Special report in support of the Statement of Assurance relating to the activities of the sixth and seventh European Development Funds for the financial year 1994, together with the replies of the Commission
Date: 1995-11-09
Institutions: European Court of Auditors
Subjects: European Development Fund, auditing, fourth Lomé Convention, publication of accounts, third Lomé Convention













EUR-Lex - 31995Y1230(10) - EN






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31995Y1230(10)

Special report in support of the Statement of Assurance relating to the activities of the sixth and seventh European Development Funds for the financial year 1994, together with the replies of the Commission  


Official Journal C 352 , 30/12/1995 P. 0097 - 0129 





Special Report  in support of the Statement of Assurance relating to the activities of the sixth and seventh European  Development Funds for the financial year 1994 together with the Commission's replyTABLE OF  CONTENTSParagraph reference1. CONDITIONS FOR PRODUCING THE STATEMENT OF ASSURANCE 1.1 - 1.13The  Court's mandate 1.1 - 1.3Accounts and transactions covered by the DAS 1.4 - 1.9Audit methodology  applied by the Court 1.10 - 1.132. PERFORMANCE OF THE AUDIT 2.1 - 2.8Constraints on the audit  work 2.3 - 2.6Scope of the audit findings 2.7 - 2.83. AUDIT RESULTS 3.1 - 3.65General conclusion  3.1 - 3.4Main observations relating to the reliability of the accounts 3.2Main observations  relating to the legality and regularity of the underlying transactions 3.3 - 3.4Detailed  observations on the reliability of the accounts 3.5 - 3.46Reliability of the financial statements  3.5 - 3.25Accounting principles, methods and practices 3.5 - 3.8Content and presentation of the  year-end financial statements 3.9 - 3.11Disparities between the accounts of the authorizing  officer and those of the accounting officer 3.12 - 3.15The EDFs' balance sheets 3.16 -  3.20Explanations to be added to the financial statements 3.21 - 3.25Revenue 3.26 - 3.28Decisions  (primary commitments) 3.29 - 3.33Accounting principles and methods 3.29Sleeping commitments 3.30  - 3.33Contracts and comparable obligations (secondary commitments) 3.34 - 3.39Omissions 3.35 -  3.36Valuation at the time of initial recording 3.37Valuation at the close of the financial year  3.38 - 3.39Payments 3.40 - 3.46Presentation of payments 3.40 - 3.42Advances 3.43 - 3.46Detailed  observations on the legality and regularity of the underlying transactions 3.47 - 3.65The EDFs'  balance sheets 3.47 - 3.48Revenue 3.49Contributions from Member States 3.49Decisions (primary  commitments) 3.50 - 3.51Contracts and comparable obligations (secondary commitments) 3.52 -  3.59Sequence of authorization stages of secondary commitments 3.52 - 3.55Eligibility 3.56 -  3.59Payments 3.60 - 3.65Eligibility of payments 3.60 - 3.65 Special Report in  support of the Statement of Assurance relating to the activities of the Sixth and Seventh European  Development Funds for the financial year 19941. CONDITIONS FOR PRODUCING THE STATEMENT OF  ASSURANCEThe Court's mandate1.1. The Treaty establishing the European Community has entrusted the  Court of Auditors with the audit of the operations of the European Development Funds. In this  context, 'the Court of Auditors shall provide the European Parliament and the Council with a  statement of assurance as to the reliability of the accounts and the legality and the regularity of  the underlying transactions`. This document sets out the results of the work undertaken pursuant to  this mandate in respect of the operations of the Sixth and Seventh EDFs relating to the financial  year 1994. 1.2. The Statement of Assurance (DAS) consists in issuing an opinion as to whether: (a)the accounts (balance sheets and revenue and expenditure accounts), taken as a whole, are  reliable, in so far as they faithfully reflect the assets, the year-end financial situation and the  results of the transactions carried out during the financial year, in accordance with the  provisions of the Treaties, the Financial Regulations and generally accepted accounting  principles; (b)the underlying transactions are generally legal and regular in respect of all the provisions  applicable in this area. 1.3. Since the EDFs' financial statements are presented cumulatively and because the first  financial year for which the DAS has to be provided comes at a time when the EDFs to which it  applies have been under way for several years, it should be noted that this DAS can relate only to  the operations of the financial year 1994 and that the Court will not be able to provide a  Statement of Assurance on the cumulative accounts of the EDFs until the Second Financial Protocol  of Lomé  IV, at present being negotiated, comes into effect. Accounts and transactions covered by the DAS1.4. The European Development Funds (EDFs) are based,  on the one hand, on international conventions agreed between the Member States of the European  Union and seventy African, Caribbean and Pacific States (1), and, on the other, on the Council  decisions relating to the association of twenty-four Overseas Countries and Territories (OCT) with  the European Economic Community. The EDFs are constituted in accordance with the Internal  Agreements on the financing and administration of the aid which the Community implements under  these Conventions and Agreements (2). 1.5. One of the main features of the EDFs relates to the arrangements for their financing. Firstly,  the financing of the EDFs is separate from that of the European Communities' general budget and  each Member State contributes to their financing according to a scale laid down by the Internal  Agreements referred to in paragraph 1.4 above (see Table 1). Since these are Funds which are used  up gradually, the appropriations allocated to them are not subject to the rule of annuality and do  not run the risk of being cancelled. 1.6. Secondly, the EDFs do not include the funds mobilized by the European Investment Bank (EIB)  from its own resources, even though the latter are provided for both by the Lomé Conventions and by  the OCT Association Agreements (see Table 2). The Internal Agreements refer not only to the EDFs'  ACP and OCT resources, but also to the amounts which the EIB is supposed to make available to them  in the form of loans granted from its own resources, i.e. 1 120 Mio ECU to supplement the Sixth EDF  and 1 225 Mio ECU to supplement the Seventh EDF (3). >TABLE>>TABLE>1.7. The revenue and expenditure accounts submitted every year  by the Commission show on the one hand the operations of the financial year and on the other  cumulative statements of the revenue and expenditure recorded since each Fund came into force.  Furthermore, although the Sixth Fund and the First Financial Protocol of the Seventh EDF each have  a duration of five years, they are implemented over a longer period, which continues until the  Commission considers that their state of implementation is sufficiently advanced. At this point,  the unexpended balances still available are transferred to a subsequent Fund. Thus, at 31 December   1994, the accounts of the Sixth EDF included the unexpended balances of the Second, Third and  Fourth EDFs (125,1 Mio ECU), whilst the Seventh EDF included the unexpended balances of the Fifth  EDF (492,5 Mio ECU), which was closed in accounting terms at the end of 1993. 1.8. The accounts which have been examined are those published in the form of the Communication  from the Commission to the Court of Auditors, Parliament and the Council under the reference  COM(95)180 final of 5 May 1995. 1.9. With regard to the scope of the Statement of Assurance and the auditing standards applied, the  Court refers the reader to its special report on the activities pertaining to the general budget  for the financial year 1994. Audit methodology applied by the Court1.10. Owing to the direct nature of the Commission's  management of the EDFs, and in view of the very precise financial implementation procedures laid  down by the successive Lomé Conventions, as well as the presence in each recipient State of a  Commission delegation responsible for monitoring their implementation, the audit of the operations  of the financial year 1994 was carried out for the most part at the central departments of the  Commission, which possess the supporting documents that make it possible for the legality and  regularity of the underlying transactions to be checked through to the final recipient. As a  supplement to this audit, questionnaires were sent either to third parties or to the Commission  delegations. 1.11. Since the overall amounts of funding (allocations) of the EDFs are used up gradually as the  development projects are implemented, the actual decrease in the capital of each Fund has to be  confirmed, in relation to the projects actually carried out and evidenced as such in the financial  statements. In so doing, the legality of the individual transactions has to be guaranteed,  especially with regard to their eligibility, but also with regard to their regularity in terms of  the implementing procedures. 1.12. In the light of this, the audit focused in particular on the amounts making up the EDFs'  capital and assets at the end of 1994 and on the validity of the flow of expenditure and revenue  corresponding to the implementation of the aid during the financial year 1994. In each case, close  attention was paid to the situation shown by the year-end financial statements. 1.13. Table 3 shows in summary form the state of progress of the Sixth and Seventh EDFs,  highlighting the amounts which should be available at the end of the financial year 1994 for new  uses. The data shown here come from the Commission's accounts and are not the figures that would  arise from accounts corrected in accordance with the audit findings. 2. PERFORMANCE OF THE AUDIT2.1. Expenditure was checked by means of statistical sampling of the  delegated appropriations (see paragraph  2.4(b)) and payments. For this purpose, the operations of  the two EDFs still being implemented were combined and it was considered that each of them  constituted part of the same whole. An overall materiality level of 57 Mio   ECU (4) was selected,  with a 95% degree of assurance, a level which led to a sample of 201 secondary commitments and 142  payments being examined. 2.2. In addition to examining the sample of expenditure, analytical review procedures were carried  out on the 1994 decisions, the valuation of operations at the end of the financial year, sleeping  commitments and revenue. Specific validation checks were also carried out on the allocations by  financial instrument and by country, on the suspense accounts and the various asset and liability  accounts. An entirely systematic control procedure has been applied to the bank accounts. Constraints on the audit work2.3. It is particularly difficult to monitor the financial resources  that have been authorized for the EDFs. In respect of past financial years, the Court has already  drawn the discharge authority's attention to the low degree of control in the management of the EDF  appropriations (5). In particular, it has recommended that the Financial Controller and the  accounting officer be associated with this management so as to strengthen the internal control by  means of greater separation of tasks, clearer procedures for authorizing movements and tighter  accounting discipline. 2.4. The EDFs are implemented in accounting terms in three stages: (a)the recording of financing decisions taken by the Commission, often called primary commitments; (b)the recording in the accounts of contractual commitments with third parties, corresponding to  appropriations whose implementation has been entrusted to the national authorizing officers of the  ACP countries or the OCT; these operations are usually called secondary commitments; (c)the payments, which correspond to disbursements that are in theory final and which constitute  the remuneration for work, supplies or services rendered. 2.5. At the year-end, in order to establish the volume of the appropriations likely to be available  for new uses, both the final payments disbursed since the beginning and the commitments of  appropriations which still actually have to be settled should be subtracted from the capital of  each EDF (see Table 3). 2.6. Since 1991, the Court of Auditors has endeavoured to show in its successive Annual Reports how  the accounting principles and methods applied by the Commission have affected the estimates of the  appropriations actually available. In 1994, by implementing a plan of action intended to reform  certain accounting practices (6), the Commission embarked on a process with the objective of making  available year-end financial statements with a genuine informative value. The observations of this  report show that it will still take some time before this aim can be achieved. Scope of the audit findings>TABLE>2.7. By using the results of all the checks carried  out, it was possible to quantify the errors. With regard to the appropriations, decisions, revenue  and financial statements, the audit work did not enable any statistical interpretation to be made  and the conclusions are based only on the known errors. For errors relating to contracts and  similar operations and to the payments examined as part of the sampling procedure, there has been  no statistical estimation of those relating to the Stabex and structural adjustment financial  instruments. In these cases, only the known errors were selected, as the size of the operations  concerned was such that virtually all the movements of the financial year had been examined. By  contrast, for the other financial instruments, the errors which have been encountered have been  used in order to make a statistical estimate of the probable error affecting the underlying  operations. The overall conclusions as to the reliability of the accounts and the legality and  regularity of the underlying operations are based on all these results. 2.8. Between the closing of the 1994 accounts and the publication of the findings of the Court's  audit, the Commission rectified the accounting errors which had been found. Because of the  mechanisms for drawing up the accounts, these corrections were booked to the financial year 1995  and do not affect the financial statements published on 5 May  1995 pertaining to the financial  year 1994. 3. AUDIT RESULTSGeneral conclusion3.1. With regard to the reliability of the accounts and the  legality and regularity of the underlying transactions, the Court is of the opinion that: (a)the EDF accounts as at 31 December  1994 imperfectly reflect the financial situation (available  capital) and the operations of the EDFs that are being implemented because of certain accounting  methods used and owing to a lack of information needed for proper understanding of certain figures  (see paragraph 3.2); (b)in respect of the legality and regularity of the underlying transactions, most of the  difficulties encountered stem from a legal framework which in some instances is ill-suited to the  conditions under which the EDFs are implemented (see paragraphs 3.3 and 3.4). Main observations relating to the reliability of the accounts3.2. Despite the Commission's recent  efforts, the accounts are still affected by the use of certain accounting practices and by the  delays inherent in the accounting procedure: (a)the way in which the appropriations are presented lacks clarity and the absence of an analytical  framework does not always enable immediate follow-up of the programmes decided on by the Budgetary  Authority. No adequate explanation is given in the notes to the financial statements for  appropriations which cannot be mobilized (174,5 Mio ECU) (7), a transfer of appropriations liable to  be made up again (12 Mio ECU) (8) and the amount of appropriations to be restored (45,5 Mio ECU) (9).  As the system for managing the appropriations lacked discipline, in 1994 it enabled 24 Mio ECU (10)  of appropriations to be created without any grounds; (b)the primary commitments are underestimated in respect of recent transactions (75,4 Mio ECU) (11); (c)the commitments remaining to be settled are overestimated because of delays in clearing old  operations. Whereas the financial statements show balances for commitments to be closed of 68,2 Mio  ECU, the Court's audit shows that this amount is markedly underestimated (12); (d)as a result of delays in accounting, the figures shown in the accounts for secondary commitments  underestimate the true situation by 140 Mio ECU (13); (e)significant payments (at least 813 Mio ECU) (14) are made to the recipient States on bank accounts  requiring two signatures, one of which must be the Commission's. The situation regarding the  mobilization of the sums thus transferred, which is indicative of the degree of implementation of  the aid, is not mentioned in the notes to the financial statements; (f)the accounting system treats the advances paid to contractors as definitive expenditure, but  this situation is not explained in the notes to the financial statements (15); (g)owing to administrative delays, expenditure amounting to 35 Mio ECU (16) which should have been  charged to development projects is included in the assets on the balance sheets of the EDFs.  Furthermore, the cash accounts include 3,1 Mio ECU (17) the availability of which is uncertain (bank  transfers not received and insolvent banks); (h)in addition to the known errors indicated in paragraph (g) above, the most likely amount of the  substantial errors affecting the reliability of the accounts is estimated, from the results of the  sampling procedure, at 31 Mio ECU for payments. Main observations relating to the legality and regularity of the underlying transactions3.3. As  regards the underlying transactions, the regulations are not always applied strictly: (a)appropriations of 18,5 Mio ECU (18) were used in 1994 without having been transferred beforehand  to the Stabex instrument; (b)supplementary financial support amounting to 13 Mio ECU (19), funded from the support for  structural adjustment facility, was mobilized in accordance with a procedure reserved under the  Convention for traditional development projects; (c)some transactions present difficulties as regards eligibility, by virtue of the origin of the  financing (17 Mio ECU) (20), or the fact that the transactions involved do not comply with either the  financing agreements (5,3 Mio ECU) (21) or the tendering rules (2,2 Mio ECU) (22); (d)the suspense accounts shown as balance-sheet assets include 6,1 Mio ECU (23) of payments which are  not backed up by supporting documents; (e)the payments relating to irregular commitments (paragraph 3.3(b)) are affected by the same flaws  as those affecting these commitments (13 Mio ECU) (24); (f)in addition to the known errors indicated in paragraphs (d) and (e) above, the most probable  amount of the substantial errors affecting the legality and regularity (25) of the payments of the  financial year is estimated at 46 Mio ECU. The most probable value of the 1994 payments affected by  the legal flaws whose direct impact on the amounts entered in the accounts cannot be quantified is  estimated at 85 Mio ECU. 3.4. Many of the observations made in paragraph 3.3 stem for the most part from a regulatory  framework which is in some instances ill-suited to the conditions under which the EDFs are  implemented. Other areas, such as global authorizations (paragraph 3.29(a)), the conditions of  eligibility for Stabex transfers (paragraph 3.51) and prior authorization in particular of  operations concerning delegated appropriations (secondary commitments) (paragraphs 3.52 to 3.55),  also need to be clarified. Detailed observations on the reliability of the accountsReliability of the financial  statementsAccounting principles, methods and practices3.5. The accounting standards adopted for  preparing the year-end financial statements have a crucial impact on the evaluation and,  consequently, on the reliability of the accounts in so far as the latter must reflect faithfully  the assets, the flow of operations and the actual financial situation. In this field, the EDF  accounts still lack the consistency and discipline to be able to reflect the true economic  situation faithfully. 3.6. The generally accepted accounting principles stipulate that the transactions and other  operations of the financial year must be entered in the accounts and presented in accordance with  their nature and with economic reality, and that regard for their legal appearance alone is not  acceptable. The observations made repeatedly in this report (26) illustrate the need for an  improvement in the way in which this principle is applied. 3.7. The valuation methods must be consistent for all the financial instruments and be applied in  the same manner from one financial year to the next. Numerous observations (27) indicate the  existence of differences in the valuation methods applied to the various financial instruments,  differences which are likely to distort the meaning of the total figures detailing the  implementation of the EDFs overall (decisions, secondary commitments, payments). 3.8. For the sake of transparency, the accounting framework must enable immediate identification of  the policies and programmes embarked upon. Once the accounting standards have been applied, if this  framework does not allow the financial positions to be followed in their entirety in the accounts,  then the financial statements must be clarified by means of precise explanatory notes. For the EDF,  such notes are especially necessary, particularly in cases where the appropriations are  administered jointly with either the EIB, ECHO or the ACP countries. Furthermore, decisions of a  political nature which affect the rate of implementation of the EDFs must be made known to the user  of the financial statements (see paragraph 3.33). Some observations in this report indicate a need  for greater transparency in the financial statements (28). Content and presentation of the year-end financial statements3.9. Document COM(95)180 final (see  paragraph 1.8) contains various errors or omissions which undermine the informative value of the  EDF financial statements as at 31 December  1994: (a)even though the EIB itself administers part of the EDF's non-programmable aid (risk capital and  interest-rate subsidies), it does not submit to the Commission in time all the data which are  needed for drawing up the year-end accounts (see paragraph 3.29(b)); moreover, the remarks  concerning non-programmable aid (pages 21-25 of the document) make no reference to either risk  capital or interest-rate subsidies; (b)with regard to non-programmable aid, although a remark is made concerning aid for refugees in  paragraph VI.3, no similar mention is made of emergency aid despite, in particular, the size of the  amounts mobilized in response to the crisis which hit Rwanda in 1994 (29); (c)although the risk capital partly finances temporary acquisitions of holdings in financial  undertakings or institutions, the EDF accounts provide no indication of the extent of such  holdings; (d)even though it is stated on page 9 of the document that the Council decided in 1993 to allocate  100 Mio ECU to a new rehabilitation programme, on page 12 reference is made, without explanation,  to projects under way amounting to 520 Mio ECU, with no distinction being made between EDF  appropriations and appropriations entered in the general budget; (e)the figures given on page 16 of the document in respect of decisions concerning interest on  Stabex funds are incorrect (30); (f)the remarks concerning Sysmin in paragraph VI.2 of the document omit the appropriations and  operations connected with the OCT (2,5 Mio ECU); (g)the figures presented in support of the remark concerning the support for structural adjustment  (page 27 of the document) are incomplete (31); (h)there is no comment on the implementation of regional cooperation, despite the volume of finance  concerned and the specific difficulties involved in its mobilization. 3.10. The EDFs' revenue and expenditure accounts are presented according to the financial  instruments, which correspond to the way in which the resources recorded in the Conventions and the  internal financial agreements are broken down. In order to assess the true state of the  implementation of Community aid, however, it has to be possible to monitor the total amounts of  funding in terms of the policies and aims pursued. However, the way in which the EDFs' financial  statements are currently presented does not make this possible, in particular as regards the  subsidies and where several financial instruments are used for one and the same aim or programme.  This is true in particular for the Cross-Border Initiative (32) (60 Mio ECU), for the support for  structural adjustment (1 162,5 Mio ECU (33)) and for the rehabilitation programme; the amounts of  funding earmarked for the latter two policies do not appear clearly in the accounts. 3.11. The measures to fight AIDS under the Sixth EDF are presented in the financial statements  under a separate heading, but this does not exist for the Seventh EDF. As a result, the measures to  fight AIDS financed under the Seventh EDF are not readily identifiable, despite the existence of  Note VI.5 to the year-end financial statements for 1994 which refers to the creation of an  allocation amounting to 50 Mio ECU. For the purposes of continuity of methods and consistency of  the financial statements, the accounts of the Seventh EDF should disclose the measures to combat  AIDS separately. Disparities between the accounts of the authorizing officer and those of the accounting  officer3.12. At 31 December 1994, the resources available for each Fund as shown on the balance  sheet drawn up by the accounting officer differ from the allocations shown in the accounts of the  authorizing officer: >TABLE>3.13. For the Sixth EDF, the difference can be explained as follows: (a)the authorizing officer did not enter in the accounts all the bank interest received in 1994,  but which had been taken into account as EDF resources by the accounting officer (+21,8 Mio ECU); (b)bank interest prior to 1994, which was credited to the Sixth EDF by the accounting officer, was  credited to the Seventh EDF by the authorizing officer (-46,0 Mio ECU); (c)the accounting officer did not alter the resources available following a transfer of  appropriations (Sysmin and Sixth EDF interest-rate subsidies) to Seventh EDF emergency aid (+126,7  Mio ECU). 3.14. For the Seventh EDF, the disparity is due to: (a)bank interest for the financial year 1994 credited by the accounting officer to the Sixth EDF  and by the authorizing officer to the Seventh EDF (-16,5 Mio ECU); (b)the addition by the authorizing officer (see paragraph 3.15), but without any supporting  documents, of bank interest under Stabex (34) (-23,9 Mio ECU); (c)the bank interest prior to 1994 mentioned in paragraph 3.13(b) above (+46,0 Mio ECU); (d)the transfer of Sysmin appropriations and Sixth EDF interest-rate subsidies referred to in  paragraph 3.13(c) above (-126,7 Mio ECU); (e)a discrepancy, which has never been corrected, of -0,1 Mio ECU relating to a paying agent  account in Algeria, opened at the time of the First EDF. 3.15. Whilst most of the disparities which have been found are mismatches between the EDFs due to  poor management of the accounting procedure for appropriations, the situation regarding Stabex  interest is more worrying from the point of view of the regularity of the transactions, in that it  involves appropriations being created without any grounds (23,9 Mio ECU). In this instance,  systematic checking of movements of appropriations by a department independent of that of the EDF  chief authorizing officer would probably have prevented these errors. The EDFs' balance sheets3.16. The balance sheet of the Sixth EDF includes 34,7 Mio ECU of  expenditure to be regularized. This sum actually comprises 41,6 Mio ECU of such expenditure, and  6,9 Mio ECU of revenue received, but awaiting final booking in the accounts. 3.17. In the balance sheet, the suspense account should have been broken down into its various  component parts, on the one hand by making a clear distinction between revenue and expenditure  awaiting clearance, and on the other by disclosing the payments of advances and the payments to  third parties separately from the expenditure. 3.18. Of the EDF's bank assets of 631,5 Mio ECU, 3,1 Mio ECU relate to sums lost or whose recovery  is uncertain. These sums should be detailed as such, and shown separately from other assets in the  balance sheet, and the EDF accounting officer should either initiate the recovery procedure or  record the losses incurred (35). 3.19. The advances paid in respect of scholarships amount to 15,3 Mio ECU and can be divided into  three groups: (a)1,7 Mio ECU paid by the delegations in the ACP countries and corresponding to old operations,  the validity of which has not been confirmed recently by these delegations; (b)7,4 Mio ECU paid to paying agencies in the Member States, with no reconciliation having been  made with the actual sums received and recorded by these agencies; (c)6,2 Mio ECU paid to the European Association for Cooperation (EAC) which could not be confirmed  owing to the unavailability of the accounts of this body on time. 3.20. These three types of operations require the Commission's departments to carry out a  comprehensive control the accounts in order to confirm the actual amounts recorded therein. Explanations to be added to the financial statements3.21. Somalia's failure to ratify the Fourth  Lomé Convention is the cause of some difficulties in the management of appropriations. Despite the  fact that, under the terms of Article 360 of the Convention, Somalia is no longer able to ratify  Lomé  IV, the appropriations which were allocated to Somalia for its indicative programme, i.e. 111  Mio ECU, were transferred in January 1995 (a few days before the closure of the financial year  1994) to a 'non distributable` reserve account. In the financial statements, this blockage of funds  has not been brought to the attention of the discharge authorities. Indeed, the corresponding  appropriations, despite being blocked, are disclosed with other reserves which can be mobilized. 3.22. The EDF's financial statements are also affected by a transfer and the use of appropriations  to be made available again, operations which have been carried out without their temporary nature  or their extent being indicated: (a)on 8 July 1994 an appropriation of 12 Mio ECU was transferred from aid for refugees to emergency  aid, pending a decision by the Council of Ministers to increase the emergency aid appropriations,  and with the firm intention of making these appropriations available again. Although the decision  was taken 17 days later, on 25 July 1994, for an amount of 150 Mio ECU, the 12 Mio ECU have not  been returned to the aid for refugees; (b)as Somalia could not benefit from the use of Seventh EDF appropriations, the emergency  operations undertaken there were financed, once the Sixth EDF appropriations were used up, from the  resources of Somalia's Lomé III indicative programme, on the understanding that these funds would  subsequently be replenished by Lomé  IV resources. The amount of these Sixth EDF appropriations to  be made available again, totalling 45,5 Mio ECU, is not disclosed in the financial statements at 31  December  1994. 3.23. Since the end of December 1991, 28,54 Mio ECU have been frozen on the Sixth EDF's allocation  accounts for the Special Programme to assist certain heavily indebted countries south of the Sahara  (36). Although these appropriations have been intended since 1987 for rapid disbursement and their  use is in reality similar to that of the Seventh EDF's support for structural adjustment  appropriations, they are recorded in the financial statements amongst the Sixth EDF subsidies  without any distinction being made. 3.24. For the support for structural adjustment operations in Tanzania, 35 Mio ECU in  appropriations which were blocked because of a lack of progress in the reform process undertaken by  the government are not highlighted in the financial statements. 3.25. Two groups of operations, for whose management the Commission is partly responsible, are  large enough to be disclosed in the year-end financial statements: (a)cash at bank made available to the Commission for certain co-financing operations. At  31.12.1994, the sums on deposit amounted to 22,1 Mio ECU; (b)the Commission participates, in conjunction with the ACP countries, in the management of the  counterpart funds created as a result of the EDF grants (especially for Stabex and structural  adjustment). The amounts concerned are estimated at 255,6 Mio ECU at 31.12.1994 by the 47  delegations which replied to the Court's questionnaire. Revenue3.26. Of the 32,1 Mio ECU in bank interest credited as revenue in the accounts for the  financial year 1994, 8,2 Mio ECU had, in fact, been received between June 1989 and August  1990.  The lateness of these entries is due to shortcomings of an administrative nature in the division of  responsibilities between the Commission's departments. 3.27. Furthermore, 4,7 Mio ECU of bank interest received was still shown in suspense accounts (37) as  it had not yet been approved by the Financial Controller, whilst 1 Mio ECU in interest received or  owed by third parties had not been entered in the accounts. 3.28. Within the Seventh EDF itself, the situation regarding bank interest is unbalanced on two  counts. Whereas the authorizing officer noted that 79,4 Mio ECU in Stabex interest had been used,  the accounting officer noted use of only 26,8 Mio ECU. Furthermore, as the actual amount of the  interest earned under the Seventh EDF is only 60,9 Mio ECU, at the end of 1994 the authorizing  officer had de facto, and without any authorization, used 18,5 Mio ECU of the Stabex tranche for  the 1994 year of application (38). Decisions (primary commitments)Accounting principles and methods3.29. The principles and methods  applied by the Commission for taking into account primary commitments are usually reliable as the  financing decisions are normally recorded for their full amount and without significant delay. Four  sizeable exceptions have, however, been found: (a)firstly, with regard to certain global decisions provided for in Article 25 of the internal  financial agreement (39), no primary commitment at global level is recorded for the Commission's  decisions. It is only at a later stage, when the individual operations have been identified, that  the primary commitments corresponding to each project are entered. This practice overestimates the  situation of the appropriations actually available for new operations. At the end of December 1994,  the authorizations of this kind which had not been re-transcribed in the Seventh EDF's accounts  amounted to 54,03 Mio ECU (40). The situation relating to the appropriations of the Sixth EDF is not  known. At the very least, the balance of the global authorizations being implemented should be  indicated in the notes to the financial statements; (b)secondly, with regard to the operations undertaken at the initiative of the EIB (41), the EDF's  accounts are updated only after considerable delays and without a procedure enabling the Commission  to guarantee the validity of the EDF's accounts. At the end of 1994, it was thus found that nine of  the fifteen financing decisions taken by the EIB's Board of Directors between October and December  1994 were not taken into account. The appropriations available for new operations are therefore  overestimated by about 62,5 Mio ECU (42); (c)thirdly, an older interest-rate subsidy for 9,15 Mio ECU was not entered in the accounts; (d)lastly, for a project to assist the Turks and Caicos Islands, a financing decision for 3,7 Mio  ECU, taken on 20 December  1994, was not included in the year-end accounts. Sleeping commitments3.30. In the 1994 financial statements, the Commission refers for the first  time to the existence of sleeping operations. This is in itself a considerable step forward, as  this phenomenon is an old one and the amounts at stake are substantial, without any systematic  joint ACP-EEC procedure ever having been introduced to remedy this once and for all. The Commission  states that there are 57,9 Mio ECU of overestimated commitments for the Sixth EDF and 10,3 Mio ECU  for the Seventh EDF (COM(95) 180 final, pages 83 and 84). 3.31. The audit controls, which were structured in accordance with an analysis by stages, show that  this estimate minimizes the volume of the appropriations which have been frozen. Thus, with regard  to only primary commitments for which there has not been any movement during the last three years,  the sums involved amounted to 46,8 Mio ECU for the Sixth EDF (43) and 33,5 Mio ECU for the Seventh  EDF (44). As regards the contracts for which no payments have been made for three years (since the  end of 1991), their balance is 42,9 Mio ECU (45) for the Sixth EDF (it is too early to make this  analysis for the Seventh EDF). The emergency-aid operations and the refugee-aid operations, because  of their rapid implementation, require additional analysis: the contracts for which there have been  no payments since the end of 1992 show a balance of 2,8 Mio ECU, and that of the contracts without  payment since 31 August  1993 is 2 Mio ECU. 3.32. Without counting the other operations which have been completed since 31 August  1993 but  which are not yet closed, there are thus about 128 Mio ECU which are likely to be decommitted. This  situation may be partly due to the fact that the Commission departments (except for ECHO) usually  wait for all the contracts of a project to be closed, and for the national authorizing officer  concerned to give his approval before considering decommitting surplus appropriations. In the  frequent cases where no action is taken by the national authorizing officer, no decommitment  procedure was applied before the end of the financial year 1994. 3.33 In this connection, apart from regional cooperation, there are nine countries for which a  special analysis ought to be made because of the high number of cases found: Sudan, Togo, Zaire,  Kenya, Malawi, Zimbabwe, Ethiopia, Liberia and Congo. In future, it would be advisable for the  EDF's financial statements to indicate clearly the countries with which cooperation has been  suspended and those with which it has been slowed down, as these situations offer some explanation  for the very slow rate of utilization of the appropriations. Contracts and comparable obligations (secondary commitments) (46)3.34. Several of the Commission's  accounting methods or practices have a considerable effect on the valuation of secondary  commitments. They stem from delays in the accounting entries, shortcomings in the computerized  accounting systems, or practices which undermine the strictness of the accounting management and  valuation. Omissions3.35. It transpires firstly that 18 of the 25 loan contracts, representing 126,3 Mio ECU,  which the EIB notified to the Commission as having been signed for the last quarter of 1994 were  not entered in the year-end accounts. For several years, the Court has regularly been pointing out  such omissions to the Commission. 3.36. Two year-end accounting re-bookings have resulted in an omission of 14 Mio ECU at the  closure, with the deductions being entered under the financial year 1994 and the additions being  made under the financial year 1995. Credit and debit movements which are, obviously, part of the  same series of entries relating to the same financial year. Such inconsistencies would be avoided  if the concept of accounting entries were better applied. Valuation at the time of initial recording3.37. Even though the financing agreements as a rule  include an amount set aside for covering unknown factors and price revisions, the Commission has  taken up the habit of recording the accounting commitments for contracts for amounts higher than  the legal commitments. This practice has been commented on repeatedly by the Court in the past (47).  Of the operations examined, the excessive secondary commitments thus recorded in the accounts  amounted to 12,3 Mio ECU. Valuation at the close of the financial year3.38. There is no revaluation of the secondary  commitments still to be settled at the year-end in cases where they have to be paid in a currency  other than the ecu. In the context of the general budget, the Commission has, however, considered  that the fluctuations were of a sufficient scale to justify a computerized revaluation procedure.  There is no reason to consider that the situation of the EDFs is fundamentally different and that  the same currency fluctuations do not affect the reliability of the valuations in the same way. A  correct revaluation would in certain cases (48) require the calculation to be broken down according  to the amounts corresponding to the various contractual currencies for payment. If this phenomenon  is processed statistically on the basis of the secondary commitments of the sample, this leads to  the excessive commitments being valued at 36 Mio ECU and the insufficient commitments being valued  at 35 Mio ECU (the most probable value). 3.39. Another accounting practice that affects the valuation of secondary commitments is that  relating to the considerable delays in the closure of operations even though the true situation of  the operations is known. At the closure, the decommitments thus deferred which were found in the  sample amounted to 1,1 Mio ECU. PaymentsPresentation of payments3.40. For the Stabex transfers and the support for structural  adjustment operations, the procedures laid down in the regulations in respect of the implementation  of appropriations result in the payments being presented in a way which, because of special  procedures applied to these financial instruments, gives a poor reflection of the operations  carried out (49). 3.41. Since the system of mutual obligation frameworks (50) for mobilizing Stabex transfers was  introduced by the Fourth Lomé Convention, the sums from the EDF have been paid into bank accounts,  mostly in Europe, held in the name of the recipient countries (51). These sums remain in these  accounts for as long as it takes the recipient country and the Commission to agree upon a programme  of measures and until the prerequisite conditions for mobilization have all been met. Whereas under  the other EDF expenditure headings, payment establishes the final utilization of financial  resources following implementation of the measures, in the case of Stabex transfers the payment  recorded by the EDF is initially merely a payment of funds into an intermediate bank account, which  gives no indication of the true degree of implementation of the subsidies. At 31 December 1994, the  sums thus deposited in bank accounts in Europe amounted to 739,8 Mio ECU, without the year-end  financial statements, however, making any mention of this situation. 3.42. As for structural adjustment, the Commission does not apply the provisions of Article 250(3)  of the Fourth Lomé Convention, which stipulate that the funds remitted to the recipient authorities  are cash advances until these authorities have submitted justification of their use. Furthermore,  in many cases the sums transferred to bank accounts in Europe in the first instance boost the  exchange reserves of the recipient countries, and are subsequently, in many cases, converted into  counterpart funds in local currency, which must then enable the financing of targeted budgetary  support. The counterpart funds thus constituted then pass through, frequently over a prolonged  period, to bank accounts requiring two signatures held in the recipient States in readiness for  mobilization. This situation is not reflected in the EDF financial statements. If the Budgetary  Authority does not have information concerning the bank accounts thus opened, it cannot obtain a  numerical estimate of the actual state of progress of the operations. In the case of eight of the  delegations which replied to the questionnaire sent to them by the Court, the unused sums (in ecu)  at 31 December  1994 in the accounts held in Europe amounted to 73,5 Mio ECU. Advances3.43. Many contracts provide for the payment of advances prior to commencement of the  work, the delivery of supplies or the provision of services. Such advance payments are distinct  from the payments on account made during performance of the contract on the basis of the work  actually carried out. 3.44. The advances usually paid for the various operations are as follows: (a)works contracts: 10% of the contract value; (b)supplies contracts: 60% of the value of the supplies; (c)work-programme cost estimates: 50% of the value of a year's expenditure; (d)services contracts: 20% of the contract value; (e)scholarships: up to 100% of the amount of the scholarship (52); (f)emergency aid and refugee aid: 50% (generally) or 80% (supply-based contracts) of the value of  the contract; (g)structural adjustment: 100% of the payment until the documents proving utilization are submitted  prior to payment of the next tranche. 3.45. The Commission makes it a principle to regard these advances as being equivalent to  definitive operations, which leads to the use of these appropriations being presented in an  inflated manner, which is not made clear in the financial statements. Strict accounting control of  the advances would be required in order to present the following for each financial year: the  amount of the advances at the beginning, the amount paid and that recovered during the financial  year, and the balance upon its closure. During the financial year 1995, the EDF chief authorizing  officer's departments have been taking steps to enable them to indicate the situation regarding  advances in the EDF accounts from the end of 1995 onwards. 3.46. At the end of 1994, the accounting system's mechanism for identifying advance payments was  unreliable and could not be used to ascertain the situation of such payments. A direct result of  this weakness is the errors detected during the clearance of the advances when subsequent payments  are made (see paragraph 3.60). Another consequence is that payments made provisionally, which need  to be monitored and cleared at a later date, are not entered as such in the accounts. In one of the  cases in the sample, the payment, entered as definitive expenditure, relates to a charge liable to  be repaid to the contractor by the ACP country, and then to the EDF by the contractor. In this  respect, it would have been necessary to issue a proposal for a recovery order within the meaning  of Article  15(1) of the Financial Regulation. Detailed observations on the legality and regularity of the underlying transactionsThe EDFs'  balance sheets3.47. Included in the expenditure to be regularized which is entered on the balance  sheet of the Sixth EDF are: (a)payments in respect of 169 operations amounting to 1,4 Mio ECU, for which the Commission has no  supporting documents; there is also an amount of 1 Mio ECU comprising 25 unidentified accounting  transactions; (b)payments in respect of about a hundred transactions, mostly old, accounting for 3,7 Mio ECU,  which cannot be charged definitively because the transactions have not been authorized; most of  these payments were made by the paying agents of ACP countries; (c)a sum of 0,8 Mio ECU representing advances which were outside the scope of the contracts and  were paid out of the EDF's cash balances in favour of some Member States which co-financed projects  in conjunction with the EDF; (d)a revaluation gain at the end of 1994 on bank accounts opened in a currency other than the ecu  (1,4 Mio ECU); (e)year-end payments made on EDF banks but not yet recorded individually (12,7 Mio ECU); (f)recent expenditure awaiting regularization amounting to 16,5 Mio ECU. 3.48. For example, transactions not supported by satisfactory documents, amounting to 6,1 Mio ECU,  are shown in the suspense accounts. These transactions should be taken into account for the final  discharge which the Commission must grant to the EDF's accounting officer, according to the  provisions of Article 43 of the Financial Regulation for the Seventh EDF. RevenueContributions from Member States3.49. The contributions from Member States called up by  the Commission in 1994 amounted to 596,5 Mio ECU under the Sixth EDF and 1 200 Mio ECU under the  Seventh EDF. These contributions were on the whole paid, with the exception of 133 000 ECU still  owed by Germany, and 89 000 ECU by Portugal. Despite the reminders sent to the debtor States by the  EDF accounting officer, these sums had still not been paid by the end of the financial year. The  provisions of Article 1(5) of the Financial Regulation for the Seventh EDF concerning the  imposition of late payment interest on unpaid contributions have not been applied by the  Commission. Decisions (primary commitments)3.50. The primary commitments relating to the structural adjustment  support programmes of Burkina Faso, Mali and Papua New-Guinea have been increased by 7,6, 3,7 and  1,7 Mio ECU respectively (20%, 14% and 20%; i.e. a total of 13 Mio ECU), on the basis of Articles  292 and 311 of the Fourth Lomé Convention and of Article 62 of its Financial Regulation. The  application of these provisions to structural adjustment (53) does not strictly comply with the  procedures provided for in Article 292(1) of the Convention, which restricts additional financing  to programmes and projects of the classic type. These additional commitments should not have been  authorized in this form, as, without new financing agreements submitted to the EDF Committee, the  increases could not be charged to the structural adjustment instrument. 3.51. Of the Stabex commitments examined, some do not satisfy the Lomé Convention's eligibility  conditions (103 Mio ECU) as the statistical data used to calculate the EDF contribution are  incomplete (six countries) or are submitted late (two countries) (54). Contracts and comparable obligations (secondary commitments)Sequence of authorization stages of  secondary commitments3.52. For many of the operations which originate in the ACP States, the  principle of prior authorization, which is supposed to enable the effective application of the  provisions of Article 19 of the Financial Regulation for the Seventh EDF, is not followed. This is  largely due to the fact that, for the purposes of simplification, the way in which the work of the  Commission departments has been organized cannot fully comply with the stipulations laid down in  the Regulations. This being the case, the Financial Controller is presented with a fait accompli,  which, above all, diminishes the importance of his approval. 3.53. This applies in particular to all of the emergency-aid contracts examined, since the  commitment proposals are always drawn up by ECHO on the basis of contracts which have already been  signed. The same is also true of the majority of the work-programme cost estimates agreed with the  authorities of the recipient countries and territories, and of numerous works, supplies and  services contracts concluded on the spot between the national authorities and the contractors. 3.54. In the sample, these operations represented 112,9 Mio ECU. There are also cases where  approval is given after the services have been provided (0,7 Mio ECU), or even after payment has  been made (15,4 Mio ECU). 3.55. The Court considers that the primary commitment (decision) is not the appropriate level for  implementing the provisions of Article  19(1)(c) and (d) of the Financial Regulation with regard to  verifying that: (a)'the expenditure is... in conformity with the provisions applicable to the management of the  EDF, and with all measures taken in implementation of these provisions, in particular, the general  and special conditions of the financing agreement relating to the operation`; (b)'the principles of sound financial management have been applied`. In order to eliminate the ambiguities of this situation, there is a need to recognize, in the  regulations, the existence of an accounting commitment at the secondary level, which would clarify  the procedures that the Commission, of its own accord, applies to a large number of its  operations. Eligibility3.56. Because advances paid previously have been used for unauthorized purposes, the  expenditure covered by the final tranche of the subsidy granted to the ACP-EEC Cultural Foundation  (0,74 Mio ECU) ought not to have been financed by the EDF. The Financial Controller issued a  negative opinion concerning this commitment, but nevertheless granted it his approval. 3.57. In the case of two supplies contracts in the sample, the eligibility of a significant  proportion of the goods stipulated in the contract was not established with regard to the financing  agreement (0,8 Mio ECU out of 2 Mio ECU committed). Moreover, a commitment of 17 Mio ECU out of  Sysmin appropriations, transferred from the Fifth EDF for the construction of a sewerage system in  Jamaica, does not comply with the provisions of the Second Lomé Convention (55). 3.58. The contracts concluded by ECHO with the NGOs cover, in principle, properly identified  expenditure for a fixed period. In many cases ECHO agrees to extend the duration of its partners'  contracts. In the sample, two of these extensions are obviously motivated by the fact that the  contractor could not charge the estimated expenditure to the contract, either because it was  financed from another source, or because it had not been incurred. The eligibility of the  expenditure covered by these extensions (3,8 Mio ECU) has not been established in accordance with  the Commission decisions on which the conclusion of the initial contracts was based. 3.59. Shortcomings were noted in the invitation-to-tender procedures for one supplies contract and  for one emergency-aid contract. In the first case (1,6 Mio ECU), the most advantageous bid was  rejected for a technical reason not stipulated in the call for tenders, even though the  Commission's central departments objected. In the second case, the actual invitation-to-tender  conditions themselves could not be laid down because the requests sent to the potential contractors  were not very specific (0,6 Mio ECU). PaymentsEligibility of payments3.60. The contracts stipulate not only the terms of payment of the  advances, but also the procedure for their subsequent recovery. Two of the payments examined,  relating to works contracts, and two others concerning work-programme cost estimates, are too high  because the advances paid previously were not recovered. The amount unduly paid is 1,2 Mio ECU, or  74% of the sum of these four payments. 3.61. In another case, the amount paid as a lump-sum advance was 20%, whereas the general  conditions applicable to EDF works contracts (Article  46) restrict these contractual advances to  10%. The excess paid thus amounts to 0,32 Mio ECU. 3.62. The final balance of one emergency-aid contract was reimbursed in full, even though the  implementation report revealed that the quantities stipulated in the contract had not been  distributed in full, basically because the food products had proved to be unfit for consumption.  Since no explanation was given as to the reasons for this loss, the unjustified proportion of the  payment amounted to 0,2 Mio ECU, or 38% of the amount paid. 3.63. The supplementary commitments referred to in paragraph 3.50, which relate to the additional  support for structural adjustment granted to three ACP countries, were settled in full in 1994 (13  Mio ECU). The eligibility of the payments is just as questionable as that of the commitments to  which they relate. 3.64. The Stabex payments for the financial year based on commitments which do not meet the  eligibility conditions stated in the Lomé Convention amount to 65,5 Mio ECU (see paragraph 3.51). 3.65. In the case of three works contracts in the sample, payments were made in respect of price  revisions (0,67 Mio ECU) without the Commission departments having been able to check the validity  of the revisions, either because of the unusual way in which they were calculated, or because of  the inadequacy of the supporting documents submitted by the contractors. The documentation  submitted by the delegations at the Court's request in May  1995 did not make it possible to carry  out adequate checks. In one case, the delegation considers that the payment made is provisional and  that settlement will follow at a later date, and will probably be accompanied by a recovery of the  funds. The Commission should stress to the national authorizing officers that when contracts are  negotiated, they should select only price-revision mechanisms which are sufficiently clear to be  applied and checked without risk of ambiguity. With this in mind, standard price-revision clauses  should be prescribed for contractors to the EDF. This Report was adopted by the Court of Auditors in Luxembourg at its meeting of  9 November 1995.For the Court of Auditors André J. MIDDELHOEK President  (1) For the Sixth and Seventh EDFs, the Third and Fourth Lomé Conventions respectively are  involved.  (2) For the Sixth EDF, the Internal Agreement of 19 February 1985, OJ L  86 of 31.3.1986; for the  Seventh EDF, the Internal Agreement of 16 July 1990, OJ L  229 of 17.8.1991.  (3) At 31 December 1994, the statements of the EIB's operations showed that 761,5 Mio ECU had been  granted in subsidized loans to supplement the Sixth EDF and 717,9 Mio ECU of such loans to  supplement the Seventh EDF.   (4) This level was selected in accordance with the volume of the transactions concerned and the  resources available for the audit. It represents about 3% of the estimated amount of payments for  the financial year 1994.  (5) Opinion on the Financial Regulation of the Seventh EDF (OJ C 113, 29.4.1991), Annual Reports  1991 (OJ C 330, 15.12.1992), 1992 (OJ C 309, 16.11.1993), 1993 (OJ C  327, 24.11.1994).  (6) See paragraph 15.1 of the Court of Auditors' Annual Report concerning the financial year 1993,  OJ  C  327 of 24.11.1994.  (7) Paragraphs 3.21; 3.23; 3.24.  (8) Paragraph 3.22(a).  (9) Paragraph 3.22(b).  (10) Paragraph 3.15.  (11) Paragraphs 3.29(b), (c) and (d).  (12) Paragraph 3.32.  (13) Paragraphs 3.35 and 3.36.  (14) Paragraphs 3.41 and 3.42.  (15) Paragraphs 3.43 to 3.46.  (16) Paragraphs 3.47(a), (b), (e), (f).  (17) Paragraph 3.18.  (18) Paragraph 3.28.  (19) Paragraph 3.50.  (20) Paragraph 3.57.  (21) Paragraphs 3.56; 3.57; 3.58.  (22) Paragraph 3.59.  (23) Paragraph 3.48.  (24) Paragraph 3.63.  (25) An operation which, if it had not been affected by an error, would have led to expenditure of a  different amount.  (26) Paragraphs 3.11; 3.21; 3.22; 3.40.  (27) Paragraphs 3.26; 3.27; 3.29; 3.36; 3.37; 3.38.  (28) Paragraphs 3.9; 3.10; 3.11; 3.16/17; 3.18; 3.21; 3.22; 3.23; 3.24; 3.25; 3.28; 3.29; 3.31/32;  3.40; 3.45.  (29) It should be noted that the operations are conducted by departments outside DG  VIII (ECHO).  (30) It should read 60,9 Mio ECU instead of 84 Mio  ECU for Stabex interest.  (31) For the Sixth and Seventh EDFs, the decisions involve 1 162,5 Mio ECU, the financing from the  SAF (Structural Adjustment Facility) amounts to 913,9 Mio ECU, and the financing from the NIPs to  248,6 Mio ECU.  (32) Cross-Border Initiative (CBI), implemented in Eastern Africa to stimulate regional integration.  (33) Appropriations committed at 31.12.1994 from the resources of the Sixth and Seventh EDFs.  (34) See in this respect the Court of Auditors' Special Report No 2/95, paragraph 3.11, OJ C  167 of  3.7.1995.  (48) Guinea (Conakry): 0,03 Mio ECU; Somalia: 0,21 Mio ECU; Zaire: 2,8 Mio ECU.  (49) See Special Report No  2/95 on Stabex in the context of the Fourth Lomé Convention, paragraph  3.4; OJ C  167 of 3.7.1995.  (50) Article 210 of the Fourth Lomé Convention.(51) These accounts operate on the principle of two signatures being required, i.e. that of the  recipient country and that of a Commission representative.  (52) The advances paid to bodies responsible for administering certain scholarships are recorded in  the EDF balance sheet until they are cleared (see paragraphs 3.19 and 3.20).  (53) A similar observation was made in respect of the sectoral import programmes of the Sixth EDF in  paragraphs 4.30 to 4.33 of Special Report No  2/94, OJ C  97 of 6.4.1994.  (54) Article 199(3) of the Fourth Lomé Convention.  (55) See the Annual Report concerning the financial year 1993, paragraph 15.96, OJ  C  327 of  24.11.1994.  Commission's reply3. AUDIT  RESULTSGeneral conclusion3.1. (a) Reliability of the accountsAs the Court itself makes clear, a  number of the points criticized by the Court relate to presentation rather than substance. The Court is requested to note that the EDF accounting officer's responsibilities will be extended  from treasury and cash management to cover appropriations accounting in order to ensure full  coherence and independence of the EDF accounting function, as is the case with the general budget. Furthermore, the accounting and authorizing officers have taken steps to close the accounts on an  intermediate basis so that a comparative examination of the accounts of the two departments can be  carried out before the end of the year. Lastly, the Commission would stress that it is implementing an action plan to improve the quality  of the EDF accounts. 3.1. (b) Legality and regularity of the underlying transactionsThe Commission is aware that some  aspects of the rules are in need of improvement. It therefore proposes that improvements be made as  part of the review of the internal agreement and the Financial Regulation for the Eighth EDF. Main observations relating to the reliability of the accounts3.2. (a) Presentation of  appropriations in the financial statementsThe Commission believes that the financial statements  correctly show the transactions to which the Court refers. Only the amount drawn on the Sixth EDF  National Indicative Programme (NIP) for Somalia to finance emergency aid (point 3.22.  (b): ECU   45,5 million) is not presented with comments on the operation in the financial statements. The financial statements do in fact show the non-mobilizable appropriations for the Somalia NIP  (point 3.21: ECU 111 million), although there is no explicit accompanying comment. In the case of  structural adjustment in Tanzania (point 3.24), there was a commitment of ECU 35 million for which  a financing agreement was signed at the end of 1994, when the country was eligible. The Commission  cannot, however, show in the financial statements that the country is ineligible at closure, as  that is a situation which may change at any time. In the other cases, the actual facts of the transactions do not fit the form of presentation  requested by the Court: - the appropriations under the special programme for the heavily indebted sub-Saharan countries are  mobilizable for other development operations (point 3.23: ECU  28,5 million), having regard to the  timetable for implementation (1988-89) and to the allocation of the funds to the National  Indicative Programmes of the ACP countries concerned, - in view of the uncertainty as to whether the transfer of ECU 12 million to emergency aid would be  offset, the Commission does not think there was any point mentioning it in the financial statements  (point 3.22.  (a)). The Commission is, however, aware that the comments on the financial statements could be improved  to provide the reader with more comprehensive information about EDF implementation, and it  undertakes to make progress in that direction. Management of appropriationsThe Commission noted a mistake involving a double entry of ECU 24  million which was corrected in 1995, after the accounts were closed (point 3.15). 3.2. (b) Underestimation of commitmentsThe underestimation is due basically to delay in booking  EIB operations (point 3.29.  (b) and (c): ECU  71,7 million). All the transactions cited by the Court were booked in 1995 after the accounts were closed (except  for a single decision in the process of being booked in November 1995). 3.2. (c) Overestimation of commitmentsIn the financial statements the Commission showed the amount  of the so-called dormant commitments (point 3.30). These figures were arrived at by a method of analysis which evaluates, project by project, the  amounts which are actually likely to be decommitted. The Commission intends to refine this method.  Steps have been taken to decommit the amounts concerned. In the Commission's view, the Court includes among dormant commitments various amounts which still  constitute legal obligations for the Commission (e.g. Stabex transfers for Sudan). 3.2. (d) Contracts and comparable obligationsThe delays in entering contracts relate exclusively  to EIB operations (point 3.35: ECU 126 million). The second case (point 3.36: ECU 14 million)  concerns a problem involving rebooking at the time of closure of the accounts. Fourteen of the 18 transactions mentioned by the Court were booked in 1995 after the accounts were  closed. At the end of October 1995, the Commission was waiting for the other four contracts so that  they could be booked. 3.2. (e) Stabex and structural adjustment paymentsThe Commission stresses that the double  signature system for ACP countries' accounts into which Stabex and structural adjustment payments  are made enables the Commission to monitor them, but the funds themselves cease to be the property  of the EDF (points 3.41 and 3.42). However, the Commission undertakes to show, in the financial statements, the amounts in the  recipient countries' bank accounts at the close of the financial year. 3.2. (f) AdvancesThe Commission will incorporate information about advances to contractors in  forthcoming financial statements (points 3.43 and 3.46). The EDF accounting software has been  adapted so that advances will be booked from June 1995 onwards. 3.2. (g) See the answers to paragraph 3.47 for § 1 and to point 3.18 for §  2. Main observations concerning the legality and regularity of the underlying transactions3.3. (a)  Primary commitmentsThe Commission considers that the transfer was carried out properly in 1995.  The operation followed on from an earlier Council decision to transfer ECU 125 million in capital  to the Stabex fund. The interest which would normally have accrued on that amount was also  transferred in 1995 as part of the reconciliation of the accounts carried out after the close of  the financial year. 3.3. (b) Additions to structural adjustment fundsFinancing decisions for structural adjustment  programmes financed from national indicative programmes may be increased by decision of the chief  authorizing officer where the overrun is not above 20% of the original commitment (Article 292 of  the Convention and Article 62 of the Financial Regulation). As there is no comparable procedure applying to structural adjustment programmes financed from the  structural adjustment facility, the Commission applies the above procedure by analogy. 3.3. (c) Contracts and comparable obligationsApart from the first case referred to in point 3.59  (ECU  1,6 million), the cases referred to by the Court are regarded as eligible by the Commission: - the waste water treatment project in Jamaica was eligible for financing by Sysmin under the  Second and Fourth Lomé  Conventions (point 3.57: ECU 17 million), - competitive procedures were applied in respect of the emergency aid contract mentioned (point  3.59: ECU  0,6 million), - the other operations financed related to items covered by the original decisions (point 3.58: ECU   3,8 million for emergency aid to Rwanda) or were consistent either with the financing agreement  (point 3.57: ECU  0,1 million) or with subsequent documents amending it (point 3.57: ECU  1,4  million). Thus the Commission acknowledges one problem relating to an invitation to tender worth ECU  1,6  million out of the ECU  24,5 million in transactions whose eligibility the Court questions. 3.3. (d) See answer to paragraph 3.48. 3.3. (e) Additions to structural adjustment fundsThe Commission explains in paragraph 3.3. (b) how  it makes up for the lack of a specific procedure for increasing the amounts allowed to structural  adjustment programmes financed from the structural adjustment facility. 3.4. The Commission is aware that the rules are in need of improvement in certain areas. Proposals are being made for improvements as part of the review of the Internal Agreement and will  also be incorporated into the draft Financial Regulation for the Eighth EDF. Detailed observations on the reliability of the accountsReliability of the financial  statementsContent and presentation of the year-end financial statements3.9. Most of the  additional information which the Court would like to have included in the financial statements is  available in the report on aid at end-1994 (ref. DE 81 - August 1995). The Commission will publish  this document earlier in the year in future. (a)The Commission will include the information supplied by the EIB about the EDF instruments which  it manages (risk capital and interest-rate subsidies) in the comments on the financial statements. (b)The Commission will include information about emergency aid in the comments on the financial  statements. (c)The Commission will discuss with the EIB the possibility of including in the EDF financial  statements information about acquisitions of holdings in financial undertakings. (d)In future the Commission will make a distinction between EDF appropriations and appropriations  in the general budget allocated to the rehabilitation programme. (e)The Commission's reply on Stabex will be found in paragraph 3.15. The figures mentioned have  been corrected. (f)The Commission will include the figures relating to Sysmin operations in the OCTs in the next  financial year. (h)The Commission will include information about the implementation of regional cooperation in the  comments on the financial statements. 3.10. The Commission strives for complete transparency about the aims of development aid. Each  year, therefore, it produces reports (particularly those laid down in Article 327 of the Lomé  Convention) describing policy developments and informing third parties about actual progress in the  implementation of Community aid. The purpose of financial statements is merely to show how much of the capital in each fund has been  taken up and what use has been made of the financial instruments set up by the Conventions, with  explanatory comments. The allocations shown in the financial statements must therefore tally only with the budget  headings laid down by the Financial Protocol. The sums referred to by the Court are not new  allocations but arise out of policies which entail financing decisions. At present quantitative  developments along the various policy lines can be traced through the statistical encryption in the  EDF accounting system (OLAS). 3.11. The following point warrants an explanation: Under both the Sixth and the Seventh EDFs measures to combat AIDS financed by the allocation for  subsidies are covered by financing decisions and are booked as commitments. The table of Seventh  EDF revenue and expenditure, rightly, does not show how much was spent on measures to combat AIDS  (only expenditure by allocation is shown). It was not necessary to enter a separate line in the financial statements for the Sixth EDF to show  measures to combat AIDS. This point will be taken into account when the financial statements for  the Sixth EDF in 1995 are produced. Disparities between the accounts of the authorizing officer and those of the accounting  officer3.12    3.14. The disparities between the two sets of accounts were reconciled by the  Commission, and a number of corrections were notified to the Court at the time of the audit as a  result. All the points raised were corrected once the procedure for checking movements of  appropriations had been set in motion by the EDF accounting officer. These corrections were not  entered under 1994 as they were made in 1995. To avoid a recurrence of this problem, an interim audit will be carried out at the end of October  with a view to entering the results under 1995 wherever possible. 3.15. Stabex interest of ECU  23,9 million was booked twice, to the Seventh and the Sixth EDFs. The  error was discovered by the Commission after the accounts had been closed and was reported to the  Court by Note No  49378 of 13 June 1995. The requisite corrections were made at the beginning of  June 1995. The EDF's balance sheets3.16    3.17. The amount in the balance sheet for items 'under  verification` represents the sum of all operations which have started to be booked but have not yet  been finally charged to the projects concerned. There are many different types of movement entered under this heading (e.g. exchange differences,  transfers between projects and local payments) and they are final-booked only after the last  department involved has acted. As there are so many such movements, and as they are temporary, only one account per country is  used for booking them. 3.18. Bank account balances identified by the Court as being difficult to recover have not yet been  classified as 'losses`. Once all means of recovering them in whole or in part have been exhausted,  the authorizing officer and the accounting officer will put forward a joint proposal to write them  off. 3.19    3.20. In the area of scholarship management, in 1994 the Commission was able to reduce the  quantity of sums to be justified. The allocation of additional staff resources (in the last quarter  of 1995 and the first quarter of 1996) to the clearing of old accounts will enable the work done so  far to be continued. A new contract will be agreed with the agencies in the Member States whereby the advance will be  fixed in accordance with the expenditure estimates for the coming financial year and renewed in  line with the supporting documents accepted (once a year at most). Furthermore, a system of prior input in the EDF accounting system has been developed and is to be  installed in the agencies in the Member States. Advances are cleared on production of evidence of expenditure. However, the control mechanism will  be reviewed when the prior entry system has been established and an on-the-spot audit may be  considered. Transactions not mentioned in the financial statements3.21. The financial statements (Annex   XII.6, footnote  3) show that the funds earmarked for the NIP for Somalia were transferred to the  reserve because that country had not ratified the Convention. Pending a decision by the contracting  parties, which alone are empowered to release the funds (under Article 232 of the Lomé Convention),  the resources concerned were not shown as being available. 3.22. (a)In the first case, the Commission applied Article 2 (b) of the Financial Protocol to Lomé   IV, which allows transfers of appropriations between Article 254 (emergency aid) and Article 255  (aid for refugees) of the Convention, which is exactly what happened in the accounting operation in  question: the allocation for aid for refugees was transferred to the emergency aid allocation (page  51 of the financial statements and explanatory note No  4, page  56). In the Commission's view, there is no obligation to offset the transfer, and the original intention  of its departments to do so was thwarted by the inadequacy of the appropriations under the  emergency aid heading, well before the end of 1994. (b)In the second case, the operation described was carried out in two stages: (1)the Council authorized the Commission to use Somalia's NIP funds under the Fifth and Sixth EDFs  for humanitarian operations (as was shown in the accounts); (2)the Council said that it proposed to replenish the NIPs from other, unspecified EDF resources. The EDF financial statements state clearly (paragraph VI.3, page  23) that in the case of Somalia  the NIP resources not used under Lomé  III were allocated to emergency and refugee aid operations  and would be made up from other EDF resources in due course. Only the amount used is not shown. 3.23. The special programme to assist certain heavily indebted sub-Saharan countries was due for  implementation in the 1988-89 period. The financial statements for 1994 therefore properly show the  balance of the appropriations concerned (and the corresponding sub-appropriations created to  facilitate management monitoring) as being available among the Sixth EDF grants. Moreover, the  funds in question are allocated to the National Indicative Programmes of the ACP countries  concerned. The Commission would stress that these appropriations could not be treated as equivalent to  structural adjustment appropriations. They were grants and were therefore subject to the same  decision-making procedures. 3.24. A third structural adjustment support programme for Tanzania, worth ECU 35 million, was  adopted in July 1994; the Convention was signed at the end of 1994. As the country has no longer  been eligible since that date, payment of the first instalment of aid has been suspended until such  time as the conditions for eligibility are once again met. The fact that the appropriations are  blocked is shown in the financial statements by the existence of a ECU 35 million commitment. In  any case it would not be for the Commission to say that the country is ineligible in the financial  statements, as that situation can change at any time. 3.25. (a)The Commission will contact the authorities concerned with a view to examining the  possibility of a report on the co-financing operations referred to by the Court. The funds  concerned are not EDF funds, however. (b)The Commission agrees to show, in the financial statements, detailed figures for the counterpart  funds released as a result of EDF aid, especially Stabex and structural adjustment. Even if the use  of these funds is controlled by the Commission, however, they are no longer EDF cash resources,  since the corresponding sums have been transferred for good and are therefore shown as outgoings  from the Funds. Revenue3.26. The ECU  8,2 million actually collected in 1989-90 and regularized in 1994  represented a batch of accounting entries drawn up at the same time as a change in procedure which  was made at that time, i.e. the booking of interest to an 'interest subject to verification`  account, whereas before it was booked immediately to the account containing interest on deposited  funds. Since 1994 interest has been booked once a quarter. 3.27. There is clearly nothing unusual about a balance being left over at the end of the year,  given that interest collected is regularized every quarter. The balance is monitored and explained  in detail; a copy of the explanation has been passed on to the Court of Auditors. As for the ECU 1  million in interest received or owed, it was booked in 1995, since the bank sent notice of the  interest scales after the accounts for the year had been closed or because the value date assigned  was in 1995. The papers relating to the case were not received until 1995 either. 3.28. At the end of 1994 there was still a backlog of entries relating to the use of Stabex  interest waiting to be booked in the cash accounts. The authorizing officer noted an amount of ECU   79,3 million used, broken down as follows: >TABLE>The EDF accounting officer only took account of the amounts for the 1990 and 1991  years of application and of ECU 378 624 from the 1992 year of application. Decisions (primary commitments)Accounting principles and methods3.29. (a)The Commission  distinguishes between the multiannual programmes mentioned in Article 290 of the Lomé IV  Convention, and global authorizations. In the first case a primary commitment is made. Examples of  these multiannual programmes are the Multiannual Training Programme (Zimbabwe) and the Multiannual  Microproject Programmes. In the second case (global authorizations), the EDF Committee authorizes  the Commission to take future financing decisions without referring to the EDF Committee. These  global authorizations do not mention the specific financing sources (some are excluded), thus no  formal primary commitment can be prepared. However, in order to monitor the evolution of these global authorizations, they will in future be  registered in the accounting system. It is expected that this can be carried out during 1996. The  Commission therefore undertakes to show in the financial statements the balance of global  authorizations being used. (b)Primary commitments for EIB operations are made on the basis of a letter of notification from  the Bank to the Commission. The deadlines by which the Bank must send these letters vary, which  leads to accounting delays. The Commission has already set up a system for centralizing, registering and monitoring documents  received, to prevent any delays attributable to the Commission. In the short term, as regards the closing of accounts, the system now in place and a reconciliation  procedure involving the EIB will make it possible to discover what decisions the EIB has taken, so  that they can be booked to the appropriate accounting period. In the case of interest rate  subsidies, however, if the amount involved is to be committed solely on the basis of the relevant  decision, an estimate should be made. In the medium term, the system of prior entry of primary commitments by the EIB should help prevent  this kind of problem, in that all decisions will be temporarily registered in the OLAS accounting  system before the Commission receives the supporting documents (for purposes of finalization). (c)The ECU  9,15 million interest-rate subsidy was in the process of being booked when the accounts  were closed but the booking was not finalized (as the approvals required for it to be definitively  incorporated in the financial statements were still pending). Sleeping commitments3.30    3.32    3.33. The Commission pays special attention to so-called  dormant appropriations and is not convinced that the figures it gives in the financial statements  underestimate their size to any significant degree. Out of a total ECU  156,5 million in primary commitments (Sixth and Seventh EDFs), ECU  88,3  million represents capital sums committed by the Commission for projects currently under way which  cannot therefore be decommitted. The remaining ECU  68,2 million represents outstanding balances  which can be decommitted. The Court of Auditors regarded the ECU  31,7 million in Stabex transfers for Sudan (footnote  55)  as dormant commitments. These cannot, however, be decommitted as they represent a legal obligation  on the EDF which the financial statements have to show. The Commission agrees that contracts should be closed as a routine practice and will press ahead  with its efforts in that area. It would stress, however, that closing contracts will not release  any appropriations additional to those already mentioned in the financial statements, as the  Commission's breakdown relates to primary commitment balances minus payments. Instructions have been given that when a national authorizing officer does not take a timely  decision concerning the closure of a project, Delegations should send a note to the NAO stating  that if no answer is received within a certain time limit (two to three weeks) confirming or  blocking a closure, Delegations will assume the tacit agreement of the NAO to the closure. This  procedure was applied in 1994. In future financial statements the Commission will be in a position to meet the Court's wishes by  stating the countries with which cooperation has been officially suspended. Contracts and comparable obligations (secondary commitments)3.34. Where the EDF is concerned, the  Commission's legal commitment towards a third party (an ACP State) is given when the decision to  finance a project is taken. A so-called 'primary` financial commitment is given in advance as  stipulated in Article 17 of the EDF Financial Regulation. Contracts entered into with third parties  by the ACP countries for the implementation of projects (secondary commitments) are legal  commitments towards the contractors on the part of the ACP country concerned. The Commission has to satisfy itself that the financial side of EDF projects is properly  implemented. It therefore takes responsibility for the contracts required for the implementation of  the projects. This is not a new legal obligation but a confirmation, operation by operation, of the  legal undertaking given at the time of the financing decision. From the contractor's point of view,  the assumption of responsibility by the Commission is an assurance that EDF financing will be  forthcoming, but it is also in effect a preliminary check by the Commission into project  implementation. Omissions3.35. Fourteen of the 18 loan contracts (risk capital) were registered by the Commission  as soon as the copy of the contract had been received from the EIB after the accounts were closed.  The Commission is aware that the time taken for them to arrive is often too long and has set up the  following arrangements: - in the short term, for the closing of accounts, a procedure involving regular consultation with  the EIB to obtain notification of contracts signed but not booked so that they can be booked to the  appropriate accounting period, - in the medium term, a system involving prior entry of contracts by the EIB so that all contracts  are immediately recorded in the accounting system, before the Commission receives the supporting  documents (for finalization). 3.36. On 31 January 1995 two secondary decommitments were made so that on the same day two new  secondary commitments could be made in respect of the same projects. The object of the exercise,  for Jamaica, was to use the grants before the special loans. The two decommitments were finalized  on 2 February 1995, before closure, but the two new secondary commitments were finalized on 10  February 1995 (more approvals had to be obtained), after closure. Estimates at the time of initial recording3.37. The provisions in respect of contracts does not  duplicate the 'contingencies` item for financing agreements. There are two levels of set-aside of  appropriations but they are not cumulative, as the second level (contract) is a subdivision of the  first (project). Where a contract is concerned, payments of all sums contractually due under the contract (legal  commitments) must be covered, including price reviews, quantity fluctuations and alterations for  works, and exchange rate fluctuations, which are estimated amounts (provisions). Estimates at the close of the financial year3.38. The Commission acknowledges that the system  designed to make up for the fact that there is no re-estimation of contracts at year-end leads to a  minor and justifiable overestimation of ECU 1 million. The problem arises only with contracts and comparable agreements denominated in national currencies  and not in terms of commitments, which are always accounted for in ECU. To deal with the problem of  currency fluctuations affecting contracts, a provision is built in when the contract is booked (as  an estimate). Given the number of operations involved (some 10 000 per year), the Commission is  looking at ways of automatically reestimating contracts at market value. 3.39. See the first part of the answer to paragraph 3.30. The Commission is aware of the time lapse between the closure of operations and the clearance of  outstanding balances. A global operation was carried out to clear the outstanding balances of appropriations for  emergency aid measures under the Seventh EDF. Others are carried out as dossiers are closed. A list  of decommitments to be carried out in respect of Sixth EDF operations has been drawn up and the  accounting operations are in the pipeline. PaymentsPresentation of payments3.40. In the case of Stabex (paragraph 3.41) and structural  adjustment support (point 3.42), the sums transferred to recipient countries cease to be part of  the EDF's cash holdings. The relevant sums have been transferred for good and are therefore,  rightly, shown as expenditure by the funds. 3.41. Transfers of Stabex funds take place as soon as the transfer agreement has been signed as  provided for in Article 211 of the Lomé Convention. What is involved is compensation for loss of  export earnings. The sums transferred are not simply an internal cash movement. Even though the Commission retains  some say in the use of the funds (through an action programme which has to be drawn up jointly by  the Commission and the recipient country), the money involved no longer belongs to the EDF but is  the property of the recipient country, a situation which is accurately reflected in the financial  statements. However, the Commission will show the amounts on the recipient countries' bank accounts at year-end  in the EDF financial statements. 3.42. Structural adjustment support is primarily balance of payments aid designed to help the  country strike a new balance between its foreign exchange resources and its outgoings, in other  words to pay for its imports of goods and services, service its foreign debt commitments and  reconstitute a reasonable level of foreign exchange reserves. When the Commission transfers funds as structural adjustment support, they naturally serve to  increase the recipient country's foreign-exchange reserves. The recipient country has to sell its  foreign currency (in return for its national currency) to the private or public sector so that the  latter can import products (under an import programme subject to rules laid down by the  Commission). The constitution of counterpart funds is one effect of the instruments used to make foreign  currency available, i.e. the import programmes. The counterpart funds thus created belong to the recipient country and their use is one element in  the structural adjustment programme negotiated between the Commission and that country. They are  usually allocated to targeted budget support operations agreed jointly with the Commission. In practice the Commission uses these counterpart funds as an important lever with which to  redirect public spending, particularly towards the priority social sectors and the maintenance of  basic infrastructure, in a framework of voluntary restructuring of the whole of the public and  semi-public sectors. As what is involved is aid for the balance of payments, the action which generates the expenditure  is the actual disbursement. This takes place when the country's exchange reserves rise, i.e. when  the central bank receives the foreign currency in the case of a foreign-exchange programme, or when  the products arrive in the country without any foreign currency going out of the central bank in  the case of a programme of imports in kind. This being so, the Commission avails itself of Article 250 (cash advance and separate accounting)  only where there is a high risk of poor management by the central bank. Advances3.43    3.44    3.45. Advances are indeed now registered in the on-line accounting system  (OLAS) in the currency in which they have been transferred. This new element was introduced into OLAS in June 1995. All new advances are registered as of that  date. Within the limits of existing capacity, advances transferred before June 1995 will also be  registered accordingly. A problem, of course, is that there is a possibility that not all the backlog might be treated by  the end of 1995. Nevertheless, where possible, the Commission will try to incorporate information  about outstanding advances in the balance sheet and results for 1995. A more complete picture can  be given at the end of 1996 (Position at the beginning of 1996, Changes during 1996, Position at  the end of 1996). 3.46. Even if the Court thinks the machinery for identifying advances was not satisfactory at the  end of 1994, that does not mean there was a risk of loss. The Commission shows under paragraph 3.60  that there was no need to recover the advances in the cases referred to by the Court. In the other case considered by the Court (project 6 TA  48/1), the payment was correctly booked as  final as it was made in accordance with the contract, which included provision for meeting the cost  of the expropriation allowances item. The financing agreement between Tanzania and the Commission,  however, provided that Tanzania should meet the cost of that item. It is therefore planned to  recover all the costs paid in respect of expropriation allowances at the end of the contract and  recovery orders against Tanzania will be drawn up for this purpose as and when payments under that  item are made to the contractor. Detailed observations on the legality and regularity of the underlying transactionsThe EDF's  balance sheets3.47. Responsibility for managing the EDF is divided between the Commission in  Brussels and the Delegations in the ACP countries, as regards both the level of authorization and  the running of certain bank accounts (ACP paying agents' accounts); consequently, all expenditure  to be regularized requires action from several departments. As long as approval by the last  department involved, making booking final, has not been given, the transactions concerned remain in  the suspense accounts. (aand  (b These were payments authorized and carried out by the Delegations for which the  supporting documents were not passed on to the Commission in Brussels or were so only in part. The  EDF accounting and authorizing officers send regular reminders to the Delegations in an attempt to  solve this type of problem. (c)These were payments made by the Delegate from the paying agent's account for co-financed  projects. The sums concerned are recovered from the co-financing accounts once the supporting  documents have been received in Brussels. (d)This was a revaluation of bank balances at year-end which requires action by the authorizing  officer and the financial controller before it can be final-booked. (e)Details of payments made by the Delegations in December were not received until after closure. A  global entry was made for each ACP bank to reflect, as far as possible, the real liquidity position  at 31 December. Points (c), (d), (e) and (f) are normal consequences of the closure procedure. 3.48. Transactions not supported by documents are referred to in paragraphs 3.50 (a) and (b) and  concern operations managed by Commission Delegates. Commission departments are doing their best to  trace the missing documents in the Delegations. If they are not found, the authorizing and  accounting officers will make a proposal for a clearance operation. The Authority which gives a discharge to the accounting officer will itself decide on what factors  it should base its decision. RevenueContributions from Member States3.49. It is true that the Commission has not required the  Member States to pay interest on late payment, since the contributions in question are at present  under discussion with the countries concerned. Decisions (primary commitments)3.50. Financing decisions for structural adjustment programmes  financed from national indicative programmes may be increased by decision of the chief authorizing  officer where the overrun is up to 20% of the original commitment (Article 292 of the Convention  and Article 62 of the Financial Regulation). As there is no comparable procedure applying to structural adjustment programmes financed from the  structural adjustment instrument, the Commission applies the above procedure by analogy. 3.51. The Commission considers that all the Stabex commitments examined meet the eligibility  conditions. In the case of the two which arrived after the deadline, there were special  circumstances which warranted their being processed in the normal way. It is true that some statistics transmitted by 31 March each year are occasionally incomplete or  call for further information from the department concerned. In such cases the Convention requires  the Commission to investigate the case. Contracts and comparable obligations (secondary commitments)Sequence of the stages of  authorization of commitmentsPreambleFinancing decisions by the Commission correspond to actual  commitments in the public accounting sense (called primary commitments in the EDF) since they are  the first commitment by the EDF towards a third party (the recipient ACP countries). Contracts entered into by the ACP countries are registered in terms of delegated appropriations  (called secondary commitments in the EDF). Delegated appropriations are merely a project management tool and enable payments to be monitored.  They do not constitute commitments within the meaning of the Financial Regulation. 3.52. For the reasons stated in the preamble, the Commission does not think there is a case for  applying the principle of prior authorization to the registering of contracts concluded by ACP  countries. The principle of prior authorization laid down in Article 17 of the Financial Regulation is fully  complied with in that financial control gives its approval in advance to all commitments based on  financing decisions (primary commitments). The importance of the financial controller's approval is  therefore not diminished. His function is not to give prior authorization for operations carried  out by the ACP countries; he carries out ex post checks on such delegated appropriations,  responsibility for the implementation of which is assigned to the national authorizing officers by  the Lomé Convention. 3.53. Operations put together by ECHO are without exception subject to approval by the Commission  after the opinions of the departments concerned have been canvassed and prior approval has been  given by the financial controller. The commitments are, in fact, established before the contracts  are concluded with the NGOs concerned. 3.54. The Commission considers that the operations referred to by the Court are covered by a prior  financial commitment (a primary commitment corresponding to the financing decision) and therefore  by approval from the financial controller. 3.55. The Commission considers that the financing decisions relating to the projects correspond to  the notion of a commitment as defined in Article  17 (2) of the Financial Regulation, which  stipulates that 'decisions taken by the Commission in accordance with the provisions authorizing it  to grant financial aid from the EDF shall constitute commitments of expenditure`. Article 44 of the Financial Regulation also states that the commitments to be charged to the EDF  are those covered by financing decisions taken by the Commission. The Commission admits that the wording of the Financial Regulation governing the EDF is not always  suited to the decentralized management of appropriations. It will therefore make proposals, when drafting the Financial Regulation for the Eighth EDF, to  make the provisions clearer in this area while at the same time moving nearer to the philosophy of  the Financial Regulation on the general budget. Eligibility3.56. As early as 1993 the financial controller delivered a negative opinion on the  draft programme of activities of the ACP-EEC Foundation for Cultural Cooperation, for which a  subsidy of ECU 7 750 000 was being requested. He maintained his negative stance in 1994, when he opposed, in particular, the high level of the  planned allowances. Lastly, following an external audit and negotiations with officials of the  Foundation, a proposal for a substantially lower level of financing (ECU 738 806) was drawn up,  designed to clear the Foundation's financial position followed by complete Community disengagement  from the Foundation. On 21 April 1994 the proposal was submitted to the EDF Committee, which gave a  favourable opinion. Before being submitted, the proposal had not been referred to financial  control, which informed the Commission that it was still critical of the proposal and pressed for  all the Foundation's financial obligations to be examined and evaluated with the greatest care, in  view of the interconnections in this particular case between Belgian and Community law, so that  final and indisputable clearance could be given. Having weighed up all the factors in the case, the  Commission took a favourable decision on the proposal on 1 June 1994 (Min(94)1204, 2 June 1994) and  the financial controller gave his approval to the relevant commitment proposal. The Commission considers that the sum in question was eligible for financing by the EDF for the  following reasons: - nearly half (ECU 330 000) of the amount was to go towards financing the remaining cultural  cooperation activities provided for in Title  XI (Articles 139 to 149) of the Fourth Lomé  Convention and which the Foundation had undertaken to finance, - the rest was to go to terminating the lease agreement and employment contracts, deemed too costly  by the Court itself, of an institutional structure, the ACP-EEC Foundation for Cultural  Cooperation, expressly recognized by Article 141 of Lomé  IV as 'having the task of contributing to  the implementation of the objectives` of Title  XI. Under Annex  XXII to Lomé  IV, the Community  had undertaken to make a financial contribution available to the institutional structure in  question, no distinction being made between the types of expenditure in which the Foundation would  engage. 3.57. (1)Financing agreement No  4026/SU allows ECU 743 000 for agricultural inputs, the object of  tender No  3775, lot No  1, whereas the contract awarded was worth ECU 1 400 088. This discrepancy can be explained as follows: The financing agreement, signed in April 1987, was intended to cover the agricultural seasons over  a five-year period from 1987-88 to 1991-92. Considering that by 1992 a balance of ECU 3 680 000  remained under financial commitment, a thorough reorientation of the project activities was  initiated within the Government of Sudan to ensure project sustainability after donor phasing was  phased out. To this end a Memorandum of Understanding was signed in August 1992 by- the supervisor, Ministry  of Agriculture, - the NAO, Ministry of Finance and Economic Planningand- in June 1993 by the representative of  the EC Delegation,in order to support the official request for an extension of the project implementation period  comprised in the initial financing agreement. Since the NAO has, according to Article  227 (5)  (a) of the Third Lomé Convention, the statutory  powers, during the execution of operations and subject to the requirement to inform the Delegate,  to decide on technical adjustments and alterations in matters of detail, so long as they do not  affect the technical solution adopted and remain within the limits of the reserve for adjustments,  the Memorandum is considered as a valid document modifying the financing agreement. In addition, the chief authorizing officer has been informed of the development and has given his  agreement to the 30-month extension based on the objectives laid down in the Memorandum. The Memorandum summarizes the EDF funding required for the reoriented project components and refers  to the annual work programme and budget estimate for 1993-94, where a total of ECU 804 000 has been  earmarked for agricultural inputs. Since the draft tender documents were submitted under the  extension phase covered by the Memorandum coming into force in June 1993, the items of tender No   3775 (lot  1) are partly covered by the balance for agricultural inputs left from the financing  agreement (i.e. ECU 396 350) and partly by the amount allocated under the work programme, which  results in a total available for agricultural inputs of ECU 1 200 350. Unfortunately, the prices quoted for this tender were rather on the high side, due to the  deteriorating political situation at the tender submission period (February-April 1994). In view of  the fact that the contract for lot No 1  has been awarded for an amount of ECU 1 400 088, it must  be admitted that the budget reserved for agricultural inputs has been exceeded by about ECU 200  000. A modification of the memorandum/cost estimate was not, however, envisaged, since by that time it  had already become obvious that EC-Sudan relations were deteriorating to the point that no new  actions were to be undertaken. (2)In the second case (7.TA.10.8), the Commission feels that the Court is placing a very  restrictive interpretation on the financing agreement. The fact that the financing agreement makes  no explicit provision for the purchase of an item does not mean that that item is not eligible  under the agreement. In the case in point, the herbicide is a subsidiary element compared with the equipment provided  for in the financing agreement. The contract for the purchase of weed-killing equipment concluded  after an international invitation to tender comprises, in addition to the equipment itself, the  frame, fittings, spare parts and herbicide, all of these being needed to operate the equipment. (3)Regarding the ECU 17 million in commitments against Sysmin appropriations, the Commission  considers that historically Jamaica has always been dependent on tropical agriculture and bauxite  extraction. It was decided to make it eligible for Sysmin financing in 1987 to support the bauxite  industry but, as production has risen, the funds have been reoriented to support economic  diversification measures in the spirit of Article 49 of the Second Lomé Convention, which states  that the purpose of Sysmin appropriations is to '(contribute) towards the creation of a more solid  basis for the development of the ACP States whose economies are largely dependent on the mining  sectors`. ECU 25 million was accordingly allocated to projects for the construction of a sewerage system and  the treatment of waste water from Negril and Ocho Rios with a view to supporting the emerging  tourism industry, which is now the principal source of foreign exchange. The financing agreement mobilizing Lomé  II appropriations was signed on 22 April 1994, following  agreement by the EDF Committee, in the spirit of the opportunities opened up by the Fourth Lomé  Convention, which stipulates that Sysmin appropriations may be used to broaden the basis for  economic growth. What is more, part of it (ECU 15 million) was financed from Lomé  IV funds. 3.58. The contracts entered into by ECHO had to be suspended following the events in Rwanda in  April 1994. As there was an urgent need to continue supplying humanitarian aid in the region, the Commission  considered it appropriate to use funds available with its partners quickly rather than making  de-commitments, waiting for the funds to be recovered and launching a fresh decision procedure to  help the same humanitarian agencies working in the same zone, that of the Great Lakes. For the sake of speed and efficiency the Commission preferred to extend the validity of the  operational contracts. This was not a departure from the Commission's original decision, as the point was to keep up the  supply of aid to the same groups of people in distress. 3.59. Regarding the second case (7 ANG.32.14), the measure was in line with the procedure provided  for in Article 254 of Lomé  IV, which lays down that 'the detailed rules for the allocation and  implementation of emergency assistance shall be the subject of emergency and flexible procedures`.  It was linked to another operation to supply agricultural equipment and is part of a humanitarian  plan to help the people of Angola approved by the EDF Committee on 4 February 1994. Direct understanding was the approach chosen because of the difficult conditions in Angola at the  time, requiring security for the operation and a guarantee of quality control by an undertaking  known for its expertise. Various supply tenders from local operators and other European operators were considered. Once they  had all been studied, with a background of experience of other food aid operations entrusted to  FOCOEX, the Commission opted to award the contract to that particular organization, especially as  the transport costs were low. PaymentsEligibility of payments3.60. In the case of programme estimates, there are no rules for  recovering advances, except that documents in support of all advances must be produced once the  operation is over. When supporting documents are submitted by the body in charge of running a  project, the Delegation decides whether to pay all the supported costs or to deduct all or part of  the earlier advance, depending on projected expenditure and the amount in the cash advance  account. Whether the two payments relating to the works contract were regular depends on the interpretation  of the contract; this stipulates that reimbursement of advances shall begin when the sums due under  the contract reach 60% and 50% (of the flat-rate advance and the advance on equipment and plant  respectively). The sums due were considered by the Commission to be those relating to work actually  done, and with the two payments in question the contract implementation cost came to 38,8%. The  advance on the contract was recovered in full against ensuing payments. 3.61. The payment by the Commission was in conformity with the contract, which provides for a 20%  advance (see tender addendum 2 to the contract). Ten per cent was paid as a start-up advance and  10% when the equipment arrived at the site. 3.62. Study of emergency aid contract 7.LBR.23.1 produces no grounds for blaming the partner for  the poor quality of the delivered product. There was therefore no reason to refuse to wind up the  case so that final payment could be made. Although the food products were not distributed in full, as they proved to be unfit for  consumption, the Delegate on the spot was unable to determine what was chiefly to blame: the NGO or  the situation at the time, which prevented distribution on security grounds and therefore caused  the products, which were perishable, to deteriorate. The file on the operation does not refer to this, but officials on the spot sometimes reach  understandings with NGOs, which then take upon themselves to replace products which are unfit for  consumption. 3.63. Financing decisions relating to structural adjustment programmes financed from national  indicative programmes may be increased by decision of the chief authorizing officer where the  overrun is up to 20% of the original commitment (Article 292 of the Convention and Article 62 of  the Financial Regulation). As there is no comparable procedure applying to structural adjustment  programmes financed from the structural adjustment facility, the Commission applies the above  procedure by analogy. 3.64. For the reasons given under paragraph 3.51, the Commission takes the view that the  commitments referred to, and therefore the payments as well, met the eligibility conditions laid  down by the Convention. 3.65. In the first and third cases, the Commission considers that the lack of adequate  documentation in the payment file about the weightings used for the price review does not affect  the regularity of the payment. Checks are being carried out on the spot to ascertain whether the  price review was calculated on a sound basis. As regards the second case, the Commission considers that where works contracts are concerned  intermediate payments are an estimate of costs due which can be corrected by adjusting the next  payment rather than final payment for one stage of the works. The situation referred to by the  Court was therefore rectified by adjusting the next payment. Given the variety of projects financed by the EDF it is not reasonable to assume that a standard  price revision clause could be adopted and enforced. The risks and factors which must be taken into account are peculiar to every project, depending on  the nature of the works, the duration of the contract, the location of the project and so on. Only  the design engineer can identify such risks and factors with a sufficient degree of certainty. On  the other hand, it is up to the contracting authority to determine if it is willing to assume some  of the risks through a price review, or if such risks are transferred to the contractor through the  absence of a price review but with higher prices up front. In approving price review formulas Commission departments take certain principles into account, as  follows: (1)a clear distinction must be made between national costs and foreign costs, and payments in  national currency versus payments in foreign countries. For that purpose, two separate price review  formulas with specific variables are required; (2)a percentage of the contract cost must be neutralized and not subject to review. This is because  the contractor is allowed to apply for advance payments and certain cost factors incorporated into  the contract prices (mobilization, overheads and profits etc.) are not to be influenced by a price  review; (3)price reviews must discourage the contractor from allowing undue delays to occur in the  performance of the contract.