Special Report No 1/98 in respect of bilateral financial and technical cooperation with non-Member Mediterranean Countries together with the Commission's replies (submitted pursuant to Article 188C, paragraph 4, indent 2, of the EC Treaty)
Date: 1998-01-29
Institutions: European Court of Auditors
Subjects: European Investment Bank, Mediterranean third countries, financial cooperation, protocol to an agreement, report, technical cooperation

31.3.98

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I

(Information)

COURT  OF  AUDITORS

SPECIAL  REPORT  No  1/98

in  respect  of  bilateral  financial  and  technical  cooperation  with  non-Member  Mediterranean
Countries  together  with  the  Commission’s  replies

(submitted  pursuant  to  Article  188C,  paragraph  4,  indent  2,  of  the  EC  Treaty)

(98/C  98/01)

CONTENTS

Paragraph
reference

Page

GENERAL  INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1  —  7

Background  to  the  audit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Approach  adopted  and  scope  of  the  audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1  —  4

5  —  7

THE  PROTOCOL  SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8  —  28

General  Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8  —  15

The  special  features  of  the  Third  and  Fourth  Protocols . . . . . . . . . . . . . . . .

12  —  15

Implementation  of  the  Protocols . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Progression  from  one  Protocol  to  the  next

. . . . . . . . . . . . . . . . . . . . . . . . . .

Utilisation  of  appropriations  as  at  31  December  1996 . . . . . . . . . . . . . . . . .

16  —  24

16  —  18

19  —  20

Budgetary  presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

Legality  under  Community  law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22  —  24

Conclusions  concerning  the  system  of  Protocols . . . . . . . . . . . . . . . . . . . . . . . .

25  —  28

OPERATIONS  MANAGED  DIRECTLY  BY  THE  COMMISSION . . . . . . . . . .

29  —  103

Management  and  monitoring  instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The  financing  agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Information  technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The  organisation  and  resources  of  the  departments  involved . . . . . . . . . . . .

The  consequences  for  the  implementation  of  the  projects

. . . . . . . . . . . . . . . .

Schedule  for  the  completion  of  the  projects . . . . . . . . . . . . . . . . . . . . . . . . . .

Financial  management  and  monitoring  of  the  projects . . . . . . . . . . . . . . . . .

Evaluation  and  external  audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amendments  to  the  initial  decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Services  provided  by  the  technical  assistance  units . . . . . . . . . . . . . . . . . . . .

30  —  42

30  —  33

34  —  36

37  —  42

43  —  84

44  —  49

50  —  68

69  —  71

72  —  80

81  —  84

2

2

3

4

4

6

6

6

8

10

10

10

11

11

11

12

12

13

13

14

16

17

18

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Management  by  those  responsible  for  the  projects  and  results  obtained . . . . .
Observations  in  respect  of  the  accounts  and  finances . . . . . . . . . . . . . . . . . .
The  results  recorded  and  the  survival  of  the  projects . . . . . . . . . . . . . . . . . .

85  —  98
85  —  87
88  —  98

Conclusions  in  respect  of  the  management  of  the  projects . . . . . . . . . . . . . . . .

99  —  103

THE  MANAGEMENT  OF  OPERATIONS  ADMINISTERED  BY  THE  EIB  ON
BEHALF  OF  THE  COMMISSION  AND  THE  AUDIT  OF  THESE
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104  —  149

General  presentation  of  the  audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104  —  107

The  system  of  risk  capital  management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The  purpose  of  risk  capital  and  conditions  of  eligibility . . . . . . . . . . . . . . . .
Description  of  the  management  system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
The  Court’s  observations  at  the  conclusion  of  the  audit

The  management  of  interest-rate  subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit  findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Observations  relating  to  the  management  of  interest-rate  subsidies . . . . . . .

108  —  136
108  —  110
111  —  121
122  —  136

137  —  149
137  —  138
139  —  146
147  —  149

GENERAL  CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

150  —  160

Considerations  relating  to  the  system  of  Protocols . . . . . . . . . . . . . . . . . . . . . .

150  —  152

Considerations  relating  to  the  Commission’s  system  of  management

. . . . . . .

153  —  158

Considerations relating to the operations managed by the EIB on behalf of the
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

159  —  160

The  Commission’s  replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18
18
18

19

20

20

22
22
22
23

26
26
26
29

29

29

30

30

31

GENERAL  INTRODUCTION

Background  to  the  audit

1. This  report  concerns  the  implementation  of  the
protocols  which  are  the  most  traditional  instruments  of
cooperation  with  non-Member  Mediterranean  Countries
(NMCs).  More  particularly,  it  concerns  the  management
of  the  Third  and  Fourth  Protocols  and  is  a  continuation
of 
the
the  Court’s  Special  Report  No  3/91  on 
management  of  the  first  two  series  of  Protocols (1).  This
Report is the last part of the Court’s overall audit of the
New  Mediterranean  Policy 
therefore
complements  the  ones  on  the  structural  adjustment
support  measures (2)  and  decentralised  cooperation  via
the  MED  programmes (3).

(NMP)  and 

2. This report comes at a time when the NMP has been
given  a  new  dimension  after  the  Council’s  adoption  of
Regulation  (EC)  No  1488/96  of  23  July  1996  relating  to
financial and technical measures to support the reform of

economic  and  social  structures  within  the  framework  of
the Euro-Mediterranean Partnership (MEDA). The latter,
which  is  ultimately  intended  to  provide  a  framework  for
all  aid  to  the  NMCs,  has  set  an  indicative  amount  of
3  424,5  Mio  ECU  for  the  period  from  1995  to  1999.
During  this  reference  period  the  implementation  of  the
Protocols  will  be  pursued 
the
appropriations  earmarked  for  this  purpose  have  been
used  up.

in  parallel  until 

3. The  Court’s  work  was  concerned  exclusively  with
measures  funded  from  budgetary  appropriations  for  the
benefit  of  the  seven  Maghreb  and  Mashreq  countries (4).
This  includes  operations  that  benefited  from  risk  capital
managed  by  the  European  Investment  Bank  (EIB)  on  the
Commission’s  behalf  and  those  that  gave  rise  to
budgetary  financing  in  the  form  of  interest-rate  subsidies
on  loans  granted  by  the  Bank  from  its  own  resources.

4.
In  addition  to  its  conclusions  on  the  application  of
the  Protocols  themselves,  the  report  sets  out  to  highlight
the  structural  problems  which  could  still  affect  the
management  of  cooperation  with  the  NMCs,  including
cooperation  falling  under  the  new  MEDA  arrangements.

(1)  See  Special  Report  No  3/91  (OJ  C  252,  26.9.1991).
(2)  See  the  Court’s  Annual  Report  on  the  financial  year  1994

(OJ  C  303,  14.11.1995).

(4)  Algeria,  Egypt,  Jordan,  Lebanon,  Morocco,  Syria  and

(3)  See  Special  Report  No  1/96  (OJ  C  240,  19.8.1996).

Tunisia.

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Approach  adopted  and  scope  of  the  audit

procedures  for  selecting  technical  assistance  and  the
examination  of  the  services  technical  assistance  provides.

5. The  Court’s  audit  includes  an  analysis  of  the  system
of Protocols and the Commission’s management of them.
In  respect  of  the  latter,  it  looks  more  specifically  at  the
systems  set  up  from  the  planning  of  the  aid  up  to  the
the
ex-post  evaluation  of 

the  projects, 

including 

6. The  audit  involved  visits  to  four  countries:  Egypt,
Jordan,  Morocco  and  Tunisia.  In  this  connection,
detailed  audits  were  carried  out  on  a  sample  of  16
projects,  which  are  shown  in  summary  form  in  Table
No  1.

TABLE  1

SAMPLE  —  SUMMARY  PROJECTS

Recipient  country

Name  of  project:

Helwan  Waste  Water
Project  —  Phase  II

Nile Valley Regional
Project

Total  cost

35  Mio  ECU

3  Mio  ECU

EEC  Contribution

32  Mio  ECU
(3rd  Protocols)

2,5  Mio  ECU
(3rd  Protocols)

EGYPT

Food  Sector
Development
Programme

Mio  ECU  —  not
indicated

55  Mio  ECU
(3rd  Protocols)

Ras  Mohamed  National
Park

4,2  Mio  ECU

2,5  Mio  ECU
(3rd  Protocols)

Ref.  No

SEM/03/220/005A

SEM/03/220/008A

SEM/03/220/020A

SEM/03/220/025A

FA  signed  on

9.7.1988  (3/EG)

16.10.1989

16.7.1990  (7/EG)

28.4.1992  (11/EG)

Duration  of  project

Completion  date
6.7.1993  —  extended  to
16.4.1995

4  years

4  years

extended  to  end  1996

Recipient  country

Name  of  project

National  Soil  Map  and
Land  Use  Project

Economic Geology
Project

JORDAN

Ground  Water
Investigation  in
Hammad  and  Sirhan
basins

Cooperation  Project  in
Science  and  Technology

Total  cost

not  indicated

1,2  Mio  ECU

4  Mio  ECU

4  Mio  ECU

EEC  Contribution

3  Mio  ECU
(3rd  Protocol)

1  Mio  ECU
(3rd  Protocol)

4  Mio  ECU
(3rd  Protocol)

3,5  Mio  ECU
(3rd  Protocol)

Ref.  No

SEM/03/628/005

SEM/03/628/013

SEM/03/628/028

SEM/03/628/033A

FA  signed  on

18.4.1989  (142/OJ)

23.4.1990  (147/OJ)

21.10.1991  (170/OJ)

29.9.1992  (183/OJ)

Duration  of  project

5  years  (R  April  1995)

2  years

3,5  years

3  years  —  extended
May  1997

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31.3.98

Recipient  country

Name  of  project

MOROCCO

Agricultural
Development  Fund
(ADF)

Contribution  to  the
improvement  of  the
system  of  teaching
science  and  technology
in  Morocco

Contribution  to  the
development  of  training
structures  in  the  textile
and  leather  industries

Rehabilitation and
protection  of  parts  of
the  Ouarzazate  and
Moulouya  disaster  areas

Total  cost

60  Mio  ECU

64  Mio  ECU

34,98  Mio  ECU

5  Mio  ECU

EEC  Contribution

30  Mio  ECU
(3rd  Protocol)

40  Mio  ECU
(3rd  Protocol)

28,075  Mio  ECU
(3rd  Protocol)

5  Mio  ECU
(3rd  Protocol)

Ref.  No

SEM/03/204/002

SEM/03/204/006

SEM/03/204/012

SEM/03/204/013

FA  signed  on

13.2.1990  (150/MAR)

26.10.1990  (159/MAR)

15.7.1991  (166/MAR)

30.7.1991  (169/MAR)

Duration  of  project

Completion  date:
31.12.1994

Initially  planned  for
1990-1994  —  extended
until  30.6.1996

48  months  (30.6.1995)

Completion  date:
31.12.1993

Recipient  country

Name  of  project

Agricultural
Development  to  the
south-west  of  Kef

Creation  of  the  Rijm
Maatoug  palm  grove

TUNISIA

Loan  operations  for  the
benefit  of  small  and
medium-sized
agricultural enterprises
in Tunisia

Exploitation  of  water
resources  in  the
Governorate  of
Kasserine

Total  cost

26  Mio  ECU

32  Mio  ECU

12  Mio  ECU

7  Mio  ECU

EEC  Contribution

10  Mio  ECU
(3rd  Protocol)

15  Mio  ECU
(3rd  Protocol)

12  Mio  ECU
(3rd  Protocol)

7  Mio  ECU
(3rd  Protocol)

Ref.  No

SEM/03/212/004

SEM/03/212/010

SEM/03/212/015

SEM/03/212/017A

FA  signed  on

9.7.1988  (123/TU)

11.8.1989  (153/TU)

29.4.1991  (167/TU)

30.9.1991  (171/TU)

Duration  of  project

5  years

5  years  (commencing  in
November  89)

Initially  planned  for
1991-1992.  The  project
was  completed  in
1993-1994  (2  years
late).

5  years  from
1992-1996,  completion
date:  9/1996

Source:  Court  of  Auditors.

7. This  Report  consists  of  three  parts.  The  first
introduces  the  system  of  Protocols  and  includes  the
observations  arising  from  the  Court’s  examination  of  the
model  of  cooperation  created  through  the  system  of
Protocols.  The  second  is  devoted  to  the  operations  that
were  managed  directly  by  the  Commission.  The  third,
finally,  deals  with  those  operations  which  were  managed
under  mandate  by  the  EIB.

THE  PROTOCOL  SYSTEM

General  Presentation

and  each  NMC  for  a  given  period  (normally  five  years).
Thus,  this  approach  to  cooperation  is  characterised  by
two  levels  of  organisation,  because  the  funding  of  any
given  project  requires  the  signing  of  a  specific  financing
agreement.

9. The  Protocols  adopt  an  overall  budget,  specify  the
source  of  the  appropriations,  depending  on  whether  they
come  from  the  general  budget  of  the  Community  or  EIB
own  resources,  and  the  nature  of  the  financing  —
non-refundable  aid,  risk  capital  or  loans.

8. The  Protocols,  which  are  bilateral  agreements  under
Article  238  of  the  EC  Treaty,  were  initiated  in  1979.
They  form  an  overall  legal  framework  for  financial  and
technical  cooperation  between  the  European  Community

10. The  total  aid  budget  made  available  to  the  seven
countries  in  question  amounted  to  3 548  Mio  ECU.  Of
this  amount,  2 158  Mio  ECU  (60,8 %)  was  financed
from  EIB  own  resources  and  1 390  Mio  ECU  (39,2 %)

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from  the  general  budget  (1 273  Mio  ECU  in  grants  and
117 Mio  ECU in the  form of  risk capital).  Tables No 2a
and  2b  give  a  breakdown  of  this  distribution  for  each  of
the countries concerned. Together with those for the first

two series of Protocols, these sums amount to 5 232 Mio
ECU,  2 112  Mio  ECU  of  which  comes  from  the
Community  budget  and  3 120  Mio  ECU  from  the  EIB’s
own  resources.

OVERALL  BUDGET  FOR  THE  THIRD  AND  FOURTH  PROTOCOLS

TABLE  2a

Cooperation  under  the  Third  Protocols

ALGERIA MOROCCO

TUNISIA

EGYPT

JORDAN

LEBANON

SYRIA

TOTAL

(Mio  Ecu)

Signature  of  the  Protocol

26.10.87

26.5.88

26.10.87

26.10.87

26.10.87

2.12.87

7.2.91

Council  Decision

21.12.87

30.6.88

21.12.87

21.12.87

21.12.87

21.12.87

16.11.92

Entry  into  force

1.3.88

1.7.88

22.12.87

22.12.87

1.2.88

1.3.88

17.11.92

—  EIB  loans

— non-refundable  aid

— risk  capital

Total

183

52

4

239

151

162

11

324

131

87

6

224

249

189

11

449

63

35

2

100

53

19

1

73

110

34

2

146

940

578

37

1 555

TABLE  2b

Cooperation  under  the  Fourth  Protocols

ALGERIA MOROCCO

TUNISIA

EGYPT

JORDAN

LEBANON

SYRIA

TOTAL

Signature  of  the  Protocol

20.6.91

20.6.91

20.6.91

26.6.91

26.6.91

18.9.91

17.7.91

Council  Decision

16.3.92

16.3.92

19.12.91

16.3.92

16.3.92

16.3.92

24.1.94

Entry  into  force

—  EIB  loans

—  non-refundable  aid

—  risk  capital

Total

1.5.92

1.7.93

20.12.91

17.3.92

1.5.92

1.5.92

1.3.94

280

52

18

350

220

193

25

438

168

101

15

284

310

242

16

568

80

44

2

126

45

22

2

69

115

41

2

158

1 218

695

80

1 993

(Mio  Ecu)

TOTAL FUNDS ALLOCATED – THIRD & FOURTH PROTOCOLS

3 548

589

762

508

1 017

226

142

304

ALGERIA

MOROCCO

TUNISIA

EGYPT

JORDAN

LEBANON

SYRIA

TOTAL

U
C
E
o
M

i

4 000

3 500

3 000

2 500

2 000

1 500

1 000

1 500

1 –

Source:  Protocols.

 
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for 

resources 

the  Fourth
11. Overall,  budgetary 
Protocols  were  26 %  higher 
the  Third.
Appropriations  made  available  for  risk  capital  rose  from
37  Mio  ECU  to  80  Mio  ECU,  i.e.  an  increase  of  216 %,
the
which 
Euro-Mediterranean  partners  will  be  attaching  in  future
to  assistance  for  the  private  sector.

importance 

underlines 

than 

that 

the 

for 

The  special  features  of  the  Third  and  Fourth  Protocols

12. The  main  new  feature  in  the  Third  and  Fourth
Protocols,  in  comparison  with  the  First  and  Second,
consisted  in  a  more  precise  definition  of  the  specific
objectives and the introduction of indicative plans. These
changes  were  already  given  positive  appraisal  in  the
Court’s Special Report No 3/91 (5). Article 3 of the Third
and  Fourth  Protocols  defines  the  general  cooperation
objectives  while  the  indicative  plans,  jointly  prepared  by
the  signatories  and  the  EIB,  define  specific  objectives,
quantify  aid  to  the  various  priority  sectors  of  activity
within  the  fields  specified  in  the  protocols  and,  in  some
cases,  identify  the  projects  to  be  undertaken.

13. An  examination  of  the  projects  implemented  during
the 3rd and 4th Protocols shows that, generally speaking,
the  indicative  plans  have  been  adhered  to  as  far  as  the
areas  of  intervention  are  concerned.  The  Community
interventions under  these  two last Protocols  thus  showed
greater  cohesion  than  under  the  previous  series.

14.
In  contrast  to  the  previous  Protocols,  neither  the
Third nor the Fourth Protocols provide, in respect of the
NMCs  covered  by  the  audit,  for  special  loans  to  be
granted  from  budgetary  resources.

15. Article 4 of the Fourth Protocols mentions 300 Mio
ECU, which was made available in addition to the overall
budget  adopted  in  the  Protocol,  in  order  to  finance
projects  in  support  of  economic  reforms  undertaken  as
part  of  structural  adjustment  programmes.  Since  this

amount  is  not  allotted  a  priori  on  a  bilateral  basis  and
the  aid 
is  committed  according  to  macro-economic
considerations,  the  EC  is  already  anticipating,  in  the
Fourth  Protocols,  the  thinking  behind  the  MEDA
Regulation (6).  This  concern  is  also  to  be  found  in  the
indicative  programmes  signed  with  Morocco,  Egypt  and
Jordan,  which  reserve  10,  20  and  30 %  respectively  of
the  non-reimbursable  aid  in  the  overall  budget  for  these
operations.

Implementation  of  the  Protocols

Progression  from  one  Protocol  to  the  next

16. While, 
in  theory,  there  was  to  be  a  smooth
progression  from  one  series  of  Protocols  to  the  next,  in
practice  the  four  series  are  running  concurrently  for  all
the  seven  countries  covered  by  the  audit.

17. This situation can be explained, on the one hand, by
an  accumulation  of  delays  due  to  the  slowness  of  the
process  of  negotiation  and  ratification  of  the  Protocols,
combined with delays ensuing from the overestimation of
the absorptive capacity of the recipient countries (7), and,
on  the  other  hand,  by  the  possibility  contained  in  the
Protocols  for  uses  to  be  sought  for  all  residual  funds  at
the  end  of  the  period  of  application  until  they  are
exhausted. Frequently, these funds are not inconsiderable
amounts.

18. Thus,  on  31  December  1991,  the  commitment
deadline stipulated in the texts of the Third Protocols, the
amounts  still  to  be  committed  totalled  123,4  Mio  ECU,
i.e. 20 % of the overall budget. This percentage, as Table
3 shows, conceals great differences between the Maghreb
and  Mashreq  countries,  which  alone  account  for  96,8 %
of  the  residue.  This  situation  is  attributable  to  political
reasons in the case of Lebanon and Syria and to technical
and  administrative  reasons  in  the  case  of  Egypt.

(5)  Paragraph  3.24  of  Special  Report  No  3/91  (OJ  C  252,

26.9.1991).

(6)  See  OJ  L  189,  30.7.1996.
(7)  The Court also identified the same problem in the context of
the  PHARE  Programme  (see  Special  Report  No  3/97  on  the
decentralised  system  of  implementation  for  the  PHARE
Programme 
(OJ  C  175,  9.6.1997,
paragraph  2.5).

(from  1990-1995) 

31.3.98

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C  98/7

TOTAL  FUNDS  STILL  TO  BE  COMMITTED  AT  CONCLUSION  OF  THE  THIRD  PROTOCOLS

TABLE  3

Country

Budget

1988

1989

1990

1991

(As  at  31.12.1991)

Committed

Algeria

Morocco

Tunisia

Egypt

Jordan

Lebanon

Syria

Total

56

173

93

200

37

20

36

615

Syria
29%

0,6

11,9

39,4

33,9

10,5

26,8

110,4

20,3

10,4

6,9

10,9

44,8

16,9

86,9

8,9

17,2

2,6

16,3

10,7

5,3

(Mio  ECU)

Total

Available

55,5

169,7

92,9

141,9

31,6

0

0

0,5

3,3

0,1

58,1

5,4

20

36

96,3

174,8

168,4

52,1

491,6

123,4

Algeria

0% Morocco

3% Tunisia

0%

Egypt
48%

Lebanon
16%

Jordan
4%

Source:  Commission  SINCOM  data.

C  98/8

EN

Official  Journal  of  the  European  Communities

31.3.98

Utilisation  of  appropriations  as  at  31  December  1996

19. Tables  4a  and  4b  show  that  76  projects  financed
under  the  first  two  series  of  Protocols  had  still  not  been
closed  on  31  December  1996.  The  cumulative  total  of

appropriations  for  these  projects  came,  at  that  date,  to
more  than  74,6  Mio  ECU.  It  will  be  noted  that,  during
the  financial  year  1996  alone,  eight  new  operations  were
committed  for  a  total  of  15,76  Mio  ECU.

FIRST  AND  SECOND  PROTOCOLS  —  BREAKDOWN  OF  REMAINING  COMMITMENT  BALANCES  AS  AT  31.12.1996

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

Algeria
Egypt
Jordan
Lebanon
Morocco
Syria
Tunisia

0,00
0,00
0,00
0,00
0,00
0,34
0,00

0,00
0,00
0,00
0,00
0,00
0,00
0,00

0,01
0,00
0,00
0,13
0,00
0,00
0,00

0,00
0,43
0,00
0,15
0,00
0,00
0,00

0,00
2,27
0,06
0,00
0,00
0,00
0,00

0,05
0,02
0,00
0,00
7,65
0,10
0,00

0,00
0,07
0,14
8,10
0,00
0,00
0,00

0,00 11,79
0,08
0,79
0,17
0,45
0,00
0,00
0,00
0,00
0,00
5,19
0,00
0,00

0,00
0,01
0,04
0,00
0,00
0,26
0,00

0,00
0,00
0,01
0,00
0,00
0,00
0,00

3,03
2,47
0,00
0,00
0,00
0,00
0,00

0,01
0,00
0,00
0,00
0,03
0,05
0,65

0,00
1,11
1,36
2,26
0,00
1,88
0,00

0,00
0,01
0,72
0,00
0,00
0,00
0,00

1,92
0,08
0,00
0,00
0,00
0,00
0,07

0,00 10,65
5,03
4,90
0,03
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,05
0,02

Grand  Total

0,34

0,00

0,14

0,58

2,33

7,82

8,31

6,43 12,04

0,32

0,02

5,50

0,74

6,60

0,73

2,08

4,92 15,76

74,66

TABLE  4a

Analysis  by  Value

Year  of  commitment

TABLE  4b

Analysis  by  Number  of  Projects

Year  of  commitment

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

Algeria
Egypt
Jordan
Lebanon
Morocco
Syria
Tunisia

Grand  Total

0
1
0
0
0
1
0

2

0
0
1
0
0
0
0

1

1
0
0
1
0
0
0

2

0
1
0
2
0
0
0

3

0
1
1
0
0
0
0

2

1
2
0
0
1
1
0

5

0
1
2
2
0
0
0

5

0
1
4
0
0
1
0

6

6
1
2
0
0
0
0

9

0
1
1
0
0
1
0

3

0
1
1
0
0
0
0

2

1
3
0
0
0
0
0

4

1
0
0
0
1
1
2

5

0
2
1
2
0
1
1

7

0
1
1
0
0
0
0

2

1
3
0
0
0
0
2

6

0
1
0
0
1
0
2

4

Source:  Commission  SINCOM  data.

20. Table  5  breaks  down  the  utilisation  of  commitment
and  payment  appropriations  by  year  and  country  for  the
Third  and  Fourth  Protocols.  As  at  31  December  1996,
605,4  Mio  ECU,  i.e.  98 %  of  the  appropriations  which
were  made  available  under  the  Third  Protocol,  were
committed  but  only  72 %  had  been  paid.  The  level  of

utilisation  of  the  appropriations  made  available  in  the
final series of Protocols is, naturally, lower at 714,5 Mio
ECU,  i.e.  92 %  for  commitment  appropriations  but  only
23 %  for  payment  appropriations.  In  the  case  of
payments,  those  effected  correspond,  in  the  main,  to  the
financing  of  the  structural  adjustment  support  measures.

(in  Mio  ECU)

Grand
Total

27,46
17,27
2,98
10,64
7,68
7,83
0,79

(Number  of  projects)

Grand
Total

13
23
15
7
3
6
9

76

2
3
1
0
0
0
2

8

31.3.98

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Official  Journal  of  the  European  Communities

C  98/9

TABLE  5

Budgetary  implementation  as  at  31.12.1996

Third  Protocols

Fourth  Protocols

Appropriations Committed

Decommit.

Paid

Appropriations Committed

Decommit.

Paid

(Mio  Ecu)

95,3
175,8
168,4
54,6
69,5
24,4
15,8
9,4
16,8

15 % 10,8
29 %
4,9
27 % 38,9
9 % 77,0
11 % 78,7
4 % 71,0
2 % 72,2
1 % 51,5
0 % 38,5

2 %
1 %
6 %
13 %
13 %
12 %
12 %
8 %
6 %

2,1
3,1
19,4

630,0

24,6

98 % 443,5

72 %

60,1
213,1
37,6
20,3
171,8
32,1
95,0

7,5

94 % 20,3
13,2 100 % 133,0
99 % 29,6
0,8
0,7
98 % 17,4
— 99 % 154,7
— 89 %
8,4
2,4 100 % 80,1

36 %
67 %
80 %
87 %
89 %
23 %
86 %

615,0

56,0
200,0
37,0
20,0
173,0
36,0
93,0

—
74,2
164,5
219,5
209,1
50,8

718,1

52,0
251,2
44,9
23,2
206,2
22,9
117,7

—
10 %
5,0
21 % 68,9
28 % 32,2
27 % 38,7
6 % 36,7

1 %
9 %
4 %
5 %
5 %

92 % 181,5

23 %

3,6

3,6

— 74 % 15,9
97 % 25,2
0,6
98 % 22,1
0,0
— 97 %
6,2
— 95 % 58,6
1,0
— 53 %
99 % 52,6
3,0

23 %
10 %
48 %
26 %
27 %
2 %
45 %

775,0

70,0
258,0
46,0
24,0
218,0
43,0
116,0

TOTAL BUDGETARY IMPLEMENTATION THIRD AND FOURTH PROTOCOLS

Appropriations

Committed

Paid

1988
1989
1990
1991
1992
1993
1994
1995
1996

Total

Algeria
Egypt
Jordan
Lebanon
Morocco
Syria
Tunisia

U
C
E
o
M

i

500

450

400

350

300

250

200

150

100

50

0

Algeria

Egypt

Jordan

Lebanon

Morocco

Syria

Tunisia

Remarks:  For  the  commitments,  the  second  column  represents  the  decommitments  which,  according  to  the  Protocol  rules,  remain  available,  for  further

use.

Source:  Commission  SINCOM  data.

 
C  98/10

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Official  Journal  of  the  European  Communities

31.3.98

Budgetary  presentation

21. Budgetary  appropriations  made  available  under
heading B7-4051 not only include the amounts agreed in
the  Third  and  Fourth  Protocols  but  also  the  additional
appropriations  for  the  structural  adjustment  support
programmes  to  which  the  Fourth  Protocols  refer.  In  the
its
interest  of  greater  clarity 
implementation,  it  would  have  been  preferable  to  apply
the principle of specification to these appropriations more
rigorously,  and  to  enter  the  Protocol  budgets  and  those
additional  amounts  involved  in  the  structural  adjustment
support  measures  under  separate  headings.

the  budget  and 

in 

Legality  under  Community  law

22.
In  its  Special  Report  No  3/91  the  Court  points  out
that  Council  Regulation  No  3973/86 (8)  only  refers
explicitly,  in  its  recitals,  to  the  Second  Protocols.  In  its
replies  the  Commission  acknowledged  the  pertinence  of
this  observation.  The  Court  notes  that  Regulation  (EEC)
the  Protocols
No  1762/92  on 
concluded  between  the  Community  and  the  NMCs
concerning  financial  and  technical  cooperation  was  not
adopted  by  the  Council  until  29  June  1992.  As  the
Council had not taken a decision to extend the validity of
Regulation No 3973/86, the third series of Protocols was
implemented  in  the  absence  of  any  legal  base.

the  application  of 

of 

for 

the 

had 

situation 

authority 

responsible 

consequences 

the
23. This 
decision-making  arrangements  concerning  interest-rate
subsidies  under  the  Third  Protocols.  In  its  Opinion
No  2/86 (9),  the  Court  argued  that  the  procedure
contained  in  the  proposed  regulation  of  1986  was
unsatisfactory, and that it was necessary ‘to safeguard the
prerogatives 
for
implementing  the  budget’  by  giving  the  Commission  the
power  to  decide  in  favour  of,  or  against,  granting  an
interest-rate  subsidy  on  a  loan  awarded  by  the  EIB.  This
observation  was  not  taken  into  account  when  Council
Regulation  (EC)  No  3973/86  was  adopted.  It  was,
however,  taken  into  account  in  Council  Regulation  (EC)
No  1762/92.  Had  steps  been  taken  to  ensure  that  there
was  a  proper  legal  base  for  implementation  of  the  Third
Protocols,  the  power  of  the  Commission  to  decide  on
interest rate subsidies could have been correctly set out in
a  regulation  from  1988.  As  it  was,  the  unsatisfactory
decision  rules  continued  for  a  further  four  years.

24. Unlike  Regulation  No  3973/86,  which  was  adopted
according  to  the  procedure  laid  down  in  Article  209  of
the  EC  Treaty  and  which  requires  a  prior  opinion  from

(8)  See  OJ  L  370,  30.12.1986.
(9)  See  OJ  C  302,  27.11.1986.

the  Court  of  Auditors,  the  1992  Regulation  was  not
adopted  in  accordance  with  this  procedure  although  it
was  identical  in  nature.  Similarly,  the  adoption  of
Council  Regulation  (EC)  No  1488/96  (MEDA)  did  not
follow  the  procedure  set  out  in  Article  209  of  the  EC
Treaty  either.  Once  any  regulation  comments  on  the
provisions  for  the  execution  of  the  budget,  its  financial
nature  might  justify  a  request  for  the  Court’s  opinion
prior  to  its  adoption (10).

Conclusions  concerning  the  system  of  Protocols

25. The  Court’s  observations  concerning  the  system  of
Protocols,  contained  in  Special  Report  No  3/91,  are  still,
for  the  most  part,  relevant,  particularly:

(a)  the  slowness  of  the  process  of  negotiation  and

conclusion  of  the  Protocols;

(b) the  absence  of  a  procedure  for  the  closure  of  the
Protocols  which,  as  a  consequence,  leads  to  the
series  of
simultaneous 
Protocols;

implementation  of 

four 

(c)  the negative consequences of the inflexible framework
of  the  Protocols  with  a  fixed  and  guaranteed  amount
for  each  recipient  country.

26. The  objectives  set  out  in  the  3rd  and  4th  Protocols
are more precise than for the first two Protocols, and the
nature of the projects or measures which can be financed
is  defined.  The  indicative  plans  drawn  up  within  the
framework  of  the  implementation  of  the  Third  and
Fourth  Protocols  have  allowed  greater  consideration  to
be  given  to  the  priorities  set  out  by  the  NMCs  in  their
planning  at  national  level.

27.
In  spite  of  the  improvements  introduced  by  the  3rd
and  4th  Protocols,  the  inability  of  the  majority  of  the
NMCs  to  absorb  the  sums  involved  within  a  reasonable
amount of time has led the European legislature to take a
more  flexible  approach  to  the  MEDA  Regulation.  Under
the  new  system,  in  contrast  to  the  system  of  Protocols,
the  NMCs  no  longer  dispose  of  a  guaranteed  amount  of
aid  but  conclude  three-year  indicative  programmes  with
the  Community  which  are  based  on  their  individual
capacity  to  absorb  the  appropriations  and  which  contain
no  precise  financial  commitment (11).

28. As  far  as  the  legal  provisions  of  the  protocols  are
concerned,  the  Third  Protocols  were  implemented  in  the
legal  base  and  Council
absence  of  an  adequate 
Regulations  (EC)  No  1762/92  and  No  1488/96  were
adopted without preliminary consultation of the Court of

(10) See  the  Court’s  Annual  Report  on  the  financial  year  1993,
especially  paragraphs  13.19  and  following  (OJ  C  327,
24.11.1994).

(11) According  to  Article  105(2)  of  the  Financial  Regulation,
protocols  are  preferential  agreements  whilst  MEDA  covers
aid  granted  autonomously.

31.3.98

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Official  Journal  of  the  European  Communities

C  98/11

Auditors  by  the  legislator,  although  this  requirement  is
stipulated  in  Article  209  of  the  EC  Treaty.

were  confirmed  during  this  audit.  Examination  of  these
agreements  has  shown,  in  fact,  that  for  most  of  them:

OPERATIONS  MANAGED  DIRECTLY  BY  THE
COMMISSION

In  this  section  of  the  report  key  findings  are
29.
presented  concerning  the 
instruments  and  resources
which  the  Commission  uses  for  the  management  and
monitoring of projects. The weaknesses identified help to
explain some of the problems and difficulties encountered
in  the  implementation  of  the  projects,  at  the  level  of  the
Commission  and  at  that  of  project  management  on  the
spot.

Management  and  monitoring  instruments

The  financing  agreements

In  the  context  of  the  operations  examined  by  the
30.
is  the  basic
Court,  the  financing  agreement  (FA) 
document  for  the  implementation  of  projects (12).  It
formalises  the  culmination  of  the  preparatory  phase  and
its  importance  is  determined  by  the  following  points:

(a)  the  agreement  constitutes  a  legal  act  which  sets  out

the  obligations  of  the  signatories;

(b) as a management instrument, the agreement, amongst
other  things,  specifies  the  objectives  to  be  achieved
and  the  project’s  management  structures,  describes
the 
the
implementing  procedures  and  specifies 
procedures 
the  operations  and
evaluating  the  results;

for  monitoring 

(c)  on the financial level, the agreement fixes the project’s
the  appropriations
identified  expenditure

overall  budget  and  defines 
allocated  to  each  of  the 
headings.

31.
In  its  previous  reports,  the  Court  pointed  out  the
considerable  weaknesses  of  the  financing  agreements
drawn  up  by  the  Commission (13),  weaknesses  which

(12) In  the  case  of  protocols,  most  of  the  projects  are  set  up
under  a  financing  agreement  concluded  with  the  national
authorities  of  the  beneficiary  country.  In  some  cases,
especially for projects worth less than 1 Mio ECU, a contract
is  enough.

(13) See  the  Annual  Report  on  the  financial  year  1991,
paragraphs  15.28  et  seq.  (OJ  C  330,  15.12.1992)  for  the
projects in Asia and Latin America. Paragraphs 5.20 — 5.32
of  Special  Report  No  3/91  identify  similar  problems  for  the
projects  in  the  Mediterranean  countries  during  the  First  and
Second  Protocols  (JO  C  252,  26.9.1991).  Paragraph  5.23  of
Special  Report  No  3/97  on  the  decentralised  system  of
implementation 
(from
1990-1995)  (OJ  C  175,  9.6.1997).

the  PHARE  Programme 

for 

(a) neither  the  general  nor  the  specific  objectives  which
the  project  sets  out  to  achieve  are  clearly  defined  or
quantified.  How  the  expected  results  are  to  be
achieved from the means made available is not defined
sufficiently  clearly.  The  consequence  is  that  the  final
evaluation  of  the  projects’  success  is  made  more
difficult;

including 

those  of 

(b) the  description  of  the  structure  of  the  management
bodies  with  the  definition  of  the  various  roles  and
responsibilities, 
technical
assistance units, is too perfunctory (14). This weakness
lead  to  conflicts  between  the
may  subsequently 
various  bodies  responsible (15); 
the
agreements are not precise enough in the matter of the
management’s  obligation  to  draw  up  work  schedules,
annual  budgets  and  implementation  reports;

in  addition, 

the 

(c) the  agreements  examined  did  not  contain  an
automatic  obligation  to  carry  out  evaluations  during
implementation,  regular  external  audits  and  ex  post
evaluations;

(d) too  often  the  texts  did  not  permit  a  clear  distinction
between  the  contributions  made  by  the  authorities  of
the  recipient  countries  in  terms  of  finance  and  in
terms  of  the  human  and  material  resources  made
available  to  the  projects;

In  order  to  complete  the  range  of  customary
32.
arbitration possibilities, in the Court’s view the financing
agreements  ought  to  contain  a  clause  stating  the
consequences  should  one  or  the  other  of  the  signatories
default  on  his  commitment.

33. As  from  1992  the  Commission  undertook  to
introduce a method of managing cycles of projects called
Project  Cycle  Management.  This  approach  should  allow
greater  control  of  the  management  of  each  stage  of  the
project  from  the  preparatory  phase  to  the  ex-post
evaluation.  However,  this  approach  was  not  followed  in
the  case  of  the  projects  of  the  Third  Protocols  since  it
was  introduced  after  they  were  drawn  up.  Nor  was  it
used  in  a  systematic  fashion  for  the  projects  financed
within  the  framework  of  the  Fourth  Protocols.

(14) The same problems were already pointed out by the Court in
the  context  of  the  PHARE  Programme  (see  Special  Report
No  3/97  on  the  decentralised  system  of  implementation  for
the  PHARE  Programme  (from  1990-1995)  (OJ  C  175,
9.6.1997,  paragraph  3.14).

(15) Economic  Geology  Project,  Jordan,  Science  and  Technology

Project,  Jordan.

C  98/12

EN

Official  Journal  of  the  European  Communities

31.3.98

Information  technology

then.  First, 

In  its  Special  Report  No  3/91  the  lack  of  an
34.
adequate  system  for  the  accounting  and  management  of
the  Protocols  was  highlighted (16).  The  situation  has  not
improved  very  much  since 
there  are
inadequate  links  between  the  Commission’s  financial
accounts  (SINCOM,  OLAS-Budget (17))  and  the  RAP
application developed in-house by DG 1B for project and
financial management data concerning projects under the
Protocols.  Secondly,  RAP  suffers  from  a  number  of
weaknesses  which  reduce 
its  value  as  a  tool  for
purposes.  Conceptual
management 
weaknesses  include  difficulties  in  accounting  for  projects
where  several  currencies  are  used,  and,  where  a  single
project  is  financed  from  more  than  one  Protocol,  the
necessity to account separately for each of these financing
components.

control 

and 

technical  unit  of  the  Mediterranean  Directorate  and  of
the  financial  unit  of  DG  IB.  The  Delegations  set  up  by
the  Commission  in  the  recipient  NMCs  also  participate
actively  in  the  administration  of  the  projects.

technical  unit 

responsibilities  between 
in 

the
38. The  division  of 
geographical  units  and 
the
the 
Mediterranean  Directorate  is  not  set  out  in  any  internal
document (21),  and  varies  from  one  project  to  another.
Although  such  an  approach  may  favour  a  certain
flexibility, 
the
respective  responsibilities  of  the  various  units  in  the
management  of  the  projects.

it  also  creates  uncertainties  about 

35. On  a  practical  level,  the  lack  of  automatic  links
between the financial accounting systems and RAP means
that  the  RAP  database  is  not  promptly  updated.  The  use
made of the system, and thus the quantity and quality of
the  data  loaded  by  each  Delegation  varies  considerably.
The deficiencies of the system, and thus the limited value
of  it  as  a  management  tool,  were  confirmed  by  users  in
the  Delegations.

36. As  a  result,  the  monitoring  and  management
capacity of the Commission, especially in the Delegations
is  reduced.  A  new  system,  the  MIS (18),  was  intended  to
provide  the  services  with  a  powerful  tool  for  project
monitoring and control, but was installed, in a simplified
version,  only  in  1997 (19) (20).

The  organisation  and  resources  of  the  departments
involved

37. The  preparation,  implementation  and  monitoring  of
the  projects  financed  within  the  framework  of  the
Protocols  is  the  task  of  the  geographical  units  and  the

(16) Paragraphs  4.1  —  4.11.
(17) OLAS-Budget  is  an  application  managed  by  DG  VIII  which
extracts  and  groups  SINCOM  payment  data  from  different
years by commitment. Since January 1996 the production of
list  and  reports  by  DG  VIII  for  DG  1B  has  ceased.  OLAS
stands  for  ‘On-Line  Accounting  System’.

(18) Management  Information  System.
(19) See  Annual  Report  concerning  the  financial  year  1996,

paragraphs  13.22  —  13.28  (JO  C  348,  18.11.1997).

(20) The Court also pointed out serious and similar weaknesses in
the  computer  systems  used  for  the  management  of  the
PHARE  Programme  ((see  Special  Report  No  3/97  on  the
decentralised  system  of  implementation  for  the  PHARE
Programme  (from  1990-1995),  paragraphs  4.24  —  4.28  (OJ
C  175,  9.6.1997)).

39. The  distribution  of  tasks  between  the  Commission’s
central departments and the Delegations is described in a
DG IB internal document of July 1992 (21). Basically, this
document  attributes  decision-making  powers  to  the
former  while  the  latter  are  given  an  advisory  role  on  the
policies  to  be  followed  and  on  the  selection  of  projects.
The  Delegations  may  also,  on  the  basis  of  instructions
given  by  headquarters,  negotiate  the  conditions  for  the
implementation of the projects with local authorities. The
logic  underlying  the  document  is  a  very  centralist  one  as
the  central  departments  retain  the  power  of  decision.  In
reality, 
the
the  controls  carried  out  showed 
Delegations  often  accept  alterations,  sometimes  quite
considerable ones, to the FA terms (see paragraphs 72 —
80).  In  addition,  these  changes  are  frequently  made
without  any  written  or  supporting  documentation  which
would allow their justification to be examined. Whilst the
Delegations  actually  are  best  placed  to  appreciate  the
relevance  of  a  request  for  amendment  which  has  been
entered  by  the  administration  of  the  projects,  at  the
present  time  no  document  authorises  them  to  make  this
decision.  Only  the  signatories  of  a  document  are
it  unless  they  delegate  this
empowered  to  amend 
competence.  It  is  therefore  for  the  Commission  to  decide
to  give  the  Delegations  such  powers,  subject  to  them
providing  written  justification,  which  would  allow  the
Commissioner  responsible  to  examine  the  decisions
taken.

that 

(21) A  DGIB  internal  document  of  July  1992  set  out  the
respective responsibilities of the Delegations and Commission
headquarters  relating  to  the  management  and  monitoring  of
development  aid  and  economic  cooperation.  This  document
refers  explicitly  to  the  situation  of  the  programme  in  Asia
and,  to  a  lesser  extent,  to  the  situation  in  Latin  America.  It
speaks  of  a  future  amended  version  which  would  reflect  the
particular aspects of cooperation in Mediterranean countries,
but  the  Commission  has  not  been  able  to  supply  the  Court
with  this  version.

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40. Furthermore,  the  Delegations  have  increasingly  to
come  to  terms  with  an  appreciable  increase  in  their
workload  due  to  their  increasingly  political  role,  the
development  of  their  economic  and  commercial  activities
and  those  tasks  involving  representation  and  the  supply
of  information.

41. With  the  resources  available  at  present,  both  in
respect  of  the  number  and  the  qualifications  of  the  staff,
the  Delegations  can  only  cope  with  this  extra  work  by
neglecting  tasks  relating  to  financial  and  technical
cooperation.

42. The  Commission  has  undertaken  a  thorough  review
of  the  development  and  management  of  its  external
services,  which  led  to  its  approving  a  document  on  this
subject  on  8  April  1997.  This  document  expresses  a
determination  both  to  increase  human  resources  and  to
improve  working  methods  in  order  to  make  the  best  use
of  those  resources.  This  document,  which  marks  an
awareness  of  the  necessity  of  decentralisation  and
acknowledges  that  much  remains  to  be  done  to  remove
the  weaknesses 
that  have  been  noted,  should  be
complemented  by  a  definition  of  the  powers  that  are  to
be  given  to  the  Delegations  and  of  the  procedures  for
implementing  those  powers (22).

The  consequences 
projects

for 

the 

implementation  of 

the

43. The  Court’s  audits  have  identified  a  series  of  delays
in  the  implementation  of  the  projects  and  inadequate
expertise  in  the  financial  management  and  monitoring  of
the  projects.  Major  amendments  to  the  terms  of  the  FAs
with  the  mere  assent  of  the  Delegations  or  the  central
departments  have  also  been  discovered.

Schedule  for  the  completion  of  the  projects

44. As  Table  6  shows,  for  six  of  the  sixteen  projects
audited,  the  period  of  time  required  for  signing  the  FA,
after  the  decision  had  been  taken  by  the  Commission,
was  more  than  10  months  and  for  five  of  them  the
period  was  one  year  or  longer.  In  two  extreme  cases  it
was  respectively  17  months  and  over  24  months.  In
addition,  in  the  case  of  several  projects,  an  extra  year  or
eighteen  months  was  necessary  to  select  the  technical
assistance  unit  and/or  send  supplies  due  to  the  growing
difficulties  on  the  part  of  the  Commission’s  departments
in organising tendering procedures within acceptable time
limits.

PERIOD  OF  TIME  REQUIRED  FOR  SIGNING  THE  FINANCING  AGREEMENTS

TABLE  6

Recipient  country

Name  of  project

Helwan  Wastewater
Project  —  Phase  II

Nile Valley Regional
Project

Financing  decision

19.12.1988

FA  signed  on

Time  lapse

3.5.1989

5  months

9.3.1989

16.10.1989

6  months

Recipient  country

Name  of  project

National  Soil  Map  and
Land  Use  Project

Economic Geology
Project

Financing  decision

FA  signed  on

18.4.1989

Time  lapse

26.3.1989

23.4.1990

13  months

EGYPT

Food  Sector
Development
Programme

2.4.1990

16.7.1990

3  months

JORDAN

Ras  Mohammed
National Park

4.10.1991

28.4.1992

2/3  years

Ground  Water
Investigation  in
Hammad  and  Sirhan
basins

5.12.1990

21.10.1991

11  months

Cooperation  Project  in
Science  and  Technology

5.12.1991

29.9.1992

10  months

(22) Similar  problems  concerning  the  division  of  responsibilities
between  head  office  in  Brussels  and  the  Delegations  and  the
latters’ powers were pointed out by the Court in the context
of  the  PHARE  Programme  ((see  Special  Report  No  3/97  on
the  decentralised  system  of  implementation  for  the  PHARE
Programme  (from  1990-1995),  paragraphs  2.16,  2.19  —
2.22  and  5.24  (OJ  C  175,  9.6.1997)).

C  98/14

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Official  Journal  of  the  European  Communities

31.3.98

Recipient  country

Name  of  project

MOROCCO

Agricultural
Development  Fund
(ADF)

Contribution  to  the
improvement  of  the
system  of  teaching
science  and  technology
in  Morocco

Contribution  to  the
development  of  training
structures  in  the  textile
and  leather  industries

Rehabilitation and
protection  of  parts  of
the  Ouarzazate  and
Moulouya  disaster  areas

Financing  decision

2.6.1989

FA  signed  on

Time  lapse

13.2.1990

8  months

24.10.1989

26.10.1990

12  months

6.7.1990

15.7.1991

12  months

2.7.1990

30.7.1991

13  months

Recipient  country

Name  of  project

Agricultural
development  to  the
south-west  of  Kef

Creation  of  the  Rijm
Maatoug  palm  grove

TUNISIA

Loan  operations  for  the
benefit  of  small  and
medium-sized
agricultural enterprises
in Tunisia

Exploitation  of  water
resources  in  the
Governorate  of
Kasserine

Financing  decision

30.6.1988

FA  signed  on

Time  lapse

9.7.1988

1  month

Source:  Court  of  Auditors.

27.6.1989

11.8.1989

1,5  months

5.12.1990

29.4.1991

5  months

9.7.1991

30.9.1991

3  months

45. Although  external  factors  —  the  Gulf  crisis,  for
example  —  may  explain,  in  part,  the  delays,  they  were
principally  caused  by  the  Commission’s  difficulties  in
managing,  in  an  efficient  manner,  the  necessary  stages  in
the  launch  of  numerous  projects.

46. The audits conducted showed that the most frequent
causes  of  delays  are  the  poor  quality  of  the  FAs  and
inadequate grasp of the public tendering procedures. One
project  involving  loan  operations  for  the  benefit  of  small
and  medium-sized  agricultural  enterprises  in  Tunisia
(SEM/03/212/015)  thus  began  with  a  delay  of  two  years
due  to  the  impreciseness  of  the  FA  in  respect  of  the
procedures  for  the  release  of  funds,  the  rate  of  exchange
to  be  applied  when  constituting  the  counterpart  funds  or
even  the  provisions  for  intervention  by  the  national
accounting  officer  and  the  conditions  regulating  the  use
of  bank  accounts  and  the  interest  yielded.  Two  projects
in  Jordan  also  suffered  such  delays  because  of  the  time
required  by  the  Commission  to  conclude  the  technical
assistance  contracts  in  the  case  of  the  Economic  geology
project  (SEM/03/628/013)  and  to  acquire  the  laboratory
implementation  of  the
equipment  necessary  for  the 
Cooperation  project 
technology
(SEM/03/628/033A).

science 

and 

in 

47. These  delays  in  the  launch  of  the  projects  increased
costs  and  sometimes  affected  results.  Generally  speaking,

they  resulted  in  a  failure  to  meet  the  deadline  for  the
implementation  of  the  financial  agreements  for  all  16
projects  in  the  sample.

In  Morocco  construction  costs 

increased  from
48.
58,6  Mio  ECU  to  a  total  of  64  Mio  ECU  for  a  project
involving  the  improvement  of  the  education  system
(SEM/03/204/006)  and  work  initially  planned  for  a
project  concerning  the  rehabilitation  and  protection  of
irrigated  areas  in  the  Ouarzazate  and  La  Moulouya
regions 
(SEM/03/204/013)  could  only  be  partially
completed.

the 

framework  of 

In  addition,  within 

(SEM/03/204/012),  28 

the
49.
implementation  of  the  project  for  the  development  of
training  structures  in  the  leather  and  textile  industries  in
Morocco 
for  a
cumulative  total  of  2,94  Mio  ECU  were  not  approved
until  after  the  deadline  for  the  implementation  of  the
financing  agreement,  which, 
in  the  absence  of  an
additional  clause  to  the  FA  extending  this  period,  is
irregular.

contracts 

Financial  management  and  monitoring  of  the  projects

50. The  audits  carried  out  have  highlighted  partial
knowledge of the situation of the projects, weaknesses in
the  monitoring  of  the  accounts  of  the  paying  agencies
and  financial  management  which  is  often  inadequate.

31.3.98

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Knowledge  of  the  situation  of  the  projects

during  the  Court’s  visit  after  joint  research  had  been
carried  out  by  the  Court’s  auditors  together  with
Delegation  staff.

51. Under  the  provisions  of  the  FAs,  the  projects  are,
generally,  jointly  financed  by  the  Commission  and  the
recipient countries. The Court’s audit showed that, for 12
of the 16 projects in the sample, the Commission was not
in  possession  of  any  information  about  the  payment  of
the  national  contribution  and  the  use  to  which  it  is  put.
With  the  notable  exception  of  the  «Rjim  Maatoug»
project  in  Tunisia  (SEM/03/212/010),  the  only  cases  in
which  the  Commission  had  the  necessary  data  available
concerned  projects  where  the  local  co-financing  came
from  counterpart  funds.

S e l e c t i o n   o f   t e c h n i c a l   a s s i s t a n c e

55. Leaving  aside  the  problems  connected  with  the
Commission’s  difficulties  in  managing,  within  reasonable
time  periods,  the  procedures  for  the  selection  of  the
technical  assistance,  the  Court  found  two  projects  for
which  these  selection  procedures  were  questionable.

large 

financial  organisations, 

52. Where responsibility for monitoring the execution of
the  projects  lies  with  the  national  administrations  of  the
NMCs  and/or 
the
Commission’s monitoring is generally at its weakest. This
weakness is accentuated in cases where a large number of
operations involving individual allocations of subsidies or
loans  is  being  financed.  Three  projects  in  the  sample  fall
into  this  category:  the  project  involving  loan  operations
for  the  benefit  of  small  and  medium-sized  agricultural
enterprises  in  Tunisia  (SEM/03/212/015),  the  project  for
the  improvement  of  the  education  system  in  Morocco
(SEM/03/204/006)  and  the  Agricultural  Development
Fund  (ADF)  in  Morocco  (SEM/03/204/002).

contribution.  The 

53. For this last project mentioned, the Commission did
not  possess,  at  the  time  of  the  audit,  any  information
about  the  use  of  the  final  10  Mio  ECU  tranche  of  its
the
financial 
management  contained,  moreover,  anomalies  that  the
Commission’s departments had not been able to discover,
since  these  reports  had  not  been  used.  These  anomalies
can  be  explained  by  a  change  in  the  accounting  for  the
operations  which  allowed  reimbursements  for  purchases
made  by  the  beneficiaries  prior  to  approval  of  the  FA  to
be  charged  to  it.

sent  by 

reports 

of 

technical 

education 
the  Commission 

In the case of the project for the improvement of the
56.
in  Morocco
system 
the
entrusted 
(SEM/03/204/006), 
implementation  to  the
monitoring  of  the  project’s 
and
identification 
consultant  who 
preparation.  The  Commission 
likewise  awarded  the
technical  assistance  contract  for  the  execution  of  the
«Rjim  Maatoug  project»  (SEM/03/212/010)  to  the  same
consultant  who  carried  out  the  feasibility  study.

carried 

out 

is 

jointly 

last  project 

financed  by 

the  Commission 

the
57. This 
Commission,  Italy  and  the  state  of  Tunisia.  The  Italian
contribution  was  managed  by 
in
accordance  with  a  framework  agreement  concluded
between  the  Commission  and  the  Republic  of  Italy  in
1985.  The  relevant  Article  2.10  of  the  FA  names  the
consultant  to  whom  the  contract  must  be  awarded  by
private  treaty.  This  procedure,  for  which  there 
is
provision  in  the  framework  agreement,  is,  however,  only
possible provided it is also expedient. Under the terms of
the  agreement,  its  expediency  must  be  assessed  by
reference  to  the  principles  of  cost  and  urgency  and
provided it has been the subject of an examination by the
responsible  Commission  departments.  The  Commission’s
files contain no indication that its departments conducted
such  an  examination.

Administrative  and  financial  management

M o n i t o r i n g   t h e   a c c o u n t s   o f   t h e   p a y i n g
a g e n c i e s

C a s h   m a n a g e m e n t

54. Examination  of  the  accounts  of  the  paying  agencies
showed  that  for  two  of  the  four  countries  visited  as  part
of the audit no reconciliation of bank accounts had been
carried out and that there were transactions in respect of
which  final  settlement  had  been  pending  since  1989.  For
one  of  these  countries,  final  settlement  only  took  place

58.
In November 1995, at the time of the Court’s audit,
of  the  33,7  Mio  ECU  paid  by  the  Commission  for  the
loan  part  of  the  Food  Sector  Development  programme
(SEM/03/220/020A)  since  its  launch,  9,3  Mio  ECU  was
still  unused.  On  the  same  date,  total  capital  repayments
and  interest  on  loans  came  to  14,7  Mio  and  1,6  Mio
ECU  respectively.  Cash-in-hand  totalled  25,6  Mio  ECU,
i.e.  54 %  of  the  initial  financing.  The  Commission

C  98/16

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Official  Journal  of  the  European  Communities

31.3.98

should have paid out the funds on the basis of a realistic
analysis  of  the  projects’  cash-flow  requirements (23).

costs  of  which  should  have  been  charged  to  the
counterpart  funds  made  available  for  food  aid.

59.
In  addition,  for  this  same  project,  the  system
established  provided  for  the  endowment  of  the  imprest
account  with  an  advance  equivalent  to  50 %  of  the
project’s  annual  requirements.  Due  to  an  overestimation
of the costs in the work schedules, the advances paid out
exceeded  the  requirements  of  the  project.  The  balance  of
unused funds on closure of the accounts at the end of the
year came to 0,8 Mio ECU in 1993 and rose to 2,8 Mio
ECU  at  the  end  of  the  following  financial  year.  In  1995,
imprest  account  still
the  balance  available  on  the 
amounted  to  1,2  Mio  ECU.

64. The  body  responsible  for  managing  the  Nile  Valley
Regional  Project  in  Egypt  (SEM/03/220/008A)  invoiced
the  Commission  for  50 %  of  all  its  administrative  costs
while  simultaneously  managing  five  further  projects
which  were  financed  by  other  international  donors.  No
document  supporting  the  invoicing  of  such  a  large
percentage  to  the  Commission  was  submitted  to  the
Court’s  auditors.  The  Delegation  was  not  aware  of  this
situation.  Complementary  controls  should  be  carried  out
by  the  Commission’s  departments  to  determine  the
amounts  wrongly  paid  out.

60. 13,8  Mio  Tunisian  dinars  (TD),  i.e.  1,19  Mio  ECU,
were  paid  as  from  27  December  1991  to  the  Tunisian
bank which was responsible for the management of loans
within  the  framework  of  an  agricultural  loan  project
(SEM/03/212/015)  involving  loan  operations  for  the
benefit  of  small  and  medium-sized  agricultural  holdings,
although  this  credit  line  was  not  drawn  upon  until  the
month  of  October  1992.  Interest  yielded  by  the  sums
deposited in the accounts of the project between October
1992  and  21  November  1994,  the  date  on  which  the
project  funds  were  exhausted,  amounted  to  13,5  Mio
TD,  i.e.  1,1  Mio  ECU.  The  Commission  did  not  become
aware  of  this  amount  until  the  Court  conducted  its
audit.

P a y m e n t   o f   i n e l i g i b l e   e x p e n d i t u r e

61. Three  cases  of  ineligible  expenditure  were  revealed
during  the  audits,  either  because  the  operations  paid  for
by  the  Commission  were  concluded  before  the  signing  of
the  FA  or  because  they  were  only  partially  eligible,  or
were  completely 
the
Community  contribution.

for  payment 

ineligible, 

from 

62. Thus operations carried out before the signing of the
FA  were  nevertheless  paid  for  by  the  Commission  within
the  framework  of  a  project  in  Morocco.  This  project
involved  aid  for  training  in  the  textile  and  leather
industries  (SEM/03/204/012)  for  which  the  total  of
operations  erroneously  financed  was  estimated,  at  the
conclusion  of  the  audit,  to  be  212  000  ECU.

T i m e   t a k e n   f o r   p a y m e n t

In 

of 

the 

the 

case 

65.
«Rjim  Maatoug»
(SEM/03/212/010) project in Tunisia, the excessively long
periods  of  time  taken  for  the  payment  of  technical
assistants’  fees  incurred  41 732  ECU  in  interest  on
arrears.

66. Similarly,  the  Commission  had  to  pay  40 000  ECU
in  interest  on  arrears  for  the  Ground  water  investigation
project  in  Azzraq  (SEM/03/628/006)  because  of  payment
delays  caused  by  application  of  the  wrong  exchange
rate (24).

67. The  contractor  carrying  out  the  Economy  Geology
project  (SEM/03/628/013)  has  submitted  a  claim  for
interest  due  to  late  payment  and,  at  the  time  of  the
Court’s audit, an invoice was still outstanding after more
than  two  years.  No  action  had  been  taken  by  the
Commission  or  by  the  Jordanian  Natural  Resources
Institute  to  resolve  these  matters.

68. Analysis  of  the  time  necessary  for  the  organisation
of operations relating to the implementation of the textile
in  Morocco
industries’  training  project 
and 
(SEM/03/204/012),  revealed  that,  in  four  cases,  it  ranged
between  121  and  221  days.

leather 

Evaluation  and  external  audits

63.
In  Egypt,  too,  two  payments  for  a  total  of  705  010
ECU  were  charged  in  1991  to  the  accounts  of  the  Food
Development  Sector  programme  (SEM/03/220/020A)  for
activities for which no provision had been made, and the

(23) See the Annual Report on the financial year 1996, paragraph

13.37  (OJ  C  348,  18.11.1997).

69. Three  of  the  projects  audited  in  Jordan  were  not
subjected  to  an  external  audit  since  this  was  not
stipulated  in  the  FA.  As  for  the  fourth,  the  evaluation
carried out during implementation was too late for those

(24) This  project  was  not  included  in  the  sample.  The  point  was
nevertheless  identified  during  the  mission  to  Jordan,  where
all  the  projects  financed  for  the  benefit  of  the  country  could
be  examined.

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responsible for the project to take the results into account
before  completion  of  the  work.

administration  which  was  not  at  liberty  to  invest  liquid
assets.

70. The  project  concerning  the  improvement  of  the
system  of  teaching  technology  and  science  in  Morocco
(SEM/03/204/006) was not subjected to any evaluation or
to an external audit. The FA, moreover, does not contain
any  obligation  in  this  respect.

71. On  this 
last  point,  the  Court  noted  that  the
Commission now has a tendency to include in the text of
the  FA  an  obligation  to  accept  external  audits.  The
Commission  should,  however,  define  the  objectives  of
these  audits  sufficiently  precisely  and 
improve  the
follow-up  in  order  to  draw  maximum  benefit  from  them
and  avoid  situations  like  those  met  with  in  the  Nile
Valley  Regional  Project  (SEM/03/220/008A).  In  spite  of
annual  audits  over  five  years  of  implementation,  the
excessive invoicing of administrative costs (see paragraph
64)  by  the  technical  assistance  units  was  never  noticed.

Amendments  to  the  initial  decisions

72. Examination  of  the  files  has  shown  that  major
amendments,  or  transfers  of  appropriations  from  one
budget  heading  to  another,  were  accepted  by  the
Delegations,  the  management  units  or  the  technical
assistance units without the Commission having delegated
authority  to  these  various  units  to  do  this.  In  addition,
these  amendments  took  place  without  any  written
explanation  which  would  have  allowed  checks  to  be
carried  out  to  see  whether  they  were  really  justified.

Major  amendments

73. Within  the  framework  of  the  project  concerning  the
loan  operations  in  favour  of  small  and  medium-sized
agricultural  enterprises  in  Tunisia  (SEM/03/212/015),  the
type  of  the  products  to  be  imported,  as  stipulated  in  the
FA,  was  ignored  and  essential  products  of  a  different
type,  to  a  value  of  almost  11  Mio  ECU,  were  imported.
The Delegation also accepted a substantial increase in the
rates  of  interest  on  the  medium-term  and  long-term
loans,  raising  them  from  7,50  to  10 %  and  from  8  to
11 %.  This  last  amendment  increased  the  farmers’  debt
burden considerably and a number of them were not able
to  support  it  (see  paragraph  97).

the 

agricultural
framework  of 
74. Within 
development  project  to  the  south-west  of  Kef  in  Tunisia
(SEM/03/212/004), the management powers delegated by
the  FA  to  a  body  with  legal  personality  and  budgetary
decentralised
autonomy  were 

transferred 

the 

to 

a 

75.
In  Morocco,  the  Agricultural  Development  Fund
project (SEM/03/204/002) for which the Commission has
paid,  within  the  framework  of  the  Third  Protocols,
30  Mio  ECU,  was,  according  to  the  terms  of  the  FA,  to
have been subjected to an audit by the Moroccan General
Inspectorate of Finances for each of the three years of its
implementation.  The  Delegation  allowed  this  inspection
to  be  replaced  by  an  audit  conducted  by  an  external
company  which  only  partly  covered  the  period  of
Community  financing.  This  being  the  case,  the  correct
use  of  10  Mio  ECU  was  not  audited.

Authorisation  of  transfers  between  headings

in 

76. During the implementation of the training project in
Morocco 
industries
(SEM/03/204/012),  the  Delegation  agreed  an  increase  of
37 %  for  the  ‘training  network’  component,  which
thereby  increased  from  1,09  Mio  ECU  to  1,5  Mio  ECU.

leather 

textile 

and 

the 

77. Transfers  of  appropriations  between  the  budget
headings of the FA were frequently approved. In the case
of  the  «Rjim  Maatoug»  project  (SEM/03/212/010),  the
changes  observed  also  concerned  the  origin  of  the  funds
and  the  acceptance  of  the  fact  that  the  approved  limits
under  certain  headings  were  to  be  exceeded.

(SEM/03/220/005A)  and,  generally,  all 

78. Finally,  in  respect  of  the  Helwan  Waste  Water
project 
the
infrastructure  projects  financed  for  the  benefit  of  Egypt,
as
the  Delegation 
appropriations  remained  available  under  the  FA  without
concerning  themselves  with  the  specific  amounts  made
available  under  each  budgetary  heading.

charged  payments 

long 

as 

that 

examples 

79. These 
the  managing
show 
departments  too  often  tend  to  overlook  the  restrictions
imposed  by  the  amounts  entered  in  the  FA  and  only
consider  the  overall  budget.  They  are,  however,  largely
unaware  of  the  rules  restricting  expenditure  to  the
appropriations 
expenditure
heading (25).

allocated 

each 

to 

80. Apart  from  the  irregular  nature  of  this  situation,  it
initial  allocation  of
raises  questions  about 
appropriations  which  were 
the
requirements  identified  during  the  preparatory  studies.  A

to  cover 

intended 

the 

(25) See  also  paragraph  15.29  of  the  Annual  Report  on  the

financial  year  1991  (OJ  C  330,  15.12.1992).

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31.3.98

to  amend 

need  to  amend  the  amounts  under  the  budget  headings
indicates  a  need 
for  a  project 
its
implementation.  This 
important  management
is  an 
decision, which should only be taken by those authorities
which  have  received  a  proper  mandate  to  do  so  (see
paragraph 39). In future the FAs should stipulate that all
applications for amendments to the initial decisions, such
as  those  described  above,  must  be  justified  and  be
approved  by  the  authority  responsible.

accounts kept were those of the technical assistance unit.
It  should  be  added  that  in  the  case  of  the  National  Soil
Map  and  Land  Use  project  (SEM/03/628/005),  the
accounts, which were kept by the TA, did not present the
appropriations  under  the  budgetary  headings  stipulated
in  the  FA,  thus  making  it  impossible  to  monitor  their
utilisation.

Services  provided  by  the  technical  assistance  units

81. An examination of the sample revealed the generally
high  quality  of  the  services  provided  by  the  technical
assistance.  Excessive  invoices  for  ineligible  expenditure
(NVRP  —  see  paragraph  64)  or  incorrect  attitudes
(Helwan  Waste  Water  —  see  paragraph  92)  were
nevertheless  observed.  The  following  comments  should
moreover  be  made.

82.
In  Morocco  the  services  provided  by  the  TA  units
for  the  implementation  of  the  pedagogical  and  technical
components  of  the  project  for  the  improvement  of  the
teaching  of  science  and  technology  (SEM/03/204/006)
were 
inadequate  by  the  Minister  of
Education  and  by  the  Commission.

judged  to  be 

86.
In  the  case  of  the  Nile  Valley  Regional  Project  in
Egypt  (SEM/03/220/008A),  the  only  accounts  were  kept
by 
the  national
coordinators for the various research programmes nor the
local  research  centres  kept  accounts.

technical  assistance.  Neither 

the 

of 

the 

«Rjim  Maatoug» 

In  spite  of  the  generally  high  quality  of  the
87.
management 
project
(SEM/03/212/010),  the  checks  carried  out  showed  that
the  managers  of  the  project  did  not  award  a  local
contract for the purchase of tractors to the lowest bidder
and the files do not supply a satisfactory explanation for
this  decision,  which  contravenes  the  public  tendering
regulations.

The  results  recorded  and  the  survival  of  the  projects

83.
In  Jordan,  in  the  case  of  the  Economic  Geology
projet  (SEM/03/628/013),  the  TA,  due  to  its  inability  to
work in close collaboration with the local authorities, did
not  lead  to  any  strengthening  of  the  institutions,  which
constituted  one  of  the  project’s  important  goals.  In
contrast,  good  cooperation  between 
technical
assistant  and  the  local  authorities  was  decisive  for  the
success  of  the  National  Soil  Map  and  Land  Use  project
(SEM/03/628/005).

the 

88. The  projects’  success  depends  on  the  partners
fulfilling  their  commitments  and  on  an  adequate  system
of  management,  the  definition  of  which  is  a  result,  or
should  be  a  result,  of  feasibility  studies.  Bearing  in  mind
these  two  criteria,  the  controls  conducted  by  the  Court
revealed contrasting situations. The shortfall in the results
achieved  compared  to  the  objectives  set  out  in  the  FAs,
and  doubts  about  the  ability  of  the  following  projects  to
survive,  should  be  emphasised.

84.
In  addition,  it  was  noted  that  when  the  technical
assistance  replaces  the  local  authorities  responsible  for
the  administration  and  financial  management  of  the
project,  the  project’s  survival  is  in  doubt  if  it  is  expected
to  continue  beyond  the  duration  of  the  consultants’
contracts.

Management  by  those  responsible  for  the  projects  and
results  obtained

Observations  in  respect  of  the  accounts  and  finances

the 

local 

Water 

Waste 

Helwan 

taken  over  by 

89. The 
project
(SEM/03/220/005A),  which  has  received,  commencing
with the first protocol, almost 87 Mio ECU, can still not
be 
institutions.  Two
administrations  share  responsibility  for  the  project.
Responsibility for the execution of the work lies with the
Cairo Waste Water Organisation (CWO)  which,  after  its
final  inspection  of  the  work  done,  hands  it  over  to  the
General  Organisation  For  Sanitary  Drainage  (GOSD),
which  is  responsible  for  the  management  of  installations
and  the  distribution  of  water.  Checks  carried  out  on  the
spot  have  shown  that  neither  of  these  two  institutions  is
in  a  position  to  perform  its  tasks  in  an  accceptable
fashion  and  that  the  project  as  a  whole  only  works
thanks  to  the  technical  assistance.

85. Two  of  the  four  projects  audited  in  Jordan  did  not
have  separate  accounts  while  for  two  others  the  only

90. There  are  two  basic  reasons  which  explain  this
situation. Firstly, the GOSD was not authorised to set the

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price of water at an  adequate  level  to allow it  to achieve
the  real  budgetary  autonomy  which  would  guarantee  its
financial viability without the aid of international donors.
Secondly,  the  poor  remuneration  paid  by  these  two
institutions to their officials has led to a number of them
leaving:  after  having  received  qualifications  through
vocational  training  from  the  technical  assistance,  they
joined  the  private  sector  as  soon  as  they  had  the
opportunity,  where  they  obtained  higher  salaries.

91. Such  a  situation  robs  the  administrations  concerned
of  their  capacity  to  fulfil  their  responsibilities  and  they
then  depend  completely  on  the  technical  assistance  for
the  smooth  running  of  the  waste  water  treatment  system
and,  ten  years  after  the  launch  of  the  project,  are
themselves still incapable of assuring its maintenance and
continuation.

92. This  situation  has  given  the  technical  assistance  a
position of such strength that they have taken the liberty,
with the active support of GOSD, of continuing to work,
in  spite  of  the  Commission’s  refusal  to  prolong  their
contract  once  it  had  ended.  At  the  time  of  the  Court’s
mission  to  Egypt,  this  situation  had  continued  for  17
months.  Following  the  Court’s  visit,  the  Egyptian
authorities  agreed  to  take  responsibility  for  the  costs
arising  from  the  extension  of  this  contract.

93.
In  addition,  at  the  time  of  the  Court’s  audit,  stocks
of  spare  parts  were  inadequate  for  an  operation  of  this
scale.  According  to  the  technical  assistance,  numerous
disappearances  of  equipment  had  occurred  and  the
standard  of  maintenance  of  the  installations  was  not
adequate.

94. Constraints  of  the  same  kind  inhibited  the  Food
Development 
project
(SEM/03/220/020A),  the  survival  of  which  will  be
technical  assistants
doubtful  once 
responsible  for  its  management  depart.

the  European 

Programme 

Sector 

95. The  Court  visited  the  Ras  Mohamed  National  Park
project  (SEM/03/220/025A)  some  weeks  before  the
deadline set by the FA for the completion of the work. At
that  time  the  buildings  required  to  carry  out  the  project
had  still  not  been  constructed  because  the  government
had  only  just  made  the  land  required  available.

96. As  in  the  case  of  the  Helwan  Waste  Water  project,
the park created as part of the Ras Mohamed project was
not  able  to  generate  the  financial  resources  necessary  to
assure  its  survival.

enterprises 

and  medium-sized 

97. The  project  involving  loan  operations  in  favour  of
small 
in  Tunisia
(SEM/03/212/015)  has  had  an  unwanted  effect.  The
farmers’  level  of  indebtedness  increased  considerably
when  rates  were  raised  (see  paragraph  73).  The  controls
carried  out  revealed  that  more  than  80 %  of  the  farmers
were  not  able  to  support  the  burden  of  their  debts.  As
national  legislation  forbids  access  to  new  financing  if
there are delays in repayments, the result is that even the
continued  existence  of  some  agricultural  holdings  has
been  jeopardised.

98. Two  of  the  four  projects  in  the  sample  which  were
financed  in  Jordan  only  partially  achieved  the  desired
objectives  and  their  survival  also  appears  fraught  with
difficulties.  On  the  other  hand,  the  National  Soil  Map
and  Land  Use  project 
(SEM/03/628/005)  may  be
considered  a  success  as  it  has  allowed  a  real  transfer  of
know-how  to  the  benefit  of  the  local  departments.  Two
aspects  in  particular  account  for  this  success:  the  project
was  well  defined  from  the  beginning  by  Jordanian
technicians  and  the  technical  assistance  worked  in  close
cooperation  with  them.

Conclusions  in  respect  of  the  management  of  the
projects

99. An  examination  of  the  management  of  the  projects
shows  that  the  main  weaknesses  pointed  out  in  the
Court’s Special Report No 3/91 still persist in spite of the
commitments  to  remedy  them  given  by  the  Commission.

100. The  inadequacy  of  the  human  resources,  the  lack
of  clarity  in  the  division  of  responsibilities  between  the
various  departments  and  of  competences  between  the
Commission’s  headquarters 
its
in  the  field  —  all  these  aspects  have
Delegations 
contributed to the Commission’s failure, on the whole, to
cope  with  the  management  of  the  projects.

in  Brussels 

and 

101. The limitations of the management tools aggravate
this  situation:

(a)  the computer software that the Commission has at its
disposal  does  not  enable  it  to  keep  real  auxiliary
accounts  for  projects  which  are  directly  linked  to  the
implementation of the budget, or even accounts giving
a  comprehensive  view  of  the  financial  situation  of
these  projects;

(b) the wording of the financing agreements is not precise
enough  when  specifying  the  nature  of  contractual
obligations,  the  management  framework  and  the
instruments  for  monitoring  operations;

(c)  the  audit  contracts  do  not  define  clearly 

information 
that 
external  controls.

the  Commission  expects 

the
from

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102. The  tangible  increase  planned  for  Community  aid
to  the  NMCs,  practically  doubling,  every  year,  the
amounts  committed,  will  only  aggravate  the  present
situation.  While  it  is  scarcely  likely  that  the  increase  in
appropriations  foreseen  under  MEDA  will  increase  the
number  of  projects  by  the  same  proportion,  the  amounts
allocated  to  each  of  them  will  undoubtedly  be  increased
quite considerably.  The first  application decisions for the
MEDA  Regulation  tend  to  confirm  this  analysis.  These
structural  adjustment  programme
actually  concern 
support  operations  and  involve  amounts  of  between  100
and  159  Mio  ECU.

103. The  management  systems  for  the  projects  must  be
set  out  in  the  FAs  on  the  basis  of  knowledge  of  the
administrative  realities  in  the  recipient  States.  Where  the
administrative  structures  are  of  good  quality,  as  is  the
case  in  the  Maghreb,  the  Commission  ought  to  use  them
and  not  attempt  to  impose  a  standard,  pre-established
model which runs counter to local traditions. An attempt
to  impose  such  a  model  can  only  lead  to  conflicts  with
the  local  authorities.  The  audit  revealed  that,  while  the
Commission  has,  on  the  whole,  avoided  this  error  when
implementing the Protocols, certain NMCs fear that, with
the  implementation  of  MEDA,  the  management  of  the
projects  will  no  longer  be  entrusted  to  the  responsible
local  institutions  but  will  lie  with  ad  hoc  management
units  headed  by  co-directorates  made  up  of  European
technical  assistance  units  and  local  managers.

THE  MANAGEMENT  OF  OPERATIONS  ADMINISTERED
BY  THE  EIB  ON  BEHALF  OF  THE  COMMISSION  AND
THE  AUDIT  OF  THESE  OPERATIONS

the  EIB.  This 

managed  by 
financing  consists  of
non-reimbursable  aid  which  takes  the  form  of  interest
subsidies  on  loans  granted  by  the  EIB  from  its  own
resources  and  of  refundable  aid  earmarked  for  risk
capital  operations.

105. Within  the  framework  of  the  Third  Protocols,
37  Mio  ECU  was  made  available  for  risk  capital.  This
amount  rose  to  80  Mio  ECU,  i.e.  an  increase  of  216 %,
in  the  Fourth  Protocols,  underlining  the  growing  interest
of  the  Euro-Mediterranean  partners  in  this  financial
instrument (26).  Tables  2a  and  2b  give  the  corresponding
amounts for the seven countries concerned. The Protocols
do  not  fix  an  overall  budget  for  the  financing  of  interest
subsidies  (see  paragraphs  137  —  138).

the  basis  of  an  examination  of 

106. The  management  of  interest  subsidies  was  mainly
audited  on 
the
Commission’s  files.  For  the  management  of  risk  capital,
the  controls  were  complemented  by  an  analysis  of  a
sample  of  projects,  most  of  which  were  the  subject  of
inspections  on  the  spot  (see  Table  7).  These  checks
covered:

(a)  whether  the  use  of  these  resources  was  consistent
the

the  objectives  assigned 

them 

to 

in 

with 
protocols;

General  presentation  of  the  audit

(b) the quality of the management by the mandated body
by  means  of  an  examination  of  the  structures
employed  and  the  results  obtained;

104. The  Mediterranean  Protocols  include  financing
which,  although  it  originates  within  the  budget,  is

(c)  the  monitoring  of  these  various  operations  by  the

Commission.

(26) NB:  25  Mio  ECU  are  added  to  this  amount  outside  the

protocols.

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TABLE  7

PROJECTS  MANAGED  BY  THE  EIB  AND  EXAMINED/VISITED  BY  THE  COURT

Ref.

Economic  sector

Number
of  jobs
created

Total  project
cost
(Mio  ECU)

EIB  resources
(Mio  ECU)

Risk  capital
(Mio  ECU)

(Mio  ECU)

Interest  rate
subsidy
(Mio  ECU)

Industry

750/800

140,0

Tourism
Carpet  ind.
Synthetic  fibres
Tourism

Industry

Horticulture

Electronics
Pesticides
Paper
Textile
Marble

Steel
Electronics
Fish  meal,  fish  oil
Leather  goods
Clothing

Rm  Concrete
Exp.  polystyrene

Textile

Biotechnology
Food
Copper  industry

400

600

480  permanent
800  seasonal

Total  Egypt

26
29
26  perm. + 10  occ.
120

not available
180
35  perm + 20  seas.
40
150

25
30

155

40

45

5,2
9,7
1,3
6,2

77,7

21,4

262

1,4
1,2
1,9
1,1

1,6
1,1
1,3
0,1
2,0

1,4
0,6

1,5

0,7
2,8
2,7

Total  Morocco

21,4

EGYPT

SEM/03/220/012E
SEM/04/220/033E

SEM/03/220/013E
Global  loan  via  the
Export  Develop.  Bank
of  Egypt

SEM/03/220/030E
SEM/04/220/029E

SEM/03/220/036E
SEM/03/220/037B

MOROCCO

Global  loans  via  the
Treasury

Financing  through
the  SPPP

TUNISIA

Global  loans  via
Banque  Nationale  de
De´veloppement
Protocols  II,  III  and  IV

Ceramics
Textile
Tyre  industry
Rubber  components
Shoes
Tourism
Mining
Enamel  industry

40

500
65
104
not available
250
60

1,8
17,0
3,5
2,0
0,1
2,5
56,0
4,5

87,3

70,4

TOTAL  RISK  CAPITAL  TUNISIA

SEM/03/212/016

Chemical  pollution

—

Source:  Court  of  Auditors.

Total  Tunisia

157,7

25,0

2,1
4,0
0,7
0,8

15,0

6,0

54

35,4

35,4

5,5

0,5

9,0

1,5

17

0,1
0,1
0,2
0,2

0,3
0,1
0,1
0,0
0,2

0,1
0,1

0,2

0,3
0,2
0,3

2,5

0,3
0,7
0,7
0,1
0,1
0,1
0,9
0,2

3,0

3,0

2,1

0,6

1,9

0,8

5

5,4

5,4

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experienced 

107. Taking 
into  account  the  number  of  financial
instruments, on the one hand, which the Commission has
entrusted  to  EIB  management  and,  on  the  other,  the
constraints 
the
in 
organisation  of  the  external  audit  of  the  EIB,  the
obligation  to  organise,  systematically,  a  joint  audit  with
the  EIB,  represents  a  real  constraint  on  the  Court.  For
this  reason,  it  was  materially  impossible  to  carry  out
controls,  on  the  spot,  on  a  large  number  of  projects
which  had  benefited  from  budget  finance  in  the  form  of
interest-rate  subsidies.

connection  with 

113. These  procedures,  presented  by  the  EIB  in  an
information  note  dated  24  June  1992,  are:

(a)  a  global  loan  to  a  selected  financial  institution

intermediary  (IFI)  (Tunisia,  Egypt,  Jordan);

(b) a  global  loan  to  the  national  exchequer  working  in

cooperation  with  several  IFIs  (Morocco);

(c)  creation  of  special  financial  companies;

(d) direct  intervention  in  the  projects  (Egypt);

The  system  of  risk  capital  management

(e)  the  financing  of  feasibility  studies.

The  purpose  of  risk  capital  and  conditions  of  eligibility

108. Risk  capital  is,  according  to  the  terms  of  the
Protocols,  intended  primarily  to  help  in  making  equity
capital  or  the  like  available  to  private  and  public
undertakings, in particular those in which natural or legal
persons  from  Member  States  of  the  Community  have
participations.  They  are  available  to  all  sectors  of  the
economies  of  the  NMCs.

109. The  extremely  broad  formulation  of  the  Protocols
led the EIB to define three conditions for the eligibility of
projects for risk capital. Two of these conditions concern
the  actual  qualities  of  the  projects,  i.e.  their  economic
value and their financial viability. The third concerns the
decisive role which risk capital must play in the execution
of  the  project.

110. The  EIB,  however,  interprets  this  final  condition
very  generously.  It  is  considered  to  be  fulfilled  when  the
absence  of  this  financing  would  lead  to  delays  in  the
operation,  to  an  upset  in  the  balance  of  the  relationship
between  the  local  and  European  partners  or  would
influence  other  hesitant  donors  unfavourably.

Description  of  the  management  system

111. This  system  is  built  around  financing  procedures
within  a  contractual  framework  and  procedures  for  the
launching  and  monitoring  of  the  projects  which  are
adapted  to  suit  each  one  of  them.

Financing  procedures  and  contractual  framework

114. The legal framework put in place by the Bank was
different for each procedure, in order to adapt it to their
particular  characteristics.  Notwithstanding  this  diversity,
the  management  of  risk  capital  is  generally  characterised
by  the  following  factors:

(a)  financing  is  always  granted  at  more  advantageous

rates  than  those  obtained  on  the  local  market;

(b) the  risk  of  exchange  losses  is  not  borne  by  the
beneficiary, but is charged to the Community initially
then  subsequently  to  the  NMC  concerned;

(c)  the  definitive  granting  of  finance  to  the  final
beneficiary  may  not  take  place  without  the  EIB’s
express  agreement.

115. As  in  the  case  of  its  own  operations,  the  EIB
ensures  that  the  clauses  of  the  contract  are  incorporated
harmoniously  into  local  law.

Appraisal  and  monitoring  of  projects

116. When  the  EIB  uses  its  own  resources  to  finance  a
project  jointly  with  risk  capital,  its  departments  appraise
the file, which is drawn up according to its usual internal
procedures, directly.

In  contrast,  when 

the  management  of 

117.
the
operations  takes  place  within  the  framework  of  the
implementation of a global line of credit, the appraisal of
the  project  follows  a  decentralised  procedure.  The  IFI
must  first  submit  an  application.

112. The  EIB  took  care  to  adapt  the  means  of
intervention  employed  to  the  realities  of  the  NMCs.  Five
methods were therefore tried out, as single alternatives or
together, one after the other, in order to achieve the best
possible  adaptation  to  local  realities.

118. Nevertheless,  the  IFI  does  not  have  autonomous
powers  of  decision  in  respect  of  the  allocation  of  risk
capital.  It  must  send  the  file  relating  to  the  project  and
the  result  of  its  appraisal  to  the  EIB  to  obtain  its
approval. This file contains, at the least, according to the
terms  of  the  contract,  a  standardised  information  sheet.

31.3.98

EN

Official  Journal  of  the  European  Communities

C  98/23

119. After  examination  of  the  forwarded  file,  the  EIB
takes  an  allocation  decision  by  which  the  IFI 
is
authorised  to  conclude  the  financing  contract  with  the
final beneficiary.

the 

120. The  monitoring  of  the  operations  is  conducted
according  to  two  complementary  procedures.  Contracts
for  monitoring  of
IFI  provide 
signed  with 
documentation, whereby information on the state of their
risk  capital  portfolio  and  on  the  financial  situation  of
each beneficiary is sent to the EIB on a regular basis. This
information is collated in standardised sheets, a specimen
of  which  is  attached  to  the  contract.  This  monitoring  is
complemented  by  inspections  on  the  spot  which  the  EIB
carries  out  directly  or  by  despatching  consultants
recruited  specifically  for  this  purpose.

121.
In  the  case  of  the  global  lines  of  credit  granted  to
the  State  of  Morocco,  its  Treasury  ensures,  prior  to  the
release  of  the  funds,  that  the  contractual  conditions  have
been  fulfilled  by  the  beneficiary.  In  parallel  with  this,  it
monitors  the  projects  by  examining  the  financial  balance
sheets  which  are  sent  to  it.

The  Court’s  observations  at  the  conclusion  of  the  audit

The  appraisal  of  the  projects

commonly 

122. The  most 
encountered  weakness
concerned  the  information  collated  on  the  European
companies  associated  with  the  joint  enterprise,  whose
exact  situation  and  the  extent  of  whose  commitment
cannot be assessed on the basis of the material contained
in  the  appraisal  files  forwarded  to  the  Court.  The
controls  carried  out  demonstrated  the  close  connection
between  the  quality  of  the  partners  involved  and  the
success  or,  on  the  contrary,  failure  of  the  projects
financed.

123. The  second  weakness  demonstrated  by  an  analysis
of  the  projects  in  the  sample  and  by  an  examination  of
the  available  documents,  concerns  the  relative  frequency
of  under-estimation  of  the  investment  budgets  and,  in
particular,  of  the  working  capital  requirements.

Concentration  of  aid

125. Of  the  eight  projects  selected  in  Tunisia,  the  IFI
was  itself  the  beneficiary  for  half  of  them,  receiving  an
amount  in  excess  of  more  than  60 %  of  the  total
allocation.

126.
In  Morocco,  according  to  information  received
from  the  supervisory  authorities,  the  beneficiaries  of  the
risk  capital  came  mainly  from  amongst  the  usual
customers  of  the  IFIs.

127.
In Egypt, three projects absorbed 16,5 Mio ECU of
the  27  Mio  made  available  under  the  Third  and  Fourth
Protocols. This concentration of allocations is also special
because  of  the  size  of  the  projects  financed,  one  of  them
representing  a  total  investment  of  140  Mio  ECU,  of  the
size  of  the  European  partners  involved,  the  majority  of
the
which  are  multinational  companies,  and  of 
commitment  by  the  EIB  of  its  own  resources  in  these
operations.

the  Protocols  and 

128. Such  concentrations  are  questionable,  in  spite  of
the  undeniable  economic  importance  of  the  projects
financed in Egypt in the light of the objectives laid down
indicative
for  risk  capital  by 
programmes  concluded  with  these  countries.  The  fact  is
that,  according  to  the  terms  of  the  latter,  small  and
medium-sized  enterprises  constitute  the  favoured  target
group  for  risk  capital.  However,  the  only  operations
aimed  at  benefiting  these  enterprises  were  financed  by
two  global  loans,  of  which  the  first,  under  the  Third
Protocol,  was  only  partially  used  and  the  second,  under
the  Fourth  Protocol,  had  not  been  the  subject  of  any
allocation  at  the  time  of  the  Court’s  audit.

129. According  to  the  EIB,  the  portfolio  of  projects
financed  in  Egypt  is  sound  and  reflects  its  concern  to
manage  the  resources  entrusted  to  it  by  the  Commission
as  well  as  possible,  taking  into  account  the  possibilities
offered by the local market. Without disputing this claim,
the  Court  notes  a  contradiction  with  the  commitments
made  in  the  indicative  programmes.

124. Apart  from  these  two  weaknesses,  the  quality  of
the  appraisal  files  varies.  An  examination  of  files
appraised by the EIB’s offices directly, or by the Tunisian
IFI,  or  by  the  investment  company  created  in  Morocco,
shows the high quality of the appraisal work. In contrast,
the  poor  quality  of  the  files  forwarded  in  support  of
applications  for  the  allocation  of  funds  by  the  other  IFIs
visited  as  part  of  the  inquiry,  reflects,  depending  on  the
individual  case,  the  absence  or  lack  of  experience  on  the
part  of  these  institutions  in  the  management  of  this  type
of  operation.

130. One  NMC’s  responsible  authorities  underlined,
moreover, that the basic value of this financial instrument
was  to  allow  the  implementation  of  quality  projects
which, however, were difficult to finance by conventional
bank  loans  because  of  the  impossibility  on  the  part  of
their  sponsors  of  offering  sufficient  guarantees.  The
purpose of the risk capital, therefore, is to encourage the
creation of a new generation of entrepreneurs, which was
not really the case for the projects financed in Egypt and
was  only  partly  the  case  for  those  financed  in  Morocco
and Tunisia.

C  98/24

EN

Official  Journal  of  the  European  Communities

31.3.98

Overall  monitoring  of  the  operations  by  the  EIB

far  as 

the  monitoring  of  documents 

131. As 
is
concerned,  it  was  observed  that,  in  general,  the  IFIs  did
not  fulfil  their  contractual  obligations  in  respect  of
forwarding  to  the  EIB,  on  a  regular  basis,  information
sheets on the state of their risk capital portfolio or on the
financial  situation  of  each  beneficiary.

132.
In May 1993 the EIB employed a consultant, at its
own expense, to evaluate operations financed in Morocco
on  the  basis  of  a  large  sample  covering  37  projects.
Several  of  the  projects  examined  as  part  of  the  Court’s
audit  had  also  been  evaluated  by  this  consultant  or  had
been  audited  by  the  EIB.  The  Court  found  similarities  in
the  findings  of  these  audits.

The  results  achieved

133. The  management  of  risk  capital  within 
the
framework  of  the  implementation  of  the  Third  Protocols
is  characterised  by:

(a)  an  even  distribution  of  the  loans  to  the  beneficiaries
in  the  various  sectors  of  activity  in  the  NMCs,
particularly in Morocco and Tunisia, where seven and
nine  sectors  of  activity  respectively  have  benefited
from  this  financial  instrument;

(b) a leverage effect on investments, whereby the priority
joint  enterprises  has

given 
the  creation  of 
encouraged  an  inflow  of  foreign  capital;

to 

(c)  the  creation  of  5 200  jobs,  directly,  in  Morocco  and
more that 1 900 in Tunisia and Egypt. In addition, in
these 
two  other  audited
operations were able to save respectively 400 and 500
jobs  which  were  under  threat;

two  countries, 

latter 

(d) a  selection  of  projects  designed  to  improve  the

balance  of  foreign  trade.

The  implementation  of  the  Fourth  Protocols

134. Within  the  framework  of  the  Third  Protocols,  the
finance  granted  through  the  global  loans,  with  the
exception  of  the  finance  granted  to  the  IFIs  themselves,
had taken the form of long-term loans offered at rates of
interest  below  those  on  the  local  market.  It  was  clear,  at
the  time  of  the  audits,  that  this  was  the  main  reason  for
their  success.

135. The  conditions  for  the  allocation  of  finance  within
the  framework  of  the  Fourth  Protocols  demonstrate  the
determination to emphasise the risk capital component by
encouraging participations which yield dividends, and the
determination  to  increase  the  priority  given  to  the
formation  of  joint  ventures  with  European  partners.
There  were  difficulties  in  the  application  of  these  new
procedures in Morocco and Tunisia and this explains the
poor  utilisation  of  the  credit  lines  agreed  within  the
framework  of  the  Fourth  Protocols  (see  Table  8).

31.3.98

EN

Official  Journal  of  the  European  Communities

C  98/25

THIRD  &  FOURTH  PROTOCOLS  —  RISK  CAPITAL  AS  AT  31.12.96

TABLE  8

Country

Ref.

Loan  Definition

Committed

Disbursed

Cancelled

Balance

(Mio  ECU)

ALGERIA

SEM/03/208/025/E Direct

SEM/03/208/026/E Direct

MOROCCO

SEM/03/204/008/C Global loan

TOTAL  ALGERIA  3rd  PROTOCOLS

SEM/03/204/010/E Venture  capital

SEM/03/204/011/E Venture  capital

TOTAL  MOROCCO  3rd  PROTOCOLS

SEM/04/204/006/E Global loan

TOTAL  MOROCCO  4th  PROTOCOLS

TOTAL  MOROCCO  3rd  &  4th  PROTOCOLS

TUNISIA

SEM/03/212/008/E Global loan

SEM/03/212/013/E Global loan

TOTAL  TUNISIA  3rd  PROTOCOLS

SEM/04/212/005/E Global loan

SEM/04/212/016/E Global loan

TOTAL  TUNISIA  4th  PROTOCOLS

TOTAL  TUNISIA  3rd  &  4th  PROTOCOLS

EGYPT

SEM/03/220/012/E Direct

SEM/03/220/013/E Global loan

SEM/03/220/022/E Direct

SEM/03/220/030/E Direct

SEM/03/220/036/E Direct

TOTAL  EGYPT  3rd  PROTOCOLS

SEM/04/220/013/E Global loan

SEM/04/220/029/E Direct

SEM/04/220/033/E Direct

TOTAL  EGYPT  4th  PROTOCOLS

TOTAL  EGYPT  3rd  &  4th  PROTOCOLS

JORDAN

SEM/03/628/011/E Global loan

SEM/03/628/037/E Global loan

TOTAL  JORDAN  3rd  PROTOCOLS

SEM/04/628/012/E Global loan

TOTAL  JORDAN  4th  PROTOCOLS

TOTAL  JORDAN  3rd  &  4th  PROTOCOLS

LEBANON

SEM/03/604/009/E Global loan

TOTAL  LEBANON  3rd  PROTOCOLS

SEM/04/604/007/E Global loan

TOTAL  LEBANON  4th  PROTOCOLS

TOTAL  LEBANON  3rd  &  4th  PROTOCOLS

3rd  PROTOCOLS

4th  PROTOCOLS

Venture  capital

Direct  loans

Global  loans

TOTAL  3rd  PROTOCOLS

Direct  loans

Global  loans

TOTAL  4th  PROTOCOLS

VENTURE  CAPITAL

DIRECT  LOANS

GLOBAL LOANS

Source:  Court  of  Auditors.

GRAND  TOTAL  3rd  &  4th  PROTOCOLS

3,0

1,0

4,0

9,0

0,5

1,5

11,0

20,0

20,0

31,0

3,0

3,0

6,0

7,0

8,0

15,0

21,0

3,0

3,0

2,0

3,0

1,5

12,5

6,0

6,0

2,5

14,5

27,0

1,0

1,0

2,0

2,0

2,0

4,0

1,0

1,0

2,0

2,0

3,0

2,0

13,5

21,0

36,5

8,5

45,0

53,5

2,0

22,0

66,0

90,0

0,9

0,2

1,0

9,0

0,5

1,2

10,7

10,0

10,0

20,7

2,9

2,5

5,4

3,0

1,5

4,5

9,8

3,0

0,5

2,0

3,0

1,5

10,0

0,0

6,0

0,0

6,0

16,0

1,0

1,0

2,0

1,0

1,0

3,0

0,0

0,0

0,0

0,0

0,0

1,7

10,5

16,9

29,0

6,0

15,4

21,4

1,7

16,5

32,3

50,5

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

2,5

0,0

0,0

0,0

2,5

0,0

0,0

0,0

0,0

2,5

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

2,5

2,5

0,0

0,0

0,0

0,0

0,0

2,5

2,5

2,2

0,8

3,0

0,0

0,0

0,3

0,3

10,0

10,0

10,3

0,1

0,5

0,6

4,0

6,5

10,5

11,2

0,0

0,0

0,0

0,0

0,0

0,0

6,0

0,0

2,5

8,5

8,5

0,0

0,0

0,0

1,0

1,0

1,0

1,0

1,0

2,0

2,0

3,0

0,3

3,0

1,6

5,0

2,5

29,5

32,0

0,3

5,5

31,2

37,0

C  98/26

EN

Official  Journal  of  the  European  Communities

31.3.98

136.
In  addition,  because  of  the  structure  of  the  local
SMEs,  which  are  often  family  enterprises,  the  twin
objectives  of  helping  to  increase  their  capital  funds  while
encouraging  the  creation  of  joint  ventures,  are  often
difficult  to  reconcile  with  the  diffidence  shown  towards
acceptance  of  a  foreign  partner.  The  local  authorities
recommend  dividing  the  credit  lines  into  two  parts  so
that some of the funds will be reserved for local sponsors
who  do  not  wish  to  participate  in  joint  ventures.

1986  in  respect  of  financing  decisions  relating  to  interest
subsidies.  For  this  reason,  non-reimbursable  budgetary
resources  were  mainly  allocated  according  to  the  EIB’s
requirements.  Council  Regulation  No  1762/92  corrected
this  but  was  not  applied  until  the  implementation  of  the
Fourth  Protocols.

The  management  of  interest-rate  subsidies

Introduction

Audit  findings

Budgetary  data

137. Non-reimbursable  aid  charged  to  the  general
budget  of  the  Community  as  stipulated  in  the  Protocols
may  be  used  to  subsidise,  up  to  a  limit  of  2 %,  the  rates
of  interest  applied  by  the  EIB  to  the  loans  it  grants  from
its  own  resources.  In  contrast  to  the  situation  regarding
risk  capital,  the  Protocols  do  not  mention  the  amounts
interest
which  may  be  allocated 
subsidies.

form  of 

the 

in 

138.
In  its  Special  Report  No  3/91  the  Court  criticised
the  powers  conferred  on  the  EIB  by  the  Regulation  of

139. The  implementation  of  the  Third  and  Fourth
Protocols  in  favour  of  the  seven  countries  concerned  by
this  audit  resulted  in  total  commitments,  as  at  31
December  1996,  of  114,7  Mio  ECU  in  commitment
appropriations,  of  which  58,2  Mio  ECU  had  been  paid.
In  addition,  5,3  Mio  ECU  in  committed  appropriations,
had  lapsed.  At  the  close  of  the  accounts  for  the  financial
year  1996,  the  balance  of  appropriations  committed  and
not  paid  in  interest-rate  subsidies  for  the  overall  budgets
of  the  Third  and  Fourth  Protocols  came  to  51,1  Mio
ECU,  i. e.  44,5 %  of  the  total  committed  (Table  9).

ALGERIA

EGYPT

THIRD  &  FOURTH  PROTOCOLS  —  INTEREST  RATE  SUBSIDIES  AS  AT  31.12.96

TABLE  9

Country

Ref.

Interest  Rate  Subsidy

(Mio  ECU)

Committed

Disbursed

Cancelled

Balance

—

SEM/03/220/011/B

SEM/03/220/014/E

SEM/03/220/015/B

SEM/03/220/016/B

SEM/03/220/017/B

SEM/03/220/027/B

SEM/03/220/029/B

SEM/03/220/037/B

SEM/03/220/038/B

SEM/03/220/041/B

—

3,0

6,4

0,9

5,6

2,8

3,8

1,9

0,8

7,9

2,7

—

2,8

5,3

0,8

3,3

2,1

3,5

1,7

0,0

6,3

0,0

TOTAL  EGYPT  3rd  PROTOCOLS

35,8

25,7

SEM/04/220/001/B

SEM/04/220/007/B

SEM/04/220/009/B

SEM/04/220/012/B

SEM/04/220/023/B

SEM/04/220/032/B

TOTAL  EGYPT  4th  PROTOCOLS

TOTAL  EGYPT  3rd  &  4th  PROTOCOLS

1,7

4,9

7,4

3,4

5,4

7,6

30,4

66,2

0,0

4,9

0,9

0,0

2,7

0,0

8,5

34,2

—

0,2

1,1

0,2

2,3

0,7

0,0

0,0

0,0

0,0

4,5

0,0

0,0

0,0

0,0

0,0

0,0

0,0

4,6

—

0,0

0,0

0,0

0,0

0,0

0,3

0,3

0,8

1,5

2,7

5,6

1,7

0,0

6,5

3,4

2,7

7,6

21,9

27,4

31.3.98

EN

Official  Journal  of  the  European  Communities

C  98/27

(Mio  ECU)

Country

Ref.

Interest  Rate  Subsidy

Committed

Disbursed

Cancelled

Balance

JORDAN

LEBANON

MOROCCO

SYRIA

TUNISIA

SEM/03/628/008/B

SEM/03/628/009/B

SEM/03/628/010/B

SEM/03/628/018/B

SEM/03/628/030/B

SEM/03/628/034/B

SEM/03/628/036/B

SEM/03/628/039/B

SEM/03/628/040/B

TOTAL  JORDAN  3rd  PROTOCOLS

SEM/04/628/002/B

SEM/04/628/003/B

SEM/04/628/004/B

SEM/04/628/010/B

SEM/04/628/014/B

SEM/04/628/018/B

SEM/04/628/020/B

SEM/04/628/021/B

SEM/04/628/026/B

TOTAL  JORDAN  4th  PROTOCOLS

TOTAL  JORDAN  3rd  &  4th  PROTOCOLS

—

—

SEM/03/608/013/B

TOTAL  SYRIA  3rd  PROTOCOLS

SEM/04/608/001/B

TOTAL  SYRIA  4th  PROTOCOLS

2,1

1,2

1,1

0,3

1,4

0,3

0,4

1,0

0,8

8,7

2,3

0,6

0,7

1,2

2,0

0,0

2,7

0,9

1,5

11,9

20,6

—

—

6,1

6,1

6,9

6,9

TOTAL  SYRIA  3rd  &  4th  PROTOCOLS

13,0

SEM/03/212/005/B

SEM/03/212/006/B

SEM/03/212/011/B

SEM/03/212/016/B

SEM/03/212/018/B

TOTAL  TUNISIA  3rd  PROTOCOLS

GRAND  TOTAL  3rd  PROTOCOLS

GRAND  TOTAL  4th  PROTOCOLS

1,4

1,4

2,4

5,4

4,4

14,9

65,5

49,2

Source:  Court  of  Auditors.

GRAND  TOTAL  3rd  &  4th  PROTOCOLS

114,7

1,5

1,2

1,0

0,1

1,3

0,3

0,4

0,9

0,8

7,5

0,4

0,4

0,6

1,1

1,0

0,0

1,0

0,4

0,0

5,0

12,5

—

—

0,0

0,0

0,0

0,0

0,0

1,2

1,4

2,2

5,1

1,7

11,6

44,8

13,6

58,3

0,6

0,0

0,0

0,0

0,1

0,0

0,0

0,0

0,0

0,7

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,7

—

—

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

5,3

0,0

5,3

0,0

0,0

0,1

0,3

0,0

0,0

0,0

0,1

0,0

0,5

1,9

0,2

0,1

0,0

1,0

0,0

1,7

0,5

1,5

6,9

7,3

—

—

6,1

6,1

6,9

6,9

13,0

0,2

0,0

0,2

0,3

2,7

3,3

15,4

35,6

51,1

C  98/28

EN

Official  Journal  of  the  European  Communities

31.3.98

Dormant  commitments  and  monitoring

P r e m a t u r e   t y i n g - u p   o f   c o m m i t m e n t
a p p r o p r i a t i o n s

140. An  examination  of  the  Commission’s  files  revealed
the  existence  of  a 
large  volume  of  commitment
appropriations  which  were  either  tied  up  prematurely  or
represented  an  amount  in  excess  of  the  requirements  of
the  operations  concerned.

141. This  phenomenon  demonstrates  the  weakness  of
the  Commission’s  monitoring:  it  did  not  carry  out  the
necessary  controls 
the  amount
committed  was  justified  and  did  not  set  up  a  procedure
for  the  closure  of  completed  projects  at  the  end  of  each
year.

to  check  whether 

the  Court’s 

examination  of 

the
142. Overall, 
that  appropriations
Commission’s  accounts  showed 
committed  and  amounting  to  27,5  Mio  ECU  remained
unused over periods exceeding two years. These amounts,
as  Table  10b  shows,  derived  from  seven  projects,  in
respect  of  four  of  which,  at  the  time  of  the  audit,  no
payments  had  been  made.

INTEREST-RATE  SUBSIDIES  —  DORMANT  COMMITMENTS

TABLE  10a

Residual  amounts  to  be  decommitted

2nd  Protocols

3rd  Protocols

4th  Protocols

Ref.

Amount
(Mio  ECU)

Ref.

Amount
(Mio  ECU)

Ref.

Amount
(Mio  ECU)

SEM/03/220/029

0,25

SEM/04/220/007

0,01

SEM/628/02/034
SEM/628/02/035

0,10
0,07

0,17

SEM/03/628/010
SEM/03/628/018
SEM/03/628/034
SEM/03/628/036
SEM/03/628/039

SEM/03/212/005
SEM/03/212/011

0,08
0,28
0,01
0,03
0,07

0,19
0,16

1,07

0,01

1,25

Country

Egypt

Jordan

Tunisia

Total

Grand  total

TABLE  10b

Delayed  utilisation  of  appropriations  committed

Country

Ref.

Amount
(Mio  ECU)

Commitment
date

First
payment

Ref.

Amount
(Mio  ECU)

Date  of
commitment

First  payment

3rd  Protocols

4th  Protocols

Egypt

SEM/03/220/037

0,75

24.11.1992

—

SEM/04/220/009
SEM/04/220/012

SEM/04/628/002
SEM/04/628/003

7,40
3,39

2,31
0,65

1.12.1993
28.7.1994

11.7.1996
—

29.12.1992
23.3.1993

13.2.1996
10.8.1996

SEM/03/608/013

6,10

3.5.1995

—

SEM/04/608/001

6,87

3.5.1995

—

6,85

20,61

Grand  total

Source:  Court  of  Auditors.

27,46

Jordan

Syria

Total

31.3.98

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U n e x p e n d e d   b a l a n c e s   t o   b e   d e c o m m i t t e d

143. The Court’s review of the operations financed with
interest-rate  subsidies  within  the  framework  of  the  Third
and  Fourth  Protocols,  and  also  of  the  Second,  showed
that  appropriations  corresponding  to  projects  for  which
the  EIB  had  made  the  final  payment  and  informed  the
the  Commission’s
Commission  were  still  open 
accounts  with  unexpended  balances  of  very 
long
standing.  In  one  case,  the  last  payment  was  made  in
1990.

in 

144. Table  10a  shows  that  eleven  projects,  accounting
for  almost  1,25  Mio  ECU,  fall  within  this  category,  one
unexpended  balance  of  168 320  ECU  even  deriving  from
two commitments made under the Second Protocols with
Jordan.  The  setting-up  of  a  systematic  procedure  for  the
annual  closure  of  operations  would  enable  such  a
situation,  where  appropriations  are  frozen  to  no  useful
purpose  and  merely  congest 
to  be
avoided.

the  accounts, 

145. Audits carried out in Egypt confirmed this analysis.
In  two  of  the  three  projects  concerned,  the  amount
committed  was,  for  one  of  them,  over  700 000  ECU,  or
25 %  too  high,  and  for  the  other  it  was  over  250 000
ECU,  or  13 %  too  high.  In  the  first  case  the  unused  and
unneeded  funds  remained  blocked  from  March  1994
onwards,  in  the  second,  from  December  1992  onwards.
In  both  cases  the  funds  in  question  were  still  in  the
account  as  ‘restant  à  liquider’  (still  outstanding)  at  the
end  of  1995,  and  were  carried  over  until  1996  and
decommitted  in  July  only  in  the  first  case.

146.
In the third case, the initial EIB own resources loan
was fixed at 35 Mio ECU, with an estimated interest rate
subsidy  of  5,6  Mio  ECU.  At  the  end  of  1993,  the  bank
decided to  reduce the  size  of  its  loan  to  28 Mio  ECU, as
the  promoter  had  reduced  the  scale  of  the  project,  but
did  not  inform  the  Commission  of  this  until  June  1994.
The  Commission,  however,  failed  to  take  action  at  this
point  to  reduce  the  funds  committed  for  the  interest  rate
subsidy.  A  balance  of  over  3  Mio  ECU  remained
committed  throughout  1994  and  1995,  with  a  final
payment  being  made  in  December  1995.  It  was  not  until
July  1996  that  the  remaining  funds  were  decommitted.
Again,  this  project  provides  evidence  of  a  lack  of
sufficiently  close  management  of  budgetary  funds  by  the
Commission’s  services.  The  bank  should  also  have
informed  the  Commission  more  promptly  of  its  decision
to  reduce  the  size  of  its  loan.

Observations  relating  to  the  management  of  interest-rate
subsidies

147. The findings described above demonstrate the poor
quality of the controls of the justification for the amounts

for 

the  reasons 

requested  by  the  EIB  for  interest-rate  subsidies.  The
Commission did not ask for any explanation of the initial
amount,  of 
the  existence  of  an
unexpended  balance  at  the  end  of  an  operation,  or,  on
the  other  hand,  of  the  reasons  which  led  the  EIB  to
request  an 
initially
increase 
committed.  The  weakness  of 
the  Commission’s
monitoring  is  confirmed  by  the  number  of  unexpended
balances  to  be  decommitted  and  the  length  of  time  they
have  been  in  existence.

the  appropriations 

in 

148. Council  Regulation  (EEC)  No  1762/92  restored  to
the  Commission  control  over  financing  decisions  relating
to  interest-rate  subsidies.  It  is  for  the  Commission  to  use
it to ensure that the application file submitted by the EIB
allows 
the
appropriations  requested  are  justified  in  principle  and  in
terms  of  the  amount.

the  Commission 

check  whether 

to 

149. Furthermore,  the  Commission  should  set  up  a
procedure  for  the  annual  closure  of  projects  and  the
cancellation  of  unexpended  balances,  as  the  Court  has
regularly  recommended  both  in  this  and  other  fields (27).

GENERAL  CONCLUSIONS

Considerations  relating  to  the  system  of  Protocols

150. The  considerations  produced  by  the  Court  on
examining  the  implementation  of  the  first  two  series  of
Protocols 
its  Special  Report  No  3/91,  are  still
valid (28).

in 

151. The right acquired by the recipient countries to the
amounts  set  out  in  the  Protocols  for  an  unlimited  period
has  meant  that  a  smooth  progression  from  one  Protocol
to  the  next  has  not  been  possible  and  that  budgetary
resources  have  been  tied  up  which  could  have  been  used
for  other  purposes.  At  the  same  time,  the  Commission
found itself obliged to manage all four series of Protocols
as  from  1992.  This  situation  will  persist  until  the
appropriations  allocated  to  the  various  Protocols  are
exhausted and will run parallel to the management of the
aid  governed  by  the  MEDA  Regulation.  In  view  of  this
situation,  the  Commission  plans,  on  the  basis  of  the
Third  and  Fourth  Protocols,  annual  payments  of
approximately 200 Mio ECU up to 1999, with payments
of  smaller  amounts  in  the  years  following  until  the
appropriations  are  exhausted (29).

(27) See,  in  particular,  paragraph  3.18  onwards  of  the  Special
Report  accompanying  the  Statement  of  Assurance  for  the
financial  year  1994  (OJ  C  252,  30.12.1995).

(28) See Special Report No 3/91, and particularly paragraph 3.23

onwards  (OJ  C  252,  26.9.1991).

(29) See  the  remarks  on  Item  B7-4051,  general  budget  of  the
European  Union  for  the  financial  year  1997  (OJ  L  44,
14.2.1997).

C  98/30

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31.3.98

152. The  MEDA  Regulation  tackles  the  problem  of  the
use of funds by adopting a procedure which can respond
flexibly  to  the  absorptive  capacity  of  the  recipient
non-Member countries while respecting their priorities. In
fact, the terms of this Regulation are such that the NMCs
will  no  longer  acquire  a  right  to  an  amount  from  the
budget  but  will  negotiate  a  plan,  the  indicative  nature  of
which  is  underlined,  to  run  for  a  period  of  three  years.

Considerations  relating  to  the  Commission’s  system  of
management

153. DG  IB’s  management  suffers  from  the  inadequacy
of its human resources, a lack of clarity in the division of
tasks  between  the  departments  and  of  competences
between  the  Commission’s  headquarters  in  Brussels  and
the Delegations. The powers of the Delegations should be
increased  to  allow  them  to  take,  in  good  time,  decisions
which  may  prove  necessary  for  the  management  of  the
projects. These increased powers should go hand in hand
with  the  obligation  to  justify  these  decisions.

154. The  quality  of  the  financing  agreements  must  be
improved from a legal point of view by making provision
for  penalties  when  obligations  are  not  fulfilled  by  the
beneficiary,  and  from  a  technical  point  of  view  by  a
better  description  of  the  management  bodies  and  of  the
contents of the implementation reports and the automatic
inclusion  of  a  clause  providing  for  an  evaluation  when
the  project  is  50 %  complete,  for  a  final  evaluation  on
completion  and  also  for  an  external  audit.

155. The  computer  tools  at  the  Commission’s  disposal
do  not  allow  auxiliary  accounts  to  be  kept  for  the
projects  which  are  directly  linked  to  the  implementation
of  the  budget,  or  detailed  monitoring  of  the  projects  to
be  carried  out.  The  secondary  commitments,  which  the
contracts  concluded  when  applying  the  FA  represent,
must  still  be  subjected  to  manual  monitoring.  The
Management Information System (MIS) was installed in a
simplified  version  in  1997.

156. The 
various
shortcomings  has  led  to  insufficient  control,  on  the  part

cumulative 

effect 

these 

of 

of the Commission, over the overall cycle of management
of the projects and particularly their implementation. The
rationalisation  of 
system  of
management,  which  began  with  the  application  of  the
Management  Cycle  Project,  must  be  intensified  and
completed.

the  Commission’s 

157. This  situation  is  particularly  worrying  at  a  time
when,  with  the  adoption  of  the  MEDA  Regulation,  the
Commission’s  departments  are  confronted  with  a
perceptible  increase  in  the  volume  of  the  budget  which
they  have  to  manage  and  which, 
in  commitment
apppropriations,  is  approximately  double  that  of  the
Protocols.  To  this  end,  amending  budget  No  1/96
provided for the possibility of using up to 3 % of MEDA
appropriations  for  administrative  and  technical  support.
In  addition,  the  change  of  approach  under  MEDA  could
completely  upset  the  pattern  of  relations  between  the
Community  and  the  NMCs  and  exacerbate  competition
between  the  latter.

the 

from 

gained 

experience 

the
158. From 
implementation  of  the  Protocols  (see  paragraph  103),  it
appears  that  for  the  management  of  finances  after  the
MEDA  Regulation,  the  Commission  should  base  its
work, whenever possible, on the administrative structures
in  place  in  the  NMCs  and  not  seek  to  impose  a
preconceived  standard  model.

Considerations  relating  to  the  operations  managed  by
the  EIB  on  behalf  of  the  Commission

159. The controls carried out showed clearly, in spite of
the  weaknesses  in  the  set-up  procedures  of  certain  IFIs,
the quality of the system established for the management
of  risk  capital  and  could  be  awarded  full  marks  for  the
results  obtained.  The  implementation  of  risk  capital  gave
rise,  however,  to  an  excessive  concentration  of  finances.

160. The  Commission’s  monitoring  of  those  operations
entrusted  to  EIB  management  was  poor.  This  poor
quality  is  displayed  in  the  minimal  use  made  of  the
informative documents sent by the EIB and, in the case of
interest-rate  subsidies,  by 
the  volume  of  dormant
commitments.

This  report  was  adopted  by  the  Court  of  Auditors  in  Luxembourg  at  the  Court  meeting  of  29
January  1998.

For  the  Court  of  Auditors

Bernhard  FRIEDMANN

President

31.3.98

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C  98/31

THE  SYSTEM  OF  PROTOCOLS

Implementation  of  protocols

Budgetary  presentation

COMMISSION  REPLIES

in  general  could  have  been
financing  agreements 
improved  and 
introduction  of  Project  Cycle
Management  (PCM)  has  lead  to  a  better  definition  and
follow-up  of  the  project.

the 

21. The  Commission  and  the  Budget  Authority  have  in
preparing  and  establishing  the  annual  budget,  sought  to
maintain  a  balance  between  the  proliferation  and  the
consolidation  of  budget  lines  whilst  maintaining  the
transparency  of  the  objectives  of  actions  funded.

Project  Cycle  Management 
training  courses  were
organised with the assistance of outside consultants from
1992 to 1997. Project leaders have gradually learned this
method  of  project  management.

Community legality

Information  technology

23. With  respect  to  decisions  regarding  interest  rate
subsidies,  while  there  is  a  theoretical  possibility  for  the
Commission  opinion  to  be  overruled,  in  fact  this  has
never  happened.

As  the  Court  notes  Regulation  1762/92  has  rectified  the
situation.

24. Pursuant to Article 209 of the Treaty, the opinion of
the  Court  must  be  obtained  by  the  Council  in  three
specific cases. The Commission does not consider that the
MEDA  Regulation  comes  directly  under  any  of  these
headings.

However,  under  the  terms  of  an  agreement  concluded  in
1980,  the  Commission  has  the  possibility  of  consulting
the  Court  on  any  proposals  involving  significant  changes
to 
financial  and/or  budgetary
the 
mechanisms.

techniques  of 

In  future  the  Commission  will  more  systematically
recommend  the  Council  to  obtain  the  Court’s  prior
opinion.

Conclusions  on  the  system  of  protocols

28. See  paragraph  24.

OPERATIONS  MANAGED  DIRECTLY  BY  THE
COMMISSION

Management  and  monitoring  instruments

Financing agreements

31.-33. The  Commission  will  examine  the  Court’s
recommendations.  The  Commission  agrees  that  the

34.-36. Further efforts are being undertaken to continue
to  develop  financial  management  and  information  tools
for  project  monitoring  and  control.

Organisation  and  available  tools

relating 

structures 

enhanced.  Within 

the  headquarters  and 

In  the  period  covered  by  the  Court’s  audit,  the
37.-43.
Commission’s  administrative 
to
bilateral  aid  have  changed  greatly.  The  division  of
responsibilities  between 
its
delegations  is  under  constant  review.  For  tendering,
contracts  and  local  payments,  the  revised  rules  have
allowed the delegations to maintain their flexibility. With
the  creation  of  MEDA  teams,  the  delegations’  ability  to
monitor  projects  will  be 
the
headquarters  the  separation  of  responsibilities  covering
conception,  resourcing,  management,  and  evaluation  of
projects,  has  been  inspired  by  the  SEM  2000  initiative
and  the  principles  underlying  project  cycle  management.
The  review  of  bilateral  aid  has  lead  to  securing  extra
implementation  and  follow-up  of
resources  for  the 
projects 
the  MEDA  Regulation.  Where
appropriate,  Commission  staff  have  been  reminded  of
and  been  provided  with  guidelines  relating  to  their
obligations in the management of contracts and financing
agreements. The effect of the consequences alluded by the
Court  in  its  paragraph  42  will  be  reduced  as  the  culture
of financial discipline created by the SEM 2000 initiative
gains  ground.

under 

The  distribution  of  tasks  between  the  geographical  and
technical  units  and  the  delegations  is  consistent  with  the
work  carried  out  in  Directorate-General  IB,  which  seeks
to draw up new rules to establish as precisely as possible

C  98/32

EN

Official  Journal  of  the  European  Communities

31.3.98

the  mode  of 
cooperation  between  headquarters’
departments  and  Commission  delegations  in  the  field  of
economic  cooperation  and  development  aid.

Schedule  for  the  completion  of  projects

for 

44.-47. With  respect  to  the  Economic  Geology  Project:
the  Commission  Decision  was  taken  on  23/3/89  and
following preparatory work the Financing Agreement was
sent 
eventually
signature  on  14/11/89  and 
countersigned  on  23.4.90.  The  delay  of  13  months  was
accounted  for  in  equal  part  by  the  need  to  complete
administrative  procedures  in  both  the  Commission  and
the  beneficiary  country.

The  Commission  is  aware  of  the  problem  identified  by
the Court and has included in the proposal to amend the
financial  regulation  that  financing  agreements  be  signed
at  least  within  the  year  following  the  year  in  which  the
Commission  Decision  is  taken.  This  measure  is  designed
to  encourage  the  recipients  to  ensure  their  national
procedures  are  completed  within  a  set  time-limit,  when
agreeing  to  the  conditions  governing  the  grant  of  aid.

46. The 
‘administrative  technical  provisions’  (DTA)
which  are  a  part  of  a  financing  agreement,  are  often
subject  of  difficult  and  sensitive  negotiations  with  the
beneficiary  states  notably  to  ensure  the  transparency  of
rules  and  security  of  Community  funds.

The financing agreements which the Court refers to, were
drafted  in  the  late  80’s  and  early  90’s.

With  the  creation  in  July  1995,  of  the  Finance  and
Resources  Directorate,  as  the  counter-weight  required  by
the  SEM  2000  initiative,  progress  has  been  made  to
standardise  and  complete  the  financing  agreements  and
these  now  include  most  of  the  suggestions  made  by  the
Court.

the 

rules 

relating 

tendering  and
Concerning 
issued
contractual  procedures,  the  Commission  has 
detailed  rules  and  guidelines  to  staff  dealing  with
Community projects. These rules are updated regularly as
well  as  when  the  circumstances  demand.

to 

48.-49. The  Commission 
that  major
construction  and  social  infrastructure  projects  often  have
a  tendency  to  overshoot  their  original  cost  estimates.  In

aware 

is 

the  field  of  cooperation  aid  covered  by  preferential
agreement,  the  project  is  managed  primarily  by  the
country  and  the  Commission  has  taken  appropriate
measures  to  ensure  that  projects  proceed  correctly  in  the
light  of  changing  circumstances  —  economic,  social  and
technical. Now, concerning the financing agreements, the
Commission  has  measures  in  place  to  ensure  that  the
expiry  date  is  monitored  with  greater  care,  and  changed
to  reflect  the  circumstances.

Financial  management  and  monitoring  of  projects

51.-53. The Commission agrees that the progress reports
should be followed with fuller effect. In keeping with the
principles  of  mutual  trust  underlying  the  provision  of
external  aid,  the  Commission  endeavours  to  ensure  that
the recipient state or the financial institution monitors the
amounts  contributed  by  the  recipient.

The  Commission  through  its  representative  ensures  that
monitoring  systems  are  updated  to  reflect  changing
requirements. Nevertheless, the Commission headquarters
receives  regular  reports  on  the  projects’  progress.  With
the 
increased  resources  available  under  the  MEDA
Regulation, the Commission foresees the improvement in
the  follow-up  of  project  progress  reports.

52. Wherever  possible,  the  Commission  aims  to  use
national structures to promote the concept of ownership.
The 
inspection  visits
currently  planned  under  the  MEDA  programme,  should
considerably  reinforce  the  monitoring  of  projects.

introduction  of 

six-monthly 

Administrative  and  financial  management

M o n i t o r i n g   t h e   a c c o u n t s   o f   t h e   p a y i n g
a g e n c i e s

54. The  Commission  is  aware  of  the  problem  cited  by
the  Court  and,  following  the  creation  of  DG  IB,  has
reallocated  personnel  to  reconcile  the  Paying  Agent
accounts.  Furthermore,  the  Commission  has  procedures
in  place  to  ensure  that  the  reconciliation  will,  in  future,
be  made  on  a  quarter  basis.  The  process  to  ensure  that
the  backlog  is  cleared  is  well  advanced,  except  for  those
countries  where  the  access  to  information  is  difficult
notably  due  to  political  difficulties.

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S e l e c t i o n   o f   t e c h n i c a l   a s s i s t a n c e

responsibility 

55. The 
technical
for 
assistance  has  now  been  passed  to  the  recently  created
Finance  and  Resources  Directorate  of  DG  IB.

selection  of 

In separating the initiation, selection, implementation and
evaluation  functions,  the  Commission  has  reinforced
internal control thereby ensuring procedures are not only
transparent  but  also  effective.  Furthermore,  new
tendering procedures with revised limits have been issued
to  staff  dealing  with  projects.

56.-57. See  remarks  for  paragraph  55.

C a s h   m a n a g e m e n t

implemented
59. Generally,  such  projects  are  often 
under  difficult  circumstances  and  it  is  essential  that  the
project  management  adopts  a  prudent  but  positive
approach.  The  work  programme  and  cost  estimates
reflected this approach. During the implementation of the
work  programme  and  cost  estimate,  the  PMU  is  obliged
to  closely  control  the  achievements  and  expenditures.

60. The  interest  generated  by  loan  operations  could  be
the
re-used  on 
administration inspired by the findings/conclusions of the
six-monthly  inspection  visits.

the  basis  of  an  agreement  with 

P a y m e n t   o f   i n e l i g i b l e   e x p e n d i t u r e

61.-62. The  Commission  is  sensitive  to  the  fact  that
payments  are  made  for  costs  which  are  eligible.  The
eligibility  is  determined,  inter  alia,  by  the  fact  that  the
commitment  of
expenditure 
appropriations  has  been 
financing
agreement  could  therefore  allow  costs  which  were
incurred  between  the  commitment  of  appropriations  and
the  operative  date  of  the  financing  agreement.

falls  due  after 

finalised.  The 

the 

for 

that 

agrees 

the  project
The  Commission 
SEM/03/204/212,  the  ECU  212 000  portion  of  a  total
payment  of  ECU  452 488  was  for  aid  to  the  section  of
the  project  which  predated  the  signature  date  of  the
Financing  Agreement.  When  the  training,  for  which  the
grant  was  destined,  started  (September  1990),  the
Commission  (6  July  1990)  had  decided  to  support  the
project  and  the  appropriations  required  to  fund  the
project  had  been  committed  already.

63. The  unforeseen  activity  noted  by  the  Court  relates
to  the  urgent  need  to  control  the  spread  of  vector
through  the  distribution,  in  Libya,  of  live  but  sterilised

screw  worms  imported  from  America.  This  activity  had
the  agreement  of  the  Member  States  and  Egypt.  The
Commission  provided  ECU  700 000  from  the  Food
Sector  Development  Programme  (FSDP)  to  purchase
urgently  needed  insecticides  for  the  preventive  control  of
animals  along  the  Libyan/Egyptian  border.  The  amount
advanced  was  to  be  reimbursed  by  the  Food  Aid
Counterpart  Funds  (FACF).  The  FACF  Committee  has
authorised  ECU  705 010  to  be  paid  in  Egyptian  pounds
into  the  FSDP  revolving  fund  account.

64. The  Financing  Agreement  has  foreseen  amounts  of
ECU  350 700  (15 %  of  project  total  less  contingencies)
for services provided by an international organisation and
ECU  1 067 500  for  the  organisation’s  personnel  and
office  costs.  These  costs  have  now  been  spread  over  the
five  projects  in  which  the  international  organisation
participates. With regard to the allocation of office costs,
the  Commission 
the  process  of  obtaining
in 
clarification  from  the  international  organisation.

is 

P a y m e n t   p e r i o d s

65. The  interest  paid  for  late  payment  noted  by  the
Court was due to the late payment of an advance due in
1991.  The  158  days  delay  was  caused  by  events  outside
the  control  of  the  Commission  headquarters,  which  was
nevertheless obliged to release the penalty in the interests
of  the  project.

66. With  regard  to  the  ‘Ground  Water  Investigation’  in
Azraq  (SEM/030628/006)  it  has  to  be  noted  that  delays
in  payments  resulted  from  the  payment  procedure
through  the  banking  system,  which  issued  payments  to
the  sub-contractor 
in  general  currencies  when  the
contract  clearly  stated  that  payments  should  be  made  in
ECU.

following 

68. With  regard  to  the  late  payment  referred  to  by  the
Court, 
the
Commission  it  took  between  42  and  53  days  to  process
the  payment  request  received 
the  National
Authorising  Officer.

internal  procedures  of 

from 

the 

Evaluation  and  external  audits

69.-71. Since  the  inception  of  the  projects  covered  by
the  Court’s  audit,  improvements  have  been  made  in  the
number  of  projects  evaluated.  In-depth  monitoring  of
audit  reports  and  mid-term  and  ex  post  evaluations  of
projects 
the
establishment  of  an  evaluation  unit  in  the  departments
concerned  and  the  reinforcement  of  the  financial  unit.

should  now  be  possible, 

following 

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Concerning audits, the Commission, faced by a constraint
on  personnel  resources,  has  resorted  to  the  use  of
external  auditors.  A  systematic  programme  of  audits,
combining 
internal  resources,  project  resources  and
external  auditors,  is  being  prepared  for  1998.

In  addition,  the  Commission  is  increasingly  trying  to
include  in  the  FA  the  obligation  to  accept  external
audits.

Amendments  to  initial  decisions

72.-80. The  project  officers,  both  at  the  Commission’s
the  delegations,  had  adopted  a
headquarters  and 
financing
pragmatic  approach 
agreement. This resulted, as the Court has noted, in them
varying  the  conditions  attached  to  financing  agreements.

implementing 

the 

to 

The  responsibility  for  ensuring  the  appropriate  approval
of contractual and legal matters has been separated from
the  technical  units  and,  to  a  substantial  degree,  from  the
delegations  and  handed  to  the  Finance  and  Resources
Directorate.  In  doing  so,  the 
internal  control  over
changes  to  financing  agreements  has  been  strengthened.
Therefore,  any  modification  of  the  financing  agreements
must  be  authorised  in  accordance  with  the  rules.

dependency. The examples given in paragraphs 89-98 are
a  confirmation  of  this  dilemma.

89. When  the  plant  was  due  to  be  handed  over  to
GOSD it became evident that GOSD needed institutional
support  for  a  limited  time  in  order  to  build  up  its
capacities  to  manage  a  plant  at  this  point  of  the  Helwan
scheme.  This  was  approved  by  the  Commission  and  a
complementary  financing  of  ECU  3  million  was  made
available for this task. The shortcomings of GOSD noted
by the auditors were recognised at the time and measures
were  taken  to  improve  their  management  capacity.

90.
It  is  not  unusual  that  the  staff  (mainly  paid  by  the
contractors)  running  and  maintaining  the  plant  during
the  testing  period  are  unwilling  to  become  government
employees.  This 
is  the  reason  why  GOSD  needed
technical  assistance  (TA)  support  for  an  intermediate
period after withdrawal of the contractors and change of
responsibility  from  government  level  to  municipal  level.
Such  a  transition  period  is  critical  and  the  Court’s
auditors  visited  the  project  just  at  this  moment.  The
situation  has  settled  down  since  then,  and  the  controlled
phasing out until 1998 of TA support is in progress. The
question  of  water  pricing  is  highly  sensitive  politically
and  could  not  be  addressed  specifically  within  the
project.  However  the  EC,  together  with  other  major
donors  have  raised  it  with  the  GOE.

Services  provided  by  the  technical  assistance  units

93. The  Commission  will  follow  up  to  ensure  that
control  over  stocks  and  equipment  is  improved.

the  Court’s  opinion
shares 
81. The  Commission 
concerning  the  overall  quality  of  the  technical  assistance
provided  to  the  projects.

94.-96. See  general  reply  for  88.

In  one  case,  the  consultant  was  replaced  and,  in
82.-84.
another,  the  consultant  was  allowed  to  continue  the
contract  and  the  matter  is  being  closed.

Conclusions  in  respect  of  the  management  of  projects

Management  by  project  leaders  and  the  results
obtained

Observations  in  respect  of  the  accounts  and  finances

85.-87. A programme for audit of projects for 1998 will
include  the  points  identified  by  the  Court.

The  results  recorded  and  the  survival  of  the  projects

88. The  Court  has  recognised  the  dangers  inherent  in
development  projects  which  require  a  balance  between
technical  assistance  and  the  creation  of  a  culture  of

in  dealing  with  aid  given 

99. The  special  report  3/91  and  the  replies  to  it  have
formed  the  basis  of  a  major  revision  of  the  Commission
procedures 
the
Mediterranean  countries.  All  the  undertakings  given  by
the  Commission  could  not  be  fully  implemented  on
projects  that  are  funded  by  the  third  and  fourth
protocols,  because  they  were  already  in  progress  when
the  report  was  drafted;  they  have  nevertheless  been
followed  for  the  MEDA  projects.

to 

provisions 

100.-102. The  shortage  of  human  resources,  underlined
by  the  Court  have,  to  an  extent,  been  made  good  by  the
budgetary 
the  MEDA
programme.  The  revised  Commission  structures’  impulse
clarification  of
by  SEM  2000,  has 
led 
responsibilities, 
the
establishment  of  clearer  rules  on  the  management  of
projects.

separation  of  duties  and 

accompanying 

to  a 

the 

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The  necessary 
improvements  will  be  continued  by
increasing  the  Commission’s  capacity  to  evaluate  and
audit  projects,  further  developing  the  computer  systems
permitting  the  accounting  and  financial  monitoring  of
projects  as  well  as  devoting  appropriate  resources  to  the
expansion  of  the  technical  follow-up  of  projects.

In  addition,  to  enable  the  Court  to  draw  the  maximum
benefit  from  on-the-spot  visits,  information  meetings  are
always  organised  in  advance.

The  system  of  risk  capital  management

101. See  paragraphs  34-36  and  37-43.

The  purpose  of  risk  capital  and  conditions  of  eligibility

103. The  Commission  notes  the  Court’s  observations
regarding the definition of the management systems. This
has now become an essential point to be treated in detail
in  the  examination  of  projects  phase  and  should  also  be
included  in  the  FA.

110. The  interpretation  of  the  terms  for  granting  risk
capital  is  compatible  with  the  objectives  of  this  type  of
assistance.  The  terms  for  each  project  are  submitted  for
approval  to  the  Article  9  Committee  (representatives  of
Member  States’  governments  and  a  representative  of  the
Commission),  in  accordance  with  the  regulations.

to  use  national
The  Commission  generally  seeks 
administrations  to 
implement  projects,  adapting  the
proposed  system  to  the  capacities  of  the  administration.

Description  of  the  management  system

Financing  procedures  and  contractual  framework

As  part  of  the  process  of  setting  up  Meda,  the
Commission  is  establishing  the  necessary  instruments  to
facilitate project management and negotiating framework
agreements  with  each  Mediterranean  partner,  which
determine 
the
administrative  arrangements  for  implementing  projects
and programmes. Starting from a common base, they will
take  account  of  various  proposals  and  specific  situations
of  the  non-member  Mediterranean  countries.

framework 

statutory 

and 

the 

114.  a)  Although the observation may be true of certain
operations under the third protocol, it does not
apply  to  most  of  the  operations  under  the
fourth  protocol.

to 

b)  In  general,  the  risk  of  exchange  losses  is
second
charged 
the
subparagraph 
management 
the
Commission  and  the  EIB  of  16  June  1987  and
17 December 1992). It is inherent in the nature
of  capital  acquisition  transactions.

the  Community 
of  Article 
agreement 

3(1) 
between 

(see 

of 

THE  MANAGEMENT  OF  OPERATIONS  ADMINISTERED
BY  THE  EIB  ON  BEHALF  OF  THE  COMMISSION  AND
THEIR  AUDIT

General  presentation  of  the  audit

Appraisal  and  monitoring  of  projects

117. Another  usual  method  is  a  global  loan  for  which
appraisal  is  delegated  and  the  EIB  retains  the  powers  of
decision,  whether  own  resources  or  risk  capital  are
involved.

107. The  Commission  and  the  EIB  are  careful  to  follow
up  the  Court’s  requests.

The  Court’s  observations  at  the  conclusion  of  the  audit

At  the  time  of  the  annual  planning  discussions  with  the
representative  of  the  Court  responsible  for  coordinating
the  audits  of  projects  administered  by  the  EIB,  the  EIB
Audit Committee expressed the wish that there should be
a  balanced  distribution  of  visits  throughout  the  year  and
local
that  the  programme  should  take  account  of 
administrative  differences  and  public  holidays.  Such
planning  is  quite  usual  for  two  audit  bodies.

The  Audit  Committee  is  always  willing  to  organise  visits
jointly  when  requested  in  accordance  with  the  Tripartite
Agreement  between  the  institutions,  sometimes  at  very
short  notice,  depending  on  the  country.

Appraisal  of  the  projects

122. The  weakness  was  identified  by  the  EIB,  which
reacted  by  giving  more  weight  to  the  companies’
technological  or  commercial  contribution  than  to  their
straightforward  capital  injection,  which  has  too  often
proved  to  have  little  impact  in  the  medium  term.

123. The  EIB  is  familiar  with  the  problem,  which
demonstrates the importance of boosting own funds with
risk  capital.

124. The  EIB  carries  out  regular  inspections  and  notes
the  progress  made  by  the  IFIs  in  this  respect.

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Concentration  of  aid

126.
It  should  be  noted  that  in  Morocco  nearly  all  the
banks  use  the  credit  line.  Given  the  great  demand  for
project  funds  in  Morocco,  it  is  efficient  and  normal  that
the  IFI’s  own  clients  introduce  suitable  projects.  This
does  not  preclude  others 
their
projects.

introducing 

from 

open to the gradual introduction of new instruments. The
EIB  considers  that  its  role  is  to  encourage  the  expansion
of  the  range  of  financial  products  on  offer  for  SMEs.

in 

the  new  guidelines 

136. Support  for  promoters  without  foreign  partners  is
included 
the  Euro-
Mediterranean  partnership  policy,  designed  to  make
SMEs  in  non-member  Mediterranean  countries  more
the  elimination  of  customs
competitive 
protection  planned  in  the  new  association  agreements.

following 

for 

127.-130.  When  launched  by  the  Community  and  the
EIB,  the  availability  of  global  loans  for  the  SME  sector
had  been  an  innovative  activity.  In  the  development
context,  it  has  not  been  easy  to  identify  suitable  projects
presented  by  financially  stable  SMEs  wishing  to  borrow
in  foreign  exchange.  At  the  time,  some  of  the  IFI’s  did
not  have  the  experience  to  extend  funds  under  the  credit
line  to  SMEs,  though  this  appears  to  be  changing  over
time.

Management  of  interest  rate  subsidies

Audit  findings

Dormant  commitments  and  monitoring

A further reason why the take-up rate of global loans has
been  low  has  been  the  exposure  to  exchange  risks  and
vagaries  of  export  markets,  together  with  conditions
prevailing 
environment  which  was
characterised by a low growth of GDP and abundance of
other  funds.

local 

the 

in 

The  Mediterranean  companies  normally  receive  revenues
in  local  currency.  The  loans  offered  at  very  favourable
rates  have  been  counterbalanced  by  the  exposure  to
exchange  risk  and  business  risk  inherent  to  the  SME
sector.

In  light  of  the  above  experience,  the  EIB  cancelled  ECU
17,4  million  of  the  own  resources  loan.  Of  the  ECU
3  million  risk  capital,  only  ECU  0,52  million  was
disbursed and the remaining ECU 2,48 million cancelled.
The  Community 
therefore
safeguarded.

interest  was 

financial 

140.-142. The 
systematic
information  system  will  lead  to  improved  information
about  interest  rate  subsidies.

installation  of  a 

recent 

As  part  of  its  periodic  review  of  sleeping  and  slow
moving  commitments,  the  Commission  has  re-examined
projects  covered  by  the  Court’s  audit  to  determine  their
continued  financial  needs.  Following  its  review,  the
Commission  has  closed  off  or  revised  the  projects
examined  by  the  Court  and  decommitted  the  funds
surplus  to  requirements.

Observations  on 
subsidies

the  management  of 

interest  rate

147.-148. See  reply  in  paragraphs  140  to  142  above.

Overall  monitoring  of  the  operations  by  the  EIB

Considerations  relating  to  the  system  of  protocols

GENERAL  CONCLUSIONS

It  has  been  confirmed  that  monitoring  is  being

131.
stepped  up.

Implementation  of  the  fourth  protocols

It  is  now  clear  that  the  concept  of  joint  ventures
135.
needs  to  be  more  flexible.  The  definition  has  been
extended  to  include  all  forms  of  cooperation  without
necessarily  entailing  joint  participation  in  capital,  thus
speeding  up  the  utilisation  of  credit  lines.

Clearly  under  the  new  procedures  the  loans  are  less
open-ended:  this  reflects  the  normal  evolution  of  the
financial  market  which  is  becoming  more  mature  and

150.-152. The  Court  correctly  notes  that  experience  in
implementing  the  Mediterranean  protocols  was  taken
into  account  in  Council  Regulation  No  1488/96  MEDA.
The  framework  for  the  Euro-Mediterranean  partnership
provides  for  financial  and  technical  measures  relating  to
reforms  of  the  economic  and  social  structures  of  its
Mediterranean  partners.

Considerations  relating  to  the  Commission’s  system  of
management

the 

153.-158. With 
the
Mediterranean  policy,  the  shortage  of  human  resources
has  become  felt.  Nevertheless,  the  Commission  has,
through  reorganisation,  redeployment  and  reinforcement

rapid  development  of 

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of  project  management,  sought  to  use  its  resources
effectively  and  efficiently.

taken  necessary  measures  to  ensure  that  the  follow-up  of
MEDA  projects  is  not  constrained  but  carried  out  with
care.

This  process  will  be  refined  further  through  the  creation
of a joint administrative service which was decided by the
Commission  on  15  October  1997.  The  division  of
responsibilities  and  separation  of  tasks  between  the
headquarters  and  delegations  and  within  Brussels
is  being
between 
reappraised.

technical  and  service  units, 

the 

These  developments  have  been  accompanied  with  a
clarification  of  rules  and  procedures  on  contract  and
financial  management.  Finally,  the  resources  available  to
evaluation  and  audit  activities  are  being  increased  both
quantitatively and qualitatively.

and
from 
Following 
implementation  of  the  protocols,  the  Commission  has

conception 

experience 

the 

Considerations  relating  to  the  operations  managed  by
the  EIB  on  behalf  of  the  Commission

159. Over 200 beneficiaries have profited from the third
and  fourth  protocols,  except  for  the  situation  outlined  in
replies  to  paragraphs  127-136,  where  the  Community’s
financial interest needed safeguarding, there has not been
an  excessive  concentration  of  funds  awarded.

160. The  Commission  is  reviewing  its  procedures  with
the  EIB  and  has,  in  the  meanwhile,  reinforced  the
resources  available  to  ensure  closer  monitoring  of  the
flow  of  information  between  the  two  institutions.