Annual report on the ECSC for the financial year 1999 together with the Commission's replies
Date: 2000-10-11
Institutions: European Court of Auditors
Subjects: ECSC, activity report, financial regulation, general budget (EU)

4.12.2000

EN

Official Journal of the European Communities

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I

(Information)

COURT OF AUDITORS

ANNUAL REPORT ON THE ECSC

for the financial year 1999 together with the Commission’s replies

(Article 45c(4) of the ECSC Treaty and Article 88 of the Financial Regulation of 21 December 1977, as last
amended by Council Regulation (EC, ECSC, Euratom) No 2673/1999 of 13 December 1999)

(2000/C 347/01)

CONTENTS

Paragraph

Page

ECSC SOLVENCY AND DEVELOPMENTS CONCERNING THE MAIN ECSC ACTIVITIES . . . . .

1-10

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The solvency of the ECSC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Solvency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provision for large exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in applications of ECSC funds and resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in the ECSC balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

2-4

2-3

4

5-7

8-9

10

FOLLOW-UP TO PREVIOUS OBSERVATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11-18

Loans to officials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Performance of liquid assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cancellation of dormant commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Repayment of taxes levied at source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

13-15

16-17

18

STATEMENT OF ASSURANCE CONCERNING THE ECSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19-23

TABLES 1 to 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2

2

2

2

2

2

3

3

3

3

3

3

4

4

5

8

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ECSC SOLVENCY AND DEVELOPMENTS CONCERNING THE
MAIN ECSC ACTIVITIES

Introduction

ship between reserves and total risk-adjusted assets) is gradually
increasing and rose from 32,8 % at 31 December 1998 to 37,8 %
at 31 December 1999. As was the case in the previous year, this
change was due partly to the increase in the Guarantee Fund
(+ 4 %), but mainly to the decrease in the volume of outstanding
loans to banks.

1. The solvency of the ECSC is of particular importance for the
following reasons:

Provision for large exposures

(a) apart from some marginal lending from its own funds, ECSC
loans are financed by bank borrowings and bond issues. It is
therefore important for ECSC securities to have the best pos-
sible financial market rating. That, in turn, requires an excel-
lent solvency ratio;

(b) most ECSC loans are back-to-back with the corresponding
borrowings in terms of rates, currency and maturity. The main
banking risk is therefore the risk of non-recovery;

(c) the Treaty of Paris, which created the ECSC, expires in 2002
and in consequence any changes in the level of own funds
needed to safeguard the ECSC’s solvency must be monitored
carefully, right up to the expiry of the Treaty, and beyond that
date, to ensure that the remaining borrowings can be serviced.

The solvency of the ECSC

Solvency ratio

2. Since 1994, the solvency ratio provided for in Council Direct-
ive 89/647/EEC (1) has been the main instrument by which the
ECSC’s solvency is assessed. The denominator of the ratio com-
prises assets and off-balance-sheet items weighted in accordance
with the Directive. For the numerator, the Commission takes the
Guarantee Fund and unallocated surplus items (see Table 1). The
definition of own funds used in calculating the solvency ratio is
the result of an interpretation of the Directive which provides a
sufficiently prudent valuation.

3. The Commission has decided to adjust borrowing and lend-
ing policy in view of the expiry of the ECSC Treaty in 2002 (2).
At that point it expects to have achieved a level of reserves equal
to 100 % of the loans still outstanding that are not covered by a
State guarantee (3). Furthermore, the solvency ratio (the relation

4. Pursuant to Council Directive 92/121/EEC (4) on the monitor-
ing and control of large exposures of credit institutions, the Com-
mission established a provision for large exposures in 1995. The
amount of the provision is calculated as a function of the amounts
by which the two limits set in Annex VI to Council Directive
93/6/EEC (5) have been exceeded. The provision fell from 23 mil-
lion euro at 31 December 1998 to 18 million euro at 31 Decem-
ber 1999. This change is due to the fall in the assets in question
following repayments in 1999. Although this Directive is not
legally applicable to the ECSC, it does result, if the ECSC observes
it, in a policy which is prudent as regards the exposures resulting
from past transactions.

Changes in applications of ECSC funds and resources

5.
In view of the forthcoming expiry of the ECSC Treaty, the
commitments for the ECSC operating budget continued to fall in
1999 (– 8,4 million euro, see Table 2), but by less than in 1998.
For the second consecutive year, budgetary expenditure was sig-
nificantly lower than estimated (– 27,4 % in 1998 and – 23 % in
1999). The differences were due in large part to the fact that
actual requirements for rehabilitation aid were considerably lower
than forecast (– 30 % in 1998 and – 50 % in 1999).

6. Resources also continued to decline in 1999 (– 28,3 million
euro), but by less than in 1998. This was mainly due to the net
effect of two opposing factors: the increase in the result of non-
budgetary operations (+ 13,3 million euro) and the decrease in
cancellations of commitments (– 48,8 million euro). It should be
stressed that, although cancellations were higher than forecast,
there ought to have been even more in 1999 (see paragraph 17).

7. The budget was in surplus for the fourth consecutive year,
thus allowing the Guarantee Fund to be increased to 553 million
euro (+ 23 million euro) and the provision for the financing of
the ECSC operating budget to be raised to 393 million euro

(1) Council Directive 89/647/EEC of 18 December 1989 on a solvency

ratio for credit institutions (OJ L 386, 30.12.1989, p. 14).

(2) Adjustment of borrowing and lending policy with a view to the expiry

of the Treaty (23 July 2002) (OJ C 175, 28.6.1994, p. 5).

(3) Questions concerning the expiry of the ECSC Treaty — financial
activities (PV(96) 1306). Deliberations based on documents SEC (96)
1492-3.

(4) Council Directive 92/121/EEC of 21 December 1992 on the monitor-
ing and control of large exposures of credit institutions (OJ L 29,
5.2.1993, p.1).

(5) Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy
of investment firms and credit institutions (OJ L 141, 11.6.1993, p.1).

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(+ 13 million euro, see Tables 1 and 3). At 31 December 1999, this
provision was clearly in excess of the requirement of 240 million
euro (1) forecast by the Commission for the period 2000 to 2002.

actual figures. The Commission replied in both cases that the
staffing and informatics problems which were the cause of these
shortcomings would be resolved. In 1999 these accounts were
once more drawn up on the basis of estimates.

Changes in the ECSC balance sheet

Performance of liquid assets

8. The ECSC balance sheet total declined by 539 million euro
(10,7 %) between 31 December 1998 and 31 December 1999 (see
Table 4), mainly owing to the lower level of outstanding loans
from borrowed funds: during the financial year 1999, the ECSC
received 463,5 million euro in loan reimbursements, whereas it
made no new loans.

9. At 31 December 1999, the liquid asset accounts made up
41,1 % of the ECSC’s assets and constituted the second largest
item, after loans. The accounts concerned and the balancing items
under liabilities are shown in Table 4.

Conclusion

10. The budget for the financial year 1999 was in surplus for the
fourth consecutive year, due to cancellations of commitments and
the underimplementation of budgetary expenditure, especially
rehabilitation aid. This surplus enabled the ECSC to reinforce its
solvency substantially and to make the necessary provisions and
value adjustments.

FOLLOW-UP TO PREVIOUS OBSERVATIONS

13. The ECSC holds sizeable liquid assets, the principal balanc-
ing items for which are the reserves (Guarantee Fund and avail-
able sections of the special reserve and the former pension fund),
commitments for the operating budget, provisions for the financ-
ing of future operating budgets, provisions for specific value
adjustments in respect of loans and advances and outstanding
borrowings back-to-back with prepaid loans. Each of these bal-
ancing items is a fund (i.e. a monetary reserve) which has been
created to deal with specific requirements (3). Table 5 shows the
position of these funds at 31 December 1999.

14. The Commission’s rules of procedure stipulate that the man-
agement of liquid assets must be based on traditional rules of pru-
dence, which is to say that it should aim to limit risks and guar-
antee a degree of liquidity in respect of commitments, while still
procuring an acceptable return on investments. Speculative opera-
tions are therefore prohibited, the balancing items must have a
good rating and the funds must be invested in negotiable bonds,
bank deposit accounts or other short-term investments.

15.
Investment policy is formulated by a management commit-
tee with the aim of covering estimated cash requirements. The
Court recommends that the ECSC’s annual report should include
all the information needed to assess whether these liquid assets
are being managed in a financially efficient manner, taking account
of market conditions.

11. An analysis of the action taken by the Commission in
response to the observations made in the Court’s previous annual
reports gave rise to the following comments. These have no bear-
ing on the statement of assurance concerning the financial state-
ments of the ECSC at 31 December 1999 (see paragraph 23).

Cancellation of dormant commitments

Loans to officials

12.
In its annual reports on the ECSC for the financial years 1981
and 1991 (2), the Court noted that the accounts covering loans to
officials had been drawn up on the basis of estimates rather than

(1)

Illustrative scenario — ECSC 2002, version 9, Annex I, to the draft
ECSC operating budget for 2000 (document SEC(1999) 803 final,
9 June 1999.

(2) Paragraph 2.3.3.2 ‘Accounts’ of the Annual report for 1981 (page 28)
and paragraph 1.7 of the Annual report for 1991 (page 12). These
reports were not published in the Official Journal, but can be obtained
from the secretariat of the European Court of Auditors.

16. The Commission’s rules of procedure on drawing up and
implementing the ECSC’s operating budget stipulate that budget-
ary commitments must be cancelled when the corresponding
legal commitments cease. The corresponding amounts thus
become available as revenue for the financial year in progress.

17. However, the audits that the Court carried out on the bud-
getary commitments at 31 December 1999 in respect of interest
subsidies revealed that substantial amounts had not yet been can-
celled. These commitments had generally been entered into in the

(3) For details of the ECSC’s reserve funds, see the Court of Auditors’
annual reports on the ECSC for the financial years 1992 (para-
graphs 1.30 to 1.33) and 1991 (Annex I), which can be obtained from
the secretariat of the European Court of Auditors.

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period 1989 to 1992, and totalled 26,1 million euro. The Court
notes the corrective measures taken by the Commission, which
during the financial year 2000 cancelled 90 % of these commit-
ments, to the value of 23,5 million euro.

20. The accounts concerned are the financial statements of the
ECSC at 31 December 1999, which were drawn up under the
responsibility of the Commission and published in the Official
Journal of the European Communities (1).

Repayment of taxes levied at source

18. The ECSC balance sheet at 31 December 1999 shows a claim
of 2,4 million euro relating to three applications concerning tax
levied at source between March 1989 and June 1996. The three
applications were sent, on average, six years and one month late.
As a result of this delay, the ECSC has not earned the legal inter-
est to which it was entitled.

STATEMENT OF ASSURANCE CONCERNING THE ECSC

19. Pursuant to Article 45c of the Treaty establishing the Euro-
pean Coal and Steel Community (ECSC), the Court has examined
the ECSC’s accounts so as to provide the European Parliament and
the Council with a statement of assurance concerning the reliabil-
ity of the accounts and the legality and regularity of the under-
lying transactions.

21.
In its report on the ECSC’s financial statements at 31 Decem-
ber 1999 (2), which incorporates the statement of assurance con-
cerning the reliability of the accounts and which is published
together with the financial statements concerned, the Court con-
cluded that the latter gave ‘a true and fair view of the assets and
financial situation of the European Coal and Steel Community at
31 December 1999, and of the result of its operations for the year
then ended’.

22. Furthermore, with a view to checking the legality and regu-
larity of the transactions underlying the ECSC’s accounts for the
financial year 1999, the Court carried out its audit in accordance
with generally accepted international auditing standards. In par-
ticular, the audit was based on an analysis of the systems and on
tests.

In the Court’s view, it obtained adequate assurance that the

23.
transactions, taken as a whole, are legal and regular.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 11 and 12 October
2000.

For the Court of Auditors

Jan O. KARLSSON

President

(1) Financial statements for the ECSC at 31 December 1999 (OJ C 281,

4.10.2000, p. 5).

(2) Report on the financial statements of the ECSC at 31 December 1999

(OJ C 281, 4.10.2000, p. 5).

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Table 1

ECSC own funds in 1999

Item (after allocation of surplus)

31.12.1998

Allocation

Withdrawal

31.12.1999

(Mio EUR)

Guarantee Fund (1)
Special reserve
Former pension fund
Surplus brought forward (1)
Value adjustment reserve

Subtotal (Reserves and surpluses)

Provision for large exposures
Available provision for financing the operating budget

530,0
176,0
72,9
0,7
0,0

779,6

23,0
380,0

(1) Own funds used by the Commission in the numerator of the ECSC solvency ratio.
Source: ECSC financial statements at 31 December 1999.

Total

1 182,6

+ 23,0
0,0
+ 1,6
0,0
+ 16,9

+ 41,5

0,0
+ 34,0

+ 75,5

0,0
0,0
0,0
– 0,5
0,0

– 0,5

– 5,0
– 21,0

– 26,5

553,0
176,0
74,5
0,2
16,9

820,6

18,0
393,0

1 231,6

Use of funds and changes in resources during the period 1992 and 1999

Table 2

Item

1992

1993

1994

1995

1996

1997

(Mio EUR)

1998
(a)

1999
(b)

Variation
(b) — (a)

A — Use
Administrative expenditure
Commitments
Exceptional uses of funds

5,0
477,2
85,9

5,0
531,2
7,1

5,0
386,4
32,5

5,0
277,9
—

5,0
201,2
—

5,0
180,9
—

5,0
154,0
—

5,0
145,6
—

Total uses (A)

568,1

543,3

423,9

282,9

206,2

185,9

159,0

150,6

B — Resources of the year
Result of non-budgetary operations
Levy
Other budgetary resources (fines, rebates, etc.)
Cancellations of commitments
Exceptional resources

131,5
146,5

201,3
121,3

75,8
—

94,0
—

112,5
107,7
4,8
63,3
91,9

90,8
102,3
11,6
70,7
—

95,6
95,9
4,4
90,0
—

143,3
101,6
4,3
195,2
—

69,6
—
12,3
134,2
—

82,9
—
19,5
85,4
—

—
– 8,4
—

– 8,4

+ 13,3
—
+ 7,2
– 48,8
—

Total resources of the year (B)

353,8

416,6

380,2

275,4

285,9

444,4

216,1

187,8

– 28,3

B — A – 214,3 – 126,7

– 43,7

– 7,5

79,7

258,5

57,1

37,2

– 19,9

Transfer from (+) / to (-) the provision for financing
the ECSC budget

+ 163,2 + 105,9

+ 43,3

+ 0,3

– 58,6

– 224,9

– 26,0

– 13,0

+ 13,0

Transfer from (+) / to (-) reserves

+ 53,0

+ 22,0

+ 2,0

+ 9,0

– 19,0

– 31,3

– 30,0

– 23,0

Surplus for the financial year

1,9

1,2

1,6

1,8

2,1

2,3

1,1

1,2

+ 7,0

+ 0,1

Source: ECSC financial statements for the years in question.

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Movements against the provision for financing the ECSC operating budget (ECSC OB) in 1999

Table 3

Item

Balance at
31.12.1998

Utilisation

Allocation

Net change

(in Mio EUR)

Balance at
31.12.1999

1. Available provision for financing the ECSC operating

budget

380,0

– 21,0

+ 34,0

+ 13,0

393,0

2. Provision for fines and surcharges to be paid

subsequently and for subsidies to be recovered (1)

96,0

476,0

Total

– 54,3

– 75,3

—

+ 34,0

– 54,3

– 41,3

41,7

434,7

(1) Fines, surcharges and interest subsidies are considered to be ECSC resources only at the point when they are actually paid. Until then, an amount equivalent to these claims

is included in this provision. The 41,7 million euro in question is thus not yet available as finance for the operating budget.

Source: ECSC financial statements at 31 December 1999, note 16.

Changes in the ECSC summary balance, before allocation of surplus, from 31 December 1998 to 31 December
1999

Table 4

31.12.1998

31.12.1999

Mio EUR

%

Mio EUR

%

Assets
Loans (to banks and undertakings)
Liquid assets (bank balances and bonds)
ECSC operating budget (ECSC OB) (levies, fines and subsidies receiv-
able)
Tangible and intangible assets
Other assets
Prepayments and accrued income

2 833
1 966

97
1
8
122

56,4
39,1

1,9
0,0
0,2
2,4

2 473
1 845

42
1
21
107

55,1
41,1

0,9
0,0
0,5
2,4

Total assets

5 027

100,0

4 488

100,0

Liabilities
Amounts owed (including bond issues)
Other liabilities
Accruals and deferred income
Provisions for liabilities and charges
Provisions for large exposures
ECSC OB (commitments and provisions)
— Commitments
— Provisions

— for financing the OB
— for fines and subsidies to be recovered

Reserves and surplus

2 806
30
94
123
23
1 172
696
476
380
96
780

55,8
0,6
1,9
2,4
0,5
23,3
13,8
9,5
7,6
1,9
15,5

Source: ECSC financial statements at 31 December 1999.

Total liabilities

5 027

100,0

2 432
28
85
113
18
991
556
435
393
42
821

4 488

54,2
0,6
1,9
2,5
0,4
22,1
12,4
9,7
8,8
0,9
18,3

100,0

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Changes in ECSC liquid assets and balancing items, 31 December 1998 to 31 December 1999

Table 5

31.12.1998

31.12.1999

Breakdown

Total

Breakdown

Total

(in Mio EUR)

Balance sheet item

Liquid assets

Loans and advances to credit institutions
— repayable on demand
— with agreed maturity dates

Bonds (1)
— public issuers
— ECSC bonds
— sundry items (2)

Balancing items

Reserves
— Guarantee fund
— Special reserve
reserve
utilisation (3)
— Former pension fund

reserve
utilisation (4)

Commitments for the ECSC OB

Provision for financing the ECSC OB
— for budget imponderables
— for financing future operating budgets

Provisions for liabilities and charges

Provision for large exposures

Value adjustments
— on loans disbursed on loan capital
— on bonds

Sundry items

406,4

1 617,3

5,7
400,7

1 114,0
22,0
481,2

Total liquid assets

2 023,6

5,0
71,3

1 223,3
23,4
608,9

553,0
27,8
176,1
– 148,3
33,7
73,0
– 39,2

59,0
334,0

143,8
87,3

76,3

1 855,5

1 931,8

614,5

556,2

393,0

113,5

18,0

231,1

5,6

1 931,8

530,0
15,6
176,1
– 160,5
30,1
71,3
– 41,2

80,0
300,0

129,6
58,1

575,7

695,7

380,0

122,9

23,0

187,7

38,6

2 023,6

Total balancing items

(1) Before value adjustments.
(2) This item inlcudes 98,4 million euro of financial instruments issued by a defaulting debtor.
(3) Loans for the construction of social housing.
(4) Building loans granted to officials of the European Communities.
Source: ECSC financial statements at 31 December 1999.

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COMMISSION’S REPLIES

FOLLOW-UP TO PREVIOUS OBSERVATIONS

Loans to officials

12. The Commission would point out that the accounts have been in order since July 2000.

Performance of liquid assets

15. From next year onwards, the Commission will indicate the average rate of yield on liquid assets in the
ECSC’s annual report.

Repayment of taxes levied at source

18. The Commission recognises that these three late applications for repayment led to a loss of revenue in
the form of the legal interest which was not collected. However, attention should be drawn to the fact that
most of the applications for repayment were made punctually. It was after a detailed audit by the Commission
that the applications for repayment were found to be missing in some cases and that corrective measures were
taken.