Communication from the Commission to the Council, the European Parliament and the European Court of Auditors - Annual Report on the financial management of the 6th-9th European Development Funds (EDFs) in 2005 {SEC(2006) 977}
Date: 2006-07-19
Institutions: European Commission
Subjects: European Development Fund, activity report, financial management, financial year

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 19.7.2006 
COM(2006) 405 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT AND THE EUROPEAN COURT OF AUDITORS 

Annual Report on the Financial Management of the 6th-9th European Development 
Funds (EDFs) in 2005 

{SEC(2006) 977} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

3. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

4.5. 

4.6. 

Introduction.................................................................................................................. 3 

Achieving the Objectives in 2005................................................................................ 4 

Raising programmes’ and projects’ quality ................................................................. 4 

Delivering programmes and projects faster ................................................................. 5 

Applying controls that meet the highest standards ...................................................... 5 

Financial situation, 6-9th EDFs – funds allocated, committed, spent and unspent, end 
2005 (€m, net) .............................................................................................................. 6 

Events significantly influencing activities in 2005 ...................................................... 6 

Backloading ................................................................................................................. 6 

Stabex........................................................................................................................... 6 

Management information ............................................................................................. 7 

Regulatory limits to co-financing ................................................................................ 7 

Internal control ............................................................................................................. 7 

Resources ..................................................................................................................... 8 

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1. 

INTRODUCTION 

The  Commission’s  Annual  Report  on  the  Financial  Management  of  the  6th-9th 
European  Development  Funds  (EDFs)  in  2005  fulfills  the  requirements  of  Articles 
96,  102  and  135  of  the  Financial  Regulation  applicable  to  the  9th  European 
Development Fund. Article 96 paragraph 2 states that: 

‘The EDF accounts shall be accompanied by a report on financial management during the preceding 
year containing an accurate description of: 
(1) 

the achievement of the objectives for the financial year, in accordance with the principle of 
sound financial management;  
the financial situation and the events that had a significant influence on the activities carried 
out during the financial year.’ 

(2) 

The European Development Fund (EDF) finances EC co-operation with: 
•  sub-Saharan Africa, the Caribbean and the Pacific under the ACP-EC partnership 

enshrined in the Cotonou Agreement; 

•  the  20  Overseas  Countries  and  Territories  (OCTs)  linked  constitutionally  to 

Member states1; and  

•  European Investment Bank (EIB) programmes in ACP states. 

The Cotonou Agreement forms the basis of the EU’s partnership with ACP countries. 
EU  and  ACP  Member  States  signed  the  agreement in  2000, and agreed to revise it 
every five years until it expires in 2020. They made the first such revision in 2005. A 
separate decision by the EU’s Council of Ministers governs the partnership between 
the EU and the OCTs of the Member States.2 

In  addition,  some  of  the  Commission’s  ACP  development  programmes  are  funded 
outside  the  Cotonou  Agreement,  from  the  general  EU  budget.  This  report  does  not 
cover these programmes. They include: 
•  the Commission’s activities in South Africa;  
•  thematic  budget  lines  covering  food  security,  democracy  and  human  rights,  and 

the environment; and  

•  support  for  banana  producers  under  the  Special  Assistance  Framework.  The 
European  Investment  Bank  (EIB)  also  funds  activities  in  ACP  states  from  the 
Investment Facility and its own resources. 

Two  Commission  departments  are  responsible  for  devising  and  implementing  EU 
development policy and programmes in ACP countries and OCTs:  
•  DG Development establishes policies and programming with ACP partners, and 
•  EuropeAid puts the policies into practice by delivering programmes and projects.  

The  9th  EDF  took  effect  on  1  April  2003,  once  all  Member  States  had  ratified  the 
agreement.  The  Commission  transferred  to  the  9th  EDF  the  outstanding  balances 
from previous EDFs. The 9th EDF expires in December 2007. 

1 

2 

Annex  II  to  the  EC  Treaty  lists  21  Overseas  Countries  and  Territories  (OCTs).  The  Commission  has 
direct relations with 20 of them, as the Overseas Association Decision does not apply to Bermuda (at its 
request). 
OJ L 314, 30 November 2001. 

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2. 

ACHIEVING THE OBJECTIVES IN 2005 

The  Commission  set  itself  objectives  and  defined  performance  indicators  and 
quantified targets for the EDFs in 2005 to measure progress in improving the: 
•  quality of programmes; 
•  speed and efficiency of their implementation; and  
•  functioning of control systems. 

2.1. 

Raising programmes’ and projects’ quality  

During  2005,  the  Commission  stepped  up  its  efforts  to  improve  new  programmes’ 
quality.  It  submitted  proposals  for  peer  review  by  a  Quality  Support  Group  (QSG) 
involving  officials  from  EuropeAid,  DG  Development  and  other  DGs  when 
necessary.  The  QSG  conducts  these  reviews  before  the  Commission  takes  its 
financing  decisions  –  at  the  programme  identification  stage,  early  on  in  the  project 
management cycle, and then again at the later technical formulation stage. In 2005, 
35 QSG meetings reviewed programmes amounting to over € 3 800 million.  

In  2005,  the  Commission  increased  EDF  investment  in  education  and  health, 
infrastructure  and  budget  support,  to  help  achieve  the  Millennium  Development 
Goals (MDGs). It also devoted EDF funds to other areas where progress is needed to 
achieve the MDGs - democracy, the rule of law, governance and agriculture.  

In 2005, the Commission devoted the greatest share of EDF resources - 36% - to the 
provision  of  basic  social  services  -  education,  health,  clean  water  and  basic 
sanitation. These are key to achieving the MDGs. The Commission assigned the next 
largest  shares  to  budget  and  balance  of  payments  support  (figures  include  food 
security  and  Stabex  operations)  and  to  transport,  communications  and  energy. 
Toegther, these three areas accounted for 84% of EDF global commitments. 

EDF commitments and payments by OECD-DAC sector, 2005 (€m, gross)3 

Sector 

Education, health, water, basic sanitation 
Budget and balance of payments support4 
Transport, communications, energy 
Agriculture, fisheries, trade, industry, tourism 
Environment, other cross-cutting issues 
Other, including reconstruction relief 

Sub-total 
ACP-EU Peace Facility5 
Total 

Commitments 

Payments 

% of total 
36% 
24% 
24% 
6% 
5% 
5% 

100% 

€m  
1 252 
858 
839 
194 
164 
205 

3 511 

3 511 

% of total 
29% 
26% 
24% 
9% 
3% 
9% 

100% 

€m  
711 
628 
584 
214 
72 
248 

2 456 

88 

 2 544 

3 

4 

5 

Reporting to the OECD DAC is provided on the basis of gross amounts. Details on the net EDF funding 
are provided in point 6.1 of the technical annex to this report 
According to the OECD DAC sector definitions, this sector includes in addition to budget and balance 
of payments support, also some types of food security and Stabex operations. 
The funding of  the Peace  Facility  is  not  accounted  as ODA  (Official  Development  Assistance) under 
the OECD-DAC definitions. 

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Global commitments 2005 (€m, gross)  

Payments 2005 (€m, gross) 

205

164

194

839

1252

858

Education, health, water
and sanitation

Budget and balance of
payments support

Transport,
communications, energy 

Agriculture, fisheries,
trade, industry, tourism

Environment, other
cross-cutting issues

Other (includes
reconstruction relief)

248

72

711

214

584

628

To  improve  the  sustainability  and  impact  of  its  aid,  the  Commission  continued  to 
provide  macroeconomic  budget  support  –  referred  to  as  general  budget  support 
(GBS)  -  and  sectoral  policy  support  programmes  (SPSPs).  The  share  of  EDF 
commitments  comprising  GBS  and  SPSPs  continued  to  rise,  from  18%  in  2004  to 
32% in 2005. The Commission approved:  
•  GBS in 13 countries, amounting to €705 million;  
•  SPSPs in 9 countries, totalling €416 million.  

2.2. 

Delivering programmes and projects faster 

The Commission continued to deliver programmes faster in 2005. This was reflected 
in its strong commitments and payments performance.  

EDF key performance figures, 2001-05 (€m, gross)6 

Global commitments 
Individual commitments 
Payments 

2001 
1 927 
2 488 
1 779 

2002 
2 125 
2 436 
1 922 

2003 
3 769 
3 062 
2 345 

2004 
2 648 
3 038 
2 464 

2005 
3 511 
3 057 
2 544 

The Commission achieved a 33% increase in global commitments in 2005 compared 
to  2004.  The  Quality  Support  Group  helped  ensure  quality,  while  the  volume  of 
operations approved rose steadily.  

After  committing  funds  for  a  programme  (global  commitments),  the  Commission 
must then sign contracts (individual commitments) with the entities that will deliver 
it (government, firms, NGOs, international organisations) and then disburse funds to 
them  (payments).  The  Commission  achieved  its  second-highest  level  ever  of 
individual commitments in 2005 - €3 057 - and record payments of €2 544 million. 

2.3. 

Applying controls that meet the highest standards 

The  EDF  is  governed  by  its  own  Financial  Regulation.7.  The  Commission  ensures 
sound  financial  management  and  proper  accountability  by  clearly  dividing 

6 

7 

These  figures  take  into  account  the  reclassification  of  certain  Stabex  operations,  for  which  a  detailed 
account was submitted with the EDF Financial Management Report for 2004. Payments shown in the 
table above include transfers €4.4 million paid from Stabex funds, although these actually took place in 
2002 and 2003.  
Available at: http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_083/l_08320030401en00010031.pdf 

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responsibilities. One set of people manages any given programme; another audits the 
programme’s financing and ensures it complies with the regulation.  

The Financial Regulation separates responsibility for managing the fund between an 
authorising officer and an accounting officer: 
•  the authorising officer performs his/her role under section 2 of the Regulation;  
•  the  accounting  officer  is  an  official  in  the  Commission’s  budget  department, 

acting under the rules in section 3 of the regulation. 

The  EDF  also  has  its  own  accounting  system,  which  the  Commission  is  currently 
modernising by shifting to an accruals-based framework (ABAC). 

EuropeAid  made  progress  with  its  main  internal  control  objectives,  covering  filing 
and Stabex. The Directorate responsible for EDF programmes successfully adopted 
new filing systems for both financial and non-financial dossiers.  

3. 

FINANCIAL SITUATION, 6-9TH EDFS – FUNDS ALLOCATED, COMMITTED, SPENT AND 
UNSPENT, END 2005 (€M, NET) 

The table below shows funds allocated to programmes in ACP countries and OCTs, 
and  to  the  European  Investment  Bank’s  Investment  Facility.  Investment  Facility 
funds from the 9th EDF are reported separately in the EIB’s financial statements. 

Funds allocated  
to ACP states (by EDF)8 
9th  
6th-8th 
Total, 
6th- 9th 
c (a+b) 
b 
29 512  14 943 44 455 

a 

Funds 
committed

Funds 
spent 

Funds/commitments outstanding 

d 
38 727 

e 
28 403

Funds 
uncommitted 
f (c-d) 
5 728 

Commitments 
unspent (RAL) 
g (d-e) 
10 324 

Total remaining 
funds unspent 
h (f+g) 
16 052 

4. 

EVENTS SIGNIFICANTLY INFLUENCING ACTIVITIES IN 2005  

4.1. 

Backloading  

The  uneven  spread  of  global  commitments  over  the  year  remained  a  problem  in 
2005. The Commission committed 38% of the 2005 total by the end of September, 
against  a  target  of  55%.  In  response,  EuropeAid  is  monitoring  the  project  pipeline 
more  closely  than  in  the  past,  and  using  the  Quality  Support  Group  to  ensure 
deadlines are respected in addition to supporting quality.  

4.2. 

Stabex  

In 2005, the Commission laid the ground for addressing outstanding Stabex issues,9 
but  this  will  only  bear  fruit  in  2006  and  2007.  The  Commission  clarified  legal  and 
budgetary issues to allow outstanding Stabex commitments to proceed.  

8 
9 

Taking into account the transfers from the former EDFs into the 9th EDF. 
Stabex is a financial instrument created by the Lomé Convention (Articles 186-212) intended to offset 
instability  in  ACP  states’  export  earnings.  The  Cotonou  Agreement  replaced  Stabex  with  a  new 
instrument, Flex.  

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The  Commission  intends  to  commit  all  outstanding  Stabex  funds  for  beneficiary 
countries through Frameworks of Mutual Obligations (FMOs). Target deadlines are:  

•  FMOs approved - end 2007 
•  contracting - end 2008  
•  disbursement - end 2010.  

To  control  Stabex  funds,  the  Commission  operates  separate  sets  of  accounts.  It 
transfers  Stabex  funds  from  the  main  account  into  “security  accounts”  in  Europe, 
which the Commission’s Accounting Officer manages. When the required conditions 
are met, the Commission then transfers funds to “double signature accounts”, which 
the beneficiary country’s National Authorising Officer (NAO) and the Commission’s 
Head of Delegation manage jointly.  

The  Commission  attaches  particular  importance  to  reporting  on  “double  signature” 
Stabex  accounts.  In  2005  it  reminded  NAOs  that  the  Cotonou  Agreement  requires 
them  to  report  regularly  on  Stabex.  The  Commission  also  appointed  an  official  as 
overall  Stabex  Coordinator  and  plans  to  establish  by  March  2007  a  database  to 
follow  up  Stabex  accounts  more  closely.  In  addition,  delegations  must  include 
statements  on  the  situation  of  Stabex  accounts  in  their  twice-yearly  External 
Assistance Management Reports (EAMRs).  

Annex  7  below  comprises  a  statement  of  the  balances  and  operations  as  at  31st 
December  2005  of  Stabex  “double  signature  accounts”  and  indicates  reporting  that 
remains outstanding. 

4.3.  Management information  

The  Commission’s  management  information  tools  -  CRIS  and  OLAS  -  do  not  yet 
provide the information needed to make fast, accurate EDF forecasts and to monitor 
and report on EDF performance indicators. This is in part because of incomplete data 
inputting.  The  Commission  is  working  to  replace  OLAS  with  CRIS-EDF  and  to 
introduce  a  new  accounting  system,  ABAC.  Training  in  CRIS-EDF  will  also  be 
reinforced. 

4.4. 

Regulatory limits to co-financing  

The EDF Financial Regulation limits participation in co-financing operations, so the 
Commission  will  pursue  its  proposal  for  a  fast-track  revision  of  the  Financial 
Regulation and 9th EDF Internal Agreement.  

4.5. 

Internal control 

In 2005, EuropeAid transferred responsibility  for ex-post controls to its geographic 
directorates. The ACP directorate recruited new staff for this task in September 2005. 

The Directorate also conducted a detailed risk analysis and applied a representative 
sampling methodology. On this basis, it drew up its Ex-Post Control Action Plan for 
transactions  effected  in  2005,  and  established  a  target  of  reviewing  in  detail  3%  of 
transactions  completed  between  January  and  end  September  2005.  Progress  in 

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implementing the Action Plan at the time this report was submitted (May 2006) was 
as follows: 

Ex-post control of transactions in Jan-end Sept. 2005 – status, May 2006 

Total no .of transactions, Jan-end Sept. 2005 
Transactions for which controls planned 
Transactions for which controls completed/ongoing 

No. of 
transactions 
19 500 
590 
307 

% of total transactions, 
Jan-end Sept 2005 
100% 
3% 
1.5% 

The  Directorate  missed  its  3%  target  for  2005,  as  it  took  longer  than  expected  to 
phase  in  the  Action  Plan.  At  the  time  this  report  was  submitted  (May  2006),  the 
Directorate  had  implemented  ex-post  controls  on  52%  of  the  2005  transactions  it 
planned to analyse.  

EuropeAid  will  use  its  experience  of  implementing  ex-post  controls  in  2004  and 
2005 to define an Action Plan for 2006 which will innovate in two areas:  

•  the scope of controls applied to each transaction and  
•  the proportion of transactions targeted for ex-post control.  

4.6. 

Resources  

To  manage  EDF  funds,  the  Commission  relies  on  staff  both  in  EuropeAid 
headquarters and in Delegations. Since its reorganisation in March 2005, EuropeAid 
has been working at the limits of its staffing capacity, which stood at 194 people in 
total  at  end  2005.  In  addition,  several  changes  of  middle  management  staff 
responsible for managing the EDF took place between March and year-end.  

As  a  result,  the  Commission  has  had  to  prioritise  certain  activities  over  others, 
leading to some slippage, for instance in: 

•  updating internal and external web sites;  
•  monitoring Stabex programmes; and  
•  implementating ex-post controls. 

The  management  of  EDF  funds  also  relies  on  other  EuropeAid  directorates’ 
resources, in particular the: 

•  Operations  Quality  Support  Directorate,  which  helps  prepare,  monitor  and 

evaluate programmes;  

•  two  directorates  providing  more  general  support  and  resources  for  EuropeAid’s 

operations.  

Point  8  of  the  technical  annex  below  discusses  in  more  detail  ACP  delegations’ 
resources situation now that EuropeAid has completed its devolution process. 

An important measure of the intensity with which EuropeAid uses its resources is the 
number of staff that EuropeAid employs on average for every €10 million in funding 
which  it  manages.  Accurately  allocating  “overhead”  staff,  and  hence  the  precise 
ratio, specifically for EDF funds, is difficult. However, the ratio for EuropeAid as a 
whole  fell  by  6%  between  2004  and  2005,  from  4.8  to  4.5.  The  Commission  will 
continue  to  deploy  staff  as  efficiently  as  possible  and  order  its  priorities  strictly  in 
2006. 

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