.2 provide a summary of the various  borrowing and lending mechanisms and of the changes in lending and borrowing operations during the  financial year 1990. OBSERVATIONS ON THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS FOR THE NCI AND EURATOM  MECHANISMS10.7. The Court examined the NCI and Euratom balance sheets as at 31 December 1990 and  the revenue and expenditure accounts relating to the two mechanisms for the financial year 1990.  The management of the accounting for that year did not call for any specific observations. FOLLOW-UP REVIEW OF ACTIONS TAKEN BY THE COMMISSION TO IMPROVE THE CONTROL OF ITS BORROWING AND  LENDING OPERATIONS10.8. In both its annual report concerning the financial year  1988 and its  special report N° 3/90 on ECSC, Euratom and NCI loans and borrowings, the Court put forward  recommendations for improving the management of Community borrowing and lending operations. Table  10.3 provides a summary of the Court's recommendations. 10.9. The Court undertook a preliminary review to establish whether the Commission had taken any  measures, during the course of 1990, concerning this matter. The Court found that, in response to  the recommendations set out in Table 10.3 items (a) to (h), the Commission had introduced various  measures aimed at improving both the control and efficiency of its borrowing and lending  operations. The Court concludes that the measures introduced so far by the Commission have, in  principle, provided an improved procedural basis upon which to conduct these operations. However,  the Court encourages the Commission to continue to review and update its working methods in order  to respond efficiently to the increasingly complex techniques employed by the financial markets. 10.10. At the same time, the preliminary review also revealed that further progress was to be made  by the Commission to implement the Court's recommendations concerning the administration of  interest subsidies in respect of ECSC loan operations, as summarized in Table  10.3, items (i) to  (m). 10.11. The Court notes that the Commission intends to introduce a computer system, during 1991, for  the collection of data from financial intermediaries which will then be analysed to assess the use  made of interest subsidies and their impact on employment objectives. The Court also notes that the  Commission is in the process of delegating more administrative responsibility to the  intermediaries, in order to reduce the volume of reports currently received from intermediaries and  final beneficiaries. 10.12. Whilst the Court welcomes these proposed measures it encourages the Commission to make  further progress to implement its recommendations aimed at simplifying the administration of  interest subsidies concerning ECSC loan operations. The Court concludes, therefore, that, as a  matter of urgency, the Commission should follow up the recommendations made on this subject by the  Court in its special report (paragraph 7.2 (c) (i) to (iv). AUDIT OF NCI LOANS IN THE MEMBER STATES10.13. As the Court noted in its annual report concerning  the financial year 1988, an agreement relating to procedures for the Court's on-the-spot audit of  NCI lending operations was concluded between the Commission, the EIB and the Court in June 1989. 10.14.    In broad terms the agreement provides for the Court to inform the Commission of  operations for which it considers an on-the-spot audit to be necessary and to examine EIB documents  forwarded to it by the Commission. The Commission then requests the EIB to invite its Audit  Committee to carry out these on-the-spot audits and to associate the Court in the audits. >TABLE>10.15. In order to make a start with the practical application of the agreement,  the EIB provided the Court with an indicative list of borrowers, prepared on the basis of selecting  those Member States in which loans, from both EIB own resources and the NCI, had been granted with  interest-rate subsidies from the Community budget. The list included Ireland because of  interest-rate subsidies granted under the European Monetary System (EMS) in accordance with Council  Regulation (EEC) N° 1736/79 of 3 August 1979, and Italy under both the EMS and earthquake  reconstruction in accordance with Council Decision 81/19/EEC of 20 January 1981. The list provided  the Court with a number of operations from which to select a  programme of visits, estimated by the  EIB at six visits to Member States over the three-year period covered by the agreement. 10.16. During the course of 1990, this agreement was put into operation and the Court has executed  two on-the-spot audits, one in Ireland and one in Italy, with the EIB's Audit Committee. The two  projects were selected because they involved large NCI loans, 3% EMS interest-rate subsidies on  both the NCI and EIB loans and had been the subject of recent evaluation by the EIB. In each  project visited the Court verified from the documentation made available that the procedures for  controlling the initiation, appraisal and authorization of the loan operation had been applied. The  information provided by the EIB's monitoring and evaluation procedures together with the  on-the-spot audits enabled the Court to review the progress of the two individual projects examined  and to assess whether in each case the NCI loans and EMS interest-rate subsidies had been used for  the purposes stated in the relevant Council decisions. The results of the Court's review of these  two projects are set out in the following paragraphs. Observations arising from on-the-spot audits>TABLE>10.17. The first project reviewed  involved the construction of a coal-fired power station in Ireland. The project aimed to provide  new generating capacity to meet the forecast growth in electricity demand, create some 250  permanent jobs and contribute to the diversification of energy supplies. The project involved NCI  loans of 94,56  Mio  ECU, and interest-rate subsidies from the Communities totalling some 43  Mio   ECU on six loans (two NCI and four EIB) over the duration of the loans. The project commenced in  1979 with site development work and was completed in 1987. 10.18. In accordance with the terms of Council Decisions 78/870/EEC of 16 October 1978 and  79/486/EEC of 14  May  1979, the Commission decided that the project was eligible for NCI loans as  it would amongst other things 'guarantee less dependence on imported energy and greater security of  supplies`. The consequence, however, of investing in a coal-fired power station is that at the same  time as decreasing dependence on imported oil supplies, dependence on imported coal supplies was  increased. Furthermore, the Court notes that the coal supplies being used at the project were  imported totally from sources outside the Community (America and Colombia) as it costs less than  Community coal. In the case of this project it was possible to combine the benefits of NCI loans  subsidized under the EMS with cheap coal from outside the Community. The Court notes that this  would not have been possible under the ECSC loan facility which aims to ensure a market for coal  from Community origins. 10.19. The Commission decided that the project was also eligible for NCI loans, in accordance with  the terms of Council Decision  78/870/EEC of 16 October 1978 as it took account of 'the need to  combat unemployment`. The Court found that at the planning stage it was estimated that the project  would create some 250  permanent jobs. In 1988, it was reported that the project employed a  workforce of 370  staff thereby exceeding the target figure. This does not necessarily mean that  these were all new staff, since at the same time there was a company-wide rationalization process  which led to a significant overall reduction in staff. 10.20. The provision of new generating capacity was meant to meet an 8% per annum long-term growth  in electricity demand forecast for the 1980s. However, over the 10-year period since 1980-81 the  real growth in electricity demand increased by only 2,9% per annum. This led to the borrower having  a high reserve margin for electricity generation. At the end of 1989, the borrower's total  installed generating capacity of 3  932 MW exceeded the peak demand of 2  466 MW by 1  466  MW  (59%). The project contributes 900 MW (23%) of the borrower's total installed generating capacity. 10.21. In 1982, when the EIB and Commission were considering loan financing for the construction of  the third generating unit at the project, it was recognized that the growth in electricity demand  would be much lower than originally forecast. The borrower now estimated that the level of  electricity demand originally foreseen for 1987, when the third unit was due to be commissioned,  would not arise until 1992 at the earliest. Economic analyses, carried out by the borrower on the  basis of 1982 coal and oil prices, indicated that as long as growth in electricity demand exceeded  1% per annum it was more economical to commission the third unit as planned rather than defer it.  The EIB and the Commission decided, therefore, that construction of the third unit should proceed  as originally planned and that NCI loans should continue to be made available to the project. 10.22.    On the basis of the information supplied by the borrower, the Court concluded that the  new generating capacity thus installed, albeit economically justified from an investment costing  viewpoint, would not be needed to meet the forecast growth in electricity demand until at least  five years after completion of the project. 10.23. The second project reviewed aimed to construct 5370 low-cost housing units in Italy for  occupation by industrial and service workers, which would contribute to the economic and industrial  development of selected regions by providing an ancillary housing infrastructure. The project  involved NCI loans of 59,6  Mio  ECU and interest-rate subsidies from the Communities totalling  some 33  Mio  ECU on both the NCI and EIB loans. The beginning of the construction work was  expected to be in early 1982 and its completion by the end of 1984. 10.24. In accordance with the terms of Council Decision 80/1103/EEC of 25 November 1980, the  Commission decided that the project was eligible for NCI loans as it would provide housing that  'forms part of a total project of economic and industrial development presenting a regional  interest`. Although the Court found that the NCI loans had been utilized for the purpose of housing  construction, it was unable to substantiate the connection to 'a total project of economic and  industrial development` thereby proving the eligibility criteria. 10.25. The project was also presented by the Italian authorities as an essential part of an overall  programme to construct 30 000 low-cost housing units. The Court found, however, that this programme  only achieved construction of some 13  000 housing units (43% realization) with the Community  project contributing 5  453  housing units (83 units more than planned) to this total. This means  that there was a shortfall of some 17  000  housing units (69% non-realization) by the Italian  authorities on their part of the programme. In the Court's view it is doubtful that existing  industrial undertakings would be encouraged to expand or that new industrial initiatives would be  attracted to regions when the necessary housing infrastructure had only been partially realized. 10.26. Although the total cost of the completed project exceeded estimated costs by 12,5%, this did  not result in any additional NCI loans or interest subsidies being made available by the  Commission. Whilst the average cost of a housing unit (84,2 Mio LIT) based on actual project costs  indicated a 10,8% increase per unit on estimated costs, the Court found some significant variations  in regional costings. These variations ranged from a 22% decrease on the project average in one  region to a 44% increase on the project average in another. The regional variations in the average  cost of a housing unit are presented in Table 10.4. 10.27. The Court was informed that one of the main reasons for the 12,5% increase in the cost of  the project was problems with the release of land by the regional authorities. These problems were  resolved either by outright purchase of land areas at increased prices or by renegotiation of  building rights which led to delays in construction and related increases in costs. As a matter of  fact the delays in construction led to the project being extended to 1990. Table  10.5 provides  details of the number of housing units constructed each year. 10.28. Another reason to explain the increased project costs concerned the numerous amendments made  to the original forecast of the number of units to be constructed in each region. The Court found  that these amendments had resulted in variations ranging from a 100% reduction in the number of  units in one region to a 255% increase in the number of units in another. The EIB explained that  this flexibility in the original forecast allowed for substitutions to be made to the project,  provided that any new proposal fitted properly into the aims of the overall project. >TABLE>10.29. The Court considers that the extension in construction to 1990 may have  delayed the project's ability to provide the ancillary housing infrastructure necessary for the  economic and industrial development of the selected regions. 10.30. The Court found that the NCI loans together with the interest-rate subsidy of some 33  Mio   ECU had been advanced to the financial intermediaries during the period June to November  1983. The  justification for this action was that it would help to secure the best financial terms for the  project's final beneficiaries, as the intermediary banks involved would know from the outset how  much the loan was going to cost. In accordance with this type of global loan, the intermediary  banks act as a project manager and provide specific services in return for their administrative  margin. In the context of this project the services provided included: (a)initial selection of the most appropriate construction proposals; (b)individual assessment of the creditworthiness of the prospective property owners; (c)assurance that the project conformed with national housing laws; (d)examination of building work-in-progress before disbursement of loan funds; (e)providing the EIB with a full guarantee for the loan. 10.31. The Court noted that, in view of the delays in construction, the intermediary banks had  exercised prudent financial management in staging the disbursement of loan funds over the extended  period of the project. 10.32.    The first attempts at implementation of the agreement on the auditing by the Court of EIB  operations show that the practical conditions for the application of this agreement are still too  rigid. The Court is of the view that on-the-spot audits should be further intensified, which  presupposes greater collaboration between the Commission, the EIB and the latter's Audit  Committee. REVIEW OF COMMISSION ELIGIBILITY PROCEDURES10.33. During the course of 1990, the Court carried out  a review of the Commission's procedures for ascertaining the eligibility of projects for loans from  NCI, Euratom and EIB own resources. The aim of the review was to: (a)confirm that formal procedures had been established; (b)ascertain whether adherence to these procedures would ensure that projects approved for loan  financing were in fact eligible in accordance with the conditions laid down in both the Treaty  establishing the European Economic Community and the relevant NCI and Euratom Council decisions. 10.34.    The Court noted that whilst the Commission is required to give a decision on the  eligibility of projects for NCI and Euratom loans, it is only required to give an opinion on the  eligibility of projects for EIB loans in accordance with Article  21(2)  of the EIB's statute. >TABLE>10.35. The Commission had established a single procedure for ascertaining the  eligibility of projects for loan financing. This procedure involves consideration of each project  proposal by the Inter-Service Coordination Group Commission's (comprising all relevant  Directorates-General) in order to check that it complies with Community legislation and policies  and that it is eligible under the provisions of Article 130 of the EEC Treaty. Furthermore,  according to this procedure supplementary information may be requested from the EIB, in particular  in the case of complex project applications. The Court notes that the different conditions  contained in both the NCI and Euratom Council decisions and the Treaty establishing the EEC are  taken into account by the Inter-Service Coordination Group during the eligibility process. On the  basis of its review, the Court concluded that a formal procedure was in place to ascertain the  eligibility of a project application for loan financing. 10.36. The Court carried out a detailed review of all applications for NCI loans (13 in total)  received by the Commission during the three-year period 1988 to 1990. It found that all  applications had been processed in accordance with the formal procedure and that the specific  conditions of the appropriate Council Decision 87/182/EEC of 9 March 1987 had been taken into  account when ascertaining eligibility. 10.37. Of the 13 applications processed by the Commission, 12 were considered eligible for NCI  loans and one case was withdrawn. The 12 applications approved for NCI loans amounted to  approximately 391  Mio ECU and were all in respect of global loans for the financing of small and  medium-sized industrial and related service sector enterprises (SMEs) and aimed to increase both  the productivity and competitive capacity of the SMEs and contribute to economic growth and  employment in the regions concerned. The 12 projects were spread amongst the following four Member  States - Italy (6 projects), United Kingdom (4  projects), France (1  project) and Spain (1   project). 10.38. The Court noted from its review that, as the project application only included a brief  description of its proposed activities, it was difficult to ascertain how the loan would contribute  to the Community policy objectives set out in the appropriate Council decision. In most cases  examined the Court found that the project application only provided details regarding the  intermediary, the amount of the loan and a general statement that the loan would increase  productivity, improve competitiveness and contribute to economic growth and employment. The Court  concluded that project applications should be improved by the inclusion of performance indicators  relating to the anticipated improvements in productivity, competitiveness, economic growth and job  creation. These performance indicators would then serve as a benchmark against which the Commission  would be able to monitor the progress and effectiveness of each project towards achieving its  objectives. 10.39. The Court noted that, with regard to project applications for loans from the EIB's own  resources, the Commission would consider them in accordance with the criteria set out in Article   130 of the Treaty establishing the EEC. This Article establishes that the eligibility of project  applications can be ascertained under one or a combination of the following criteria: (a)projects for developing less-developed regions; (b)projects for modernizing or converting undertakings or for developing fresh activities called  for by the progressive establishment of the common market, where these projects are of such a size  or nature that they cannot be entirely financed by the various means available in the individual  Member States; and(c)projects of common interest to several Member States, which are of such a  size or nature that they cannot be entirely financed by the various means available in the  individual Member States. 10.40. In order to ascertain the extent of Commission activity under each of these three criteria,  the Court carried out a statistical analysis of all projects which had received positive  eligibility opinions from the Commission over the three-year period  1988 to 1990. It found that  out of a total of 646  projects, 611 (94,6%) were in respect of criteria  (a) and  (c). Criterion   (b) was only individually represented by 2  projects (0,3%) but that a further 33  projects (5,1%)  existed involving criterion  (b) jointly with criteria  (a) and  (c). Table  10.6 provides a  detailed breakdown for the period 1988 to 1990 of all projects which had received positive  eligibility opinions from the Commission under the criteria set out in Article  130 of the Treaty  establishing the EEC. 10.41. It is evident from the statistics set out in Table  10.6 that the most significant element  of the Commission's eligibility activity is occupied with considering projects for less-developed  regions and those of common interest to several Member States. This complies, to some extent, with  the terms of the Single European Act (1986) as set out in Article 130a of the Treaty establishing  the EEC, which aims to reduce the disparities between the various regions and the backwardness of  the least-favoured regions. It could, however, be questioned whether the criteria applied by the  Commission during the eligibility procedure are still appropriate. These criteria, which are based  on Article 130 of the Treaty and date back to 1957, may require modification to bring them into  line with the aims of the Single European Act and the reform of the structural Funds. In the  Court's view, it is important that the Commission should be able, during the eligibility procedure,  to assess the anticipated impact that projects should make in achieving Community policy  objectives. All project applications should, therefore, include performance indicators which  identify the progress that is expected to be made in contributing to the overall aims and  objectives set out in Article 130a of the Treaty. The Court is unable to comment on whether the  individual project applications analysed in Table  10.6 included performance indicators, as its  audit mandate does not provide for an examination of projects receiving loans from the EIB's own  resources. CONCLUSION10.42. As regards the follow-up review of actions taken by the Commission to improve the  control of its borrowing and lending operations (paragraphs  10.8-10.12), the Court considers  that: (a)the actions taken so far by the Commission provided in principle an improved procedural basis  upon which to conduct its borrowing and lending operations; (b)the Commission should, however, continue to review and update its working methods in order to  respond efficiently to the increasingly complex techniques employed by the financial markets; (c)the Commission should make further progress to implement the Court's recommendations concerning  the administration of interest subsidies in respect of ECSC loan operations; (d)as a matter of urgency the Commission should follow up the recommendations made on this subject  by the Court in its special report (paragraph 7.2 (c) (i)-(iv). 10.43. As regards the audit of NCI loans in the Member States (paragraphs 10.13-10.32), the Court  considers that: (a)although the construction of a coal-fired power station (paragraphs 10.17-10.22) had been  achieved, there was serious doubt as to whether: (i)the new generating capacity installed would be needed to meet the forecast growth in electricity  demand, until at least five years after completion of the project; >TABLE>(ii)the project's total dependence on coal supplies imported from sources outside   the Community was in line with the intentions of the relevant Council decision; and that(iii)the  project had created new permanent jobs in accordance with the intentions of the relevant Council  decision. (b)although the construction of low-cost housing for industrial and service workers (paragraphs  10.23-10.32) had been achieved, the Court could not satisfy itself that the economic and industrial  development objectives of the project had been achieved, due to the absence of verifiable  criteria; (c)the practical conditions for implementing the agreement between the Court, the Commission and  the EIB concerning the Court's audit of NCI lending operations need to be improved. Continued and  strengthened cooperation between the three parties is needed and more on-the-spot audits with the  EIB's Audit Committee should be undertaken in the future. 10.44. As regards the review of the Commission's procedures for ascertaining the eligibility of  projects for loan financing (paragraphs 10.33-10.41), the Court considers that: (a)a formal procedure was in place for ascertaining the eligibility of project applications for  loan financing; (b)all project applications for loans, regardless of their source of funding, should include  performance indicators against which a project's actual progress could be monitored and its  contribution to the overall aims and objectives of Article  130a of the Treaty evaluated; (c)almost all the Commission's activity concerning project applications for EIB own resource loans  is devoted to ascertaining the eligibility of projects for less-developed regions and those of  common interest to several Member States. >TABLE>CHAPTER 11  (*) Research and energy >TABLE>  aeIMPLEMENTATION OF THE BUDGETGeneral observations11.1. Table 11.1 compares the 1990 budgetary  appropriations for Title 7 of the general budget with the funds actually committed and paid. The  overall utilization of commitment appropriations was satisfactory. The overall utilization of final  payment appropriations (94%), however, fell compared to 1989 (98%). This is largely explained by  delays in approving transfer requests resulting in insufficient time for payments to be made in the  year. A second factor was a shortfall, again, in the Joint Research Centre's work for third  parties. The low utilization of appropriations made available again (which arise from receipts from  non-member countries participating in the Communities' programmes) is explained by some receipts  arriving late in the year. Joint Research Centre (JRC) 11.2. Within the budget of the JRC (budget headings 7301 to 7309),  overhead and general costs were charged to appropriation accounts during the year and then  apportioned to the budget headings at the year-end. This apportionment was done on the basis of the  research manpower effort expended on each budgetary item. Because of the shortfall in work for  third parties, overheads fell more heavily than anticipated on other activities of the JRC.  However, insufficient payment appropriations were available on budget headings 7302 and 7303 to  absorb these overheads. The balance was thus charged instead to heading 7307. As a result, budget  headings 7302 and 7303 are understated by 0,03  Mio  ECU and 1,13  Mio  ECU respectively, and  budget heading  7307 overstated by 1,16  Mio  ECU. This problem should not arise in future years  since, under the new budgetary nomenclature, there are distinct budget headings for JRC overhead  and general costs. Verification of costs of research contracts>TABLE>11.3. As part of its examination of  the implementation of the 1990 budget, the Court has given particular attention to controls carried  out by the Commission over the costs claimed by external organizations participating in research  contracts. In particular the Court has examined the use by the Commission of external audit firms  to verify claims submitted by contractors. The Court last referred to this in its annual report on  the financial year 1984. 11.4. External audits provide assurance as to whether or not costs claimed by contractors are  reasonable. The Court found that the audits do not provide this assurance promptly. In the great  majority of cases, the Court found that final reports had still not been agreed one year after the  end of the period covered by the audit. In addition, the use of external audits to verify costs is  an expensive control procedure - as are on-the-spot visits by Commission officials - and thus it is  not possible to cover all research contracts. The examination revealed that both the  Directorate-General for Science, Research and Development (DG  XII) and the Directorate-General for  Telecommunications, Information Industries and Innovation (DG  XIII) have established procedures  that allow them to accord priority to particular contracts for auditing. Thus efforts have been  made to make the best use of available resources in this area. 11.5. Whilst precise written instructions are given to the audit firms, the Court identified a  number of differences between the two Directorates-General and within DG  XIII, as well as between  the Esprit and RACE programmes, as regards external audit procedures. These concern: (a)the number of staff coordinating and following the audits (DG  XII - one  person part-time; DG   XIII  - four  people); (b)the scope of the audits. The Court considers that there is scope for much closer coordination, involving the adoption of  unified procedures. 11.6. The audit showed that the weak point of the control of costs lies in the percentage of  overheads included in the hourly rate charged to the contracts. In fact, this control calls for  exhaustive checks on the contractors' accounting systems, which is something that is not easy to  carry out within the limits of the controls at present being carried out. A recent study of the  administration of the Communities' research activities has recommended that the principle of  shared cost be replaced by pre-negotiated fixed-price contracts. The Court points out that the  verification of payments made to contractors under such a system would be considerably easier and  less demanding of the Commission's resources. 11.7. Furthermore, DG  XII is currently developing a new computer system for the management of its  operations, whilst DG  XIII has embarked on modernizing its own system, without there being any  provision for making these two systems compatible with each other. The Court considers that here  too the necessary steps should be taken to harmonize these systems.OBSERVATIONS ON ENERGY    INTRODUCTION11.8. Improving the security of supply and reducing the  level of dependence on oil have pride of place in the objectives of the European Community's energy  policy. That is why the Community grants financial support to energy projects at all stages of the  innovation process, i.e. at the stage of basic research as well as at the subsequent stages of  development and demonstration which precede commercial exploitation. This chapter concentrates on  two programmes, one relating to technological development in the hydrocarbons sector and the other  to the demonstration of new energy technology. 11.9. As of 1973, following the first oil-price crisis, a programme of promoting and developing new  technologies was set up in the hydrocarbons sector. This programme was followed in 1978 by two  others concerning the granting of financial support for projects to exploit alternative energy  sources and for projects in the field of energy saving. These programmes, which differed both in  the aim of the objectives pursued and in the scale of the resources used, were then continued  without interruption. 11.10. In this chapter, the Court first of all describes the main features of the programmes under  way during the four-year period from 1986 to 1989. It then analyses the degree of success and the  shortcomings of these programmes as at the end of 1990. Lastly, the Court examines whether the  single Thermie programme, which has taken over since 1990 from the previous programmes that had  expired, has been designed and implemented in such a way as to avoid the difficulties encountered  in carrying out the earlier programmes. THE PROGRAMMES OF THE PERIOD 1986-89Regulations11.11. During the four-year period from 1986 to  1989 the Commission carried out two programmes on the basis of the following two Regulations: (a)Council Regulation (EEC) N°  3639/85 of 20  December  1985 on a programme of support for  technological development in the hydrocarbons sector (shortened hereinafter to 'hydrocarbons  programme`); (b)Council Regulation (EEC) N°  3640/85 of 20  December  1985 on the promotion, by financial  support, of demonstration projects and industrial pilot projects in the energy field (shortened  hereinafter to 'energy demonstration programme`). 11.12. On the basis of these Regulations, the Community granted financial support of 535,6  Mio   ECU to 1  035  projects. Eligibility criteria applicable to the projects11.13. According to these Regulations, projects -  in order to be eligible - had to meet the following conditions, amongst others: (a)-hydrocarbons programme: 'they develop innovatory techniques, processes or products or exploit a  new application of techniques, processes or products for which the research stage is completed`; - energy demonstration programme: 'they must exploit innovatory techniques, processes or products  or a new application of techniques, processes or products which are already known; they must be  based on completed research and development work`; (b)-hydrocarbons programme: 'they offer prospects of industrial, economic and commercial  viability`; - energy demonstration programme: 'they must, at the demonstration stage, offer promising prospects  of industrial, economic and commercial viability...`; (c)-hydrocarbons programme: 'they present difficulties with regard to finance because of the  considerable technical and economic risks involved, such that they would very probably not be  carried out without Community financial support`; - energy demonstration programme: 'they must present difficulties with regard to finance because of  the considerable technical and economic risks involved to the extent that the project would very  probably not be carried out without national and/or Community public financial support`; (d)-energy demonstration programme: 'they must envisage actions and means for replicating the same  type of project`. Management principles11.14. These two Regulations also contained the following management  principles:  (a)projects are assessed 'on the basis of the information provided by applicants`; (b)the level of support is to be determined for each project individually. 'Support shall not  exceed 40% of the eligible cost of the project`. In determining the level of support the Commission  must take account of other aid received or expected. With regard to projects under the energy  demonstration programme, the sum total of Community support and national support may not as a  general rule exceed 49% of the total cost of the project; (c)the Commission must examine 'the content of the projects in relation to other Community  programmes and shall avoid all duplication` in respect of the energy demonstration programme; (d)'the support granted by the Community must not affect the conditions of competition in a manner  incompatible with the relevant provisions of the Treaty`; (e)in the event of commercial success, the Commission may demand that the support granted be  repaid. This provision applies only to the hydrocarbons programme, however, and does not concern  the energy demonstration programme. Selection procedure11.15. The energy projects were submitted to the Commission by legal or natural  persons. The Commission analysed the content of the projects as part of an annual selection  procedure and decided on the support to be granted after consulting an Advisory Committee composed  of two representatives from each Member State. For the projects selected, a contract was then drawn  up between the Commission and the promoter of the project. THE COURT'S OBSERVATIONSNumber of projects selected11.16. In all, 256  projects connected with  hydrocarbons exploration, production, storage or transportation activities were selected by the  Commission between 1986 and 1989 as part of the hydrocarbons programme (Table  11.2); the amounts  committed were 152,0  Mio  ECU and the amounts paid 86,2  Mio  ECU. Under the energy demonstration  programme, 779  projects were chosen between 1986 and 1989 (Table  11.3), 383,6  Mio  ECU were  committed and 182,1  Mio  ECU paid. The breakdown of the projects by energy sector is shown in  Table  11.4. It is in the field of alternative energy sources that the largest number of projects  received support. In second place are projects relating to energy saving. Projects in progress11.17. Table  11.5 shows the state of progress and the evaluation, as at the  end of the financial year 1990, of the projects chosen. It shows that 65,6% of the projects under  the energy demonstration programme and 50,8% of the projects under the hydrocarbons programme are  still under way. This proportion of projects still in progress one year after the closure of the  programmes is partly due to the fact that the selection and management procedures are extremely  slow moving. For example, in general, several months elapse between the Commission's decision to  support the project and the signing of the contract. It must be pointed out that, of the projects  under way, no contract had been signed for 12 of them, despite the expiry of the period fixed for  carrying out the programme and committing the corresponding appropriations. Since it would be  premature to embark at this stage on an evaluation of the projects currently in progress, the  following observations are based on an analysis of projects which have been abandoned or  completed. Abandoned projects11.18. Table  11.5 shows that at 31 December 1990 a total of 214 projects had  been abandoned. For most of them there was not even a contract after a lengthy period of time. But  these projects have nevertheless required a considerable amount of management work, starting with  the selection procedure, then the commitment of appropriations, and lastly the collection of the  basic data for possible future contracts. 11.19. There are a large number of reasons for these abandoned projects. Bankruptcies, withdrawal  of partners from the project, lack of national capital, overestimation of the prospects of  profitability or the impossibility of forecasting energy price trends are often some of the  explanations given by the aid recipients. The Commission, for its part, has cancelled contracts  where certain contractual provisions (such as that stipulating the regular presentation of reports  on the state of progress of the project) have not been complied with. >TABLE>>TABLE>>TABLE>11.20. Although the high number of abandoned  projects can probably be explained by the presence of considerable technical and economic risks, it  also implies that the Commission has not required the aid applicants to supply sufficient  information and that the information they have provided has not been adequately checked. The  selection procedure has therefore not enabled the non-viable projects to be eliminated from the  outset. 11.21. At 31  December  1990, the amount of appropriations committed for these abandoned projects  was 84,6  Mio  ECU. These appropriations have remained committed for months, if not years, until  cancelled. The Court considers that they should be cancelled as soon as the corresponding legal  obligations disappear. Commercial exploitation11.22. It is the level of commercial exploitation achieved that constitutes  the deciding criterion of success for the evaluation of the programmes. To date the hydrocarbons  programme has resulted in only one project which partially achieved the commercial exploitation  stage (see Table  11.5). The other completed projects have not yet been able to demonstrate their  industrial, economic or commercial viability, even though for 67 of them, which have achieved the  stage of technical feasibility, this is not excluded in the medium or long term. Only time will  tell whether these technologies will be accepted by the market. 11.23. Under the energy demonstration programme, 38  projects in all were regarded by the  Commission as having totally achieved the stage of commercial exploitation (see Table  11.5).  Fourteen other projects have achieved partial commercial exploitation. This programme thus seems to  achieve more commercial successes than the hydrocarbons programme. The latter is further upstream  from the marketing stage. It is also to be feared that the Commission's evaluation of the projects  of the energy demonstration programme has tended to be more favourable because of the lack of a  repayment clause (see paragraph 11.14(e)). It should be noted too that the description of  'commercial exploitation totally achieved` does not necessarily mean that a project is commercially  of interest beyond the exploitation carried out by the promoter himself. What matters in terms of  the planning of future programmes, however, is whether the project which has been supported has  been used as a model for carrying out other projects and, if so, how many have been based on it.  The Court observes that the Commission does not have enough information on this matter. 11.24. It should also be noted that some projects in the energy demonstration programme which have  been very successful would most probably have been carried out even without Community aid. Most of  these projects concern energy saving in the industrial sector and industry, for cost reasons, has  every interest in reducing its consumption of energy. The use of new, more energy-saving techniques  may thus prove profitable even without any extra incentive measures. This is particularly true in  situations where investment to replace or modernize plant is necessary in any case, because of the  demands of competition or because stricter rules concerning the environment prohibit processes used  previously. Thus, for about 15 projects, there are various indications which give rise to the fear  that Community support has not always been the determining factor for carrying them out: (a)short length of time needed to recoup the cost of investments, even without Community aid; (b)lack of financing difficulties; (c)starting-up of the project considerably in advance of Community agreement having been given for  supporting it; (d)investment intended essentially for the replacement or modernization of plant and where energy  saving is no more than an automatic consequence of this investment. 11.25. In the Court's opinion, the Commission has not taken sufficient account of all these factors  before agreeing to promote a project or determining the rate of aid to be granted. Effects on competition11.26. According to the Regulations, the support granted by the Community  'must not affect the conditions of competition in a manner incompatible with the relevant  provisions of the Treaty`. The files show, however, that hardly any checks seem to have been made  on whether this provision has been complied with. 11.27. The Commission seems in part to be implementing a policy of active intervention of a kind  which is forbidden in the Member States. Thus: (a)the Directorate-General for Competition (DG  IV) checks the national aid arrangements and in  particular the main aid granted to research, so as to avoid aid being used improperly, on the  pretext of carrying out research and development, to promote the normal development of a product or  for replacement or modernization investments. The Directorate-General for Energy (DG  XVII), for  its part, does not seem to have any worries of this kind with regard to its own aid policy; (b)the Commission's policy with regard to national research and development aid aims to make the  rate of these subsidies vary according to the degree of progress of the project towards a practical  application. Thus the rate of aid must not exceed 50% for the basic research and 25% for applied  research. Beyond that the rate of aid applicable gradually drops to zero for normal investments in  industrial plant. For the energy demonstration programme, however, the sum total of Community aid  and national aid must not exceed 49% of the total cost of the project. The level of aid is thus  virtually equivalent to the rate which the Commission, in its competition policy relating to  national programmes, stipulates exclusively for basic research. In addition to this, there is the  fact that the Commission has not always checked the volume of the national support. The Commission  is not therefore aware of how many times the sum total of the Community support and the national  support has exceeded the stipulated maximum rate of 49%. Checking the amount of national aid has  been made difficult because of DG  XVII's lack of knowledge of the national aid schemes. It is only  since December  1990 that DG  XVII has had at its disposal an initial report on the Member States'  programmes in the energy field. 11.28. DG  XVII has largely given up determining the rate of support project by project and, as a  general rule, has granted the maximum rate of 40% of the expected eligible costs. In one particular  case, it continued to grant the 40% rate even when it subsequently discovered that the project was  in addition going to receive national aid. The sum total of public support therefore exceeded 60%.  Instead of making a proportional reduction in the Community aid, DG  XVII continued to pay this  rate of aid contrary to the competition policy. 11.29. Moreover, for the same project, the checks on the eligibility of the declared costs were  very incomplete. The promoter had in fact declared investment costs which were already partly  covered by a national subsidy. DG  XVII ought to have asked the promoter of the project for the  necessary explanations; it would then have been able to see that a national subsidy had already  been paid covering the eligible costs of the project. The Court considers that the Commission  should recover the amount (about 0,1  Mio  ECU) of aid wrongly granted. Coordination with the other Community programmes11.30. For both these programmes, Community aid is  provided only for projects where the research stage has already been completed. This provision aims  to achieve a greater degree of progress towards practical application. The relatively poor  prospects of industrial, economic and commercial viability for some of the assisted technologies  are due, for some projects, to the fact that the research stage had not been completed. For these  projects, support under the special Community research programmes in the energy field (the Joule  programme or its predecessors) would have been more appropriate. It would, moreover, be desirable  for the projects completed under these research programmes to be systematically evaluated by DG   XVII in order to allow better assessment of the support to be granted to certain technologies  beyond the research stage. This problem does not occur in the coal sector because this sector is  managed by a single Directorate-General. 11.31. Moreover, the Commission has not always examined the content of projects in relation to the  special Valoren programme in the energy field. Thus, in one case, the promoter of the project  withdrew from the energy demonstration programme, after having received agreement of support, and  turned instead to the more attractive Valoren programme. In terms of their objectives, the  programmes do not really compete. Valoren, as a regional economic programme, is intended to support  only projects which concern tested processes, whereas the energy demonstration programme aims to  promote only innovatory processes. The eligibility under Valoren excludes eligibility for this  programme. The system of mutual information and checking is therefore not sufficiently effective to  prevent the Commission from supporting the same type of project under different programmes. 11.32. Lastly, the Court considers that, with regard to the dissemination and publication of the  results of development and demonstration activities, DG  XVII should make more effective use of DG   XIII's departments specializing in technology transfer. Indeed, as the Court's special report on  the utilization of the results of Community research pointed out, the Directorate  for the  exploitation of research and technological development, technology transfer and innovation (DG   XIII-C) takes very little action with regard to making optimum use of demonstration projects in the  energy field, despite the fact that in the strict sense of Article  B  753 of the budget (as from  1991, Article  B  5.503), it is responsible for taking joint action with DG  XVII to make optimum  use of these projects. The Sprint and Value programmes carried out by Directorate XIII-C ought  also to be able to play a part in DG  XVII's dissemination and publication of findings. Community value added11.33. These two programmes put forward two reasons for justifying promotion  at Community level: (a)to develop cooperation between undertakings in two or more Member States in order to carry out  Community projects; (b)to extend the dissemination and publication of findings beyond national frontiers throughout  Europe. Promotion at Community level must be such as to satisfy these two requirements and thus to obtain  Community value added. 11.34. The Court has tried to determine whether the Community programmes met these requirements.  With regard to the first one, it was found that the Community programmes frequently supported only  purely national projects and not multinational projects. It was only in the case of a minority of  projects that a partnership between undertakings in different Member States was arranged in order  to carry out the projects. Nevertheless, this minority mainly concerns projects carried out by  international oil companies, which have been assisted under the hydrocarbons programme. To date,  specific promotion of European cooperation beyond normal trade relations has therefore not been  attained to any significant extent. 11.35. With regard to the second requirement, the Commission has set up a databank called Sesame,  where data on the assisted projects are stored. This databank, together with the organization of  conferences and the production of brochures sent on request to interested firms, is an important  instrument in the dissemination of findings. About 1  500 sectoral compendia, combining extracts  from Sesame in brochure form, are distributed every year. The Commission is nevertheless aware of  the fact that many improvements are still needed before Sesame can fully fulfil its function. Its  main weaknesses include: data inputs rarely updated for certain fields, a lack or inadequacy of  information on commercial successes, unclear presentation, restricted consultation facilities and  texts only in English. The number of users and the duration of its use are therefore limited. In  1989, 27  users had consulted the databank for a total of 21  hours. 11.36. This means that the knowledge accumulated has not always been made use of. There is  therefore the risk of 'reinventing the wheel` for one technology or another in the context of the  many European development activities or, on the contrary, of once again coming to a dead-end. The  potential benefit which could arise from carrying out programmes at Community level is therefore  very small. Thus the Commission does not manage to disseminate the findings effectively throughout  the Community. This is partly why the main objective of the programmes - improving security of  supply or reducing the level of dependence on oil by means of broad commercial exploitation of  assisted technologies - has been achieved to only a very limited extent. 11.37. The Court therefore wonders what benefits the Communities derive from implementing these  programmes. It is all the more relevant to put this question in so far as the Commission has  granted the four countries which develop the biggest national programmes (FR of Germany, France,  Italy and the United Kingdom) almost three quarters of the amount committed under these two  programmes. External evaluations11.38. In 1988, the Commission commissioned consultants to draw up evaluation  reports on the two programmes from the time of their introduction in 1973 and 1978. The findings of  these external evaluations, examined by the Court below, were sent by the Commission to the  Council. Report on the hydrocarbons programme11.39. The report concerning the hydrocarbons programme  reveals that since 1985 no project which has received Community aid has been exploited  commercially, whereas in 1975 one in two projects was still used commercially. Even bearing in mind  the fall in the price of oil and the uncertainties about its future evolution, this lack of success  shows that the hydrocarbons programme has lost some of its effectiveness over the years. There is,  moreover, a risk that this aid, which was started in 1973, will encourage many undertakings always  to rely on an additional 'back-up Regulation`, rather than on their own performance in the face of  competition. Report on the projects relating to energy saving and to renewable sources of energy11.40. One of  two reports on the energy demonstration programme, the report on projects relating to energy saving  and to renewable sources of energy makes two basic recommendations: (a)to grant greater priority to 'consolidation activities`; (b)to reduce support to projects in the usual form and work out a new form of support. 11.41. By 'consolidation activities` the report means: (a)the gathering of consistent, exploitable information on the findings of projects by means of  independent audits; (b)the making of assessments of the technology by sector - including the findings of the Member  States - and access to these assessments by improving the databank; (c)evaluation of the market; (d)coordination of the promotion of findings - especially those coming from the Member States - on  a European scale and the involvement of specialist bodies in exploiting transfrontier information  networks; (e)coordination between the various activities in order to improve the financing decisions. 11.42. With regard to drawing up a new form of support, the report recommends concentrating efforts  on 'targeted projects`, i.e. projects with a specific objective regarded as priority by the  Commission (for example, protection of the environment) and 'dissemination projects`, i.e. projects  which have already been carried out and which are likely to be the subject of demonstration in  other regions of the Community under different regional conditions (for the latter projects, it  would be best to make provision for the setting-up of joint ventures). THE THERMIE PROGRAMME OF 199011.43. On 29  June  1990, the Council, on a proposal from the  Commission and after consulting the European Parliament and the Economic and Social Committee,  adopted a new global programme concerning the promotion of energy technology in Europe (the Thermie  programme). This programme is applicable until 31  December  1994. The Community funds considered  necessary for its implementation amount to 350  Mio  ECU for the period 1990-92. The first  selection of new projects took place in 1990 and, out of 228  projects, 84 were selected. The  allocation of 45  Mio  ECU provided for 1990 has been used up completely. 11.44. This Regulation reflects in its wording the recommendations of the report referred to in  paragraph  11.40. Moreover, with regard to the 'consolidation activities`, the Court recognizes  that a considerable effort was made in 1990, even though it did not have any effect on the initial  selection of projects for the Thermie programme. With regard to this selection, the analysis  carried out by the Court revealed, however, that in practice very little account had been taken of  the recommendations made. For example, 30% of the first projects selected relate to energy saving  in the industrial field, whereas the report referred to in paragraph  11.40 recommended that before  continuing to support such projects evaluations of the technology used should be made. These  evaluations have still not been made available to the Commission. Moreover, 19% of the projects  selected relate to hydrocarbons, a sector which has also not yet been the subject of a review  aiming to increase the commercial success of the assisted projects. Lastly, in almost all the  energy sectors, the Commission has sometimes given its backing to projects which are borderline  cases in terms of eligibility: poor economic viability, or insufficient likelihood of replication,  or technical and economic risks which are not high, or the lack of true innovation. 11.45. Article  4 of the Regulation on the Thermie programme provides for the possibility of  encouraging and coordinating 'targeted` projects. The Commission has not yet been able, however, to  set up the conditions for such a selection. With regard to the dissemination projects, out of 15   projects selected, only three relate to joint ventures, despite the fact that the report referred  to in paragraph  11.40 recommended that only joint ventures be supported. CONCLUSIONS11.46. The Court has found that: (a)one year after the closure of the programmes, more than half the projects are still under way  and many have been abandoned (see paragraphs 11.17 to 11.21); (b)the degree of commercial exploitation has to date been very low (energy demonstration  programme), or even non-existent (hydrocarbons programme); but given that the time needed for the  assisted technology to penetrate the market may stretch to several years after the completion of  the project, an improved commercial success in the medium and long term is still possible. With  regard to certain projects which have had commercial success, Community support may well not have  been a deciding factor (see paragraphs 11.22 to 11.24); (c)there seem to have been hardly any checks on the impact of the subsidies on the rules of  competition and the Commission has to a certain extent practised a policy of intervention of a kind  which it forbade in the Member States (see paragraphs 11.28 and 11.29); (d)some projects which have not yet had commercial success in fact belonged under the specific  Community research programmes in the energy field and not under the programmes examined, since the  research stage had not been completed; the coordination with other Community programmes still needs  to be improved (see paragraphs 11.30 and 11.31); (e)the Community value added, which was to have been expected from the carrying-out of Community  programmes of this kind, has hardly been apparent (see paragraphs 11.33 to 11.37). 11.47. The foregoing observations and the recommendations contained in one of the external  evaluations would make it possible, if they were taken into account and applied by the Commission,  to ensure that the Thermie programme achieved more satisfactory results. For this reason, the Court  invites the Commission: (a)to continue without delay the consolidation activities or support measures started in 1990 (all  the more so since the Thermie programme allocates them 10% to 15% of all the appropriations); (b)to pay greater attention to becoming familiar with and coordinating national energy policies, as  provided for in the new Regulation; (c)to ensure that the selection procedure enables any non-viable project to be eliminated from the  very outset. >TABLE>CHAPTER  12  (*) Aid to the countries of Central and Eastern  Europe >TABLE>INTRODUCTION12.1. Within the framework of the measure intended to  support the process of reform and democratization throughout Central and Eastern Europe, the  European Communities have instituted two categories of measure: (a)Financial aid: -Subsidies: Operation Phare (Poland and Hungary: aid for economic restructuring),   -Loans: Community financial instruments. (b)Support activities: -Coordination of the group of the 24 OECD donor countries. 12.2. At the same time as these measures, and in order to alleviate the effects of the collapse of  the Comecon market, the European Communities have also instituted a trade policy, improving access  to Western markets, which in Poland and Hungary has already resulted in a change in trade flows.  So-called 'first generation` trade and cooperation agreements already exist with certain countries  of Central and Eastern Europe. 12.3. The aim of these various measures is to contribute to the progress and reconstruction of  those countries of Central and Eastern Europe which undertake to observe and put into practice the  principles of parliamentary democracy and a market economy. 12.4. This Community aid was differentiated and adapted according to the specific requirements of  each country. Table  12.1 summarizes its overall volume for 1990. 12.5. In this starting-up stage, the Court's examination was mainly based on an evaluation of the  systems in place. BUDGETARY IMPLEMENTATION12.6. The year 1990 was characterized as regards the supplementary and  amending budget by a significant increase in appropriations and by an extension of the number of  beneficiary countries. The nature of the appropriations (budget heading B996) thus changed from  'non-differentiated` to 'differentiated`. 12.7. Table  12.2 shows that the degree of compliance between the budgetary estimates and the  utilization of the appropriations allocated is relatively high. However, an analysis of the figures  reveals that utilization was concentrated at the end of the year: the last quarter of 1990  accounted for 48% of commitments and 74% of payments (Table  12.3). 12.8. This situation may be explained, on the one hand, by the increase, as from the fourth quarter  of the year, in the number of countries benefiting from the programmes and, on the other, by delays  in the implementation of programmes. 12.9. An examination of the financial statements drawn up by the Court in Table  12.2 suggests that  there has been a certain degree of implementation at financial level, but it would be unwise to  draw conclusions therefrom as regards the actual progress of projects or operations on the ground.  Indeed, at the level of payments, the Commission's financial data only give a very imperfect  picture of the physical implementation of the projects, in particular on account of the system of  payment by advance (60,6  Mio  ECU, i.e. 36% of payments). In addition, there is also the effect of  retroactive cover by the Phare operation of expenditure already effected in the form of emergency  food aid to Poland and Romania (44,55  Mio  ECU), which was pre-financed by the EAGGF-Guarantee,  and emergency medical aid to Romania (8,48  Mio  ECU). In this connection, the remarks concerning  the financial audit are set out in Chapter 1 of this report (paragraphs 1.80-1.83). 12.10. None of the advances paid out under the work programme were subject to detailed  justification in 1990. It should be noted, however, that the Community has stipulated that an audit  should be carried out in respect of the various programmes by an external audit firm, normally once  every six months. As the advances were only paid towards the end of the year, it has not been  possible to assess the quality of the system for monitoring these advances. OBSERVATIONS IN RESPECT OF THE VARIOUS TYPES OF AIDSubsidies: Operation Phare12.11. The legal  basis for the Court's audit is now formed by the framework agreements concluded between the  Commission and the various countries of Central and Eastern Europe, the necessity for which the  Court pointed out in its 1989 annual report. 12.12. The Court noted that no agreement of this type had been concluded with Romania and the  Soviet Union. The Court again insists upon the need to establish such agreements before the  European Community grants aid. 12.13. The Court examined the system for managing the Phare programme established under Council  Regulation (EEC) N°  3906/89 of 18  September  1989, as amended by Regulation (EEC) N°  2698/90 of  17  September  1990. The general objectives, described in the abovementioned Regulations, are as  follows: (a)the choice of measures to be financed must meet the wishes expressed by the recipient countries  concerned (Article  3(2) of Regulation (EEC) N°  3906/89); (b)the aid must be used primarily to support the process of reform (Article  3(1) of Regulation  (EEC) N°  3906/89) and to provide humanitarian assistance (Article  1(4) of Regulation (EEC) N°   2698/90). Description of the system of implementation12.14. The rules for implementing this aid are jointly  established in a framework agreement signed by the Commission and each of the countries concerned.  It stipulates, on the one hand, that every measure should be taken by the recipient country to  ensure that this aid is properly implemented (Article  1 of the framework agreement) and, on the  other hand, that the Commission should implement this aid according to the practices of sound  financial management (Article  3). >TABLE>12.15. The main participants in the distribution of this aid are respectively: >TABLE>(a)the Phare management committee (made up of representatives of the 12 Member  States and chaired by the Commission), which is called upon to deliver opinions on the projects  presented by the recipient country and submitted to it by the Commission. The corresponding amounts  are then committed by the Commission; (b)the national coordinator, appointed by the government, who is responsible for coordinating the  aid within the recipient country; (c)the Commission, with its on-the-spot delegations, and the national coordinator who are jointly  responsible for the preparation, implementation and monitoring of the programme; (d)the operational management units, set up with the aid or the participation of European experts,  which are, where necessary, set up on the premises of the various national ministries. 12.16. The main features of the system are thus defined by the following: (a)an annual target programme established on the basis of priorities given by the national  coordinator and signed by the recipient country and the Commission. It contains sectoral  allocations for this aid in the form of programmes or projects; (b)feasibility studies are then drawn up, where necessary, usually by external consultants, in  order to pinpoint and identify the main parameters of the project or programme in question; (c)a financing proposal, covering factors that have been examined beforehand, may then be presented  to the Phare Management Committee and approved by the Commission; (d)the financing agreement for a programme or project, which is then adopted by the two parties  concerned, i.e. the Commission and the national authorities of the country concerned. This  agreement adopts the main principles of the previous proposal; (e)the control and follow-up of the implementation of the project, which is carried out by  consultancy firms in liaison with the Commission and its delegations, whilst the ex-post assessment  is carried out by the Commission and the appointed national coordinator. The multiplicity of the programmes>TABLE>12.17. At the end of 1990 a total  of 37  programmes had been concluded. These programmes are themselves divided into sub-programmes or  projects and mainly concern the following areas: agriculture, investments (privatization), the  environment and training (Table  12.4). 12.18. This sectoral diversification, to which may also be added an extensive local dispersion,  related to the recipient countries' requests and economic requirements, places considerable  constraints on the management, from the point of view of effectiveness, for both the local  administration and the Commission departments. 12.19. It should be pointed out here that the roles of the Commission and its Delegations in the  countries of Central and Eastern Europe ought to be more clearly and more thoroughly defined. Consistent framework for the aid12.20. The Court was not able to establish the existence of a  single consistent framework covering subsidies and loans for aid to the countries of Central and  Eastern Europe. 12.21. The drawing-up of a multiannual programme should encompass both Community subsidies, the  Community financial instruments and aid supplied by the group of 24 donor countries of the OECD  (G-24) and coordinated by the Commission. In this way, the Commission could check that there is a  sound balance and rational utilization of the loans and subsidies. In order to achieve a measure of  synergy, the Court recommends that all the aid tools be effectively integrated and considers that  this integration should take the form of the drawing-up of a multiannual programme. State of progress of the programmes12.22. According to the Commission's budgetary data, at the end  of 1990 only the sectoral programme for importing crop-protection products (50  Mio  ECU) of the  Phare operation had been carried out, bearing in mind the emergency related to the agricultural  cycle in Poland. 12.23. The aim of this pesticides programme was to save the harvests before winter, and it was the  first programme to be implemented within the framework of operation Phare. 12.24. In general, the Court was able to establish that the plant health products had been  delivered by the Commission in compliance with the time-limit which had been fixed beforehand and  that they had used four different distribution channels: the Foundation for the Development of  Polish Agriculture (FDPA), which was also the only body responsible for importing pesticides,  Hortex, Samopomoc and Chemikolor. 12.25. Nevertheless, the Court would like to make the following comments: (a)in respect of stocks, - the results of the analysis of the management of these deliveries of pesticides show that  approximately 20% of these products were still in store at the end of the year, in particular in  the distribution centres; - the replies given to the Court's auditors during their visit were not adequate to check the  reasons for this storage. Nevertheless, given the cost of storage and the risks related to  inflation or the insolvency of intermediaries, the Court recommends that the Commission take the  steps necessary to see that stocks are disposed of; - the value on the Community market of these remaining stocks amounts to approximately 10  Mio   ECU, whereas the minimum global value of the batches for sale at the local price is estimated at 5   Mio  ECU. The proceeds of this sale will be added to the already existing Phare counterpart funds  (see paragraphs 12.39-12.40); - moreover, the Polish authorities plan, in future, to distribute products on the spot by tender,  so as to ensure that operations are carried out in a manner which is regular and can be checked; (b)the Court carried out an analysis of tenders and contracts. The pesticides cycle usually took  the form of a contract concluded between FDPA and a European supplier, the latter being approved  beforehand by the Commission. During its audits at the Commission, the Court noted a lack of  strictness in the generally accepted formalities, which may be explained by the urgent nature of  the programme, but ought not to recur in future; (c)in respect of the impact on the environment, - before these plant health products were delivered the Court made certain at the Commission  departments that there was actually a compliance certificate which confirmed that these pesticide  products complied with the technical standards laid down in Directive  79/117/EEC of 21  De-  cember  1978 prohibiting the placing on the market and use of plant protection products  containing certain active substances; - the Court was unable to establish the existence of any post-use control report on these  pesticides. In fact the FAO's international code of conduct for distributing and utilizing  pesticides (United Nations Organization for Food and Agriculture) lays down this type of control  for the country using pesticides and the drawing-up of a report (Article  12(6) of this code); (d)in respect of the final destination of the pesticides, - the Court was not able to establish whether the Commission had checked the final destination of  the pesticides, when they reached the Polish farmers. It did not see the list of final  beneficiaries. The Court is of the view that the Commission's responsibility does not cease when  these goods have been delivered and a system of management and monitoring should also be instituted  (see also paragraphs 12.41 and 12.42); - similarly, the Court was not able to make certain of the reliability of the procedure for the  physical receipt and the vetting of the products by the Foundation for the Development of Polish  Agriculture (FDPA). Counterpart funds12.26. During the period from August 1989 to May 1990, at the request of the  Polish authorities, the Commission delivered foodstuffs, valued at a total of 140  Mio  ECU, plus  20  Mio ECU in transport costs, free of charge to Poland. 12.27. A counterpart fund was created with the proceeds of the sale of these agricultural products  under Polish market conditions. The resources that have been thus allocated to this fund are  intended to finance projects for the structural improvement of Polish agriculture. 12.28. The delivery of the abovementioned aid was not based at the time on any actual analysis of  requirements, either by the Polish authorities or by the Commission. The Court has already  discussed this matter, in its 1989 annual report(6). 12.29. When the 1989 and 1990 deliveries of food aid were decided upon and implemented, the  Commission acted on the assumption that there was an emergency in Poland. Subsequently, especially  in the case of the 300  000  tonnes of wheat delivered in May 1990, it became evident that actual  requirements in Poland were not on this scale. Because of the fact that the new harvest was  imminent, Polish farmers had obviously brought hitherto hoarded quantities of foodstuffs to market.  They were afraid that the large quantities of available foodstuffs would not all be purchased.  According to information in the possession of the Court, Poland had in July  1990, for example,  stocks of grain amounting to approximately 2  Mio  tonnes. The fact that the foodstuffs delivered  by the Commission had not all been sold by the beginning of 1991 serves to emphasize the truth of  the above statements. 12.30. Under such circumstances there is obviously a risk that products delivered free of charge  will be misused, especially in the form of re-exports or through the sale of comparable,  domestically produced products, at world market prices, outside Poland. Although such re-exports  are not in contravention of the letter of the agreement, the Court (and, for its part, the  Commission) have drawn the attention of the Polish authorities to the fact that re-exports of this  kind are inconsistent with the objective of these deliveries of EC produce free of charge. 12.31. The Polish authorities made it quite clear to the Court, during its audits, that their own  production position was such that no further help of this kind was needed. 12.32. During its audits the Court was not able to obtain, either at the Commission or on the spot,  a list from which it could have traced the distribution network for the food aid. The Court calls  upon the Commission to insist on the need to compile such a list for future deliveries of aid to  Central and Eastern European countries. 12.33. In its 1989 annual report the Court criticized the slow start to the process of financing  projects from the counterpart funds. The Court attributed this situation in particular to the fact  that the Polish authorities took too long to make the proceeds of sales available to the  institution responsible for the counterpart funds. 12.34. At 31 December 1990, the Court was able to establish that considerable progress had been  made since the audit for its 1989 report in the making-available and use of these resources. At  that time 746  280  Mio  zloty (57  Mio  ECU at the 31  December  1990 exchange rate) had been paid  into the counterpart fund from the proceeds of sales, and of that sum 565  850  Mio  zloty (43 Mio  ECU at the 31  December  1990 rate) had been set aside in the form of low-interest loans to finance  4  024 private farm projects. In addition to these loans, the fund granted advances to the 'rural  water supply` (17 000 Mio zloty (1,3 Mio ECU at the 31  December 1990 rate)) and 'telephone  network` (57  543  Mio  zloty (4,4 Mio ECU at the 31  December  1990 rate)) projects. 12.35. While the counterpart funds are already at the disposal of the Polish authorities from the  outset, the use that may be made of them, however, is subject to the Commission's approval. Rules  of procedure in this respect have been agreed by the Commission and the Polish authorities, and in  this connection one may speak of shared responsibility. These official agreements are meant to  guarantee that these resources do not simply disappear into the Polish budget but are channelled to  specific predetermined investment projects. 12.36. The Court has established that the counterpart funds are partly distributed in the form of  low-interest loans, which result in a revolving fund, and partly in the form of non-repayable  advances. The Court was unable to establish which criteria were used to decide whether to make the  allocation in the form of low-interest loans or in the form of non-repayable advances, and in which  proportions. The Court asks the Commission to ensure that clear criteria are laid down in this  respect. 12.37. Moreover, the Commission has not yet drawn up an assessment report on the utilization of the  food aid delivered in 1989 and 1990. The same is true of the utilization of the counterpart funds  from the proceeds of sales. The Court must ask the Commission to carry out this assessment as soon  as possible. 12.38. To date, the counterpart fund has already waived loan obligations for a number of debtors.  The Court was able to establish that these waivers had been decided on an ad hoc basis at the  suggestion of the Bank for Food Economy, which is involved in managing these loans. The Court was  unable to obtain the criteria for deciding such waivers, either from the managers of the  counterpart fund or at the Bank for Food Economy, which, moreover, has no relevant experience in  this field. The Commission is asked to ensure that clear and consistent criteria for such decisions  concerning the counterpart fund are established. 12.39. In addition to the abovementioned 'Food aid` counterpart fund, there is another one in  Poland which was created from the proceeds of sales of pesticides delivered under the Phare  programme (50  Mio  ECU) (see paragraphs 12.23-12.26), as well as deliveries of animal food  supplies (20 Mio ECU). This fund is managed in Poland by a different body from the institution  responsible for the food aid counterpart fund mentioned above (namely, the Foundation for the  Development of Polish Agriculture mentioned in paragraphs 12.24-12.25). 12.40. Unlike the 'Food aid` counterpart fund, the Court established during its audits that in  April 1991 no projects had yet been decided upon or financed from the 'Pesticide/Animal Food`  counterpart fund, although the pesticides had been delivered in July and August 1990. The Court  calls upon the Commission to take the necessary steps in this case also to ensure that correct and  rapid use is made of these counterpart funds as soon as possible. 12.41. The comments made earlier as regards the risk of misuse on delivery, especially in the form  of re-exports, are equally valid for pesticides, the market value of which in Poland is 50% below  what may be obtained from sales in the Member States. The Court was unable to consult any list of  final recipients (farmers) in respect of the sale of these products. 12.42. The Court is aware of cases of re-export to three EC Member States. It was not until  November 1990 that the Polish Council of Ministers made a decision to prohibit the re-export of  pesticides delivered by the European Communities in July and August 1990. Until this measure was  adopted the Polish customs authorities had no legal basis on which to intervene by means of checks  and, where necessary, seizures in order to prevent the re-export of these pesticides, which were  identifiable as EEC deliveries. The Commission is requested to ensure, for future aid programmes of  this sort, that the necessary administrative steps are taken prior to delivery of the aid, so as to  ensure that the goods are used in the country in question in a regular manner and in accordance  with the objectives. This also includes the setting-up of an efficient monitoring system. Once  again, the Commission is also requested to draw up an assessment report. 12.43. The Court has, moreover, established that co-ordination of the management of the various  resources arising from the counterpart funds and the other Phare measures, the EIB loans and G-24  aid programmes, has been inadequate and in some cases even non-existent. 12.44. The audit further revealed that there were no uniform conditions for administering the  resources of the various counterpart funds, e.g. for determining the level of interest rates or for  the granting of interest-rate subsidies on loans. The Court calls upon the Commission to remedy  this situation. Loans: Community financial instruments12.45. In 1990 the Court examined the EEC's progress as  regards the setting-up of the various financial instruments used to supply aid to Hungary and  Poland. The results of this examination are given in the following paragraphs. The Community's medium-term loan to Hungary12.46. Council Decision 90/83/EEC authorizes the  Community to grant a medium-term (five-year) loan to Hungary for a maximum amount of 870  Mio  ECU.  This loan, commonly referred to as a 'balance of payments` loan, should make it possible for  Hungary to re-establish its international financial credibility and smoothly carry out the  adaptations to its economy that are set out in its restructuring programmes, thereby facilitating  the transition to a market economy as well as tackling the negative effects or symptoms deriving  from past failures. The Commission is required to manage the loan in full cooperation with the  EEC's Monetary Committee in a way which is compatible with any agreement concluded between the  International Monetary Fund (IMF) and Hungary. 12.47. The loan must be paid out in three instalments, each payment being subject to the observance  of certain conditions. The first instalment, for an amount of 350  Mio  ECU, was made available to  Hungary in April  1990 after it had been confirmed that a stand-by agreement had been concluded  between Hungary and the IMF in March  1990. This instalment is fully covered by a Community  guarantee entered under Article  997 of the 1990 general budget. 12.48. The payment of the two subsequent instalments is subject to the observance of the  performance criteria listed in the Agreement Protocol (Memorandum of Understanding), dated 30   March  1990, concluded between the Commission and Hungary: (a)the reduction of the deficit of the national budget deficit on current account; (b)the country's unpledged international reserves in convertible currencies should be equal to at  least 400  Mio  USD before the second instalment is paid and equal to at least the sum of the first  and second instalments before the third instalment is paid; (c)the implementation of a borrowing programme concluded with the IMF which aims to ensure the  continuous participation of commercial banks; (d)pursual of the extension of the programme to lift price controls in 1991 and 1992; (e)reduction of subsidies for consumption, production, investment and housing, as defined by the  International Bank for Reconstruction and Development (IBRD), from 13,2% of GDP in 1989 to 9% in  1990, 6,5% in 1991 and to less than 5% in 1992. 12.49. The protocol agreement also provides for monitoring procedures, under which the National  Bank of Hungary is to provide the Commission with information certifying that the five performance  criteria have been observed. By applying these procedures, the Commission was able to establish at  the end of November  1990 that the performance criteria in respect of the current account deficit,  the lifting of price controls and the reduction of subsidies would be observed before the end of  1990. It was not able to confirm, however, that the increase in the level of unpledged  international reserves would be achieved. Moreover, the programme of borrowing from commercial  banks had not been fully implemented and the Commission confirmed that this particular performance  criterion would not be observed. 12.50. Although the protocol agreement stipulated that payment of the other loan instalments would  be subject to the observance of the five performance criteria, the  Community decided to grant the  second instalment (260  Mio  ECU) of the medium-term loan. This amount was paid on 14 February  1991. The Court has observed that the general budget of the European Communities in respect of the  financial year 1991 makes provision for a Community guarantee for the first instalment only, in  order to enable the Commission to ensure the debt service in the event of default. The Court calls  upon the appropriate authorities to take the steps required to see that the budgetary guarantee  also covers the possibility of default as regards the second instalment. Loans from the EIB's own resources to Hungary and Poland12.51. In reply to a Council request, the  EIB's Board of Governors decided in November 1989 to authorize the EIB to grant loans from its own  resources for a total amount not exceeding 1  000  Mio ECU to finance investment projects in  Hungary and Poland. Lending operations in these two countries are fully guaranteed by Article 997  of the 1990  Community budget, within the framework of Council Decision  90/62/EEC of 12  February   1990. All EIB loans to Hungary and Poland are guaranteed either by the State or by the national  bank. The Community guarantee, which covers every aspect (reimbursement of capital, interest and  associated costs) of the debt service only comes into play where both the borrower and the  guarantor default in respect of one of the loans. The Court noted that the total possible  theoretical debt corresponding to the Community guarantee could range from 1  600  Mio ECU to 1   900  Mio ECU. 12.52. During 1990 the EIB approved loans for a total of 235 Mio ECU in respect of six investment  projects. The Court's examination confirmed that the Commission's procedures described under  Chapter 10, paragraph 10.35 had been applied to all of these projects in order to confirm their  eligibility for financing by loan. The Court considers that it is too early to assess the progress  of each of these projects, but it is taking care to discuss the procedures for its audits of these  Community-guaranteed loans with the EIB and the Commission. Loans from ECSC resources to Hungary and Poland12.53. In May 1990 the Council of the European  Communities agreed, pursuant to Article 95 of the Treaty establishing the European Coal and Steel  Community (ECSC), to grant ECSC loans for a total amount of 200  Mio ECU to finance industrial  projects in Hungary and Poland. ECSC loans are not guaranteed by the general budget of the  Communities but by the ECSC's own guarantee fund. In 1990 no financing operation by loan had been  approved and the Court believes that one of the reasons for this inactivity on the part of the ECSC  compared with the EIB (described under paragraph 12.51) may be traced to the difference in the  guarantee offered by the two financial instruments. COORDINATION OF THE GROUP OF 24 OECD DONOR COUNTRIES12.54. Following the 'Paris Summit` Decision  (15  July  1989), the Commission was entrusted by the group of 24 OECD countries with the task of  co-ordinating the aid and setting up a framework for the aid decided upon. 12.55. It appears, however, that this active role of co-ordination is not sufficiently well known  in the recipient countries. 12.56. Dialogue and information should be promoted within a framework of programming under which  Community measures should be effected. The Court has already insisted on the important aspect of  coordination, namely in its 1989 annual report. 12.57. For this reason it would be useful to set up a data bank which would be accessible to all  donors and which would cover a wider diversity of situations and improve management of the  extensive aid resources. This data base would incorporate information concerning the measures and  instruments provided for by the public authorities. It would thus promote co-financing measures or  joint projects and prevent measures from being duplicated. 12.58. Such coordination of aid would also considerably relieve the recipient countries' national  authorities. OBSERVATIONS COMMON TO THE VARIOUS TYPES OF AIDCapacity to absorb the aid12.59. During its  missions in Hungary and Poland respectively the Court was made aware of the real difficulties  facing the persons involved in Community aid measures. These difficulties reflect the economic,  sociological and technological changes in process. What is more, historical experience provides  only limited help in understanding this transition from a rigid planned economy to a market  economy. 12.60. The following are examples of some of the restrictions and disincentives generally existing:  a fragile macroeconomic framework (high public debts, high potential unemployment, fluctuating  purchasing power, balance of payments' deficits, etc.), an incomplete legal and fiscal framework, a  rudimentary financial and banking structure, very partial privatization, unavoidable bureaucracy  and lack of know-how and expert knowledge as regards market economies. 12.61. Thus the Court noted certain delays in the implementation of the projects, caused, for  example, by an incomplete definition of the environmental projects in Hungary or the failure to  utilize a credit facility (30  Mio  ECU) for Polish farmers. 12.62. During its on-the-spot audits the Court observed the negative effects of the absence of an  efficient and competitive banking system on the functioning of Community aid. That is why it is  important for the Commission and the national institutions to take account of this factor in future  aid programmes. An improvement of the banking system could play a central role in further  development, for example in connection with the privatization of agriculture, in the creation of  small and medium-sized undertakings, the management of external aid, the payment  of counterpart  funds, private and public investments, the granting of loans, guarantees, joint ventures, the  channelling of savings to finance investments, etc. 12.63. The Court considers that the difficulties as regards these countries' capacity to absorb aid  must not be underestimated, and recommends that more account should be taken of these difficulties  by the Commission when drawing up the programme of Community aid. Technical assistance12.64. During its examination of the various projects or programmes, the Court  was able to establish that the Community financing programme makes provision for one section for  technical assistance and another for material investment.12.65. Technical assistance, financed mainly by operation Phare, very often represents the main  feature of the machinery of these projects and programmes. 12.66. Local training measures are required in this context. The Court considers that this transfer  of knowledge is indispensable for mutual understanding and that it should accompany every  programme. The Court would also like recourse to local technical assistance to be taken more into  consideration in the future within the framework of a progressive transfer of know-how and  technologies. Structural adjustment and sectoral investment approach12.67. The objectives of Community  assistance presuppose a sustained effort of concentration on the structural and strategic measures  required for the development of a market economy. For example, decisions in respect of  demonopolization should precede privatization. Similarly, permanent rules should be laid down as a  matter of necessity to ensure a reliable accounting system, correct evaluation of assets and  standardized audit procedures. 12.68. The concentration of these objectives, finally, calls for a specific effort of coordination  and consistency as regards the overall Community aid compared with the strategies followed at  local, regional or national level in the recipient country, so as to increase convergence of  economic performances and achieve a situation of synergy. 12.69. The question of ownership and formation of capital, both for national and foreign capital,  is very important for the subsequent economic development of these countries. Uncertainties in this  area may considerably slow down the flow of capital needed, or even halt it completely. 12.70. The Court recommends that sectoral investment should be optimized and adapted to the  structural adjustment policy, given that the specific requirements of the recipient country are  taken into account in the annual programme. 12.71. Although the Community is clearly one of the principal donors (mainly on account of the  combination of subisidies and loans), this aid should be used mainly as a consistent link and as a  catalyst between the structural, politico-economic and social measures carried out in the recipient  country. Performance criteria12.72. An assessment of the socio-economic impact of Community aid and its  effectiveness can only be made in relation to pre-defined performance indicators, by which success  or failure can be measured and which will provide a periodic measure of the implementation of the  programme. These criteria, which may be updated, will make it possible to adjust the programme in  mid-course, in order to provide an improved response to actual economic and social trends. This  process will thus make it possible to identify on a regular basis the correspondence between  objectives and results, risks and consequences or alternative solutions and revised results. 12.73. During its audits the Court found no evidence that any such performance criteria had been  laid down in the Commission's programmes. The Court considers these criteria to be essential to any  ex-post assessment and to capitalization on the experience gained. GENERAL CONCLUSION12.74. Despite the difficulties encountered, in particular because of the  administrative procedures, the information systems and the economic changes in these countries, the  European Communities, through their Phare programme, have provided substantial aid to accompany the  first stages of the reform. 12.75. The efficiency of European Community aid is fundamentally linked to the effectiveness of the  national authorities and to the clarity required in demarcating responsibilities between the  various departments (ministries between themselves, subordinate departments, agencies, foundations,  funds, etc.). 12.76. The multiplicity of the programmes involved in operation Phare imposes serious constraints  at management level. The Court would like to draw attention, in this process, to the importance of  absorptive capacity, which should be taken seriously into consideration. By way of example, food  aid to Poland was not based on any realistic analysis of needs. 12.77. The Court is of the view that the European Community should concentrate for the moment  mainly on the financing of technical assistance. It should ensure that its aid is not spread too  thinly in measures which can hardly guarantee that the desired and necessary overall result will be  obtained. 12.78. Correct functioning of the banking system is a principal prerequisite for the economic  development that these countries desire. This objective should thus be given priority in the aid  measures undertaken.  12.79. Steps should be taken to ensure that the Commission, and the countries of the Group of 24,  do not finance technical assistance of different kinds in several sectors, without any general  relation or any clearly defined common objective. 12.80. An effective integration of all the aid instruments (direct, coordinated or financial aid)  within a consistent framework, would make it possible to draw up a multiannual overall plan. 12.81. As regards the management of counterpart funds, the Commission must devote all the necessary  attention to the use of these important resources. 12.82. The EEC guarantees are shown in the general budget as 'for the record` entries. The  Commission is now examining the question of risk and potential debt and intends to submit a report  to the budgetary authority. 12.83. The 'balance of payments` loans are certainly important but are only justifiable on a  temporary basis, given that they are only a remedy for the symptoms, not for the cause. The  granting of aid should aim to eliminate the causes themselves. >TABLE>CHAPTER 13  (*) Cooperation with developing countries > TABLE POSITION>IMPLEMENTATION OF THE BUDGET13.1. This chapter deals with the 'Cooperation with  developing and non-member countries` financed using appropriations from the Community budget, i.e.  for the most part the appropriations relating to food aid, cooperation with Asian and Latin  American developing countries and some Mediterranean countries, joint financing of projects  implemented by non-governmental organizations (NGOs) and some emergency aid. 13.2. All the appropriations available and the way in which they have been used are shown in Table   13.1. The relatively high rates of utilization of the appropriations for the financial year have  been achieved by making considerable use of transfers of appropriations (six between chapters and  32 within chapters) and of advances entered in the accounts as final expenditure (see paragraph  1.85). The fact that only 43,2% of the appropriations for payments carried over have been used is  due to the partial payment (78,7%) of commitments against non-differentiated appropriations from  1989 which have been automatically carried forward and to the minimal utilization (20,6%) of the  payment appropriations carried forward by the Commission, which nevertheless used them in  accordance with the regulations, i.e. after the appropriations of the current financial year had  all been used up. >TABLE>13.3. There would be little point in making an assessment of the implementation  of the budget on the basis of overall ratios covering all the cooperation measures, because of the  diversity of the basic regulations and of the budgetary rules and procedures which apply. A wide  variety of aid measures, most of them multiannual, are in fact authorized under the same budgetary  title. For this reason the Court considers that its earlier recommendations on making the use of  differentiated appropriations more widespread (recommendations which were largely shared by the  Commission and the principle of which was incorporated into the revision of the Financial  Regulation) are still relevant. This is particularly true for this area of aid measures, which is  characterized by growth in both its geographical scope and its needs and by a proliferation in the  number of parties involved and aid recipients. JOINT FINANCING WITH NON-GOVERNMENTAL ORGANIZATIONSIntroduction13.4. The Community's cooperation  with the non-governmental organizations (NGOs) consists of food aid, emergency aid, joint financing  of projects in developing countries, public information campaigns in Europe and a number of  specific measures with the European and local NGOs. This chapter deals only with the joint  financing of projects and the information campaigns financed from Article  941 of the budget  (B7-5010 as from the 1991 budget). 13.5. During the 1980s, the NGOs became increasingly important as partners in development  cooperation. The NGOs are often regarded as being more efficient than public organizations in  reaching the poorest sections of the population. Almost all the Member States have set up a system  of joint financing of projects carried out by their national NGOs. The Community funds paid to  these same NGOs have been steadily growing throughout the past decade, reflecting the high priority  which the Community gives to supporting the initiatives of NGOs. Public funds at present represent  a large source of financing for the NGOs, which have thus been able to expand and diversify their  activities. Budget trends13.6. The appropriations of Article  941, entered in the budget for the first time in  1976, have grown very rapidly from their original 2,5  Mio  ECU, in keeping with the wishes  expressed by the European Parliament. In 1989 they amounted to 80  Mio  ECU and this was raised to  90  Mio  ECU in 1990. At present they account for almost one-third of the Community contribution to  the NGOs (±  300  Mio  ECU per year), and 3% of the Community's financial commitment for all its  development cooperation, including the EDFs. The development and budgetary implementation of the  appropriations are shown in Table  13.2, as are the jointly financed measures. The Community's  total contribution from 1976 to 1989 was 455,6  Mio  ECU and this enabled the joint financing of 3   523 projects in the developing countries (representing 91% of the appropriations) and 659  information campaigns in Europe (9%). Geographical distribution13.7. The geographical breakdown shows that 43,9% of the funds were  allocated to Africa, 30,3% to Latin America, 18,6% to Asia, 5,1% to the Mediterranean area, 1,3% to  the Caribbean and 0,8% to the Pacific. The ACP countries received about 44% of the funds and the  non-associated countries around 56%. 13.8. The number of NGOs with which the Commission has jointly financed projects has risen from 33  in 1976 to 602 in 1989. During this same period, the funds paid to the NGOs of Belgium, the FR of  Germany, France, Italy and the United Kingdom have shown a similar trend to that of the  appropriations available, whereas those paid to the NGOs of Denmark, Ireland and Luxembourg have  remained at a very low level. The Netherlands is a special case, since it has developed in a manner  which is midway between these two groups. Since 1986, the funds paid to the NGOs of Spain have  tended to follow the same trend as that of the first group, and those paid to the NGOs of Portugal  have followed that of the second group. The Court's auditEarlier observations13.9. In 1984, when it was carrying out an audit on the  system of joint financing of projects with the NGOs, the Court noted that the Commission was  rarely in a position to monitor the actual use of the Community funds which were managed by the  NGOs. The difficulties which were encountered related chiefly to the imprecision of the General  Conditions, insufficient information about the use of Community funds, the lack of transparency in  the European NGOs' accounting systems and shortcomings in the monitoring of projects by the  Commission departments. 13.10. The conclusions, which, as regards the need for an improvement in the management systems,  were shared by the Commission, recommended greater precision in the General Conditions, more  effective and more uniform monitoring of the projects by the Commission and, in particular, better  choice of the NGO partners and more stringent selection of projects. Objectives and scope of the audit13.11. The objectives of the audit were: (a)to check the proper application of the General Conditions of joint financing drawn up by the  Commission; (b)to assess the administrative and financial management systems of the NGOs as managers of  Community funds; (c)to assess the application of the principle of partnership between the Commission and the NGOs; (d)to assess the effectiveness of the management procedures and the quality of the monitoring and  evaluation of results by the Commission. >TABLE>After carrying out checks in the Commission departments on the procedures adopted  for selecting projects, the appraisal of files and the monitoring and checking of joint financing,  the auditors then proceeded to check at the NGOs' head offices whether their management information  systems enabled clear, reliable monitoring of the funds paid to the projects. In order to make the  conclusions more specific, on-the-spot checks were made on some projects. 13.12. A summary of the Community contributions granted by Member State, for the NGOs which were  audited and the projects examined on a random sample basis, is shown in Table  13.3. The 53 NGOs  visited received 46% of the total amount of joint financing from 1984 to 1988 and the projects  audited on a random sample basis represented around 25% of the funds granted by the Commission to  the audited NGOs. Legal framework of the joint financing13.13. There is no Council Regulation within the meaning of  Article  189 of the Treaty. On 28  November  1977, the Council ('cooperation and development`)  gave its agreement on the basic guidelines and the procedure to be followed for using the  appropriations for joint financing with the NGOs. These provisions, applicable for the appraisal,  implementation, monitoring and checking of the joint financing, are laid down in the text of the  General Conditions, the first version of which remained in force from 1976 to 1981. After a first  revision in 1982, a second revision of the text was made in 1988. 13.14. Once this second revision was completed, the General Conditions were better systematized and  included more detailed data-sheets. The General Conditions specifically for the public information  campaigns stipulate that from now on projects whose objective is the financing of the day-to-day  running of the NGO, the collection of funds or the promotion of the NGO will be explicitly  excluded. Observations on the joint financing with the NGOsEligibility of the NGOs13.15. NGOs officially  established in a Member State of the European Community are eligible to take part in the joint  financing arrangements provided that they satisfy a number of criteria, which are laid down in  three articles of the General Conditions and summarized below: >TABLE>(a)only autonomous, non-profit-making NGOs which have their head office in a  Member State and of which a major proportion of the financial and human resources is of Community  origin may make an application for a joint financing grant; (b)in determining whether an NGO is eligible to receive a joint financing grant, the Commission  considers its ability to mobilize solidarity and private resources in Europe, its experience in and  the priority it gives to development aid in developing countries or to public information campaigns  in Europe, the efficiency of the organization and its capacity to ensure the competent formulation  and viable implementation of projects and the financial and operational contribution of the NGO  itself to the projects presented for joint financing; (c)applications made by NGOs which satisfy the above requirements but which are acting on behalf of  other NGOs which are not qualified to submit applications will not be eligible for Community  assistance. 13.16. The Court's audit of 53 NGOs revealed that: (a)the Commission agreed to finance projects presented by four Iberian NGOs despite the fact that  the latter failed, on some important points, to satisfy the eligibility criteria: because of a lack  of appropriate legal provisions, because of a financing structure for their activities which  deviated substantially from the principles laid down in the General Conditions, or because of a  lack of vocation for and experience in development cooperation. Even though, at the time of the  enlargement of the Community in 1986, the Commission was obliged to be less strict than with the  NGOs of other Member States, it should have set up exceptional arrangements. In the absence of any  such arrangements, the Court points out that the eligibility criteria summarized in paragraph  13.15(b) should be applied strictly, and not just be regarded as secondary factors; (b)there are doubts as to the eligibility of a Danish NGO because in fact there is no separation  between its political activities and its development activities. Its human and organizational  resources and its management information system were common to both. Moreover, the Court's checks  showed that the NGO had submitted as an 'own contribution` estimates of work which it could not  prove. This procedure, according to the official representatives of the NGO, was the only possible  way of making up for its inability to mobilize private financial support; (c)the four Dutch NGOs with which the Commission has jointly financed projects are financed  exclusively by public funds from the Dutch Government. No private funds are therefore mentioned in  these projects. The NGOs' financial contribution to the projects13.17. According to the General Conditions, the  Commission's contribution to projects may not normally exceed 50% of the total cost of the measure  (project). The NGO's contribution may include funding from its own resources, from other NGOs,  from governmental joint financing schemes and from local beneficiaries. The Commission gives  priority to projects where the own non-public NGO financial contribution is at least 15% of the  total cost. Since 1988 the General Conditions have laid down that the Commission may accept, as  part of the NGO contribution, an estimate of the human and material resources which the NGO has  used for these projects. In this case, the estimate must be substantiated and the method of  calculation identified. 13.18. The audit shows that, during the period from 1984 to 1988, more than 20% of the 53 NGOs  visited had, in fact, made financial contributions to projects of amounts much lower than 15%. In  itself, that is not inconsistent with the policy of the Commission. Nevertheless, the Court's audit  has revealed shortcomings in the application of this policy because, in several cases, the  Commission has not been able to assess precisely the true contribution of the NGOs, as can be seen  in the following paragraphs: (a)for the three projects which were audited at the head office of a Danish NGO, the NGO's own  financial contribution was about 5, 2 and 1% respectively. Several estimates had been charged to  the projects and accepted by the Commission as the NGO's contribution. At the time of the audit,  the NGO did not have any material enabling it to prove that these estimates were acceptable. For  one of the projects, some of the estimates declared to the Commission concerned the receipt and  dispatch to Nicaragua of 10  000 pairs of used spectacles, which had been donated in Denmark; the  local partner, however, had received only 2  463 of them; (b)other NGOs have used procedures which make it difficult to ascertain the amount of their own  contribution, by sometimes failing to make any reference to the estimate of their own contribution  when they presented their application for joint financing. These procedures are estimates of 'work`  and 'services` calculated in proportion to the salaries of the permanent staff at the NGO's head  office (including senior management). In five cases, the NGOs visited did not have any analytical  accounts, which made it impossible to assess whether the amounts entered against the projects were  reasonable; (c)in other cases where the Commission had taken the joint financing decision on the basis of an  NGO own financial contribution of at least 15%, it was found that in reality this contribution was  much lower. In respect of two projects submitted by a German NGO, the NGO's own contribution was  2,6 and 2,8% respectively. The funds granted and paid by the Federal German Ministry of Economic  Cooperation were not identified as stipulated by the General Conditions. For three French NGOs, the  contributions of other partners were not identified separately with the result that the apparent  own contribution of the NGO was higher than it was in reality. In these cases it was no higher than  about 5%. 13.19. At least prior to 1988, some NGOs with very limited resources used to forward their projects  to other NGOs, which submitted them for Community joint financing. Once the necessary funds had  been obtained, the projects were returned to the 'prime contractor` NGO, which carried them out  without contributing financially to them, as stipulated by the General Conditions. 13.20. The Court considers that, in view of the difficulty of evaluating contributions in the form  of human and material resources and the possibilities of abuse, the Commission should no longer  accept such estimates as part of the NGOs' own contributions. In return, the Commission could  consider a lump-sum contribution of up to 10% of the direct costs of the projects as part of the  general administrative expenses. The NGO's own financial contribution would have to be identified  separately. Observations on the management by the NGOsPayment of funds to local partners13.21. In accordance  with the procedures laid down, the Commission makes the payments in one or more successive  instalments and at the request of the NGO. Part of the funds is then sent to the local partner  responsible for carrying out the project in the recipient country. The monitoring of funds should  be made project by project. 13.22. Some NGOs, which have several projects in the same country and sometimes in the same region,  deposit the funds in a foreign currency bank account on behalf of the NGO representative in the  recipient country personally. In most cases there are no documents to substantiate the transition  of the funds from the NGO representative's account to the project, which means that the system of  transferring funds is not very transparent and that the actual amounts paid to each project cannot  be identified. In these cases, it is not possible to trace the flow of funds right down to the  projects. 13.23. Another practice which tends to obscure the system of monitoring funds right down to the  projects is the use of triangular operations. The funds are paid into accounts held outside the  recipient country, sometimes even in Europe, on behalf of the project leader personally or a third  party. Even though, in some cases, the receipt note for the funds paid into these accounts is  available in the head office of the European NGO, there is no trace whatsoever of the amounts  received by the project in the recipient country. The Commission should demand proof of the receipt  of funds by the local partners at the time the reports are submitted. Interest earned by Community funds13.24. According to the General Conditions laid down by the  Commission, the European NGO must notify it of any interest earned on the funds advanced by the  EEC. This interest may either be used to promote the projects concerned or be refunded to the  Commission. Since 1988, the General Conditions have specified that the allocation to the project of  the interest earned is not allowed to reduce the contribution of the NGOs or of the other donors. 13.25. Of the 53 NGOs audited by the Court, only five systematically abided by the provisions of  the General Conditions concerning bank interest. 13.26. The system whereby the Commission pays advances and then the NGOs send the funds to the  local partners means that the funds often remain in Europe for lengthy periods. These funds are  normally paid into a bank account which the NGO uses for all its activities. When the NGO has a  large amount of funds available, it makes financial investments. Since it is impossible to  establish the share of the Community funds which was invested, it is likewise impossible to check  on the interest earned. 13.27. In examining the extent to which the fact that funds remained on the accounts of the  European NGOs benefited the recipients of the projects, it was found that in more than 40% of cases  the funds had remained in Europe for a period ranging from several days to several months and in  some cases more than a year, but that no interest had been paid to the project or even refunded to  the Commission. Other NGOs held bank accounts specifically for Community funds, but they had not  paid the interest earned to the projects either. If the Commission does not know the amount of the  interest earned, it can neither authorize this interest to be used on behalf of the projects nor  ask for it to be refunded. Implementation and financial management by the NGOs13.28. Some NGOs to which the Commission has  for several years been granting funds for the joint financing of projects have not set up even the  most rudimentary system of management accounting. In other NGOs which have set up such a system it  does not always satisfy the principles of clarity and completeness. Community funds are not shown.  The Commission should urge its partners to improve their management tools further and should assess  the management abilities of the NGOs before deciding on the joint financing grant and paying them a  contribution. 13.29. A good illustration of the need for an adequate management system is the example of a United  Kingdom NGO, which is one of the group of 10 NGOs that received the most joint financing from 1980  to 1989. This NGO, having received a large increase in its financial resources, expanded its  activities without making the necessary arrangements for proper financial and administrative  monitoring. Consequently, it became insolvent and had to suspend its activities. Because of its  failure to assess the NGO's management systems and abilities, the Commission was faced with a fait  accompli. Despite the fact that for over six years the Commission had not received any project  implementation reports concerning previous joint financing grants, it continued to pay funds until  the NGO itself informed the Commission of the suspension of its activities. Inquiries are still  under way to determine whether Community funds have been misappropriated. Financial implementation of the projects13.30. The General Conditions in force in 1984 made it an  obligation for the NGOs to maintain 'separate book-keeping for each project`. The 1988 revised  version of the General Conditions now stipulates that the bookkeeping must be separate for each  project by means of a specific bank account and/or by an accounting document which specifies the  revenue and expenditure and their respective dates. 13.31. Amongst the NGOs visited, compliance with this stipulation ranged from the formal keeping of  a document not based on the accounts and concerning solely the flow of funds, to 'project` accounts  integrated into the management accounts. Three of the NGOs visited did not abide by this  stipulation. 13.32. The chief objective of keeping separate accounts is to enable each NGO to prove at any  moment its various contributions to the project and the financial implementation of all the budget  presented in support of its request for joint financing. This objective has not been attained in a  significant number of NGOs. The accounts are often badly kept and, in several cases, they do not  include the contributions of donors other than the NGO or the EEC, and the total expenditure  incurred in Europe and in the recipient countries is not specified. 13.33. Over 20% of the NGOs visited had not entered the expenditure incurred in Europe in the  accounts for their projects. These were in general 'information on development` expenditure and  'study costs`, the amounts of which had been entered in the financial statements sent to the  Commission. These amounts of expenditure could thus not be verified. 13.34. For the expenditure incurred in the developing countries, two basic approaches were adopted  by most of the European NGOs visited: (a)according to the first approach, it is the local partner who is responsible for the  implementation and financial management. He has to give an account at predetermined intervals. In  this case, the project accounts in Europe include only the transfers of funds to the project. The  Court has found that the local partners are often unaware of the project data-sheet which has been  submitted to the Commission, with the result that the financial statements are presented according  to a different structure, thus making it very difficult or even impossible to reconcile the two; (b)according to the second approach, the financial implementation of the project is the  responsibility of the local representative of the European NGO, who must send a list of his  expenditure each month, with or without supporting documents. In this case, the project accounts  include the expenditure incurred in the recipient country. The Court's audit inquiries have shown  that frequently, where the local representatives are running several projects in the same country,  they draw up general lists of expenditure for all the projects without specifying those relative to  each project and at the head office of the European NGO the expenditure is roughly allocated to the  various projects. 13.35. The Commission should consider preparing guidelines with the aim of harmonizing the  accounting procedures and the presentation of the financial statements of the projects. Similarly,  the European NGOs should send their local partners all the information necessary for the  presentation of financial data which can be reconciled. Reports supplied by the NGO13.36. For each project or information campaign the European NGOs are  obliged to give an account of the use of the funds paid by the EEC and by the other donors and to  notify the progress by means of project progress reports (where the Community contribution is paid  in several instalments), a final implementation report and an operational report. Payment of the  next instalment is dependent on the approval of the progress report. 13.37. In most of the projects audited, the progress reports and the final reports are late  (ranging from a few months to several years, see paragraph  13.49) and, in a not inconsiderable  number of cases, the financial statements do not give a true picture of the financial  implementation of the project. This is very often the result of shortcomings in the management  systems set up by the European NGOs. For example, in the case of a project carried out in  Madagascar by an Italian NGO, the acquisition in Europe of fixed assets had been recorded in the  project accounts by the European NGO. These assets had also been recorded by the local partner.  When the financial statements were being drawn up, the same expenditure was entered twice. The  situation is similar in the case of a project implemented in India by a German NGO where the  purchase of a vehicle was entered three times in the financial statements sent to the Commission. 13.38. Some European NGOs have a tendency to increase the expenditure of the projects in a rather  fanciful manner. In the case of a project carried out in Nicaragua, for example, which was  unquestionably of benefit to the local people, the gap between the actual expenditure of the  project and the expenditure recorded in the financial statements sent to the Commission by the  European NGO was around 25%. The financial statements presented by the local partner and checked by  random sample, however, were well kept and did not lead to any observations at the time of the  on-the-spot audit by the Court. 13.39. In some cases the financial statements could not be verified because the NGO had no project  accounts, no summary lists of expenditure nor even any supporting documents, or because the  financial information received from the local partner could not be reconciled with that sent to the  Commission. 13.40. The operational reports due for all the projects jointly financed up until 1988 were in  general missing from the Commission's files. For the Commission departments, however, these reports  should constitute the main means of assessing the development of the projects after the end of the  outside joint financing and their socio-economic impact on the recipient sections of the  population. Since the revision of the General Conditions in 1988, this report has no longer been  systematically required. The Commission thus has no means of assessing the actual viability of the  jointly financed projects nor of knowing the extent to which the living conditions of the recipient  people have been improved. Observations on the Commission's managementAppraisal of files13.41. The number of applications  for joint financing and that of files to be appraised increase in proportion to the appropriations  available. In 1989, the department responsible was faced with more than 1  000 applications,  submitted by over 200 NGOs and involving a total Community contribution of 162,4 Mio ECU. Information available13.42. The Court's audit showed that, although as a rule the Commission had  at its disposal the NGOs' articles of association, in more than 55% of cases it had neither the  annual accounts nor the activity reports of the NGOs since 1986. Moreover, as paragraph  13.50  shows, it has not set up any system enabling it to carry out regular monitoring of the current  joint financing grants for each NGO. The Commission does not have all the information necessary for  taking decisions on new joint financing grants in full knowledge of the general situation of the  NGO and of the state of progress of previous joint financing grants. The present system may lead to  situations such as that concerning the United Kingdom NGO described in paragraph  13.29. 13.43. The Commission should consider keeping up to date a permanent file for each NGO. In addition  to the legal articles of association, the certified annual accounts, activity reports and any  evaluations made by independent experts, it should include a summary data-sheet showing the way in  which the NGO has fulfilled its obligations arising from previous joint financing contracts. Prior analysis of projects13.44. The Court has identified several projects which have been jointly  financed despite information available, including opinions from Delegations or technical  departments, indicating that the long-term viability without outside funds was doubtful, or that  the project was not consistent with the actual priorities of the country. The Commission's files  for these projects contain neither explanations stating the reasons why it has not followed these  unfavourable opinions nor the Financial Controller's observations on these opinions. 13.45. At the time of the Court's audit, these Commission files did not contain any implementation  reports making it possible to assess the degree of success of the projects, even though some of  them were supposed to have been completed some time ago. 13.46. The Court considers that the grounds for any decision to overrule the opinions of the  technical departments or Delegations should be clearly stated in the joint financing file. Appraisal times13.47. The increase in appropriations and the consequent growth in the number of  projects to be handled have not been accompanied by any strengthening of the human resources in the  departments concerned, and the studies on the computerization of the activities of the managing  department, to which the Commission made reference in its replies to the Court's 1985 report, have  not resulted in any concrete action. Consequently, the average length of time taken for appraising  the files has risen from five months in 1985 to eight months in 1989 and 1990. Checks on a sample  of 60 files have revealed certain circumstances underlying the excessive increase in these periods  of time: (a)the fact that projects are carried over from one year to another (because of a lack of  appropriations) means that the files remain pending for several months until the contract is  signed; (b)the files of the NGO projects constitute a further addition to the list of normal tasks of the  technical departments and the external relations departments, which already have a heavy workload.  Consequently, these departments sometimes take several months to give their opinion; (c)the lack of precision in some of the provisions of the General Conditions is often the cause of  repeated exchanges of letters between the Commission and the NGOs. In this case, the period of time  before a decision is taken often exceeds a year. 13.48. For the small NGOs which do not have adequate financial capacity, an inordinately long  file-appraisal time and, consequently, a belated Commission decision often mean that their  activities are blocked. For the NGOs which are bigger in financial terms and which are able to  start a project with their own resources, the major consequence is that when the NGOs receive the  joint financing contract the projects are already well advanced. In several cases of projects  jointly financed with the Dutch NGOs, the contract reached the NGO only a few months before the  completion of the project. Monitoring of implementation and checking13.49. Monitoring the implementation of the jointly   financed projects is the responsibility of each manager and is based on project progress reports  and/or an implementation report. The periods of time within which these reports must be submitted  are laid down in the General Conditions. The findings of the Court's audit of a sample of about 50  of these projects are as follows: (a)in the case of multiannual projects, about 70% of the progress reports had been submitted late.  In more than 25% of cases, this delay was longer than one year, and could even be several years; (b)in the case of the implementation reports which the NGO is obliged to submit after having  received the final payment, around 75% of reports were submitted late. In 23% of these cases, the  delay exceeded two years. 13.50. At present the Commission has no system offering it an overall view of the situation with  regard to expected implementation reports and has no efficient procedures for issuing reminders  about reports still outstanding. It is left up to the initiative of each manager. In some cases, an  annual campaign of issuing reminders has been launched by the Commission but the results have been  poor. In only 20% of the cases examined, there was a reminder letter which had been sent several  months or even several years after the deadline set for sending the report. It is only very rarely  that these reminders are followed up at the appropriate time. 13.51. One of the consequences of the shortcomings of the Commission's and the NGOs' monitoring  procedures is that committed appropriations may lie idle for long periods of time. The successive  instalments of the joint financing grant cannot be paid if the progress reports have not been  submitted or are not satisfactory or if an NGO fails to make a request for the payment of an  instalment. Circumstances such as these result in the committed appropriations sometimes remaining  unused for several years. 13.52. The shortcomings in the monitoring of the project implementation reports show that the  Commission resources available for handling these reports are insufficient and that the system  adopted by the Commission is unsuitable. 13.53. The Court has observed that even where the technical departments of DG  I and DG  VIII give  an opinion on the financing applications, they do not monitor the implementation of the projects  and are not involved in evaluating the reports. Role of the Delegations13.54. The Commission's Delegations have only a marginal role to play in  the present system of managing the NGO projects. An opinion is requested on the proposal for joint  financing. But the number of applications on which they are supposed to give an opinion is often so  high that they are not able to give more than a superficial evaluation. The resources available for  monitoring in the field are sometimes extremely limited or even non-existent. Usually the  Delegations receive the implementation reports only for information purposes. Conclusion13.55. The Court does not question the Commission's strategy of jointly financing  projects with the NGOs as an instrument of development cooperation. It should be emphasized,  however, that the budgetary appropriations devoted to this have grown considerably in volume and  that it is consequently all the more essential that suitable management systems be set up which  make it possible to account for the use of Community funds in an intelligible manner and to  minimize the risk of misappropriation of these funds and which permit effective monitoring of the  projects which have been carried out. 13.56. The observations presented above show that, even though the Commission has improved the  General Conditions and certain procedures since the Court's special report of 1985, the system set  up for the management and monitoring of joint financing with the NGOs still does not adequately  meet the management needs at the level both of the NGO and of the Commission. The very high number  of projects to be jointly financed and managed each year is hardly compatible with the requirement  that prior, in-depth study be made of the files of the individual projects, and this high number is  detrimental to stringent monitoring of projects at the financial level and in terms of actual  implementation in the field. 13.57. The Court considers that the Commission should review the present system, in order to  establish a system of joint financing by means of a programme of projects within a multiannual  framework for the NGOs with which it has worked for several years and which have shown proof of  efficient management and effective project work. Such a system could include, for example: (a)a multiannual framework agreement with the NGO defining the key objectives and the mutual  responsibilities of the Commission and the NGO; (b)an annual activity plan presented to the Commission which would serve as a basis for the  Commission's financing decision; (c)the annual submission by the NGO of certified accounts and of an activity report. 13.58. In return for this flexibility there should be increased stringency in the monitoring and  evaluation of jointly financed projects. The certified accounts which have to be submitted each  year should include annexes showing the state of financial progress of each project. Upon  completion of the implementation of a project, an evaluation report should enable the Commission to  assess the extent to which the objectives have been attained and the socio-economic impact on the  target population. In addition, the Court emphasizes, as it did in its 1985 special report, the  need for the Delegations, which are closer to the actual projects than the Commission's central  departments, to play a greater role. 13.59. The shortcomings identified by the Court in the systems of certain NGOs are such that the  system proposed above could be applied only to NGOs for which the Commission has ascertained  beforehand that they meet the defined management criteria. For the others, an extra effort, with  the support of the Commission if necessary, should be demanded before they are allowed in their  turn to benefit from these flexible arrangements. It is also important that the Commission stops  jointly financing projects with NGOs which have no management systems enabling them to give account  of the use of Community funds in a satisfactory manner and which have shown themselves to be unable  to carry out projects in an efficient way. CHAPTER 14  (*) The European Development Funds >TABLE> INTRODUCTION14.1. This part of the annual report deals with the financial and technical  cooperation up to 31  December  1990 with 66 African, Caribbean and Pacific (ACP) States financed,  in accordance with the first, second and third Lomé Conventions, by the EC Member States outside  the general budget of the European Communities. The fourth Lomé  Convention, which includes another  three ACP States, only came into effect on 1  September  1991. The period between the expiry of the  third Lomé  Convention and the commencement of the fourth was covered by transitional measures  provided for in Article  291 of the third Lomé Convention. The Court's observations on cooperation  with non-ACP States financed from the general budget of the European Communities will be found in  Chapter  13 of this volume and in paragraphs 0.13 and 0.14 of the introduction. Readers are also  referred to Volume  II, paragraphs 17.3-17.25 in Chapter 17 concerning the administration of the  Commission's Delegations in third countries. 14.2. The need for better harmonization of accounting procedures, better exchanges of information  and improved cooperation between donors of development aid is a theme which the Court has often  raised in past annual and special reports. In pursuance of this objective the Court has assisted in  strengthening links between the Commission's Directorate-General for Development and the  Development Administration Division of the United Nations. 14.3. In the Court's view the administration of aid would achieve considerable improvements in  effectiveness in beneficiary countries were aid donors to harmonize their financial procedures and  controls. EXECUTION OF THE EDFs UP TO 31  DECEMBER  1990Utilization of appropriations>TABLE> 14.4. Table  14.1 illustrates the utilization of the fourth, fifth and sixth European Development  Funds at 31  December  1990. Figures for the fourth EDF are final since it was closed on 31   December  1990 after 15  years' existence. For the three Lomé Conventions in operation during the  year new payments amounted to 1  256,3  Mio  ECU and new primary commitments amounted to 992,7  Mio   ECU. 14.5. After 10 years of implementation 83,2% of the fifth  EDF has now been disbursed. The  disbursement rate for the fourth  EDF at this stage of implementation had been 88,3%. Five years  after the sixth  EDF entered into force payments amounted to 44,6% of funding. At the same stage of  the fifth  EDF similar progress had been made (44,0%) although without the rapid disbursement  sectoral import and special debt programmes which were introduced under the sixth  EDF (see  paragraph  14.6). Financial statements14.6. The presentation of the financial statements furnished to the European  Parliament and the Member States has been improved compared with previous years in so far as the  evolution of allocations to the various aid instruments is now disclosed. However, sectoral import  programmes which represent accumulated commitments of 493  Mio  ECU, in addition to the 273,5  Mio   ECU of the special debt programme, are still not shown separately in the sixth EDF accounts for  1990. 14.7. The clearance of expenditure already effected has not improved in 1990. The uncleared amount  over the last three years for all EDFs in the course of being implemented has increased by 223%.  There was 28  Mio  ECU at the end of 1988, 67,2  Mio  ECU at the end of 1989 and 90,6  Mio  ECU at  the end of 1990 still to be cleared. The Court therefore stresses again the necessity for the  Delegations and the authorizing services of the Commission to be mindful of the need for rapid and  complete clearance of expenditure if proper accounting control is to be maintained over  operations. 14.8. Once more in 1990, the Court has been unable to obtain complete and reliable financial  information regarding counterpart funds in the Commission's central services. Because of the  amounts concerned and the importance of the issue for the development of ACP countries, the Court  calls for complete information to be disclosed on this matter in the end of year financial  statements for the EDFs. Outstanding commitments as at 31  December  199014.9. Commitment decisions still to be cleared at  31  December  1990 are 807,1  Mio  ECU for the fifth EDF and 3  530,9  Mio  ECU for the sixth EDF.  Included in these amounts are 338,4  Mio  ECU and 1  400,9  Mio  ECU respectively which correspond  to contracts placed with third parties and still to be settled (outstanding secondary  commitments). 14.10. An analysis of the secondary commitments relating to the fifth EDF has shown that 1  403  contracts placed before the beginning of the 1990 financial year and representing outstanding  amounts of 100,8  Mio  ECU had not been the subject of payments in 1990. Out of these, 30% had been  placed more than three years earlier and represented 38% of the slow-moving commitments. Among the  uncompleted operations most frequently encountered were risk-capital commitments and interest  subsidies, both managed by the European Investment Bank (EIB). 14.11. For the sixth EDF, slow-moving items represented 17% of open contracts and a total of 284   Mio  ECU. As for the fifth EDF, risk capital and interest subsidies represented an important share  of the total: 206,4  Mio  ECU, i.e. 73%. It is the Court's view that the Commission should carry  out a review of all EIB- managed operations under both EDFs in order to identify the reasons why,  according to the Commission's accounts, agreed payment schedules are not being adhered to. Wherever  necessary, commitments not required should be cancelled and appropriations reallocated to new  actions. CLOSURE OF THE FOURTH EDF14.12. The fourth EDF, which had entered into force on 30  January  1976,  was formally closed on 31  December  1990. However, in order to enable the closure to take place,  it was necessary to transfer 125,1  Mio  ECU of fourth  EDF funds which had not been disbursed by  31  December  1990 to the accounts of the sixth  EDF. Transfers of undisbursed appropriations were  effected at financial instrument, country and project level. The amount transferred was in addition  to 1,1  Mio  ECU reallocated from the grant allocation of the fourth EDF to the sixth EDF Stabex  allocation in 1990, and to a total of 68,7  Mio  ECU which had been transferred from the fourth EDF  to other EDFs in previous years. 14.13. Table 14.2 provides an analysis of the transfers of funds at financial instrument level. 14.14. At country level, funds allocated to the indicative programmes of individual States that  remained undisbursed were transferred to new sixth  EDF accounts for utilization by those States.  While the proportion of allocations which remained unused varied significantly from country to  country, 21  ACP States and six  overseas countries and territories (OCTs) were in the position of  having more than 5% of their allocation undisbursed at 31  December  1990. Four ACP States and  three OCTs actually had more than 10% of their allocation undisbursed: Barbados  26%, Jamaica  17%,  Nigeria  13%, Trinidad and Tobago  65%, Belize 38%, Falkland Islands 95%, Montserrat 14%. 14.15. In addition to the transfer of indicative programme allocations, undisbursed allocations  made to three countries from the Rehabilitation and Revival Plan financed from  fourth  EDF funds  also had to be transferred to the sixth  EDF. The countries concerned were Chad  (504  000  ECU),  Mali  (754 000  ECU) and the Sudan  (855  000  ECU). The plan, designed to grant special relief to  countries which had suffered worst from the drought in 1984 and 1985 had been intended to be  implemented within two years from January  1986. 14.16. At project level, outstanding commitments amounting to 44,7  Mio  ECU on 107  Lomé  I  projects which had commenced prior to  1990 and were not yet completed at 31  December  1990, were  transferred to the sixth  EDF accounts. These projects will thus continue to be implemented using  the funds transferred. While the uncompleted projects covered a wide range of different types of  EDF project, it is noted in particular that the Lomé  I scholarship programmes for 10 countries  (Burkina Faso, Cameroon, Côte d'Ivoire, Guinea Bissau, Jamaica, Madagascar, Mali, Sudan, Swaziland  and Togo) were still in the course of implementation. The accounts for these projects had all been  open since June  1976 while, overall, more than half of the projects (55) are 10 or more years old.  For 18 of the projects there were no disbursements in either 1989 or 1990. EDF-FINANCED OPERATIONS, OUTSIDE PROGRAMMES AND PROJECTSACP General Secretariat14.17. The  Brussels-based General Secretariat of the ACP States, which was set up under an agreement of 6 June  1975, is charged, under the authority of the ACP Council of Ministers, with overseeing the  application of the Lomé Conventions and with assisting the organs of the ACP group and the joint  bodies. Since July 1977, 18,4 Mio ECU has been allocated by the Commission to the Secretariat. Financing agreements>TABLE>14.18. Financing agreements providing for reimbursement by  the Commission of approved expenses, including salaries, have been concluded with the Secretariat  but they are rather vague. They do not, for instance, set out the number or the functions of  experts employed by the Secretariat with the rank equivalent to category A officials whose salaries  are reimbursed by the Commission. They do not make obligatory the presentation to the Commission of  annual budgets with staff details and audit reports. The Secretariat is required to furnish the  contracts of experts to the Commission. When, as late as April  1991, the Court was examining the  payments for 1989 and 1990 and sought the contracts governing the employment of 26  experts, only  two could be identified and made available at the Commission. Expenditure to be covered by ACP States14.19. In regard to experts, the financing agreement of  16   September  1988 covering the period 1  January 1988 to 31  December  1990 provides that only  expenditure arising under a contract and which is justified in the execution of such contracts  should be reimbursed. In this context only the expenditure covered by the Secretariat's Staff  Regulations are reimbursable. The financing agreement also provides that an additional 1% of the  eligible expenditure be paid to cover miscellaneous overheads. The Court found, however, that the  following miscellaneous overheads were otherwise reimbursed although they were not authorized by  any financing agreement: (a)telefax and translation charges (100  000  BFR or 2  371  ECU); (b)charges connected with cultural activities and relations with the Press (500  000  BFR or 11   853  ECU); (c)fees for external audit of the Secretariat in  1989 and 1990 (780  000  BFR or 18  491  ECU),  the results of which were not passed to the Commission until the Court requested them; (d)entertainment expenses (330  000  BFR or 7  823 ECU). In addition, contrary to Protocol  2 of the third Lomé Convention, the Commission paid the mission  costs of the Secretariat staff who attended the general sessions of the Council and the Joint  Assembly, amounting altogether to approximately 150  000 ECU for 1989 and 1990. Uncleared advances14.20. An advance of  13,5  Mio  BFR (287  000  ECU) was paid to the Secretariat  by the Commission to meet running expenses in 1977. The advance was 'topped up` in June 1985 to  bring it to 19  Mio  BFR (420  000 ECU). The amount concerned is not included as a recoverable item  in the EDF balance sheet as at 31  December  1990 whereas it is recorded as a liability in the  accounts of the Secretariat itself. The accounts for the fifth EDF, furthermore, showed another  advance at 31 December 1990 of 8,5 Mio  BFR (227  000 ECU) yet to be cleared. This second advance  was not foreseen by the financing agreement. 1989-90 expenditure14.21. The Commission paid a total of 8 Mio BFR (190  000 ECU) to two experts  whose contracts, without the authorization of the ACP Council, lasted for 12 and 16 years  respectively, whereas according to the Secretariat's Staff Regulations (Article  12), the length of  its staff's mandates should not exceed five years (except with the authorization of the Council).  Furthermore, financial compensation was paid for unused annual leave of 193  days and 187  days  respectively although such compensation for leave in excess of 60 days is not provided for (Article   39). 14.22. It is the Court's view that the Commission should not accept to refund severance grants  unless the employment of the experts involved ceases. However, the two experts concerned were still  on the payroll for all of 1990 with the same level of remuneration as before their 'termination` of  service. To give legal cover to the payments, 'special temporary contracts` were arranged. 14.23. Not only had the experts continued in the employment of the Secretariat but their families  also remained in Brussels. Even so, personal and family repatriation costs were paid on the basis  of an estimate (1,6  Mio BFR or 37 929 ECU) up to the maximum amount permissible without the  experts being required to justify the real costs. 14.24. Similarly in the case of three temporary contracts, the Commission reimbursed 830  000  BFR  or 19  676  ECU as 'end of service benefits` although all contracts have since been extended in  some cases more than once. In a further case, an amount of 52  000  BFR or 1  233  ECU was paid for  'accumulated leave` after a working period of three months only. 14.25. Experts' mission costs for 1990 amounted to 142  000  ECU, approximately. Examination of the  relevant accounts and available vouchers gives rise to the following comments: (a)mission costs are frequently paid on a 'demande de mission` without a check on the actual  situation after the mission; in several cases the documents presented in support of reimbursement  indicated neither the purpose nor the location of the mission; (b)these were reimbursed on the basis of travel agency bills only (1,1  Mio  BFR or 26  076  ECU); (c)frequently business-class flight tickets have been paid for whereas entitlement according to the  Secretariat Staff Regulation (Article  55) was to economy class. In view of the changes which have  occurred in air travel tariffs since that provision was adopted, the Court calls for procedures to  be established to ensure compliance with the principle of economy; (d)transport fares for home leave entitlements were paid without taking advantage of usual tariff  reductions (e.g. excursion tickets); overcharge in  1990 can be estimated at 1  Mio  BFR or 23  706   ECU. 14.26. The files are lacking in supporting documents for other Secretariat expenses. In December   1989, for example, 185 285  BFR or 4  392  ECU were paid to an expert over and above her normal  salary without any documentary support or reason being given. 14.27. Article 48 of the Staff Regulations provides for education grants without any ceiling. As a  matter of comparison the ceiling under Community Regulations is 156  792  BFR or 3  717  ECU a  year. In the school year 1990-91 as much as 530  000  BFR or 12  564  ECU was paid for one child's  school fees. In 10 cases education costs have been reimbursed without supporting documents (420   000  BFR or 9  956 ECU). For 21  pupils in  1990 excess payments in comparison with the Community  ceiling were 4,1  Mio  BFR or 97  194  ECU. 14.28. An expert was paid 169  702  BFR or 4  023  ECU in February 1990 based on two receipts from  a school in Kenya without any further information. Indeed, one of these receipts which was dated 15  January 1989 is made out to a name other than that of the expert claiming and no explanation is  given. Control by the Commission14.29. Despite the weaknesses of the reimbursement system evident in 1989  and 1990, the Commission has not sought to correct them, and it has authorized payments even where  the Financial Regulation was being breached. What is more, authorizations have received the  approval of the Financial Controller without any notes of significance being kept in the  authorizing officer's files. Indeed, the accounting officer for the EDF has never suspended  payments even when Article 31 of the Financial Regulation obliges him to suspend payment in cases  where the validity of the discharge is contested. This is facilitated by the lack of separation of  functions of the authorizing and the accounting officer in the Commission as regards EDF  operations, a situation which the Court has criticized in its 1988 and 1989 annual reports and,  most recently, in its Opinion N° 1/91 on the draft Financial Regulation applicable to the internal  financing agreement under the fourth Lomé Convention. Participation of ACP States in meetings organized by the Joint AssemblyFinancing agreement14.30.  Annex XXXI of the third Lomé Convention provides, for the period of the Convention, for 1 Mio ECU  to be paid to the ACP States towards the expenses of participating in meetings organized by the  Joint Assembly outside of general sessions. For this purpose a financing agreement was concluded on  26 November 1986 with retroactive effect to cover meeting costs from the time the Convention  entered into effect (April 1986). Even though the financing proposal approved by the EDF Committee  limited the contribution of the Commission to 80%, the financing agreement between the Commission  and the ACP General Secretariat put 1 Mio  ECU as the only limit. 14.31. At 31 December 1990 the Commission had, in fact, contributed the full 1 Mio ECU to the Fund  while the ACP Member States' contribution was only 45  000 ECU or 4,5% of the Fund. Justification of expenditure14.32. The financing agreement provided for the payment of the EDF  contribution in five successive annual tranches on the basis of a detailed explanation of the use  made of earlier tranches. However, the final fifth tranche was paid on 18  December  1990 without  the supporting documents for the fourth tranche having been received. These were only submitted at  the end of January  1991. The documents on file call for the following observations: (a)in 55 out of 61 cases (90%), the lists of attendance setting out the daily allowances for  payment did not include any certification of attendance by the beneficiaries; (b)most travel costs were reimbursed by the Commission on the basis of a simple declaration without  the relevant travel ticket vouchers being attached; (c)the third tranche included the payment of 298  000  BFR or 7  064  ECU for costs already  reimbursed out of the first and second tranches. No corrective action had been taken by the  Commission at the time of the audit; (d)one trip which was cancelled was reimbursed as if it had taken place. The amount involved was  134  500  BFR or 3  188  ECU and no corresponding reduction was made in the amount released under  the following tranche. Another trip amounting to 162  600  BFR or 3  855  ECU has been accepted by  the Commission without adequate supporting documentation; (e)for the fourth tranche for which an advance of 215  000  ECU had been paid, supporting documents  were only submitted for operations representing 82  600  ECU (i.e. 62% without supporting  evidence); (f)some daily allowances, exceeding the standard allowances under the Secretariat's internal  Regulation, and for which no evidence of authorization was on file, were paid (200  000  BFR or 4   741  ECU). In all these cases the Commission should have deducted from the next tranche all unjustified  expenditure relating to the previous tranche. The supporting documents for the expenditure of the  last tranche (225  000  ECU for the period 1  March  1990 to 28  February  1991) were inspected by  the Commission at the Secretariat in August  1991. Financial charges14.33. The Court examined the financial costs charged to the EDF in 1989 and  1990. These costs are all merged into one account in Table  14.3. 14.34. Most entries arise out of currency-exchange differences which may be positive or negative.  The remaining transactions are mainly bank charges and commissions. Exchange differences14.35. Most exchange differences arise out of the system of adjusting bank  accounts kept in national currencies into ecus whereby the balances in national currencies are  globally adjusted from time to time. This automatically consolidates any exchange losses or gains  which occur during the period in question and it can conceal accounting errors which may have  occurred on the various bank accounts. For example, in 1990 an adjustment carried out on 30   September partially hid the fact that revenue of 940  000  UKL had only been accounted for to an  amount of 340  000  UKL in the previous year. The end-1989 adjustment of an account hid an  overvaluation of the balance by 200  000  DM which arose from an erroneous accounting entry the  previous October. 14.36. The Court considers that any global adjustment should be preceded by a detailed check on the  accuracy of the bank balances. It should also be borne in mind that, given late entry into the  accounts of certain expenditure, the balances are not always up to date. During its audit the  Court noted that some bank balances have never been adjusted. Bank charges and commissions14.37. EDF bank accounts should not generate overhead charges. The  Commission does not carry out any systematic checks to ensure that banks do not wrongfully impose  such charges. Indeed, it was only incidental that the Commission sought a refund of 76  400  ECU at  the end of 1989 from an English bank which had debited such charges throughout the year, and also  obtained an assurance from a Dutch bank in early 1990 that charges would no longer be imposed. For  other bank accounts which are still subject to overhead charges notwithstanding existing  agreements, the Commission has not taken steps to avoid the imposition of such bank charges. In the  case of operations made under the accelerated semi-direct payment procedure the Commission takes  the view that overhead charges are acceptable. The Court questions this approach. Operations carried out on the financial charges account14.38. Any bank interest obtained by the  European Association for Cooperation (EAC) on funds advanced to it by the Commission should, in  principle, be paid over by the EAC to the Commission. The EAC procedure is to enter such interest  in the accounts as a negative charge. As this is, in fact, a receipt it should not be treated as a  negative charge but as revenue (147  000  ECU). 14.39. Amongst charges noted in the account were expenditure not covered by an accounting  commitment and penalties for late payment incurred in relation to particular projects or contracts.  These charges should have been allocated to the relevant projects.TEXT CONTINUED UNDER DOC.NUM : 391Y1213(04).9Overall appraisal>TABLE>14.40. The financial charges account covers many different  types of operation and the control thereof is weak. Separate accounts for the different types and a  clearer accounting structure separating receipts from expenditure as well as administrative  procedures strictly in line with the provisions of the Financial Regulation would facilitate better  management. IMPLEMENTATION OF DEVELOPMENT AID IN VARIOUS SECTORSScholarships14.41. At 31 December  1990  unsettled scholarship advances paid by the EDFs amounted to 6,5 Mio  ECU. As from the third Lomé  Convention, scholarships cannot be readily identified in the EDF published accounts because they  are included in various projects at country level and are considered as the training element in  those projects. The Court has nevertheless examined the global management of scholarships through  the various advances paid to outside agencies which have been allocated the tasks of detailed  scholarship management in the Member States and in the ACP countries. This examination was carried  out taking account of the observations made in the 1982 and 1986 annual reports. 14.42. Three observations need to be repeated. These concern: (a)the delays with which individual scholarships are accounted for; (b)the level of fees paid to outside agencies entrusted with scholarship management; (c)the unavailability at Commission level of an overall control system to assess the extent to  which scholarships have met indicative programmes' objectives. Delays in recording individual transactions14.43. Accounting commitments recorded by the  Commission often include various scholarships which make the follow-up of actions at individual  level difficult. Moreover, some of the outside agencies in Member States, especially France, Italy  and the FR of Germany report on the utilization of advances entrusted to them on a yearly basis  only. Some Delegations which manage scholarships in ACP countries are reporting with even longer  delays for example: Nigeria, Rwanda, Jamaica and Sierra Leone. Thus accounts do not constitute an  adequate basis for following up the actual utilization of funds. Fees paid to outside agencies14.44. The European Association for Cooperation (EAC) which manages  scholarships in Belgium has made considerable efforts to remedy most shortcomings identified in the  past. The relatively high level of management fees which it charges to cover its operating costs  has, however, still to be dealt with by the EAC. 14.45. Despite directives and general implementing provisions adopted by the Commission relating to  the administrative, operational and financial management of scholarships, only one out of eight  agencies reimbursed to the Commission financial interest received from banks on advances granted by  the Commission (see paragraph  14.38). Such moneys unduly increase the revenue earned by the  agencies and are a loss of income for the EDF. Undertakings of the Commission in  1983 (reply to  paragraph  15.54 of the 1982 annual report) were obviously not followed up adequately by its  services. Moreover, it has been noted that in some Member States school fees applied to ACP  scholarship beneficiaries are still higher than those applied to nationals. In this case also the  Commission has failed to follow up the previous observations of the Court. Scholarship computerized control system14.46. In its replies to the Court's 1986 annual report,  the Commission stated its awareness of the fact that the scholarship data-processing system no  longer met requirements and should be adapted. The Court examined  the adaptations made and noted  that they had not been developed as intended and that the existing system was so inflexible that  only standard management information could be obtained without the assistance of a computer  programming expert. This constituted such a handicap that users had almost ceased to have recourse  to the system. It was also noted that basic information for the proper management and evaluation of  scholarships like their rates of success, average duration and actual costs, as compared to  forecasts, were not available. The Court cannot but repeat its previous recommendation that a  computerized control system be introduced to assess the cost of training of each person with regard  to educational effectiveness and relevance from the point of view of the objectives of indicative  programmes. This is all the more necessary since the accounts themselves no longer facilitate the  easy identification of training funds and the uses to which they have been put. Technical assistance managed by the European Association for Cooperation14.47. The European  Association for Cooperation (EAC) is a private non-profit making organization which recruits and  manages individual experts in the framework of technical cooperation measures financed by the EDF.  In carrying out this mission the EAC acts on mandate from the Commission, which itself initiates  action at the request of an ACP State. In practice, the EAC plays little part in the selection of  experts. This is principally carried out by the Commission with the ACP State concerned. The  essential role of the EAC is to provide the ongoing management of the individual technical  assistance contracts which it has been asked to handle. 14.48. In recent years, EAC-managed expenditure on technical assistance has evolved as shown in  Table  14.4. Management of accounts14.49. In general the EAC's accounting system is of a high standard, but  better use could be made of it. It can provide a detailed budget per expert which should make it  possible to control expenditure. However, the system cannot ensure that there are no overruns of  local expenditure, which, even if monitored on the spot by the Delegation, can easily exceed the  agreed limits. During its audit the Court noted such overruns. 14.50. Too often the accounting commitments are only cleared well after the contracts to which they  relate have expired. In many cases delays have been as long as two, and in some cases three, years.  For example, five commitments cleared on 15  May  1990 related to contracts which had expired two  or three years previously. A similar situation has already been reported upon by the Court in  relation to other areas of EDF intervention. Such occurrences needlessly block appropriations which  could be usefully invested in other measures, projects or programmes. 14.51. Details of local expenditure are frequently unnecessarily slow in being sent to the EAC head  office by the Delegations. At the head office there are long delays before the information is  entered into the accounts. At mid-February  1991 the Delegations had not all yet sent their  statements of expenditure for the closing months of 1990 to the head office. For its part, the head  office only processes once or twice a year the statements it receives. At the same date it had not  yet entered into the accounts the most recent statements received from 15 Delegations. This  situation makes the management of contracts rather risky. Although the clearance of suspense  accounts has started to improve, cases remain where regularization is slow in being effected. At  1   February  1991, for example, the imprest account in Uganda still showed amounts of 36  103 ECU and  1  484  ECU not yet regularized since 1989. >TABLE>14.52. The Court has noted that the EAC and the Commission experience  difficulties in coordinating their activities in relation to management and accounting. For  example, it was necessary for the Commission to remind the EAC at end-1990 to forward commitments  to the appropriate authorizing officer for entry into the accounts. In addition, the EAC is slow in  forwarding details of expenditure which leads to accounting delays in the Commission. This  situation is aggravated by the fact that the Commission itself delays entering the details into the  accounts. Financial management14.53. The financial cost of technical assistance should be better controlled.  The EAC monthly cost per expert has been calculated at 9  500  ECU, taking into account salary,  allowances and related charges. A comparative study by the EAC of its technical assistance costs  and those of bilateral aid supplied by Member States has shown that the EAC costs are generally  higher. The Court itself has recently found in Uganda that EAC technical assistance was about twice  as expensive as non-EAC technical assistance. 14.54. Technical assistants on contract to the EAC benefit from the reimbursement of various  expenses, particularly for housing and transport (car allowance), in addition to their normal  salary. Generally, the EAC reimburses the full costs incurred which is no incentive to the  beneficiaries to seek to economize. Apart from this the reimbursement of numerous detailed claims  imposes a significant accounting and administrative burden both on the spot and at head office. A  lump-sum payment, based on local conditions as necessary, would eliminate unnecessary bureaucratic  control of numerous small payments and lead to a reduction in costs. 14.55. In regard to the housing and car allowances it is, in any event, questionable that the full  cost should be borne by the EAC. Housing allowances and related charges (furniture, security, etc.)  cover what is essentially a private matter and, furthermore, the expert will already benefit from  allowances such as overseas, expatriation, first installation and reinstallation allowances. Where  local administrations give logistical support, for instance a car, accommodation or other  facilities, the EAC should be careful to avoid duplication. 14.56. A tax deduction from salary equivalent to the tax on Community officials is imposed on the  technical assistants managed by the EAC. Where deductions are made to meet Community tax liability,  they should be paid over to the general budget of the European Communities and not, as in the case  of the EAC, retained for the purpose of financing additional expenditure on projects. Moreover,  net salaries of technical assistants are sometimes taxed by national authorities, in which case the  national taxes are refunded by the EAC and thus are a charge on the projects. A review of these tax  arrangements should be undertaken. 14.57. To sum up: greater control of the EAC's expenditure is essential in the interest, finally,  of EDF projects. For legal reasons it may not be possible to introduce desirable changes into  existing contracts. However, even for these, a detailed statistical analysis of pay and allowances  should be undertaken in order to identify where anomalies or excesses exist within the present  rules. Sysmin14.58. In order to help compensate ACP States for reductions in their exports of mineral  products to the Community, the second Lomé Convention instituted a special financing facility  called Sysmin. Like Stabex which compensates for losses relating to the exportation of certain  agricultural products, Sysmin is non-programmable aid. However, unlike Stabex, aid is not automatic  and its level is not based on the export losses alone. Its original aim was to support economically  viable production units suffering temporary or unforeseeable set-backs. The following amounts were  originally allocated for Sysmin (Mio ECU):  Lomé II:280,  Lomé III:415,  Lomé IV:480. 14.59. Under Sysmin, ACP States receive aid in the form of loans under certain conditions and for  specified metals or ores, i.e. copper-cobalt, phosphates, manganese, bauxite, alumina, tin and iron  ore (second and third Lomé Conventions) if they derive at least 15% of their export earnings from  any of these products. Article  180 of the third  Lomé Convention allows for derogations on a  case-by-case basis, to include all mining products (other than precious minerals, gas and oil),  where there is a dependence rate of 20% or more on revenues from the exportation of such products.  Lomé  IV provides for the systematic eligibility of these pro- ducts. For eligible products,  access to Sysmin assistance is granted where a substantial drop in production capacity, or in  exports, or in export revenue is noted. 14.60. The amount of EDF aid is fixed by the Commission on the basis of available funds and taking  account of the gravity of the situation. The projects or programmes which are funded are aimed at  offsetting the negative consequences of the disruption in mining revenue by putting the mining  bodies back on a viable footing or by promoting diversification which would replace, even  partially, export-earnings capacity lost in the mining sector (Lomé III, Article  182). 14.61. The Court has commented on Sysmin in its 1983 and 1985 annual reports. In 1983, the Court  reported that the Zambian authorities had not made adequate amounts of foreign currency available  to the mining sector thus jeopardizing its investment capacity and long-term viability. In 1985,  the Court commented on the cumbersome administrative procedures which led to slow implementation of  Sysmin aid schemes. The Commission said at the time that the slow implementation was due to delays  by the ACP States in setting up projects and programmes. Financial situation as at 31  December  199014.62. At 31  December  1990 five ACP States had  received aid under Sysmin from the fifth  EDF (Lomé  II) out of a revised total allocation of  275,64  Mio  ECU. Commitments amounted to 91% of this allocation and payments were 60%. Out of a  commitment of 49,3  Mio  ECU, only 3,68  Mio  ECU had been paid in the case of Liberia. Clearly, if  the remaining 45,59  Mio  ECU are not likely to be used in the near future, the financing agreement  should be renegotiated so that such funds can be made available to other projects. A request from  Jamaica received by the Commission in October  1985 was still awaiting a decision. 14.63. At 31  December  1990 six other ACP States had received Sysmin aid from the sixth  EDF (Lomé   III) out of a revised allocation of 305,4 Mio ECU. Commitments amounted to 117,8  Mio  ECU or 39%  of this allocation and payments amounted to only 4%. At end-1990 Zambia, Zaire and Papua New Guinea  were awaiting a response from the Commission to their further requests for Sysmin aid. 14.64. Before the expiry of the second and third Lomé Conventions, the ACP-EEC Council of  Ministers should have decided on where to allocate the amounts remaining unused under Sysmin. At 31   December  1990 no decision had yet been taken in respect of 25  Mio  ECU available under Lomé  II  and 202,6  Mio  ECU available under Lomé  III. Processing of demands for aid and conclusion of agreements14.65. Table  14.5 illustrates the  slowness with which requests for Sysmin aid are processed. To help in remedying this, the fourth  Lomé Convention provides for eligibility and financing to be decided at the same time. 14.66. Under Lomé II and III Sysmin aid was only granted to remedy the damaging consequences of  serious disruptions which were of a temporary nature and which were not brought about by the ACP  State itself. The Court has, however, noted that frequently the problems of the mining sector are  due to insufficient local investment and renewal of plant and machinery rather than falling prices  on the world market. This low level of investment is often due to excessive tax burdens and to  inadequate access to foreign currency - both matters which are under the direct control of the ACP  States. Zambia and Zaire provide examples of this. Even so, the Commission continues to respond  favourably to requests from these States for Sysmin aid on the basis of commitments that they will  in future abandon their damaging practices. 14.67. The financing agreements for Sysmin aid generally specify how the aid is to be used (e.g. in  purchasing equipment) but the main objectives of the aid are rarely spelt out in any greater detail  than those already set out in the Lomé Conventions. In the absence of clearly defined and  quantified objectives, it is very difficult to assess whether the aid has achieved its objectives  or not. In the case of assistance granted to Zaire and Zambia, for example, it would have been  useful to have set operational and profit targets for the different production units. Indeed, for  management purposes the operational units are the appropriate levels at which to fix quantified  targets and to measure results. Implementation of projects14.68. The financing decisions for 10 ACP States which have benefited  from Sysmin funds cover a total amount of 353,4  Mio  ECU. Table  14.6 illustrates the situation  per type of forecast expenditure. 14.69. The proportion of the funds devoted to management (3%) is low given that the key to mining  companies' viability is cost control. This depends as much, if not more, on the quality of  management and technical expertise as on plant and equipment. Also noteworthy in the picture  provided by  Table  14.6 is the absence of conversion and diversification operations. 14.70. Although the Lomé Conventions emphasize rapid implementation of aid, the reality is that,  generally, implementation is slow: (a)in Zaire contracts for the second project were concluded with a delay of over two  years; (b)in Zambia a significant share (5,5  Mio  ECU, i.e. 20%) of the equipment for the second project  was delivered with a delay of three years or more; (c)in Mauritania railway sleepers which were delivered (3,9  Mio  ECU) did not all correspond to  the technical specifications set out in the contract. As a result, the project will be delayed at  least two years according to the most optimistic forecasts; (d)the potential beneficiary of Sysmin aid in Botswana was unable to wait for the processing of its  demand to be completed before embarking on its planned investment programme. The enterprise  accordingly found another financing source thus making its original Sysmin claim obsolete. However,  this important development was not brought to the attention of the EDF Committee although 21,65   Mio  ECU had been committed; >TABLE>(e)in the Republic of Guinea three years elapsed before the first contracts  valued at 0,87 Mio  ECU were signed. Thus the original completion date (mid-1991) will be seriously  delayed. >TABLE>14.71. In most cases of Sysmin intervention the loans on special conditions are  made available to the ACP State which onlends it to the mining companies on less-favourable terms  (shorter-term and higher-interest rate). The Lomé Conventions require any profits which accrue to  the ACP State to be used for development purposes on the conditions laid down in the financing  agreement or loan contract. In this context the conventions provide for the setting-up of a fund to  which is credited any profit accruing to the ACP State and this fund can only be used with the  agreement of the Commission's Delegate. 14.72. Enquiries carried out in Zaire and Zambia have revealed practical difficulties with the  handling of these funds. In Zambia only the interest-rate differentials were credited to the Fund  with no account being taken of the profit from the difference in the repayment schedules of the  loans concerned. Furthermore, the independent evaluator which assessed the performance of the  Zambian projects in August  1990 noted that the Social Fund was used for the sole benefit of the  mining industry employees and, in fact, operates as a salary supplementation scheme. In this case  the control by the central services of the Commission was symbolic rather than real. As regards  Zaire, at the time of the audit, in January 1991, while details of the Fund and the use to which it  is put were only available in Lubumbashi with the beneficiary enterprise, the Commission central  services had no clear information as to whether the Zaire authorities were respecting their  obligations or not. Financial execution14.73. The Lomé Conventions provide for the issue of advances when the means  of production call for precautionary measures. No advance can be paid before eligibility is  determined and agreed by the Commission and it must be included in the aid accorded upon the  signing of the relevant financing agreement. In the case of Guyana advances of 3 Mio  ECU were  issued in 1985. This was not included in the financing agreement for the main project (31,5  Mio   ECU) but was considered as a separate project. 14.74. Although Zambia did not receive advances before the signing of a financing agreement, the  project related to this agreement operated under an advances system. In doing so, the Commission  only carried out checks on expenditure a long time after the payments were made. By allowing what  was, in effect, an imprest account system the Commission was in breach of Article  34 of the  Financial Regulation applicable under the third Lomé Convention. Conclusion - Sysmin14.75. Sysmin's major innovation since Lomé  III is the financing of actions to  convert or diversify out of the mining sector. However, in practice, this objective has not been  pursued. 14.76. The Sysmin facility in practice is subject to a number of weaknesses: (a)contrary to what is expressly stipulated in the Lomé Conventions, projects which benefit from it  are characterized by slow implementation. This arises both at the stage of processing the aid  demands (principally due to cumbersome administrative procedures) and to the implementation stage; (b)the financing agreements, which are quite explicit in relation to the technical interventions to  be financed, are vague when it comes to profitability and the need to reduce costs. The latter is  particularly important given that cost reductions are essential for the viability of the mining  sector; (c)the financial envelope for Sysmin is substantial, so much so, that ACP States appear to have  difficulty in identifying suitable projects for Commission approval. Already a significant part of  the funds originally earmarked for Sysmin have been usefully diverted elsewhere. Of the original  allocation under Lomé  III, 26% was so diverted; (d)certain ACP States benefiting from Sysmin have not been respecting their obligations  particularly in regard to making available adequate amounts of foreign currencies to the mining  companies for productive investment. 14.77. Sysmin, in effect, allows certain ACP States whose income from Stabex is minimal or  non-existent, to receive funds for amounts which often exceed those of their national indicative  programmes (see Table  14.7 at the end of the chapter). Where Sysmin assistance is used to  compensate for unreasonable withholding by an ACP State of foreign currencies needed for  reinvestment, it can have adverse effects through encouraging the State to finance non-development  expenditure at the expense of development aid. In such situations the Community clearly cannot  guarantee that the EDF funds contribute to the achievement of the objectives of the Lomé  Conventions. 14.78. To avoid the use of Sysmin funds to rehabilitate inherently unprofitable enterprises, the  Court recommends that more attention be given to conversion and diversification projects and that  the rehabilitation of mining enterprises should be mainly financed with risk capital. COMPUTERIZED PROJECT MONITORING SYSTEM14.79. In its resolution for discharge in respect of the  financial management of the EDFs for the 1989 financial year, the European Parliament stressed the  need for better budget management and accounting procedures. 14.80. In replies to previous Court reports, the Commission stated that major improvements in the  financial management of EDF projects would be derived from the introduction of a new computerized  on-line accounting system (OLAS). The Court has reviewed the development phases of the new system  and the Commission's wider computer strategy in order to assess the extent to which management  objectives are likely to be achieved. 14.81. The review indicated two serious weaknesses which cast doubt over the extent to which the  financial management of the EDF will be improved as a result of these new developments. (a)Budgetary control at project level is not provided within OLAS in so far as the system does not  have a facility for monitoring project expenditure in relation to the cost estimates for the  individual components of projects as set out in the financing agreements. As a result, project  budgetary control will continue to have to be carried out manually, outside the accounting system  itself, by technicians and desk officers, who according to the Commission are too few in number to  properly carry out all their tasks and responsibilities. (b)OLAS itself has been designed as a purely accounting system primarily intended to service the  Commission's departments. However, sound financial management is dependent not only on financial  information but also on operational information. The latter is outside the scope of OLAS itself and  has not been adequately catered for by the wider computer strategy. Weaknesses in project  monitoring found by the Court in the course of its audits of EDF projects can often be attributed  to a failure by the Commission's services to define and collect the necessary information relevant  to decision-making at the different stages of the project. A revised computer strategy based on a  detailed review of the monitoring responsibilities at Delegation and central services levels and  recognizing the significant responsibilities of programme and project managers throughout the  Commission's services should be considered in order to lay the basis for sound financial management  under Lomé  IV. >TABLE> The Commission's replies to the Court of Auditors' observations  concerning the financial year 1990  INTRODUCTIONWithin the Community, 1990, the year to which the  Court's report relates, saw completion of the implementation of the 1988 reform of the structural  Funds and application to all the Funds of a new management system, one of the main features of  which is partnership. In the space of two years the Fund system has been radically altered. The guidelines are now as  follows: - management on a project-by-project basis has been dropped in favour of programme-by-programme  management; - programmes have been incorporated into an overall development concept, the Community support  frameworks; - all the financial instruments have been coordinated to maximize their effects; - regional government departments are involved in the planning and management of programmes and in  monitoring their implementation. In introducing these principles the Commission has applied the lessons learned from shortcomings in  previous practice and from criticism levelled at it, not least by the Court of Auditors. Two years is obviously not long enough to achieve complete success. The Court's report cites some  of the problems and shortcomings: the very short deadlines for preparing programmes have hindered  proper ex ante assessment of their impact, there is room for improvement in the coordination of  financial instruments, monitoring committees have not yet started playing the part assigned to them  and it is not always obvious that Community aid satisfies the additionality condition. The Commission is aware of these shortcomings and is doing its best to rectify them. As a whole,  though, it sees the Court of Auditors' report as an endorsement of its policy and of the basic  thinking behind it and as encouraging it to continue moving actively along its chosen path.  Basically, the years from 1988 to 1990 were intended as a time for planning and setting up the CSFs  and management structures. From now the Commission's attention will be focusing on management,  monitoring and assessment. In that connection, the Commission initiated a series of studies of financial circuits in the  Member States. It hopes that the results of the research will serve as a basis from which  organizational steps can be taken to make sure that funds flow a great deal more rapidly from the  Commission to end-recipients. On the external front, the changes in Central and Eastern Europe severely tested the capacity of  the Community's financial and budgetary procedures and instruments to react to developments. The  food and humanitarian aid for Poland and Romania, the development of the Phare programme for all  the former Warsaw Pact countries other than the USSR and the Soviet Union's requests for aid all  required imaginative use to be made of every available instrument. The first checks carried out by the Court (see Chapter 12 of the report) give a first impression of  the difficulties encountered, as well as evidence that the Commission rose rapidly and effectively  to these new challenges. The difficulties the Commission faced have prompted it to give thought to ways of amending the  financial and budgetary procedures for the supply of humanitarian aid. It is hoped that specific  proposals will shortly emerge from this process and can be submitted to the Council and  Parliament. Similarly, the appearance and development of a new budgetary risk associated with the budget  guarantees attached to the Community's loans to non-member States, particularly those for the East  European countries and the Soviet Union, have persuaded the Commission and Parliament of the need  to set up a facility for mobilizing these guarantees. It has undertaken to put forward a practical  solution in the context of renewing the Interinstitutional Agreement. SUBSIDIARITY0.4. Regarding subsidiarity, the Commission, like the Court of Auditors, believes that  it must have as much information as possible about Member States' management in the implementation  of Community policies, so that it can discharge its monitoring responsibility. It has no intention  of shirking that responsibility by invoking the subsidiarity principle. 0.5. The Court considers that successive extensions of the compensatory allowances for farmers in  less-favoured areas to new beneficiaries are due to a passive approach by the Commission and are  thus an example of the principle of subsidiarity not being applied correctly. The Commission  believes that the Court is barking up the wrong tree. The extensions were deliberate and were  decided on by the Community's legislative authority; they comply with the basic provisions of  Directive 75/268/EEC defining the criteria for classification (see paragraphs 9.21 and 9.22). The  underlying motivation for the extensions may seem to the Court to be open to criticism, but cannot  be used as grounds for accusing the Commission of failing to apply the principle of subsidiarity  correctly. Nor do there seem to be any solid grounds for the Court's claim that the premium in question has an  adverse effect on the environment. In paragraph 9.38 the Commission outlines the measures taken to  reduce intensive stockbreeding. 0.6. The Commission also takes the view that proper application of the subsidiarity principle  presupposes that relations between the Commission and the Member States are based on reciprocal  trust and that the Commission is able to advise on and supervise the action taken by Member States  pursuant to Community provisions. The supervision of Member States' management is, however, generally ex post. In the case to which  the Court refers, the Commission discharged its duties correctly. When checks carried out in the  course of clearing the accounts brought to light cases of failure to apply Community law, the  Commission quite properly reduced the refunds to the Member State concerned (see paragraphs 3.35 to  3.40). On the other hand, the resources available to the Commission do not, generally speaking,  enable it to advise national bodies on the details of Community regulations in all cases and in a  preventive sense. It does, however, respond to any request for an interpretation of the  difficulties facing national administering departments. It answered numerous requests, for example,  for explanations of the system of sheepmeat and goatmeat premiums. None of the points listed by the  Court in paragraph 3.37, however, gave rise to any such request for interpretation. 0.7. The Commission agrees with the Court about the difficulties of putting the principle of  subsidiarity into practice in the context of the structural Funds. It is taking two courses of  remedial action. First, it is seeking to ensure that partners from all territorial levels of  authority sit on the monitoring committees. Second, it is looking at practical ways of expanding  these committees to include bodies representing social and occupational groups. It also considers  that the regional level should be more involved at the planning stage of regional development  strategies. However, the Commission still has to take account of actual institutional practice in the Member  States, where internal structures may sometimes impede the establishment of a completely  satisfactory relationship of partnership with the end-recipients of Community grants. SOUND FINANCIAL MANAGEMENT0.8. A number of points need to be clarified in relation to the Court's  remarks on sound financial management. The Commission has never regarded the agricultural guideline  as a spending target. The 1990 budget, for example, was more than ECU 2 billion below the guideline  figure. It did not in any way use that margin as an argument for deciding to increase expenditure  where there was no real need to do so. In fact it had to take steps to manage certain markets in  order to restore them to balance, which is the object of Article 39 of the Treaty; in the short  term this may have the effect of creating additional expenditure. In any case there was convincing  justification for its decisions. Like the Court, the Commission has never considered that the availability of appropriations under a  budget heading justifies using those appropriations without due regard for the principles of sound  financial management. It is surprised that the Court feels able to level such an accusation at it,  even through the indirect channel of a statement of principle. 0.9. The Commission attaches great importance to compliance with the principle of 'additionality`,  which is a prime guarantee of the effectiveness of the Community's structural action. It believes  that the practical scope of that principle is sufficiently clear. Article 9 of Regulation (EEC) N°  4253/88 states that an increase in the appropriations for the Funds should result in at least an  equivalent increase in the total volume of official or similar aid. The problem arises, in fact, at the point where practical checks have to be carried out. At the CSF  preparation stage, checking has proved to be difficult, largely owing to the lack of information  about official expenditure in the base year. In August 1990 the Commission told the Member States  what information it had to have to be able to make a proper assessment of compliance with  'additionality`. The information received is at the moment being studied in the Commission. The  degree of difficulty in analysing it varies according to the objective and the Member State  concerned. 0.10.     0.11. The Commission, like the Court, regrets the fact that prior appraisal of the impact  of structural operations in terms of the objectives selected was not carried out as planned. As the  Court says in paragraph 6.20, one of the reasons for this state of affairs is that the time limits  for implementation of the various stages of the reform were extremely short. Another was the  considerable methodological difficulties which had to be overcome, particularly as regards the  development of appropriate macroeconomic models. These difficulties are on the way to being solved.  Initial results from the appraisal process, which is under way at the moment, will be available in  the annual report for 1990. 0.12. In the case of the NCI loan to Italy for the construction of low-cost dwellings for secondary  and tertiary sector workers, the Court criticizes the absence of verifiable criteria whereby the  Commission could satisfy itself that the objectives had been achieved. The fact is that the NCI loan in question was part of a development strategy which included the  building of 30  000 dwellings, of which the Community loan was supposed to cover the building of 5  370. The dwellings covered by the NCI loan were all built. The Community institutions cannot be blamed for the fact that another part of the overall  programme, i.e. the measures to be financed using national resources, was not completed. As regards the food aid to Poland, the Commission explains in Chapter 12 that, because of the  urgency of the matter, it was not possible to carry out a detailed analysis of needs in Poland, but  it did express its doubts to the Polish authorities as to whether the amount of aid requested was  appropriate. They, however, urged that the aid continue. Nevertheless, the Commission eventually  reduced the amount of aid from 500  000 to 300  000 tonnes. 0.13. The Commission believes that the ways in which the EIB, NGOs and the ACP Secretariat-General  are involved in the implementation of development programmes are not comparable. As far as NGOs are concerned, the strictness with which the Commission can impose monitoring and  control arrangements has to be assessed against a particular background. The machinery for joint  financing of development projects with NGOs, for example, enables original, high-quality and often  successful schemes to be carried out with limited human and financial resources. Even if it is  important to ensure that NGOs manage the funds properly, steps must be taken to prevent red tape  dampening the efficiency and enthusiasm of the NGOs, which sometimes act in a charitable capacity  (see the closing remark in Chapter 13). As for the ACP Secretariat, the Commission would refer to its replies to the Court's observations  in Chapter 14. The Commission's view, lastly, is that the EIB cannot really be regarded as a third party like NGOs  and the ACP Secretariat. Relations between the Commission and the EIB are governed by a set of very  comprehensive rules and agreements. The Commission is, incidentally, constantly at pains to improve the use of Community resources to  achieve its objectives and to take the consequences of existing programmes into account so as to  make the best possible use of such resources. The Commission's system of follow-up0.17     0.23. In its replies to the Court of Auditors' annual  report for 1985, to which the Court refers, the Commission made a distinction between follow-up  action on undertakings given to the Court of Auditors and follow-up to Parliament's observations in  its resolution accompanying the discharge decision. As regards Parliament's observations, there is a very comprehensive procedure, and the Commission  regularly follows up on its obligations as well as checking that they are being met. As regards the Commission's undertakings to the Court of Auditors, it should be made clear that the  Court's remarks are often no more than one factor among many in determining the Commission's  policy. On occasion, for example, the Court criticizes this or that aspect of a Community policy.  The Commission's reply is that it will take this into account when the policy next comes up for  review. A review of this kind generally covers a range of issues including those raised by the  Court. Once the review has been carried out, the practical effect of the Court's observations is  difficult to ascertain with any accuracy, although in essence the Commission has honoured its  undertaking. How precise these undertakings are is not always stated in so many words, for example when the  Commission undertakes to give thought to a problem raised by the Court or to discuss an issue with  the Member States. In this context the Court refers to the questionnaire sent to the Directorate-General for  Agriculture. In the questionnaire it set out a selection of 50 observations taken from the reports  for the period from 1983 to 1988. In so doing, it made no allowance for the fact that some of the  points had been covered again in more recent reports - for example, public storage and clearance of  accounts. Furthermore, the Commission referred to any documents and decisions which existed and  forwarded copies of them to the Court as a matter of course so that it could monitor Commission  management. Nevertheless, the Commission did also try to set up a system for following up its undertakings to  the Court. The system chosen was a combination of a manual compilation of undertakings and  computerization of the results. It required lengthy inputting based on defining key words and no  check could be kept on what happened after the discharge period. The system was dropped as it was  not judged to be reasonably cost-effective. The Commission is at the moment researching a more economical and efficient system. This would  consist of a regularly updated data base of undertakings given. There will be a multi-criterion  interrogation system whereby cases can be selected according, for example, to the DG concerned, the  reference year, the paragraph in the report concerned, the type of measure involved and the  progress achieved in the case in question. The Commission's thinking, in other words, is moving in the same direction as that of the Court.  Once the system is operational, the Court of Auditors will be linked to it, which will no doubt  make for even closer collaboration between the two institutions. CHAPTER 1 Financial audit of the Commission's revenue, operating expenditure and financial  accounting and the consolidated accountsTHE IMPLEMENTATION OF THE BUDGET IN 1990The adoption and  presentation of the budgetPresentation of the budget1.2. Since the budget voted by the budgetary  authority contains the definitive revenue and expenditure figures for one financial year, the  Commission maintains that there cannot be any 'budget authorizations` or 'funds available for  payment` which differ from them. Carryovers of appropriations1.5. The reasons are set out in the reply to paragraph 3.16. The  carryovers, which were decided by the budgetary authority, concerned the Italian olive cultivation  register and the European Council decision of 14/15 December 1990 to grant food aid to the USSR  under the 1990 agricultural budget. 1.6. The ESF carryovers concerned 58 measures. The Court's remarks concern just six measures which were almost ready to be concluded; the  consultations on the programme or draft decision were virtually finished at 31 December 1990 but  had yet to be translated into book commitments. The six measures represent a total of ECU 35.44  million. In future, the Commission will take care to comply strictly with the rules. The use of national currencies to implement appropriations authorized and booked in ecus1.7. The  Commission has proposed to the Council that Regulation N° 1676/85 concerning the use of the green  rate in EAGGF/Fisheries transactions be amended. Once the amendment is adopted by the Council, the  problems connected with the exchange rates between the ecu, green ecu and national currencies  should be greatly reduced. Administrative expenditure charged to the section of the budget devoted to operating  expenditureQuantification of the mini-budgets1.12. The Commission takes the view that  mini-budgets could be created either directly through the remarks in the budget or indirectly using  the legal bases set out in the remarks. As regards the Phare mini-budget (Item B-9960), the  Commission admittedly gave a wide interpretation to Article 6(2) of Council Regulation N° 3906/89  of 18 December 1989 authorizing operating costs to be covered. The situation has now been finally  clarified by the introduction in 1991 of a specific heading in the budget. 1.13. It is correct that the internal regulations relating to mini-budgets prescribe an upper limit  for each budget heading to be fixed by the Commission. A procedure exists for adjusting these  ceilings. Some ceilings may have been exceeded independently of this procedure for technical  reasons to do with the problems which emerged when the internal regulations were being introduced.  However, the full and definitive entry into force of the internal regulations on 1 January 1991 has  completely solved the problem. 1.14     1.15. The reason why mini-budgets have such a low utilization rate is explained below. The new internal regulations only came into force fully on 1 January 1991, after a start-up period  during which a number of difficulties had been encountered in accurately defining and assessing  mini-budget expenditure. The budgetary authority, however, wanted to have the allocation between expenditure on operations  and support expenditure fixed in the 1991 budget. This allocation was based on initial estimates so  there was a possibility of the actual requirements being different. However, since one of the main objects of the internal regulations was to tighten budgetary  discipline over the mini-budgets, a low utilization rate could be considered a sign of success  especially when it is borne in mind that unutilized appropriations are systematically transferred  to the operational part of the policy concerned. 1.16. The Commission believes that the accounting system set up, and the booking codes in  particular, meant that in 1990, for the first time, it was possible to clearly identify headings  concerned by the mini-budget arrangements and the amounts involved. The situation is presented in  an annex to the revenue and expenditure account which sets out the budgetary implementation of  'mini-budget` items in 1990.1.17. The reasons why 100% of expenditure for some headings is of the mini-budget type - and not  additional to expenditure on specific measures - is that, as shown by the Court's examples (trade  cooperation, GATT talks, generalized system of preferences), there may be some Community policies  and activities which do not themselves give rise to operational expenditure but which do require  some support expenditure. In any event, the headings themselves and the comments clearly show the nature of the expenditure  (e.g. Article 940 - Organization of seminars on the Community's generalized system of  preferences). 1.18. It is true that, prior to adopting the internal regulations on mini-budgets, the Commission  had experimented with various types of booking code. Since the internal regulations were adopted,  however, there has been far less change in the definition and scope of the booking codes; the  system was even further simplified by the elimination of over 80 analytical codes at the beginning  of 1991. It is also true that there was some uncertainty about the correct booking of some expenditure  during 1990. As was said at paragraph 1.15 above, these were teething problems and the situation  has become much clearer in 1991. 1.19. The Commission's internal regulations were not in force for the carryovers from 1989 to 1990,  while no appropriations from 1990 operational budget headings were carried over to the new 1991  headings for mini-budgets in Titles A4 and B8. 1.20. The Commission believes the Court's criticism about the system's unreliability is somewhat  premature as it was only set up in May 1990 and did not become fully operational until the  beginning of 1991. By judging so hastily a system which has done much to improve the transparency  and the control of mini-budget expenditure, the Court has paradoxically called into question the  value of a serious attempt at administrative rationalization. The Court also questions the validity of the listings given to it, but this simply reflects the  difficulties encountered at the start of the system and which were referred to at paragraphs 1.15  and 1.18 above. When the revenue and expenditure account was drawn up, these difficulties had been  resolved and the annex to it gives a fairly accurate picture of the financial year. 1.21. With reference to the research objectives, only ECU 71 million can be considered mini-budget  expenditure. The other expenditure is made up of the salary costs and administrative and technical  costs of the JRC and shared-cost measures which have always been part of the operational research  budget. The details are set out in the tables of equivalence which form an integral part of the  budget. The mini-budget total associated with the structural Funds was ECU 370 000 in 1990. The infrastructure quotient1.22     1.24. Given that the budget remarks on the mini-budget  headings generally allow any related expenditure to be booked to the measure in question, the  Commission took the view that the mini-budget appropriations used for employing certain staff in  house should also cover the related infrastructure costs. The 1990 quotient of ECU 13 433 represents the average annual infrastructure costs per official. In July 1990, it was decided that in view of the appropriations available under Title A2 of the  1990 budget and of the forecast outturn, not all the quotient needed to be used and only 89,887  %  of the cost of using outside personnel in house was booked. Because of the type of expenditure involved (rent, insurance, security and maintenance) and the  need to make certain payments on fixed dates, it is not possible to match the calculation of the  infrastructure quotient to actual recruitment procedures. The calculation therefore has to be based  on recruitment forecasts. On 11 July 1990 the budgetary authority approved supplementary and amending budget 2/90 concerning  financial aid to the countries of Eastern and Central Europe other than Poland and Hungary  (geographical extension of the Phare programme). In order to finance the new requirements resulting  from this decision, the Commission had no other choice than to book, in November 1990, the total  installation and infrastructure cost of new staff to the headings concerned. Since this calculation was based on forecasts, the infrastructure quotient had to be adjusted in  1991 to take account of the numbers actually recruited in 1990 and of the recruitment forecasts for  1991. Given that each DG has a different quotient and since the Directorate-General for External  Relations is based for the most part in the Berlaymont and is responsible for Phare, it is not  unreasonable for the part of the rent corresponding to staff paid from mini-budgets to be charged  to the infrastructure quotient. Observance of the financial perspective1.25. The mini-budgets do not consist just of  administrative expenditure resulting from the daily management of the Commission's activities.  Although the expenditure is of an administrative nature, it is also used directly and specifically  in support of policies and certain operational measures so that it becomes, to some degree, part of  the measure itself. It is, therefore, quite logical for it to be classified under heading 4 of the  financial perspective. The Commission does, however, agree that the difficulties and constraints connected with heading 5  were also a contributory factor in the growth of mini-budgets. The management of mini-budget expenditure1.26. The Commission has provided for implementing rules  to complement the new regulation on mini-budgets which came into force on 30 April 1991 so as to  improve control of certain kinds of expenditure by the central departments responsible for  administrative expenditure and by the Financial Controller, and to make sure that all equipment is  inventoried. DG IX, which had its role recast by the Commission in January 1991, will be expected to provide the  necessary supervision to ensure that a coherent personnel (officials and non-officials) and  administrative policy is carried out. In practice, this means that DG IX will be expected to define, introduce, and supervise common,  coherent rules and mechanisms for the management of personnel and administrative appropriations  allocated to specific operations. 1.27. The 1990 budget remarks made explicit provision for the financing of auxiliary staff under  headings other than Item A1110. 1.28. While it is true that various kinds of appropriation are used to finance auxiliary staff, the  latter are all managed in the same way and according to the same criteria, with all contracts being  approved by DG IX. Conclusion1.29     1.31. The Commission considers that the Court's interpretation of Article 19 of  the Financial Regulation is too restrictive in that it attempts to rank the various criteria for  classifying expenditure items according to their type or use - something which the Regulation  itself does not do. Since the expenditure concerned is of an administrative nature but is used for operational purposes  - in that it provides direct support for specific measures - booking the expenditure to Part B of  the budget is not, in the Commission's opinion, a breach of the provisions of the Financial  Regulation. Such expenditure is, indeed, subject to the provisions of the Financial Regulation in  just the same way as other appropriations. 1.32     1.33. The Commission's new system has more advantages than those noted by the Court, since  support expenditure can now be identified, monitored and controlled. This represents a serious  attempt at administrative rationalization and budgetary discipline. Although there have been some  initial problems, they are not so serious as to justify the pessimistic attitude taken by the  Court. The weaknesses identified by the Court are nothing more than teething problems for which the  Commission has made the necessary budgetary and accounting adjustments. The case of the priority publications programme1.34     1.43. The management and accounting system  used for the priority publications programme was chosen by the Commission as being the most  suitable in that it provides a coherent and transparent framework for the specific programme of  priority publications on the main Community policies and activities. The Commission has carefully studied the Court's comments. In fact, it had already modified its  approach by entering a special heading for the programme (B3-305) in the preliminary draft budget  for 1992. The Commission hopes that the budgetary authority will approve this action and allocate  it the necessary resources. A transfer of appropriations has been proposed as a transitional  measure for the 1991 financial year. The role of the Financial ControllerWithholding of approval by the Financial Controller and the  overruling of such refusal1.44     1.45. There are a number of ways in which the Financial  Controller can express a negative opinion in writing concerning a proposal from an authorizing  officer; these range from the standard memo sent back by an authorized member of the Financial  Controller's staff, to a formal withholding of approval by the Financial Controller himself. During 1990, there were no cases of formal approval being withheld by the Financial Controller. The Commission can see no justification for taking this situation to mean that Financial Control is  not operating properly. Rather, it demonstrates the effectiveness of Financial Control's action  with authorizing officers during 1990. There was no need for formal withholding of approval - still  a very effective deterrent - because contentious transactions were always settled in some other  manner (e.g. dialogue, suspension of the dossier). In order to understand what Financial Control does, it is essential to take into account all  aspects of its operations. Accordingly, the Commission would refer the Court to the detailed  replies given to the Court's comments on the internal control system in its report on the 1988  financial year. 1.46. In the cases mentioned by the Court, there was no question of conditional approvals or of any  dilution of the approval system. Financial Control gave its approval after establishing that the expenditure was in order, conformed  to the relevant provisions and satisfied the criterion of sound financial management, as required  by the Financial Regulation. Each case was examined on its merits, with particularly close  attention being paid to the financial management aspects. Approval was only given if all the relevant criteria were satisfied. None the less, the approval procedure is a useful opportunity for Financial Control to make  suggestions to authorizing officers for improving management. The firm tone of the memos sent by Financial Control shows its determination to improve financial  management without this in any way undermining the system of approval. OBSERVATIONS ON THE LEGALITY AND REGULARITY OF THE OPERATIONS PASSED TO THE ACCOUNTS DURING THE  YEARSupporting documents used to validate operations passed to the accounts1.48. The Commission  accepts that the supporting documents used to validate operations passed to the accounts in respect  of the 1990 financial year were sent to the Court too late; this was due to pressure of work on  accounting staff owing to the introduction of a new computer system. The Commission agrees in principle to the Court's suggestion that documents be forwarded at monthly  intervals. Although this has not been easy to put into practice so far, the Commission has taken  steps to ensure monthly transmission in the future. 1.49.  (a) Payment orders transmitted for the ERDF and the EAGGF Guidance Section are always  accompanied by the documents required by the rules. It is true that the documentation may not  always appear to be complete. Sometimes, its sheer volume makes it difficult for it to be forwarded  to the Court. (b) The Commission shares the Court's concern regarding the supporting documents for payment of  advances relating to the local costs of development projects. The supporting documents were not always available for the following reasons: - the cumbersome administrative structure in recipient countries; - the imbalance between the constantly increasing financial volume of the aid granted and the  Commission's staff resources; - the priority given to some projects forced the Commission to postpone its own controls. The Commission is strengthening and extending control measures by employing local auditors to check  project accounts and by not making advances unless proper supporting evidence is provided for the  costs already incurred and the estimates on which the request for an advance has been based. Traditional own resourcesImplementation of the separate accounting system1.50     1.52. Since  Council Regulation (EEC, Euratom) N° 1552/89 implementing Decision 88/376/EEC, Euratom on the  system of the Communities' own resources was only adopted on 29 May 1989 (OJ L 155, 7 June 1989),  it was not until the second half of 1989 that Member States were able to take steps to implement  the provisions of Article 6(2) of the Regulation, which introduces separate accounts for  established entitlements that have not been recovered. The new features of the Regulation have forced national administrations to make a considerable  effort to adapt their procedures by setting up new accounting structures, drawing up implementing  rules and, for some, converting their computer systems. None the less, nine Member States forwarded  to the Commission quarterly statements which, because of the difficulties mentioned above, did not  all follow the same format. For its own reasons of cost-effectiveness, Denmark does not wish to keep the separate accounts  described at Article 6(2)(b) of Regulation N° 1552/89. However, it has agreed to enter all  established entitlements, whether or not they have been recovered, in the main accounts, and to  provide all the information required by the other provisions of Regulation N° 1552/89. On 14 June 1989, at a meeting of the Advisory Committee on Own Resources, the Commission presented  the Member States with a working paper analysing the provisions of the new rules concerning the  establishment, entry in the accounts and inspection of traditional own resources. Throughout 1990,  the Commission continued its efforts to secure uniform application of the Regulation, particularly  in ACOR discussions, and made proposals for establishing common interpretation criteria and for  facilitating the setting up of standardized national procedures. On 19 and 20 February 1991, the Commission organized a seminar on the innovative aspects of  Regulation N° 1552/89; the points raised then were taken up by the Commission in a statement made  at the ACOR meeting on 27 June 1991. In addition, the 1991 programme of Commission controls in  Member States provides for systematic control of separate accounting arrangements. 1.53. The Commission has regularly reminded Member States, especially at ACOR meetings, that they  are required to forward a quarterly statement by the due date. On 5 February 1991, the final  reminder for 1990 was sent out in writing to Member States, including the three referred to by the  Court. 1.54. The 1990 revenue and expenditure account shows, as separate items in its table of revenue,  all the established entitlements still to be recovered derived from the separate accounts  statements received from Member States by the end of the 1990 financial year. EAGGFEAGGF Guarantee SectionNational controls over expenditure1.55     1.56. The Commission  considers that the responsibilities of the paying agencies are clearly set out in Council  Regulation N° 729/70 (see also its reply to paragraph 3.47). It carries out checks to see if Member  States are complying with their obligations under the terms of the Regulation and, if necessary,  recommends improvements. Where appropriate, it makes corrections during clearance of the accounts. In paragraph 3.34 of its report, the Court maintains that it has no objection to the powers of  paying agencies being delegated to other bodies, provided there is adequate verification. The Commission agrees that such supervision is necessary and it has approached Member States  whenever it has judged the situation to be unsatisfactory. It has also carried out checks on the  bodies responsible for the controls. Where they have been found wanting, the necessary corrections  have been made during clearance of the accounts. The Commission also agrees that the delegation of powers referred to by the Court should identify  the body responsible for keeping the records (supporting evidence). Central accounts for expenditure1.58. As pointed out by the Court, there was a delay in entering  commitments owing to problems with the new computerized system, particularly as regards the  transfer to Sincom of data from the declarations of Member States held in authorizing DG systems.  No such delays occurred in 1991. Coordination of checks on elements common to guarantee and guidance expenditure1.60. The  Commission is just as aware as the Court of the great variety of control systems in Member States.  However, it has more faith in the effectiveness of the controls carried out by national authorities  than does the Court (see also the reply to paragraphs 9.23 and 9.24). 1.61     1.62. The Commission shares the Court's concern about poor coordination of checks on  elements common to guarantee and guidance expenditure. In the context of reform of the common agricultural policy, it will try to adopt a comprehensive  approach by encouraging Member States to group together, under a single mechanism, all the  management and control procedures for the various Community agricultural measures. Such a  rationalization would be facilitated if each farm kept records of all the essential data. The EAGGF Guidance Section1.63. The national legislation concerned was approved by the Commission  as complying with Regulation (EEC) N° 797/85. The Commission therefore believes that the  expenditure effected under this legislation was regular (see replies to paragraphs 9.17 to 9.19). Veterinary measures1.64. The Commission charged the last two commitments to Items 3800 and 3810  because it wanted to make the best use of the appropriations. In the case of Item 3800, commitment of the ECU 88 000 still available was made on the basis of  Council Decision 90/424/EEC in the light of the expenditure estimate sent in by Italy in November,  following the outbreak there of the cattle disease CBPP. The same applies to Item 3810. The ECU 3.1 million available was committed following examination of  the expenditure statement sent in by Spain in much the same way as for Item 3800. 1.65. After Parliament had entered an amount of ECU 0.5 million in the 1986 budget for varroatosis  control, the Commission took a decision (SEC(86) 2075) laying down the procedures for granting aid  to recognized Community beekeeping organizations. These provisions were extended by other decisions for subsequent financial years whenever the  relevant appropriations were entered in the Community budget. Since it was a pilot measure of uncertain duration, it was judged preferable to ascertain the  results obtained in the first few years before proposing that the Council adopt a regulation. The  Commission will soon be deciding whether to continue the measure and feels that it has so far  proceeded in a legally correct manner. 1.66. There are sound practical reasons why the deadline set in Article 4 of Council Decision  89/455/EEC providing for the notification of the programme by the Member State prior to its  implementation has not been respected. Oral vaccination of foxes should, for technical reasons, take place in spring and autumn each  year. The Commission was informed of the imminence of the Council's decision in July 1989 (finally  adopted in August) and it was then that it took the initiative to convene the representatives of  all the Member States concerned on 25 July. All the detailed plans for the autumn season were  informally approved by the Commission with Member States being requested to submit them officially  as soon as they were able. The plans were submitted between September 1989 and January 1990. Since these were national  projects embracing adjacent frontier zones and thus necessitating transfrontier cooperation, it was  decided to approve all the plans at the same time. Thus it was that the decisions taken on 23 May 1990 provided for the entry into force of these  plans prior to their official submission. Fisheries1.67. The problem of commitments in the field of fishery agreements being drawn up late  has to do with the fact that the funds the Community commits vis-à-vis non-member countries are  only decided when the negotiations are over and cannot therefore be fixed beforehand. None the less, all commitments and payments made by the Commission complied with the amounts  stipulated in the fisheries agreements. 1.68. Some payments were finalized late because the agreement had been drawn up much later than  expected. This is not a problem that has ever been raised by the non-member countries in question. 1.69. This operation was carried out so as not to delay the payment due to Greenland at the  beginning of the year and to allow Community fishermen immediate access to Greenland's waters. 1.70. Since the laying-up of fishing vessels was organized by the competent authority, the  Commission checked whether the amount of aid corresponded to the amount eligible under the  regulation for overall tonnage laid up. The checking was done on an overall rather than a  boat-by-boat basis. In view of the Court's comments, the Commission will take steps to recover the  sums in respect of the three vessels concerned. 1.71. This error could not have been detected by the control system in use at the time. Since then,  the system has been improved so that an application which is submitted can be checked against any  previous application. The Commission is taking steps to recover the undue payments. The social field1.72. Where the recovery of debts is concerned, it is best to allow the debtor  sufficient time to pay. In this connection there is a general rule which sets the deadline at the  end of the month following that in which the debit note was sent to the debtor (see Internal Rules  - 1991 edition, p. 277 - Internal procedure provisions concerning the collection of debts under the  EEC and Euratom Treaties; and p. 357 - additional information relating to the procedures for  utilizing the batch of forms making up the recovery order). Since some internal procedures can be rather lengthy, if the accounting officer finds that the  debtor does not have enough time to pay the debt, he will alter the deadline in accordance with the  principles laid down in the internal rules. This is what makes the debt recovery procedure work in practice, since otherwise the authorizing  officer would be forced to set a much longer deadline. 1.73. The cancellations scheduled for 1990 were delayed for administrative reasons. They will be  made in 1991. 1.74. On 21 November 1989, the Commission agreed in principle to contribute towards the events  organized as part of Europalia Japan. The agreement clearly stated that funding would be decided on  a case-by-case basis and for specific projects ('detailed concrete projects`). In a letter dated 29 January 1990, the Europalia foundation requested funding/cofunding for five  specific events in the programme. The commitment referred to by the Court covers only these five events and not Europalia's final  deficit. A final expenditure statement was submitted to the Commission on 23 July 1990, which was  accompanied by photocopies of invoices supporting the expenditure declared. The absence of a final report is explained by the fact that three of the five measures concerned  publications of which the Commission had already received copies. The two other measures were  already over when the application for financial aid was made (which is not contrary to the policy  on the granting of unregulated subsidies by the Commission) and were described in the annex  attached to the application. In giving his approval, the Financial Controller had full knowledge of the facts and all the  necessary supporting documentation. Research and energy1.75. The revenue and expenditure account gives a fair indication of the actual  costs of the COST and Teleman programmes even though, as the Court remarks, the launch of a  programme may occasionally involve using staff paid for out of other programmes. In the case of the COST and Teleman programmes, this 'personnel policy` was a consequence of  particularly low staff levels and the need to ensure that the programmes got under way quickly and  effectively; however, compensation was made later so as to restore the balance between the various  programmes. As regards the fields of information technology and telecommunications, it is true that some posts  paid for out of research appropriations, for example some Esprit posts, appear in the DG XIII  establishment plan as allocated to units other than the programme directorate. For the most part, these posts are to be found in central units with an interdepartmental role such  as finance or personnel management, which are themselves engaged in tasks that benefit Esprit. At the same time, some staff in the Esprit programme directorate actually come under the general  budget. Consequently, the directorate's overall resources are at much the same level as that  provided for by the programme decision. 1.76. Systematic monitoring of dormant commitments has been going on since 1 July 1989 following  the discharge resolutions for 1988 and 1989, and has meant that, in 1989 and 1990, 622  cancellations were made in respect of commitments between 1984 and 1989. The cases looked at by the Court all belong to what was in 1990 sub-heading 5 of the Esprit  programme, which mainly covered research and technological development projects to which the  Community contributes 50% of the costs actually incurred (the remaining 50% being borne by the  industrial consortium). The reason for not cancelling the commitments for these research and technological development  projects is as follows: When commitments are established to cover contracts the Commission is to sign on behalf of the  Community with a consortium of industrial partners, these commitments cover the maximum Community  contribution. The Community contribution can in no event exceed the amount of the commitment,  although it may be (and often is) below it: a project may cost less than expected to implement or  it may be cancelled if things do not go as planned or if it is overtaken by other technological  developments, in which case, the corresponding commitments are not paid in full and the sums  involved remain unused. On the other hand, some projects - and this is not unusual in RTD activities - cannot be finished  within the deadline laid down in the contract (sometimes three years in advance), or an extension  might be required if their scientific and technical objectives are to be fully achieved. Clearly,  this only becomes apparent towards the end of the project. Thus it is only towards the end of a programme that it can be said whether certain areas of  research and technological development require an additional input in order to bring their overall  objective within reach. Furthermore, because appropriations corresponding to cancelled commitments are in principle allowed  to lapse, and because appropriations which lapse during year n   P  1 can only be made available  again at the beginning of year n (Article 7 of the Financial Regulation), it was decided to make  the cancellations in 1991 (93 cancellations as at 30 June 1991) and request that they be re-entered  in 1992, the last year of the programme, depending on the needs of projects requiring extension or  completion. It should be added that there were seven non-RTD projects concerning contracts for the provision of  services which had a small surplus of man-days still available (amounting to ECU 250 423): these  have been cancelled since the Court's audit. Operations under Title 9Aid to non-member countries1.77.  (a  and  (b) The Commission agrees with  the Court as regards the closure of projects and the cancellation of outstanding commitments.  Unused commitments usually account for only around 5% of the total but the procedure is very  cumbersome and time-consuming, particularly when it comes to obtaining the agreement of the  recipient country. In 1990 a closure operation was undertaken in respect of 22 projects committed between 1978 and  1988 for a total of ECU 132 million. In 1991, 15  projects (amounting to ECU 15 million in  commitments) were cancelled. The operation continued in 1991, targeting 73 projects committed between 1977 and 1987 (ECU 30  million). Of these, 27 projects have so far been cancelled for a total of ECU 7 million. (c) The main reason why no start was made in implementing the commitments referred to by the Court  is that the recipient countries were not ready. The Commission will discuss the matter with them  further and then act accordingly. 1.78. The Commission plans to introduce a six-monthly procedure for cancelling balances in order to  improve control of the utilization of appropriations for non-member countries. 1.79. The Court's proposal will be considered once the computerized financial management system has  made sufficient progress. Aid to the countries of the East1.81     1.82. For political reasons, the Commission considered  that any assistance to Romania should come under the Phare programme. However, humanitarian aid was  needed so urgently at the time that it was not possible to wait for Romania to be included among  the beneficiaries of the Phare programme - although such an extension to the Phare regulation was  already envisaged. The Commission accordingly decided to provisionally charge the aid to Article  950 with a view to recharging it later to Article 996 after amendment of the Phare regulation. OBSERVATIONS ON THE PRESENTATION AND KEEPING OF THE ACCOUNTSThe financial balance sheet of the  Communities1.84. The institutions have always sought to achieve as close a reconciliation as  possible between interinstitutional current account balances: for several years, the procedure has  been that one institution immediately informs another of any reciprocal transaction concerning it. However, it will never be possible to achieve perfect reciprocity because the institutions do not  close their accounts on the same date; the new Financial Regulation, by obliging each institution  to transmit its accounts to the Commission by 1 March, may even lengthen the gap between the  closure of the accounts in the other institutions and the closure of the Commission's own accounts.  Once the other institutions have closed their accounts, the Commission may still have to charge  their current accounts in its books, (e.g. late imprest account entries); because it is too late  for such transactions to be recorded in the books of the other institutions, they appear as an  unreconciled balance once reciprocal entries are cancelled out prior to consolidation. This leaves two possibilities: either create an artificial situation of perfect reciprocity by  transferring the unreconciled balance to some form of revenue or expenditure suspense account, or  else recognize the fact that unreconciled transactions are an interinstitutional peculiarity and  leave the balance in the current accounts. The Commission considers the latter solution to be more  transparent; moreover, the situation is correctly described by the remark accompanying the relevant  item in the consolidated balance sheet. The keeping of the accounts in the Commission's balance sheetTreasury management1.86. The  Commission agrees with the Court about the maintenance of minimum bank balances. The computerization of the Treasury function which is now under way provides for a procedure based  on objective data allowing the optimal level for cash balances to be determined systematically. 1.87. The Commission will set down the appropriate rules in writing. Information concerning payments1.88     1.90. The Commission agrees that information on payments  needs to be improved. The situation will be better by the end of 1992 once Sincom has been extended  to the cash and treasury functions. One of the modules deals specifically with treasury  management. Sincom data are not currently accessible in a form adapted to treasury requirements; the Commission  will be looking into simple ways of giving the Treasury the information it requires. Cash transmission1.91     1.92. The Commission has begun to comply with the Court's request that  cash transmission duties should be segregated. Thus the official responsible for arranging  transfers only has access to the cash transmission coding system if staff shortages necessitate it;  once the situation is back to normal, the password giving access to the transmission system is  always changed. Reconciliation of accounting systems1.93     1.94. The delay in the reconciliation of the bank  accounting system and the general accounts was due to the heavy workload. It was brought up to date  before the Commission's balance sheet as at 31 December 1990 was produced. More generally, the Commission agrees with the Court that the reconciliation of the two accounting  systems should be performed in a systematic manner. This procedure will be introduced as soon as  the computerization of the treasury function is completed. Balance sheet item1.95. The JRC has taken the Court's comments on board and now physically checks  items listed in the inventory. The gradual decentralization of the JRC, which is accompanied by  increased responsibilities for the various institutes, will facilitate implementation of the  necessary measures. 1.96. JRC accounts will in future require the authorizing officer to supply detailed supporting  documents. Some such documents relating to 1990 have already been sent to the Court. 1.97. The Commission apologizes for not having detected this posting error during the final  controls before publication of the accounts. In mitigation, this was the first time the Commission  had only a month to prepare the accounts and the final controls were not as extensive as in  previous years. However, the two items concerned by the reversal of the amounts come under the same heading in the  consolidated balance sheet and it is only the breakdown given in the remark accompanying the  heading which is incorrect. The revenue and expenditure account: recording of payments, payments on account and advances1.98      1.108. In the Commission's view, the new Financial Regulation is perfectly coherent on the  distinction between payments by instalment ('acomptes`) on projects and contracts, and the payment  of advances which - apart from the special case of the EAGGF - are limited to the staff of the  institutions. Although payments by instalment are sometimes also described as 'advances`, a clear distinction is  maintained in the accounts: - payments by instalment ('acomptes`) are charged directly to the commitment concerned and to  budgetary payment appropriations; - advances to staff (for instance on mission expenses) are charged to an extra-budgetary holding  account until the advance is repaid or cleared by payments on the appropriate budgetary lines. Staff receiving advances are debtors of their institution until the advances are refunded or  cleared. Outstanding advances at the end of the year appear under 'debtors` in the balance sheet of  the institution. The beneficiaries of payments by instalment, on the other hand, are creditors of the institution  and receive the instalment as Article 46 paragraph  1 of the financial Regulation makes clear 'in  accordance with the rules governing the policy concerned or in accordance with contractual  provisions` or on the same terms as any other budgetary payment. The payment arrangements are similar to those for subsequent payments except that the first payment  order 'shall be accompanied by documents establishing the creditors claim to payment of the  instalment in question`. The settlement of this claim does not create a debt to the institution, unless the beneficiary  fails at any stage to comply with the regulations or the contract concerned, in which case all  stage payments so far received and not just the first instalment, are subject to review. The legislator did not follow the Court's proposal that 'definitive` payments should be identified  in the account: the Financial Regulation makes no further distinction between payments by  instalment and other budgetary payments. The notion that some interim payments made under  regulations or contracts are more 'definitive` than others is in any case questionable until the  project/contract is completed and the final payment is due. In the Commission's view, current projects or contracts need to be monitored at all stages up to  final closure and not just after the payment of the first instalment. In programming the development of its computerized accounting system (Sincom), the Commission has  included the means of systematically monitoring the status of outstanding commitments, whether at  the first instalment stage or any other intermediate payment stage. The computerized budgetary accounting system (Sincom)1.110. Since the systems analysis of the  Sincom project took place before the concept of appropriations made available again was introduced  into the Financial Regulation, the system started out without any proper facility for separately  monitoring them. Appropriations made available again had therefore to be grouped together with  another type of appropriation - appropriations carried over - during the system's first year of  operation. Alterations have now been made to the system so that these new appropriations can be  separately monitored in future. The new version, which ensures that the two types of appropriation  are not mixed up, became operational on 1 January 1991. In response to the Court's request in its report on the 1989 financial year (paragraph 1.10), the  Commission did in fact take steps to show execution of the two types of appropriation separately  once the 1990 accounts had been closed. It accordingly carried out an ex post analysis based on  individual commitment transactions so that the information in the new annexes (B2 and B5) to Volume  II of the revenue and expenditure account would be accurate. 1.111. Like the old system, the new one did not, in its first year, allow separate monitoring of  appropriations entered following a contribution from third parties to Community programmes. To  avoid any confusion in the computer bases between these appropriations and the appropriations for  the financial year, the Commission entered the appropriations relating to the contributions of  third parties to the Comett programme in an account normally used by the external offices for the  management of appropriations carried over. However, just as it did for the presentation of  appropriations made available again (see paragraph 1.115), the Commission segregated these  appropriations from appropriations carried over for the purpose of their presentation in the  revenue and expenditure account (the appropriations relating to contributions from third parties  are covered in Annex B4 for commitment appropriations and Annex C3 for payment appropriations). In  the closure of the 1990 accounts the Commission was thus able to satisfy the request made by the  Court in its report on the 1989 financial year (paragraph 1.7). The new version of the Sincom programme came into operation in January 1991 with a facility for  separate monitoring in the databases of financial contributions from third parties, so there will  be no need in future to adopt the expedient used in 1990. As regards the presentation of appropriations relating to contributions from third parties in the  monthly report on the implementation of the budget, this too was changed in January 1991 in  response to the Court's remarks in its report on the 1989 financial year - as a result, these  appropriations and appropriations deriving from transfers can no longer be confused. The tables  group together the appropriations available in three large homogeneous categories: appropriations  entered in the budget (including supplementary and amending budgets and transfers); additional  appropriations (appropriations made available again and those relating to contributions from third  parties); and appropriations carried over. 1.112. The Commission does not consider the case mentioned by the Court to be an anomaly in the  accounting system. To avoid all misunderstanding, it is worth recalling that the management of  funds from third parties falls into two distinct categories: - one is where the Commission manages contributions from third parties which are officially entered  in the budget and to which Article 4(2) and Article 96 of the Financial Regulation generally  apply  - cases such as Comett and some of the JRC's research activities; - the other is where the Commission, as has sporadically been the case for a number of years,  provides, at the request of third parties and in the course of its duties, facilities of an  exclusively logistic nature for the management of funds entrusted to it by these third parties. For  example, some third parties - mainly from EFTA - approached the Commission in connection with  European Tourism Year to ask it to manage certain funds for them, since the Commission, with the  appropriations in Item A-3052, was already active in this area. Funds falling into this second  category are actually posted to an account outside the budget and, since there is absolutely no  overlap with the budget itself, there are no authorization procedures, accounting implications, or  statements of accounts either. The Commission is well aware of the distinction between these two categories of transaction and has  clarified their treatment in the recent draft regulation laying down detailed rules for the  implementation of certain provisions of the Financial Regulation (SEC(91) 201 final, of 18   February 1991) by laying down the appropriate framework for each case (see Articles 145 to 149 of  the draft). The Court of Auditors has already given a favourable opinion of the Commission draft. Although the way in which the second category of funds is managed means that they do not figure in  the revenue and expenditure account, for procedural reasons they are monitored in line with the  provisions applicable to budgetary appropriations and within the same Sincom module. Until the end  of 1990, there was no facility in Sincom for monitoring these funds separately; they were therefore  booked to an unused budget account for the heading in question (without this entailing any entry in  the revenue and expenditure account). Since January 1991, there has been a separate Sincom facility for monitoring these transactions so  there should not be any danger of them being confused with transactions involving budget  appropriations. 1.113. The Commission recognizes that there were a few problems with Sincom in its first few  months. It has closely checked the consistency of the system's databases by, for example, producing  listings designed to detect any discrepancy between the individual transactions and account  balances. As a result of these checks, some year-end corrections were made before producing the  final accounts. 1.114     1.116. The Court's access to Sincom was arranged in July 1990 through an exchange of  letters between the Directorate-General for Budgets and the Secretary-General of the Court. The  Court was connected to Sincom on-line (screen) in September, as soon as the system was sufficiently  advanced and continued to receive the paper 'batch` output as from the previous (NCR) accounting  system. The Court's access to the Commission's accounts has in fact improved considerably. Since  then, there have been no changes affecting the Court's access to Sincom. In this connection, the application of the provisions of the Financial Regulation referred to by  the Court should be designed to maintain an appropriate distinction between the means available for  internal management control on a daily basis and those required by an ex post external audit which  is restricted to transactions entered in the accounts. It was on this latter basis that the Court  was given access, provision being made to allow open access for systems audit purposes. The Commission is willing to cooperate with the Court in working out a system of access which would  take account of the points raised by the Court while maintaining the distinction between functions  and between means of control referred to above. CHAPTER 2 RevenueIMPLEMENTATION OF THE BUDGET2.1.  (d) When the balances were  established in October 1990 it was quite impossible for the Commission to take account of the  results of its controls on national VAT returns for 1989. VAT returns for year n must as a rule be  notified to the Commission by 31 July of year n+1. The Commission carries out its controls in the  course of the following few months and corrections that are then needed, and accepted by the Member  States, can only be taken into account for the balances established in October of year n+2. (e) Regarding controls carried out in 1989 and earlier years, there were still five Commission  reserves outstanding on 31 August 1991. These should be settled by 2 December 1991 in accordance with the rule laid down by the Commission  (see answers to the Court's report for 1989, point 1.80 on page 228) to the effect that all  reserves entered on a VAT control for year n generally lapse on the first working day of December  in year n  +  2. There may be exceptions if problems arise with the interpretation of legal instruments or if there  are technical problems in compiling the requisite data. 2.3.  (a  and  (b) As the Commission stated in its answers to the 1989 report (point 1.65), it did  not enter the entire 1989 surplus in the 1990 budget by way of an SAB because this would have had  the result of applying a VAT rate not complying with Article 2(4) of the Council Decision of 24  June 1988 on the system of the Communities' own resources. Parliament supports the Commission's  interpretation but the Council, which does not, has referred the question to the Court of Justice. (c Article 6 of the Decision of 24 June 1988 provides that 'The revenue referred to in Article 2  shall be used without distinction to finance all expenditure entered in the budget of the  Communities`, and this in the Commission's view includes the EAGGF monetary reserve. The Commission  accordingly considers that by including the monetary reserve in the calculation of the VAT resource  it has applied the rules correctly. The GNP resource is a back-up resource to be used to balance  expenditure and revenue and need not be used unless the others fail to cover the full amount of  expenditure, including the monetary reserve. 2.5.  (a When preparing SAB N° 3/1990 at the beginning of October 1990 the Commission was lacking  part of the information it needed to calculate the final amount of the refunds to Spain and  Portugal, and particularly the figures for the GNP correction used to calculate the GNP balance. Moreover, the margin available under heading 5 of the financial perspective for 1990 was not wide  enough to cover all the appropriations needed. The Commission accordingly proposed that the margin  be entered in SAB N° 3/1990 to finance part of the amounts due and, in its 31 October 1990 proposal  for revision of the financial perspective, called for technical adjustment of heading 5 to release  enough money to cover the Community's obligations to the Member States. After the budgetary  authority had taken the decision approving the revision, the Commission then entered a  supplementary appropriation of ECU 110 million in the 1991 budget to cover refunds due in respect  of 1990. (b) A Member State which at the beginning of December 1990 owed balances and adjustments to VAT and  GNP resources for 1989 and 1988 and to which the Commission was to refund part of these resources  preferred to pay over the net amount, that is to say the difference between its debit and credit  positions, instead of paying over the gross amount and receiving the refund. As soon as the appropriations were available the Commission made out payment orders for the  refunds. The amount authorized for the Member State that had paid the net amount of VAT and GNP  balances and adjustments was not paid to it but offset against its debt. The full amounts of the  revenue and expenditure were entered in the budget; so this was a simple debit/credit operation  requested by the Member State. THE VAT RESOURCERevenue collectedAmounts collected to be taken into consideration2.10.  (b) The  Commission would point out that in these cases its controls on national annual VAT base returns  give an opportunity to correct the intermediate figures in the light of final revenue figures  ascertained from national accounts. 2.11.  (b) The observation made by the Court in its 1984 report served to illustrate the  difficulties of applying the revenue method (the old 'B` method). It did not warrant a conclusion  that amounts collected by Italy under the 'condono fiscale` law were not included in the VAT  revenue to be used for calculating the VAT base. As soon as the fact was realized by the Commission in 1989, it was able to recover resources due  for 1986, 1987 and 1988 which, for a posteriori corrections, fell within the limits set by Article  10b(2) of Regulation (EEC) N° 2892/77 (as amended). Delays in passing VAT revenue to the accounts2.12. The Commission would recall that national VAT  accounting procedures have not been harmonized in the Community. 2.13.  (b) The Commission is aware that in certain Member States, including Italy, there is a  time-lag from one year to the next between the collection of VAT revenue by local offices and the  entry of amounts collected in the budget of the State concerned. The Commission considers that this is an acceptable state of affairs, provided the revenue not  entered at the end of year n is properly registered in year n  +  1. Analysis of this phenomenon in Italy for the period from 1979 to 1988 has revealed that amounts  entered in the budget are not routinely lower than the amounts collected by local offices in the  same year. Considering more specifically the 1989 VAT revenue carried forward to 1990 as observed by the Court  in Italy, the amount is indeed higher than usual. The Commission's information is that the rise is  due to exceptional circumstances such as a bank strike and the introduction of a new revenue  centralization system which, while potentially more efficient, has been difficult to put into  operation. The Commission is studying the problem with the Italian authorities. Changes to the collection system2.16. Given that Spain introduced the Community VAT system only in  1986, and Greece only in 1987, and given the scheme of periodic VAT returns, the VAT revenue  actually collected by the Member States in the relevant years did not correspond to the equivalent  of a year's total VAT revenue. The Commission therefore felt the need to ask those countries to  reconstruct one year's VAT receipts in order to determine VAT bases equivalent to those of the  other Member States. 2.17.  (a) The Commission already explained this point in its answer to the Court's report on 1989  (point 1.76 on page 127). Since the Commission was not in a position to draw attention to the  problem before making its controls in 1989 on the return for 1988 notified to it in 1989, the  amount involved was recovered when the balances were established on 1 December 1990. (b) The accelerated reimbursements to Danish exporters are due to the fact that the deadlines for  lodging VAT returns have been changed, now being weekly rather than monthly in many cases. This is  authorized by the Sixth VAT Directive, which leaves the Member States to establish return periods,  and entails no corrections to the VAT base for Denmark. Corrections and compensationsGeneral observations2.20. Some of the derogations allowed by the  Sixth Directive were abolished by the 18th Directive in July 1989 and the Commission will shortly  be proposing abolition of most of the rest. 2.21. Corrections not provided for in the rules are evidence of temporary infringements of the  Community legislation; proceedings are in hand accordingly. The concepts of 'solutions` and 'authorizations`; Harmonization of calculation methods2.26      2.28. The Court's remarks highlight the complexity of the technical problems surrounding the  determination of the national bases; the Commission has always endeavoured to find consistent  solutions through the horizontal examination of calculations of compensations. The Commission agrees with the Court that the distinction between 'solutions` and 'authorizations`  is a purely formal one as regards the calculation of certain compensations, but the sometimes  artificial nature of the distinction has no impact in practice on the actual calculations. 2.28.  (a  and  (b) In order to intensify this effort to apply consistent solutions, the  Commission's controls on the 1989 returns concentrated on a series of compensations common to  several Member States. The compensation singled out by the Court, relating to limitations on the right to deduct in  respect of vehicles for business use, was one such case. To place the Member States on an equal footing and produce comparable results, the same calculation  formula was used for all the Member States. If it is to achieve its aim this formula must, however, be based on the best available figures and  on parameters reflecting the differences between national tax law systems. This explains the divergences observed by the Court. (c) The coefficient for private use of company cars was studied by the Commission on this  horizontal basis; it was ascertained that the parameters were perfectly comparable except in  Belgium, France and Italy. Following Commission requests for correction: - Italy corrected the calculation of the compensation and paid additional own resources of ECU 16  million or so; - Belgium agreed to review its calculation in the light of a special study to be completed in  1992; - discussions already commenced with France should be concluded by the end of 1991. 2.29. Positive compensation (in favour of the Commission) for the exemption of securities  management was calculated for three Member States: - the input deduction rates for overheads in Germany and Luxembourg are quite comparable, given the  differences between the two countries' banking structures; - Denmark refrained from making the deduction, which increased the amount of the positive  compensation as it cannot break overheads down between these operations and other banking  activities. Lack of precision in the regulations2.31. Since all the Member States are considering the  possibility of using the calculation method accepted by the Court of Justice for compensations for  operations in Annex F to the Sixth VAT Directive, this method will probably constitute the new  uniform method. As for the calculation of compensations for operations listed in Annex E to the Directive, the  Commission has withdrawn the reserve referred to by the Court. Compensations of this type will consequently be calculated in accordance with the applicable  uniform method. 2.32. As the Commission explained in relation to point 2.28, it certainly does not leave the Member  States free to select their own methods of calculating compensations but has regularly taken the  initiative of proposing harmonized methods so as to achieve consistent solutions and comparable  results. Since several derogations from the common system of VAT have already been abolished (see point  2.20), the risk that the Member States might cut their VAT liability by means of minimalist  compensations is unlikely to grow worse. Despite the risk alluded to by the Court, the fact is that certain Member States overestimated the  compensations, to their own detriment (see points 2.29 and 2.33(a)(i) regarding Denmark and point  2.34 regarding Italy). The quality of the estimates2.33. (a)(i)It was at the Commission's request that Denmark updated  the calculation of the compensation for petroleum products, which was based on 1979 statistical  series. VAT bases for recent years will be corrected in Denmark's favour. (a)(ii)It is inevitable that Greece uses 1980 input-output tables for calculating compensations,  since they are the most recent available. (a)(iii)This is the positive compensation calculated by Luxembourg for the proportion of  international rail passenger transport occurring in its territory. Since the compensation is calculated from approximate estimates, the percentage relating to the  sale of tickets to taxable persons in relation to total sales is set at a standard 20%. There is no reason to believe that it will vary from one year to another. (a)(iv)The negative compensation for taxation in Belgium of services rendered by travel agencies in  respect of journeys outside the Community is based on the most recent sources of the three kinds of  information: - the number of journeys is based on a 1985 survey, whose results are updated using more recent  figures supplied by the trade; - the unit price per journey is based on a 1981 survey, whose results are updated by the consumer  price index; - the profit margin is set periodically by Belgian tax legislation. (b)(ii)This point was considered in the course of the Commission's last control on the 1989  return. It was found that agricultural statistics used for determining the VAT base and ESA data were  obtained from the same source. The differences are due to the very nature of the calculation that  has to be done for own resources purposes. To calculate the upstream tax burden, the data are modified to exclude the activities of  non-taxable persons from the VAT field. (b)(iii)These are the only available data; they are vital to the correct calculation of the  compensation. (b)(iv)All the data used by the Member States to calculate the compensation for the exemption of  military procurement are classified as secret. The Commission can only check for plausibility and see that the data are properly used. External  trade statistics give at least a partial view of the problem; the Commission concluded from them  that Spain's orders of magnitude were plausible. 2.34. The Commission considers that the calculations of some compensations do not qualify for a  general accusation of laxity. As the Commission's explanations show, they are all controlled by the Commission, which makes every  effort to see that they are calculated by the strictest parameters, both in terms of each national  compensation and horizontally for each type of compensation in relation to all the Member States. Regarding the two compensations referred to by the Court in Greece and Italy, the Commission would  make the following remarks: - it can be seen from control papers for 1987 and 1988 that the Commission did not accept the  figures used in 1987 for Greece's calculations for the negative compensation for petroleum products  and cars;- the downward variation referred to by the Court in Italy's calculation of a positive compensation  flows from the greater accuracy of the data now used in the calculation. The current data are taken  from tax returns, whereas estimates were used previously. Conclusion2.35. The Commission does not agree with the Court that deficiencies in the  harmonization of VAT assessment bases preclude any kind of guarantee of fair treatment of the  various Member States. The Commission would recall that the very purpose of the Community rules is to treat the Member  States fairly by calculating the corrections needed to offset the positive or negative effects of  these deficiencies. Moreover, the calculations made by the Member States to this end are examined by all the Member  States in the Advisory Committee on Own Resources. The Commission believes it has done all it could - and in any event it will continue to do all it  can - to see that the rules are strictly applied despite the complex variety of disparate  situations to which the Court rightly refers. 2.36. At points 2.12, 2.13(b), 2.16 and 2.18, the Commission explained that the variety of  practices engendered by differing national tax rules was no bar to the proper collection of own  resources. 2.37. The Commission believes that, since there are so many cases of so many different kinds in  which corrections or compensations have to be calculated, it would be inconceivable to try and  implement detailed rules specifying the calculation methods. But, as it stated in answer to points 2.26 and 2.28, the Commission sees no need to seek uniform  solutions for the determination of corrections and compensations. 2.38. The Commission agrees with the Court that full attainment of the objective of fair treatment  for all Member States entails a further Commission effort to improve the comparability of data  needed for the establishment of the national VAT assessment bases (see answer to point 2.37), to  see that national VAT laws are in conformity with the Community legislation (see answer to point  2.21) and to pursue the harmonization of those laws (see answer to point 2.20). IMPORTS OF MOTOR VEHICLESSuspension systemsTemporary storage2.44. Under the current directive it  is for the national authorities to assign a customs arrangement to goods in temporary storage where  there is a breach of the prescribed periods. The Community rules applicable from 1 January 1992 are  clearer on the approach to be followed. By Article 19 of Regulation (EEC) N° 4151/88, the customs authority is required without delay to  take all necessary measures, including the sale or destruction of the goods, to regularize the  situation of goods when formalities are not commenced within the prescribed period. Warehousing procedure2.45. A proposal for a Regulation was laid before the Council which, on 25  July 1988, adopted Regulation (EEC) N° 2503/88 on customs warehouses. The new rules will be  implemented from 1 January 1992 under Commission Regulation (EEC) N° 2561/90 of 30 July 1990. Among other things these regulations specify the places that may be approved as customs warehouses,  the standard and simplified entry and exit procedures, usual types of handling and the obligation  to keep stock accounts. There is also a requirement to demonstrate the economic justification for the procedure when  applying for it. 2.46.  (a) The current rules give an exhaustive list of operations that may be regarded as usual  handling. The conversion of passenger cars into utility vehicles is not on the list and cannot  therefore be within the definition; it can only be done under the inward processing arrangements,  complying with the rules applicable thereto. The new rules preserve this situation. The Commission's services will examine this case with the country in question in order to clarify  the situation revealed by the Court, and to determine whether there are own resources to be  recovered. (b) Open warehouses are expressly provided for in the new rules and will be authorized in all  Member States. The current directive covers the customs warehousing procedure, which can be applied  to goods held in places not authorized as warehouses provided other conditions are satisfied. (c) The current rules are silent on the frequency and scope of checks on the customs warehouse  procedure. The general principle that checks are to be made in the light of the risks that each  procedure can generate applies here, the customs authorities of the Member States being responsible  for them. Inward and outward processing2.47. It is true that the rules on inward processing allow the  economic conditions to be considered satisfied when the value of imported goods per authorization  and per annum does not exceed ECU 200 000. The amount of detail to be borne in mind when deciding whether one item is in the same class as  another is not specified. The result may well be differences of interpretation as between Member  States. The Commission will consider, with the appropriate Committee, whether there are such  differences and whether the rules should be tightened up. It is for the customs authorities in the Member States to check for compliance with authorizations  given. Use of suspension systems2.49. The Commission considers that too many products are concerned for  the preparation of product monographs to be a practicable exercise. Customs valueProcedures for checking declared values2.51.  (a) Where the customs value is  determined by the transaction method, the Member States should ensure that invoices are always  presented with the declarations for release onto the market or no later than the prescribed  periods. (b) The DV 1 document must be properly and accurately completed if the rules on customs evaluation  are to be applied correctly. (c) To simplify formalities Regulation (EEC) N° 1496/80 provides for derogations from the  obligation to present a DV 1 form (e.g. where the imported goods are worth less than ECU 3  000 or  have no commercial value). The derogation for goods imported on a regular basis on the same terms from the same supplier to  the same buyer is that the importer must supply all the DV 1 particulars whenever there is a change  in circumstances and in any event once every three years. This last derogation is optional, but the customs authorities are entitled to check a posteriori  for accuracy of the particulars on a customs declaration. Value reductions2.52.  (a) The proper treatment for customs value purposes of repair costs borne  by the importer under a guarantee given to the purchaser is being considered in the context of the  existing legislation, and an inquiry is in motion into the operation of the procedure used by the  authority concerned in this case. The Court will receive a separate answer as soon as possible. (b) Commission Regulation (EEC) N° 1495/80 (as amended) provides that for the purposes of the  second paragraph of Article 4 of Regulation (EEC) N° 1224/80 'Apportioning the price actually paid  or payable shall also apply in the case of the loss of part of the consignment or when the goods  being valued have been damaged before entry into free circulation`. The techniques used by the customs authorities to establish the scale of the damage may vary  according to the customs techniques being applied but always respect the principle that the change  to the price paid or payable in respect of such damage will not exceed the real estimate. Regarding the specific cases mentioned here, it is vital for customs procedures to ensure that  damage to vehicles in transit should be registered at the proper time and that the amounts  corresponding to it do not exceed what the Regulation allows. Second-hand vehicles2.53. It is true that the general Community rules on value for customs  purposes must be applied to determine customs duties payable on commercial imports of second-hand  vehicles. But the Member States may apply different evaluation techniques for the purposes of assessment to  purely national taxation such as excise duties. Evaluation exercises2.54. The Community rules follow the GATT Agreement on customs valuation in  designating the transaction method as the first method to be used for the purpose. The attraction  of the Agreement is that it is based on the reality of a liberal trading system. But it also means  that importers enjoy no 'room for manoeuvre` outside what has to be proved, with documentary  evidence, on customs declarations. The GATT Agreement was adopted in response to the need for a fair, uniform and neutral system of  customs valuation, recognizing that value has to be determined by fair and simple criteria  respecting commercial usage. Its aim is to avoid giving favoured treatment either to importers or  to the customs authorities in the operation of the valuation rules. The customs authorities always have the power to reject requests for the transaction method to be  applied if there are doubts - or insufficient evidence - as to the factors to be used in  determining the value. Customs controls2.55     2.57. The Commission takes note of the Court's observations regarding  customs controls and shares its concern. It must emphasize that the organization and practical operation of controls are the Member States'  own responsibility. It is not possible for Community law to regulate every detail of them. The Commission is fully aware of the difficulties they can engender. The problem could be solved if  two basic instruments were put in place (but this has not been possible so far, given the new  priorities imposed by the target of achieving the internal market by 1993): - the coordinated development of computerized administrative procedures (CD project approved by the  Council Decision of 4 February 1986) in the Caddia context, with a view to establishing  data-processing facilities enabling the Commission and the Member States to retrieve and process  any information needed to perfect the customs union rules; - the Community Customs Code and its implementing rules, combining the current mass of dispersed  provisions in the interests of simplicity, clarity and transparency for the benefit of the  authorities and traders alike. In addition the Commission is currently working with the Member States on the possibility of  introducing new working methods throughout the customs services, and in particular new risk  analysis and audit techniques. The introduction of these methods was recommended by a study on 1992  and the customs union prepared by the Maastricht European Institute for Public Administration in  1990. THE OUTWARD PROCESSING SYSTEM2.59     2.74. The position here is different from that for inward  processing in that the economic conditions are defined in purely negative terms. A further  difference is that neither the Council Regulation nor the Commission implementing Regulation gives  any details as to the evaluation of these negative conditions. This flexibility is the result of  the difficult negotiations to attain the requisite majority for adoption of these instruments in  the Article 113 Committee. Even so, the customs authorities have to evaluate the economic conditions before authorizing  outward processing (Article 3(1) of the implementing Regulation): the Commission will draw the  Member States' attention to this at the next Committee meeting. The Commission has also noted the Court's observations on the consequences of the failure to spell  out the economic conditions for outward processing and will propose that the Committee consider  adopting Community legislation to define and specify them. Procedures adopted by the Member States to 'simplify things` when calculating the amount of the  exemption will be examined in depth and appropriate measures will be taken if they turn out to be  contrary to Community rules. Delegations to the Committee on Customs Procedures with Economic Impact will be asked, at the next  meeting, to verify the checking procedures used by their authorities and to strengthen them if  necessary.FINES, PERIODIC PENALTY PAYMENTS AND OTHER PENALTIES2.76.  (a) As the Court observes, it sometimes  takes time to notify a decision imposing a fine. This is because the full text has to be translated  into all Community languages. In 1990 there was only one case of late notification. (b  and  (c) The only means the Commission has of ascertaining the date of receipt of the letter  notifying its decision is the advice of delivery returned to it by the postal services. In some cases it has been returned late and in some it has never come. Consequently every letter of  notification contains a form on which the addressee declares that he has received the letter on a  specified date. In any event, if the postal services return the advice of delivery, that is what  counts since it is issued by a third party (the post office). The recovery order is no more than an accounting paper in the case of a fine whereas in the general  case it constitutes the debit advice to the debtor; it cannot be established before the Commission  receives the advice of delivery. The due date has to be established on the basis of the advice of delivery which, as we have seen,  is not always returned by the postal services. (d) The routine notification of judgments given by the Court of Justice or the Court of First  Instance to the Accounting Officer has suffered somewhat as a result of the recent reorganization  of the European Courts and their jurisdiction. Practical measures to deal with the problems observed have been agreed on by the departments  involved. 2.77. The system of imposing fines and obligations comprises two quite separate parts: the  procedural part leading to the notification of a fine, followed by the financial part directed at  the collection of the fines imposed. Even if the Court has detected procedural deficiencies, it is not true to say that 'there has not  been any fundamental change in the situation`. The Court's criticisms have not highlighted any  specific deficiencies in the financial area stricto sensu. 2.78. The Commission accepts the Court's proposal and will henceforth include bank guarantees in  its accounts. The Commission enters interest on arrears in the same item as the principal (Article 710) because  Article 700 (interest on arrears) is reserved for interest due on own resources. In the preliminary  draft budget the Commission proposed opening a specific item for interest on arrears in other  areas; this would help distinguish interest from principal in the case of fines. The Accounting Officer has to await collection of the principal before entering interest in the  accounts, since interest is calculated from the date the fine falls due to the date of actual  payment. It is only from the latter date that the amount can be established. The argument against entering the amount of the fine in the accounts from the date of notification  - the fine being payable regardless of any appeal to the Court of Justice (Article 185 EEC) - is  that interest on arrears depends wholly on the Court's judgment. Consequently there is no credit  position to be established since it is not certain, not liquidated and not recoverable. CHAPTER 3 The European Agricultural Guidance and Guarantee Fund, Guarantee  Section (EAGGF-Guarantee): Management and budgetary controlBUDGETARY DISCIPLINEEarly warning  system3.5     3.8. Decision 88/377/EEC on budgetary discipline must be taken as a whole: Article 6  cannot be considered in isolation from its context. Under Article 5 of the Council Decision, constraint, i.e. compliance with the guideline, is  global. The objective of controlled growth of expenditure by chapter is difficult to achieve in practice,  at least under the current CAP system, because of the many unpredictable factors affecting  expenditure. EAGGF Guarantee appropriations by chapter are therefore to be seen as evaluations, in  that they relate to requirements which may develop as the budget is implemented. Article 8 quite  logically provides for the possibility of making transfers. Article 6 defines the nature and scope of management by chapter. It contains two main notions: - monitoring of expenditure by chapter, with the aid of the early warning system as a tool for  information, reference (monthly indicator) and monitoring; - the Commission is obliged to react to the signals given by the early warning system by taking or  proposing the appropriate rectifying measures, as laid down in Article 6. However, the Commission would point out the limits of the early warning system, which have to do  with: - the relative nature of the expenditure profile, which cannot take account of time-lags or  extensions in payment times during the course of a financial year, nor of exceptional circumstances  affecting agricultural markets; - the time elapsing between a budget overrun being noted and corrective action being taken; this  time-lag is a result of the joint effect of the nature of the agricultural rules and the  decision-making process. With regard to the expenditure profile, the Commission takes the view that corrective measures  should not be taken blindly whenever there is a deviation from a profile, without account being  taken of the reasons for the discrepancy. The causes could be economic, but discrepancies can also  arise because payments have been delayed or brought forward for various administrative reasons, or  even because of a fortuitous shift of expenditure from one month to the next. The impact of any  measures to be taken must therefore be assessed from the point of view of sound market management  as well as the application of budgetary discipline. Lastly, the Commission would point out that the presentation of the monthly report on EAGGF  Guarantee Section expenditure has been considerably improved in the 1991 financial year. Where the  appropriations for a chapter are overrun or in danger of being overrun, the report includes an  assessment of the market situation and details the management measures which the Commission has  taken or intends to take within the limits of its powers, on the one hand, and any proposals it  might have presented to the Council on the other hand. Furthermore, the reports incorporate the  lessons the Commission has learned from the situation updates which are also transmitted to the  Budgetary Authority. With regard to the tobacco sector, as soon as  the budget or market problems arose, the Council   adopted strong measures for the 1990/91 marketing year, consisting in: - classification of Badischer tobacco produced in zone B as a separate 'new` variety called  'Badischer Guedertheimer hybrids`; - reduction of the premium for the 1990 harvest by about 25%, in addition to the 15% reduction due  to the overrun of the maximum guaranteed quantity; - reduction of the buying-in price, from the 1989 harvest, by about 35% in order to discourage an  explosive increase in production. Once these measures had been taken, the Commission used its management powers in December 1990 to  make a 15% cut in export refunds for the 1990 harvest for those varieties which had exceeded their  maximum guaranteed quantity. In order to contain expenditure in this sector, the Commission included in its 1991/92 price  proposals reductions of between 4 and 17%, depending on the variety, in the prices and premiums for  all varieties. A further reduction of up to 15% will come into effect for varieties which exceed  the MGQ. In addition, the broad lines of a reform have been presented to the Council (COM(91) 258 final). 3.9. In 1990 the Commission was faced with difficulties on certain agricultural markets. The danger  of market instability was so acute that the Commission had no reasonable option but to take market  management measures, which did not result in savings. Any measures taken in certain sectors to  limit expenditure at that stage would in all likelihood have worsened the situation. The Commission  would draw the Court's attention to the fact that overall market management during 1990 led to a  level of actual expenditure, as the Court noted, 5.3% lower than the initial appropriations. For  more details, the Commission would refer the reader to its reply to points 3.5-3.8. In 1991, however, the Commission used its management powers under Article 6 to contain expenditure.  It adopted economy measures which resulted in total savings of ECU 385 million in the 1991  financial year. In addition, it presented to the Council price proposals for the 1991/92 marketing  year and related measures which entailed savings of ECU 540 million for the 1991 financial year,  which the Council only followed to the tune of ECU 460 million. 3.10. The Commission is aware of the unreliability of the Member States' forecasts. It has launched an enquiry in the Member States with a view to examining the methods used and  identifying the difficulties encountered when drawing up forecasts. The enquiry should be completed by early 1992. 3.11     3.12. The Commission regularly conducts an overall critical examination of the economic  assumptions underlying the budget. Its findings are reflected in the monthly reports of the early  warning system. The Commission takes the view that this analysis, which has been gradually improved, should help to  reduce the reaction time of the Commission and the Council but cannot entirely eliminate the  time-lag between an overrun being noted and a corrective measure being adopted, since this time-lag  is due to the nature of the decision-making process and the agricultural regulations. 3.13. The Commission too feels that ex-post financial evaluation can be useful and enlightening.  However, such analyses are not without difficulty and are in danger of being purely theoretical. The Commission would stress that an evaluation is carried out whenever this is necessary or  warranted. It should also be pointed out that no measure can be considered in isolation. Each is  part of a general framework within which a number of factors come into play to influence the  measure in question. This being the case, when a given economic framework is used for the purpose  of forecasting the budgetary effects of a measure, that framework is generally found to vary to  such a degree that it is as good as impossible to isolate ex-post the effect of a specific  measure. MANAGEMENT OF APPROPRIATIONSCarryovers3.16.  (a) Being aware of the delays in olive-oil  production aid payments in Italy, the Commission had set deadlines for payment to beneficiaries.  The backlog was due to be cleared in 1990. However, deadlines have had to be extended again in order to allow the Italian administration to  adjust to the accelerated rate of payment of expenditure. Furthermore, the entry into use of the  olive cultivation register created certain start-up problems which hindered the clearing of the  backlog. Further difficulties arose as a result of the introduction of the 'anti-mafia` law. From the 1991/92 marketing year the Commission will no longer authorize any extensions in payment  deadlines. 3.16.  (b) The European Council's decision of 14 and 15 December 1990 provided for the ECU 250  million for food aid to the Soviet Union to be included in the 1990 agricultural budget. The  carryover was effected pursuant to that decision. 3.17. In addition to the justification given above, the justification for the other carryovers  which were the subject of document COM(91) 269 final of 13 February are sufficiently detailed to  explain the need for such carryovers. These carryovers increase the overall funds available in the  EAGGF-Guarantee budget without however increasing the availability of appropriations to cover the  requirements of the 1991 financial year. Carryover appropriations are booked separately. There can therefore be no question of charging against them expenditure not covered by carryover  appropriations, and any such appropriations which are left unused will lapse at the end of the  financial year. A clear distinction is made in the monthly reports on utilization of appropriations  between expenditure against new appropriations and expenditure against carryover appropriations.  Perfect transparency is therefore guaranteed. Corrections of prior year expenditure3.19. The Commission believes that any deviation from the  expenditure profile must be analysed in depth before corrective measures are decided (see detailed  reply to points 3.5-3.8.). In addition, the Commission stresses that corrections made in an accounts clearance operation do  not necessarily mean that expenditure has not been made, even if that expenditure is not paid by  the Community. 3.20. The financial outcome of all corrections made in an accounts clearance operation, be it  positive or negative, must, in accordance with the obligations imposed by the Financial Regulation,  be booked solely to Article 290 of the budget, as the Court itself recognizes in point 3.18. There is no cause to make a distinction between headings having negative appropriations and all  other EAGGF-Guarantee headings. These appropriations must therefore be considered as appropriations of the same type as those  entered under any EAGGF Guarantee heading, on condition that: - since they cannot be foreseen in advance, a token entry is entered in the budget for that  heading; - since these appropriations originate in the Commission's clearance decision, they are therefore  an integral part of the appropriations for that financial year, be they positive or negative. Therefore, since these appropriations, positive or negative, relate to the financial year, they  have the same characteristics as other EAGGF-Guarantee appropriations, with the exception of their  different origin. When there is a deficit an appropriation must be entered under a heading by means of a transfer  from another heading or, where no funds are available, by recourse to a supplementary and amending  budget. Conversely, when the Community is in credit, a negative appropriation should be entered  under the heading. When implementing the budget, the Commission decides on the use of this  appropriation by means of transfers, taking due account of the requirements and priorities. In the  Commission's view, there is no need to lay down guidelines as the Court suggests. The transfer of ECU 115 million to Chapter 20 (Milk products), Article 207 (Financial contribution  of milk producers) was the result of the application of a recital in the clearance of accounts  decision for the 1987 financial year relating to Germany, pursuant to which the amount was  initially paid by Germany and subsequently, after it had communicated its programme for buying back  milk quotas, the Commission reimbursed it the maximum amount provided for, namely ECU 115 million.  It was therefore quite regular for that amount to be charged against the item under which it had  been provisionally booked as negative expenditure (Article 280) and rebooked under Item 2071 which  provides, inter alia, for the financing of any expenditure arising from the programme for buying  back reference quantities, following the clearance of accounts for 1987. Negative expenditure3.21. The Commission refers to the sections on negative expenditure in its  replies to the 1979, 1982, 1983, 1985 and 1989 reports. 3.22. There is a direct link between the income and expenditure booked under Item 2071, given that  the levies received following the overrun of the individual quota are intended for the national  buying back of quotas if the national quota has not been exceeded. Expenditure charged as negative expenditure3.24. The interpretation of Article 9(4) consisted in  accepting that a national programme to buy back quotas should be financed from the sums 'recovered`  from the Member State by the EAGGF in the clearance of accounts, and not from the sums received by  the Member State from producers, as the abovementioned provision dictates. However, it is in any  case in accordance with the objective of Article 4(1)(a) of the said Regulation, which is to reduce  the existing reference quantities, and made it possible to bring Germany's guaranteed global  quantity back to the correct level. In addition, this interpretation should be seen in the context  of the difficult negotiations with the Member States concerned, which led to the solution as it  stands. NATIONAL CONTROLS OVER GUARANTEE EXPENDITUREIntroductionThe Commission notes the Court's  comments. It will make the contacts necessary to see to what extent the information the Court can  provide will enable it to assess the cases described. Verification of the eligibility of claims3.35     3.40. The Commission, like the Court, addressed  observations relating to the lack of supervision concerning the sheep and goat premium on the part  of both the central (AIMA) and the regional (Assessorati all'agricoltura) authorities on the  routine work which is carried out by the Ispettorati di Agricoltura and/or the communes themselves.  These observations were first addressed to the Member State concerned in the context of the  clearance of the 1988 EAGGF accounts. The Court had been made aware of these observations. The Commission notes that the Court's observations confirm its own observations which were  addressed to the competent national authorities following the audits carried out for the clearance  of the 1988 EAGGF accounts. These audits led to significant disallowances of expenditure in the  framework of the clearance of the 1988 EAGGF accounts and will involve such disallowances in the  upcoming clearance of the 1989 EAGGF accounts. The Court's staff had access to and examined all the pertinent current audit files, audit reports  and clearance documents of the sheep and goat premium expenditure. Community rules3.46. The Commission examines the documents presented by the Member States as part  of its analysis of management procedures, book-keeping and internal auditing of the paying agencies  and other departments involved in the payment procedures. Once examination is completed, the Member  State concerned is informed of any recommendations for improving these systems. In addition, the Commission takes measures at Community level where necessary by amending the  control provisions in the regulations. The Court may judge these measures to be inadequate, but any additional action would require a  substantial increase in human resources for the EAGGF and the market divisions. 3.47. The Commission is of the opinion that the responsibilities of the paying agencies are  sufficiently clearly defined in Council Regulation (EEC) N° 729/70. It must be ascertained that the Member States fulfil their obligations under Regulation (EEC) N°  729/70, which specifies, in particular, that: - the administrative and accounting conditions in accordance with which payments are made relating  to the implementation of the Community rules within the framework of the agricultural market  organizations must be laid down in writing; - Member States must ensure that (EAGGF) appropriations are used exclusively for the purposes laid  down; - Member States must, in accordance with their national laws, regulations and administrative  provisions, take the necessary steps to satisfy themselves that transactions financed by the Fund  are actually carried out and are executed correctly, prevent and deal with irregularities and  recover sums lost as a result of irregularities or negligence; - Member States must inform the Commission of the measures taken for those purposes and in  particular of the progress of any administrative or legal proceedings. CHAPTER 4 The European Agricultural Guidance and Guarantee Fund, Guarantee  Section (EAGGF-Guarantee): Organization and management of markets 4.1.Export refunds for  non-Annex II goodsREFUNDS PAID ON CERTAIN PROCESSED GOODS4.1.7. The number of refund rates is  relatively limited. It is the subject of three monthly publications (cereals, milk, sugar) and a  quarterly publication (eggs). It is the combinations of agricultural products (listed in Annex II) in different forms which are  practically unlimited. 4.1.8. Even though the ingredients used in certain products are entirely lost as such, chemical  analysis of the end products and any losses and residues can be very useful in determining the  nature and origin of the ingredients as well as their quality and the likely accuracy of the  quantities declared. Budgetary execution4.1.9. Commission Regulation (EEC) N° 1762/89 applies only from the first  quarter of 1990; the information gathered under this Regulation was therefore not yet available  when the 1990 and 1991 budgets were being prepared. The application of the systems in the Member States 4113     4140.     With regard to the  weaknesses noted  by the Court in the application of the system in the Member States, the  Commission will examine with the representatives of the administrations concerned the specific  cases which the Court mentions. 4.1.13. The Commission does not agree that the rules give only minimal guidance. The body of regulations applying to the export of and checks on non-Annex II goods covers those  provisions which can be adopted on a common basis. If, as the Court stresses, additional detailed rules must be adopted, such rules must be tailored  to specific cases given the excessively wide variety of goods produced and manufacturing processes.  For example, analytical checks on goods could prove to be the best control method for certain goods  but they could better be replaced by a different set of on-the-spot checks in the case of large  production units. 4.1.16. In the Commission's view, the Member States must be able to adapt their control methods to  the specific cases they meet, which can vary considerably from one part of the Community to  another, as well as to certain products which are specific to certain regions. Registration of recipes4.1.17. With the redrafting of Regulation (EEC) N° 3035/80 the Commission  will propose that the registration of recipes is harmonized so as to facilitate the exchange of  information between Member States provided for in Article 8. However, application of Article 3(2) of Regulation (EEC) N° 3035/80 requires henceforth that Member  States possess all the necessary information; the Court's request therefore concerns registration  of these data in a formal file. The Commission does not feel that it should impose detailed implementing procedures, such as a file  of this kind, on Member States, except to the extent desirable for the exchange of information  between Member States. The Commission also refers to its reply to point 4.1.51. Regular review of recipes4.1.20. As the Court points out, the frequent appearance of new products  or changes in the composition of certain goods requires the registration of a considerable number  of standard recipes, several thousand or even tens of thousands, some of which are practically  never used (they could, however, concern old stocks in certain cases). As a result, a risk analysis based on the registered recipes is not necessarily efficient, given  the large number of recipes and the use to which they are put. More generally, the Commission would  point out that the checks organized by the Member States must ensure that the amounts of refunds  granted to the same firm are correct. Since refunds relate to the raw ingredients used, checks  should focus primarily on verification of the quantities the firms actually use; such checks must  also be supplemented to ensure that refunds are not granted for goods marketed within the  Community. Consequently, a risk analysis based on the registered recipes must above all contribute  to supplementing the orientation of checks. (See points 4.1.38-4.1.40 and 4.1.51). Verification of recipes4.1.24. The difficulty encountered in obtaining analytical confirmation  (chemical analyses) of declarations resides in establishing coherent methods. However, Commission  Regulation (EEC) N° 4056/87 lays down certain rules on chemical analyses applicable to Regulation  (EEC) N° 3035/80 and intends to continue its work in this area. Production losses4.1.38     4.1.40. A distinction should be made between residues (by-products  from the processing of certain agricultural products, of little or no commercial value, the  characteristics of which are clearly distinct from the exported goods) and losses proper (products  with characteristics similar to those of the exported goods, such as waste, misshapen products,  etc. which cannot therefore be exported as such). Since the Court's last report on export refunds for non-Annex II goods (1979) the Commission has  regularly discussed the question of losses or residues within the 235 Group (see reply to point  4.1.45). These discussions have helped clarify the situation for a considerable number of cases by  making this distinction. In the case of losses in the strict sense of the term, the Commission intends to confirm the  following rules in guidelines for application to be used by all the Member States: - no refund can be granted for products marketed in the Community; - no refund can be granted for residues with a commercial value (since such cannot be considered as  residues); - the admissibility of losses must be established on the basis of the most up-to-date production  techniques; - where losses exceed a certain threshold (the Commission proposes 2%) cases must be notified to  the Commission; below this threshold Member States will be responsible for deciding on  admissibility. The Commission has no knowledge of any cases where losses (products with characteristics similar to  the exported goods) are as high as 30%; losses of more than 5% are very rare. The same is not true  of residues. Residues of more than 30% appear justified. The Commission's central managementCoefficients applied to processed goods containing  cereals4.1.42. This point concerns agricultural raw materials which are not normally among the  ingredients of typical non-Annex II goods. In the case of the main ingredients of this category (starch, glucose, etc.), the coefficients  fixed in Regulation (EEC) N° 2744/75 are identical or very similar to those used for exports of  those products in the unaltered state (e.g. 1,61 instead of 1,60). 4.1.43. The cases mentioned in this paragraph concern marginal products and wrongful use came to  light only recently (1990). In all, three cases have been notified. An initial adjustment of refund  rates was introduced from 1 May 1990, in Commission Regulation (EEC) N° 1100/90 of 30 April 1990  (OJ L 111, 1.5.1990, p. 39). In order to stop attempts at misuse, the general purport of the annex to the monthly regulations  fixing the refunds for cereals exported as non-Annex II goods has been modified since August 1991  (Commission Regulation (EEC) N° 2315/91). An amendment of the coefficients themselves also affects the calculation of import levies on  processed cereals. Standard composition of goods4.1.44. The coefficients for pasta are reviewed in a study on  processed cereals commissioned by the Commission with a view to establishing technical coefficients  and economic relationships between the basic cereals and the products resulting from their  processing. As regards the other coefficients, it should be noted that: - the coefficient for penicillin (1  530) cited by the Court corresponds to a maximum grant. This  coefficient is applied only in cases where the quantity of sugar used is greater than 1 530 kg/100  kg of penicillin; - the coefficient for beer does not represent the quantity of barley actually required for the  production of 1 hl, but the equivalent of the difference between the price of the agricultural raw  ingredients converted into a quantity of barley. Nevertheless, the situation should be re-examined  in the light of the technological advances in beer production. Monitoring Member States' control procedures4.1.45. The role of the Commission is to ensure  uniform application of the rules and to seek solutions for problems brought to its attention by the  Member States and by firms. A group of experts (the 235 Group) was set up for this purpose to  debate the problems encountered. This group meets at least four times a year. It examines all questions concerning the application  of the rules and the amendments which are necessary or desirable in order to adapt the rules to  technical progress, developments in trading practices and international agreements as well as to  changes in other CAP rules. It is preparing the redrafting of Regulation (EEC) N° 3035/80 and the  review of the system applicable to imports of non-Annex II goods with a view to adapting it to the  developments in international agreements. On the basis of the information gathered in this group, the Commission believes that the rules of  application introduced by the Member States are in conformity with the regulations. Following the Court's observations, the Commission has reminded the Member States of their  obligations with regard to information, with a view to examining whether for the purpose of  applying these rules certain lacunae in the checks should be remedied. The Commission acknowledges the usefulness of ensuring better information on the detailed rules of  application of the regulation introduced by the Member States. Conclusions4.1.47. The Commission intends to replace the ad hoc measures referred to above with a  more clearly drafted version of the Regulation. It has therefore embarked on a study of the  coefficients, including certain goods referred to in Annex C. The Commission is of the opinion that it needs more resources in order to be able to react more  quickly to cases of misuse, and it will make the appropriate proposals. An amendment of Regulation (EEC) N° 3033/80 is planned, to take account of the evolution of  international trade agreements, particularly the agreements on the EEA currently under discussion,  and to give the Commission the power, through the management committee procedure, to fix the  quantities of basic products to be taken into account for the calculation of import duties  (currently fixed by Council Regulation (EEC) N° 3034/80). Similarly, certain provisions of Regulation (EEC) N° 3035/80 should be removed from that Regulation  and included in a Commission regulation; the provisions in question are the annexes to the  Regulation and the conversion coefficients, with a view to allowing the rules to be adapted more  rapidly when necessary. 4.1.48. The Commission feels that it has taken care to ensure coherent treatment of production  losses. As mentioned in points 4.1.38-4.1.40, only residues and losses which are not marketed must  be included in the calculation of the additional supply costs for certain agricultural raw  materials in the Community. The Commission confirms that export refunds must not be granted on  goods marketed in the Community. 4.1.49. Article 3(2) of Regulation (EEC) N° 3035/80 implicitly requires that operators notify any  changes to their recipes. The Member States are responsible for establishing how this must be  done. The Commission has recommended to the Member States that they restrict the validity of recipes to  the end of the year following their registration at the latest. Regulation (EEC) N° 3035/80 is clear on the matter of wrongful use of recipes. However, strict  application of the rules, which leads to non-payment or recovery of the amounts granted, may in  some cases be out of proportion to the error committed. The Commission will continue its efforts to avoid fortuitous errors (misinterpretation of the  rules) or mistakes due to administrative complexity. If necessary appropriate penalties will be  introduced for those cases which cannot be considered as fraudulent claims. 4.1.50. The creation of a central database in each Member State is very expensive in relation to  the objective (which is to pay refunds equal to the price difference of the agricultural raw  materials). The best way of identifying abnormal discrepancies and thus of making the best risk analysis will  be either at regional or at national level, depending on the nature of each product. The recorded  data should therefore be used to supplement checks and direct them more rapidly once the risk of  certain types of fraud or misuse are identified. However, the Commission shares the Court's opinion that checks must be based on a full range of  information (physical and analytical checks, sampling, audits, etc.), hence the need to allow the  Member States enough leeway to determine the surest method on a case-by-case basis. The risk to a firm of having a product which is not in conformity and the steps taken by that firm  to reduce the risk may prove to be a better guarantee of the accuracy of declarations than many  other forms of control. 4.1.51. 'Distortions` of this type are also due to excessive precautions on the part of the Member  States. While the Court has noted differences in the quality of controls, these do not necessarily  privilege companies in some Member States; they can simply reflect different strategies for  ensuring the same general objective. 4.1.52. The Commission feels that its task is to ensure that the results obtained are as close as  possible to the objectives of the rules (while achieving some balance between fairness and  efficiency); consequently, in the spirit of paragraph 4.1.52 as drawn up by the Court, its task is  to harmonize as much as possible the procedures introduced by the Member States and not to ensure  that the same procedures are applied everywhere (since the economic and institutional environment  is in any case different). Its task is more one of organizing collaboration between the Member  States and of verifying the efficiency of the controls introduced by the Member States than of  dictating to them general control rules. The latter should be there as a supplement to fill in  gaps. REFUNDS ON CEREALS EXPORTED IN THE FORM OF CERTAIN SPIRITUOUS BEVERAGES4.1.56. The Court itself  recognizes the practical nature of the method used, even if that method results in certain  distillers being over- or under-compensated (see point 4.1.92). Despite certain possible drawbacks,  a simple fixed-rate scheme is preferable to any other arrangements, which would generate a lot of  paperwork and bureaucracy for an overall result which would be little different from that of the  current system. Budgetary execution4.1.60. The Commission confirms the classification error pointed out by the  Court and has since corrected it. In any case, it has no implications for overall expenditure. The application of the system in the Member StatesGeneral observationWhere checks are concerned,  the Commission's job is not to control all expenditure but to control the checks carried out by the  Member States. The expenditure in this sector was the subject of a systems audit in Ireland and the  United Kingdom in 1982 and 1983. The observations arising from those audits, which concerned in  particular the taking under control of cereals and checks on the quantity and quality of the  cereals distilled, were the subject of dialogue with the Member States concerned. However, the Commission notes the Court's comments concerning the correct application of the rules  by the Member States and will take them into account when it makes its own checks. Taking cereals under control4.1.64     4.1.65. The Commission notes the Court's observation and  will make corrections during the clearance of accounts if its own checks confirm that the Member  State is not applying Community rules. 4.1.66     4.1.67. The Commission notes the Court's comment that cereals may be taken under control  only at the distillery in order to avoid the risk of a difference between the quantity of cereals  taken under control and those actually distilled. It will examine the situation and take any  necessary measures. The coefficient4.1.80     4.1.84. The Commission notes the Court's information. It will examine  the Court's findings with the Member States concerned with a view to adapting the rules at a later  date. The Commission's central managementThe budget4.1.85     4.1.87. The Commission will review the  data used for the budget estimate on the basis of the information provided by the Court. Monitoring the system4.1.88. The Commission will review the information required from the Member  States after making a fresh analysis of its requirements. The Commission presents no reports on the management of this limited market because there is no  market organization for alcohol. The measure in force refers only to cereals and is included in the  cereals market organization. The Commission therefore presents tables summarizing the data on the  production and export of whisky to the management committee for cereals, when the coefficients are  determined. Relationship between barley and malt4.1.90. The coefficients for turning barley into malt are  currently being reviewed in collaboration with the management committee for cereals. Economic importance of the aid4.1.91. The purpose of the export refund for cereals in the form of  whisky is to compensate distillers for the difference between the Community and world prices for  cereals. Conclusions4.1.92     4.1.95. The Commission notes the Court's observations. It will make an  in-depth examination of the system. This examination will comprise, on the one hand, an analysis of  the basis for the aid, the coefficients and their adaptation and the data to be supplied by the  Member States and, on the other hand, the control procedures. It will then take any necessary  measures. It does not agree that the rules provide only minimal guidance. 4.2.Operation of the common organization of markets in the sugar and isoglucose  sectorINTRODUCTION4.2.3     4.2.4. The Commission refers interested readers to the special report  on the operation of the common organization of markets in the sugar and isoglucose sector and the  Commission's detailed commentary thereon. The Commission's replies to the main conclusions of the Court's special report, set out in points  4.2.8-4.2.27, are given below. A SEEMINGLY COHERENT SYSTEM4.2.8. The Commission is convinced that after more than 23 years of  application of the common organization of the markets in sugar, which has evolved considerably  despite appearances, the management and checks in this sector are very effective, at the level of  the Member States and producers as well as the Commission. The rules may be complex, but although  appearances belie this, the sugar sector is a complex one which requires firm management and strict  control. The production of sugar from beet and cane grown in the Community is only one factor in the  management of a sugar campaign, since disposals, either for domestic consumption or for export,  also depend on imports, intra-Community trade and stock fluctuations. In addition, sugar is an  industrial as well as an agricultural product, which induces market behaviour unlike that of any  other product covered by a market organization. 4.2.9. Community competition rules also apply to the sugar sector. The Commission is constantly  vigilant in this area and ready to take the necessary measures in the event of infringements, as  was the case in 1973 (Commission Decision of 2 January 1973, OJ L 140, 26.5.1973, p. 17). A SYSTEM ADRIFT4.2.11. The market organization for sugar is in conformity with the principles of  the Treaty. Both the Commission and the Council ensure that each measure respects these  principles. In the Commission's opinion, the best proof of the success of the 'Communitization` of the sector  has been the introduction of the principle of Community financial solidarity with the introduction  of the system of self-financing (provided for in Articles 28 and 28a of the basic regulation,  Council Regulation (EEC) N° 1785/81) and the compensation system for storage costs, also  self-financed (Article 8 of Regulation (EEC) N° 1785/81). In the Commission's view, as far as the objectives of Article 39 of the Treaty are concerned,  implementation broadly corresponds to the objectives laid down. The Commission stresses that there have always been stabilizing measures in the sugar sector, in  the form of production quotas and the system of self-financing. The latter, introduced in 1968 and  strengthened in 1981, 1986 and 1988, currently aims in particular at ensuring on an annual basis  that Community producers fully cover the costs arising from the disposal of surplus Community  output. The level of self-sufficiency quoted by the Court (150%) includes imports, which are, by  definition, not produced in the Community. Expenditure related to Community production surpluses is fully covered by the producers as  production under A and B quotas. 4.2.12. It is true that quotas are set on a regional basis (and allocated to individual companies  thereafter) and managed in the first place by the Member States (according to strict Community  rules). But this policy clearly illustrates the Community's wish to safeguard a certain level of  production in all regions of the Community - all-important in the Commission's view - so as to  contribute directly to rural development as regards both beet cultivation and sugar manufacture. 4.2.13     4.2.14. The Commission acknowledges that it would in theory be preferable not to have to  apply a system of production quotas, but experience has shown the effectiveness of such a system as  a tool for managing the sector and containing production. The fact that production continues in regions which are, according to the Court, less efficient,  shows that profitability per hectare is still satisfactory, even without aid. Nor should one lose  sight of the agricultural, socio-economic and political aspects of the question. When fixing the  quotas, the Commission took into account existing production levels in each region, and the  decisions taken in the case of Portugal clearly show the Community's will to stimulate the  production of sugarbeet for lack of other suitable agricultural products and to avoid total  dependence on imports. The Commission feels that it is absolutely necessary to apply a system of production quotas for  isoglucose. In view of the similarities between isoglucose and liquid sugar, and because the  production of isoglucose forces a corresponding quantity of sugar into export, it is quite  justifiable that isoglucose producers should take responsibility for their share of the surpluses. The Commission does not consider that prices in the sugar sector are 'generous`, particularly when  compared with those in other industrialized countries; and prices obtained in developing countries  usually bear no relation to the economic situation. However, this does not mean that guaranteed  prices in this sector should not be reduced. Furthermore, the management of the sugar sector requires a great deal of administrative work which,  until now, could only be done by the Member States. Therefore, the Commission sees no advantages,  in terms of cost efficiency, to justify transferring these activities to the Commission. Moreover,  in 1974 it unsuccessfully proposed that quotas be allocated directly to companies. 4.2.15. The market organization in the sugar sector has always been characterized by total freedom  of production, while the quantities guaranteed by the Community are restricted by production  quotas. Given that the system of self-financing ensures, in the Commission's view, that the producers cover  the cost of disposing of surplus production in the Community under A and B quotas and that exports  of non-quota sugar (C sugar) are also financed fully by the producers, the Commission does not see  in what way the principle of economy is being ignored. Nor does it see the 'financial need` to  reduce sugarbeet plantings, which would in any case have serious consequences for the rural economy  of the regions which the Court has in mind. 4.2.16. The quotas of the new Member States were set on the basis of traditional production during  a reference period. The Commission stresses that as a matter of principle national aid schemes have  always been limited in duration but could be extended. The current system provides for a 30%  reduction in aid by 1992/93 in relation to the aids authorized in 1988/89. In the Commission's view, economically efficient production is an important factor in a complex  agricultural policy in which the ideal goal must be to optimize all factors. In this respect, mixed  prices have never been applied throughout the Community, but only in those regions which can be  considered as most suited to sugarbeet production (such as the Netherlands and Belgium). The  Commission has in any case twice proposed that the option of using a so-called mixed price system  should be abolished, but its proposals were never accepted. 4.2.17. The possibility of producing non-quota sugar (C sugar) guarantees the principle of free  production of sugar and isoglucose in the Community while leaving the producers fully responsible  for disposing of it without guarantees on non-Community markets. Exports of C sugar depend closely  on the quantities of sugar carried forward, but nevertheless contribute to stabilizing world sugar  prices, because of the elasticity of these exports due to price fluctuations. The Commission does not agree with the Court's view that exports of sugar as such contribute to  keeping down world sugar prices. The Community's exports help for the most part to supply countries  which cannot produce their own sugar. In the unlikely event of the production of C sugar being  reduced, or even eliminated, this would have an unavoidable short-term inflationary effect on the  world price level, but in the medium and long term Community sugar exports would of course be  replaced by white sugar produced by other exporting countries, and we cannot know whether that  production would be any less artificial than the Community's is now. Besides, in periods when world  prices have been favourable, Community exports of C sugar have not been found to depress the world  market to the detriment of Community exports with refunds. On the contrary, operators continue to  submit acceptable bids during tendering procedures. For these reasons the Commission does not feel  that C sugar leads indirectly to an additional burden on the Community budget. In addition, any  discontinuation in the planting of beet for C sugar would automatically be followed by increased  planting of other crops such as cereals, which would result in increased expenditure for the  Community budget in the sectors concerned. 4.2.18. The fact that the production of C sugar depends on high world prices and that this cyclical  situation is fairly rare for sugar (once every 7 to 10 years) makes it reasonable to affirm that  the existence of C sugar has only a marginal effect on the world market. With regard to the eligibility of carried-over C sugar for reimbursement of storage costs, the  Commission's recent proposal aiming to abolish such eligibility was not adopted. 4.2.20. It would seem to be incorrect that the southern Member States such as Italy are reticent  with respect to the possibility of substituting sugar with isoglucose. In fact, there was a plan to  manufacture isoglucose from a variety of sorghum in southern Italy. The sugar arrangements permit  the unlimited transfer of the sugar quota to isoglucose quota within the framework of restructuring  plans in Italy. The Commission would not object to such transfers.4.2.21. The ACP/EEC sugar Protocol provides that 'the Community undertakes for an indefinite period  to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw or white,  which originate in the ACP States and which these States undertake to deliver to it`. It also provides that its implementation is 'carried out within the framework of the management of  the common organization of the sugar market`. The physical importation of this sugar into the Community is a fundamental element of the agreement  concluded with the ACP States. If the Court's suggestion were to be followed, the immediate placing  on the world market of raw sugar in the unprocessed state would no doubt affect world sugar prices  and the Community's undertaking to respect traditional trade patterns, made at the time of the 1973  enlargement, could not be kept. With regard to the budget, the Commission must comply with the nomenclature for the classification  of budget expenditure, but it explains the special situation regarding this Protocol and the  specific Agreement with India in its comments on Chapter B1-11 and in the general observations at  the end of subsection B1. This budgetary classification of the expenditure on preferential imports does not preclude  recognition of their special nature, as was the case, for example, in the Community rules on  budgetary discipline. 4.2.22. While sugar exports, following the reasoning of the Court's observations, benefit importing  developing countries, the Community's obligation physically to import 1.3 million tonnes of sugar  from exporting developing countries at guaranteed prices benefits the latter. SUBSTANTIAL COSTS4.2.23. The Commission is unable to agree with the Court's conclusions for all  the reasons given in its replies above. 4.2.25. The Commission does not agree with the Court. The budgetary impact mentioned by the Court  is only seen when a comparison is made between the effect on the expenditure and revenue of the  sector of what has come to be known as the 'double-rate effect`. Since the sector's revenue covers  part of the expenditure charged to the Community producers, the difference noted by the Court is  merely the double-rate effect on the other part of the expenditure, charged to the Community  budget. 4.2.26. The Commission notes with interest the Court's suggestion regarding verification of whether  the self-financing mechanism is justified, and has no difficulty in accepting the suggestion. CHAPTER 5 Common policy on fisheries and the seaOBSERVATIONS CONCERNING  BUDGETARY MANAGEMENTOutstanding commitments5.6. The Commission would point out that it took a  decision on the first measures in December 1987, at the end of the first year of the new  regulation. As the time allowed by the regulations for the implementation of shipbuilding and  aquaculture projects exceeds three years (see below), the main burden of implementation is  naturally delayed. The decision to grant assistance sets the following deadlines: - 12 months to begin work; -24 months to complete the project; -6 months to submit the application for payment to the Commission. OBSERVATIONS ON THE IMPLEMENTATION OF STRUCTURAL MEASURESAdmissibility conditions for applications  for aid and reimbursement5.10. The Commission believes that the admissibility conditions have been  applied in accordance with the regulations. (a)On 7 December 1988 the Commission decided, in the interests of the sound management of the  structural policy on fisheries, not to finance certain investment projects from 1987 and 1988,  which it declared eligible for 1989. The Commission does not contest the Court's legal analysis. However, it has requested the Member  States to reconfirm that the projects are still valid. This avoids administrative work and the  resubmission of dossiers by the Member States to the Commission. (b)The delay in the submission of dossiers is often due to the checks required by the national  authorities. The Commission accepts some delay in dossiers as it cannot automatically cancel  assistance without adequate legal instruments. The Court of Justice has held that delays in the  submission of applications for payment do not in themselves provide the Commission with sufficient  grounds to withhold payment. 5.11. The Commission seeks to influence the programming of investments during discussions with the  Member States on the multiannual guidance programmes for fishing fleets and aquaculture. However,  it is difficult to make very detailed forecasts because these investments are initiated by the  private sector, which has to take account of both the current economic climate and fluctuations in  resources. Aid for modernizing vesselsReasons for not taking certain projects into consideration5.12. The  Commission examines applications for aid for modernization and takes decisions to grant Community  aid on the basis of the admissibility of the projects. The reasons requested by the Court are sent  to the Member States through the Standing Committee for the Fishing Industry and will be forwarded  to the Court regularly. Offsetting of cost items within a project5.13. These are grouped measures which are managed  principally by the Member States. Instructions on the investments eligible have been attached to  the implementing regulation. It is clear that some adjustments between categories of expenditure  must be permitted between the estimate and the final invoice because the conformity of the estimate  to the works cannot be checked until the modernization work begins. The Commission's inspections  show that there are normally explanations to justify the amendments made. The Commission will inform the Member States through the Standing Committee for the Fishing  Industry that they must show that they have given their prior approval to any variations requested  by the beneficiary. Rate of implementation of payments5.14. The Commission welcomes the Court's proposal. A system of  advances could be considered as part of the incorporation of the structural policy for fisheries  into the reform of the Funds. However, the present system requires the Member States to check  progress on modernization work, which tends to speed up implementation of this measure. Aid for the adjustment of fisheries capacityFailure to comply with the period for adopting  decisions and with the rule of budgetary annuality5.16. The Commission reminds the Member States  of the need to submit their budget forecasts, some of which arrive late and require clarification.  These factors make for some delay in the Commission's initial decision. The sound management of this measure, which is closely linked to the objectives of the multiannual  guidance programmes for fishing fleets, requires the Commission to revise its estimates in the  light of actual results. Permitting the Member States which have been able to implement their  programmes to reduce fishing capacity to use the appropriations which other Member States have been  unable to use is also a more effective management strategy. Since the effort to reduce capacity is  made at Community level, compensations should be allowed and such adjustments are not forbidden by  the basic regulation. The first decision on the adjustment of capacities contains a clause  permitting possible amendments if required by information provided by the Member States. The amendment of a decision at the end of the year is a realistic step because it enables the  Member States to provide the most up-to-date information on progress in implementing the measure at  national level. Conditions for committing and implementing expenditure5.17     5.18. Pursuant to Article 26(3) of  Regulation (EEC) N° 4028/86, the Commission decides on the maximum amount of eligible expenditure  per Member State on the basis of its planned expenditure and the appropriations available. For  purely budgetary reasons, the Commission is not always able to accept all the expenditure in the  Member States' estimates. The Commission therefore fixes the maximum amount eligible for Community reimbursement for each  Member State in the light of the resources available. These amounts are expressed in accounting  ecus and the rates used for converting ecus into national currency (the accounting rate for the ecu  for the month in question) are also stated in the decision. The ceiling of eligible expenditure for each Member State in national currency should therefore be  calculated from the amount fixed in ecus and the conversion rate for that currency for the month  stated in the decision. The difference between this method and the accounting method to convert ecus into national currency  is of little importance since the Commission normally makes only a single commitment to cover all  the Member States. The Commission will therefore make reimbursements to the Member States in  accordance with the method described above up to the limit for each Member State set out in the  decision. It should be noted that the available appropriations have so far  never been used up. The method now used by the Commission to determine the ceiling of expenditure eligible for  Community reimbursement by Member State has permitted the Danish application for 1989 to be  settled. 5.19.  (a) The supporting documents annexed to the payment order show the breakdown by type of  expenditure. (b) Since the measure is managed by the Member States, the Commission receives only outline  information. However, if it has doubts about whether expenditure is eligible, it requests further  information. The Court's recommendations5.20. The Commission is considering these suggestions. CHAPTER 6 The reform of the structural FundsBASIC PRINCIPLES OF THE  REFORM6.7. Even though the legislation governing the reform of the structural Funds does not  expressly provide, in respect of Objective 5a, for the system in stages envisaged for the other  objectives, Community intervention can none the less be carried out along the same lines. This was indeed the case in respect of Regulations (EEC) N° 4042/89, N° 866/90 and N° 867/90. COMMUNITY SUPPORT FRAMEWORKS AND DECISIONS TO GRANT AID6.15. The Commission wishes to point out  that EAGGF Guidance Section expenditure results from commitments arising from Regulations in force  before the reform of the Funds but adapted since then (see paragraph 6.13 of the Court), from  Regulations still in force in their original form but shortly to expire (see paragraph 6.14 of the  Court) and from operational programmes recently adopted following the reform of the Funds. The share of expenditure arising from measures which have not been adapted will get smaller  progressively. 6.17. The accounts relating to structural intervention are kept per Fund. With regard to the other  statements, the Commission points out that the DGs responsible for each objective monitor the  progress of the CSFs by forms of intervention via trend charts in which a clear distinction is made  between single-fund and multi-fund programmes, and the Commission departments can provide full  information on all the programmes approved. The Commission is none the less aware that instruments  need to be developed which will give a better overall view of the state of progress of Community  operations. To this end, it is developing an information system called Arinco, which should allow a  more appropriate follow-up of all the components of the CSFs and the OPs. 6.18. Regulation (EEC) N° 4253/88 provides that operational programmes may be implemented in the  form of an integrated approach, but it does not explicitly mention integrated operational  programmes (IOPs) or multi-fund operational programmes (MOPs). The Commission invited Member States  to present programmes called multi-fund programmes, providing for operations financed by several  Funds, relating to the same territory or the same sector and accompanied by a single monitoring  system. At the same time these programmes provide for autonomous financial management for the part  of the programme financed by each Fund so as to simplify their implementation. Past experience  (IMPs, IDOs) had in fact shown that when financing of the individual measures from the various  sources overlapped too much, financial management could become unnecessarily complicated. What is  important is not so much the financial integration of the Funds but the combined effect of the  various measures in a programme. The term 'integrated operational programme` refers to programmes which involve a higher degree of  integration among financial instruments. The Commission considers this desirable in a limited  number of situations. The multi-fund operational programmes and the integrated operational programmes are operational  programmes implementing the integrated approach. In all 85 programmes implementing the integrated approach (MOPs and IOPs) have been approved since  the reform of the structural Funds in respect of Objectives 1, 2 and 5b up to 31 December 1990. 6.19. The Commission agrees with the Court that there is still work to be done to improve  integration of the operations. It feels that substantial progress has already been achieved and intends, on the basis of  experience gained, to make such integration still more effective. It is true, however, that the formula of aid combined with a loan has been used very little. 6.20. The Commission agrees with the Court's opinion according to which the very tight deadlines  for implementing the various stages of the reform have hampered its ex ante assessment. However, as regards the ex ante assessment of proposed measures which precede the decision giving  rise to Community intervention, it should be recalled that efforts were made during the planning  stage by both the Member States and the Commission to carry out assessments. An examination process  did in fact take place when the plans, Community support frameworks and various forms of  intervention were drawn up and this led to the range of possible actions being looked at in detail  and to the selection of the measures through which the objectives could be attained. Moreover, as regards the assessment of the potential impact of the Community operation in relation  to the objectives for which it was established, various methodological difficulties had to be  resolved, particularly with regard to the creation of appropriate macro-economic models. Also, to  make such an assessment, it was necessary to know the content of a Community support framework in  detail in terms of the forms of intervention approved or in the process of approval. Delays  therefore ensued before the work of assessing the potential impact could start. The Commission has  currently, however, set up an extensive system for assessing the potential impact of Community  support frameworks, and a number of the findings will appear in the 1990 Commission annual report. As regards the utilization of the 1990 appropriations for technical assistance, the Court's  comments are well-founded. It should be said, however, that the Member States' needs in respect of  technical assistance depend to a large extent on progress made with the implementation of the  reform and that currently, in 1991, there has already been a significant increase in applications  which has led the Community to intensify the use made of these financial resources. FINANCIAL PLANNING AND THE USE OF THE ECU6.24. The appropriations allocated each year to the  structural Funds at 1988 prices are adjusted to price trends in accordance with the mechanism set  up for the purposes of such adjustment by the inter-institutional agreement. The Commission  currently estimates at ECU 594 million (1991 prices) the gap between the 1988-91 appropriations  calculated by applying this method and the amounts which would be calculated on the basis of the  most recent prices recorded. An initial correction of this gap was made within the framework of the 1991 budget, and the  Commission proposed that a flat-rate and provisional second correction of ECU 200 million be made  as part of its preliminary draft budget for 1992. The Commission also points out that Section 2 of the financial perspective contains elements other  than the structural Funds proper and that only these have had assigned to them an expenditure  target in real terms. It therefore considers that the amounts in question were mentioned by the  Court for information purposes and that they do not raise any particular problems. 6.25. The Commission points out to the Court that Table 9.1 of its report concerning the EAGGF  Guidance Section shows a utilization rate of 99.9% in the case of commitment appropriations and  98.9% in the case of payment appropriations. 6.26. The Commission takes the view that budgetary implementation in the first two years of the  reform was largely satisfactory. In 1990 the rate of utilization of the commitment appropriations of the Guidance Section and the  ERDF was adequate. In the case of the ESF there was under-utilization, and an in-depth analysis was  made of this state of affairs. In part it was due to the majority of the Member States showing a  preference for more extensive recourse, in the context of the CSFs, to the operations financed by  the other Funds than had been anticipated at the time of the preparation of the 1990 budget. As regards the attainments per objective, there were delays in the case of Objectives 1 and 5b,  while for the other objectives, particularly Objective 2, the attainment rate was higher than  expected. The unused appropriations will, however, be transferred to the financial years 1992 and  1993 under Articles 10 and 11 of the inter-institutional agreement. 6.28. The procedures concerning the use of the ecu in the budgetary implementation of the  structural Funds were adopted by the Commission on 2 July 1990 (Regulation (EEC) N° 1866/90) after  having been discussed at length within the committees provided for in Article 17 of Regulation  (EEC) N° 2052/88. It was decided on this occasion that Community grants and financing plans for the  CSFs and the forms of intervention were to be at constant prices. The procedure for indexing financing plans for the CSFs and the forms of intervention was adopted  by the Commission on 11 June 1991 and was communicated to the Member States. The indexation of these plans is currently being carried out. The problems involved are complex and have entailed adaptations of procedures and administrative  rules for the Commission and in the Member States. 6.29. Article 5(2) of Commission Regulation (EEC) N° 1866/90 provides for the arrangements enabling  Member States to submit their payment requests in ecus. Portugal and Greece have submitted requests  for grants and for payment in ecus since 1991. 6.30. The Commission agrees with the Court's comment that accounting in constant prices does not  wholly eliminate the risks inherent in the depreciation of purchasing power (total elimination of  such risks was not feasible), but it points out that indexation is carried out on the basis of the  depreciation rate of the ecu and is not intended to compensate changes in prices in national  currency. It stems, as the Court indicates, from the will, at Community level, to respect the  principle of the doubling of the structural Funds in real terms over the period ending in 1993, as  is laid down in Article 12(2) of the basic Regulation. Indexation, it should be pointed out, applies to the annual instalments of a financing plan in  force at the beginning of a financial year, reviewed if need be to take account of the progress of  the operations. 6.32. The indexation procedure adopted by the Commission on 11 June 1991 provides for the indexing  of financing plans according to relatively simple, clearly defined rules of which the Member States  will have prior knowledge. 6.33     6.34. In a bulletin published at regular intervals, the Commission gives information  relating to the multi-annual decisions for the granting of aid from the structural Funds. The first  issue of this bulletin shows the decisions taken and the aid granted, by objective and by country,  between 1 January 1989 and 31 December 1990 as well as the decisions taken prior to that but for  which the financing is included in the CSFs. Subsequent issues will give detailed information on  their budgetary implementation. ADDITIONALITY OF THE AID6.37. The Commission now has an operational methodology for assessing the  application of the concept of additionality, as referred to in the coordination Regulation. The  Member States were informed of this methodology when the Commission sent them a formal request in  August 1990 to supply the statistical data required for its implementation. The methodology was  defined by the Commission in such a way that it could be applied to all the objectives of the  reform. Experience gained so far has shown that its application is more difficult for the  objectives in respect of which the CSFs cover geographical areas for which statistical and  budgetary data are not directly available. 6.38. The Commission wishes to point out that the purpose of the letter addressed to the Member  States in August 1990 was to render the concept of additionality operational. The explanatory note  related therefore to the practical application of Article 9 of the coordination regulation.  Moreover, since additionality relates to the objectives as a whole, including the horizontal  objectives, reference should be made more to eligible total expenditure than to the total regional  expenditure of the Member States. 6.40. The methodology for verifying additionality which the Commission has been in the process of  implementing since last year involves an analysis over the whole period covered by the CSFs and a  regular updating of data. Since verification of additionality is an operation carried out at regular intervals, within the  framework of the partnership, corrections can always be made where the partners find that the  Community funds do not have an additional effect on the regions. 6.41. At the practical level, verification of additionality depends to a very large extent on  statistical information which only the Member States are in a position to supply. Hence, measuring  additionality gives rise to difficulties of a technical order. The problems, for example,  concerning statistical data and, more especially, disaggregated data, are substantial. In this  connection, the Commission has already informed Member States that it may base its assessment on  qualitative information. To this, all the problems mentioned by the Court inherent in any ex ante assessment must be added. With regard to the base year, a year preceding the entry into force of the reform had to be chosen.  That year could have been either 1987 or 1988 or, for reasons of representativeness, the average of  the two years. Assuming the Court's comment concerning a reduction in regional aid in the 1980s is true, it should  be borne in mind that additionality relates to eligible expenditure as a whole, only a part of  which concerns regional aid. 6.42. The replies sent in by the Member States following the Commission's two requests for  information in August 1990 and April 1991 are presently being discussed in a series of bilateral  meetings with the national authorities so that the specific problems concerning, in particular, the  statistical data may be examined. In 1991, the Commission departments are checking additionality as and when the statistical data  become available. The responsibilities within the Commission have been defined since the beginning of the financial  year, and an inter-departmental group has been formed (to assess and check the data forwarded by  the Member States). The Directorates-General connected with structural policy are all represented  in this group. CONCLUSION6.44. The Commission agrees with the Court's comment. Experience so far has shown that the planning procedure is appropriate for planning Community  operations mobilizing resources which exceed a certain critical level. Using the procedure to plan  resources not exceeding a few tens of million ecus might possibly encumber the planning mechanisms  to some extent. 6.45. For additionality to take concrete form in legal and operational terms, the 1988 reform had  first to take place. Indeed, the principle of additionality was defined in 1988 in Article 9 of  coordination Regulation (EEC) N° 4253/88, as mentioned by the Court in paragraph 6.37. It found expression in operational terms after the adoption in 1990 of the most recent CSFs by way  of a request formulated to the Member States which also contained methodological elements for the  verification of the principle (see answer to paragraphs 6.37 to 6.42). CHAPTER 7 The promotion of the development and structural adjustment of  underdeveloped regions (Objective 1 of the reform of the structural Funds)IMPLEMENTATION OF  OBJECTIVE 1Financial implementation7.3     7.4. In Tables 7.1 and 7.2 and in the paragraphs  concerned, the Court gives the commitments and payments for new operational programmes decided  since 1989. This does not give a full picture of all the new types of measure adopted on the basis of the  reform. Big projects, aid schemes, global grants and technical assistance, which are all types of  assistance provided for under the reform, are not included in the tables. The Court's tables do not  therefore show the proportion of measures begun before the reform. The CSFs, in accordance with the rules, include a certain number of operational programmes  (Community programmes, IMPs, IDOs, NPCIs) which have similar features to the new programmes. The  Court therefore gives an incomplete picture as regards the programme-based approach. With regard to the relative rates of payment, it should be recalled that the systems used by the  different Funds are not always identical, owing to regulations existing before the reform. For  example, certain indirect EAGGF Guidance Section measures are Community aid schemes for which  Member States submit their expenditure during the financial year ex post facto. That part of the  expenditure which is the responsibility of the Community is then reimbursed. In this case,  Community commitments and payments coincide. In the light of the above, a direct comparison cannot  be made between the rates of payment referred to by the Court. Selection of eligible regions and allocation of aid7.5     7.8. The Commission recalls that the  list of regions drawn up by the Council is based on the strict application of Article 8 of  Regulation (EEC) N° 2052/88, which specifically provides for a certain flexibility with regard to  the statutory threshold of 75  % of the Community average. In addition to Northern Ireland and the  overseas departments specifically mentioned on the list, other regions could be included where  their per capita GDP was close to the threshold and taking account of their regional  characteristics. 7.9. The Court has criticisms of the global nature of the objective criteria used by the  Commission. The other structural problems referred to by the Court are, indirectly, taken account of by the  global criteria: regional development is a global rather than a sectoral problem, although  development problems must be tackled on the basis of their specific causes. Furthermore, the use of multiple objective criteria is limited by the difficulty of finding a  reliable arithmetic weighting. 7.10. Account has been taken of the gravity of the regions' specific problems by using the regional  per capita GDP to adjust the region's population. The national per capita GNP has been used as an  indication of the Member State's ability to resolve its development problems unaided. 7.11. A significant effort has been made to aid the least prosperous regions. The ability of Member  States to solve their regional problems unaided and their ability to mobilize the resources  available effectively (Ireland in particular) have also been taken into account. This explains the  fact that the allocation of Community aid between Member States does not always correspond strictly  to the needs. See also paragraph 7.17. 7.12. The Court points out that the allocation between regions within Member States is often based  on the regional development plans the States have submitted, which have been very difficult to  change despite the Commission's efforts. The Commission points out that the tight schedule for the implementation of the reform means that  the principles on which it is based can only be applied progressively and has prevented it from  having a greater influence on the regional distribution of Community aid. The Commission intends to  intervene more effectively in future. 7.13. See paragraph 7.10. 7.14. The variable relation between the intensity of Community aid per capita and the per capita  GDP is because the per capita GDP, as explained above, is not the only criterion used to decide  upon the allocation of aid. 7.15. See paragraphs 7.10 and 7.11. 7.16. The Commission also considers that a geo- graphical analysis at subregional level would  enable the definition of more discriminating measures, particularly for those large regions which  show subregional variations. It is pursuing the efforts already made to refine the available  indicators. 7.17. When determining the allocation of aid, the Commission has indeed used, amongst other  criteria (see paragraph 7.11), that of the regions' capacity to mobilize resources. It also wishes in future to increase the transparency and coherence of the criteria used, but  stresses that, at this stage, implementation of the principles of the reform can still only be  gradual (see also paragraph 7.12). Partnership7.18. If it is to be effective, partnership must take effect at the various stages of  programming, monitoring and assessment. However, the Commission has noticed that the internal institutional structures of the Member States  can act as a brake or impose a limit on the success of the partnership on the ground, despite the  efforts being made. It therefore intends to intensify these efforts yet more in the future. 7.19     7.20. The document prepared by the Commission for the attention of the Member States  specifies that the Commission expects the plans submitted to it to have been the subject of a  wide-ranging consultation with the competent regional, local or other authorities. This was  repeatedly stressed during the high-level meetings organized in the various Member States to  explain the main principles of the reform to the authorities concerned. The Commission points out, however, that for certain types of intervention the maximum structural  effect can be achieved at the national or at the very least multi-regional level. Furthermore, the very short deadlines have not always allowed as full and wide-ranging  consultations as desired to be organized. This problem should disappear as the principles of the  reform are actually implemented more and more fully. 7.21. As regards monitoring, the regional authorities are represented on the overwhelming majority  of the committees for monitoring the CSFs and programmes, even in those Member States where,  strictly speaking, there are no regional structures. Although deadlines were too short to enable an 'official` partnership to be organized every time,  the Commission managed, in most cases, to establish a 'pragmatic partnership`. The case of Ireland, where the Commission has not yet managed to organize a regional partnership  due to the lack of suitable regional structures, illustrates the effort that still needs to be  made, although a system for the regular exchange of information with the regional level has been  established and numerous local authorities are involved in the implementation of the CSF. The Commission attributes the limited use of global grants in the CSFs for Objective 1 to the  present lack of involvement by the regions and other economic operators in the negotiation of the  CSFs. To remedy this situation, the Commission has drawn up a guide to global grants detailing the  specific advantages to potential beneficiaries and encouraging them to make use of such grants. Coordination7.25. The Commission is aware of the shortcomings in structural coordination, for some  of which it is responsible. The CSFs and the monitoring committees can make an important  contribution to solving these difficulties. As regards the remaining problems of coordination within the Member States, see paragraph 7.18  above. 7.27. In its efforts to locate the CSFs within the macroeconomic context of the Member States  concerned, the Commission has tried to take account of the general conditions in which Community  financing is granted. In Greece, for example, the Commission's aim was to promote macroeconomic  adjustment without hindering the investment necessary for development. 7.28. Of course, optimum coordination of sectoral measures as diverse as the combating of youth  unemployment and the modernization of farms cannot be achieved immediately or easily. For the  Commission, the important thing is to integrate these measures into the overall development  strategies. This permits an assessment of their respective roles to be made and therefore enables  gradual changes to be made on the basis of the overall objectives being pursued, leading to the  introduction of medium-term adjustments to improve the synergy between Funds. 7.29. See paragraph 6.15. 7.30. See reply to paragraph 6.19. 7.31. See paragraph 7.18. 7.32. The Commission recognizes that progress is still to be made on cooperation and coordination  between Funds. However, the regular exchange of information which has been established between them  and the considerable progress made towards harmonizing their respective procedures and working  methods are necessary preconditions for any coordination. 7.33     7.35. Despite certain shortcomings, coordination with other Community policies  (competition, industrial policy and environment in particular) has led to the inclusion in  decisions to grant aid of clauses laying down the conditions for the implementation of the CSFs and  operational programmes in the different sectors. As well as providing information to operators, these conditions contained in the decisions to grant  aid enable the Commission to suspend financial support where it is established that these  requirements have not been fulfilled. The fact that the programme-based approach excludes a specific examination of each project  concerned sometimes makes it difficult to make the connection between structural measures and  transport infrastructures. The Commission regards this as a minor drawback considering the decentralization of management that  can be achieved in CSFs and operational programmes through this approach. 7.37. The Commission points out that the Community loans provided for in the CSFs in no way  represent the full range of the Bank's activity in the Member States concerned, EIB financing  always having covered a multitude of projects which are not necessarily covered by the priorities  adopted in the CSFs. A comparison between the Bank's previous activity in a Member State and the  loans specified in the CSFs therefore seems inappropriate. Furthermore, as the Court points out, the approaches of the Bank and the Funds, through projects  and pro- grammes respectively, are often difficult to reconcile on the ground. 7.38. Although the Commission has involved the EIB very closely in the negotiation of the CSFs and  has kept it systematically informed about the evaluation of the various operational programmes, the  Commission recognizes that this close cooperation has not brought the results expected. The Commission believes that insufficient use is made of the Community loan instruments for the  following reasons: - in certain Member States, EIB loans are unattractive compared with facilities offered by other  financial institutions; - on an operational level, the project-based approach of the EIB and the programme-based approach  of the Commission are difficult to harmonize. 7.39. The Commission points out that, because of the fact that EIB loans usually cover wider-based  operations than those it itself supports, implementation of the rules on coordination agreed  between the Commission and the Bank raises certain technical difficulties because the Community  intervention rates are based on different criteria and are not immediately comparable. 7.40. The overwhelming majority of requests for aid on which consultation is sought give rise to a  significant number of comments and observations from the various departments, concerned to ensure  that the various Community policies are respected. 7.41. The Commission also considers that shortcomings, sometimes serious ones, exist with regard to  administrative coordination within certain Member States. Already, and on several occasions, it has  insisted on the vital need to resolve this problem and is pursuing its efforts in this direction.  The Commission refers to the comments made under paragraphs 7.25 and 7.18. ProgrammingRegional development programmes7.45. The different approaches adopted by the Member  States in drawing up their regional development plans are a result of the regulations, which lay  down that the Member States have responsibility for drafting these plans. The organization of the plans is a reflection of the administrative organization of the Member  States themselves. Commission intervention at this level is sometimes hindered by the limits  referred to under paragraph 7.18. 7.46. The Commission considers that the fact that certain plans are taken from programmes already  decided at Member State level shows that the Member States are discussing regional development  strategy, which cannot be a bad thing. Although it is perhaps true that in such cases Community  intervention does not necessarily give rise to the implementation of new measures, this situation  does enable the contribution made by Community funding to initiatives already taken at national  level to be determined, thereby increasing the transparency of Community structural measures. 7.47. The Commission is pursuing its efforts to define more clearly the commitments of the Member  States themselves, particularly in the current bilateral discussions on the additionality of  Community funding with regard to national expenditure on development. 7.48     7.50. The Commission stresses that, for certain Member States at least, a programme-based  approach involves such an organizational change and such a qualitative leap that, initially, no  more than a gradual improvement in implementation can be expected. If the results of the exercise appear, in certain respects, less than perfect, the Commission  considers that the qualitative leap aimed at by the reform has, in the main, been achieved.  Moreover, it recalls that the role of these plans differs slightly from the role of the regional  development plans previous to the reform. The latter provided a frame of reference for the granting  of aid from the structural Funds and more particularly from the ERDF. Since the reform, this role  has, to a certain extent, been taken on by the CSFs. At this level it is essential that the  objectives be quantified and the priorities set out in detail so that the effectiveness of the  planned measures can be assessed. 7.51. It is true that a common scheme was not drawn up for the current plans as was the case with  the regional development plans. This is because, as stated above, the role of the plans is  different from that of the regional development plans and because the shortage of time caused the  Commission to concentrate its efforts on the CSFs. Furthermore, the Commission points out that the Regulation makes the Member States responsible for  drawing up the regional development plans. 7.52. See paragraphs 7.46 and 7.47. Community support frameworks7.54. Progress still needs to be made in making the objectives and the  regional development priorities in the CSFs more precise. Most of the remaining problems are the  result of the very tight schedule imposed on Member States. The Commission emphasizes that, for the first time, proper negotiations took place between the  partners, both on the priorities for the development of the regions concerned and their respective  responsibilities. 7.55. The Commission is anxious to improve coordination, particularly with regard to the Community  loan instruments. See also paragraphs 7.34, 7.35 and 7.38. 7.56. This problem should disappear during the next financial year since operational programmes  resulting from Community initiatives, where already approved when the CSFs were negotiated, were  included in them. The other operational programmes will be incorporated as they are approved,  through revisions of the CSFs. 7.57. The mixing, in certain tables, of current prices and constant prices is because of the fact  that some measures already decided upon in current prices have had to be included in CSFs. This  problem should disappear in the future. 7.58. The difficulty in reading certain tables may be a result of the fact that certain measures  adopted before the reform were priced in current prices whilst the rest of the CSF is in constant  prices. The Commission points out that it has not had sufficient time to draw fully the lessons of the past  with regard to analysing the experience gained. 7.59. Since it provides an overview of all financial measures in a specific region, whether  implemented before or after the reform, the CSF can only give a global timetable. The Commission  considers that the detailed timetable of Community measures should be drawn up when the various  types of measure are adopted. 7.60. The development of productive activities is a constant aim of the Commission's regional  policies. The difficulty of precisely determining the effort made in this area is a result of the fact that  this must not only include direct investment aid but also all measures to improve the business  environment. In the cases cited by the Court, the inclusion of all these measures and not only aid to industry  would give considerably higher percentages than those shown. 7.61. Article 16(4) of Regulation (EEC) N° 4253/88 lays down that the total cost of an operational  programme in a region covered by Objective 1 should, as a general rule, come to ECU 100 million. The Commission's efforts to establish a true regional partnership have sometimes resulted in the  negotiation of regional or even subregional CSFs, involving relatively small sums even in Member  States with a large Community allocation. 7.62     7.63. Being the first exercise of its kind for Member States and also from the Commission  and carried out under pressure of time, the drafting of the CSFs has not yet achieved the level of  accuracy and coherence desired. The Commission is aware of this and is continuing its efforts to  resolve the problem. Operational programmes7.65. Despite its attempts to obtain more clarity, the Commission would like  yet more precision in the objectives and priorities contained in the operational programmes  proposed by the Member States. The Commission draws attention to the fact that, in numerous cases, the planning specified by the  reform represents a significant change to the previous way of working. Such a change can only be  implemented gradually and with the inevitable problems. 7.66. The same volume of detailed information on individual projects as provided by the  project-based approach cannot be available with the programme-based approach. The Commission has  also encouraged Member States not to describe each project in the operational programmes in detail  except in special cases or, of course, when the regulations so specify (large projects) so as to  get full benefit from the flexibility of the operational programme method. The Commission therefore considers that operational programmes should only describe the selection  criteria for projects under each measure, the selection of individual projects being made as the  programmes are carried out. This has the effect of making the operational programmes a coherent set  of measures rather than just a catalogue of unconnected projects. 7.67. The shortcomings pinpointed by the Court have now been overcome, with all the operational  programmes having been completed both with regard to the use of the ecu and the recovery of undue  payments. 7.68. See paragraphs 7.54 and 7.65. Monitoring, control and assessment7.69. The principles of the reform with regard to monitoring,  control and assessment are crucial. The Commission would, however, draw attention to the  administrative difficulties of implementing a new structural Fund approach without any transitional  period. Both Member States and the Commission still have things to learn with regard to the  application of the principles governing assessment and monitoring. 7.70. The Commission shares the Court's regret that, in certain cases at least, the time taken,  particularly to convene monitoring committees, was much longer than planned. The Commission  stresses, however, that these delays have had a very limited effect on the implementation of the  reform. 7.73. The Commission has specified the information required on financial management and control,  both in the vade-mecum for Objective 1 and 2 operational programmes and the guide for the control  of operational programmes, each of which has been widely distributed amongst operational programme  managers at regional, national and Community level. 7.74. See paragraph 7.70. 7.75. As regards regional representation on the monitoring committees for Ireland, see paragraph  7.21 above. With regard to Italy see paragraph 7.18. 7.76. As regards Fund managing departments within the Commission, a preparatory meeting is  organized before each monitoring committee meeting to define the Commission's position on the  agenda which has been drawn up. The Commission, moreover, attaches particular importance to systematically informing all of the  departments concerned both about monitoring committee meetings themselves and about the points with  which they are to deal. 7.77. The Commission is very aware of the patchy nature of the work carried out up till now by the  various monitoring committees. Some of the meetings during the period under consideration were devoted to drawing up working  methods and procedures rather than to detailed discussions of the progress of the CSFs. This is inevitable when entirely new bodies, particularly from the point of view of their  composition and functions, are being established. Once the 'framework` has been fixed, there will  be no further need to discuss it. The Commission would also point out that most of the CSF monitoring committees have concentrated on  financial analyses. Numerous committees have produced harmonized tables containing the necessary  indicators. The physical indicators are much more difficult to establish and use. Some committees have decided  to carry out monitoring at the level of the types of operational measures (programmes, etc.). 7.81. The CSFs are still not a satisfactory instrument with regard to prior assessment,  particularly of the results expected. Their content should therefore be improved in this respect. The methodology of prior assessment contained in the CSFs is important, however, since this is an  entirely new exercise both for Member States and for the Commission. 7.82. The Commission did not in fact have the assessments of the external consultants in time. It  believes, however, that even though full advantage could not be taken of their work this time, it  will in future enable the effectiveness of Community measures to be improved. Furthermore, aware of the difficulties involved in assessment, the Commission points out that to a  large extent these are the result of a lack of appropriate methodological guidelines for the  drafting of CSFs. A study of current assessment practices in Member States reveals numerous problems. The Commission  hopes that the results of the work now being carried out by independent assessors under the  direction of its staff will help to solve these problems. 7.83. This situation, which is mainly due to the conditions under which the reform has been  implemented, will complicate assessment, particularly of operational programmes already adopted. 7.84. The Commission points out that a number of operational programmes have already received  external technical assistance enabling, amongst other things, the definition of more accurate  objectives and the establishment of quantified physical and financial indicators of the progress of  implementation (Ireland in particular). CONCLUSION7.85. With regard to the implementation of the principles of the reform, the Commission  points out that: - temporal constraints made a transitional period impossible; - the lack of such a period has forced the Commission and the Member States to learn as they go  along, resulting in a gradual implementation; - the quality of implementation of the principles also depends on the quality of the partnership  established with the Member States. 7.87. The quality and intensity of the partnership varies from Member State to Member State. The  Commission stresses however that the reform and the instruments concerned have not yet been in  place a sufficient time for a totally reliable assessment to be made of the implementation of the  principles of the reform. 7.89. The Commission stresses that the programme-based approach is, in most cases, completely new,  therefore requiring that the various partners undergo a gradual learning process. 7.90. The Commission draws attention to the difficulties, particularly the administrative  difficulties, inherent in the implementation of entirely new principles in the absence of any  transitional period. The Commission also considers that the efforts already made will improve future relations with the  Member States. 7.91. The Commission is aware of the need to pursue its efforts and to encourage those of Member  States to ensure that the principles of the reform are implemented as satisfactorily as possible.  With regard to the difficult problem of additionality, it recalls that, since this principle was  newly defined in the Regulation resulting from the reform, it had initially to 'construct` the  concept before implementing it. 7.92. The Commission, which shares the desire for maximum transparency expressed by the Court,  considers that the periodic bulletin referred to in paragraph 6.17 will meet this requirement. 7.93. Aware of how important it is that its measures be assessed, the Commission has established an  assessment mechanism which will be implemented systematically with the help of external experts. CHAPTER 8 Social fieldWINDING-UP OF THE FUND WHICH ENTERED INTO FORCE ON 23  OCTOBER 1983Introduction8.5. The payments schedule set out in the remarks to the 1990 budget  provides for most of the commitments entered into under the former fund to be settled in 1991,  except in a few special cases. The Commission will do its utmost to ensure that the schedule is  respected. 8.6. The Commission agrees with the Court that the old fund cannot be considered truly wound up  until all operations pending and therefore also all outstanding claims have been resolved. The  Commission will step up its efforts to achieve this. Outstanding commitments8.8. Specific procedures were introduced in 1990 in order to ensure more  effective monitoring of the settlement of commitments within the ESF. A detailed plan for the implementation of the budget was drawn up as early as February 1990. The  plan served as a point of reference for measuring the progress of budget implementation at any  time, particularly as regards the settlement of commitments made under the old fund. Tables  specifically produced for the purpose and periodic monitoring reports made it possible to steer  implementation throughout the year, resulting in the settlement of ECU 964.1 million in commitments  made under the old fund (as against ECU 956.5 million in 1989 and ECU 890.8 million in 1988). This  result was achieved in 1990 despite the extra workload entailed by the new fund's first year of  operation. It should be noted that, out of the ECU 1 282.6 million which, at 31 December 1990, remained to be  settled under the old fund, ECU 576 million is attributable to an overassessment of pre-1990  commitments. Commitments for this amount will be cancelled in the books in 1991. Consequently, the  amount to be settled by means of payments is approximately ECU 700 million. The ECU 576 million corresponding to cancelled commitments will be re-used in accordance with  Article 7(2) of the Financial Regulation and point 11 of the Interinstitutional Agreement on  budgetary discipline (OJ L 185, 15.7.1988, p.  33). 8.9. Of the ECU 129 million which, at 31 December 1990, remained to be settled in respect of  commitments from 1985, 1986 and 1987, only ECU 27.1 million was still outstanding at the end of the  second quarter of 1991; the remainder had already been paid (or was in the process of being paid).  It should be noted that almost ECU 15 million of this ECU 27.1 million relates to Portuguese files,  for which there are specific problems (see reply to paragraph 8.10 et seq.). The decommitments which the Court describes as late concern cases involving problems or requiring  further information, which is the main reason for the time needed to process them. It should also be borne in mind that in 1990 the ESF departments had to contend with the priorities  connected with the examination and approval of the operational programmes during what was the first  year of implementation of the 1988 reform. Save in exceptional cases, it should not take such a  long time to close files in future. 8.10. It is true that at the time of the Court's audit, a considerable number of files had not yet  undergone their first examination or had not been re-examined in the light of additional  information received. This was due in large part to the start-up of the procedures relating to the  new fund, which in 1990 took up most of the departments' operational capacity. Since then things have improved and, at the end of June 1991, the number of files which had not yet  been subject to departmental examination numbered - as regards the Member States referred to by the  Court in its report - 17 for Spain, 16 for Italy and 26 for Belgium (as against 125, 377 and 198  respectively at the beginning of February 1991). 8.12. Talks with the Portuguese authorities produced an agreement on 16 May 1991 entitling the  Commission to conduct examinations and make payments in respect of individual projects included in  a group file which have been carried out by bodies not suspected of any irregularities. Once these  payments have been made, the remaining amounts still committed in respect of bodies suspected of  irregularities will be released from commitment. Provision has also been made for recommitting the appropriations needed to make additional payments  should the courts decide in favour of the bodies concerned. The Portuguese authorities have kept the Commission regularly informed of investigations begun or  in progress. Furthermore, the Commission has decided to bring civil action in all cases where this is warranted  (roughly 25 cases to date). It should be noted, however, that in most cases the national  authorities have immediately repaid the amounts unduly received by the bodies in question. Lastly, under the agreement of 16 May 1991, the Portuguese authorities undertook to inform the  Commission after one year of the state of play regarding files which were the subject of legal  proceedings. Recovery of unwarranted payments8.13. Given the rules in force from 1984 to 1989, the management  results could not have been any better. It should be noted, however, that advances increased - on  average - by around 11% per year between 1984 and 1989, whereas claims relating to the same period  increased on average by about 5.3% per year. 8.14. It is a fact that the rules which emerged from the 1983 revision afforded the Commission few  effective legal means of compelling the debtor bodies and, by virtue of their secondary liability,  the Member States to pay back - by the due dates set - the amounts of advances not corresponding to  work done. It should be noted however that, at the end of 1990, unsettled claims were roughly ECU  19 million lower than at the end of 1989. This is a noteworthy improvement. A point to be noted for the future - in connection with the new fund - is the adoption of  Regulation (EEC) N° 1865/90, under which interest on amounts overdue can be charged to the debtor  bodies. The purpose of this regulation is to reduce the time taken to recover claims. However, this  Regulation implements Article 24(3) of Regulation (EEC) N° 4253/88 and therefore cannot be extended  to cover authorizations under the former fund. 8.15 More than 90% of disputed outstanding claims relate to files dating from 1984, 1985 and 1986,  the recipients being, in the majority of cases, public bodies and, in particular, ministries. These  claims arise mainly as a result of difficulties encountered by some ministries in adapting to the  changes in the rules and the introduction - with effect from 1984 - of time limits for the  submission of applications for final payments as well as for the provision of further information  needed for the examination of payment files. The Commission will do its utmost to find a solution for the particular problem posed by these  contested recovery orders. As regards the 10 bankrupt bodies and the claims on them, in the first half of 1991, the Commission  solved the problem in five cases. A solution is in view for the other claims. Lastly, in one case  the claim will be the subject of legal proceedings since the secondary liability of the Member  State cannot be invoked. As regards the other bodies which are the subject of legal proceedings in the Member State, the  Commission will take whatever measures are necessary to recover the claims. The above analysis gives an idea of the wide variety of situations and difficulties hindering rapid  solution of the problems posed by the various categories of outstanding recovery orders. Weaknesses in the establishment of entitlements8.16. In the Commission's opinion, there will be no  substantial change in the field of ESF recoveries - as regards procedures for both appraising and  checking applications for final payment - unless the new rules which emerged from the 1988 reform  are implemented. Unlike the Court, the Commission does not think that the solution lies in giving  priority to the establishment of entitlements. Indeed, experience shows that, where the ESF is  having to contend with too many files, staff energies are, quite naturally, primarily devoted to  the overriding need to process those files which require departmental examination before any  commitment or payment can be made. This is clearly shown by the insistent lobbying by the recipient bodies to obtain payment of the  amounts due to them as swiftly as possible. It has to be admitted that in many cases, an excessive  delay in payment threatens to have more serious consequences for the recipient body and for the  Commission's credibility than the settlement of a file where the advance has been enough to cover  expenditure.Despite these difficulties, the Commission ensures that a recovery order is duly issued in respect  of all claims. In 1990, for example, 2 169 new recovery orders were issued (as against 2 130 in  1988 and 2 106 in 1989). This effort will continue in 1991, particularly as regards established  claims relating to 1989 (information about which reached the Commission in late 1990/early 1991). In this context, applications for final payment showing a negative balance are a special case in  the same way as unrequested repayments. (As regards the priority governing the way in which these  two types of file were treated in 1990 from the point of view of recovery orders to be issued, see  the replies to paragraphs 8.18 and 8.19.)These recovery orders are obviously not all issued  together but one by one as the result of work staggered throughout the year. Under these  circumstances, it is not surprising that some orders were issued in 1990 immediately after the  various deadlines provided for in the old fund whereas others were made out only much later, well  into 1990. 8.17. The Commission agrees with the Court that it should have been informed immediately of any  change affecting the circumstances on which the decision approving an application for aid had been  based. This was the reason why the 1988 reform of the structural Funds introduced totally new ad  hoc monitoring provisions (see Article 25 of Regulation (EEC) N° 4253/88). It should be pointed  out, however, that, under the former fund, the management system was extremely inflexible owing to  the excessive number of files in progress and requiring processing every year. In this connection,  it must be borne in mind that - some exceptions apart - the national authorities had great  difficulty in monitoring the progress of each of the very many projects financed by the ESF on  their territory. Penalties against Member States failing to comply with their obligation under Article 5 of Decision  83/673/EEC would require an amendment of the regulation. However, the regulation expired at the end  of 1988. Under the new rules introduced by the 1988 reform, it is expected that the Commission will be  informed more rapidly than in the past about any programmes which Member States decide not to carry  out. This will be achieved by the work of the monitoring committees and the smaller number of  programmes receiving ESF assistance (at present some 400 operational programmes - not counting the  Community initiatives - as against 10  000 projects a year under the old fund). The Commission accepts the observation that it did not send the Member States the statement  referred to in its reply to the Court's annual report for the financial year 1988, the reasons for  which are set out in the reply to paragraph 8.21. 8.18. It is true that few recovery orders were drawn up automatically on the basis of applications  for final payments showing a debit balance. The reason for this lies in the fact that in reality  the issue of such recovery orders is not always automatic. The Commission has processed this type  of application for final payment in such a way that the recovery proposal is made only after  examination of the general statement of expenditure. This ensures that the ESF accounts department  does not have to issue two different recovery orders for the same file. 8.19. It is true that in 1990 the ESF issued few recovery orders allowing the immediate  regularization in the accounts of unrequested repayments. The reason for this is that in 1990 the  Commission considered it more urgent to process those files for which accounting documents needed  first to be issued in order to speed up the recovery of claims. Under these circumstances, the  regularization of revenue already received was of secondary importance. This goes to explain the  increase in revenue on the suspense account at the end of 1990 whereas a record number of recovery  orders were issued in the course of the year. Observations on the settlement of claims8.20. At 31 December 1990 recovery orders issued in  respect of claims under the old fund totalled approximately ECU 788 million. At the same date,  roughly ECU 645 million of this amount had been settled, some ECU 129 million having been recovered  in 1990. At the same time, preparations were made for other operations such as the settlement of  disputed claims and settlement by means of setting-off. The Commission will continue to take  action, particularly as regards outstanding and disputed claims. 8.21. In 1990, in response to the comments made by the Court in its annual report for 1989, the  Commission, with the cooperation of the national authorities, began a detailed examination of  outstanding claims. In this context, rather than send an official letter, the Commission chose to  give the officials concerned in the relevant national departments a personal reminder of their  obligation under Article 5 of Decision 83/673/EEC. The French and Spanish administrations tend to be candid about their dislike for an obligation  which, given the large number of projects which was a characteristic of the way the old fund  operated, they know to be difficult to comply with. Under the rules introduced to give effect to  the 1988 reform, this should no longer be a problem, mainly because of the expected fall in the  number of files. The activity of the monitoring committees is also a major factor in determining  how soon the ESF administration can be notified of the cancellation of certain programmes. 8.22. At the end of 1990, the amount of ESF claims unrecovered at the due date was some ECU 19  million less than at the end of 1989. This result at the end of 1990 reflects the efforts made  during the year to improve the situation with regard to claims on advances. At all events, experience has shown that the Commission has only limited physical and legal means  available to deal with such massive numbers of recovery operations as those caused by the  activities of the ESF from 1984 to 1989. Furthermore, the observations made by the Member States in  reply to certain reminders from the Accounting Officer have tended to impede the systematic sending  of reminders. In such instances, it became clear that, as the authorizing department, the ESF had  first to clarify the situation of the files concerned with the national authorities. This  clarification work began in 1990. 8.23. The volume of disputed claims was impossible to ascertain in 1990. The lists of files  successively drawn up by the Commission departments - lists which could, if necessary, have been  used to determine the volume of disputed claims - were no more than working hypotheses, which  explains why they were adjusted several times. In reality, experience has shown that late  recoveries require case-by-case examination. Only such an examination reveals whether an  outstanding claim is disputed or not and whether the reasons for the dispute are founded or not.  Consequently, the overall volume of late claims which are disputed can only be determined reliably  and definitively by statistical means at a later date. 8.25. Case-by-case examination of files relating to outstanding recovery orders began in 1990,  resulting, in some cases, in acceptance of the arguments put forward by the debtor and,  consequently, in cancellation of the recovery order.As a rule, the Commission does not hesitate to invoke the secondary liability of the Member State  where the case warrants it. In the case of Belgium, the positions adopted by that State did not justify the dispatch of a  letter in 1990 concerning the claims established under the ESF. In the Commission's opinion, clarifications concerning the way in which secondary liability applies  to the Member States can only be provided by a court ruling in a real case. The Commission will not fail to bring legal proceedings when an appropriate case arises. 8.26     8.27. A number of outstanding claims have been settled by means of a setting-off  procedure. However, this rather complex procedure requires the following preliminary steps: - identification of one or more final payment files relating to a body named as debtor in a  recovery order; - examination of these final payment files and issue of a payment proposal. This phase of the  procedure may take some months, especially where problems arise or further information has to be  sought; - formal consultation of the Member State concerned in compliance with the general obligation laid  down in Article 6(2) of Regulation (EEC) N° 2950/83 (generally, two months allowed for reply) and,  in this connection, the need to ensure that the claim which is to be recovered by setting-off is  not disputed. For these reasons, the results of the efforts made by the ESF departments were not entirely evident  in 1990. Furthermore, in a number of cases, the mere announcement by the Commission of its  intention to set off claims against debts was enough to impel the body concerned to repay the  amounts it owed forthwith. Notwithstanding, at 30 June 1991, 141 additional claims had been, or  were in the process of being, settled by setting-off (as against 58 in 1990). As regards the Court's observation that the setting-off procedure should be applied not only to  final payments but also to advances, it is justified from the strictly accounting point of view. On  a more general level, the Commission cannot accept the risk of jeopardizing the completion of  projects which it has approved. 8.28. The Commission has taken note of the Court's suggestion and will see whether it can be  applied to the Community procedures. 8.29. The Commission is at one with the Court in deploring the legal situation whereby the files  covered by the old fund fall outside the scope of Regulation (EEC) N° 1865/90 on interest on late  payment and would refer to its efforts to secure acceptance of rules which would have simplified  its management role in this connection (see observations in paragraphs 9.53 and 9.54 of the Court's  report for the financial year 1988 and the Commission's replies: OJ C 312, 12.12.1989, p.  1). In  the Commission's opinion, no new circumstances have arisen to warrant a new proposal in this  matter. Re-use of revenue8.30. The decision to authorize an additional amount, which the Commission took  at the end of 1989 with a view to re-using most of the ESF appropriations corresponding to revenue,  was based on reasonable forecasts which, unfortunately, turned out to be inaccurate. Conclusions8.31. Any judgement passed on the financial management of the ESF in 1990 should, the  Commission believes, allow for the fact that, as regards the ESF, 1990 was above all the first year  in which the new rules introduced in December 1988 were implemented. Most of the Commission's  energies were therefore taken up with the need to examine and approve the operational programmes  designed to give tangible form to the assistance objectives defined in the Community support  frameworks. However, in 1990, the Commission did also devote its attention to recoveries, as illustrated by the  large number of 'orders` issued (2 169). Any operation intended to speed up the recovery of claims  depends on the fastest possible issue of new recovery orders. Furthermore, a systematic, case-by-case examination of claims corresponding to overdue recovery  orders was begun in 1990 in order to determine the reasons for the delay in certain repayments.  This resulted in many files being closed once and for all. At the same time, the ESF departments  carried out recoveries by setting off claims against debts, a technique and procedure introduced in  1990 and intended for application on a greater scale in 1991. It should be noted however that in  several cases written notice of the Commission's intention to use the setting-off procedure was  enough to make the body concerned take swift action to pay back the amounts it owed. Clearly, all  these various cases cannot be recorded as recoveries by setting-off, but the files concerned have  nevertheless been finally closed. Lastly, a Regulation providing for the charging of interest on late payments on any sum not repaid  by the set deadline was drafted and approved in 1990. However, this Regulation is to implement  Article 24(3) of Regulation (EEC) N° 4253/88 and so cannot be applied to amounts to be recovered in  cases dating from before then. In the light of the above, there would appear to be no justification for criticizing the financial  management of the ESF as ineffective. 8.32. The Commission shares the Court's concern to prevent a situation arising as regards  recoveries which would tend to create a new type of 'burden of the past`. The Commission's policy  in 1991 is to continue the practice adopted in 1990 with the ESF - as the authorizing department -  monitoring recovery files until their final closure. This monitoring will be intensified with the  establishment of an internal working group whose specific task will be to identify the problems  still posed by the different categories of claims and to propose an appropriate solution for each  of them. In addition, procedures will be adapted so that recoveries can be processed more  effectively by suitable computerized means. 8.33     8.34. As regards the future, the Commission is relying on the fact that, by radically  reducing the number of files and establishing monitoring arrangements, the new rules introduced by  the reform will enable the ESF to adopt a different approach to the handling of claims and  recoveries. In this context, the fact that a regulation now exists allowing interest to be charged  on late payments means that a solution can be found so much more quickly for the few claims which  are recorded. COMMUNITY MEASURES WITHIN THE FRAMEWORK OF THE ERASMUS PROGRAMMEIntroduction   The Erasmus  programme's management system8.40     8.43. The Commission takes the view that the diversity and  complexity of the administrative procedures are mainly the result of differences in the nature and  degree of decentralization of the four kinds of operation provided for under the Council Decision. 8.44. Contracts concluded by Erasmus Bureau on behalf of the Commission are based exclusively on a  standard contract designed in cooperation with and under the responsibility of the competent  Commission departments. Furthermore, Erasmus Bureau complies with the list of beneficiaries issued  by the Commission and the standard contract terms laid down. The final claims are drawn up by  Erasmus Bureau using a format set out as an annex to the standard contract and on the basis of the  criteria defined in the guidelines drawn up with the department responsible, approved by that  department and communicated in advance to the contractors. Aspects of the implementation of the Erasmus programmeInter-university cooperation programmes  (ICPs)8.49. The selection criteria can be broken down into qualitative and organizational criteria  deriving from the recommendations published in the Guidelines for appli- cants and criteria of  'balance` - more especially between Member States and areas of study - which can only be applied  after an initial selection is made on the basis of the published criteria and the relative  influence of which depends on the outcome of that selection. In this way, the Decision invests the  Commission with powers of discretion. In response to the Court's observations, the Commission has taken steps to give greater  transparency to the qualitative and organizational selection criteria in the Guidelines for  applicants. Lastly, while any advance application for aid is necessarily based on an estimate of expenditure,  the introduction, as from 1991, of a multiannual perspective in the programming of aid for ICPs  will make it possible to take account, in the selection for year n, of the real mobility by  institution for year n-1, an interim report regarding which will be submitted at the same time as  the application for aid for year n (see also paragraph 8.54). 8.50. Subsidies are paid by cheque made out to the coordinating university and not to the programme  coordinator, to whom the covering letter attached to the cheque is addressed. This procedure has  proved effective in speeding up the identification of funds allocated to the universities and their  utilization. In response to the Court's observations, the Commission undertakes to study the most reliable  method of payment for each Member State. 8.51. With effect from 1990, the Commission applies rules concerning the documents to be produced  in support of expenditure eligible for the subsidy as well as the mutual exclusion of expenditure  between different contracts (Article 7(8) and (9) of the general conditions governing ICP  contracts). Moreover, in its statement of expenditure, the university coordinating the ICP is  required to give details of other contracts held by each ICP participant under other Community  programmes. The obligation to retain proof of expenditure - especially original transport tickets - is not  contractually binding on the coordinating university but on all the beneficiary universities and  the Commission requires the contract and statement of expenditure to be signed by the highest  authority of the coordinating university (rector, vice-chancellor) or his representative. 8.52. As from 1991, the introduction of a multiannual perspective into the ICPs will make it  possible to obtain interim reports sufficiently early in the calendar year for actual student  mobility at each university to be taken into account in the granting of aid for the following  year. Furthermore, since October 1990, Erasmus Bureau has been placing all data - including applications  - relating to mobility by institution on computer in such a way as to be able to identify more  readily those institutions which might be tempted to inflate their student mobility forecasts. 8.53. The Commission shares the Court's reaction to the case referred to, which cannot, however, be  considered typical of inter-university coordination contracts. The project in question did appear  to offer every guarantee as regards its execution and the Commission had proposed a maximum  Community contribution of ECU 78 500 in line with the expenditure forecasts for the four types of  inter-university cooperation. This matter has already been scrutinized by the Commission and Erasmus Bureau and the appropriate  steps have been taken. Student grants8.54. While it is true that the number of students taking part in the ICPs was not  taken into consideration during the first phase of the programme, since 1990 this has been a factor  in the distribution of the 5% of the annual budget for financing student grants which serves as a  reserve fund to ensure a certain balance between countries and disciplines. The policies pursued by the national authorities as regards the distribution of grants also go to  explain the differences observed by the Court (distribution amongst the greatest number in Ireland  or, in Portugal, limitation of the number of recipients so that, compared with other Member States,  the individual grant is relatively high). 8.55. The following facts will put another perspective on the Court's observations concerning the  flow of funds: - the Commission endeavours to issue the list of beneficiary universities as soon as possible and  encourages the national authorities to simplify the distribution of grants so that grants are  actually paid to students if possible before they go abroad; - Erasmus Bureau - acting on behalf of the Commission - transfers the grants to the national  authorities as soon as it receives the signed contracts from them and at all events well before the  start of the academic year; - most students only receive their full grant well on into their stay abroad owing to the fact that  the national authorities apply a procedure whereby grants are distributed in several stages (so as  to redistribute unspent grants); - depending on the Member State concerned, the national authorities distribute the grants to  students by means of contracts with the universities, the ICP directors or the students  themselves; - Erasmus grants are mostly regarded as a supplementary contribution to the national system for  financing students and the distribution system differs from one Member State to another. (a) The problem of student accommodation is general and is a real obstacle to mobility. Several  countries and universities are in the process of releasing funds for the building of more student  residences. The Commission has just received the results of a survey commissioned on this subject  and it will give particular consideration to the possibility of regional, national and Community  measures in this connection. (b) The national authorities have been requested to take account of the cost of living in the host  Member State and a table showing travel and subsistence costs - within and between the various  Member States - has been sent to them for reference purposes. (c) Lack of knowledge of the less widespread languages in particular is unquestionably a major  obstacle to mobility towards the countries where these languages are used. The Commission has been  behind serious efforts to remedy this shortcoming, the Community Lingua initiative being an  illustration. Special priority is given to operations designed to promote the teaching and learning  of the less widespread languages. 8.56. 'Bafoeg` grant-holders who take part in the Erasmus programme in fact receive a supplement to  the German national grant based on the estimated travel expenses and the difference in cost of  living between Germany and the host country. However, it is for the university authorities to gauge students' financial needs and adapt the  individual Erasmus grants accordingly. 8.57. The Commission must guard against proposing a measure which might give rise to discrimination  between Member States, i.e. depending on whether the national authority invests the Community funds  in transit with a bank or not. With effect from 1991, and as a result of the observation made by  the Court, the contracts with the national agencies have stipulated that any interest earned on  funds in transit must be repaid to the Commission. 8.58. When the report referred to by the Court appeared, the data on student mobility for 1987/88  and 1988/89 were not fully available. For each academic year, the mobility data are communicated in detail by the universities to the  national authorities, which, after verification and synthesis, send them to Erasmus Bureau, in  principle by 15 October 1990 in the case of the 1989/90 academic year. In actual fact it has so far  been impossible to adhere to this deadline owing to the difficulties encountered by the  universities in producing their reports. The Commission will try to ensure that the deadlines set  are more strictly adhered to in future. The differences observed by the Court between forecasts and outturn are mainly attributable to the  policies concerning the distribution of grants adopted by the Member States and their national  authorities. It should also be borne in mind that if the planned number of exchanges do not take  place, the national authorities use the extra funds to increase the average level of grants (see  also paragraph 8.59.). The multiannual perspective introduced into the management of ICP contracts from 1991 should enable  the universities to plan student exchanges more effectively and thereby help them to enhance the  profile of their exchange programmes for the purpose of the Commission's annual selection exercise  as well as subsequently in the eyes of their national authority. 8.59. This year, the Commission was able for the first time to award an average monthly grant of at  least ECU 91 under the budget for Action N° 2 and with the aid of the 5% reserve fund designed to  ensure balanced participation. The average monthly grant in Ireland has gone up from ECU 56 to ECU  91, in Belgium from ECU 62 to ECU 91 and in the Netherlands from ECU 84 to ECU 91. Greece and  Portugal have also benefited from this reserve fund, with their average monthly grants rising to  ECU 154 from ECU 116 and ECU 125 respectively. There is an average 25% drop-out rate (difference between the ICP director's initial estimate and  the actual number of stays abroad), the effect of which is a commensurate rise in the level of the  average grant. Furthermore, with the financial resources of the programme it is not possible to iron out the  differences between Member States in the total amount of aid granted to the student. The national  aid component, where it exists, remains decisive. Grants to teaching staff for visits8.61. Documentary proof of the completion of study visists is  not required under the terms of the contract concluded between Erasmus Bureau (on behalf of the  Commission) and the recipients. However, under the general conditions governing contracts, teaching  staff are obliged to keep all supporting documents for five years for possible inspection by the  Commission or the Court of Auditors. The Task Force for Human Resources, Education, Training and Youth has just set an annual target of  5% for the audit of subsidies awarded to the universities (ICPs) to be conducted with the  assistance of Erasmus Bureau and is planning to take advantage of these on-the-spot operations to  inspect a similar percentage of subsidies granted for the purpose of study visits. Remarks concerning Erasmus Bureau8.62.  (d) In July 1991, the task of ex-post evaluation was  assigned to an outside firm of consultants. 8.63. The increase in the number of staff employed on indefinite-term contracts in the Erasmus  Bureau department of the European Cultural Foundation from 21 in September 1987 to 58 in September  1991 reflects the exceptional expansion of tasks required by the implementation of a programme - in  nine languages - the resources for which have risen from ECU 10 million to ECU 74 million, the  number of ICPs from 350 to 1800 and the number of students involved from 3 000 to 60 000. The review clauses referred to by the Court in the technical assistance contract have been  substantially simplified in the 1991/92 contract. Reference is now made only to the amount of the  contract, with any increase in excess of 10% entailing renegotiation of the contract as well as a  new procedure in accordance with Article 60 of the Financial Regulation (ACPC opinion) prior to the  authorizing officer's decision. Article 4.2 of the contract limits the financial consequences in  the event of non-renewal by the Commission as follows: 'The Commission shall indemnify the  Foundation in respect of any losses arising as a result of any legal obligations (including  financial commitments such as depreciation costs) entered into by the Foundation in execution of  this contract except where this contract is terminated by the Commission on grounds of the failure  of the Foundation to perform its obligations under this contract satisfactorily. In the event of  termination of this contract by the Commission, the Foundation shall take all reasonable steps to  mitigate any such losses as referred to above.`The form of contract adopted - i.e. repayment of  real costs subject to a ceiling for each period, with the exception of a management fee of less  than 5% of the total - has prompted the Commission to lay down specific provisions relating to the  termination of the contract. The other party is thus obliged to take any reasonable measure to  limit the cost. The Commission would also stress the efficiency and flexibility which recourse to an outside  contractor lends to the daily management of the programme. 8.64. At the invitation of the Commission, Erasmus Bureau took the necessary steps to obtain VAT  exemption on the purchases of goods and services which it makes under the technical assistance  contract it has with the Commission. The Belgian authorities accepted the principle of back-dating exemption to 1987. They conducted a  detailed on-the-spot inspection on 16 July and agreed to the amount mentioned by the Court. 8.65. Only two reports are due to the Commission to date, relating to the 1987/88 and 1988/89  academic years. As regards the first of these, account has to be taken of the difficulties inherent  in the programme's first year of implementation. The report for the 1988/89 academic year was submitted, with the agreement of the Commission's  departments, in October 1990. The report for 1989/90 was received at the end of July 1991. 8.66. The Commission acknowledges the fact that Erasmus Bureau's accounting system does not yet  extend to the management of movements relating to each contract in isolation and that incorporation  of this feature would enhance the speed and reliability of the information provided by the  statements of account at any time. The Commission therefore plans to take steps in this direction. 8.68. The Commission has already instructed the contractor to repay the bank charges and the  interest lost. The Commission has ensured that the contractor takes the necessary organizational  measures to prevent any repetition of the incident reported by the Court. 8.69. The contracts which Erasmus Bureau concludes on the Commission's behalf with the  universities, national authorities and other beneficiaries provide for 100% advances, which  themselves are first paid by the Commission to Erasmus Bureau. At the close of the financial year, most of the commitments for the Erasmus item have therefore  been provisionally paid, pending settlement of the authorized advances, which is not possible until  the following year at the earliest. The Commission will take steps to ensure that the latest available data relating to a given  financial year are recorded in the accounts as part of the procedure for closing the accounts that  year. Inadequacy of the auditing8.70. In view of the rapid growth of the resources allocated to the  programme, the Commission recognizes the need to strengthen the structure and resources required  for the auditing of the programme. This aspect will be addressed in the first phase of the external  evaluation survey which has just been commissioned. 8.71. It should be emphasized here that the national authorities - whatever their legal status -  are designated by the Member States in accordance with the Council Decision adopting the programme.  The UK national authority, in particular, has declared its readiness to submit to a detailed annual  audit. Conclusions8.72. The decentralization of certain activities provided for by the Council Decision  on the one hand and the fact of resorting to external technical assistance on the other inevitably  make the administrative procedures more complicated than in the case of a programme managed  entirely by Commission departments. The interplay of the Community and national measures also poses the problem of the demarcation of  responsibilities in terms of management, especially as regards the determination of the individual  amounts of Erasmus grants and their complementarity with the national systems for financing student  mobility. The Commission sets out the framework for action in the Guidelines for applicants as well as in the  contracts with the beneficiaries. The activities of Erasmus Bureau are audited in the relevant  department, with which close contact is maintained throughout the management cycle of any financial  year. 8.73. The Commission has already taken steps to incorporate actual mobility results more rapidly  into the selection process (paragraph 8.54). 8.74. A detailed answer to the criticism concerning the conveyance of funds to students is to be  found in the reply to paragraph 8.55. Despite the time taken to convey the funds, there is already evidence to suggest that Erasmus  students come from a variety of socio-economic backgrounds reflecting the university population as  a whole. This has been confirmed more particularly in the Commission's recent bilateral  consultations with the authorities of each Member State concerning the arrangements for monitoring  the Erasmus programme. Furthermore, specific guidelines are addressed to the national authorities  and the universities requesting that they endeavour to take account of the needs of the less  advantaged students. However, in some Member States, action of this nature comes up against  barriers of a legal nature. 8.75     8.76. The Commission will take account of the Court's observations (paragraphs 8.66 and  8.70). 8.77. In the period 1987 to 1991, the percentage of total student mobility accounted for by student  stays in France, Germany and the United Kingdom declined from 62 to 35%, thanks partly to the  information campaigns conducted by the Commission in the peripheral countries and the attention  paid to this aspect in the selection of ICPs and partly to the efforts of the Member States  concerned. 8.78. The Commission has initially published indicative figures for applications for assistance for  student mobility as well as those relating to the subsidies granted. In September 1990 the Erasmus  Committee was presented with the mobility results for the years 1987 and 1988. The first results of the evaluation survey launched in July 1991 are expected for January 1992 and,  in particular, will show the drop-out rates. This same survey will provide the first independent  assessment of the machinery for the management of the programme. CHAPTER 9 European Agricultural Guidance and Guarantee Fund, Guidance Section  (EAGGF-Guidance): The compensatory allowance granted to farmers in less-favoured  areasOBSERVATIONS National provisions9.13. Member States may adjust the amount of the  compensatory allowance in the light of the economic situation of the farm and the income of the  farmer receiving aid. Although they did not make use of this possibility, they took account of the  economic situation of farms and farmers' incomes in the general conditions for application of the  measure. Two Member States (Germany and France) fixed an income limit for granting the allowance to  beneficiaries, and a large number of countries restrict the grant of aid to a certain number of  units. As regards Lower Saxony, the natural production conditions in less-favoured areas do not call for  as much differentiation as in other regions of the Community (for example in France: high  mountains, mountains, piedmont and other less-favoured areas), which would entail  disproportionately high administration costs. For this reason the regional legislation concerned is not contrary to the letter or spirit of  Community rules. 9.14. Although France has defined areas for the purpose of granting the compensatory allowance for  dairy cows, this does not constitute an obligation. The determining factor is that milk production  must account for a major part of farming activity. The Commission is anxious to point out that allowances have never been granted for dairy cows in  non-mountainous less-favoured areas in Portugal, with the exception of a very limited number of  communes which, from April 1991 onwards, has been definitely fixed at two. Furthermore, in the Commission's opinion, it was not necessary to define special conditions for the  Azores, since this region is, by vocation, a milk-producing area. The Commission will ensure that such a distinction is drawn in the FRG if the need arises. 9.15. Community rules authorize the paying of allowances for areas (crop units) other than those  given over to feed for livestock already receiving the allowance intended for livestock units. Recently the Commission forwarded to the Council a report containing an interpretation of the  first subparagraph of Article 15(1)(b) based on the fact that the word 'livestock` refers only to  the species mentioned in the sentence in question, i.e. those already receiving the allowance  provided for in point (a) of the same paragraph (cattle, equidae, sheep and goats). 9.16. The national provisions concerned are based on the same interpretation as that supported by  the Commission under point 9.15. In a situation where, for example, two farmers in the same area  produce barley, it would be discriminatory if one of them could benefit from the allowance for the  product by placing it on the market and the other could not benefit from it on the pretext that he  could feed his animals with his product. It would be all the more unfortunate to penalize the second farmer since he practises a more  autonomous form of production contributing towards a reduction in imports of cereal substitutes  from third countries and in the build-up of surpluses on the cereals market. In the Commission's opinion, the compensatory allowance should be distinguished from investment  aid. The aid scheme is restrictive in that Article 3(4) of Regulation (EEC) N° 797/85 lays down  that aid may be granted only if the holding can produce at least the equivalent of 35% of the  quantity of feed consumed by its pigs. For this reason the Commission considers that payment of the compensatory allowance to this type of  farmer complies with Community rules. 9.17. The same agricultural holding may receive the two types of compensatory allowance  simultaneously, i.e.: - for cattle, sheep, goat or equidae production, an allowance calculated on the basis of the number  of livestock units (LUs); - for other forms of production, an allowance calculated on the basis of the number of hectares,  certain areas being deducted, in particular those given over to feeding the cattle, sheep, goats  and equidae on the holding. As a result, in areas where the stocking density is one livestock unit per hectare - as is the case  in Baden-Wuerttemberg - a holding of 40 ha with 12 LUs of cattle, sheep, goats or equidae may  receive an allowance for the 12 LUs (corresponding to 12 ha) and an allowance for the remaining 28  ha given over to other forms of production. Since in Baden-Wuerttemberg the amount of the allowance is the same per LU or per ha, the total  amount of allowance granted to this farm of 40 ha is 40 times the amount per ha. 9.18. Although the Community provisions do not allow aid to be paid directly for deer, the grant of  a compensatory allowance based on fodder areas used for feeding animal species other than cattle,  equidae, sheep and goats not explicitly provided for in Community rules is consistent with these  rules (see reply under point 9.15). The Commission recently reminded the German authorities that  allowances may be granted for deer only on the basis of the fodder area. Community reimbursements9.19. In line with its interpretation of Community rules, the Commission  considers these reimbursements to be in order. 9.20. The case mentioned by the Court leads to a much more extensive and complex problem affecting  the majority of aid granted by the EAGGF as a whole. The Commission is studying at present the expediency of taking an initiative on the matter. Less-favoured areas9.21. The Commission considers that all the extensions made satisfy the  classification criteria defined pursuant to Directive 75/268/EEC. 9.22.  (a) The achievement of technical and economic results which are considerably lower than the  national average for classification as a less-favoured area is verified for each homogeneous  farming area over several years (three consecutive years). Two Member States, Germany and the  Netherlands, apply the land productivity index. In the case of Germany, the index has increased,  reflecting unfavourable natural production conditions. However, the index used is still  significantly lower than the national average. (c) Directive 75/268/EEC makes no provision for a periodic revision of the Community list of  less-favoured areas. Nevertheless, if it is found that some areas no longer satisfy the conditions which made it  possible for them to be included in the list of less-favoured areas, they will be removed from it. The Commission will draw the attention of the Member States to the need to verify that areas which  have been classified still qualify as having handicaps. Administration of the measureThe national administration systems9.23     9.24. The Commission  stresses that Regulation (EEC) N° 797/85 provides that control methods are to be determined by the  Member States. The reason for this provision is that the aid is granted to more than one million  individual beneficiaries. The compensatory allowance is an optional measure largely part-financed by the Member States (75  %  in the case of the main beneficiaries). For this reason they have a direct interest in the introduction of efficient control systems  specially adapted to their agriculture and to their administrative organization. This major national financial contribution characterizing the compensatory allowance distinguishes  it clearly from the other aid cited by the Court which is financed in full by the EAGGF Guarantee  Section. When approving national and regional implementing measures, the Commission is informed of the  control methods introduced by Member States. It receives all the administrative control provisions  when the first reimbursement application is made and verifies the effectiveness of these control  systems in on-the-spot checks carried out in the Member States. However, it will examine the expediency of defining minimum Community control standards when a  number of aid measures similar to the compensatory allowance are introduced as part of the reform  of the common agricultural policy. Furthermore, it is proposing, in the same context, that the  administration and control methods for all direct aid measures should be grouped together under one  single mechanism which could also be applied to the compensatory allowance. In particular, it would  be useful to draw up a register for each holding, providing all the essential data. It also  proposes to promote the use of computerized methods in this field. The verification procedures available and the use made of themSupporting documents9.27. In the  Commission's view it is inevitable that the type of supporting document requested will vary  according to the legal situation in each region. Therefore, the letting of land without a written  contract, a traditional contractual practice, may mean that no supporting documents are submitted  in support of applications submitted by tenants. Effectiveness of the measureContinuation of farming activities and maintenance of the  population9.32. The Commission thinks that the scheme for the grant of compensatory allowances  eases the situation of farmers in mountainous and less-favoured areas in that each year it provides  them with a source of stable income, ensuring the maintenance of agricultural activity in these  regions. The farm structure situation in the Community varies considerably. It has never been established  that the grant of a compensatory allowance in certain Member States has prevented the development  of structures and the growth in the size of farms in less-favoured areas. The development of farm  structures in Portugal is no more unfavourable in classified areas than in non-classified areas. 9.33. It was established in a Commission study that almost all the agricultural income in  mountainous and less-favoured areas in the United Kingdom was made up of direct aid, and in  particular the compensatory allowance. Therefore the payment of the compensatory allowance is a  determining factor, even in the United Kingdom, for the maintenance of agricultural activities.  Furthermore, compensatory allowances already existed in the United Kingdom prior to accession in  the form of hill-farming subsidies. 9.34. The grant of the compensatory allowance is linked to the practice of agricultural activity.  Recipients of a retirement pension are excluded from the scheme once they cease to farm. In cases where farmers, in a country where there is no provision for a retirement pension, continue  to exercise their profession, they do so in order to ensure their livelihood. Therefore the social  objective of the measure is achieved in full. Furthermore, structural improvement is not  permanently thwarted: it will be achieved somewhat later than in regions in which farmers can  obtain a retirement pension. 9.35. The Commission stresses that the two situations mentioned by the Court are not comparable in  any way. Under set-aside, farmers lose income drawn from previous production, which justifies a premium  amount higher than the compensatory allowance, which is intended only to compensate for the lower  productivity of farms resulting from their natural handicaps. In addition, Member States may request not to apply the set-aside scheme in areas where natural  conditions or the risk of depopulation militate against reducing production. 9.36. The definition of a less-favoured area is based on the averages of several criteria. For this  reason it may happen that in some parts or for some criteria the situation is less unfavourable.  This explains the Court's findings. Article 3(5) of Directive 75/268/EEC also allows areas in which the maintenance of agricultural  activity is necessary in order to ensure the protection of the environment and the conservation of  the countryside to be treated as less-favoured areas. Conservation of the countryside9.37. It is left to the Member States to decide on the conditions  for the grant of the compensatory allowance linked to environmental protection requirements,  because it is at this level that needs can best be assessed. However, it is important to remember  that, like all national provisions for the application of Regulation (EEC) N° 797/85, these  conditions are examined by the Commission and the Member States in the STAR Committee. 9.38. The natural afforestation which could result from the uncontrolled abandonment of  agricultural activity could damage ecological diversity and the countryside and would not result in  rational forestry. In order to prevent the compensatory allowance from promoting intensive livestock farming methods,  its grant is limited to 1.4 livestock units per hectare of fodder area. Improvement of farmers' incomes9.39. Community part-financing does not increase linearly as a  function of the number of units held (livestock, hectares). An answer has already been given to the  question of the adjustment of the amount of allowances in point 9.13. In addition, Community  part-financing is limited to the equivalent of 120 units per farm. 9.40. Being able to benefit from the compensatory allowance in addition to the premiums granted  under the common organizations of the markets makes it possible to compensate for the extra costs  linked to agricultural activity in less-favoured areas. 9.41. One of the objectives of the compensatory allowance is to narrow the income gap between  normal areas and less-favoured areas. As regards Germany, Commission data harmonized for all the  Community referring to 1985 do not justify the conclusion that incomes are higher in less-favoured  areas than in normal areas. On the contrary, the latest available index for the income of farmers  and their families per man-work unit is 106 in normal areas and 89 in less-favoured areas. CONCLUSIONS9.42. The Commission does not share the Court's view on the flexibility left to the  Member States in the administration and monitoring of the compensatory allowance. Furthermore, it  considers the Member States' administration of this measure to be on the whole satisfactory. In reply to the Court's recommendations its comments are as follows: (a)The national provisions for the application of the compensatory allowance have already been  approved by the Commission, which has ensured that they comply with Community rules. It will  continue to pay attention to compliance in the event of any subsequent text amendments. (b)The possibility of removing some areas from the Community list of less-favoured areas is already  open to Member States, to which it will address a communication as indicated under point 9.22 (c). (c)It is examining the expediency of laying down control standards in the wider context of the aid  measures to be introduced following the reform of the common agricultural policy (see points  9.23-9.24). (d)As indicated under point 9.24, it intends to promote the use of computerized methods in the  Member States for the control and administration of the various aid schemes. (e)It is keeping this measure under constant review to improve it, given that its multiple  objectives have extended its field of application. Far from being a general aid measure, the  compensatory allowance makes it possible to modulate the effects of aid granted by the EAGGF  Guarantee Section. 9.43. The Commission points out that, in order to take account of the objectives of the reform of  the structural Funds, Regulation (EEC) N° 797/85 has been amended, in particular on the following  points: - promotion of the diversification of farm activities, - emphasis on the protection of the environment, farm hygiene and livestock welfare, - increased aid for young entrants, - restrictions on eligibility for the compensatory allowance in less-favoured areas. CHAPTER 10 Loans, borrowings and interest-rate subsidiesINTRODUCTION10.5. The  Commission undertakes continual and close assessment of the level of risk to the Community budget  related to the various loan operations guaranteed by the general budget. Indeed, in view of the increased loans to third countries, the Commission has formally declared its  intention to propose improvements in the budgetary procedure for these cases in the context of the  renewal of the IIA. Moreover, the Commission will report twice-yearly on the situation concerning  budget guarantees and the corresponding budgetary risks. As far as New Community Instrument (NCI) and Euratom loans are concerned, each year the EIB informs  the Commission of any risks of non-recovery. As in previous years, then, the EIB signalled that at  31 December 1990 none of the loans awarded under either instrument could be considered 'doubtful`  for reasons of legal proceedings against borrowers or financial difficulties affecting them. OBSERVATIONS ON THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS FOR THE NCI AND EURATOM  MECHANISMS10.9. In line with the Court's wishes, the Commission is working to improve its  procedures and is also making an effort to adapt to new techniques on the financial markets subject  to the limits imposed by its special status. 10.10     10.12. The Court's special report N° 3/90 putting forward recommendations regarding  interest-rate subsidies was published in the Official Journal on 29 June 1990. Since then, specific action has been taken to simplify matters, as urged by the Court, as regards  both the number of subsidy payments made (reduced from 10 to 3) and the reports that have to be  submitted by intermediaries and/or final beneficiaries (Court's recommendation (m) in Table 10.3). The Court's other recommendations ((i) to (l) in Table 10.3) specifically relating to the  management of interest-rate subsidies are being considered as part of the Commission's current  reflections on the integration of ECSC loans into the reform of the structural Funds. The  Commission would refer to its replies to the Court's observations in Chapter 4 of the report (Annex  to the ECSC annual report 1990) on the accounting and financial management. Observations arising from on-the-spot audits10.18. The Court suggests that investment in a coal  generating station could be considered in contradiction with the eligibility criteria for NCI loans  of reducing dependence on imported energy since though reducing dependence on imports of petrol it  increases dependence on imported coal. The Court also notes that imports of coal are from outside  the Community. These comments should be viewed in the context of Ireland's absence of known oil deposits or  commercially viable coal deposits of any significant size, and its dependence on imported energy.  The difference between these two sources of energy is that whereas coal is plentiful on the world  market, without difficulties regarding supply, the availability and price of oil have both been  volatile in the past. Excessive dependence on imported oil threatens the security of energy supply.  In diversifying its energy resources from oil to coal this project therefore reduces dependence on  imports of the more unreliable energy source and assures a greater security of energy supply. Moreover, given that the primary objective of the project is to lower electricity generating costs  in Ireland, importation of coal from the cheapest source of supply (whether from within or outside  the Community) is essential from an economic point of view. 10.19. The Court suggests that though the project itself increased employment above what was  forecast, the promoter reduced overall staff because of rationalization. The Council Decision (78/870/EEC of 16 October 1978) speaks of attaining priority Community  objectives in the various sectors, 'taking account inter alia of the regional impact of the  projects and the need to combat unemployment`. This is a much broader concept than whether or not  employment increased in the company. In reducing relatively high electricity generating costs, and  thus charges to Irish industrial users, the competitiveness of Irish industry is improved,  permitting increased employment creation. It is the overall impact on the economy which is  relevant. 10.20     10.22. The Court notes that installed capacity was underutilized in consequence of  optimistic demand forecasts. The objective of the project was to provide more efficient and cheaper base load generating  capacity, and its economic justification is recognized by the Court in paragraph 10.22.  Minimization of the cost of producing electricity throughout the entire system is a more important  economic objective than full utilization of older and less efficient generating units. It is true that the promoter was optimistic about future demand trends, as were many other similar  establishments in the Community prior to the second oil price shock of 1979-80. 10.24. The Court has indicated that it was unable to substantiate the integration of the project  with an 'overall project of economic and industrial development`. In Italy there was no formal overall development programme covering all aspects of regional  development at the time. There was, however, a development strategy consisting of actions aimed at  specific objectives. In this context the project can in fact be considered as part of an overall  industrial and economic development initiative. The Italian State, through the Cassa per il  Mezzogiorno, intervened essentially for infrastructure and infrastructural networks, but not for  housing. The NCI project was designed to provide low-cost housing principally for industrial workers. Each  sub-project financed was located close to a new Cassa industrial zone, with the objective of  complementing the contribution of these zones to economic development in various regions of the  Mezzogiorno. During the appraisal it was ascertained that each of the sub-projects was justified  both in the light of housing conditions and of the economic structure of the local economy  concerned. The promoters, a combination of public sector, private sector and the Italian cooperative  movements, acted under the auspices of the Italian public authorities in bringing this project to  fruition. 10.25. The aim of the Community project, which was to build 5 370 housing units, was met with room  to spare. In fact, 5 453 units were built. The Commission regrets that construction under the  responsibility of the Italian authorities, where the Commission and the EIB have no powers of  control, was not as successful. 10.26     10.29. In practice, given the type of project involved, the 12.5% cost overrun and the  delays were within reasonable limits. To put matters into perspective it should be borne in mind  that between 1981 and 1989 housing construction costs in Italy approximately doubled, so that cost  increase for this project was small by comparison. 10.32. The Commission takes the view that the tripartite agreement between the EIB, the Court of  Auditors and the Commission has operated well initially. Discussions were held between the three  institutions in September 1991 to improve practical implementation. These talks resulted in an  agreement on arrangements for closer collaboration. 10.38. The Commission is willing to examine with the EIB the scope for expanding upon, where  possible at the stage of decision-making on eligibility, information on expected performance of  investment projects within the Community which are financed by future Community loan operations and  managed on behalf of the Community by the EIB. 10.41. As noted with respect to paragraph 10.35 the Commission's examination relates to conformity  with Community legislation and objectives and not only to the criteria given in Article 130. The  examination already takes account, as has the EIB in revisions to its own eligibility criteria, of  the Single European Act. As far as the reform of the structural Funds is concerned it has been  agreed with the EIB that information should be supplied on each project which indicates whether it  falls within a region covered by the structural Funds and which permits an examination of the scope  for combined operations with the structural Funds. The EIB subjects all projects submitted to it to  a rigorous economic and financial appraisal, covering where applicable expected employment  creation, productivity increases, improvements in competitiveness, etc. Detailed information on  these aspects cannot, however, always be verifed at the time decisions on project eligibility are  taken. At that stage the Bank provides the Commission with the information then at its disposal,  which is normally adequate to enable the Commission to take its decision. Where necessary, the  Commission seeks additional information in order to be able to reach a decision on conformity with  the provisions of Community policy, including notably Article 130 of the Treaty. The Commission  discusses regularly with the Bank possible improvements in the data provided when the Article 21  procedure is launched. It is willing to explore with the Bank the usefulness and practicality of  expanding, where appropriate and feasible, pre-appraisal information on expected performance, as  suggested by the Court. The Commission doubts, however, the realism of trying systematically to  provide an assessment in quantitative terms and in advance of the contribution of specific projects  to particular Community policy objectives such as environmental improvement and protection,  cohesion, competitiveness, etc. It should be emphasized in any case that following project  completion the Bank produces detailed evaluation reports concentrating on the extent to which  initial forecasts and policy objectives have been achieved. Reports on projects involving Community  funds are made available to the Commission. CONCLUSION10.42.  (b) The Commission would refer back to its reply to paragraph 10.9. It agrees  with the Court on the importance of adapting its procedures. (c  and  (d) The Commission would refer back to its reply to paragraphs 10.10-10.12. The Court's  recommendations form an integral part of the Commission's current reflections on the integration of  ECSC loans into the reform of the structural Funds.10.43.  (a  (i) As indicated at paragraph 10.18, the Commission believes that the project has  helped to increase the Community's security of energy supplies. Dependence on energy imports has  been reduced in relative terms. From an economic point of view it was more efficient to create and  operate new capacity, which explains the temporary under-utilization of existing capacity. Besides the fact that the project created more jobs than planned, it should also be noted that by  reducing what were relatively high electricity generating costs, it has enhanced the  competitiveness of Irish industry, allowing higher job creation throughout the economy. (a  (ii) See the reply to paragraph 10.18. (b) Because of the poor record of the projects outside the control of the EIB and the Commission,  the knock-on effects were probably weaker than anticipated. (c) As stated in reply to paragraph 10.32, there has been an agreement between the EIB, the Court  of Auditors and the Commission on improving the arrangements for applying the tripartite  agreement. 10.44. The Commission is willing to discuss with the EIB the scope for expanding upon the  information supplied on expected performance of projects, where appropriate and feasible, in  relation to both agency operations and investments supported by the EIB's own resource loans.  Precise quantification, however, will often not be possible for many of the objectives involved. CHAPTER 11 Research and energyIMPLEMENTATION OF THE BUDGETVerification of  costs of research contracts11.4     11.6. The actual duration of the audits carried out varies  according to the quality of the contractor's accounting system, the documentation, the cooperation  given to the auditors, and so on. This in turn affects the level of costs. Secondly, audits cannot  be carried out until after the accounts for the financial year in question have been closed and  until the costs have been accounted for and, where appropriate, balanced. The Commission has taken  the necessary steps to reduce the overall period of time between the start of an audit and the  submission of the final report. The Commission shares the Court's view that simplifying the financial conditions applicable to  shared-cost R& TD contracts would considerably facilitate the negotiation and management of such  contracts and the verification of costs. A proposal for a fixed hourly rate is under examination. DG XII intends, in line with the practice adopted by DG XIII, to increase the number of controls on  costs relating to a single year, widening the scope of the audit if it reveals problems for the  year in question. This method reduces costs and implementation times; it also has the advantage of  enabling the audit to be carried out before the end of the research project, thereby facilitating  any financial adjustments. The reform of management structures undertaken by the Commission in DG XII and DG XIII in the field  of control, as for all 'horizontal` services, involves the gradual introduction of unified  procedures and a strengthening of the coordination that already exists, particularly through the  exchange of information on current audits. 11.7. DG XII and DG XIII do use different computer systems for managing operations relating to  projects, contracts and financing. While this is admittedly partly due to historical reasons, it is  also a response to the specific features of the programmes and their management. The problem of  compatibility between the systems only arises in terms of the convergence and consistency of the  information which the systems produce for management. The joint Framework programme management  information system (FPMIS) is being developed to address this problem. The Information systems  managers (ISMs) in the two DGs are working closely together on the development of this system. As Sincom is the only accounting system used by the Commission, and local systems are a basic  component of its architecture, DG XII and DG XIII have always maintained compatibility with the  Commission's central accounting system in the past. The local systems for accounting and financial management are modules designed for day-to-day  management, their aim being to improve departmental efficiency, on the one hand, and to supply data  to the general accounting system, which is the official Commission system, on the other. The  development of interfaces with Sincom therefore helps with data convergence, a process which is  made easier by the gradual alignment of management procedures. THE COURT'S OBSERVATIONSProjects in progress11.17. The Commission sees nothing unusual in the  fact that more than half of the projects are still in progress one year after the closure of the  programmes. The average duration of a contract is between five and seven years and contracts are  concluded at different times during the four-year programme period. The relatively long time-lag between the Commission's decision and the signing of the contracts is  due to the fact that the technical annexes to the contracts, which differ in many cases from the  initial proposal, have to be adapted to the provisions of the decision. Another reason is the need  to consult the departments involved and to complete the financial procedures. In most cases,  however, these delays do not interfere with the implementation of the projects inasmuch as the  notification of the Commission decision constitutes the original legal undertaking enabling the  successful tenderers to start work on the projects without waiting for the contracts to be signed.  In 12 of the cases mentioned by the Court, the fact that these contracts had not been signed by the  end of the programmes was due to difficulties during the negotiation of the technical annexes.  There are still difficulties with four contracts. The Commission feels that the Court's observations, based on an analysis of the projects completed  at the end of 1990, should be considered in the context of a constantly evolving situation. There  is not necessarily a correlation between the extent of market penetration by innovatory projects  which have received Community support and the end of the contracts. In a good many cases, an  additional period - which varies in length according to the individual case - is essential in order  to gauge the full effect. Abandoned projects11.20. The form prepared by the Commission for submitting applications for  Community support is a complex document which enables tenderers to check for themselves whether  they have sufficient technical, economic and financial information at their disposal to submit the  application and to enable the Commission to take its decision. The Commission's departments themselves carry out an evaluation of the files, which are likewise  evaluated by external consultants and by the Advisory Committee. There is therefore a three-tier  evaluation process in which a large number of qualified experts are involved. The percentage of  abandoned projects noted by the Court, without being excessive, is inherent in the nature of risk  investment in innovatory projects. 11.21. The Commission has been endeavouring for a number of years to cancel committed  appropriations as soon as the state of the files permits, i.e. some months after the unilateral  cancellation by the Commission of its legal obligations. Commercial exploitation11.22. The criterion of commercial exploitation adopted as the determining  criterion for evaluating the success of the programme, while undoubtedly valuable, should be  handled with care. By their nature, technological development projects in the hydrocarbons sector entail a technical  or financial risk; hence their financing difficulties which provide the justification for Community  support. Furthermore, at the application stage these are projects which merely offer a prospect of  commercial viability and which have no guaranteed market. Experience has shown that commercialization of results takes place within three to five years after  the closure of a project; this period can be as long as eight years in a few exceptional cases. The  extent of commercialization becomes a far more meaningful concept if it is applied to all projects  since 1973, since this eliminates the time factor. In 1988, 65 of the projects supported since the  beginning of the programme had reached the commercialization stage. This figure has now grown to  74, indicating that commercialization of the techniques developed is continuing. It should be noted  that, in the case of projects receiving aid under the programme to which the report refers  (1986-89), the number of examples of commercialization has increased slightly since the Court's  review and several cases which are likely to have a favourable outcome are under discussion. This  confirms how important it is to see the figures against the background of an evolving situation, in  order to avoid drawing premature conclusions. 11.23. The Court observes that 'under the energy demonstration programme, 38 projects in all were  regarded by the Commission as having totally achieved the stage of commercial exploitation`. It  should also be said that these projects make up 38% of the completed projects (99). The Commission  regards this as a remarkable percentage for a programme whose projects inevitably entail technical  and economic risks. The Court rightly points out that the Commission does not have sufficient information about whether  projects which have been supported and successfully completed have served as a model for other  projects. The Commission is evaluating this question as part of the Thermie programme. 11.24     11.25. The Commission feels that, in practice, it is extremely difficult to establish  after the event whether or not a project would have been carried out without Community aid.  Referring to the evidence put forward by the Court concerning 15 completed projects, the Commission  would point out that: (a)the short length of time needed to recoup the cost of investments is linked to the profitability  of projects which, because of the financial risk involved, could not have been carried out without  Community aid; (b)the aid granted has acted as a catalyst for the implementation of projects. In a good many  cases, by providing financial backing and a 'seal of approval` Community aid unlocks other  non-Community aid or bank loans, and this multiplier effect is conducive to sound financial  management (Article 2 of the Financial Regulation); (c)while it is natural that the non-eligible part of a project should start in advance of the  Commission decision, the same is not true of the eligible part (see reply to point 11.17); (d)the Commission takes account of the multiplier effect of projects in its evaluation of  submissions. The three-tier evaluation process (see reply to point 11.20) allows a decision to be taken between  inherently contradictory criteria, namely financing difficulties which justify support and  prospects of economic viability which present the issue in terms of an investment. Clearly, a  promoter would not wait a year (or even longer) for possible financial aid from the Commission for  a project which was certain to succeed without Community aid. Effects on competition11.26. Under the Commission's operating procedures, the agreement of the  Directorate-General for Competition (DG IV) is required prior to the decision to grant Community  support in the energy sector.11.27.  (a) As stated at point 11.26, it is for DG IV to decide on aspects related to competition  and on the compatibility of national government aid with Community law. (b) In the case of national aid to research and development, the 50% maximum rate of aid applies to  basic industrial research and not to fundamental research (OJ C 83, 10.4.1986, p. 2). Moreover, the  rate of 25% is permitted for applied research and development. In the energy sector the Commission is simply abiding by the rules which stipulate that aid may not  exceed 40% of the total project cost. The Commission would stress that in the large majority of  cases, even if the level of aid is at or close to the 40% mark, it is only the innovatory part of  the project that is financed. This means that the actual level of aid granted is well below 40% of  the total cost of the project. As regards any additional aid which may come from the Member States, the Commission would stress  that this aspect is taken into account in the decision-making process. In fact, the majority of the  projects submitted did not have national financing secured at the decision-making stage. In  accordance with the Community framework for State aids for research and development, higher aid  levels than those generally permitted may be approved, including cases where the project is linked  to a Community programme or where the results are widely disseminated. The additionality of the aid  is one of the criteria which qualifies a project for the exception provided for in Article 92(3)(c)  of the EEC Treaty authorizing a higher rate of aid compatible with the common market. 11.28. In most cases the Commission has deliberately opted to provide support at the maximum rates  (35% or 40%, depending on the case) so as to ensure that a limited number of projects receive a  substantial amount of aid rather than spreading the aid too thinly, thereby avoiding an increase in  the number of abandoned projects referred to by the Court at point 11.20. 11.29. This is an isolated case which accounts for 0.2 of the programme budget. The Commission has  taken steps to recover the ECU 100 000 paid to the contractor. Coordination with the other Community programmes11.30     11.31. In accordance with the  Commission's operating procedures DG XVII consults the other DGs involved before proposing a  decision. DG XVII is likewise consulted on projects under other Community programmes with which it  is associated. Coordination took place with DG XII for the programme of support for technological development in  the hydrocarbons sector. All the project proposals received were sent to DG XII for scrutiny, while  DG XVII gave its opinion on those submitted under the Joule programme. This made it possible to  improve the technology evaluation and to rule out projects which were too far upstream. The  Regulation 3639/85 Committee also had occasion to recommend that a project be transferred to the  Joule programme with a favourable assessment. That transfer was carried out. Moreover, the distinction between research activities and development activities is clearly not an  easy one to make, a fact which the Regulation on support for technological development took into  account. This explains why, in the case of a few projects, research activities may have been  included in development activities. None the less, this is a minor aspect in terms of the programme  as a whole and the Commission considers that this shortcoming is not in evidence to any marked  extent in the majority of the projects at which the Court has directed this criticism. 11.32. Since 1986 DG XVII has played an active part in the preparation of the Cordis (Community R&  D information system) project run by DG XIII-C. It was one of the first Directorates-General to  supply information for this database, which now contains data on all the projects managed by DG  XVII. Moreover, Cordis also contains synopses of every EUR report on demonstration projects  published by the Office for Official Publications. Because of the scale of the programme and the  need to disseminate the results, the Commission has developed the OPET network as part of the  Thermie programme, in parallel with the Sprint and Value programmes. Community value-added11.33     11.34. In recent years the Commission has found that more and more  projects are in fact being submitted jointly by undertakings from several Member States. Although  this was not the case in the early days of these programmes, one-third of projects are now  multinational, as the graph in Annex 2 clearly shows. Ad hoc measures have been taken under the  Thermie Regulation to strengthen this Community element. In the case of the Regulation on support for technological development in the hydrocarbons sector,  the criterion that preference should be given to collaborative projects was applied, but under the  terms of Article 4(4) of the Regulation this criterion was merely an adjunct to the criteria  defining the nature of the project. Nevertheless, the trend has been favourable, as the table below  shows.    >TABLE>The right-hand figure in each case represents the number of cooperative  projects involving oil companies. 11.35. This point only deals with Sesame, when in fact the dissemination of information on projects  involves numerous other activities and publications. Apart from direct consultation of Sesame, some  3 000 requests for information catalogues describing energy demonstration and hydrocarbons projects  have been answered. Data contained in Sesame are also sent out in response to requests from  undertakings (averaging two per week). Since 1989 the number of bodies exploiting Sesame commercially has quadrupled as the number of  users has increased. The energy departments in the Member States now use Sesame when evaluating  proposals for new projects in the energy technology sector. 11.36. It is highly unlikely that the results obtained through the hydrocarbons and energy  demonstration programmes will go unnoticed in the various development activities in Europe, since  the 'potential customers` for whom these programmes are intended are specifically targeted. 11.37. The fact that four Member States give national aid to technological research does not mean  that they should be precluded from receiving Community aid. The subsidiarity principle dictates  that Community support be allocated where it is most effective. Dissemination of results is not  confined to each individual Member State but extends to the Community as a whole. Moreover, these  programmes did not set out to correct regional imbalances, as was the case subsequently with the  Thermie programme. External evaluationsReport on the hydrocarbons programme11.39. There is nothing unusual about the  fact that no projects supported between 1975 and 1985 were exploited commercially between 1985 and  1988, the year in which the evaluation referred to by the Court was ordered by the Commission. This  situation is explained by economic trends, including the fall in oil prices. Since 1988, there have  been examples of commercial exploitation of these projects which, in fact, were supported under the  regulation which preceded Regulation 3639/85. As the Smith-Rea evaluation report explains (p. 26),  'There is a considerable time delay before project commercialization can occur`. In fact 65  projects, representing 20% of completed projects, were commercialized during the period 1975-83. In the Commission's opinion there is nothing to suggest that similar figures will not be achieved  in years to come. As mentioned earlier, the development that is taking shape will take several  years to reach its peak. Report on the projects relating to energy saving and to renewable sources of energy11.40      11.41. The Commission agrees with the Court's recommendations, which it has already taken into  account to a large extent in the implementation of the Thermie programme. 11.42. The Commission intends to undertake targeted projects in 1991 and expects to step up this  action in subsequent financial years. THE THERMIE PROGRAMME OF 199011.43     11.45. In its assessment of the implementation of the new  Thermie programme the Commission points out that this analysis was made six months after the formal  adoption of the Regulation by the Council on 29 June 1990. In this new programme the Council and  Parliament took the view that an initial report evaluating the results obtained and examining the  compatibility between national and Community action (Article 17) should be drawn up by 17 July  1993, i.e. three years after the entry into force of the Thermie Regulation. This shows that the  Community authorities appreciate the influence of a programme's duration on the evaluation of its  results. The Commission has implemented without delay a number of support measures, including market  analyses, dissemination activities and, in particular, the setting up of a network of 35 bodies to  promote energy technologies (OPET). CONCLUSIONS11.46. The Commission would like to elaborate on the Court's conclusions as follows: (a)It is normal in the case of projects spanning several years that more than half of the projects  should still be under way one year after the last decision taken under the programmes. This finding  is not to be regarded as evidence of delays in implementation (see point 11.17). The percentage of  abandoned projects noted by the Court, without being excessive, is an inherent feature of risk  investment in the innovation process (see point 11.20 and Annex 1). (b)The reference period chosen by the Court (1986-89) for its assessment is too recent to be a  meaningful indicator of commercial success, since some projects may not achieve market penetration  until several years after being completed. The evaluation of the results obtained in 1990 on  projects completed between 1986 and 1989 is, in the Commission's opinion, premature and will not  provide a true measure of the success of these programmes (see points 11.10 and 11.22). The Commission has difficulty in accepting the premise that the commercial success of certain  projects is unrelated to Community support. The evidence put forward by the Court is not conclusive  in this regard (see points 11.24 and 11.25). (c)The impact of subsidies on competition rules has been the subject of an interdepartmental study,  which showed that the generally accepted 25% threshold for national aid to demonstration projects  could be raised in the case of projects linked to a Community programme or where the results are  widely disseminated. Additionality of support is one of the criteria for applying the exception in  Article 92(3)(c) of the EEC Treaty (see point 11.26). (d)The projects receiving Community aid under the hydrocarbons and energy demonstration programmes  have been evaluated by comparison with the special Community research programmes in the energy   sector, and the Commission has made the necessary transfers (see points 11.30 and 11.31). Coordination with the other Community programmes is working properly. This coordination applies not  only to the research programmes but also to other programmes such as Valoren, which covers a more  limited area and pursues regional policy objectives (see points 11.30 and 11.31). (e)Community value-added lies in the increase in cooperation between undertakings in different  Member States, which in turn strengthens the industrial fabric and gives Community industry an edge  over its competitors. Moreover, because of the scale of the funding requirements in certain  technology sectors, it is essential that efforts be coordinated and implemented at Community level  if this cannot be done in the Member States. Such are the objectives of the Thermie programme. It  is important to emphasize that Community value-added is reflected not only in the dissemination of  results at Community level but also in the implementation of projects which would not have  materialized without Community support (see points 11.33 and 11.34 and Annex 2). 11.47. The Commission is continuing with the consolidation activities or support measures under the  Thermie programme, and with the coordination of national energy policies. However, it has  reservations about the scope for tightening up the project selection procedure, which it sees as  offering sufficient guarantees taking into account the high-risk nature of the projects submitted  for Community support. >TABLE>>TABLE>>TABLE>CHAPTER 12 Aid to the  countries of Central and Eastern EuropeBUDGETARY IMPLEMENTATION12.7     12.9. The pattern of  commitments and disbursements observed by the Court does not necessarily allow the conclusion that  there were delays in the implementation of programmes. The sequencing of commitments and  disbursements is in fact typical for the programmes funded by Phare, where an initial commitment is  followed by gradual disbursement in accordance with the schedule of implementation which varies  from one operation to another. In the case of 1990 activities, the fact that both commitments and payments tend to be concentrated  towards the end of the year is the inevitable consequence of: (a)the time necessary for proper appraisal and preparation of proposals, and(b)the fact that the  amendment to Council Regulation (EEC) 3906/89 admitting Czechoslovakia, Bulgaria, Romania,  Yugoslavia and the German Democratic Republic was not adopted by Council until 17  September 1990. OBSERVATIONS IN RESPECT OF THE VARIOUS TYPES OF AIDSubsidies12.12. A framework agreement with  Romania was concluded on 12  March 1991 at the time when Romania was deemed to have met the  conditions necessary for access to Phare funds; these conditions were agreed between the Commission  and the G24. For the USSR, a protocol containing the equivalent stipulations was signed in August  1991, three weeks after the Regulation covering technical assistance to the USSR was adopted by the  Council. The Commission is at present examining whether the protocol can still cover the rapidly  changing political situation in the USSR. Description of the system of implementationThe multiplicity of programmes12.18. When the Phare  action commenced in January 1990 both parties recognized that they were launching a programme of  assistance in respect of systemic and structural reform which was, in terms of both content and  scale, totally unprecedented. Given the absolute obligation for the Commission to commit all funds  before the end of 1990, the time available for reflection and planning was strictly limited. In  addition, the processes by which the recipient countries selected the sectors and projects  considered to be of national priority had not been fully developed (Article 3 of Regulation (EEC)  N°  3906/89 obliges the Commission to take account of the priorities set by the recipient  countries). In these circumstances it is clear that the consequence was a wider range of programmes  than would have been ideal. This situation has since been restricted by the adoption by the  Commission of a limited number of 'core activities` which formed the basis for programming in 1991:  restructuring of public enterprises, modernization of financial services, promotion of the private  sector, and development of the labour market and the social sector. The core areas are complemented  by support in related sectors such as energy, environment, telecommunications, transport, health,  housing and education. 12.19. The respective roles of delegations and headquarters have been developed and clarified.  Delegations have been given detailed guidelines on their roles in the various phases of the  programming and project cycle. The Commission is now testing how these guidelines are working in  practice and will make further clarifications in the light of experience during programme  implementation. Consistent framework for the aid12.21. Since 1991, the Commission and its partners have both  adopted a two-year approach to programming, allowing more pragmatic and flexible use of Phare  assistance, including improved coordination with other instruments and sources of aid. State of progress of the programmes12.25.  (a) Various circumstances in 1990 were behind the  storage of 20% of the plant health products delivered as observed by the Court: - spring came very early (a month), which meant that some products arrived too late; - even though the prices of the products were subsidized, they were still far higher than in  previous years and were thus beyond the means of the users; this is because farmers' financial  resources are very limited and borrowing costs are high. By contrast, during that period the prices  of agricultural produce did not rise to the same extent; - the Polish Government's distribution system was in the process of reorganization and did not  always function satisfactorily. In order to see the programme through, even subject to these constraints, the Commission took the  following steps in April 1990: - an independent monitoring mission was set up to pinpoint the shortcomings in the distribution  system and to make recommendations for strengthening it; - the Ministry of Agriculture was given aid to enable it to complete the technical assistance  component of the programme, in particular the measures for the development of a new distribution  network; - a contract was concluded with Polish specialists to help the Polish Government organize an  auction of the products in store in January and February 1991, after which all the stocks were  disposed of on the terms approved by the Commission. (b) The Commission will draw the attention of the Polish Government to the need to produce a report  on the utilization of the pesticides, as required by the FAO's international code of conduct for  distributing and utilizing pesticides. (d) The Commission agrees with the Court that there must be a management and monitoring system  covering more than just the delivery of the plant health products. However, it is convinced that it  took all the necessary steps to set up this system, with due respect for the objectives of the  programme as described in the financing agreement. The Commission concluded a contract on behalf of  the Polish Government with the Foundation for the Development of Polish Agriculture (FDPA), which  was assigned certain logistical and training functions (programme monitoring, training in the use  of pesticides, operations for the development of the distribution network). In addition, since April 1990 the Commission has had a contract with an independent bureau of  consultants which should enhance the monitoring of the programme. This has involved the following: - control of delivery dates; - identification of reasons for any delays and/or errors or difficulties; - description of the system for organizing sales to farmers, including on-the-spot inspections of a  number of final recipients (private farmers, agricultural cooperatives, State farms); - description of the method of collecting the counterpart funds created by FDPA; - drafting of appropriate new proposals for improving the operation of the programme; - check on irregularities to eliminate the risk of re-exports to third countries. The various monitoring missions identified failings in the system so that they could be rapidly  corrected. One thing revealed by the monitoring reports is that the physical receipt of the  products by FDPA was satisfactory. Counterpart funds12.28     12.29. At the beginning of food deliveries in 1989, assessment of the  needs was extremely difficult. The severity of the food supply situation in Poland was, however,  demonstrated by empty stores all over the country. In the circumstances, an urgent decision on the  delivery of food aid to Poland was necessary; this was taken in July 1989. However, when the Polish  authorities approached the Community again in January 1990 for delivery of an additional 1 million  tonnes of breadmaking wheat, since, in their view, the supply of bread was endangered, the  Commission expressed its doubts to the Polish Government on the need for such a shipment. However,  the then Prime Minister of Poland, Mr Mazowiecki, personally insisted that at least 500  000 tonnes  were necessary. In response the Commission agreed to send another 300  000 tonnes. 12.30. The Commission has no evidence that any re-exports of products delivered as food aid or  exports of comparable products from Poland took place. Indeed, even now, there exists an embargo on  all exports of wheat from that country. 12.36. From the beginning, the principle determining the method of financing was that loans were  provided to private farmers, and grants to public utilities (telephone, water and gas supply  organizations). However, since the beginning of 1991, public utilities have also been financed  through loans, and grants are no longer provided. 12.37. The Commission is currently preparing such an evaluation, and will present it to the  Budgetary Authority. 12.38. Wherever a credit is cancelled, the decision is taken by the Board of the counterpart fund  after consultation of the Commission. The Commission considers the criteria to be on the whole  uniform and clear, in the sense that they only refer to serious unforeseeable events such as fire  or the death of the beneficiary. However, a certain amount of subjectivity in such cases is  inevitable. The Commission and the Polish authorities have been very well aware of the shortcomings of the Bank  for Food Economy, whose main advantage has been its extensive network of offices throughout the  country. It is, however, expected that the Bank for Food Economy will shortly be replaced. 12.40. The Commission recalls that, according to the Memorandum of Understanding made on 30 October  1990 between the Polish Government and the Commission, the utilization and the management of the  counterpart funds are the responsibility of the Polish Government. Under the decision procedure  contained in the Memorandum, an indicative programme of counterpart funds utilization is required  to be approved, in principle each year, by the Minister in charge of aid coordination and the  Commission. The first such indicative programme remains to be finalized. One cause for the delay  may be attributed to the change of ministerial responsibilities for aid coordination in the  aftermath of the presidential elections at the end of 1990. The Polish authorities have been  actively engaged in preparing options for the indicative programme. The Commission, for its part,  has been kept informed and has impressed on the Polish authorities the need to finalize the  programme and the corresponding management rules for the various types of chosen expenditure. In  the interim, the funds have been placed on interest-bearing accounts. 12.41     12.42. As soon as the Commission's attention was drawn to the question of re-exports of  pesticides, the Commission approached the Polish Government in September 1990 asking it to take  steps to impose a ban. The Commission also contacted the exporting firms in the Community and studied Community import  statistics during the period in question. It was found that the re-exports were on a limited scale  (around 350 tonnes of pesticides out of a total of 7 000 tonnes) and also that the products were  not smuggled back into the Community but were cleared through customs. Following the contacts with  the Polish authorities, measures were taken and this traffic was halted in November 1990. There is to be an evaluation as part of a sectoral study on pesticides. 12.43. The Commission takes note of the Court's concern about coordination of the various financing  instruments and will continue its efforts to improve coordination further. Regarding coordination between Phare operations and the use of counterpart funds, the Commission  refers to its reply to point 12.40. Coordination and complementarity will be assured by means of  the annual 'indicative programme` for the use of counterpart funds. While a situation of complete  transparency has not yet been reached, coordination with other G24 donors is already very active  and is steadily being improved, especially by means of coordination 'in the field` (meetings of G24  representatives with Commission delegates and with visiting mission teams in the capitals). This  includes coordination with the EIB, which is, of course, also taking place directly between Phare  and the EIB through regular coordination meetings. 12.44. See reply to paragraph 12.36. Loans: Community financial instrumentsThe Commission's medium-term loan to Hungary12.50. The 1991  budget passed by Parliament does in fact provide a guarantee for the second instalment of the loan  to Hungary. However, in the version published the necessary adjustment to Article B0-210 was not  made, only the remarks being amended. A corrigendum is to be published shortly. Loans from the EIB's own resources to Hungary and Poland12.51. The amount of the risk mentioned by  the Court tallies with the Commission's estimate. Loans from ECSC resources to Hungary and Poland12.53. The Commission considers that the main  reasons for non-disbursement of ECSC loans in 1990 include the following: - The Polish and Hungarian Governments' delay in drawing up overall and sectoral plans of  government priorities and the consequent difficulty for the Commission of appraising projects in  sectors which will need complete restructuring. - Changes in internal procedures, personnel, law and policies in the countries concerned. - The necessity at that time for a joint venture for industrial projects in the coal and steel  sectors. - European companies' reluctance to commit themselves to joint ventures at an early stage in the  coal and steel sectors. - The fact that infrastructure projects using Commmunity steel are generally large and very  expensive and require long periods of planning involving detailed feasibility studies and  government approval. The Commission has subsequently proposed an amendment to the rules which would have the effect of  removing the joint venture requirement for industrial projects in the coal and steel sectors. COORDINATION OF THE GROUP OF 24 OECD DONOR COUNTRIES12.55. In the field of medium-term financial  support for the balance of payments of the countries of Central and Eastern Europe, the Commission  plays an active coordination role within G24. The authorities of the recipient countries are well  aware of this role and appreciate it greatly. The Commission is none the less looking at ways of  directly informing the sectors concerned and the national media in the recipient countries about  its action. One planned move is to have Community loans for the Central and East European countries  signed in the capitals of these countries rather than in Brussels. 12.57. The Commission is already establishing a data base to serve as an information system for all  G24 members on their respective activities, on a project-by-project basis. This system will  facilitate coordination and increase transparency. OBSERVATIONS COMMON TO THE VARIOUS TYPES OF AID Capacity to absorb the aid12.61. Regarding  delays, the Commission refers to the general comments made on paragraphs 12.7-12.9. The 1990 environment sector programme for Hungary was based on the recommendations from a G24  environmental fact-finding mission visiting Hungary early in 1990 for only one week. Due to the  urgent political wish to start up activities, the project was initially not very well defined. In  order to ensure effective utilization of the Phare funds it has since been necessary to redefine  and further concentrate the project in line with newly emerging government policies before  implementation could start. This has been further complicated by changing priorities for environmental management in Hungary,  and personnel and organizational changes in the Ministry of the Environment. As to the agricultural credit line for Poland, it had been agreed at the request of the Polish  authorities to set up the line with the Polish agricultural cooperative banks, which are presently  being restructured. The ongoing restructuring is supported by Phare and by the World Bank but has not yet reached a  stage where the use of these funds for investments in the agriculture and food processing sectors  is possible. 12.63. The absorptive capacity for technical and other assistance is a major factor covering the  rhythm of commitments and payments. Recognizing this, the Commission has engaged a team of experts  to work within recipient ministries to help elaborate proposals and manage the implementation of  projects. Structural adjustment and sectoral investment approach12.67     12.71. The Commission has taken  note of the points made by the Court concerning the objectives of Community aid. They are without  doubt an interesting addition to the ideas of its own departments. Whenever the need arises, new  priorities are set and the objectives of this aid are adjusted by the political authorities of the  Community in conjunction with the other G24 members and the recipient countries concerned. Performance criteria12.72     12.73. The Commission shares the views of the Court regarding the  importance of incorporating evaluation criteria to enable monitoring of programmes. A formal system  of identifying criteria for automatic monitoring and assessment of projects has now commenced. It  is based on the logical framework approach and will integrate appraisal and evaluation criteria, so  that project progress and impact can be checked against the original objectives and targets. GENERAL CONCLUSION12.76. See replies to paragraphs 12.18 and 12.63. 12.77. While the Commission agrees that in the initial two to three years Phare assistance should  be concentrated on technical assistance, and has adopted this approach, it notes that by the end of  1991 most countries will have a Phare-financed programme of technical assistance covering the major  reform areas for three to four years ahead. It will be necessary therefore to develop other forms  of assistance (credit lines, risk-capital finance support, etc.) for 1993 and beyond. 12.78. The Commission shares the view that a banking system which functions well is essential. This  is reflected by the choice of the financial sector as one of the 'core areas` as from 1991 (see  comment on paragraphs 12.18-12.21). Financial sector reform programmes are being financed or are  planned in all Phare recipient countries. 12.80. As indicated in its reply to paragraph 12.21, the Commission has now adopted two-year  programming, which will enable improved coordination of the various sources of aid. CHAPTER 13 Cooperation with developing countriesJOINT FINANCING WITH  NON-GOVERNMENTAL ORGANIZATIONSObservations on the joint financing  with the NGOsEligibility of  the NGOs13.16.  (a) If the Commission acted in this way with regard to the four Iberian NGOs, in  order to help Spanish and Portuguese NGOs get off the ground, it did so in the conviction that it  was acting in accordance with the General Conditions (Chapter I, Articles 1 and 2). The Commission  considered that these distinguished between obligatory conditions for eligibility (Chapter I,  Article 1) and additional, non-obligatory criteria for appraisal, which were of a more qualitative  nature (Chapter I, Article 2). The introductory paragraphs to these Articles and the fact that  there were two Articles seemed clear on this point. Since opinions on this matter have differed,  the General Conditions should be made clearer on this point. This did not prevent the Commission from monitoring the management of these NGOs' projects in the  same way as those of other NGOs. In this respect, the Commission would point out that it has  ensured that the Court's fundamental observations with regard to their management have been  followed up. (b) This Danish NGO is legally separate from the associated solidarity movement. They broadly overlap in terms of personnel, resources, etc. However, the NGO was created quite  openly and was presented to the Commission as being indispensable in order to comply with the  relevant Danish legislation. None the less, the Commission will in future examine similar cases more closely, particularly with  regard to the main point, i.e. the NGO's real financial autonomy and decision-making power  vis-à-vis the movement which inspired it. (c) The four Dutch NGOs were accorded this treatment because it was necessary to take account of  decisions taken by the Member State concerned, without which these NGOs could not have participated  in the Community mechanism for projects in developing countries. Not to do so would have meant  financing almost no Dutch NGOs' projects. It was partly for this reason that Article 19.1 of the  General Conditions sets out the principle of a 15% contribution 'as a rule`, as the Court notes at  the start of point 13.18. The NGOs' financial contribution to the projects 13.18. While it is true that in principle, under  the old General Conditions, an NGO's own financial contribution had to represent at least 15% of  the total cost, the revised General Conditions which entered into force on 1 January 1988 are more  precise and Article 19.1 now states as follows: 'As a rule, the NGO presenting the application must  contribute at least 15% of the direct costs from private European funding.` This funding may, for  example, be provided by another European NGO. It is true that in the cases cited by the Court in paragraphs (a), (b) and (c), subject to the  following remarks, the Commission was unable to check all the factors which would enable it to  determine precisely the NGO's contribution. (b) The valuation of the human and material resources contributed to the project by the NGO is  permitted under Article 19.1 of the General Conditions. Nevertheless, the Court is right to point  out that it found certain failings in calculating the value of the contributions. This will be taken into account. With regard to point 13.18.(b), last sentence, the current General Conditions do not require NGOs  to keep analytical accounts, but the problem of proper accounting merits attention. (c) With regard to the German NGO, Commission officials decided in 1985 to treat it in the same way  as the Dutch NGOs referred to in point 13.16.(c) because of the distribution of financial resources  and responsibilities within the group of NGOs linked to the Evangelical Church; 15% of the funds  managed by this NGO come from the Church, the rest from the government. For this reason, this NGO  does not call on additional private funding for individual projects. 13.19. Since 1988, Article 3 of the General Conditions has excluded only those NGOs acting as  intermediaries who do not contribute towards financing and have no influence in the execution of  the projects. The underlying principle is to allow experienced NGOs to help new NGOs get off the  ground. The Commission sees to it that at least one of these conditions is fulfilled, in accordance  with the General Conditions. 13.20. The Commission is already trying to solve these problems. It notes with interest the Court's  suggestion that it should stop estimating the NGOs' non-financial contributions, which would tackle  the problem at the roots, and perhaps provide compensation for the NGOs. This question will be discussed in the review of management procedures, including the General  Conditions, which is currently under way (see below, 13.56 et seq.). Observations on the management by the NGOsPayment of funds to local partners13.23. The Commission  agrees with the Court's obser- vation. It accepts the recommendation and will put it into  practice. Remuneration on Community funds13.25     13.27. The General Conditions do not specify the NGOs'  obligations with regard to the remunerative investment of Community funds entrusted to them. They  only provide for any interest accumulating when the funds are with the NGO to be either passed on  to the project or paid back. Moreover, in some cases the progress of the project in the developing  country inevitably means that funds are held by the European NGO for longer periods than could have  been foreseen. With regard to the last sentence of point 13.27, the Commission wishes to point out that  increasingly, where necessary, it checks up on the interval between the NGO's receipt and payment  of the funds and if need be reminds the NGO of its responsibilities in terms of proper financial  management and its consequent obligations. It will continue to draw the NGOs' attention to this  matter. In future it expects the revised General Conditions to contain detailed provisions on the  management of and interest derived from Community funds. Implementation and financial management by the NGOs13.28. The Commission regularly monitors the  management abilities of the NGOs. It continually urges its partners to improve their management  tools further, as a way of gradually increasing their professionalism as well as for the reasons  recommended by the Court. In particular it tries to encourage and assist relatively inexperienced  NGOs which have interesting projects, so as not to restrict unduly the number of NGOs which benefit  from the system. 13.29. To illustrate this point, the Court has selected a quite exceptional case, that of the  British NGO War on Want. This was a rare case of an NGO going bankrupt (without there being any  question of fraudulent bank- ruptcy) through concentrating too much on its development operations  at the expense of its financial management. This took not only the Commission by surprise, but also  the public and other providers of funds including the British Government. Having access to project  implementation reports would not have made any difference to its knowledge of the NGO's overall  financial situation. The projects financed jointly with War on Want have been taken over in an  orderly manner by other NGOs, which have committed themselves to their completion, so as to avoid  their beneficiaries in the Third World losing out through this quite extraordinary occurrence. At the Commission's request, the NGO provided all the necessary information in 1990-91. The  Commission took all the appropriate steps to avoid any losses; it is unlikely that there will be  any. It has kept the Court informed. Financial implementation of the projects13.30     13.33. The Commission fully shares the Court's  concern regarding the need for NGOs to keep orderly and clear accounts. It continually urges its partners to become more professional and in particular to keep separate  accounts for each project. It considers that the situation has improved since the entry into force  in 1988 of the new General Conditions, which are much more precise and which particularly emphasize  the points made above. The Commission suspended the joint financing of new projects with certain NGOs until their accounts  were in order, and it will continue to do so. The overhaul of their accounts was checked by audit  firms. 13.35. The Commission will take these recommendations into account in its current review of the  system of joint financing. Reports supplied by the NGOs13.37     13.40. The Court's observation wholly co- incides with the  Commission's concern and regular attempts to ensure that the NGOs supply the various reports  required on time. However, in the experience of both the Commission and the Member States, it is  often difficult to obtain the reports within the time limit (this varies greatly from one NGO to  another). While it is to some extent understandable that NGOs give higher priority to their work in  the field, this is an important matter, particularly in the light of the Court's conclusions from  point 13.55 onwards and the Commission's comments on these. The Commission continually seeks to improve monitoring and to obtain the required reports sooner.  In some cases it has been forced to suspend cooperation with certain NGOs while they sort  themselves out. It has also done this in response to other management failings by NGOs. Nevertheless, the Commission would point out that if a report is not submitted or is late it does  not necessarily mean, by any means, that the jointly financed project has failed. Here, and more  generally, the Commission would refer to its closing comments on this chapter. 13.40. In our experience, systematically requiring operational reports was not justified: it  imposed an extra burden on NGOs, often for no real purpose. Such reports have no longer been  required for all projects since the General Conditions were revised. However, there is still  provision for requiring operational reports where they might be useful, and the Commission does  make use of this provision. It could certainly make better use of it, and will draw attention to  this matter. The other solution to this problem lies in the evaluation exercises which have been  emphasized since 1988 and which will be stepped up. Observations on the Commission's managementAppraisal of filesInformation available13.42      13.43. The Commission would point out that an NGO's financial record should be evident from the  'NGO file` (set out in Annex 1 of the General Conditions) which the NGO is required to update each  time it presents a project. As for keeping a 'summary data-sheet` for each NGO, such a data-sheet exists but is admittedly  under-used because of the lack of available resources in the department. In addition, the  performance of each NGO is regularly assessed by the manager responsible for monitoring it. It is difficult to make more stringent demands, because there are limits to what can be expected of  the Commission in terms of checking on the financial situation of NGOs, and it is desirable to  limit the administrative burden on NGOs to what is strictly necessary. Prior analysis of projects13.44     13.46. The NGOs unit sometimes has to overrule these opinions,  when they are quite clearly ill-founded. In most cases, the opinions are discussed with the NGO;  the project is accepted when the NGO has provided an explanation or made changes as necessary. The  unit now systematically gives reasons for any decision to overrule, even (and this has been the  case for some time) when the reasons are obvious. The opinions, the comments on them and the  outcome are always incorporated in the file on each project. Financial Control's approval is given after all the information referred to above has been  examined, and after supplementary information has been obtained from the NGO unit if necessary. Appraisal times13.47. Although, within limits, some accommodation to change is possible within  available resources, this cannot go on indefinitely and it cannot be done at the expense of the  quality of management and monitoring demanded by the Court itself. Unfortunately, the workload is increasing all the time, while the Commission's management staff has  remained practically unchanged. Indeed, between 1980 and 1990, the number of new loans committed  each year per manager increased fourfold and the total number of commitments (all requiring  control, monitoring, etc.) by a factor of 7.7. However, while average appraisal times did  deteriorate temporarily, particularly in 1988, the situation stabilized and even improved somewhat  in 1989-90. As for the fact that projects are carried over from one year to another, this is done within  reasonable limits. The present system allows the appraisal of files to be rolled over and financing  to be agreed as and when possible. The Commission and the NGOs prefer this method to a system in  which requests which cannot be financed immediately because of the limits of the annual budget must  be rejected altogether. With regard to computerizing the NGO unit, the Commission at last received the resources to conduct  a study, but had to reject the first report received and recently began the operation again with a  different firm. It is true that there are numerous exchanges of letters between the Commission and the NGOs, but  this is hardly caused by a lack of precision in the General Conditions as most NGOs, even the new  ones, have few problems with these. Monitoring of implementation and checking13.49     13.50. See comments on point 13.37 (the  Commission's efforts to obtain the reports required and the measures taken to this end), and points  13.56 and 13.57, which explain how the Commission intends to review its management goals and  methods. 13.52. The Commission's resources are indeed insufficient. Conclusion13.55. The Commission registers its agreement with these observations, which it entirely  shares. 13.56     13.58. The Commission shares the Court's opinion that, because of the problems  encountered and the growth in the funds to be managed, the management emphasis should be shifted  from the prior study of individual files to monitoring and evaluating projects. In general, the Commission appreciates the fact that the Court has tried to take into account the  rapid and substantial growth in the number of projects and NGOs involved in joint financing,  administered by the same number of staff, and to propose solutions aimed at streamlining and  improving this administration. The Commission considers it essential to recall here that NGOs have their own way of working, based  on small projects aimed at grassroots development, partly relying on volunteers and at all events  conducted in conditions very different from those obtaining in large public administrations or  private companies. While it is vital that they provide proper management, the rules of joint  financing must nevertheless take account of these factors and must not seek to turn NGOs into  something they are not. With regard to the review of management goals and rules, the Commission departments have already  begun considering and examining this, focusing on two areas: - examination and incorporation of proposals for improving management procedures, within the  framework of existing principles and objectives, from its own managers, from Financial Control or  the recipient NGOs, and now also the Court of Auditors; - project reforms required by fundamental changes in developing countries, in approaches to  development and in the guiding principles of the NGOs, particularly with regard to the growing and  increasingly well-organized role of grass roots organizations in the developing countries. This exercise will have to be completed in stages: some improvements can be rapidly made within the  existing rules, others will have to await the results of the evaluations of jointly financed  projects (which the Commission intends to launch on a wider scale shortly, in addition to the  selective evaluation of projects currently in progress), and still others will represent  fundamental shifts in direction. In some areas, measures have already been taken to solve the  problems raised by the Court (see in particular the comments concerning points 13.33 and 13.37). The procedure to be followed by the Commission in conducting this review of NGO joint financing is  as follows. It has begun an internal examination (while taking account of external suggestions -  see above) of management methods, with a view to changes which could be made within the existing  General Conditions. It is also launching evaluation exercises by sector and by problem, within the  limits of the budgetary resources available in 1991 and 1992. Lastly, it has also started the  process of revising certain provisions of the General Conditions; this work should be brought to a  conclusion in the course of 1992, with a view to their entry into force in 1993. The whole exercise will be conducted in close consultation with the NGOs, which will offer their  own suggestions and ideas. 13.59. With regard to the last sentence, see comments on points 13.33 and 13.37. FINAL REMARKThe Commission accepts the substance of some of the Court's criticisms of management  weaknesses. It intends, as stated in points 13.56-13.58, to introduce changes aimed at improving  management. None the less, it would emphasize that these criticisms do not cast doubt on the  quality and success of joint financing projects as a whole. It remains convinced that the NGO  projects and the existing system of joint financing are eminently positive for the development of  developing countries. In effect, the mechanism of NGO joint financing allows original, high-quality  and very often successful projects to be produced with the limited human and financial resources of  the NGOs. CHAPTER 14 The European Development FundsINTRODUCTION14.2     14.3. The  Commission plays an active part in meetings of development aid donors, the aim of which is to  harmonize the financial and accounting requirements imposed on the recipient countries by donors. The Commission considers this a necessary exercise, although the desired objective is ambitious.  The expected results should assure donors of the reliability and proper use of the funds granted,  and at the same time standardize their accounting requirements. EXECUTION OF THE EDFs UP TO 31 DECEMBER 1990Financial statements14.6. There are three categories  of sectoral import programmes (SIPs). Firstly, there are SIPs within the special debt programme and  those outside that programme. Secondly, within the special debt programme, there are SIPs funded  from additional resources decided by the Council, and those funded from programmable aid - the  national indicative programmes. The situation of decisions at 31 December 1990 was as follows:  >TABLE>As the accounts are classified by source of funding, those SIPs under 1 above  are shown separately, but SIPs under 2 and 3 must be included in the programmable aid under the  national indicative programmes. Nevertheless, for internal purposes, they are identifiable within  those indicative programmes by means of statistical codes allotted to them. 14.7. The figures quoted by the Court relate to payments already made by the ACP delegations,  usually in the local currency, which had been registered on suspense accounts by the DG VIII  accounting unit in Brussels, but not yet formally passed by the DG VIII authorization unit and  Financial Control for final inclusion in the accounts. Although the figure at the end of 1990 is a  useful indicator of the increasing work burden on staff in the authorization unit and in Financial  Control, it should be borne in mind that the total of uncleared local payments at the end of 1990  represents only 7% of the total payments authorized during the year. 14.8. In order to improve its information on, and control over, counterpart funds in local currency  held in ACP States, a circular note was issued on 14 March 1991 to all ACP delegations on the  principles of utilization, modalities of constitution and financial management of counterpart  funds, including standardized formats for the reporting of these accounts to the Commission's  central services. Copies of these notes have been sent to the Court. Outstanding commitments as at 31 December 199014.10. A check carried out by the EIB of fifth EDF  statistics shows that for interest subsidies only two loans had not been closed at the end of 1990  and that for risk capital operations only 12 projects are being carried out. This situation was not reflected in the official accounts to 31  December 1990, as several projects  which had been completed by the EIB had not been formally closed. A review of the conformity of the EDF accounts with EIB records is now being undertaken, to ensure  that all closed projects have been duly registered as such. 14.11. With regard to the sixth EDF, the rate of payment for operations managed by the EIB is  slightly slower than for the fifth EDF. At 31 December 1990 payments represented ECU 224 million or  33% of commitments in the form of own resources loans and ECU 215 million or 40% of commitments in  the form of risk capital operations. This rate is none the less comparable to that of other  financial institutions. The main reason for this situation is the adverse economic and financial climate obtaining in the  last few years in the recipient countries, which does not make quicker payment any easier. Also, in many cases the EIB co-finances projects with other institutions and it cannot always avoid  the legal and technical constraints of this type of operation. Nevertheless, as stated in point 14.10 above, the number of open contracts in the EDF accounts at  31  December 1990 is not so much a result of delays in the real implementation of EIB projects, but  simply delays in reflecting the real situation in the accounts. This situation is being rectified  by a comparison of EIB records with the EDF accounts. CLOSURE OF THE FOURTH EDF14.14. It should be noted that most of the cases mentioned are relatively  small programmes in which the blockage of a single project can have a major effect in percentage  terms on the disbursement of the programme as a whole. 14.15. Practical implementation of the rehabilitation and revival plan was completed well before 31  December 1990. The few projects remaining open in the fourth EDF had to be transferred to the sixth  EDF pending clearance of certain advances not yet fully justified by supporting documents. 14.16. Expenditure has now ceased in all of the 10 programmes mentioned, which are only awaiting  final supporting documents from the delegations concerned before closure, which will take place  shortly. All 18 of the projects for which there were no disbursements in 1989 or 1990 were reviewed before  the end of 1990, but could not be closed mainly because of uncleared advances. EDF-FINANCED OPERATIONS OUTSIDE PROGRAMMES AND PROJECTSACP General SecretariatFinancing  Agreements14.18. Although the Financing Agreement does not mention the number of experts, the  financing proposal presented to the Member States included the number of posts financed (28, of  which 26 filled) and every month the ACP Secretariat provides the Commission with a complete list  of the experts employed and their salaries. This list backs up the monthly request for  reimbursement presented to the Commission. In addition, each time a new expert is taken on, a copy of his contract is sent to the Commission  with the first request for reimbursement concerning him. The contract states his functions  clearly. The next Financing Agreement to be concluded under Lomé IV will, however, take account of the  experience of previous agreements. The ACP Secretariat draws up an annual budget which is approved by the Council of ACP Ministers. It  provides for all the expenditure connected with experts' work, the financing of which is covered by  the Convention. This expenditure includes, in addition to that connected with the terms of  employment of the Secretariat's experts, mission expenses, including experts' participation in  general meetings of the Council of ACP Ministers and the Joint Assembly. This expenditure varies  between 40 and 45% of the Secretariat's overall budget. The budget also provides for expenditure  connected with the work of the other members of staff, administrative expenses and the cost of  equipment. This expenditure, which varies between 55 and 60% of the budget, is financed by  contributions from the ACP States. The Secretariat has sent its budgets for the financial years 1989 and 1990 and its audit reports  for 1986 to 1989 to the Commission. The audit for the financial year 1990 is under way. The Commission has the experts' contracts and they have been available to the Court since July this  year. Expenditure to be covered by ACP States14.19. Before the financing proposal for the period 1988-90  was presented to the Member States, the Commission received from the ACP Secretariat a detailed  cost estimate covering the three years, giving details of the various items which were proposed for  financing by the Commission. After discussion, these were accepted by the Commission as the  proportion of the ACP Secretariat's total budget financed by the EDF was still under 50%. The Secretariat's budget approved by the Council of ACP Ministers takes account of the Community  declaration on Protocol 2 (Annex L), which is as follows: 'Having noted the request by the ACP States concerning a financial contribution towards the  operating expenditure of their Secretariat, the Community, in the spirit of the relevant  undertaking made at the second meeting of the ACP-EEC Council of Ministers in Fiji, states its  readiness to examine with particular attention the specific requests to be made to it in due course  with a view to enabling the Secretariat to avail itself of such personnel as may appear  necessary.`All of the items at (a) to (d) were included in the original cost estimate sent to the  Commission by the ACP Secretariat. The telefax machine was specifically required for the Lomé IV  negotiations, and the external audit was included under the heading 'consultants`. This audit is  required annually by the financial regulation of the ACP Secretariat, and includes expenditure not  financed by the EDF.Nevertheless, when the Court requested the document, it was provided voluntarily by the ACP  Secretariat. It was not considered necessary at the time of the preparation of the Financing Agreement to  include therein the details of the three-year budget, as both sides understood clearly the scope  and limits of the financing, and felt able to continue together in a climate of mutual trust. Nevertheless, the next Financing Agreement within the framework of the Lomé IV Convention will be  more precise in this respect, as mentioned in the previous paragraph. Uncleared advances14.20. It is true that the Commission provided the Secretariat with an advance  of ECU 19 million, which corresponds to about three months' expenses. It is used as working  capital, in other words to cover expenditure connected with the work of the Secretariat's experts  and consultants. This expenditure is then submitted to the Commission for reimbursement. The  advance is reconstituted every month when the Secretariat's expenses are reimbursed by the  Commission. It is not included as a recoverable item in the EDF balance sheet as it is already shown as an  uncleared advance at project level. Inclusion in the balance sheet would of course be possible, but  then the project advance would have to be cleared. As regards the second advance of BFR 8.5 million, this represented an advance of salaries for the  months of July and August 1985 which was paid in June 1985. The clearance of this temporary advance  has been overlooked, but this is now being rectified as supporting documents were received in  September 1991. 1989-90 expenditure14.21. According to Article 12 of the ACP Secretariat's Staff Regulations its  staff's mandate should, wherever possible, last as long as the Convention. At least three months before the end of each contract the appointing authority informs the member  of staff of its intention to renew or extend the contract. The second part of this Article shows clearly that it was not the Council of Ministers' intention  to limit the length of its staff's mandate to the lifetime of a single Convention. Just as the  Convention is renewable, so are the staff's contracts. This is particularly the case of the two  experts who left the Secretariat after more than 12 and 16 years' service respectively. Article 39 of the Staff Regulations states that unused annual leave in excess of 60 days cannot be  carried over. The two employees had accumulated more than 60 days' leave. They were paid because  they were at the end of their contracts and because it was not possible, due to service  requirements, to give them all their leave owing. The Committee of ACP Ambassadors was none the  less informed of the situation and confirmed the payments. The amounts paid to the two experts were worked out on the basis of the scale adopted by the  Council of Ministers. 14.22     14.23. At the 49th meeting of the Council of Ministers, held in Lomé (Togo) on 14  December 1989, it was decided that these two experts should retire on 28 February 1990 and that, on  an exceptional basis, a six-month temporary contract, renewable once for a further six months,  should be given to each of them. From 1 March 1990 these two experts were no longer permanent members of the Secretariat's staff.  All their entitlements connected with their previous service therefore had to be settled, including  repatriation costs in accordance with the rules of procedure then in force. These rules no longer  apply. The temporary contracts granted to these experts expired on 28 February 1991 and they are no  longer in the employment of the ACP Secretariat. The ACP Secretariat accepts that in future repatriation costs should only be payable when evidence  of the removal has been presented. 14.24. The contracts of the three employees in question expired on 30 June 1990. All their previous  entitlements were settled. Subsequently, new contracts were given to these experts starting on 1  August, 17 August and 1 September respectively. The sum of ECU 52 000 was paid for duly approved overtime which, in accordance with the rules of  procedure in force, gave rise to additional leave. This unused leave had to be paid for at the end  of the contract. 14.25.  (a) A brief description of the system in force for approving and checking missions is  needed in order to understand the situation better. When it is decided that the Secretariat should attend a meeting outside Brussels, the following  steps are taken: (1)The employee chosen for the mission fills in the mission request form on which he indicates the  purpose of the mission, its length and the estimated cost (daily allowances and return travel  costs). The details of the mission are usually attached to the form. (2)When the request is approved by the authorizing officer, the original of the form is sent to the  accounting unit, which commits the expenditure (daily allowances plus travel expenses) and then  pays the daily allowances on the basis of the number of days approved. A copy of the form is given to the administrative department so that an order form can be drawn up  for the travel tickets. On the order form economy class tickets are always requested for experts. (3)When the expert returns from the mission he must give his ticket voucher to the accounting  unit. (4)When the accounting unit receives the travel agency's invoice, it checks that it tallies with  the order form and then settles it. (b) In future, for mission travel expenses, the Secretariat will provide, in addition to travel  agency bills, the order form and the used ticket voucher. (c     (d) Whilst fully agreeing with the Court on the need to ensure compliance with the principle  of economy, the Commission is prepared to reimburse air tickets up to the value of the full-fare  economy class, even though this is considered by many airlines to be equivalent to business class  on certain flights, especially within Europe. This is acceptable because the various cheaper  alternative tickets impose restrictions particularly on dates of travel, which can lead to the loss  of the entire ticket when dates of meetings are changed. 14.26. The sum of BFR 185 285 paid to an expert in December 1989 represented compensation for 12  days of unused annual leave and 32 days of compensatory leave. The expert was at the end of his  contract. The Commission was provided with the supporting documents in June this year. 14.27. The Secretariat draws up and regularly updates the list of schools attended by its staff's  dependent children. The Secretariat receives information direct from these schools about the  official cost of school fees. When staff claim for payment or reimbursement of fees, the Secretariat compares the amounts claimed  with the information previously provided by the schools in question. With regard to these amounts, in November 1990 the Council of ACP Ministers decided to set ceilings  per child ranging from BFR 128 000 to BFR 275 000 depending on the level. This decision will come  into force from the 1992-93 school year. 14.28. It is true that one of the receipts was in the name of the child's guardian in Kenya, but  the ACP Secretariat has verified with the school that the fees reimbursed in respect of the child  have indeed been charged by the school for that child. Control by the Commission14.29. As the Commission has already explained in its replies to the  Court of Auditors for the financial year 1989 (points 14.26 to 14.28), the vast majority of  Financial Control's comments are recorded by controllers on standardized forms which are sent with  the disputed dossier to the authorizing officer and returned to the controllers with replies.  Copies of these replies have been in the possession of the authorization unit since mid-1991. The Commission can provide the Court with copies of the comments made in 1989 and 1990 by Financial  Control on the accounts submitted by the ACP Secretariat. These comments, which also tie in with some of the questions raised by the Court, mainly  concerned: - the need to improve the presentation of supporting documents; - the payment of unused leave; - school fees. In each case Financial Control did not give its approval until explanations had been provided by  the authorizing department. In the Commission's opinion, these interventions by Financial Control demonstrate how well internal  control works in this area. The Commission would also point out to the Court that the very nature  of the costs reimbursed to the ACP Secretariat (numerous expenses of a relatively modest unit cost)  means that Financial Control has to use spot check methods. As the validity of the discharge was not contested at the time of the payments, the accounting  officer for the EDF had no particular reason to suspend payment. The Court's comment on the lack of separation of functions of the authorizing and accounting  officer does not in this case have relevance; the Commission services are however making  arrangements for the transfer of the accounting officer to a unit hierarchically unlinked to the  authorizing officer, so as to comply with the Parliament's resolution on this matter following the  Court's annual report for 1989. Participation of ACP States in meetings organized by the Joint AssemblyJustification of  expenditure14.32. The ACP Secretariat has provided to the Commission a complete analysis of all  payments under this project from 1986 to date, and two Commission officials have inspected the  supporting documents on the spot in August 1991 at the ACP Secretariat and found them to be  satisfactory. Over the period of the project the ACP Secretariat has justified expenditure totalling BFR 45.2  million, and has been paid ECU 1 million (BFR 42.4 million). (a) The travel tickets submitted are considered satisfactory evidence of attendance; nevertheless  the ACP Secretariat will in future provide a more systematic certification of attendance. (b) The ACP Secretariat has based its reimbursement claims on existing ticket vouchers, which as  mentioned above were checked by Commission officials in August 1991. (c) Within the framework of the complete analysis of expenditure over the period of the projects  which was carried out in August 1991, the amount of BFR 298 000 was allowed only once. (d) The amount of BFR 134 500 has now been disallowed from the ACP Secretariat's claim. The  Commission accepts that the supporting documentation for the trip amounting to BFR 162 000 was  unclear, and is carefully investigating this point. There is no doubt, however,  about the  attendance of the individual concerned at the meeting in question. (e) As mentioned above, all supporting documents have since been inspected, and the Commission is  satisfied that the expenditure incurred is justified. (f) These increased per diem payments were made for a working party on refugees in the horn of  Africa after a special dispensation had been granted by the co-president of the Joint Assembly. Financial chargesExchange differences14.35. The Commission acknowledges that errors due to the  inaccuracy of bank balances can be concealed in the short term, if these balances are not checked  against the corresponding bank statements. For example, the Court refers to two cases where because  bank balances were not compared with bank statements when they were adjusted into ecus, the  exchange difference attributed to the financial charges account was erroneous. It should, however, be stressed that the readjustments made during a financial year have a merely  indicative value. It is only at 31 December, the annual closure of the financial year, that it is  vital to know the exact balances in ecus for the final drawing up of statements, which enables the  necessary exchange adjustment to be carried out. 14.36. The reason why exchange adjustments are carried out during the financial year is to be able  to establish whether the amount of the approved commitment is sufficient to cover all the possible  losses incurred for the whole financial year. What is important is to update the accounts for the  annual closure. In any case, the indicative estimates made during the financial year will in future  probably be closer to the actual situation with the introduction of the OLAS computerized  accounting system. Bank charges and commissions14.37. It is true that the agreements with the EDF's paying agents  stipulate that banks will not be paid for their services. Correspondence costs (charges for telex  and other communications) cannot be considered as remuneration and are therefore borne by the  Commission, which none the less endeavours to check them. In addition, the contracts that have been concluded with all banks in Europe are currently being  reviewed and this should give rise to new contractual provisions. Operations carried out on the financial charges account14.38. The proceeds paid over by the  European Cooperation Association (ECA) have been credited to the financial charges account because  they were considered attributable to the projects managed in general terms by the ECA. The  Commission acknowledges that in future it would be wiser to enter these proceeds in a revenue  account. 14.39. The case of payments exceeding a commitment involved a sum of ECU 1 834,09 for an emergency  aid operation. Because it was not possible to make a payment of ECU 215 000 to Western Samoa in  ecus, this amount had to be expressed in Western Samoan tala. In the time between submission of the  transfer request and its dispatch, Western Samoa's currency was revalued and the payment in  question had to be entered in the accounts for ECU 1 834,09 more than expected. As it was a  question of emergency aid, where each operation has a ceiling, it was decided, with Financial  Control's agreement, to consider this unexpected amount, which was the result of a monetary  fluctuation, as an exchange loss. With regard to penalties for late payment, it should be borne in mind that since the delay in the  commitment and payment procedure was not the fault of the National Authorizing Officer, the  Commission was of the opinion that late payment interest should not be charged to the project but  to the financial charges account. Overall appraisal14.40. In order to ensure greater transparency in the monitoring of financial  charges, special accounts will be opened for each category of operation concerned and receipts will  be separated from expenditure in the new OLAS accounting system. IMPLEMENTATION OF DEVELOPMENT AID IN VARIOUS SECTORSScholarshipsDelays in recording individual  transactions14.43. The Commission agrees that the system of advances to management organizations  in the Member States, and to the delegations in ACP States, give rise to delays in recording  expenditure in the EDF accounts. However, the amounts involved are insignificant (only 3% of the sixth EDF had been committed in the  field of education and training at 31 December 1990), and will in future diminish further and  perhaps even disappear as two trends take effect: (1)Training will be carried out more and more in the ACP States and less and less in Europe. (2)Training in the ACP States will be within the framework of EDF projects rather than generalized  scholarships, and will not normally require utilization of scholarship advance accounts, unless  training of nationals from one ACP State is carried out in another ACP State. Fees paid to outside agencies14.44. The EAC has already taken steps in 1990 to reduce the number  of staff working in the scholarship section, thus reducing its management costs to a level  comparable with other management organizations. 14.45. In conformity with its reply to the Court in the 1983 annual report, the Commission has  tried to insist on the opening of separate bank accounts for EDF-financed students, but the larger  management organizations in the Member States have refused to do so as they are responsible for  students from several sources of financing, and need the economies of scale inherent in a jointly  managed system. In addition, due to the general downward trend in the numbers of the EDF-financed  students in Europe, the smaller management organizations in the Member States are finding it ever  harder to cover their fixed and recurrent costs, and some are now running at a loss. In these circumstances, further attempts by the Commission to reclaim interest on funds advanced to  these organizations will only give rise to higher management charges by them. As regards the level of school fees, the Court is presumably mainly referring to the situation in  the United Kingdom. It should be remembered that for many years British education policy included the charging of  higher rates of fees to overseas students than to UK nationals. The principle of equality of  treatment of all EC nationals required that policy to be amended to allow reduction of the fees  charged to EC students to the same level as for nationals, but the higher level of fees remains in  place for other overseas students. These fees are chargeable irrespective of the source of funding  of the scholarships, whether EC, UN, or bilateral aid, and the policy concerning their level is a  national prerogative. Scholarship computerized control system14.46. The EDF scholarship data-processing system -  Boursfed - was set up only recently. Although still in its running-in phase, it has proved its  worth. The system is not difficult to use. Each scholarship manager receives half a day's training to  teach him how to access data. The specialized statistical tables are drawn up by an executive with  special responsibility for managing Boursfed (collecting data, updating, use etc.). This job, which  calls for wide experience in data processing, has more to do with the efficient organization of the  unit's work than the complexity of the data-processing system. The Court's previous recommendation that a computerized system be introduced to assess individual  costs, educational effectiveness and relevance to indicative programmes was valid in respect of the  old multiannual training programmes, and the Commission's response was to progressively abandon  these programmes in favour of project-linked training, usually on the spot, for which there are no  doubts about costs, effectiveness or relevance. Technical assistance managed by the European Cooperation Association14.47. With regard to the  selection of experts, the ECA has a file of candidates. Furthermore, the role of the ECA is not confined just to the management of contracts. Any  recruitment implies contacts between the ECA and potential experts and a procedure for setting out  the rights of these experts in their contracts. Management of accounts14.49. In order to improve the management of local expenditure for TA  contracts, the ECA is going to set up a computerized system for collecting technical assistance  imprest account data. The system provides for an allocation of provisional appropriations before  expenditure is recorded (locally) by the delegation. In this way some autonomous control/freezing will be possible at delegation level for expenditure  expressed in local currency. This does not rule out, when the data are checked, a posteriori  monitoring by Commission departments in Brussels. 14.50. Certain costs, due for example to back-dated salary increases or final payments of insurance  costs, may not emerge until well after the expert concerned has stopped working. This is why the  ECA was forced to delay clearing commitment. However, in order to speed up clearance in the future,  the ECA is considering the possibility of partially releasing appropriations at the end of TA  experts' contracts, pending entry in the ECA's central accounting system of all the expenses  relating to a contract. The ECA is also studying ways of reducing delays as part of its examination of the system referred  to at points 14.53 and 14.57. 14.51. According to the ECA's internal procedure the delegation should send details of imprest  accounts to the ECA every month. Delays in the regular transmission of imprest accounts are often justified because of the  delegations' lack of staff. The ECA itself has recently taken steps so that expenditure in local currency is entered in the  central accounts on a quarterly rather than annual basis. With regard to the imprest accounts of the 15 delegations referred to by the Court, the process of  entering the statements in the central accounts had been virtually completed at 31 March 1991. As for Uganda and the unsettled items, when in March 1991 the ECA received imprest account  statements for the financial year 1990, it was able to settle almost all the amounts in question. 14.52. ECA/DG VIII administrative and accounting coordination poses no real difficulties, even  though, as the Court pointed out, in a few cases the ECA had forgotten to forward the commitments  authorized by Financial Control to DG VIII. With regard to entering details of expenditure in the accounts, which is done at the ECA head  office on the same day, there is obviously a time lag before expenditure is entered in the EDF's  central accounts. It should, however, be noted that the ECA regularly sends details of commitments  and payments, which are at once entered in the accounts by DG VIII. Financial management14.53. The Commission considers that the monthly cost quoted by the Court for  ECA contracts corresponds to the cost of the services of experts from private consultancy bureaux.  None the less, the cost of technical assistance can vary widely, depending on the nature and length  of the work and the expert's qualifications. The example given of Uganda is a good illustration -  the ECA expert in question was of a very high level; he was expensive but he achieved some  particularly significant results. The ECA is currently drawing up a simpler ad hoc salary and management system for TA experts, based  mainly on information gathered in the Member States. It is, however, vital to maintain the standard of quality and ability of ECA technical assistance  experts. 14.54     14.55. The reimbursement of expenses referred to by the Court is the practice generally  followed when drawing up technical assistance contracts financed by development aid agencies. The  deteriorating economic situation in most of the ACP countries means that they can no longer provide  logistical support (provision of offices and office equipment) for technical assistance experts.  The corresponding costs are therefore included in the experts' budgets and the equipment is  returned to the project in question when the experts finally leave the country. It is worth pointing out that in regard to accommodation and a car, it is not the recipient who  chooses them. The delegation on the spot makes a proposal to the ECA, which gives its authorization  on a case-by-case basis, if necessary using information provided by the Directorate for the  Administration of Delegations (DAD). The provisions of the contract forbid the private use of a staff car. 14.56. The tax deducted from the salary of technical assistants is calculated on the basis of the  Community system (reference to the Community scale). This ensures equal pay for all technical  assistance experts, whatever their country of origin, and it reduces the cost of technical  assistance accordingly. The tax could not be paid to the general budget of the European Communities  because this would result in EDF appropriations, in principle intended for development, being  diverted to the administrative part of the Commission's budget. It is extremely rare for national taxes to be refunded by the ECA (twice in 25 years). 14.57. The ECA is examining the existing system in order to revise contractual and management rules  with a view to simplifying and improving control over costs. It must, however, maintain the  standard of technical assistance and give it the means to be immediately operational. This implies  offering both an attractive salary and essential facilities in the current situation of many  developing countries. SysminFinancial situation at 31 December 199014.62. In the mean time because of the civil war the  funds reserved for Liberia have been decommitted and the project has been cancelled. The  redistribution of the funds will require a decision by the ACP-EEC Council. Jamaica was declared eligible in April 1987 and will be the subject of a decision for ECU 25  million in due course. The delay in the decision has been due to a change in the nature of the  project foreseen (diversification instead of bauxite). 14.63. Papua New Guinea was declared eligible in April 1990, and a Commission decision was made for  ECU 18 million on 2 May 1991. Zambia and Zaire have not yet been declared eligible, and their requests remain under inquiry. 14.64. Under Lomé II, ECU 25 million is reserved for the Jamaica project as mentioned in paragraph  14.62. The amount remaining unused under Lomé III cannot be finalized at the present stage because  several requests and projects remain under examination. Nevertheless, a proposal for partial  re-utilization of funds will be made to the Council this year. Processing of demands for aid and conclusion of agreements14.66. Indeed ZCCM's (the Zambian mining  corporation) fiscal burden is a heavy one, and of the receipts of foreign exchange of more than USD  1 billion, only USD 350 million is available to ZCCM for necessary replacements, tools and other  inputs. However, this question cannot be discussed exclusively at ZCCM level. Issues like tax  regimes and foreign exchange regulations should be discussed at national level. The Government of  Zambia is attacking these issues under the guidance of the IMF and the World Bank within a  structural adjustment programme. These institutions consider that the provision of USD 350 million  in foreign exchange would be sufficient for ZCCM to be able to function properly. It is true that in Zaire the tax burden hinders investment. However, the case mentioned by the  Court concerns the retroactive payment of taxes normally due. No changes were made to the tax  treatment applied to the mining company within the meaning of the statement of common agreement  between the Government and the Community. 14.67. The observation that production goals and profitability are unclear has already been  analysed in an evaluation report prepared by an independent firm and financed by the Commission. In  its recommendations for a Sysmin  3 programme it suggests: 'Rationalization plans to be discussed  on a yearly basis, and unit production costs per mined ore source could constitute parameters  enabling the lenders to follow the progress of the company`. This suggestion is to be followed up in the joint ACP-EEC evaluation of Sysmin towards the end of  1991. Implementation of projects14.69. Sysmin only finances a small proportion of the total needs of a  mining firm, so it is not possible to see from the composition of the Sysmin expenditure whether  other sources are financing management needs. Diversification has been planned in two cases (Niger  and Papua New Guinea) and is foreseen in Jamaica (see paragraph 14.62). It is also foreseen to add  a diversification element to the Guinea project. 14.70.  (a) The delay was caused during the tendering procedure, in which the Commission was unable  to accept the proposals of the Zaire authorities for adjudication of the offers. It should be  pointed out that, in accordance with the regulations, the Commission insists that the most  advantageous tenders should be accepted. In order to decide on the tenders the Commission did, in  this case, bring in experts to examine the Zaire authorities' proposals for adjudication. Against  the advice of these experts, the authorities in some cases stuck to their proposals, as a result of  which the Commission cancelled part of the Sysmin 2 financing. (b) The rules of origin, and competition rules in particular, were rather difficult to apply in the  context of a longstanding ZCCM-suppliers relationship and led to long delays in the delivery of  equipment in Zambia. (c) There is, in fact, a dispute between the supplier and Mauritania's national authorizing officer  on this matter. (d) The unfortunate delay in the availability of Sysmin funds from the Commission does not mean  that the Government has found another source of financing. It changed its procurement schedule in  the face of the delay, substituting other funding for what had been foreseen for the European  Community. The EC resources are to be used for a later stage (deepening the mine). From the beginning it was foreseen, and still is, that the financing plan exists from two sources,  which are the Commission and BCL (Botswana Copper Ltd) itself. The Sysmin loan covers an amount of  ECU 21.65 million whereas BCL has budgeted ECU 19.12 million. As the funds from the EC were not available at the early stage of the project, BCL has started, out  of its ECU 19.12 million budget, the financing of the development of the Selebi ore body below the  550-metre level. As mentioned, what has changed is the timing of the financing. BCL's own funds are used fully at  the moment and this will be reduced when EDF funds become available. The reason for the recent  mission of the project consultant was to develop and suggest a new schedule for EDF funds, and  identify areas which should be covered by EDF financing. This means that there is no delay in the project itself, although the availability of EDF funds is  considerably delayed. (e) The delay in the execution of this project is mainly due to the time that it took for the  signature of the loan agreement between the State and the Frigula factory, followed by major  problems in drawing up the invitation to tender, which had to comply with both the Lomé  Convention's rules of origin and competition and Frigula's equipment purchasing policy. 14.72 The technical problem of the calculation of profits accruing to ACP States from the onlending  of funds on less favourable terms will be simplified under Lomé IV, as Sysmin transfers will be in  the form of grants instead of loans. In conformity with the Financing Agreement, the fund created for Zambia was to be used for  development projects with the approval of the delegation; the central services were informed by the  delegation of this use of the fund. Because of hold-ups over the invitation to tender, the Sysmin 2 'social` fund for Zaire is only now  beginning to be financed. The delegation on the spot provided the central departments with the  financial details of the account in June this year. Further explanations about the actual use made  of these funds have been requested by the central departments. Financial execution14.73. The ECU 3 million advance is of course considered an integral part of  the overall project in Guyana. It was referred to in the commitment proposal for ECU 31.5 million. The two amounts are entered in the accounts as separate projects because a separate Financing  Agreement and loan agreement had to be concluded for the amount of the advance and for the  balance. This does not, however, prevent the two accounting numbers from being considered as forming a  single project. 14.74. According to an evaluation report prepared by independent auditors and financed by the  Commission: '... the use of advances is inefficient and increases the difficulty in controlling  expenditure. In our view a disbursement approach (where funding occurs at the time of expenditure)  is preferable from a control point of view.`The constitution on the spot of imprest accounts  within projects is the subject of detailed instructions in the manual of instructions. These instructions adapt the provisions of Article 34 of the sixth EDF Financial Regulation to  take account of the special situation of advances managed in the delegations. These instructions  were complied with as far as possible in the case of the advances system for Sysmin in Zambia. Conclusion - Sysmin14.76.  (a) The Commission agrees with the Court's comment about the slow  implementation of projects. This issue will be examined in greater detail in a joint ACP-EEC  evaluation of Sysmin as part of the evaluation of the mining sector planned for the end of 1991. (b) The explicit objective of Sysmin is to contribute to the efforts made by the State and the  companies concerned to restore the profitability of an otherwise viable and economic production  tool. Any intervention which is described in the technical details of Financing Agreements is  defined according to this objective. Having said this, the Commission shares the Court's view that it would be easier to monitor the  progress achieved by mining companies if some of the secondary objectives were expressed in  figures. This issue will also be discussed in the evaluation referred to under point 14.76(a). (d) Where an ACP State fails to respect its obligations, it is liable to face refusal by the  Commission for renewed Sysmin funds unless visible measures are taken by that State to rectify the  situation. 14.77. Every effort is made when negotiating Sysmin loans to ensure that 'unreasonable` actions by  the beneficiary State are avoided, by setting out the State's obligations clearly. See the previous  reply above concerning the respect of those obligations. 14.78. The Commission cannot abandon the basic idea of Sysmin, which is to rehabilitate viable  mining enterprises. This does not exclude a parallel use of risk capital as has already been done  in a number of cases. The Convention specifically forbids the use of Sysmin funds to rehabilitate inherently unprofitable  enterprises. COMPUTERIZED PROJECT MONITORING SYSTEM14.80. The Commission can confirm that the introduction of  the new computerized accounting system (OLAS) will give rise to major improvements in the  monitoring of the financial management of EDF projects. OLAS will also mean that the PICS (Project information and control system) application is far more  useful as it will be able to access up-to-date accounting data, which is not the case at present. From this point of view, the introduction of OLAS is therefore a necessary, but not the sole,  condition for other improvements in this area. 14.81. This is why the Commission shares the Court's view that once OLAS becomes operational it  will be necessary: (i)to set up a system for the financial monitoring of projects according to their components. In  this connection the Commission has already taken appropriate steps to begin an operational analysis  on the basis of a pilot scheme, with the aim of applying the results to seventh EDF projects; (ii)to discuss the development of its information technology strategy with a view to involving the  delegations and showing them the advantages to be gained from the central data base. The Commission  will none the less continue, as in the past, to build step by step on sound and reliable  foundations. OJ L 24, 29.1.1990. OJ L 62, 12.3.1990. OJ L 239, 3.9.1990. OJ L 381, 31.12.1990. In so far as the aim of the perspective is to provide a framework for the budget procedure, the  implementation figures used are the figures for operations linked directly to the 1990 budget  appropriations (use of these 1990 appropriations in 1991, fate of the appropriations still unused:  carry-over to 1991 or cancellation), rather than for operations effected in 1990 (utilization of  1990 appropriations, appropriations carried over from 1989 and appropriations made available again  in 1990). And, in some cases, Chapter  B73 (research). SEC (90) 2473 of 13  December  1990, p.  2. Special report N°  2/91, OJ C  133, 23.5.1991, paragraph  5.32. SEC (90) 2473 of 13  December  1990, p.  3. OJ C 342, 31.12.1980, p.  59. Regulation implementing Decision 88/376/EEC, Euratom on the system of the Communities' own  resources (OJ  L  155, 7.6.1989). Council Regulation (EEC) N° 729/70 of 21 April 1970 (OJ L 94, 24.4.1970). See Chapters 4.2 and 4.4 of the annual report concerning the financial year 1989. In particular: OJ C 348, 31.12.1984, paras 9.4-9.5; OJ C 321, 15.12.1986, paras 1.23, 5.8-5.9,  9.13; OJ C 336, 15.12.1987, paras 2.50-2.53; OJ C 316, 12.12.1988, paragraph 1.23. SEC (89) 2260 of 22  December  1989, SEC (89) 2326/7 of 24  December  1989, SEC (90) 132 of 19   January  1990. Council Regulation (EEC) N° 2698/90 of 17 September 1990 amending Regulation N° 3906/89 in order to  extend economic aid to other countries of Central and Eastern Europe (OJ  L  257, 21.9.1990). OJ  C 72, 20.3.1989, p.  6, paragraph  5.2. For an evaluation of revenue from sugar, see paragraph  4.2.6 in this annual report. OJ C 312, 12.12.1989, p. 46, paragraph 4.21. The amount remaining to be financed is the portion of expenditure that is not covered by  traditional own resources (customs duties and agricultural levies) and miscellaneous revenue. OJ L 185, 15.7.1988, p. 24. See paragraph 1.64 of the annual report concerning the financial year 1989, OJ C 313, 12.12.1989,  p. 24. See paragraphs 1.8 and 1.10 of the annual report concerning the financial year 1985, OJ C 321,  15.12.1986, p. 13 and paragraph 1.6 of the annual report concerning the financial year 1986, OJ C  336, 15.12.1987, p. 9. OJ L 155, 7.6.1989, p. 1. Contrary to Article 36 ff of the Financial Regulation, Article 10 of Regulation (EEC/Euratom) N°  1552/89 and Articles 187 and 374 of the Acts of Accession of the Kingdom of Spain and the  Portuguese Republic. Articles 3 and 11, Regulation (EEC, Euratom) N°  1553/89 of 29  May  1989 on the definitive uniform  arrangements for the collection of own resources accruing from value-added tax, OJ L 155, 7.6.1989,  p. 9. OJ C 326, 16.12.1985, p. 31, paragraph 3.13. This is a table which is prepared from Member State data. Consequently it does not neutralize the  accounting peculiarities of certain Member States, such as France, which do not include certain VAT  refunds in their total for gross revenue collected.  Table 2.2 consists of two parts. The first  provides an overview of the corrections and compensations. The second part shows, in detail,  firstly, the 'other corrections` (items I.5.a and I.5.b of part 1) and, secondly, the  'compensations under Annexes E and F` (items IV.2.a and IV.2.b of Part 1). OJ L 145, 13.6.1977, p. 1. See in particular, Regulation (EEC, Euratom) N°  1553/89, OJ L 155, 7.6.1989, p. 9, the Acts of  Accession of the Hellenic Republic, the Kingdom of Spain and the Portuguese Republic; the 11th  Council Directive of 26 March 1980 on the French overseas departments (80/368/EEC), OJ L 90,  3.4.1980, p. 41; the 20th Council Directive of 16 July 1985 on aids granted to German farmers  (85/361/EEC), OJ L 192, 24.7.1985, p.  18. The 18th Council Directive on the harmonization of the laws of the Member States relating to  value-added taxes laid down a timetable for abolishing some of the derogations provided for in the  Sixth Directive with effect from 1  January  1990, OJ L  226, 3.8.1989, p.  21. Any Member State may, not later than 30  April in year  n+1, propose the 'solutions and amendments`  which it proposes to adopt in order to determine the VAT resources base relating to its corrections  and compensations. Only the authorization decisions are published in the Official Journal; the  solutions are recorded in the minutes of the meetings of the Consultative Committee for Own  Resources. See Doc. COM(85) 170 final, p. 24. At the time when the statements for the 1989 financial year were compiled, 41 authorizations to use  estimated figures and 31 authorizations not to take certain operations into account were in force. The revenue collected by the Member State was increased by the fact that entitlement to deduct VAT  paid upstream is limited; the 'negative compensation` has the effect of adjusting the own resources  base by deducting from it the tax base corresponding to this limitation on the deduction  entitlement. Judgment in Case  C  251/88. Council Directive 71/235/EEC of 21 June 1971 on harmonization of the provisions laid down by law,  regulation or administrative action relating to the usual forms of handling which may be carried  out in customs warehouses and in free zones, OJ L 143, 29.6.1971, p. 28. In the United Kingdom, the distinction operates at the eight-figure level of the nomenclature, i.e.  in respect of 101 different items. Council Regulation (EEC) N° 1224/80 of 8 May 1980. The 'transaction value` is the price actually  paid or payable for goods sold for export to the Community net of various adjustments (Article 8:  commissions, packing... charges, transport...) and subject to compliance with certain conditions in  the case of related undertakings. The DV 1 document is the form which must be used in cases where the customs value is based on  Article 3 of Regulation (EEC) N° 1224/80. Council Regulation (EEC) N° 2473/86 of 24 July 1986, OJ L 212, 2.8.1986; Commission Regulation  (EEC) N° 2458/87 of 31  July  1987, which lays down certain implementing procedures, OJ L 230,  17.8.1987. Council Regulation (EEC) N° 1970/88 of 30  June  1988 concerning triangular traffic, OJ L 174,  6.7.1988. This would explain the negative figures for added value in Table 2.3, which should normally not  exist. 'Rate of yield`: the quantity or percentage of compensating products obtained from the processing  of a fixed quantity of temporarily exported goods. Articles 3, 79, 85 and 86 of the Treaty and implementing Regulations (Council Regulation N°  11  (EEC) of 27 June 1960, OJ 52, 16.8.1960; Council Regulation N° 17 (EEC) of 6 February 1962, OJ 13,  21.2.1962; Regulation (EEC) N° 1017/68 of the Council of 19  July  1968, OJ L 175, 23.7.1968;  Council Regulation (EEC) N° 4064/89 of 21  December  1989, OJ L 395, 30.12.1989. Article 6 of the provisions concerning the Commission's internal procedures of 29  October  1986  for recovering fines and other penalty payments imposed under the EEC Treaty. In the case of penalty payments, the final amount is fixed when the undertaking has fulfilled its  obligations. OJ L 185, 15.7.1988, p. 29. Commission Regulation (EEC) N° 618/90 of 14 March 1990 (OJ L 67, 15.3.1990, p. 21); Council  Regulation (EEC) N° 3492/90 of 27  November  1990 (OJ L 337, 4.12.1990, p. 3); Commission  Regulation (EEC) N° 3597/90 of 12  December  1990 (OJ L 350, 14.12.1990, p. 43). The financial year of the Guarantee Fund ends on 15  October, except public storage accounts which  are closed on 30 September. Council Regulation (EEC) N° 598/91 of 5 March 1991 (OJ  L 67, 14.3.1991, p. 19). Commission Decision N° 89/627/EEC of 15 November 1989 (OJ  L 359, 8.12.1989, p. 23). OJ  L  90, 1.4.1984, p.  13. OJ L 94, 28.4.1970, p. 13. As rectified, in the Spanish-language publication only, in OJ C 331, 31.12.1990, p. 14. Gazzetta Ufficiale N° 43, 26.2.1985. OJ L 94, 28.4.1970, p. 13. OJ L 30, 2.2.1988, p. 7. Council Directive 77/435/EEC of 27 June 1977 (OJ L 172, 12.7.1977, p. 17). Council Regulation (EEC) N° 4045/89 of 21 December 1989 (OJ L 388, 30.12.1989, p. 18). OJ L 186, 18.7.1990, p. 6. OJ L 323, 29.11.1980, p.  27. OJ 195, 28.10.1966, p.  3361. Commission Regulation (EEC) N°  1762/89 of 20  June 1989 (OJ L 172, 21.6.1989, p.  23). Special report of the Court of Auditors on various measures affecting the management of the EAGGF  Guarantee Section - Part 3 (OJ  C  258, 6.10.1980, p.  7). OJ L 351, 14.12.1987, p.  1. OJ L 323, 29.11.1980, p.  27. OJ L 388, 30.12.1989, p.  18. OJ L 172, 12.7.1977, p.  17. Special report of the Court of Auditors on various measures affecting the management of the EAGGF  Guarantee Section - Part 3 (OJ  C  258, 6.10.1980, p.  7). OJ L 323, 29.11.1980, p.  27. OJ L 281, 1.11.1975, p.  65. OJ L 367, 29.12.1990, p.  107. OJ L 323, 29.11.1980, p.  27. The two main products are Irish whiskey and Scotch whisky. In this report the word 'whisky` should  be read to include Irish whiskey except where the context indicates otherwise. OJ L 121, 5.5.1981, p.  3. OJ L 183, 4.7.1981, p.  10. 'Grain whisky` means whisky made from malt and cereals; 'malt whisky` means whisky made exclusively  from malt; 'Irish whiskey, category A` means whisky obtained from malt and cereals, the malt  content being less than 30%; 'Irish whiskey, category B` means whisky made from barley and malt,  with at least 30% malt. OJ L 121, 5.5.1981, p.  3. OJ L 183, 4.7.1981, p.  10. OJ L 388, 30.12.1989, p.  18. OJ L 121, 5.5.1981, p.  3. OJ L 183, 4.7.1981, p.  10. OJ L 183, 4.7.1981, p.  10. OJ C 290, 7.11.1991. Council Regulation (EEC) N° 4028/86 of 18  December 1986 (OJ L 376, 31.12.1986, p.  7). Opinion N° 5/91 adopted by the Court of Auditors at its meeting on 25 April 1991 and forwarded on 6  May  1991 to the Community institutions concerned. At the rate of 70% since 1 January 1991 for vessels effectively scrapped after their withdrawal  from a Community fishing fleet. Council Regulation (EEC) N° 3944/90 (OJ L 380, 31.12.1990, p. 1). Council Regulation (EEC) N° 2052/88 of 24  June  1988 (OJ L 185, 15.7.1988, p. 9). Council Regulation (EEC) N°  4253/88 of 19  December  1988 (OJ  L  374, 31.12.1988, p. 1). Council Regulations (EEC) Nos 4254/88, 4255/88 and 4256/88 of 19 December 1988 relating to the  ERDF, the ESF and the EAGGF-Guidance respectively (OJ L 374, 31.12.1988, p. 15).OJ C 188, 28.7.1990, p. 9. Interinstitutional agreement on budgetary discipline and improvement of the budgetary procedure (OJ   L  185, 15.7.1988, p. 33). Commission Regulation (EEC) N° 1866/90 of 2 July 1990 (OJ L 170, 3.7.1990, p. 36). Fourth periodic report on the situation of the regions. Communication 88/C 212/02 (OJ C 212, 12.8.1988, p.  2). See the recital and Article 13 of Regulation (EEC) N°  2052/88 of 24 June 1988 (OJ  L  185,  15.7.1988, p.  9). First report on the implementation of the reform of the structural Funds, COM(90) 516, p. 33. See COM (86) 340 of 27.6.1986 and the last Regulation concerning transport Regulations (Council  Regulation (EEC) N° 3359/90 of 20 November 1990, OJ  L  326, 24.11.1990, p.1). OJ C 69, 24.3.1976, p. 2. Recommendation N° 79/535/EEC of 23 May 1979 (OJ L 143, 12.6.1979, p. 9). Council Regulation (EEC) N°  1787/84 of 19 June 1984 (OJ  L  169, 28.6.1984, p. 1). The Court's annual report concerning the financial year 1987. Laying down provisions for implementing Regulation (EEC) N° 2052/88 of 24.6.1988 as regards the  ESF, OJ L  374, 31.12.1988, p. 21. On the tasks of the structural Funds and their effectiveness and on coordination of their  activities between themselves and with the operations of the European Investment Bank and the other  existing financial instruments, OJ L 185, 15.7.1988, p. 9. Laying down provisions for implementing Regulation (EEC) N° 2052/88 of 24.6.1988 as regards  coordination of the activities of the different structural Funds between themselves and with the  operations of the European Investment Bank and the other existing financial instruments, OJ L 374,  31.12.1988, p. 1. On the tasks of the European Social Fund, OJ L  289, 22.10.1983, p. 38. Amending, on account of the accession of Spain and Portugal, Decision 83/516/EEC of 17.10.1983 on  the tasks of the European Social Fund, OJ L 370, 31.12.1985, p.  40. The Court made observations on this subject in its annual report concerning the financial year  1988, OJ  C  312, 12.12.1989, paragraphs 9.33-9.87. Resolution embodying the comments which form an integral part of the decision granting a discharge  in respect of the implementation of the general budget of the European Communities for the  financial year  1988, OJ L 174, 7.7.1990, p. 49. SEC(88) 752-E/618/88, memorandum to the Commission from the Member responsible for financial  control on the recovery of claims in the ESF field. Following the meeting of 25.5.1988, the  Commission instructed the DG  V departments concerned, the accounting officer and the Financial  Controller to implement the practical  measures referred to in this memorandum. Some  measures were  taken from those proposed by DG XIX  and DG XX and included in the 16th report of the  Commission's  Financial Controller drawn up pursuant  to Article 29(3) of the Financial Regulation of  13.3.1990,  SEC(90) 840  final, 10.5.1990. The Court's audit did not cover the 1988 and 1989  files in order not to interfere with their   processing. Dafse: Departamento para os Assuntos do Fundo Social Europeu. It is not yet possible to calculate the exact amount of the entitlements established since many  debit notes have still to be drawn up in 1991 for files relating to the financial year 1989. The Court's annual report concerning the financial year 1988, OJ C 312, 12.12.1989, paragraph  9.58. On the management of the ESF, OJ L 377, 31.12.1983, p. 2. The Court's annual report concerning the financial year 1988, paragraph 9.57. According to the reply, 'in the statement which it will be sending to the Member States on  recovery, the Commission will recall the obligation to be notified without delay of any change in  the circumstances on which the decision approving assistance was based`, OJ C 312, 12.12.1989, p.   309. SEC(88) 752-E/618/88. The observation made in this paragraph refers to that contained in paragraph   9.44 of the Court's annual report concerning the financial year  1988. The majority of the amounts shown in the suspense account 'sundry revenue to be allocated`  concerned unrequested repayments which could have been regularized quite easily. See note 16, p.  125. The abovementioned SEC(88) 752-E/618/88. The observation made in this paragraph refers to that  contained in paragraph 9.42 of the Court's annual report concerning the financial year 1988. The abovementioned SEC(88) 752-E/618/88. The observations made in paragraphs 8.30-8.35 refer to  those contained in paragraph 9.45 of the Court's annual report concerning the financial year 1988. The observation made in this paragraph refers to that contained in paragraph 9.47 of the Court's  annual report concerning the financial year  1988, OJ C 312, 12.12.1989. Internal note of 26.4.1990 from the Legal Service sent to the Director-General of  Directorate-General  V, JUR(90) D/02679, according to which Belgium cannot escape its Community  obligations by taking advantage of its internal organization and, in particular, the allocation of  certain responsibilities to its communities and regions. The Court's annual report concerning the financial year 1988, OJ  C 312, 12.12.1989, paragraph  9.62. OJ L 70, 16.3.1990. See note 16, p.  125.The Court's annual report concerning the financial year 1988, OJ  C 312, 12.12.1989, paragraph  9.46. Concerning interest on account of late payment to be charged in the event of late repayment of  assistance from the structural Funds, OJ L 170, 3.7.1990, p. 35. OJ L 374, 31.12.1988. With regard to unwarranted payments, the Commission needs to provide itself with a full framework  of appropriate rules on the information which it must be sent on the implementation of measures,  the obligation to repay assistance without being requested, the appraisal of negative claims, the  establishment of entitlements, the fixing of the deadline, the sending of debit notes to the  authorities concerned, the application of interest on late payment, the setting-off procedure, the  handling of disputed claims, the serving of notice and the recourse to secondary liability. OJ  L  166, 25.6.1987, p.  20. OJ  L  395, 30.12.1989, p.  23. See also the European Parliament Resolution of 16.5.1986, OJ  C  148, 16.6.1986, p.  124. Document V/1200/87 of September 1987 concerning the Erasmus programme. Document V/394/88 of September 1988 ('Candidates` guide'). The academic year is usually the period from the end of September until July. In the context of the  ICPs, the Commission regards the academic year as the period from 1  July to 30  June. The problem of subcontracting concerns not only the Erasmus programme but also the management of  other measures in the social field. The applications for aid are also examined by a group of experts. This group is obliged to examine  and judge at least 7  000  pages in two days. NGAA: National Grant Awarding Authority. 'Bafoeg`: 'Bundesausbildungsfoerderungsgesetz` (Federal German Law for the promotion of training). 'Report on the experience acquired in the application of the Erasmus programme 1987-89`, SEC(89)  2051 final, 13.12.1989. The situation was adjusted at the end of the financial year 1990, following the Court's audit. OJ L 93, 10.3.1985. OJ L 128, 19.5.1975. See Article  3, paragraphs  3, 4 and  5 of Directive 75/268/EEC. Regulation (EEC) N°  797/85, Article  14. Council Regulation (EEC) N° 1316/86 of 22 April 1986  (OJ L 115, 3.5.1986). Regulation (EEC) N° 797/85, Article 14, paragraph  2. Regulation (EEC) N° 797/85, Article 15. Council Regulation (EEC) N°  1609/89 of 29  May  1989 (OJ  L  165, 15.6.1989). Regulation (EEC) N°  797/85, Article  15, paragraph  1(a). Regulation (EEC) N°  797/85, Articles 3(4) and 4(1). Article  13, paragraph  2, of Regulation (EEC)  N°  797/85 prohibits the granting to less-favoured  areas of a compensatory allowance which exceeds the limits set out in the Regulation or which fails  to satisfy the conditions established in the same Regulation. Resolution of 11 July 1986, OJ  C  227, 8.9.1986, p.  159. Regulation (EEC) N°  797/85, Article  31a, introduced by Regulation (EEC)  N° 3808/89 of 12   December 1989. Agrarbericht 1989 (1989 agricultural report of the German Federal Government), p.  25. Council Regulation (EEC) N°  768/89 of 21  March  1989 setting up a transitional system of aids to  agricultural income (OJ L  84, 29.3.1989). Council Decision 78/870/EEC of 16  October  1978 (OJ  L  298, 25.10.1978). Council Decision  82/169/EEC of 15  March  1982 (OJ L 78, 24.3.1982). Council Decision 83/200/EEC of 19  April  1983  (OJ L 112, 28.4.1983). Council Decision 87/182/EEC of 9  March  1987 (OJ L 71, 14.3.1987). Council Decision 77/270/Euratom of 29  March  1977 (OJ  L  88, 6.4.1977). Council Regulation (EEC) N° 397/75 of 17  February  1975 (OJ  L 46, 20.2.1975). Disseminated as an annex to the ECSC annual report (1990). OJ C 312, 12.12.1989. OJ C 160, 29.6.1990. OJ C 312, 12.12.1989. OJ C  326, 16.12.1985, paragraphs  9.6 to 9.8. 'Study of the administration of the research activities`. This study, commissioned byVice-President  Pandolfi, was made by an external consultant from April to October  1990. OJ  C  241, 25.9.1986, p.  1. OJ  L  312, 13.11.1973, p.  1. OJ  L  158, 16.6.1978, pp.  3 and  6. OJ  L  350, 27.12.1985, p.  25. OJ  L  350, 27.12.1985, p.  29. OJ  L  98, 11.4.1989, p.  13. OJ  L  305, 31.10.1986, p.  6.'Valoren` is the Community programme for the development of certain  less-favoured regions of the Community by exploiting endogenous energy potential. OJ  C  133, 23.5.1991, paragraph  4.13. OJ  L  112, 17.4.1989, p.  12. OJ  L  200, 13.7.1989, p.  23. COM(89) 164  final, 20.3.1989. OJ  L  185, 17.7.1990, p.  1. Council Decision 90/468/EEC of 27 July 1990 (OJ  L 259, 24.9.1990). Council Regulations (EEC) Nos 456/90 and 457/90 of 22 February 1990; Regulation (EEC) N° 2698/90 of  17  September 1990; SEC(89) 2260 of 22 December 1989; SEC(89) 2326/7 of 24 December 1989; SEC(90)  132 of 19  January 1990. OJ C 313, 12.12.1990. OJ L 33, 8.2.1979, p. 36. Council Regulations (EEC) Nos 2247/89 of 24  July  1989 and 457/90 of 22 February 1990. OJ C 313, 12.12.1990. Council Decision 90/681/EEC of 21  December  1990 (OJ L  375, 31.12.1990). OJ C 313, 12.12.1990. The Court's observations in this chapter relate to neither aid for African, Caribbean and Pacific  countries financed by the Member States through the European Development Funds (see Chapter 14 of  this report), nor aid for the countries of Central and Eastern Europe (see Chapter  12 of this  report). The observations concerning the administration of Commission delegations in non-member  countries are in Volume II of this report. The Court's Opinion on the proposals for amendments to the Financial Regulation, adopted  respectively on:  (a)21.5.1981, OJ  C  232, 11.9.1981, paragraph  3, pp.  4 and  5;  (b)9.2.1989,  OJ  C  72, 20.3.1989, paragraph  4.1(b), p.  2. Commission proposal for amendments to the Financial Regulation COM(88) 838 of 16.12.1988, OJ  C   115, 8.5.1989, p.  1 (ninth recital). Financial Regulation of 21.12.1977 (as amended by Council Regulation (Euratom, ECSC, EEC) N°   610/90 of 13.3.1990): Article  1(4), second subparagraph. Some NGOs are active in the 'development` sector and/or in the 'public information campaigns`  sector. Special report N°  5/85 of 12.12.1985 (not published) on the Community contribution towards schemes  concerning developing countries carried out by non-governmental organizations (NGOs). Council R/207/78 (GCD) of 26.1.1978, summary of the Decisions of the 485th session of the Council  of 28.11.1977 (Annex 4). By way of an exception, the Community contribution may cover up to 75%. Report not systematically required since the revision  of the General Conditions in 1988. Special report N° 5/85, paragraphs 64 and 65. Fourth EDF, OJ L  25, 30.1.1976; fifth EDF, OJ L 347, 22.12.1980; sixth EDF, OJ L 86, 31.3.1986. OJ  L  86, 31.3.1986. Which differs from the ACP-EEC Council in so far as EC Member States and the Commission are not  represented (Protocol  3 to the third Lomé  Convention). Fourth EDF 2,3  Mio  ECU; fifth EDF 6,3  Mio  ECU; sixth  EDF 9,8  Mio  ECU. Where the account entries or calculations were made in Belgian francs only, the figures have been  converted into ecus for comparison purposes at the official exchange rate at 31  December 1990: 1   ECU =  42,1839 BFR. Severance grants, 5  Mio  BFR; annual leave claims, 2,5  Mio  BFR; resettlement, 0,5  Mio  BFR. The Commission undertook to do so in its reply to the Court's 1989 annual report (OJ  C  313,  12.12.1990, points 14.26 to 14.28). OJ C  113, 29.4.1991. For example, the exchange-rate adjustment carried out at end-October  1990 on one account related  to the balance of 2  July  1990, while on another account the balance related to the 25  May   1990. Annual report  1982, paragraphs 15.50-15.60 (OJ  C  357, 31.12.1983); Annual report  1986, Part  two, paragraphs 23-56 (OJ  C  336, 15.12.1987).    Annual report 1982, paragraph 15.51(b). Annual report  1989, paragraph  13.10. Court of Justice, Case 85/86 of 3  March  1988 concerning the payment by the EIB of the tax levied  on its staff salaries to the general budget of the EC. The 15% rate of dependence is reduced to 10% and the 20% rate is reduced to 12% for the  least-developed, land-locked and insular ACP States. Article  52 of the second Lomé Convention; Article 179 of the third Lomé Convention. Annual report 1983, paragraphs 15.76 and 15.77 (OJ C  348, 31.12.1984); Annual report 1985, Part  two, paragraphs 67-72 (OJ  C  321, 15.12.1986). 280  Mio  ECU plus 2  Mio  ECU added on accession of Zimbabwe minus 6,36  Mio  ECU transferred to  the sixth EDF-Stabex. 415 Mio ECU minus 109,6 Mio  ECU transferred to Stabex. Second Lomé Convention, Article 51, last paragraph (28  February 1985); third Lomé Convention,  Article 178(2) (28  February  1990). Second Lomé  Convention, Article 103(3); third Lomé  Convention, Article  197(10). Second Lomé  Convention, Article  55; third Lomé  Convention, Article  183. Third Lomé Convention, Articles 19 and 186(d): financial and technical cooperation shall  'contribute to the fullest participation of the majority of the population in the benefits of  development, as well as support the necessary structural changes`. Annual report 1989, Part two, paragraphs 13.6-13.11 (OJ  C  313, 12.12.1990); Special report N°  1/91 on the revival and rehabilitation plan, paragraph  4 (OJ  C  83, 27.3.1991). Council Decision 90/424/EEC of 26  June 1990 on expenditure in the veterinary field, OJ L 224,  18.8.1990, p. 19. Council Decision 89/455/EEC of 24 July 1989, OJ L 223, 2.8.1989, p. 19. Note that these outstanding commitments have not meant unnecessarily immobilizing some of the  payment appropriations requested, since in recent years the utilization rate for payment  appropriations under the Esprit programme has been very high (99.95% in 1988, 99.96% in 1989 and  99.99% in 1990). OJ L 33, 8.2.1986, p. 28. The traditional calculation of the degree of self-sufficiency, i.e. the relation between total  Community production and domestic utilization, gives an average of 127% for the Community for the  first four marketing years in which the current quota system was applied (1989/90: 129%, 1988/89:  128%, 1987/88: 122% and 1986/87: 129%). A summary of this information is given on a regular basis in a bulletin prepared by the Commission  departments (see paragraphs 6.33 and 6.34). Community structural operations - Statistical bulletin N° 1. With reference to the current year, it should be noted that in July 1991 - out of a total of 2  163  claims recorded on 1989 commitments - 1  149 recovery orders had been issued, but this is in no way  to be interpreted as meaning that the Commission will not be issuing recovery orders for the  remaining 1  014 cases. SEC(91) 751 final, 29.4.1991. Farms in mountainous and less-favoured areas of the Community. Commission of the European  Communities, 1989. The data are being updated to take account of the situation in 1988/89. Part IV, Chapter 6. ANNUAL REPORT  concerning the financial year 1990 VOLUME II The report, together with the institution's  replies to the Court'sobservations, was transmitted to the authorities responsible for  givingdischarge and to the other institutions by 30 November 1991Aldo ANGIOI (President) André  J. MIDDELHOEKJohn CAREYJosep SUBIRATSCarlos M. MORENORichie RYANFernand HEBETTEOle Joergen  WARBERGKonstantinos ANDROUTSOPOULOSDaniel STRASSERBernhard FRIEDMANNMaurice THOSS FOREWORD 1.  This 14th annual report (on the financial year 1990) of the Court of Auditors of the European  Communities is in two volumes.  2.The first volume contains observations on the operating budget of the Commission and on the  consolidated accounts of the European Communities, along with observations on the European  Development Funds. The Commission's replies to the Court's observations conclude this first  volume.  3.The second volume contains all the observations that concern the administrative appropriations  of the institutions. Three chapters are each devoted to one institution and are followed by the  replies received from the institution concerned. The last chapter deals with the European Schools.  This volume contains, in addition, a list of reports and opinions that have been adopted by the  Court of Auditors over the last five years, together with a financial and statistical annex.  4.The key to the abbreviations and symbols used in this report is given on the first page of Annex  II (Volume II).  5.The references to the Official Journals in which the annual reports in respect of previous  financial years were published are listed below: - 1977: OJ C 313, 30.12.1978- 1978: OJ C 326, 31.12.1979- 1979: OJ C 324, 31.12.1980- 1980: OJ C  344, 31.12.1981- 1981: OJ C 344, 31.12.1982- 1982: OJ C 357, 31.12.1983- 1983: OJ C 348,  31.12.1984- 1984: OJ C 326, 16.12.1985- 1985: OJ C 321, 15.12.1986- 1986: OJ C 336, 15.12.1987-  1987: OJ C 316, 12.12.1988- 1988: OJ C 312, 12.12.1989- 1989: OJ C 313, 12.12.1990 6.Unless  otherwise stated, the observations set out in this report refer to the Financial Regulation of 21   December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977)  as amended by Council Regulations (EEC) N° 1252/79 of 25  June 1979 (OJ L 160, 28.6.1979, p. 1), N°   1176/80 of 16 December 1980 (OJ L 345, 20.12.1980, p. 23), N°  1600/88 of 7 June 1988 (OJ L 143,  10.6.1988), N°  2049/88 of 24 June 1988 (OJ L 185, 15.7.1988, p.  3) and N° 610/90 of 13 March 1990  (OJ L 70, 16.3.1990, p. 1). >TABLE>INTRODUCTION1. This volume deals with the Court's examination of the Community  institutions' management of staff and administrative expenditure. 2. As regards staff expenditure, in 1990 the Court carried out in particular an audit of  expenditure on staff posted to the Commission's delegations in third countries; the administrative  expenditure of these delegations was also examined. 3. With regard to the European Parliament, the observations relate to various aspects of the  accounting system and of the institution's expenditure. 4. With regard to administrative expenditure, the observations cover the acquisition of computer  equipment at the Commission and the Council. Some observations on the Commission's contribution to  the European Schools' budget have also been included. >TABLE>5. Table  1 summarizes the institutions' staff. All the institutions' staff and  administrative expenditure is shown in Tables  2 and  3. >TABLE>>TABLE>CHAPTER 15  (*) Parliament >TABLE> INTRODUCTION15.1. For the financial year 1990 the Court of Auditors examined Parliament's  budgetary and general accounting system, including all subsystems furnishing data to the main  accounting system. GENERAL AND BUDGETARY ACCOUNTING15.2. Parliament maintains its accounting record by means of a  LogAbax computer system. A copy of the records is transferred every three days to a supplementary  system, SIRC, to provide an on-line interrogation facility. Both systems are old, and a project  ('Finics`) to replace them is now under way. Functioning of the present accounting system15.3. Article 29 of the implementing measures  requires that the accounts department's registration procedure should make it possible to ascertain  at any given moment, for each budget item or heading, the commitments and payments made and the  resulting balances. There are severe practical constraints on interrogating the LogAbax system,  since all other processing must be suspended while this is done; and in view of the delay of one to  three days before the data are transferred to SIRC, present arrangements do not in practical terms  meet the requirement. 15.4. Moreover, because of the abovementioned shortcomings of these systems (LogAbax and SIRC), the  Financial Controller is not able to check at any given moment the accuracy of the revenue and  expenditure entries. This being so, he has been obliged to keep parallel accounts in order to be in  a position to carry out these tasks. The Court considers, however, that it is the clear implication  of Articles 29 and 30 of the implementing measures that any check ought to be made with the prime  accounting record maintained by the accounts department. 15.5. Article 83(4), second indent, of the implementing measures requires that bank reconciliations  should be made every month. Although a constant watch is kept on bank accounts, complete formal  reconciliations which are examined by the accounting officer are only done every three months.  There is a risk that errors might not be discovered in good time, making it more difficult to trace  their causes and correct them. 15.6. Job descriptions and instruction manuals have not been prepared for the accounts and treasury  departments. These are necessary both to achieve and to demonstrate good management control of any  financial system. 15.7. There are several control weaknesses in the LogAbax and SIRC computer systems. In particular,  the LogAbax machine operates in a normal office and access to it is not restricted, nor is it kept  locked outside office hours. Programmed controls over the completeness and accuracy of data stored  in the two systems are limited and the transfer of data from LogAbax to SIRC is not wholly  reliable. 15.8. In general, because of the limitations of these controls, the accounts department relies  mainly on ex post checks carried out by its staff to detect any errors. This dependence solely on  ex post controls in principle gives the accounting officer less good assurance regarding the  correctness of accounting. It may also represent inefficient use of staff resources overall. The  Court suggests that increased use of preventive controls rather than ex post checks should be  considered in the new system Finics. Accounting for and recovery of receipts15.9. A review of the situation regarding debtors accounts  as at 31  December  1990 brought to light that they related, in particular, to: (a)old or long-outstanding debts (0,2  Mio  ECU); (b)debts for which the establishment or recovery procedures had not been followed (1  Mio  ECU). 15.10. The Court considers that debtors accounts should include only amounts which are recoverable;  that recoveries should be made as soon as possible; and that any bad debts should be indicated and,  where necessary, cancelled. 15.11. Some credit notes are addressed directly to the various authorizing officers. This involves  potential risks for receipts; the Court recommends that the internal rules should include an  instruction to authorizing officers to ensure that credit notes are addressed to the accounts  department and not to individuals. 15.12. Not all authorizing officers indicate the due date for recovery on recovery orders. In case  of non-payment by the due date the accounting officer does not always immediately initiate the  legal procedures to recover the debt required under Article 16(4) of the implementing measures. The  Court recommends that steps to recover amounts due should always be taken without delay. 15.13. The Members' general allowance is recoverable as to 50  % from any Member who is absent for  more than half the parliamentary year. Parliament had not normally raised a recovery order as  required by Article 28(2) of the Financial Regulation. This lacuna was corrected only during the  audit performed by the Court for the financial year 1990. The Court recommends that Parliament  should carry out a special exercise to ensure that collections due from previous years have all  been made. The BUDG project15.14. The LogAbax and SIRC accounting systems, even taken together, do not  provide adequate support to management of the Institution. In July 1983 the Bureau of Parliament  approved a priority project to provide the Institution with a management information system  enabling it to be run on a highly cost-effective basis. 15.15. A consultancy firm was employed to establish the project specifications and in December   1986 a contract was signed for development of the whole project on a turnkey basis. The bulk of the  project was in fact to be carried out by a subcontractor. The system should have gone live on 1   January  1989 at a cost of 1,3 Mio ECU. 15.16. During the development, the users asked for several changes to be made to the configuration  of the initial project and considerable problems of project control arose. In the end, the start of  live operation was postponed, the immediate reason being that one of the main components of the  software failed to perform as required. In 1989, the progress of the project having been put in  serious doubt, payments to the contractors were suspended. 15.17. A new deadline had to be fixed. Despite earlier assurances, however, the contractors failed  to meet the new deadline of 19  March  1990. This being so, Parliament formally notified them on 5  April 1990 that the contracts were terminated by reason of breach. By that date Parliament had paid  1,9 Mio ECU. 15.18. Because of the increased needs of the accounting department and the fact that it still has  to use the old LogAbax machine, Parliament has been obliged to undertake as a matter of urgency a  much smaller computer accounting project (Finics) to take over the basic general and budgetary  accounting functions of the LogAbax system. This is expected to be ready for operation in January  1992, at a total cost of 0,4 Mio ECU. 15.19. The delays in and then the cancellation of BUDG meant the loss of specific control  improvements as well as of the expected financial management capability for which the project was  designed. The cancelled project represents expenditure totalling 2,5 Mio ECU for which no usable  system has been received. 15.20. The Court considers that, besides the specific difficulties noted above, the BUDG project  was seriously hampered by problems at a strategic level: introducing cost-control and financial  management systems is not solely a question of computer development, but requires changes of  attitude and of working methods in many parts of the institution. Although many aspects of project  management were clearly a matter for the contractors, the Court considers that better project  management methodology on Parliament's part would have prevented the project being begun with a  specification which apparently did not fully match user needs (see paragraph 15.15). 15.21. There has been a significant increase in Parliament's administrative spending since the BUDG  project was approved. The Court recommends that Parliament should urgently re-assess the need, and,  if it is confirmed, ensure that the aspects mentioned above are examined before undertaking a  successor project. MISSION EXPENSESImprest with funds15.22. The most significant imprest fund is held permanently by  an official in the Members' allowances service for paying Members' travel and subsistence  allowances. It is kept in 12 different currencies, involves the use of 12 bank accounts to allow  for payments by cheque, and has a ceiling of 2,5  Mio  ECU. In 1990 payments through this fund  totalled 28,8 Mio ECU, 6,8  % of Parliament's budget. The Financial Regulation (Article 54) permits  establishment of imprest funds for 'certain categories of expenditure`; but taking into account the  amounts flowing through this imprest fund and the fact that at any given moment a certain amount  beyond entitlement is advanced, and considering that expenditure through an imprest fund is not  subject to the prior approval of the Financial Controller, the Court considers that this is not an  appropriate use of the imprest mechanism. 15.23. An imprest fund is supposed to be used only for expenses and not for recovery of debts. It  was found, however, that the Members' imprest was also used as a means of recovering debts. These  amounted to some 258  000  ECU on 4  September  1990, to 176  000  ECU on 11  October  1990 and 252   000  ECU on 21  November  1990. Of these amounts, 215  000  ECU, 119  000  ECU and 111  000  ECU  respectively had been outstanding for over two months. At the end of the year, amounts due since  June, July and August were still entered in the accounts and pending recovery. 15.24. Article 54 of the implementing measures requires that the decision setting up an imprest  shall specify the maximum amount which can be set aside as an imprest. The decision should be taken  by the President of Parliament (as budgetary authority); in practice it is delegated under the  internal rules, and is made on a proposal from the authorizing officer, after a favourable opinion  has been given by the accounting officer and the Financial Controller (Article 51 of the  implementing measures). For this fund the ceiling was raised from 2 Mio ECU to 2,5 Mio ECU in  October 1987 without a new decision having been taken by either the President or the person  delegated by him. The new ceiling is indicated only in a letter from the Financial Controller and  in a treasury operation signed by the accounting officer. In the Court's view a new formal decision  is needed whenever the maximum amount of an imprest fund is changed. 15.25. The Quaestors' rules governing travel, subsistence and other allowances to Members are  complicated (for example, triangular trips) and some of the supporting procedures in the Members'  allowances service are not in accordance with the Financial Regulation (specifically, debt  establishment - Article 28(2) of the Financial Regulation). The Quaestors' rules, and the  administrative procedures which they make necessary, should be reviewed together with the aim of  achieving improved clarity and simpler procedures. 15.26. Payments to Members are made against their declaration of intentions and not on the basis of  the attendance list; they are corrected later, if necessary, following a check against the  attendance lists. Outside the three normal working places, undue or duplicate payments may occur  temporarily because the most recent computer records cannot be checked on-line at the time of  payment. Imprests without funds15.27. For paying staff mission expenses, and auxiliary staff during  sessions, the Parliament uses an imprest system without any actual advance of funds ('régies  d'avances sans fonds`). The imprest regimes are established normally but payments are made by the  accounting officer's department. The effect is to allow specified payments to be made without  establishment of a payment order and hence without the prior approval of the authorizing officer  and the Financial Controller. The Court considers that such use of the imprest method is not  consistent with the purpose for which imprests are intended by the Financial Regulation and the  implementing measures (hich clearly envisage a fund managed by the administrator and provide for  its replenishment by the accounting officer), but amounts to an arrangement to bypass the normal  authorization procedures preceding payment by the accounting officer. As such the arrangements are  inadmissible and should be replaced by a normal payments circuit. 15.28. For Parliament's meetings in the three usual working places and elsewhere, officials travel  on the basis of mission orders. Advances are paid to the staff either in cash or by bank transfer;  normally, authority for the advance is given to the cash office on a copy of the mission order.  With regard to these staff mission expenses, the 'imprest-holder` is also the operational head of  the department ('Division des décomptes`) which, by means of a computer system, controls the  advances and the final settlement of mission expenses. This is not in keeping with the principle of  separation of duties. In 1990, 32  000 mission orders were issued, the expenditure covered being  14,1 Mio ECU. 15.29. According to Parliament's internal rules, payments to staff should be made 'wherever  possible` by bank transfer. The level of routine payments in cash is excessive in the light of this  rule. 15.30. The rates of mission expenses and the tables used to calculate the amounts due can be  changed by any of the staff in the 'Division des décomptes` who use the computer. The correct  operation of the system depends completely on the accuracy of these data: they should therefore be  given better access protection, and the head of the division should ensure that there are  independent checks that only authorized alterations have been made. 15.31. Balancing payments or recoveries of mission expenses are made through the payroll (the PAIE  system). However, the missions department does not check that the processing in the PAIE system  matches the amounts input except for net sums above about 20  000  BFR. The risk of material error  is high and the Court recommends reducing this threshold. 15.32. The system does not provide the capability of regularizing advances within a reasonable  time. Because of the time allowed for submission of claims, combined with the timetable for input  to the PAIE system, January missions are not regularized until May's salary. For the same reasons,  reconciliations can only be done quarterly, and so undue payments might be allowed to stand for  longer than they should. These aspects of the system should be reviewed by Parliament in the light  of the requirement (Article 2 of the Financial Regulation) for sound financial management. 15.33. The authorizing officer's checks on staff mission expenses are insufficient to ensure that  there are no excesses over commitments, and where excesses relate to carried-forward appropriations  there is a consequent violation of the annuality principle which is central to the Communities'  financial rules (Article 1 of the Financial Regulation). 15.34. For missions within the EC, daily allowance rates are specified by the Staff Regulations,  and the power to modify them lies with the Council. Parliament, however, pays at rates fixed by  application of a Bureau decision, which in 1990 were variously between 4  % and 26  % higher. This  contravention of the Staff Regulations should be discontinued. INVENTORIES OF MOVABLE PROPERTY15.35. Inventory management is dispersed, and despite two reports  from the Financial Controller, in 1987 and 1991, Parliament has not yet established effective  administrative control over all aspects of the inventory. 15.36. Parliament's balance sheet as at 31  December  1990 includes movable property valued (at  cost) at 52,1 Mio ECU, representing 84 000 items. About 17  000 of these, costing 7,4 Mio ECU,  could not be identified in the latest physical check of the inventory, done in November-December  1988, and had still not been located in December  1990. Property not located includes furniture (9  804 items valued at 1,6 Mio ECU), technical equipment (3 219 items; 2,0 Mio ECU), office machines  (1  571 items; 0,6 Mio ECU) and computer equipment (2  384  items; 3,2 Mio ECU). 15.37. The discrepancy resulting from the 1988 physical check must be accounted for by locating the  items concerned or by following the required procedures to write them off. The delay in dealing  with it demonstrates that Parliament's inventory management and control is not yet on a sound  basis. This matter is a continuing breach of Article 65 of the Financial Regulation. Furthermore,  Article 78 of the implementing measures requires checks on items over 150 ECU to be done on a  three-year cycle; no such checks exist. 15.38. The delay clearly also risks making investigation of any thefts and losses ineffective, and  will make it more difficult to assign specific responsibility for losses (as envisaged by the  Financial Regulation, Article  67(2)). 15.39. Parliament's internal regulation on the inventory makes authorizing officers responsible  for the initial entry of each item acquired and for keeping the record up to date. Parliament  should consider also ensuring that the responsibility of individual members of staff for items  issued for their use is explicitly defined. 15.40. The regulation requires that a print-out from the computer records should be posted in each  location, and that nominated inventory officers should exercise control over the whereabouts of  property and ensure the recording of items; but this appears to be a dead letter. The computer  system used to register property does not provide all the facilities needed for exact execution of  the internal regulation. Much of its operation is left to one official, who has privileged access  to the system; access permission has been established for officials in other locations in such a  way that manipulation of the record could be done; and entries are not subject to the level of  check normally applied to accounting systems. 15.41. During 1990, some items (with a total value of 0,2 Mio ECU) were sold before the meeting of  the 'Comité de déclassement` (Committee on surplus equipment) at which their disposal was to be  discussed. It is evident that the prior opinion of the 'Comité de déclassement` should always be  obtained before final action connected with disposal or write-off is taken. ACCOUNTING BY THE POLITICAL GROUPS15.42. In its annual report concerning the financial year  1989  the Court noted that improvements were required in the methods of accounting used by the political  groups for information campaign expenditure (budget Item 3708). In the reply published in December  1990, Parliament did not give a definite response on this issue. The Court has been involved with  Parliament in discussions on the matter and reiterates its view that improvements in the accounting  by the political groups are necessary. GENERAL AND BUDGETARY ACCOUNTING15.2     15.4. The European Parliament is aware of the  shortcomings of the LogAbax-SIRC system. A new Finics system is therefore in preparation and will  be operational from the beginning of 1992 if the test phase scheduled for November 1991 is  successful. The Finics system is designed in such a way as to meet the requirements of the Court of Auditors. 15.5. A comparison between the accounting entries relating to movements of funds and statements of  account is carried out on every working day. Complete formal reconciliations are then carried out  every three months. The daily check enables any error to be detected in good time. By way of  example, according to the Bank reconciliations of 31  December 1990 there are no reconciliation  entries older than those for 5  December 1990. The system used thus guarantees a check which, in  many respects, is more thorough than that required by the Financial Regulation. In future, however,  the Administration will comply with the provision in the Financial Regulation which provides for  monthly reconciliation. 15.6. The accounting officer addresses regular memoranda to the departments concerned (e.g.  Accounts/Treasury, authorizing officers or imprest account administrators) providing them with the  necessary instructions regarding the accounting procedures. Job descriptions already exist for each  post in the accounts department. Parliament is, however, aware of the need to provide more specific details. This matter is  currently in hand. 15.7. As regards surveillance of the rooms in which the LogAbax system is installed, checks at the  entrances to the building and the surveillance carried out by the security guards are the  appropriate means of guaranteeing the security of the system. The European Parliament has rejected  the use of a magnetic card system. It is intended to ensure the security of the Finics system by restricting access to authorized  staff. With regard to controls over the completeness and accuracy of data, the new Finics system  incorporates the necessary data control protection. The transfer of data from LogAbax to SIRC has not been responsible for any errors. 15.8. The Finics system also incorporates a preventive control system enabling ex-post controls to  be reduced. 15.9  and  15.10. According to Article 29(2) of the Financial Regulation, the authorizing officer  must propose a cancellation of an established debt. For this purpose, authorizing officers are  informed every three months by the accounting officer of the non-recovery of old debts and  requested to consider the possibility of waiver. At 31  December 1990, the authorizing officers  considered that no debt was doubtful. With regard to point 15.9 (a), the real amount is ECU 170  000, consisting of cash losses amounting  to ECU 98  000 dating back to 1982 (case pending before the Court of Justice), ECU 18  000 in debts  of two former Members, and ECU 54  000 owed by various debtors. The figure quoted in point 15.9 (b) is misleading. It is composed of amounts to be settled under  the Members' imprest fund, phased repayments from staff and ECU 624  000 representing the minimum  amount to be refunded by the BUDG project contractors. 15.11. At the European Parliament all invoices and credit notes arrive first at the mail service  which forwards them to the accounts department for registration in the suppliers file. The  accounting officer is then responsible for distributing them to the authorizing officers. This  arrangement guarantees the security and conservation of the documents. The procedure needs to be  formalized however. 15.12. With regard to the recovery of debts, reminders are sent to debtors at the end of each  quarter. The attention of authorizing officers has been drawn to the need to indicate the due date  for recovery of the debt to enable the accounting officer to effect the recovery in good time. 15.13. The European Parliament drew up recovery orders, in accordance with Article  28 of the Rules  governing the payment of expenses and allowances to Members, for all Members having resigned. As  regards Members who remained in office, half of the general allowance was refunded directly to the  European Parliament or a deduction was made from the general allowance which was to be paid to  them. With the exception of one amount outstanding, which is the subject of legal proceedings, all the  amounts unduly paid in respect of half the general allowance due from previous years have been  recovered. 15.14     15.21. The European Parliament is considering the advisability of introducing a modern  management system enabling the responsible officials of the institution to take decisions on the  basis of real costs and to decentralize management responsibilities and ensuring better and more  economic use of budgetary appropriations and human resources. An external study to determine the  institution's needs in this area is in progress. The BUDG project had to be abandoned because of problems which arose in relation to the consultancy  firm and the subcontractor. As the Court of Auditors points out, the contractor was not able to  deliver a full turnkey system in accordance with the project specifications by the prescribed  deadline. Negotiations are currently in progress with the firm in question with a view to reaching an  amicable settlement. Should they prove unsuccessful, legal proceedings will be initiated in order  to secure damages and interest in respect of the expenditure incurred, which will also result in  the imposition of fines. MISSION EXPENSES15.22. The imprest fund for Members of the European Parliament operates in the  eleven Community currencies, plus the ecu, and currently uses twelve bank accounts. To prevent any misunderstanding, it should be pointed out that it is not possible to establish a  link between the ceiling on the imprest fund and the total amount of payments for the year 1990.  Payments are kept within the limits of the fund's ceiling, a management instrument which compels  the fund administrator to ensure that his accounts are kept up to date on a daily basis. The imprest fund arrangement constitutes an exception to the principle of prior control of  expenditure. The fund enables payments to be made without prior authorization. Only commitments  intended to cover expenditure of the imprest fund and the budget regularization order are subject  to the approval of the Financial Controller. The European Parliament does not share the Court of Auditors' view that the imprest fund for  Members is not an appropriate use of the imprest mechanism. Article  54 of the Financial Regulation  authorizes the setting up of an imprest account for the payment of certain categories of  expenditure. The Regulation does not stipulate any conditions as regards the level of amounts to be  paid. Moreover, it is difficult to see how any system other than the imprest fund could be applied on the  basis of the rules currently applicable. The decision as to the advisability of setting up an imprest account is the responsibility of the  President of the European Parliament (Articles  54 and 22 of the Financial Regulation and Article   51 of the Implementing Rules), who has the power to delegate this decision to the administration  pursuant to the European Parliament's Internal Rules on the implementation of the budget (Article   51(c)). 15.23. As noted by the Court of Auditors, the amounts to be refunded by Members are deducted from  the allowance paid to them under the existing imprest mechanism. It is impossible to proceed in any  other way if the amounts due are to be recovered, as urged by the Court, in the shortest possible  time. The application of a procedure whereby the authorizing officer would be required to draw up a  recovery order every time would make this system more cumbersome and would make it necessary to  take on extra staff. The European Parliament considers that the system used for the payment of Members' entitlements  must be fast and efficient. In order to carry out recovery operations on an ongoing basis and ensure that this area is subject  to monitoring and checks, an official from the Members' Accounts Office will be transferred to  Brussels by the end of this year. 15.24. The European Parliament takes the view that it is not necessary to approach its President  for a decision modifying the ceiling for an imprest, since the principle of setting up imprests is  firmly established. Pursuant to Article  52(d) of the Internal Rules for the implementation of the  European Parliament's budget, furthermore, such action can be taken by the authorizing officer  concerned after the Financial Controller and the Accounting Officer have given their approval, the  latter being responsible for placing funds in the imprest in accordance with the commitment  covering the expenditure to be effected from that imprest. 15.25. The Court of Auditors rightly notes that the rules drawn up by the College of Quaestors, and  approved by the Bureau, concerning Members' travel and subsistence allowances are complicated. The European Parliament would point out that the complex nature of those rules is closely bound up  with the duties to be discharged by Members of the European Parliament, Members being required to  travel very frequently between their place of origin, the working places, Member State capitals and  other places across the Community as well as outside the Community. Under the circumstances, it  does not seem straightforward to act on the Court's call for the rules to be simplified. 15.26. The European Parliament would stress that, given the frequency of meetings imposed on  Members because parliamentary activities take place throughout the Community, it is inevitable that  undue payments, to which the Court makes reference, will be made in a very few cases. With the help of Members and cashiers, these incidences are being kept to an absolute minimum. Undue payments outside the normal working places make up a negligible proportion of the recovery  operations pending. 15.27. The European Parliament takes the view that the Financial Regulation does not prohibit the  setting up of an imprest without funds, provided, however that there is every guarantee as to  checks on the expenditure effected from such an imprest. Given the geographical spread of Parliament's activities, as a result of which staff are obliged to  travel frequently between the three working places, the use of an imprest without funds has been  deemed appropriate with regard to mission expenses. 15.28. The European Parliament is as alive as the Court of Auditors to the need for the duties of  authorizing officers, the Financial Controller, the Accounting Officer and imprest administrators  to be separate, with a view to carrying out mutual checks. As the Court of Auditors has pointed out, the Head of the Staff Pay and Allowances Division  controls the advances to be paid. He subsequently carries out final monthly settlement in respect  of the imprest on the basis of the declarations submitted by staff sent on mission. It is entirely  normal and in keeping with the duties of an imprest administrator that he or she should carry out  these operations. It is not the same person, however, who signs the authorization order for budget regularization.  Final settlement for budgetary purposes is handled by the appropriate authorizing officer, who  signs the authorization order drawn up for that purpose. Accordingly, the principle of separation of duties is observed in full. 15.29. Parliament agrees with the Court that, as yet, not enough use is made of payments by bank  transfer. This is true both of payments of Members' allowances and of officials' mission expenses. It is not always possible, however, to pay advances on mission expenses by bank transfer, given the  frequency of missions and the urgent nature of some missions. Under the circumstances, the fact is that there are practical reasons why it is impossible to  insist that staff be paid advances by bank transfer only. 15.30     15.31. Regular checks are made to protect data held in the computer system. With regard  to the rgularization balances handled via the PAIE system, more rigorous checks will be  implemented; as recommended by the Court, this will extend to sums below the threshold of BFR 20   000. 15.32. The interval between the date of a mission and the date of regularization results, in the  first instance, from the fact that an official who is sent on mission has 30  days in which to  submit a mission expenses declaration after carrying out the mission; the number of missions and  the timetable for data input into the PAIE system are further factors. That system allows  netting-off of amounts to be paid or recovered. The Administration is contemplating an arrangement for paying balances without using the PAIE  system. If the enquiries prove conclusive, it will be possible to pay in balances in 1992 without  using the PAIE system; this will make it possible to cut the average settlement period, after an  official has submitted his declaration that the mission has been carried out, from 30  days, as it  is at present, to about 15  days. 15.33. The European Parliament is examining the points raised by the Court of Auditors concerning  the quality of the information required for drawing up expenditure commitments. The measures recently taken to monitor more closely the rate at which the appropriations entered in  budget Item 1301 are utilized will make it possible to rule out the risk that mission expenses will  exceed expenditure commitments. It is proving difficult to forecast actual expenditure against the sub-items, one reason being that  political decisions are taken which involve unforeseen mission expenses. 15.34. The European Parliament pays daily allowances at rates laid down in the Bureau decision of  13  May 1986 because of the Council's dilatoriness in taking a decision on revising the rates laid  down in the Staff Regulations in the light of the objective data on real cost increases. The Council acted on 22  July 1991, enabling the European Parliament to bring its rates into line,  in the main, with the daily allowance rates for missions paid by the other Institutions on the  basis of the Council decision. 15.35. Administrative efficiency is being enhanced through: - more active involvement by all the Directorates-General in the inventory and in the three-yearly  control exercise, - improved management procedures (introduction of new inventory control plates, systematic  registration of items entering and leaving the warehouse, reorganization of depot areas, checks on  equipment movements, improved computerized management, enhanced security. INVENTORIES OF MOVABLE PROPERTY15.36. Some of the inventory-related discrepancies, which are being  looked into, have already been accounted for. Following the last inventory, in 1988, there were  discrepancies concerning some 20  000 items. By the start of the year, that figure had been reduced  to 16  978. The provisional figure as at 15  June 1991 was 11  821. The active involvement of each  official has made it possible to locate items to a greater extent. With regard to computer facilities, a large number of items have not been located because they are  computer software or electronic cards fitted into microcomputers; they are difficult to locate for  inventory control staff who do not specialize in computing. A considerable proportion of the remaining discrepancies concern property with a current value of  less than ECU 75. The threshold above which items must be inventoried has been raised; in the  absence of new instructions to the contrary, however, property previously entered is still recorded  in the inventory. 15.37. In accordance with Article  78 of the Rules implementing the Financial Regulation and with  the internal rules on the keeping of inventories, a three-yearly programme is now being implemented  in the normal working places. The relevant services are endeavouring to complete the inventory control exercise as quickly as  possible, but it is necessary to take account of a number of factors specific to Parliament: - property that has been relocated during the inventory and property that, by its nature or of  necessity, is movable, - the fact that inventoriable property is located in several working places, - property belonging to different Institutions (Strasbourg) and to political groups or Members  (Brussels) in a large number of offices, - the fact that removal operations may have taken place between inventories, - the fact that inventory control plates may have been lost during removals, which take place  often, - equipment installed directly in offices by the supplier because of its specific technical  features, - property which, by its very nature, is difficult to log (computing and audiovisual facilities,  headphones, etc). 15.38. Each authorizing officer has clearly defined inventory-related responsibilities, as the  Court of Auditors itself indicates in paragraph 15.39: 'Parliaments internal regulation on the  inventory makes authorizing officers responsible for the initial entry of each item acquired and  for keeping the record up to date.`In addition, the authorizing officers in each  Directorate-General have appointed an official to be responsible for controlling inventoriable  property. 15.39. Since each authorizing officer is responsible for the equipment acquired under his  management, it would appear difficult to issue rules making each member of staff responsible for  the equipment he or she uses - except in cases of theft, damage or in flagrante delicto -  particularly in view of the fact that many offices in each working place are occupied  simultaneously or successively by more than one person. 15.40. An inventory record is indeed displayed in each office. Modifications have very recently  been made to the relevant software to enable such records to be produced directly. Only a small  number of officials or other staff are authorized to access the system. A new application will be  introduced at the end of 1991 which, in particular, will enhance system security. 15.41. The few items of property that were sold before the matter could be discussed by the  'Committee on Surplus Equipment` were an exception; the action was taken as the committee was being  constituted. There should be no repetition of this in future. All other rules have been complied  with at all times. ACCOUNTING BY THE POLITICAL GROUPS15.42. The European Parliament notes the Court's observations  with regard to accounting by the political groups for information campaign expenditure (budget Item  3708). The political groups have drawn up a harmonized accounting scheme. The rules governing the  use of appropriations under Item 3708 will be amended; the amendments should come into effect on 1   January 1992 and take account of the remarks made by the Court on this problem in its report on the  financial year 1989. CHAPTER 16  (*) Council >TABLE>Data-processing  expenditureINTRODUCTION16.1. The Council's expenditure on data processing and office automation  is charged to Article  222 (technical equipment and installations) of the budget and covers in  particular the purchase, hire and maintenance of the equipment and the cost of studying and of  developing and acquiring the software, including the services of outside staff. IMPLEMENTATION OF THE BUDGET16.2. The 8,4  Mio  ECU of appropriations entered under Article 222 of  the Council's budget in 1990 was in fact intended to cover expenditure falling under the remit of  several authorizing officers. The appropriations actually committed for data processing represented  the largest share of the costs charged to this Article. They amounted to 6,9  Mio  ECU (82,5  % of  the total). 16.3. This kind of management of appropriations by several authorizing officers has certain  drawbacks in terms of surveillance of the use of appropriations and budgetary transparency and  requires a degree of coordination between the authorizing officers. In view of the ever-increasing  share of data-processing appropriations, it would be more in keeping with the principle of  budgetary transparency and management of appropriations if the various items of expenditure charged  to this Article were presented under separate budget headings. DATA-PROCESSING STRATEGY AND PLANNING16.4. The Council's policy-making and planning in the field  of data processing/office automation are at present based on an action programme adopted in 1986  concerning the development of applications connected with data processing. Independent  data-processing systems which are not covered by this action programme are being developed at the  same time for administrative use. 16.5. In the mean time, the programme in question has not been formally updated. The updating of  the General Secretariat's computerization programme is being carried out when the annual budget  estimates are being drawn up. POWERS IN THE DATA-PROCESSING FIELD16.6. Introducing and developing data processing/office  automation at the Council are chiefly the responsibility of two separate units: the 'New  technology` division and the 'Data-processing` unit. 16.7. An analysis and a comparison of the powers of these two units show that: (a)on the technical level, the two units each work  independently; (b)they each make their plans separately; (c)the use of appropriations is monitored without any interface between the two systems; (d)each unit has its own system for recording and managing equipment. 16.8. In view of the benefits to be gained at organizational level from having one single  management, the present situation at the Council should be altered. The Council should make all the  activities related to data processing more consistent and should draw up a multiannual  data-processing programme as such. PURCHASE OF DATA-PROCESSING EQUIPMENT16.9. With regard to the purchase of data-processing  equipment by the Council, an examination of a sample of relevant files gave rise to the following  remarks: (a)whereas until recently the practice was to hire equipment, preference is now given to purchasing  it. This change has been made, however, without any programme having been laid down in this area; (b)the Council should develop a purchasing policy since, for a period of 60  months, the cost of  hiring is up to 76% higher than the cost of purchasing equipment; (c)the hire policy followed to date is not very consistent. There were found to be substantial  differences in the hire terms, especially with regard to the duration of contracts with the same  supplier, which varied between 36 and 60  months. In this case, were the contracts to be cancelled,  this would have to be drawn out over several years, thus imposing heavy dependence on the  supplier; (d)with some suppliers, the periodic fees are fixed either globally per contract or analytically  per item of equipment. In cases where a comparison can be made, different fees are at present being  paid for similar equipment. KEEPING OF THE INVENTORY16.10. An inspection to ascertain the physical presence of the equipment  and to check that it tallied with the entries in the inventory revealed that data-processing  equipment which, according to Article  65 of the Financial Regulation, was required to be included  in the inventory was not in fact entered. This was the case in particular for equipment which was  purchased by the Council and installed on hired machines. 16.11. Similarly, software is not entered in the inventory. In view of the amounts of money  involved (in 1990, the software purchased cost 0,3  Mio  ECU), the Council should lay down specific  rules concerning the safeguarding of software administratively and as an asset. 16.12. The inspection also showed that some of the equipment was not located in the places marked  in the inventory and that some machines were used outside the premises of the Council without their  removal to another location being recorded. There should be better monitoring of the transportation  and use of portable items of equipment outside the Council's premises in order to prevent the  equipment in question from being dispersed. BUDGETARY IMPLEMENTATION16.2  and  16.3. The two units which administer the informatics  appropriations under Article  222, namely the Data-processing service in DG A/I and the New  technologies division of DG A/II are both part of Directorate-General  A. There is as a result  close cooperation between these two services both during preparation of the budget and during its  implementation. Information is exchanged regularly, with the result that the existence of several  computers has never caused any problems. The Council notes that the question of the presentation of the appropriations under the  administrative budgets will be the subject of an interinstitutional study with a view to  harmonization. The Council will involve itself in that study so as to take account of the Court of  Auditors' recommendations. INFORMATION STRATEGY AND PLANNING16.4  and  16.5. The independent informatics systems in the above  two services meet different requirements. Traditional administrative data processing has been  applied in all the sectors involved in staff management in DG A/I's Data-processing service since  1979, while in DGA/II's New technology division informatics have been applied since  1988 to the  Council's operational services in areas such as word processing, production control, electronic  archives, etc. Work in this latter sector is based on an action programme adopted in 1986 which is  covered by annual situation reports. Studies began in 1990 on the updating of this programme and  are still in progress, with the objective of establishing a blueprint for the Council's informatics  architecture for the next five years. This will be consistent with the Council Decision of 22   December 1988 on standardization in the field of information technology and telecommunications. At  the same time, DG A/I's informatics applications are under study with a view to the preparation of  a new master plan, scheduled for 1992. RESPONSIBILITIES IN THE INFORMATICS SPHERE16.6  to  16.8. As is clear from the above, there is  close consultation and cooperation between those responsible for the New technologies division in  DG A/II and the Data-processing service in DG A/I. This cooperation is particularly apparent during  the planning of activities concerning applications of interest to both services simultaneously.  Monitoring of the use of appropriations also takes place in a coordinated manner. The Council  accepts the Court of Auditors' suggestion that in future strategic forward planning in these two  sectors be merged and coordination reinforced. ACQUISITION OF INFORMATICS EQUIPMENT16.9. The policy of renting data-processing equipment followed  hitherto by the Council was warranted in view of the speed of developments in this area. Sound  financial management of budget appropriations would in certain cases warrant further application of  such a policy even today. However, the Council agrees with the Court of Auditors that a purchasing  policy in this area makes increasing sense in cases where it allows the greater financial burden of  certain rental contracts to be avoided and increased flexibility to be enjoyed, particularly in the  context of 'open` informatics systems. For that reason, since  1990 a policy favouring purchase  over rental of data-processing equipment has been adopted. STOCKTAKING16.10  to  16.12. As was pointed out during the audit, it is difficult to make an  inventory of equipment installed out of sight within machines (this equipment is acquired under  Item  2223). In any event, the Council will draw up rules allowing such equipment to be inventoried  as soon as the new procedures for the implementation of Article  65 of the Financial Regulation are  adopted. Furthermore, hitherto software has not been regarded as subject to inventory, since it loses its  value extremely quickly as a result of the production of new versions and rival products (software  is purchased under Item  2224). The relevant Council departments will review the existing rules for  software management so as to ensure it is covered by the inventory. As regards the problems experienced during checking of the inventory, it should be noted that  although some of the equipment was not to be found at the place specified in the inventory, the  system of equipment management within the Council's departments allowed the equipment to be  located. Moreover, the portable computers, which are intended particularly for use outwith the Council's  premises, are allocated to individual users by name for use on mission. Henceforth, their  allocation will be recorded in the way the Court of Auditors suggests. CHAPTER 17  (*) Commission >TABLE>Expenditure of the Commission  delegations in third countriesINTRODUCTION17.1. As at 31 December 1990 there were 110 delegations  or offices located world-wide outside the Community. On the same date the staff employed there  totalled 541 officials and temporary staff and over 1 500 local staff. This structure is managed by  the Directorate for the Administration of Delegations and Information Offices (DAD). This  management takes place under a system of cooperation with the delegations, which in turn effect the  expenditure via imprest accounts. SUMMARY OF FINANCIAL INFORMATION17.2. The appropriations for these delegations' expenditure cover  both the staff expenditure entered under Chapter 18 'Staff serving in third countries` (77,8  Mio  ECU) and the administrative expenditure entered under Chapter 28 'Buildings, equipment and  miscellaneous operating expenditure` (34,4 Mio ECU), i.e. a total of 112,2 Mio ECU in 1990. The use  made of these appropriations in 1990 is summarized in Table 17.1. IMPREST ACCOUNTS - REGULARIZATION PROCEDURE17.3. The management of the delegations relies heavily  on the use of imprest accounts, through which very large amounts of money pass (44  Mio ECU in  1990). The procedure which the DAD follows for regularizing this expenditure is therefore of the  utmost importance. An examination of the procedure for charging this expenditure to the various  budgetary articles resulted in the following observations: (a)none of the decisions to set up an imprest account specifies the maximum amount of each item of  expenditure to be incurred, as laid down in Article  54 of the Financial Regulation; >TABLE>(b)the DAD department responsible does not have sufficient access to the  information and documentation required to carry out the regularization operations. The  documentation available at the Brussels headquarters is very widely dispersed, often incomplete and  in many cases it was difficult to have access to it. Some supporting documents are not even  forwarded by the delegations; (c)the checks currently carried out by horizontal sampling do not appear to be adequate in relation  to the scale of management at delegation level or where there is insufficient documentation at the  head office. Selective audits by delegation or by subject should be introduced in order to  strengthen the checks on the accuracy and comprehensiveness of the supporting documents sent to the  DAD. STAFF MANAGEMENTRemuneration of officials outside the Community17.4. During the financial year  1990, 53,0 Mio ECU were paid out as remuneration or for the reimbursement of expenses. This  expenditure is paid by means of the data-processing application known as 'Paie hors Communauté`.  The audit findings are given below. Determination and settlement of entitlements 17.5. With regard to the DAD's establishment of  entitlements, it was noted that for the expatriation allowance, family allowances and fixed service  allowances in particular, the decisions to grant such allowances are not signed by the Appointing  Authority responsible as stipulated by the Staff Regulations. 17.6. The Commission has not yet delegated its Appointing Authority responsibilities for any of the  entitlements arising from Annex X to the Staff Regulations adopted on 5  October 1987. These  decisions are therefore taken by the administrating department without its responsibility in the  area having been determined beforehand. 17.7. Except for decisions on the allocation of the expatriation allowance and those relating to  the fixed service allowance, no decision with a financial impact is sent to the Financial  Controller. 17.8. With regard to certain entitlements (in particular travel and removal expenses), almost all  the settlement decisions are signed by a member of staff who is not of authorizing officer status  and some are not signed at all. 'Paie hors Communauté` data-processing application 17.9. Management by the 'Paie hors Communauté`  data-processing application has various types of weakness. In particular there are no written  instructions for the staff responsible for operating the payroll system stating which documents may  be accepted for inclusion in the application. Moreover, the same department decides upon the  determination of entitlements and their entry in the files and checks the entries. This situation,  which is contrary to the principle of the separation of duties, should be reviewed in order to  ensure that adequate internal controls are carried out. 17.10. Virtually none of the available technical documentation needed for maintenance of the  payroll-application is up to date and there is also hardly any documentation for information  purposes on running the payroll system (user manual). 17.11. Under these circumstances, a number of specific improvements would appear necessary for the  proper running of the application. In particular, there needs to be the possibility of producing an  accounting breakdown by delegation, of calculating the installation allowance in local currency and  of encoding the data in respect of the non-fixed education allowance without restriction. Advances on travel expenses17.12. Every March the DAD pays the delegation staff an advance of up  to 90  % of the expected amount of travel expenses (401 cases in 1990, involving 2  Mio ECU). This  practice is based on Article 9 of the general implementing provisions relating to the application  of Article 8 of Annex VII to the Commission's Staff Regulations of 1  January 1982. 17.13. The procedure adopted, however, does not comply with the abovementioned rules. Neither an  application nor an estimate is required. The amounts of the advances are automatically calculated  and then paid with the remunerations for the month of March. Moreover, these advances are directly  charged to the budget. 17.14. In 1990, 77 payments made in this way, for amounts which in some cases exceeded 22  000  ECU  and which totalled approximately 0,4 Mio ECU, had still not been adjusted by March 1991, even  though by that time the advances for the new financial year had been paid to the persons  concerned. Installation allowances and service accommodation17.15. In 1990 approximately 1,4  Mio ECU was  paid out in installation allowances to officials who either were leaving the head office to take up  a posting in a delegation or were changing delegation. However, following the entry into force of  Annex  X to the Staff Regulations, service accommodation, for which the rent is paid by the  Commission, is made available to all delegation officials. The Commission also fits out and  furnishes the accommodation for a cost of around 14  200  ECU per lodging. The cost of removing  personal effects, furniture or decorations is also borne by the Commission. Officials therefore  continue to have the benefit of both the installation allowance and the accommodation made  available by the Commission. Under these circumstances, the Commission should examine whether the  Staff Regulations need to be amended in order to abolish or adjust the installation allowances for  members of staff living in service accommodation. Local staff17.16. At 31  December 1990 the delegations' personnel included over 1 500 members of  local staff. During the financial year their actual overall cost amounted to 17,3  Mio ECU. Of  these members of staff, 463 belonged to the External Relations delegations (cost: 10  Mio ECU) and  1  064 to the Development delegations (cost: 7,3  Mio ECU). It should be noted that the first  category of delegation (External relations and press and information) has always been part of the  Commission departments, while the second category (Development), formerly under the European  Association for Cooperation (EAC), has been managed by the Commission since 1988. 17.17. An examination of the current management of the staff in question gives rise to the  following observations:17(a)these members of staff are recruited and classified and their remuneration is determined by the  Authority Empowered to Conclude Contracts of Employment (AHCC) on the basis of a proposal by the  Head of Delegation, without the AHCC having at its disposal the necessary supporting documents, in  particular those attesting to the candidate's level of training and professional experience, which  are kept in the delegation's personal file on the person concerned. It is obvious that the  classification and assignment of step thus become subjective and do not allow the Financial  Controller, who is required to approve the AHCC's decisions, to have sufficient data on which to  base his decision, especially since the decisions concerning the Development staff are never sent  to the Financial Controller for approval; (b)the personal files kept by the DAD are incomplete. In many cases a final assessment of the  situation of a member of staff is possible only by comparing the file available at the head office  with that kept by the delegation; (c)there is no complete, consistent system of computerized administrative management. The existing  databases do not provide a complete and reliable view of the staff's administrative position; (d)unlike the position of the External Relations staff, who are subject to the provisions of the  Staff Regulations in force, the position of former EAC staff has not been settled by the DAD, which  has not adopted the rules that are provided for in Article 79 of the CEOS and are intended to  replace those formerly drawn up by the old EAC. There are now therefore two different sets of rules  governing the working conditions of the Commission's local staff. MANAGEMENT OF THE LOGISTICAL INFRASTRUCTUREManagement of buildings17.18. At the end of 1990 the  DAD managed 621 buildings including 507 units (houses/flats) of residential accommodation (38 as  own property) as well as 114 delegation offices (9 as own property), i.e. a total of 574 rented  buildings and 47 owned. The expenditure relating to these buildings amounted to 20,3  Mio ECU, of  which 16,4  Mio ECU was for the payment of rent, 3,2  Mio ECU for associated costs and 0,9  Mio ECU  for fitting-out and major repairs, 0,5  Mio ECU having been entered under Chapter  100 for the  construction and purchase of buildings. 17.19. These buildings are managed in accordance with a Commission Decision of 26 October 1988.  This management calls for the following observations: (a)the rental of new housing is not subject to the prior opinion of the Advisory Committee on  Procurements and Contracts (ACPC) required for all contracts exceeding 35  000  ECU; (b)the special provisions adopted by the Commission refer only to residential accommodation and  offices. However it was noted that the delegations rent other premises such as car parks and  warehouses, thus avoiding any check by the DAD and the Financial Controller's prior approval; (c)the Commission Decision on officials' accommodation is still in fact applied in a somewhat  random manner, given the failure to date to comply with the circular explaining the procedures to  be followed in this field; (d)half-yearly reports listing all the rental operations made, the amounts authorized in relation  to the previous amounts and the special payment provisions, stipulated by the Commission Decision  of 1988 have never been drawn up; (e)accommodation is rented directly by officials and the rent is paid for by the Commission. The  latter should only have to fulfil obligations entered into by itself and not those made by its  staff. It should be noted, furthermore, that such contracts are often concluded without applying  the prior authorization procedures in force; (f)in certain cases, no agreement is made stipulating the respective rights and obligations of the  official and institution in respect of the accommodation made available by the Commission. In order  to remedy this situation the Commission should draw up rules laying down the respective rights and  obligations in this area. Real-estate policy17.20. The real-estate policy followed hitherto has mainly been pragmatic and  dependent upon current budgetary resources available. Thus the 50 buildings owned by the  Communities have been purchased with ECSC funds, EDF funds, budgetary appropriations from the  former EAC or the Commission's budgetary appropriations. 17.21. The inclusion, since 1989, of a specific budget heading entitled 'Construction and  acquisition of buildings` under Chapter 28 of the budget should prompt the DAD to submit to the  budgetary authority its general view of a property purchasing policy. One approach should be to buy  or construct rather than rent in all cases where this would prove to be the most advantageous  solution. Such an approach would depend on a systematic exploration of the markets in order to  define a regional or local purchasing policy. Transfer of property from the former EAC to the Commission - Furniture and inventory17.22. The  operations for transferring the property of the former EAC to the Commission were practically  finished by the beginning of 1991. With regard to the rentals, around 80  % of the former EAC's  leases had been formally taken over. 17.23. There are problems in respect of the inventory. It was noted during an on-the-spot audit  that the External Relations delegations were experiencing difficulties in applying the general  provisions governing this area. However, so long as new provisions are not adopted the delegations  are obliged to apply the old ones. As regards the Development delegations, although 75  % of the  property has been entered in an inventory, the goods listed are not included in the Commission's  general inventory (approximately 60 000 items). Vehicle fleet and transport allowances17.24. As regards the vehicle fleet and transport  allowances, the situation at present varies depending upon the type of delegation concerned. The  Development delegations have a sizeable vehicle fleet. No transport allowances are paid. In the  External Relations delegations, by contrast, the vehicle fleet is smaller and specific transport  allowances are granted to officials who use their own car for official purposes. Indeed, cars are  assigned to the various delegations (the vehicle fleet comprised 493 vehicles at the end of 1990)  without any specific criteria having been laid down by the DAD. 17.25. A comparison made between the number of A and B category officials (who may, in principle,  be called upon to travel in the interests of the service) and the fleet of cars revealed that the  External Relations delegations had 102 cars for 203 posts (10 of which were vacant) whereas the  Development delegations had 316 cars for 309 posts (25 of which were vacant). In view of the fact  that the number of cars exceeds that of officials in the latter delegations, the requirements of  each delegation should be assessed in order to bring the vehicle fleet into line with the real  needs of the service. Expenditure on data processingINTRODUCTION17.26. The Court examined the expenditure of Part A of  the budget in respect of the procurement, leasing and maintenance of computers, peripherals and  software and the procurement of equipment, supplies and documentation relating to the operating of  the Computer Centre and the computer network. The use of appropriations in respect of the services  of outside computer staff and the computer operations handled outside was also audited. IMPLEMENTATION OF THE BUDGET17.27. The appropriations of the financial year 1990 initially entered  under Chapter 21 of the Commission budget amounted to 39,0  Mio ECU. An increase (1,4  Mio ECU)  during the financial year brought the budgetary resources up to 40,4  Mio ECU. Revenue available  for re-use, which was re-used in 1990, amounted to approximately 2,0  Mio ECU. For the financial  year 1990, the data-processing expenditure of Part A of the budget thus totalled about 42,4 Mio  ECU. 17.28. It should be pointed out that the Commission's Directorates-General also finance part of  their computerization from the operating budget headings (Part B of the budget). The amount of  appropriations from Part B thus used for data-processing expenditure was 25,8 Mio ECU. ACQUISITION OF EQUIPMENT17.29. The acquisition of data-processing equipment by the Informatics  Directorate (at central level) and by the various Directorates-General is carried out on the basis  of framework contracts made with the suppliers, selected after invitation to tender, with a view  possibly to making repeat supplies of equipment. By contrast, orders are placed by direct  negotiation for single contracts. Only equipment included in the 'list of products` may be ordered,  irrespective of the budget heading or the authorizing officer responsible. 17.30. The procedure followed by the Informatics Directorate gives rise to the following  observations: (a)the issuing of periodic invitations to tender is restricted to the hardware for normal use and  is designed to enable the Commission to acquire equipment on the basis of appropriate technical  criteria from pre-selected specialist firms without the invitation to tender itself involving an  obligation to purchase the equipment; (b)the ACPC is therefore called upon to decide on economic and/or technical aspects before the  conditions for awarding a specific contract have been laid down; (c)there are not usually any invitations to tender for equipment for special use or for software.  These contracts are awarded directly by private treaty, in accordance with Article  58(d)  (particular supplier) and/or (e) (contracts which cannot be separated from the main contract) of  the Financial Regulation. 17.31. In the Court's view this procedure does not fully comply with the provisions in force,  especially in view of the absence of the ACPC's (compulsory) opinion on the acquisition of the  equipment. Current practice should be reviewed in order to enable the ACPC to deliver its opinion  at the time of the actual conclusion of contracts and not only on the selection of equipment and  potential suppliers. PROVISION OF SERVICES17.32. In the computer field, the Commission entrusts a number of activities  to outside staff, such as systems analysis and programming, technical back-up, training,  application management, data acquisition, etc. 17.33. The contractual framework for these services is based mainly on either the framework  contracts concluded directly with the equipment suppliers or a framework contract concluded with  specialist firms. 17.34. An examination of the payments made in the first six months of 1990 showed how frequently  the Commission had recourse to outside staff and how much this cost. The prices paid per day of  service were between 132 and 1  158  ECU. In 1990 the amount of appropriations intended to cover  the provision of services was 9,0 Mio ECU for Part A of the budget and 10,7  Mio ECU for Part B,  which represents approximately 210 man-years of service (average unit price per day 390  ECU). 17.35. These services and the application of the framework contracts concerned give rise, in  particular, to the following observations: (a)the supervision and checking of the presence of staff on contract are the responsibility of the  requesting departments. This checking is not consistent (lack of a standard form to record hours  and days worked) and the contracts do not clearly define the hours to be worked; (b)certain specific agreements concluded in accordance with the same framework contract determine  the prices of services either on the basis of a specific number of days of service or by an overall  fixed amount or in relation to the two criteria (both the number of days and the maximum amount).  This means that different controls have to be made even for the services performed by the same firm  and makes it difficult to check the invoices; (c)the framework contracts currently applicable to the provision of services were concluded in 1989  with 78 different firms, depending on the type of work to be performed. As for the equipment, the  framework contracts do not obligate the Commission to place orders. The contracts are concluded  with selected firms on the basis of an invitation to tender sent each time to certain contractors  (maximum 10) selected from all the contractors approved for each type of work. All the contractors  are, in this way, consulted in turn over a given period. It is obvious that this practice does not  always favour the contractors offering the best terms amongst all the tenderers. MANAGEMENT OF EQUIPMENTSystems of managing equipment17.36. The data-processing equipment is  managed by the Informatics Directorate on the basis of a computer application known as 'base  déquipements`. The check carried out at two Directorates-General in order to check whether the data  contained in the 'base déquipements` tallies with the actual location of the property revealed that  only 70  % and 59  % respectively of the equipment was in place. Similarly, a comparison of the  computer equipment installed with that listed in the inventory revealed equipment that did not  appear on the 'base déquipements` list. 17.37. The local management applications at Directorate-General level were developed without  interface with the 'base déquipements` managed by the Informatics Directorate. Moreover, it should  be noted that all the data-processing equipment listed in the inventory is also recorded in the  Commission's Sysbien system, also without interface with the Informatics Directorate's 'base  déquipements`. The Commission thus has three separate computer applications which cover the same  equipment but are not interlinked. Inventory of data-processing equipment17.38. The data contained in the inventory and the  on-the-spot check of equipment revealed the lack of precise criteria to be applied when making  entries in the inventory. It was found that items of equipment of the same type are sometimes  listed and sometimes not. Moreover, it was noted that the software and supplementary equipment (for  example: mouse) for computers that were already installed were considered impossible to be listed  in an inventory. On account of their omission from the inventory, the value of these items of  equipment is not included in the Commission's assets. Software17.39. According to the estimates of the administrators concerned, at the Commission there  are currently approximately 100 types of software in use, for which the 'base déquipements`  contains some 870 software entries. It should be noted that the relevant expenditure concerning  only new acquisitions exceeded 2,9  Mio ECU in 1990. In view of its increasing financial and  operational significance, it is both urgent and necessary that the Commission draw up specific  rules for the handling of software from the administrative point of view and in terms of its  assets. Expenditure of the Commission delegations in third countriesIMPREST ACCOUNTS - REGULARIZATION  PROCEDURE17.3.  (a) It would be almost impossible to specify a maximum amount for each item of  expenditure in view of the intolerable administrative burden this would entail (see the  Commission's reply to paragraph 1.125 of the 1989 annual report). The Commission took this into  account in its proposal for a regulation laying down detailed rules for implementing the Financial  Regulation (Title X), on which the institutions are at present being consulted. (b) The dispersion of documents is due to the way responsibilities are allocated between the DAD  units. Nevertheless documents are accessible to any individual or department requiring them.  However, the Commission agrees with the Court about the need for full, easily accessible  documentation. (c) In May 1991 the DAD elaborated a set of work sheets initially setting out the steps to be  followed for the monthly audits of imprest accounts and subsequently covering the methods to be  used for management control, although this is limited for the moment to the vehicle fleet and local  staff. STAFF MANAGEMENTDetermination and settlement of entitlements17.5     17.6. It is true that the  table of appointing authority responsibilities within the DAD has not yet been updated. Pending the decisions concerning the future of the DAD and in order not to paralyse operations, the  administering departments have acted in their capacity as subdelegated authorizing departments. Once the new structures are in place, the table of appointing authority responsibilities will be  updated. 17.7. The DAD administrative departments will do all they can to ensure that the procedures  followed at headquarters for all decisions with financial implications are also applied outside the  Community. 17.8. The problems regarding signatures have been dealt with and decisions on the settlement of  entitlements are now signed by the competent authorizing officers by delegation (Director or Head  of Unit). 'Paie hors Communauté` data-processing application17.9. It is true that not all input procedures  have yet been formally set down. The DAD will endeavour to remedy the situation by reallocating  responsibilities within departments in line with the principle of separation of duties  (determination of entitlements, input and checking). It should be noted that in practice those operating the payroll system take the data determined by  the appointing authority before the official concerned was posted abroad. Where necessary the  situation is regularized once the DAD takes over responsibility for administering the staff in  question so as to minimize the delay in the transition from one system to the other. 17.10. The Commission agrees that the user manual/guide for the payroll application needs to be  updated. However, an outside expert is currently engaged in making improvements to the 'paie hors  Communauté` system. Once this priority task is completed, the manual can be brought up to date. 17.11. The improvements suggested come within the remit of the expert referred to above. Advances on travel expenses17.12     17.14. In view of the many different departure points and  destinations involved, it was felt that the most economical answer was to pay advances on travel  expenses together with salaries for March, on the basis of the IATA rates communicated by a travel  agency for the most direct and cheapest route available. The advances are calculated in the light of the most up-to-date information regarding the family  situation and place of origin of staff. At the end of 1990 the advances charged directly to the budget that year were adjusted. As regards the 77 advances for 1990 that had not been adjusted in March 1991, the sums paid to  officials who had not submitted supporting documents by then were recovered. There remain 6 cases  where supporting documents have been presented, and these are in the process of being regularized. The administration of staff outside the Community is rather special, and there should be specific  implementing provisions for applying the rules of the Staff Regulations in these special  circumstances. Installation allowances and service accommodation17.15. The installation allowance is not to  offset any quantifiable or detailed expenses, but instead reflects the fact that at least some  costs have been incurred (see the analysis of the allowance by the Court of Justice in Burg). Although officials serving outside the Community are provided with accommodation and are reimbursed  removal costs for their personal effects, the fact remains that installation in a foreign country  and settling down there entails some costs. These minimum costs, which vary very widely from one official to another, are what the (flat-rate)  installation allowance covers. The Commission considers it quite justified and therefore does not  see any need to propose an amendment to the Staff Regulations on this head. Local staff17.16     17.17. The procedures currently used for staff outside the Community are  intended to afford the same guarantees as regards compliance with the rules as at headquarters,  while allowing the decentralization that is essential in this area. Administering more than 1  500 locally recruited staff working in 115 countries and governed by a  variety of different rules poses enormous difficulties. Centralizing all the data in Brussels and  updating it there does not appear feasible. But checks on the personal files of local staff  constitute an important part of on-the-spot inspections. As far as employment contracts and classification decisions for local staff are concerned, a list  of the supporting documents that have to be submitted to the DAD is going to be drawn up in  agreement with Financial Control, with a view to simplifying procedures and improving  decentralization. As for paragraph 17.17.  (d) regarding the existence side by side of two sets of rules governing  the conditions of employment of local staff, on 21 November 1989 the Commission adopted framework  rules (SEC(89)2022/2, dated 22.11.1989) which will make it possible for all Commission local staff  serving in non-member countries to be treated on the same footing, while still allowing specific  local conditions in each country to be taken into account. MANAGEMENT OF THE LOGISTICAL INFRASTRUCTUREManagement of buildings17.19.  (a) Although the  general rule requires the prior opinion of the Advisory Committee on Procurements and Contracts  (ACPC) for all contracts exceeding ECU 35  000, the particular problems of managing buildings  outside the Community - both in terms of sheer number and the speed of reaction needed in certain  places where the property market is especially tight - have prompted the DAD to apply the  Commission's Decision of 26 October 1988 (Written procedure E/1295/88 - SEC(88)1526) when renting  residential accommodation and offices. (b  (c  (f) The rules on building management (internal circular N° 7) are now being revised to  reflect the particular features of management outside the Community. Proposals to rent buildings of the kind referred to by the Court always have to be submitted to the  DAD for prior approval and will also require approval by the Financial Controller from now on. (d) The DAD will in future produce the six-monthly reports required under the Commission's Decision  of 1988. (e) The practice of staff renting accommodation directly is now being dealt with. As staff move under the rotation system, contracts concluded directly by them are terminated and  new contracts are concluded by the DAD when the new officials arrive. Real-estate policy17.20     17.21. It is true that there is no document setting out a general view  on property policy. However, there are two items of note here: - the DAD has pursued a consistent policy on the purchase of property outside the Community and  benefits from the experience of its predecessors in terms of managing the delegations; - the shortage of funds in recent years has prompted specific analysis, by a standing technical  working party, of individual cases where financing was possible. At present the DAD is examining various financing systems and should eventually be able to spell  out its views in a more detailed document. Transfer of property from the former EAC to the Commission - Furniture and inventory17.22      17.23. Data on the property entered in the delegations' inventories was sent on diskettes to the  headquarters department responsible for keeping the Commission's general inventory. This data will therefore be included in the inventory for 1991. Vehicle fleet and transport allowances17.24     17.25. The Commission endeavours constantly to  ensure that each delegation has the most suitable vehicle fleet for its particular circumstances  and operational needs. The very poor state of the roads in some countries, especially in Africa, and the number of  projects being monitored warrant the purchase of a larger number of vehicles there, all the more so  since officials cannot be expected to use their own vehicles for delegation business in view of the  very tough conditions. The opposite phenomenon is found in the 'industrialized` countries. Expenditure on data processingACQUISITION OF EQUIPMENT17.31. Orders for the acquisition of  data-processing equipment are placed with suppliers under general contracts concluded after  consulting the ACPC, following a tendering procedure. They take the shape of 'specific agreements`,  which in fact amount to detailed orders. These specific agreements in no way affect the overall  framework set by the general contract, which specifies the contractor, the equipment that may be  ordered and the unit price. The only departure from the general contract that may occur is that a  lower price may be negotiated, depending on the quantity ordered. In terms of sound financial management there is, then, no reason to refer these transactions to the  ACPC, as they are conducted under contracts on which it has been consulted in advance. Purchases of  this kind cannot be regarded as being made by direct negotiation, since they are directly subject  to the general contracts. They are, indeed, submitted individually for approval by Financial  Control, which is thus able to check that they fall under the general contract. The situation is, of course, different where an order placed with a supplier falls outside the  scope of the general contract concluded with him. For example, the purchase of software from a  supplier with whom the Commission has signed a general contract for services would have to be  referred to the ACPC, even in the event of a directly negotiated contract, as soon as the threshold  value was exceeded. PROVISION OF SERVICES17.35.  (a) The Commission recognizes the value of uniform methods for  supervising and checking the presence of outside staff and a clear definition of the hours to be  worked. Contracts and procedures will be altered accordingly. (b) The Commission will ensure that contracts specify unambiguously either a specific number of  days of service or an overall fixed amount. (c) The Commission is currently drawing up new general contracts for the provision of  data-processing services. The contracts will relate to specific fields, which will make it possible  to select a smaller number of firms. This should make it possible, in any given field, to find the  firm offering the best terms among those selected. MANAGEMENT OF EQUIPMENTSystems of managing equipment17.36     17.37. While not contesting the  Court's figures, the Commission would point out that some equipment is mobile by its very nature  (portable computers, for instance) and that some is located close to the recorded place of  installation (neighbouring offices). If these factors are taken into account, 84  % of the  equipment installed in the first Directorate-General and 87  % in the second was at the correct  location. After the inspection, all the equipment was located. Nevertheless, to improve equipment management and in view of the decision to decentralize its  data-processing management, the Commission intends to rethink the equipment management system, in  particular the link between equipment management applications in the Directorates-General and the  central systems (Sysbien and the 'base déquipements`). Inventory of data-processing equipment17.38. The Commission will bring in procedures to review  regularly the criteria for entries in the inventory. Some equipment, however, is impossible to  include in an inventory (electronic cards, for instance). Nevertheless the Commission will take  steps to ensure that the value of such items is included in its assets. Software17.39. The different language and technical versions of each item of software are recorded  in 'base déquipements`. In view of the growing scale of software purchases, the Commission recognizes the need to lay down  specific rules for handling software from the administrative point of view and in terms of its  assets. CHAPTER 18  (*) European Schools >TABLE>INTRODUCTION18.1. At the  start of the 1990 autumn term, the nine European Schools were attended by 14  598 pupils (including  1  187 at infant-school level, 5 477 at primary-school level and 7 934 at secondary-school level).  The staff totalled 1  030 teachers seconded by national governments, 365 part-time teachers  recruited by the headmasters, 196  part-time teachers of religious instruction and 204   administrative and service staff. For the financial year 1990, the total expenditure of the nine Schools and the Office of the  Representative of the Board of Governors amounted to 98,6  Mio  ECU, 65,3 of which was covered by  the Community budget. APPLICATION OF THE FINANCIAL REGULATION18.2. The Financial Regulation of the European Schools  entered into force on 1 January 1989. The main provisions of the Regulation concern: (a)the establishment of a single budget; (b)the creation of a uniform accounting plan; (c)the separation of the duties of authorizing officer, accounting officer and Financial  Controller; (d)the obligation to carry out a check prior to transfers, commitments and payment orders. 18.3. These provisions were supplemented by the implementing procedures of 2 February 1989 and the  internal rules of 24  July  1989, 9  October 1989 and 1  February 1991 decided upon by the  Representative of the Board of Governors. 18.4. The application of these provisions, however, is still not satisfactory. Certainly some  progress has been noted as regards the presentation of the budget for the financial year 1990 in  accordance with the Financial Regulation, the appointments of authorizing officers, accounting  officers and the Financial Controller and the introduction of new financial management procedures.  However, the creation of a uniform accounting plan in accordance with the Regulation still runs up  against the different systems of accounting within the Schools, pending the forthcoming  introduction of a computerized accounting system. 18.5. With regard to the prior check, the requirements of the Regulation have been only partially  fulfilled. For the check prior to commitment proposals, the Schools apply a procedure which runs  counter to the Financial Regulation. By regarding almost all expenditure as current expenditure and  by proposing provisional commitments, the Schools are in fact circumventing the specific, prior  check for most of the commitments entered into. Except for certain items of expenditure  (installation allowances, severance grants, replacement of equipment), the payment orders are not  approved. 18.6. Moreover, at its meeting of 24 and 25 April 1990 the Board of Governors deemed fit to extend  until 1  May  1992 the dual mandate of Financial Controller and internal controller given to the  official responsible for carrying out prior checks on expenditure. The Board of Governors has  thereby maintained the existing situation of  dependence which in fact reduces the effectiveness of  the Financial Controller's work in the area of prior checks. 18.7. The Board of Governors should consider whether the absence of approval in respect of payments  could not be partially corrected by the appointment of an assistant Financial Controller (Article  20 of the Financial Regulation). APPLICATION OF THE FINANCIAL REGULATION18.4. The Office of the Representative of the Board of  Governors has prepared consolidated accounts for 1990 covering all the European Schools and the  Representative's Office in accordance with the Financial Regulation applicable to the general  budget of the European Schools. There is a uniform accounting plan; it applies to those parts of  the budget which have been computerized (Brussels I and II and the Office). By the end of 1991 the  Mol, Bergen and Luxembourg Schools will be computerized, and the system will be complete by the end  of 1992. 18.5. Article 90(2) of the Financial Regulation allows the application of Articles 20, 24, 31 and  41 (prior approval by the Financial Controller) to be deferred. While the computer system was being  put into operation the Representative of the Board of Governors authorized deferral in cases  specified in his internal instructions, notably in areas not yet computerized. The Commission will ask the Representative to instruct authorizing officers to confine provisional  commitments to routine expenditure. 18.6. The Commission has always opposed the dual mandate of Financial Controller and internal  controller, but the establishment of a post of full-time Financial Controller was delayed both for  budgetary reasons and because decisions of the Board of Governors have to be unanimous. The Commission will ask the next meeting of the Board of Governors (29 and 30 October 1991) to  issue an immediate call for applications so that the post of Financial Controller can be filled by  1 May 1992, when the current appointment expires. 18.7. The Commission will also ask for an assistant Financial Controller to be appointed. Commission Regulation (ECSC, EEC, Euratom) N°  610/86 of 11.12.1986 laying down  detailed rules for the implementation of certain provisions of the Financial Regulation of  21.12.1977 (OJ L  360, 19.12.1986, p. 1), referred to in this Chapter as 'the implementing  measures`. Internal rules for the implementation of the European Parliament's budget, adopted by the Bureau on  17.12.1986. Internal rules for the implementation of the European Parliament's budget, adopted by the Bureau on  17.12.1986. Staff Regulations: Annex VII, Article 13, paragraphs 1 and 9. Bureau decision of 13.5.1986, which established a system of annual indexing of the rates. 'Règlement concernant la tenue de linventaire` (Regulation on the keeping of inventories), made by  the Secretary-General on 19.4.1989. Annual report concerning the financial year  1989, paragraphs 16.13 to 16.16. OJ L  286. 9.10.1987, pp. 3 to 7. Sysbien: Computer application for the management of movable property listed in an inventory at the  Commission. Financial Regulation of 18.10.1988 applicable to the general budget of the European Schools. ANNEX IReports and opinions adopted by the Court of Auditors during the last five  yearsThe Court of Auditors is required by the terms of the Treaties to produce an annual report.  It is also required, by the Treaties and other regulations, to produce annual reports on certain  Community bodies and activities. The Treaties further give the  Court the power to submit  observations on specific questions and to deliver opinions at the request of one of the  institutions. The reports and opinions adopted by the Court during the last five years are listed  below. >TABLE> ANNEX IIFinancial information relating to the general budget of the European Communities  and to the European Development Funds (1990)Preliminary remarks1. Source of financial dataThe  financial data in this Annex have been drawn from the revenue and expenditure accounts and the  balance sheets of assets and liabilities of the European Communities  (1) and of the European  Development Funds and from other financial records provided by the Commission. 2. Monetary unitAll the financial data are presented in millions of ECU (Mio ECU), rounded to one  decimal place. They always represent the rounding-off of each exact value and not the sum of the  rounded-off figures. 3. NomenclatureFor each financial year the Court uses the budgetary nomenclature corresponding to  that financial year for the presentation of the historic data. In 1988 there was a significant  change in the nomenclature  compared with previous financial years: as from that financial year  costs incurred in the collection of own resources are no longer shown as expenditure but as  negative revenue. This should be taken into account when comparing the various financial years. 4. Abbreviations and symbolsECEuropean Community(ies)ECSCEuropean Coal and Steel  CommunityEECEuropean Economic CommunityEAEC or EuratomEuropean Atomic Energy  CommunityEAGGFEuropean Agricultural Guidance and Guarantee FundGNPGross national  productVATValue-added tax(1)For the financial year 1990: revenue and expenditure account and  balance sheet of assets and liabilities relating to operations under the 1990 budget [doc. SEC(91)  508 512]. BFRBelgian francDKRDanish crownDMGerman markDRGreek drachmaESCPortuguese escudoFFFrench  francHFLDutch guilderIRLIrish poundLFRLuxembourg francLITItalian liraPTASpanish  pesetaUKLPound sterlingu.a.Unit of account (until 1977)EUAEuropean unit of account (from 1978 to  1980)ECUEuropean currency unit (as from 1 January 1981)Mio ECUMillions of European currency  unitsDADifferentiated appropriationsNDANon-differentiated appropriationsCACommitment  appropriationsPAPayment appropriationsAFCAppropriations for commitmentAFPAppropriations for  paymentBBelgiumDKDenmarkDFederal Republic of  GermanyGRGreeceESpainFFranceIRLIrelandIItalyLLuxembourgNLNetherlandsPPortugalUKUnited  KingdomEUR 10/12Total of the 10 or 12 Member States of the European  CommunitiesBGBulgariaCSCzechoslovakiaHHungaryPLPolandex. GDRthe former German Democratic  RepublicRURomaniaYUYugoslaviaEDFEuropean Development FundACPAfrican, Caribbean and Pacific  StatesOCTOverseas countries and territoriesFODFrench overseas departmentsRRPRehabilitation and  Revival PlanStabexStabilization of export earningsSysminSystem of stabilization of export  earnings from mining productsFRFinancial Regulation of 21 December 1977 (see also the foreword on  the inside front cover)OJOfficial Journal of the European CommunitiesSBudgetary  sectionTBudgetary titleChBudgetary chapter-Nil0,0Data between zero and  0,05%Percentage§Sections referring within this annex to texts, diagrams and tables>TABLE  POSITION>Part I: General budget of the European Communities 1. Background information on the  general budget1.1. Origin of the general budgetThe general budget was created by the Merger  Treaty  (1) (Article 20). It replaced, on 1 January 1968, the three separate EC budgets which  existed before then: the ECSC administrative budget, the EEC budget and the Euratom operating  budget. The Euratom research and investment budget was incorporated in the general budget as from  1971 by the Treaty of Luxembourg  (2) (Article 10). 1.2. Legal basisThe general budget is governed by the financial provisions of the Treaties of  Paris  (3) (Article 78 ECSC) and Rome  (4)  (5) (Articles 199 to 209 EEC and Articles 171 to 183  Euratom). The Financial Regulation  (6) governs the procedure for establishing and implementing the  budget and for presenting and auditing the accounts. It is supplemented by further specific  enactments governing the details of budgetary implementation. 1.3. Main budgetary principles prescribed by the Treaties and the Financial RegulationThe budget  is authorized for one financial year (annuality). The budget presented must be in balance.  Budgetary revenue is to be used without distinction to finance all expenditure entered in the  budget (non-assignment). All items of Community revenue and expenditure are to be included in the  budget (unity). The appropriations are specialized according to their nature or intended use  (speciality). All items of revenue and expenditure are to be entered in full in the budget and in  the accounts without any adjustment against each other (universality). There are some exceptions to  these general principles. 1.4. Content and structure of the general budgetThe general budget comprises the estimates of the  ECSC's administrative expenditure and corresponding revenue, the EEC's revenue and expenditure and  Euratom's revenue and expenditure. The budget consists of five separate sections subdivided into statements of (estimated) revenue and  expenditure: (I) Parliament; (II) Council (annexed: Economic and Social Committee); (III)  Commission; (IV) Court of Justice; (V) Court of Auditors. Within each section  (7), revenue and expenditure are classified under budget headings (titles,  chapters, articles and items) according to their type or the use to which they are to be applied. 1.5. Monetary unit of the general budgetThe budget is established and implemented in ECU. The ECU  is a unit based on a basket of national currencies. Following the revision of September  1989, 1   ECU = 0,6242  DM + 0,08784  UKL + 1,332  FF + 151,8  LIT + 0,2198  HFL + 3,301  BFR + 0,130  LFR +  0,1976  DKR + 0,008552  IRL + 1,440  DR + 1,393  ESC + 6,885  PTA. The rates of conversion at 31 December 1990 between the ECU and the national currencies were as  follows: 1 ECU = 42,1839  BFR = 7,88260  DKR = 2,04195  DM = 214,065  DR= 182,818 ESC = 6,95010  FF  = 2,30384  HFL = 0,767840  IRL = 42,1839  LFR = 1  540,26  LIT = 130,604  PTA = 0,707840  UKL. 1.6. Financing of the general budget (budgetary revenue)The general budget is mainly financed from  the Communities' own resources: agricultural levies, sugar and isoglucose levies; customs duties;  VAT-based own resources and GNP-based own resources;  for more detailed information see the  legislation in force  (8). Besides own resources, there are also other smaller sources of revenue (see §  5). (1) Merger Treaty (8 April 1965): Treaty establishing a Single Council and Single Commission of the  European Communities. (2) Treaty of Luxembourg (22 April 1970): Treaty amending certain budgetary provisions of the  Treaties establishing the European Communities and of the Merger Treaty. (3) Treaty of Paris (18 April 1951): Treaty establishing the European Coal and Steel Community  (ECSC). (4) Treaty of Rome (25 March 1957): Treaty establishing the European Economic Community (EEC). (5) Treaty of Rome (25 March 1957): Treaty establishing the European Atomic Energy Community  (Euratom). (6) Financial Regulation of 21 December 1977 (OJ L 356, 31.12.1977). See in this respect the  foreword on page  2. (7) Section III (Commission) is subdivided into Part  A 'Staff and administrative appropriations`  and Part  B 'Operating appropriations`. (8) Principal legal acts relating to own resources: -Sixth Council Directive of 17  May 1977, common system of VAT: uniform assessment basis (OJ L 145,  13.6.1977). -Council Decision 88/376/EEC, Euratom, of 24  June 1988 (OJ L 185, 15.7.1988). -Council Regulation (EEC, Euratom) N° 1552/89 of 29  May 1989 (OJ L 155, 7.6.1989). -Council Regulation (EEC, Euratom) N° 1553/89 of 29  May 1989 (OJ L 155, 7.6.1989). -Council Directive 89/130/EEC, Euratom, of 13  February 1989 on the harmonization of the  compilation of GNP (OJ L  49, 21.2.1989). 1.7. Types of budget appropriationsTo cover estimated expenditure, the following types of budget  appropriations are distinguished in the general budget: (a)Differentiated appropriations (DA) are used to finance multiannual activities in certain  sectors. They comprise commitment appropriations and payment appropriations: -commitment appropriations (CA) cover, for the current financial year, the legal obligations  entered into for activities whose implementation extends over several financial years; -payment appropriations (PA) cover expenditure arising from commitments entered into in the  financial year and/or preceding financial years. (b)Non-differentiated appropriations (NDA) cover, for annual activities, both commitments and  payments for the same financial year. It is thus important to establish the following two totals for the same financial year: -the total of appropriations for commitment (AFC)  (1) = +non-differentiated appropriations  (NDA)+commitment appropriations (CA)  (1); -the total of appropriations for payment (AFP)  (1)= +non-differentiated appropriations  (NDA)+payment appropriations (PA)  (1). Revenue raised in the budget is to cover the total appropriations for payment. Commitment  appropriations are not financed until the corresponding payment appropriations have been entered in  the budget. The following simplified scheme (with illustrative amounts) shows the impact of these types of  appropriations in each budget year: (1)It is important to note the differences between appropriations for commitment and commitment  appropriations and between appropriations for payment and payment appropriations.  The two terms  commitment appropriations and payment appropriations are used exclusively in the context of  differentiated appropriations. >REFERENCE TO A FILM>1.8. Establishment of the general budgetBefore 1 July of each year each  institution draws up estimates of its expenditure for the following financial year (running from 1  January to 31 December). The Commission enters these estimates in a preliminary draft budget, and,  not later than 1 September, places this before the Council, which with Parliament constitutes the  budgetary authority. The Council establishes the draft budget and forwards it to Parliament not  later than 5 October of the same year. Parliament can propose modifications to the draft budget for  compulsory expenditure  (1) and make amendments for non-compulsory expenditure; these modifications  and amendments are submitted to the Council. For compulsory expenditure the Council takes the final  decision. For non-compulsory expenditure Parliament may, within the limits of a statistical maximum  rate of increase, make amendments before taking the final decision. The President of Parliament  declares that the budget has been finally adopted. However, Parliament may reject the draft budget  and ask for a new draft to be submitted  (2). If at the beginning of a financial year the budget has not been voted, particular provisions of the  Treaties and the Financial Regulation relating to the authorization of expenditure are to be  applied  (3). Amending budgets (which do not alter the total amount of the annual budget) or supplementary  budgets (which alter the total amount) may be adopted by the budgetary authority. The budgetary allocation to a specific budget heading can be modified by transfers  (4) from other  budget headings. 1.9. Implementation of the general budget1.9.1. Responsibility for implementationThe Commission  implements the budget on its own responsibility in accordance with the Financial Regulation and  within the limits of the appropriations allotted; it also confers upon the other institutions the  requisite powers for the implementation of the sections of the budget relating to them  (5). The  Financial Regulation lays down the implementation procedures and, in particular, the  responsibilities of the authorizing officers, accounting officers, administrators of advance funds  and financial controllers of the institutions  (6). 1.9.2. Implementation of revenueThe estimated revenue is entered in the budget subject to change  by amending and supplementary budgets. The budgetary implementation of revenue consists in establishing the entitlements and recovering  the revenue due to the Communities (own resources and other revenue); it is governed by special  provisions  (7). The actual revenue of a financial year is defined as the sum of recoveries upon entitlements  established during the current financial year and recoveries upon entitlements still to be  recovered from previous financial years. 1.9.3. Implementation of expenditureThe estimated expenditure is entered in the budget. According  to the nature of the legal obligation involved, it is covered by appropriations for commitment or  appropriations for payment. The budgetary implementation of expenditure, i.e. the evolution and  utilization of appropriations, may be summarized as follows: (a)Appropriations for commitment-Evolution of appropriations: The appropriations for commitment  allocated in the initial budget can undergo certain modifications until the final appropriations  for commitment are obtained: final appropriations for commitment = initial budget (NDA and CA) +  amending and supplementary budgets + supplementary receipts  (8) + transfers  (5) + commitment  appropriations carried over from the preceding financial year  (9) + non-automatic carry-overs   (10) from the preceding financial year (uncommitted NDA) + released commitment appropriations from  preceding financial years which have been made available again  (11). -Utilization of appropriations: The final appropriations for commitment are available in the  financial year for use in the form of commitments entered into (appropriations for commitment  utilized = amount of commitments entered into). -Appropriations remaining available for the next financial year: Non-differentiated appropriations  which have not been committed may be carried over non-automatically to the next financial year  after approval by the budgetary authority  (10). Non-utilized commitment appropriations may be  carried over by the Commission to the following financial year  (9). -Cancellation of appropriations: The balance is cancelled. (b)Appropriations for payment of the financial year-Evolution of appropriations: Appropriations  for payment may also undergo modifications leading to the final appropriations for payment: final  appropriations for payment = initial budget (NDA and PA) + amending and supplementary budgets +  supplementary receipts  (9) + transfers  (5). -Utilization of appropriations: The final appropriations for payment are available in the financial  year for use as payments (utilized appropriations for payment of the financial year = amount of  payments made from the appropriations of the financial year). -Carry-overs of appropriations to the next financial year: Appropriations not paid may be carried  over to the next financial year in the form of automatic  (12) or non-automatic  (13) carry-overs. -Cancellation of appropriations: The balance is cancelled. (c)Appropriations for payment carried over from the preceding financial year (automatic and  non-automatic carry-overs)In each financial year these appropriations are also available for use  as payments. Carry-overs which remain unused during the year are cancelled, except in the case of  expenditure on behalf of third parties where carry-overs can be repeated. Amounts cancelled in this  way are added to the result of the financial year in the consolidated revenue and expenditure  account (see 1.9.4.). With regard to actual expenditure, a distinction is made between: -actual expenditure during a financial year = total payments during the financial year = payments  against appropriations for payment of the financial year plus payments against appropriations for  payment carried over from the preceding financial year. -actual expenditure charged to a financial year = expenditure charged to the consolidated revenue  and expenditure account (see 1.9.4.) = payments against appropriations for payment of the financial  year plus appropriations for payment of the financial year carried over to the following financial  year. 1.9.4. The consolidated revenue and expenditure account and the balance of the financial yearAfter  the closure of each financial year the consolidated revenue and expenditure account is drawn up.  The balance of the year, which is to be entered in the budget of the next financial year on the  occasion of an amending budget, is determined therein  (14) (see §  10). 1.10. Presenting the accountsNot later than 1 May of the year following the closure of the  financial year, the Commission forwards to Parliament, the Council and the Court of Auditors the  accounts of that year: the accounts comprise a revenue and expenditure account and a balance sheet,  together with an analysis of the financial management (15). 1.11. External auditAs from 1977 the external audit of the general budget has been carried out by  the Court of Auditors of the European Communities  (16). The Court of Auditors examines the  accounts of all revenue and expenditure of the general budget, whether revenue has been received  and expenditure incurred in a lawful and regular manner, and whether the financial management has  been sound. The audits may be carried out before the closure of the financial year in question. The  audits are performed on the basis of records and, where necessary, on the spot in the institutions  of the Communities and in the Member States. The Court of Auditors draws up an annual report for  each financial year and may also, at any time, submit observations on specific questions and  deliver opinions at the request of one of the institutions of the Communities. 1.12. Discharge and follow-upAs from 1977 the following provisions are applicable  (17):  Parliament, on the recommendation of the Council, gives, before 30 April of the second year  following the financial year in question, discharge to the Commission on the implementation of the  budget. To this end the Council and Parliament in turn examine the accounts presented by the  Commission and the annual report of the Court of Auditors. The institutions must take appropriate  action on the comments appearing in the decisions giving discharge and report on the measures taken   (18). (1) Compulsory expenditure is that resulting necessarily from the Treaties or from acts adopted in  accordance with them. (2) For details concerning the budgetary procedure see Articles 78 ECSC, 203 EEC and 177 Euratom. (3) Article 9 of the Financial Regulation. (4) Article 26 of the Financial Regulation. (5) Articles 78d ECSC, 205 EEC, 179 Euratom and 22(2) of the Financial Regulation. (6) Articles 21 to 55 and 73 to 77 of the Financial Regulation. (7) Articles 28 to 35 of the Financial Regulation and Council Regulations (EEC, Euratom) Nos   1552/89 and 1553/89 of 29  May 1989 (OJ L  155, 7.6.1989). (8) Article 96(2) of the Financial Regulation. (9) Article 7(2) (a) of the Financial Regulation. (10)Article 7(1) (a) and 7(3) of the Financial Regulation. (11)Article 7(6) of the Financial Regulation. (12)Article 7(1) (b) of the Financial Regulation. (13)Articles 7(1) (a) and 7(2) (b) of the Financial Regulation. (14)Article 32 of the Financial Regulation and Articles 15 and 16 of Council Regulation (EEC,  Euratom) N°  1552/89 (OJ L  155, 7.6.1989). (15)Articles 78 to 82 of the Financial Regulation. (16)Articles 78e, 78f ECSC, 206 and 206a EEC, 180 and 180a Euratom and Articles 83 to 90 of the  Financial Regulation. (17)Articles 78g ECSC, 206b EEC, 180b Euratom. (18)Article 89 of the Financial Regulation. >REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>> REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>> REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>> REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>> REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>Part  II: The European Development Funds (EDFs) (position at 31 December 1990) 21. General information  on the EDFsTHE FIRST FOUR EDFs21.1 General information and detailed financial information on the  first three EDFs, has most recently been given in the annual report of the Court of Auditors on the  financial year 1980. Information concerning the 4th EDF has been given in the annual report on the  financial year 1986. Only a few small amounts still remain to be paid under the 4th EDF. A summary  of the payments made under the first four EDFs is given in §  28. THE 5th AND 6th EDFs21.2. Legal provisionsa)Legal basis in respect of ACP States: -5th EDF: second ACP-EEC Convention signed in Lomé on 31 October 1979 (Lomé II), -6th EDF: third ACP-EEC Convention signed in Lomé on 8 December 1984 (Lomé III). b)Legal basis in respect of the OCT: -5th EDF: Council Decision 80/1186/EEC of 16 December 1980, -6th EDF: Council Decision 86/283/EEC of 30 June 1986. c)Establishment of the EDFs: -5th EDF: internal agreement of 20 November 1979, -6th EDF: internal agreement of 19 February 1985. d)Financial Regulations: -5th EDF: Financial Regulation 81/215/EEC of 17 March 1981, -6th EDF: Financial Regulation 86/548/EEC of 11 November 1986. 21.3. Allocations, financing, distribution and type of aidThe EDF allocations after changes  (1)  by the Council are as follows: -5th EDF: 4  775,5 Mio ECU, -6th EDF: 8  064,1 Mio ECU. The EDFs are financed by the EC Member States in proportions laid down in the internal agreements  (see also §  22). The abovementioned internal agreements provide for distribution of the allocations of the  EDFs  between the ACP States and the OCT and between grants, special loans, risk capital, Stabex  (2) and  Sysmin  (3). Part of the allocation in the form of grants is reserved for exceptional aid and for interest  subsidies on loans granted by the European Investment Bank. The rest of the allocation in the form  of grants and the allocation in the form of special loans are distributed among the recipient  countries, with the exception of funds for the regional projects, administrative costs  and a  contingency reserve. The amounts thus allocated to the recipient countries, called indicative  programmes in the case of the ACP States, are used to finance the projects adopted. 21.4. Monetary unitEDF allocations are denominated in ECU; for the purpose of converting the  monetary units previously applied into ECU, it has been agreed that 1  u.a. = 1  EUA = 1  ECU. 21.5. Date of entry into force- 5th EDF: 1 January 1981, - 6th EDF: 1 May 1986. 21.6. Financial implementationThe Commission draws up a timetable of requests for contributions,  which in principle are to be paid quarterly by the Member States of the European Communities. The  use of the EDF resources is shown in the accounts in three stages: (I) financing decision, (II)  signing of contracts against funds allocated to national authorizing officers, (III) authorization  of payments to contractors. 21.7. External auditThe Court of Auditors is responsible for the audit of the EDFs (in accordance  with the Treaty). 21.8. Authority giving dischargeThe European Parliament gives discharge for the financial  management of the EDFs, on the recommendation of the Council (in accordance with internal  agreements). (1)The initial allocations were altered by Council Decisions, and are increased by various receipts  such as reconstitution of Stabex transfers and bank interest. (2)System designed to guarantee the stabilization of earnings from exports by the ACP States to the  Community (Lomé I, Article 16; Lomé II, Article 23; Lomé III, Article 147). (3)System designed to aid ACP States whose economies are largely dependent on the mining sectors  and in particular towards helping them cope with a decline in their capacity to export mining  products to the Community (Lomé II, Article 49; Lomé III, Article 176). >REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>> REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>