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# 31991Y1213(04)

**Annual report concerning the financial year 1990 together with the institutions' replies** 
  
*Official Journal C 324 , 13/12/1991 P. 0001 - 0316*

  

ANNUAL REPORT concerning the financial year 1990 VOLUME I

The report, together with the institutions' replies to the Court's

observations, was transmitted to the authorities responsible for giving

discharge and to the other institutions by 30 November 1991

Aldo ANGIOI (President)

André J. MIDDELHOEK

John CAREY

Josep SUBIRATS

Carlos M. MORENO

Richie RYAN

Fernand HEBETTE

Ole Joergen WARBERG

Konstantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

FOREWORD 1. This 14th annual report (on the financial year 1990) of the Court of Auditors of the European Communities is in two volumes.

2.The first volume contains observations on the operating budget of the Commission and on the consolidated accounts of the European Communities, along with observations on the European Development Funds. The Commission's replies to the Court's observations conclude this first volume.

3.The second volume contains all the observations that concern the administrative appropriations of the institutions. Three chapters are each devoted to one institution and are followed by the replies received from the institution concerned. The last chapter deals with the European Schools. This volume contains, in addition, a list of reports and opinions that have been adopted by the Court of Auditors over the last five years, together with a financial and statistical annex.

4.The key to the abbreviations and symbols used in this report is given on the first page of Annex II (Volume II).

5.The references to the Official Journals in which the annual reports in respect of previous financial years were published are listed below:

- 1977: OJ C 313, 30.12.1978

- 1978: OJ C 326, 31.12.1979

- 1979: OJ C 324, 31.12.1980

- 1980: OJ C 344, 31.12.1981

- 1981: OJ C 344, 31.12.1982

- 1982: OJ C 357, 31.12.1983

- 1983: OJ C 348, 31.12.1984

- 1984: OJ C 326, 16.12.1985

- 1985: OJ C 321, 15.12.1986

- 1986: OJ C 336, 15.12.1987

- 1987: OJ C 316, 12.12.1988

- 1988: OJ C 312, 12.12.1989

- 1989: OJ C 313, 12.12.1990

6.Unless otherwise stated, the observations set out in this report refer to the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977) as amended by Council Regulations (EEC) N° 1252/79 of 25 June 1979 (OJ L 160, 28.6.1979, p. 1), N° 1176/80 of 16 December 1980 (OJ L 345, 20.12.1980, p. 23), N° 1600/88 of 7 June 1988 (OJ L 143, 10.6.1988), N° 2049/88 of 24 June 1988 (OJ L 185, 15.7.1988, p. 3) and N° 610/90 of 13 March 1990 (OJ L 70, 16.3.1990, p. 1).

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Annual report of the Court of Auditors concerning the financial year 1990

INTRODUCTION (\*)

(\*) The Commission's replies are on page 211.

DEVELOPMENT OF THE COMMUNITY

0.1. It is inherent in the role of the Court of Auditors that most of the observations in its annual reports have a retrospective character. The present report is no exception. This introductory chapter, however, brings together certain observations which in the Court's view are of relevance to the future development of the Community's institutions and policies.

0.2. Several factors combine to make an assessment of this sort timely. In the first place, the Community has, in the wake of the Single European Act and with a view to the establishment of the internal market by 1993, recently decided to speed up the progress towards political and economic union. Achievement of a sufficient degree of economic convergence, which is one of the key elements of progress, will depend inter alia on the Community's ability to spend money wisely. It is in any case now clear - and some signs of this are apparent in the present report - that the Community budget is entering an extremely difficult period, in which the agricultural guideline policy which was established in 1988 will be put under severe pressure.

0.3. Simultaneously, major international developments such as the unification of the two Germanys and the opening up of Central and Eastern Europe are of potentially great significance for the Community budget. As Chapter 12 of this report shows, the Community's cooperation and active fostering of the process of transition in these countries towards a market economy will require the real needs of their economies to be evaluated and administrative inefficiencies to be overcome, if Community financial resources are to be used both economically and effectively.

SUBSIDIARITY

0.4. Efforts to maximize the share of responsibility borne by national (and where appropriate local) authorities for day-to-day implementation of Community policies are in many cases commendable from the point of view of sound financial management. The Court has previously drawn attention to the risk that the doctrine of subsidiarity will be used to excuse inadequate performance by the Commission. It is essential that the Commission, as the Community's unique and central executive agency with political responsibility for the use made of taxpayers' money, should ensure that Member States provide it with sufficient information to monitor the quality of their day-to-day management and should be ready to initiate remedial action as necessary.

0.5. The chapter in the present report (Chapter 9) about compensatory allowances paid under the EAGGF (Guidance) regime provides a vivid illustration of the possible consequences when the Commission adopts a passive approach to the management of the structural Funds. The original target of the aid was a minority of the farming population in less-favoured areas who suffered from certain specific handicaps, such as poor-quality terrain. However, the areas have been extended and the number of beneficiaries has been increased to the point where the aid is no longer fulfilling its original objective and is having a perverse impact on other Community objectives, for example in connection with the environment.

0.6. Subsidiarity implies, inter alia, a state of affairs in which Member States devote equal care and attention to the safeguarding of Community and national assets, and perceive the Commission as a source of guidance and advice in optimizing their use of Community funds. An observation in Chapter 3 (3.45-3.47) shows that relations between the Commission and Member States are still some way from this ideal condition. In the case in question, the Commission imposed a heavy financial correction on a Member State for weak administration of a Community sheep and goat premium scheme, although the Member State's difficulties were partly due to a failure by the Commission to exercise its own role as supervisor and counsellor.

0.7. The Court's observations on the structural Funds (7.18-7.22) provide another illustration of the reasons why subsidiarity is a difficult principle to put into practice. Here the Court concludes that the concept of partnership, which is vital to the successful reform of the structural Funds, has yet to be developed in a satisfactory manner.

SOUND FINANCIAL MANAGEMENT

0.8. The Treaty confers on the Commission, as the institution responsible for implementing the budget, a trusteeship role. This role has now been made more explicit by Article 2 of the Financial Regulation which came into effect in March 1990. This Article specifies economy and cost-effectiveness as two guiding principles for implementing the budget. This provision has important implications for all the institutions. Where budgetary objectives are defined in terms of ceilings on expenditure, as is the case with the agricultural guideline, it will not be permissible to treat such ceilings as targets. Decisions to increase expenditure in certain markets, as the Commission did in 1990 (3.4) when the guideline was in no danger of being breached, will need very convincing justification in future if their legality is to be above question. More generally, the availability of appropriations on a budgetary line can never in itself be sufficient justification for using those appropriations without due regard to the principles of sound financial management.

0.9. An important element in the Community's structural policies has been the concept of 'additionality` which is the subject of observations in Chapter 6 of this report. The common interpretation of this concept appears to be based on the principle that more means better, which is the negation of Article 2 of the Financial Regulation. The decision to double the amount of money available for the structural Funds by 1993 will only achieve its objective of reducing the differences in economic performance between the regions if the funds are spent with due regard to the principles of sound financial management. The Court underlines the importance of its recommendation (6.45) that the Commission should give more precision to the concept of additionality.

0.10. If the effectiveness of aid is to be properly measured, suitable quantitative and financial criteria have to be fixed by appraisal prior to the start of projects or programmes. Monitoring and evaluation can then be carried out by comparison with these criteria.

0.11. Point 6.20 of this report draws attention to the virtual lack of prior appraisal in the reform of the structural Funds and to the implications of this lack for future evaluation. Point 7.48 notes that Member States rarely present quantified objectives in their regional development plans; even when they do, the validity of these objectives in terms of the proposed development strategy is not always clear.

0.12. In Chapter 10 the Court reports that it was unable to satisfy itself that the economic and industrial development objectives of an NCI loan project had been achieved, due to the absence of verifiable criteria. The chapter on aid to Central and Eastern Europe makes it clear that a large quantity of food aid, which was delivered to Poland without any prior analysis of needs, was not actually required.

0.13. The chapters of this report dealing with development cooperation highlight the weaknesses in the management and control of financial resources which can arise when third parties (for example non-governmental organizations, the EIB, the ACP Secretariat) are involved in the implementation or administration of development programmes. The years ahead are likely to see substantial increases in the funds available for development cooperation, for example as a result of the revised Mediterranean policy, the new policy framework for Asia and Latin America and the fourth Lomé Convention. A similar increase can therefore be expected in the involvement of third parties. The Commission's role should be to ensure that any such third party is capable of managing and reporting on the use of funds it receives, and that the Commission itself has the resources, procedures and systems to prepare sound proposals, to manage the physical and financial implementation of development projects, and to monitor effectively the actions undertaken by beneficiaries. Otherwise, the principles of sound financial management will not be satisfied, and the objectives of the Community's policy in this area will not be achieved.

0.14. The Commission should do much more to ensure that Community funds are not committed without adequate prior appraisal, that results are evaluated in terms of objectives and that the lessons learned are used to correct ongoing programmes and improve the design of future ones.

THE PERSISTENCE OF WEAK FINANCIAL MANAGEMENT

0.15. Numerous observations in this report refer to similar observations in previous years, for example those concerning non-Annex II products in Chapter 4; less-favoured areas (EAGGF-Guidance); recovery of sums wrongly disbursed by the Social Fund; co-financing with NGOs of development aid projects; management of bursaries by the EDF; and execution of Sysmin projects. To some extent this is also the case for EAGGFGuarantee - manipulation of the Guarantee budget, negative expenditure, inadequate discharge of responsibilities by the paying agencies and the particular problems associated with the sheep and goat premium.

0.16. In order to determine the extent to which observations made in past years remain valid, the Court examined the system established by the Commission for following the action taken in order to remedy deficiencies pointed out by the Court.

The Commission's system of follow-up

0.17. In its replies to the 1985 Court of Auditors' annual report, the Commission stated:

'Follow-up action to comments made by the supervisory authorities - by the European Parliament in its resolution accompanying the discharge decision and by the Court of Auditors in its annual report and special reports - is of constant concern to the Commission.

The Commission considers it essential to respect its undertakings to these institutions. Thus, in order to have an overall view of the action taken and, where appropriate, to make the necessary adjustments, the Commission has set up an internal procedure to keep it informed each year of the undertakings given to the supervisory authorities, the measures planned or already in force by way of follow-up action and the schedule for their implementation. This procedure was first applied in spring 1986.`

It has reiterated its position in replies to the Court's subsequent annual reports.

0.18. Following its system-based approach the Court has examined the Commission's follow-up procedures in order to find out whether and to what extent this system can be used as a reliable basis for the review of actions taken by the Commission as a result of the Court's observations.

0.19. The procedure was operated by three staff of a unit within Directorate-General XIX (Budgets), responsible for, inter alia, obtaining information on follow-up from the other Directorates General. The exact nature of the system has not been easy to establish given that no documentation describing it exists.

0.20. When compiling reports on measures taken, Directorate-General XIX relied on information, submitted at its request, from the other Commission departments. However, some Directorates-General failed to provide it with all the information requested. Often what was received was late, incomplete and in need of clarification. Directorate-General XIX does not have the staff to carry out an in-depth analysis of such information it receives. There is no comprehensive inventory of the undertakings given to the Court and thus no check that they are being met.

Effectiveness of the follow-up procedure

0.21. The Court has attempted to evaluate the effectiveness of the follow-up system in the context of EAGGFGuarantee. A selection of 50 observations was taken from the Court's annual and special reports covering the period 1983-88. A questionnaire was sent to Directorate-General VI (Agriculture). The answers given were incomplete and sometimes of very limited value. It was unclear what action, if any, had been taken to redress the weaknesses indicated. In many cases the undertakings themselves had been couched in extremely vague terms.

0.22. Given the deficiencies of the system, the Commission has recently decided to abandon it entirely. Attempts during the past five years to develop a computerized system have so far come to nought. The Commission needs a system which:

(a)includes a comprehensive inventory of all undertakings given and the extent to which they have been met, such as measures taken by the Commission, by Member States, implementation dates, reports regarding the effectiveness of the measures, etc.;

(b)comprises clear practical instructions to be carried out by DG XIX and other Directorates-General;

(c)checks the consistency of the undertakings given in replies to the Court of Auditors' reports with those given to the Parliament;

(d)includes an assurance that the different services take the necessary measures;

(e)provides access to the system for the Court of Auditors.

0.23. Whilst the Court is able to conduct its own research into measures taken, this would imply repeating the work of its earlier enquiries, which is neither practical nor desirable. On the basis of its examination of the Commission's system, the Court was unable to determine whether the Commission has respected the undertakings given.

CHAPTER 1 (\*) Financial audit of the Commission's revenue, operating expenditure and financial accounting and the consolidated accounts

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THE IMPLEMENTATION OF THE BUDGET IN 1990

The adoption and presentation of the budget

Adoption of the budget

1.1. The general budget for the financial year 1990 was finally adopted on 13 December 1989

, the budgetary procedures having been completed within the time-limits specified in the Treaties. At that time, the amount fixed for appropriations for commitment was 48 846,5 Mio ECU, whilst the amount for appropriations for payment was 46 716,8 Mio ECU. These amounts were subsequently modified by three supplementary and amending budgets on 16 February 1990

, 11 July 1990

and 12 December 1990

, as a result of which the appropriations for commitment were increased progressively to 49 207,9 Mio ECU and the appropriations for payment to 46 928,2 Mio ECU.

Presentation of the budget

1.2. For the record, the Court wishes to point out that the true volume of budget authorizations is larger than the above figures indicate, if the revenue that is entered in the form of negative expenditure (1 366,4 Mio ECU of agricultural co-responsibility revenue, intra-Community compensatory amounts and the EAGGF Guarantee Section clearance) and the expenditure entered as negative revenue (1 514,8 Mio ECU for the costs of collecting own resources) are taken into account. The total volume of funds available for payment that emerges from a study of the general budget is in fact 49 809,4 Mio ECU.

The utilization of appropriations

Rates of utilization of the available appropriations

1.3. Using the information on which the Commission's revenue and expenditure account is based, the Court compiled a number of tables setting out in detail the changes in and utilization of appropriations for the year. These figures are published in Tables 1.1 and 1.2. An analysis of the main areas of activity is given in the introductions to the various specialized chapters.

The utilization rates in the light of the financial perspective

1.4. The Court also grouped together, in Table 1.3, the figures for budget implementation with reference to the 'financial perspective`

.

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Carry-overs of appropriations

1.5. In the sphere of the EAGGF Guarantee Section, 407 Mio ECU were carried over to 1991 with the approval of the budgetary authority, although the Court's scrutiny showed that not all the basic conditions laid down in Article 7(1) and (3) of the Financial Regulation had been satisfied (for further details see paragraphs 3.14-3.17).

1.6. In the case of the ESF, of the 217,8 Mio ECU carried forward to 1991, 200 Mio ECU were for the operational programmes ready for commitment or decided at the end of 1990, but the list used to validate the carry-overs does not tally with the programmes finally committed against the appropriations that were carried over. Furthermore, these appropriations were committed for measures that had already been carried out in 1990, whereas the relevant operating rules, contained in Council Regulation (EEC) N° 4255/88 of 19 December 1988 (OJ L 374, 31.12.1988, p. 21), provide that the Commission is to rule on aid applications before the measures are started.

The use of national currencies to implement appropriations authorized and booked in ecus

1.7. Examination of the implementation of the Commission decisions relating to the adaptation of fishing capacity (see paragraphs 5.17-5.18) revealed a rather confused situation in the accounts, due to the fact that the decisions are adopted in budgetary ecus, whereas the eligible expenditure is effected in national currencies. Fluctuations in the various exchange rates used at the times when payments are validated and then effected make it impossible to predict the amounts that will be finally paid to the Member States, as they are sometimes greater and sometimes less than the amounts actually due. This problem is common to most of the operations financed by the budget (see in particular paragraphs 6.22-6.34). In its opinion on the amendment to the Regulation laying down detailed rules for the implementation of certain provisions of the Financial Regulation, the Court stated that it was in favour of implementing the budget in ecus to the fullest extent possible, so as to prevent this type of distortion, which also affects the monitoring of commitments (need for periodic revaluation), the implementation of appropriations (the effect of the revaluation) and the accounting.

Administrative expenditure charged to the section of the budget devoted to operating expenditure

Background to the enquiry

1.8. Over a period of several years, the Court has noticed in the course of its audits that administrative expenditure (staff expenditure, official travel expenses, purchases of equipment, etc.) has been charged to operating appropriations, which, in turn, has gradually had an effect on the observance of the principle of budget specificity, on which the budgetary authority depends for the exercise of its powers. The object of this principle is to ensure that the appropriations made available are not diverted from their objectives.

1.9. For a long time this phenomenon, which is commonly known as 'mini-budgets` and by definition does not appear in the accounts, remained marginal. The Court confined itself to mentioning the anomalies encountered, especially as this practice has gradually come to be covered by ad hoc budget remarks at the initiative of the Commission, or sometimes of the budgetary authority itself.

1.10. In 1989 the Court decided to carry out an audit in order to quantify this phenomenon. The results of that audit are set out in the paragraphs which follow.

Quantification of the mini-budgets

1.11. Up till the end of 1990, the administrative expenditure in question was posted to headings to which operating expenditure (subsidies, projects, etc.) was also booked, so that it was not possible to identify it, or a fortiori the accounting system, from the budget classification. The Commission did, however, endeavour to develop a system of booking codes and analytical codes to make it possible to extract administrative expenditure from the operating expenditure accounts by computer. The Court carried out certain checks which gave rise to the following observations.

1.12. Whilst the remarks against item B9960, which refer to Council Regulation (EEC) N° 3906/89 of 18 December 1989 (OJ L 375, 23.12.1989, p. 11), do authorize the charging of costs related to the initial period of operation of the measures financed, they do not provide authority for charging administrative expenditure of the 'mini-budgets` kind to these appropriations, even after the appropriations had been increased by supplementary and amending budget N° 2. This item is, however, mentioned in the list of budget headings including mini-budgets which followed the Internal Regulations adopted by the Commission on 22 May 1990 with the intention of providing a formal framework for the mini-budgets. It gave rise to commitments totalling some 3,4 Mio ECU, which were thus effected without authorization in either the budget or the Regulation. The Financial Controller noticed this, but considered that the list of mini-budgets compiled by the Commission constituted an adequate legal base.

1.13. The Internal Regulations prescribed, for each budget heading and mini-budget, an upper limit for the amount to be charged to operating appropriations. These upper limits have not always been respected and the procedure for adjusting them has not always been followed either. For example, the upper limit against item B4702 was exceeded by at least 0,9 Mio ECU of commitment appropriations. Similarly, within Title 6, the limits against Chapters 63, 66 and 67 were exceeded by 0,075 Mio ECU, 0,786 Mio ECU and 4,589 Mio ECU respectively.

1.14. Conversely, the revenue and expenditure account for 1990 (pp. 345-347) shows an amount of 201,360 Mio ECU for mini-budget commitment appropriations implemented, whereas the Commission's estimates give a figure of 276,452 Mio ECU. This is equivalent to an overall utilization rate of 72,8%, which is rather low.

1.15. This same rate is particularly low (10,6%) in the case of the support measures for the development of the single financial market (Item B7752). In the case of the European Social Fund (Item B6000), the rate is 4,8%, as only 0,593 Mio ECU of commitment appropriations were used, compared with the upper limit of 7,8 Mio ECU. In Chapters 64 and 68 the respective limits were 12,7 Mio ECU and 2,2 Mio ECU, of which only 7 Mio ECU and 1,5 Mio ECU were used up.

1.16. This state of affairs is not satisfactory. It raises questions concerning the way in which the upper limits were estimated and the accounting system operated, as it is not possible to use the latter to identify mini-budget expenditure correctly.

1.17. In this respect the value of the estimates for Articles 940, 990 and 995 is particularly doubtful. They predicted that 100% of the expenditure would be charged by way of mini-budgets, which is surprising in itself, as, logically, the mini-budgets must be additional to expenditure on the measures for which the mini-budget appropriations provide back-up support. Moreover, in the lists published on page 347 of Volume II of the revenue and expenditure account, the execution of these headings - contrary to the indications given by the Commission in its reply - mainly takes the form of intervention expenditure.

1.18. As for the question of identifying mini-budgets through the accounting system, the Commission's use of booking codes and analytical codes remains arbitrary and the accuracy of the data thus produced cannot be guaranteed. Throughout 1990 the Commission modified the contents of the booking codes and analytical codes, rendering them increasingly complex. The codes entered by the authorizing officers in the accounting documents (proposals for commitment and payment orders) do not always tally with those which appear on the lists sent to the Court. Finally, it was frequently observed that intervention expenditure was mixed with mini-budget expenditure. This was especially apparent in the case of subsidies (expenditure on various Community measures) and supplies of services (mini-budget expenditure). For example, for Items B3010, B3870, B4702, B6310, B6320, B6472, B9300, B9304, B9311 and B9360 personnel expenditure was posted to operational codes. For items B6451 and B6751 costs arising from translation work, meetings, press conferences and the hire of meeting rooms were booked to operational codes.

1.19. A further aspect dealt with in the study concerns the application of the Commission's Internal Regulations to mini-budget expenditure financed from carried-over appropriations, appropriations made available for re-use, or payment appropriations belonging to financial years following the one during which the commitment was entered into. The Commission's Internal Regulations do not make it clear whether they apply to these categories of appropriations. The Directorate-General for Budgets takes the view that they do not. In practice, however, mini-budgets, some of them representing substantial amounts, receive finance from these appropriations (Chapter 60 provides an example of revenue available for re-use: 3,5 Mio ECU). Most of the mini-budgets are grafted onto headings which comprise differentiated appropriations, but if the application of the Internal Regulations is confined to the appropriations for the year, the heterogeneity of mini-budget expenditure becomes a problem: some of the expenditure is governed by the Internal Regulations (booked to the appropriations for the year) and some is not (posted to other types of appropriations).

1.20. The conclusion that inevitably follows from all these findings is that in 1990 the system established by the Commission in order to identify and control mini-budgets was unreliable. On the other hand, as the Court was not given sufficient access to the Sincom system (see paragraphs 1.109-1.116) it had to rely on the Commission to extract the mini-budget data from the accounts. It was not possible, from the Court's checks on the listings forwarded, for it to verify their validity, or, in consequence, that of the listings published in the revenue and expenditure account. Nevertheless, in the informatics field, the Court did, in another context, examine in greater detail (see Volume II, paragraphs 17.32-17.35) an amount of 25,8 Mio ECU of expenditure, including 10,7 Mio ECU for services, financed by appropriations from Part B of the budget. This amount should be compared with the 42,4 Mio ECU, including 9 Mio ECU for services, financed by appropriations from Part A of the budget. The comparison illustrates the extent of the mini-budget phenomenon.

1.21. For the record, in the 1991 budget the total for the mini-budgets, which are specifically identified in the interests of transparency, represents 9,634 Mio ECU in Part A and 183,325 Mio ECU in Part B. To these amounts are to be added the administration-related appropriations required for the realization of the Community research objectives (i.e. a total of more than 300 Mio ECU) and an undefined volume of appropriations concerning the mini-budgets associated with some of the structural Funds (the European Social Fund in particular).

The infrastructure quotient

1.22. In view of the increasing volume of personnel costs financed by means of mini-budgets, the Commission departments responsible for the institution's administration have been obliged to place an ever-increasing volume of infrastructure resources (premises, furnishings, telephones, electricity, etc.) financed from Part A of the budget at the disposal of these people. The corresponding Part A appropriations have not, however, increased at the same rate and quickly proved inadequate. In order to satisfy the demand, the Commission introduced a method of financing based on budget headings supporting mini-budgets.

1.23. In order to do this, the Commission calculated an infrastructure quotient (equal to the total infrastructure costs normally booked to Part A divided by the number of persons working for the institution). For 1990 the quotient was fixed at 13 433 ECU per person. The Commission decided that, on this basis, each operating appropriation heading used to finance outside personnel should support 89,887% of the infrastructure cost thus calculated, multiplied by the number of persons identified as being financed from these operating appropriations. This corresponded to an amount of 12 074 ECU for every person concerned. In some cases the Commission has not always been logically consistent. For example, it posted 805 980 ECU to the appropriations for the countries of Eastern Europe, i.e. 100%, instead of the 89,887% of the infrastructure quotient, on the basis of 60 posts, half of which were still unoccupied at the year-end, which was in contradiction with the Internal Regulations, which prescribed that the actual situation as regards staff employed at the end of the year should be taken into account.

1.24. This procedure is irregular. For example, as a result of these methods part of the rent of the Berlaymont building and substantial removal costs were financed from the Phare programme without following the criteria for breaking expenditure down which the Commission itself established when instituting the infrastructure quotient. In order to comply with the Financial Regulation, the Commission should have initiated a transfer procedure, with the approval of the budgetary authority, so as to furnish Part A with the necessary appropriations, and should then have committed and charged this infrastructure expenditure.

Observance of the financial perspective

1.25. Both the mini-budget phenomenon and the mechanism of the infrastructure quotient raise the question of the limits on administrative costs imposed by the financial perspective. After the 1990 revision, item 5 of the financial perspective (see Table 1.3) set a mandatory upper limit of 4 930 Mio ECU for appropriations for commitment. It is clear that had the administrative expenditure openly charged to Part B of the budget (mini-budgets) and the administrative expenditure that was charged to it without budgetary authorization (the quotient) been taken into account as administrative costs, the upper limit for item 5 would have been exceeded in the 1990 financial year. It is impossible to exclude the possibility that the extent of the mini-budget phenomenon is due, indirectly, to the imposition of the ceiling for item 5.

The management of mini-budget expenditure

1.26. It should also be noted that very decentralized management methods have evolved alongside the use of mini-budgets and have, to a large extent, escaped control by both the central departments responsible for administrative expenditure and the Financial Controller, with the result that, for example, computer equipment has been purchased, but in some cases has not been inventoried.

1.27. In the context of personnel management, and having regard to the relevant budget remark and the provisions of Article 3(a) of the Conditions of Employment of Other Servants of the European Communities, which defines temporary staff as being paid out of the global appropriations entered for that purpose, Item A1110

is the only one which can be used to provide financing for auxiliary staff. This category is, however, mentioned specifically in the schedule in Annex 1 of the Internal Regulations and has, for a long time, been financed partly from the mini-budgets in Part B of the budget.

1.28. The case of auxiliary staff also illustrates the problems engendered by the variety of categories in which appropriations may be classified. Some auxiliary staff are managed by the Directorate-General for Personnel and Administration using Part A appropriations, which may not be carried over. Others are under the management of the operational Directorates-General concerned, using appropriations, in some cases differentiated ones, which are subject to more flexible carry-over rules. In consequence the management procedures (recruitment, management, payment, etc.) applied to this category of staff are not uniform.

Conclusion

1.29. The Financial Regulation was amended in 1990 and the Community legislative authority specified in Article 19(1) that 'the Commission section [of the budget] shall consist of:

- a 'Part A` for the staff and administrative expenditure of that institution ...

- a 'Part B` for operating expenditure ...`.

1.30. It is true that paragraph (2) of the same Article 19 continues to provide that within each section the items of revenue and expenditure are to be classified according to their type or the use to which they are assigned. The retention of this Article in the revised Financial Regulation must not, however, be allowed to weaken the import of paragraph (1).

1.31. Taking a strict interpretation of Article 19(1) of the Financial Regulation, mini-budgets, in legal terms, cease to be exceptions justified by the existence of covering remarks in the budget and become cases of failure to comply with the Financial Regulation. This state of affairs is aggravated by the fact that, in terms of budget implementation, the mini-budgets are currently managed according to the rules governing the underlying appropriations (differentiated or non-differentiated appropriations, compulsory or non-compulsory expenditure), especially where transfers and carry-over are concerned, whereas if they appeared in Part A the only rules applicable to them would be the specific provisions relating to staff or administrative expenditure. Under those rules appropriations relating to remunerations and allowances payable to the staff of the institution may not be carried over (Article 7(1) of the Financial Regulation).

1.32. These shortcomings are such that it is not possible to exploit the positive aspects of the mini-budget system (the advantages of decentralized management, the allocation of administrative resources according to operational objectives).

1.33. In the interests of transparency, the budgetary authority made certain changes to the layout of the 1991 budget, where most of the mini-budgets are specifically identified, but it appears highly likely that the weaknesses that have been found thus far in the mechanisms for identifying the expenditure to be booked by way of mini-budgets will radically affect this transparency. The case of the priority publications programme, though posing certain problems of its own, illustrates some aspects of this suggestion rather well.

The specific case of the priority publications programme

1.34. Each year the Commission draws up its publications programme for the following year. Since 1988 the programme has been broken down into an 'ordinary` programme and a 'priority` programme, the object of the latter being to put the Commission's priority political activities into published form

.

1.35. From the beginning, the resources allocated to the priority programme have been centralized, whereas the appropriations for the ordinary programme continue to be handled by the various originating departments. The mechanism used for financing the programme owes its origins to the fact that the budget does not provide any appropriations for this purpose. The division of appropriations between the ordinary programme and the priority programme 'does not follow a budgetary approach but a purely administrative one, whereby the various budget headings which could bear publications expenditure are tapped, in the context of the annual publications programme approved by the Commission, of a fraction of their available resources for the purposes of the priority programme`

. This tapping of resources provides the mechanism whereby the financial resources are in fact centralized under the authority of the Secretary-General, but without formally depriving the authorizing officers for these various headings of their authorizing powers. It involves a number of budget headings, mainly in Part B of the budget (operating expenditure), the remarks for which provide that they may be used for administrative purposes. As can be seen, these are, in part, mini-budget headings.

1.36. Chapter 34 (Article 341) of Part A (Commission - Administrative appropriations) of the general budget for the financial year 1990 provided appropriations to cover expenditure on the publication, publicity and promotion of the Commission's publications. In 1990 these appropriations amounted to 2,8 Mio ECU. However, if the expenditure associated with the priority publications programme (PPP) had been booked to this Article, quite regularly, the appropriations would have had to be augmented by 3,6 Mio ECU, which is tantamount to under-estimating the requirements by approximately 56%.

1.37. The mechanism which has been established makes it possible for the Commission, with all the resources it obtains by tapping operating appropriations, to publish, at will, the documents which it considers have political priority, whether or not they are related to the general objective of the budgetary heading to which they are being booked. The irregularities to which this mechanism gave rise in 1990 concerned a total of 3,4 Mio ECU and are detailed in Table 1.4. The table is based on an analysis of the orders placed for implementation of the priority programme.

1.38. Centralized at the administrative level, but decentralized in budgetary terms, the system for managing the priority publications programme appropriations has not been efficient either. The dispersion of responsibility for authorization, implementation and supervision has made it impossible to monitor them in a way which might have satisfied internal and external control requirements. Thus:

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(a)the Commission department responsible for coordination of the PPP was not able to provide financial statements covering its implementation at a moment's notice;

(b)no-one noticed that there was no delegation of signature for two budget headings in the department responsible for placing orders (Publications Office);

(c)as the Commission itself admits

, the majority of the Directorates-General concerned have not accepted this form of financial 'solidarity`, which has accordingly remained non-existent at the level of budgetary implementation.

1.39. For 1990 the PPP initially provided financing for 34 publications. Work started on only 15. Of those 15, five were completed after 16 months of work (position at the end of April 1991).

1.40. At the end of 1990 the PPP coordinating committee decided to amend the initial Commission Decision of December 1989 by adding 17 new publications to the initial programme and deleting others. The expenditure commitment that had been passed before the initial decision was not amended to take account of the new titles that had been inserted. This sort of approach once again proves that the choice of budget headings within the operating part of the budget is made with a total disregard for whether or not the title of a publication bears any relation to the wording of the items concerned.

1.41. In general terms, if the way a priority programme is implemented does not reflect its priority nature as initially defined, it may be asked whether such a programme is not justified by its financing 'facilities`.

1.42. The details supplied by the Commission were somewhat vague, but a rough estimate (see Table 1.5) showed that payments effected in 1990 amounted to no more than about 19% of the orders placed and that substantial carry-overs of appropriations were to be expected, whereas if the payments had been booked to administrative appropriations correctly such carry-overs would have been excluded under Article 7 of the Financial Regulation.

1.43. The Commission's Financial Controller played an active role in operating the PPP mechanism, through his membership of the corresponding interdepartmental committee. Furthermore, in most cases he gave his approval for taking funds from the operating appropriations to finance administrative expenditure, on condition that the remarks against these items included a comment providing a broad justification for this type of action. Using this approach, the entering of miscellaneous remarks makes it possible to charge to a particular heading expenditure which has nothing to do with the meaning and scope of the heading itself.

The role of the Financial Controller

Withholding of approval by the Financial Controller and the overruling of such refusal

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1.44. During 1990 the Court noticed, in a document which was sent to the Council, a reference to the withholding of approval by the Financial Controller. In this case the Financial Controller had refused to approve an operation which sought to regularize the anomaly mentioned by the Court in paragraph 1.113(a) of its 1989 annual report, by booking the operation retrospectively to the 1989 financial year. Apart from this instance, the Court is not aware of any cases in which approval has been withheld. Due to the limitations on the Court's access to the Commission's computerized accounting system (Sincom) (see paragraphs 1.109-1.116) and data-bases, it was not possible to check whether the Court's information was complete.

1.45. If this information proved to be accurate, however, and if only one operation was the object of approval being withheld during 1990, that would be somewhat surprising, given the number of operations subject to scrutiny by the Financial Controller and the numerous cases of irregularity noted by the Court in the present chapter where the Financial Controller ought to have refused to approve the operations submitted to him (in particular, mini-budgets, priority programme, observations on the legality and regularity of the operations passed to the accounts during the year). On the other hand, this state of affairs would confirm the fears expressed by the Court in the annual report concerning the financial year 1988, where it noted (paragraphs 3.13 and 3.14) that 'the tendency for the Financial Controller to give an opinion on all decisions prior to commitment in the accounts ... clearly entails a risk ... that of having to criticize decisions to which he had previously given his approval, ... the outcome of his technical checks is compromised`.

1.46. Moreover, in some cases the Financial Controller approved 'as exceptions` operations which he considered irregular in respect of the principle of budgetary specificity, justifying ex post his final position with considerations of overall sound financial management. This attitude comes down to agreeing to render the principle of budgetary specificity devoid of meaning (Articles 202 of the EEC Treaty and 26 of the Financial Regulation). In addition, it undermines the system of approval in the same way as the practice of granting 'conditional approval`, which the Court criticized in the annual report concerning the financial year 1979 (paragraph 4.35)

and which is now expressly prohibited by Article 38(2) of the Financial Regulation.

1.47. In addition, the Court has not been formally notified of any cases in which a refusal of approval has been overruled.

OBSERVATIONS ON THE LEGALITY AND REGULARITY OF THE OPERATIONS PASSED TO THE ACCOUNTS DURING THE YEAR

Supporting documents used to validate operations passed to the accounts

1.48. Generally speaking, the Commission does not observe the statutory time-limits for forwarding supporting documents to the Court. This omission seriously affects the possibility of the Court's auditing them. For example, the supporting documents for December 1990 operations, which the Commission acknowledged represented 30% of the payment volume, were not forwarded until the end of May 1991, by which time the Court had virtually finished drafting the observations which it was required to send to the institutions by 15 July 1991. In the Court's view, the Commission would not have any problem in meeting the statutory deadlines if it established a more easily manageable system for forwarding accounting documents at monthly intervals.

1.49. The Court has access to individual files on the spot, but that does not justify sending incomplete supporting documents to the Court. Scrutiny of the documents that were forwarded revealed the following main weaknesses:

(a)in the case of the EAGGF Guidance Section and the ERDF, the Court is frequently not in a position to audit payments satisfactorily, as the payment orders are all too often accompanied by documents which do not provide valid support for the payments made or do not provide an adequate basis for appraisal of the terms on which transactions were effected. There were even cases in which payment orders were forwarded without any supporting document;

(b)in the case of aid to non-member countries, examination of a sample of renewable advances for local project costs revealed a number of payments which did not have adequate supporting documents. The latter should normally provide details of the advances used previously and furnish evidence of such use. This was frequently not the case.

Traditional own resources

Implementation of the separate accounting system

1.50. According to the provisions of Article 6(2) of Council Regulation (EEC, Euratom) N° 1552/89 of 29 May 1989

, the Member States must keep accounts of established entitlements and must also keep separate accounts of established entitlements that have not been recovered and for which no security has been provided. They may follow similar procedures where established entitlements for which security has been provided have been challenged. In plain terms, the traditional own resources are covered by two accounting systems: the main accounting system in the case of established, recovered or secured and unchallenged entitlements, and a separate system in the case of the other established entitlements. Every Member State is required to send the Commission a monthly statement for the main accounts and a quarterly statement for the separate accounts.

1.51. Although the Regulation has been in force since 1 January 1989, some Member States did not begin to send quarterly statements for the separate accounts until 1990. The Commission received nine statements for the fourth quarter of 1990. Denmark informed the Commission that it did not have any separate accounts and Spain and the Netherlands did not provide any statement.

1.52. The breakdown of the data supplied varies from one Member State to another. Only two statements followed the standard form proposed by the Commission. In some statements either information was missing or there were differences in the carry-over of established entitlements that had not been recovered.

1.53. At the beginning of March 1991, the Commission undertook to record entitlements notified to it in the statements for the separate accounts. For this purpose it made out 12 recovery orders, three of which, however, for the reasons given above, did not include any amount; in spite of that, it did not take any corrective action vis-à-vis the three Member States concerned.

1.54. The Court wishes to point out that the object of the separate accounts is to make it easier for the Commission to monitor the action taken by Member States to recover own resources which have been established but not recovered or guaranteed. Article 78 of the Financial Regulation states that the revenue and expenditure account is to include a table of revenue containing, inter alia, all the entitlements established in the course of the financial year and the amounts still to be collected at the end of the year. These obligations cannot be properly discharged unless the accounts made up and forwarded are clear and reliable.

The EAGGF

The EAGGF Guarantee Section

National controls over expenditure

1.55. Payments made by the Member States are entered in the Commission's revenue and expenditure account on the basis of the Member States' monthly declarations. In its Annual Report concerning the financial year 1989, the Court commented on the inadequacy of certain paying agencies' controls over guarantee expenditure in Belgium and Spain, in respect of measures for which the responsibility for verifying and authorizing claims does not rest with the paying agencies. The Court's findings in Italy confirm that such deficiencies are common to several Member States, and can, and do, result in the disbursement of significant sums in response to ineligible claims (see paragraphs 3.31-3.44).

1.56. Council Regulation (EEC) N° 729/70 of 21 April 1970

requires Member States to keep sufficient records to allow the Commission to monitor the expenditure. However, this Regulation, while providing a statement of principles, does not contain sufficient guidance with regard to the question of practical application, and, in cases where powers are delegated to bodies other than the paying agencies, it is not clear which body is responsible for keeping the records. The Commission should propose an implementing regulation which will define the paying agencies' responsibilities with more precision (see paragraphs 3.45-3.47).

1.57. In the context of the control on processed agricultural products, France refused to provide the Court with all of the results of the controls laid down by the applicable Community regulations (see paragraph 4.1.33).

Central accounts for expenditure

1.58. In 1990, the Commission was unable to commit the expenditure declared by the Member States within the two months stipulated by Article 100 of the Financial Regulation because problems with its new computerized accounting system, Sincom, delayed input of data from Member States' declarations. As a result, at the end of July 1990 some 8 190 Mio ECU of expenditure had not been committed on time.

Coordination of checks on elements common to guarantee and guidance expenditure

1.59. An examination of the compensatory allowances paid by the EAGGF Guidance Section to farmers in certain less-favoured areas (see paragraphs 9.40-9.41) has shown that many of the problems associated with the administration of that scheme are similar to those experienced with several guarantee measures.

1.60. The allowance can be paid per animal or per hectare of land cultivated, two formulas widely used under the Guarantee Section. The essential control in both cases consists of verifying the actual situation on the farm by means of on-site inspection or an administrative control which will offer the guarantee of an adequate level of reliability. The responsibility for, and the extent and depth of, the inspection are factors that vary from Member State to Member State. It is also possible for some farmers to escape inspection entirely if the Member State adopts a system that is limited to claimants making a declaration (see paragraph 9.26).

1.61. No coordination exists to ensure that optimum use is made of resources dedicated to inspection tasks, so that the absurd situation may arise in which the same farm is inspected on a number of occasions under different guarantee and guidance schemes. No account is taken of the proportion of all income derived from the EAGGF that is received by individual farmers when selecting which holdings to inspect.

1.62. Without a system of identification for all animals eligible for Community aid and a comprehensive and up-to-date land registry system, the effectiveness, and hence the validity, of the aid payments will continue to be called into question. The Court's previous observations

on the suckler cow premium and the set-aside scheme also illustrated these problems.

The EAGGF Guidance Section

1.63. The reimbursement corresponding to expenditure effected on the basis of national legislation which derogates from the Community regulations (aid for deer, allowance on the basis of pasture areas and not on the number of livestock units) cannot be considered regular, even if such measures have been approved by the Commission, nor can reimbursements in respect of expenditure effected on the basis of an unconventional interpretation of Article 15(1)(b) of Council Regulation (EEC) N° 797/85 of 12 March 1985 (OJ L 93, 30.3.1985, p. 1) for areas under cereals intended for animal fodder (see paragraphs 9.15-9.17) be considered regular either.

Veterinary measures

1.64. Examination of the last two commitments for the year concerning the veterinary measures charged under Articles 380 and 381 (allocated 1,750 Mio ECU and 41,123 Mio ECU respectively) shows that the commitment procedures normally applied during the year were not observed and that the amounts committed corresponded exactly to the amounts of the appropriations still available, whereas each of these accounting commitments in fact corresponded to larger commitments: 88 000 ECU out of an actual commitment of 700 000 ECU for Article 380 and 3,1 Mio ECU out of an actual commitment of 10,2 Mio ECU for Article 381.

1.65. Examination of the 933 000 ECU paid out in 1990, from the commitments carried over from 1989, against Article 380 in respect of varroa-mite disease in bees shows that there was no legal basis for these payments, since the basic regulation had not been adopted, even though appropriations for this type of measure had been entered in the budget since 1986.

1.66. Two decisions, concerning 970 000 ECU committed against heading 380, under Council Decision 89/455/EEC of 24 July 1989 on pilot projects for the control of rabies, served to finance pilot projects which were already completed or under way before they were forwarded to the Commission for approval, which is in breach of the provisions of Article 4 of the aforementioned Decision.

Fisheries

1.67. Article 36 of the Financial Regulation provides that 'all measures which give rise to expenditure chargeable to the budget must be preceded by a proposal for commitment of expenditure from the relevant authorizing officer`. In contrast, the proposals for commitment concerning the financial consequences of the fisheries agreements are drawn up after the decisions or regulations which, since they finalize these agreements, effectively commit the Community vis-à-vis non-member countries. In this respect, the Court would point out that, in several previous annual reports

, it has raised the problem posed by the heterogeneity and the excessive flexibility of the Commission's practices in matters of commitments in respect of the provisions of Article 36 (previously Article 32) of the Financial Regulation.

1.68. The Commission made the first payments in respect of four new or renewed fisheries agreements after the deadline dates laid down in these agreements, because they had been drawn up very late and even, in one case, after the deadline in question.

1.69. Where the fisheries agreement with Greenland is concerned, in 1990 the Commission not only paid the financial compensation of 34,25 Mio ECU in respect of 1990 but also paid out in advance the 34,25 Mio ECU due in respect of 1991. In order to make this payment, which constitutes a transfer of expenditure from one financial year to the previous one, it had to have 14,5 Mio ECU transferred from Chapter 100.

1.70. According to Articles 26(2) and 24(2)(a) of Council Regulation (EEC) N° 4028/86 of 18 December 1986 (OJ L 376, 31.12.1986, p. 7), only 50% of Member States' expenditure in respect of the laying-up of vessels measuring not less than 12 metres in length is refundable. Three payments for reimbursements of premiums for final withdrawal amounting to around 40 000 ECU were irregular, since the vessels concerned did not meet this condition.

1.71. Still on the subject of the reimbursement of premiums for the final withdrawal of fishing vessels, it should be noted that the authorizing officer did not observe that, in 1989, Italy submitted a second application in respect of three vessels for which a first application had already been submitted and the reimbursement executed. This entailed the payment of 320 000 ECU twice over, and the undue payment should be recovered.

The social field

1.72. In the ESF field, the 'accounting officer` determines the due date for recoveries, 'after` the Financial Controller has given his approval, whereas Article 28(2) of the Financial Regulation states that the purpose of the Financial Controller's approval shall be to 'establish` that the due date is indicated by the 'authorizing officer`.

1.73. Furthermore, the cancellation of commitments which have become superfluous because the measures concerned have not been carried out, or have only partly been carried out, is not undertaken until long after the event. In 1990 there was no record of any cancellation of commitment having been identified either before or after appraisal of the applications for final payment submitted to the ESF.

1.74. Lastly, financing of 230 000 ECU for the Fondation Europalia Internationale was provided in 1990 on the basis of a Commission commitment of 17 April 1990 and a contract of 30 May 1990. This financing was for an event that had already been organized in Brussels in 1989 (Europalia Japan) and in fact amounted to a commitment to make good the final deficit. However, the explanatory report provided for in the contract is not included in the dossier. A press dossier, which predates the contract, has been substituted for it. Since it is impossible to justify this 1989 expenditure under the 1990 budget, the Financial Controller ought to have withheld his approval.

Research and energy

1.75. For certain research programmes, COST and Téléman in particular, and for measures in the field of information technology and telecommunications, a certain number of researchers are paid for by other research programmes, e.g. the radiological protection and Esprit programmes. The revenue and expenditure account does not therefore give a true picture of the real costs of these programmes.

1.76. The monitoring of commitments is not satisfactory. A sample taken of 29 commitments in respect of the 'Esprit I` programme showed that 18 commitments to a value of 2,76 Mio ECU ought to have been cancelled at the end of 1990.

Operations under Title 9

Aid to non-member countries

1.77. The total volume of outstanding commitments doubled between the end of 1985 and the end of 1990, rising from 1 256,6 Mio ECU to 2 685,6 Mio ECU. A total of 595 commitments amounting to 301,6 Mio ECU, or 26,5% of the total outstanding by way of commitments entered into from 1978 to 1988, gave rise to no payments in 1989 and 1990:

(a)95% of these 'dormant` commitments concern Chapters 93 (Asia and Latin America) and 96 (Mediterranean);

(b)for Chapter 93, a single dormant commitment was cancelled, whereas examination of a sample of 51 entries totalling 27,7 Mio ECU showed that 30 commitments to the value of 6,3 Mio ECU should have been cancelled (e.g. 0,242 Mio ECU for a supply of fertilizers which was completed in 1987; 0,898 Mio ECU for a solar energy programme in Pakistan which has in theory been completed since 1986; 0,150 Mio ECU in operating aid for the Indian commercial office in Brussels in 1983 and, lastly, 0,755 Mio ECU concerning three measures in agricultural advisory work in Zimbabwe which have been finished since 1987);

(c)twelve entries concern 'blocked` commitments, some of which date from 1985 and 1986 and on which, for various reasons, a start had still not been made by the end of 1990.

1.78. The Court observes that the departments responsible for cooperation with non-member countries have no adequate system for identifying dormant commitments, and no regular procedures for showing balances, although these tasks are major responsibilities for the authorizing officer in the management and control of the utilization of budgetary appropriations.

1.79. Examination of the transactions charged to Title 9 also leads the Court to recommend the introduction of an individual code for 'third parties` concerned by cooperation measures. Such a code would allow individual files to be drawn up and would thus facilitate the evaluation of the overall relations between the Commission and any one contractor who receives financing under several budget headings. This would also improve coordination with other sources of financing.

Aid to the countries of Eastern Europe

1.80. The Commission decided, in a perfectly regular manner, in December 1989 and January 1990 to grant emergency medical aid to Romania totalling 11,12 Mio ECU. In the three Commission Decisions concerning this matter

, it is expressly laid down that this aid is to be charged to Article 950 of the 1990 budget, 'Aid to disaster victims in developing and other third countries`. The commitment proposals were correctly charged to Article 950 in January and February 1990.

1.81. At the time of the extension of the Decision concerning economic aid on behalf of Hungary and Poland to other countries of Central and Eastern Europe

, however, the Commission re-charged the commitments and payments in respect of this emergency aid to Article 996, 'Aid for the economic restructuring of Poland and Hungary`. The Court takes the view that re-charging this expenditure to Article 996 lays the Commission open to censure.

1.82. In fact, Article 2 of the Council Regulation concerning the extension of economic aid to other countries of Central and Eastern Europe stipulates that this Regulation is to enter into force on the third day following its publication in the Official Journal, i.e. on 24 September 1990. This Regulation can therefore not have any retroactive effect. There is, therefore, no legal basis for the emergency medical aid, which was decided before this Regulation came into force. Moreover, no provision for re-charging expenditure is made in the Financial Regulation or in its implementing procedures.

1.83. To the extent that the aim of this re-charging was to allow new measures in the field of aid to developing and other third countries, appropriations should have been transferred from one chapter to another. The budgetary authority should have taken the transfer decision in order to comply with the principle of budgetary specificity.

OBSERVATIONS ON THE PRESENTATION AND KEEPING OF THE ACCOUNTS

The financial balance sheet of the Communities

1.84. One of the principles used in drawing up a consolidated balance sheet is that intergroup balances cancel out at group level. The amounts thus shown in the balance sheet relate solely to external transactions. The Commission does not follow this principle when preparing the consolidated balance sheet. There is no consolidation adjustment for items which have been included in the reciprocal account of one institution but have not been included by the other. A number of these debtor (2,5 Mio ECU) and creditor amounts (0,2 Mio ECU) could not be eliminated at the time of consolidation this year. It is recommended that the reconciliation of the balances on the reciprocal accounts be improved so that the amounts completely cancel out or that an adjustment on consolidation be made which ensures that the balance sheet is clear of interinstitutional transactions.

The keeping of the accounts in the Commission's balance sheet

1.85. Preliminary to the audit of the balance sheet for 1990, the Court studied some of the Commission's main accounting systems in order to update its permanent audit files. For example, it prepared a documented description of the internal control systems relating to payments, receipts, personnel advances and liaison accounts. An evaluation of these systems and of those of the JRC has given rise to the following observations.

Treasury management

1.86. An important aspect of treasury management is that of cash conservation and one of the objectives in this area would be the maintenance of minimal bank balances. This will only be achieved if the treasury section is operating in accordance with a definite and well thought- out policy of fund management.

1.87. In practice the official who determines the level of funds held in each of the Commission's bank accounts relies on his experience and some hand-written notes, passed on by his predecessor.

Information concerning payments

1.88. Treasury management implies collecting information and processing it to produce timely decisions. Accurate information is required regarding the amounts which will be required for expected future payments and the relevant payment dates.

1.89. It was observed at Directorate-General XIX (and also at Ispra) that such information is lacking. Often the first intimation the treasury section receives that a large payment is due is when the payment order is presented for execution. If a number of such payment orders arrive simultaneously, the result can be seriously depleted balances which have to be replenished hurriedly, or balances which are too high because a safety margin must be maintained to cope with such eventualities.

1.90. It is to be recommended that the information flow from the initiators of payments to the section responsible for their execution should be improved. The information regarding payment proposals validated by authorizing officers, which is available from Sincom, should be used for this purpose.

Cash transmission

1.91. One component of funds management is cash transmission, using techniques which minimize total cost and reduce transmission risks. Transmission risk will be minimized if internal controls such as the segregation of duties are adhered to. Where computer systems are involved, it is imperative that security of the system should be maintained.

1.92. An official in the treasury section has, amongst other tasks, the responsibility for arranging transfers of funds. During the year, in the interests of the efficient processing of payments, he operated the transmission system, to which he should not have had access because he has no password. Restricted access through password protection is an integral feature of a secure system, which should not be circumvented whatever the circumstances. If it is deemed necessary that the official should have access, taking other facets of the principle of segregation of duties into consideration, this use should be formalized.

Reconciliation of accounting systems

1.93. The accounting system operated by the treasury section is a stand-alone system, i.e. not a module of Sincom. The accounting entries for payment orders are made in detail to the bank accounting system and thereafter posted at a lesser level of detail to the general accounts.

1.94. This situation requires regular reconciliations of the two systems to be carried out, to ensure that entries are correctly reflected in both systems. At the time of the Court's review of the system, this reconciliation was four to five months behind schedule. This procedure is important from both an accounting and a management information point of view. The task should be assigned to a specific official or section and carried out systematically.

Balance-sheet items

1.95. At Ispra, the inventories have not been physically verified in recent years, if at all. This has a direct impact upon the balance sheet of Ispra. The accounts affected are 'Furniture and equipment`, 'Office furniture` and 'Scientific and technical materials`. For these accounts the value in the balance sheet is taken directly from the inventory listings at the year end. If these figures are unreliable, the accounts figures are equally so. For 1990 the balances account for 43,58% of Ispra's total assets. The consolidated balance sheet of the Communities is also affected as follows:

(a)Furniture and equipment at Ispra accounts for 19,68% of the 'Tangibles` heading within 'Fixed assets`;

(b)'Office supplies` and 'Scientific and technical materials` make up 7,3% of the 'Inventories` figure.

1.96. While it is the task of the Commission in general to see that the Financial Regulation is being respected, Directorate-General XIX has responsibility for the production of the balance sheet and, as such, should ensure that systems are put in place which will provide reliable accounting data for processing.

1.97. In addition, this year an important posting error occurred whilst entering balances relating to NCI and Euratom operations. The relevant balance sheet items are on the liabilities side under the heading 'accrued expenses`:

(a)'interest accrued but not due on borrowings, lines of credit and swaps` reads 99 698 014,90 ECU for the NCI when it should read 16 720 228,25 ECU,

(b)the 'other` heading under 'accrued expenses` shows an amount of 16 720 228,25 ECU for NCI swap operations instead of the correct figure of 99 698 014,90 ECU.

This error also has an impact on any comparison made with last year's values and note 5.28 in the consolidated balance sheet.

The revenue and expenditure account: recording of payments, payments on account and advances

1.98. In its report on the financial year 1987, the Court, when it came to discuss the mechanisms for recovering payments on account, urged the Commission 'to adapt its system and accounting procedures so that it will be able to grasp immediately the legal nature of the payments made, so that it is possible at any time to distinguish between final and non-final payments`. Later, in its Opinion N° 1/89 of 9 February 1989

concerning a proposed general revision of the Council Regulation amending the Financial Regulation of 21 December 1977 applicable to the general budget, the Court expressed the view that accounting systems ought to supply consolidated statements of the financial situation, in which it would be possible to single out immediately those sums that corresponded to final expenditure and those that corresponded to operations that had not yet been settled. In this annual report the Court wishes to take its thoughts on this matter further.

1.99. Article 45 of the Financial Regulation states: 'The payment order shall be accompanied by the original supporting documents ... certified in respect of or accompanied by a certificate confirming ... the receipt of the supplies and the performance of the service...`.

1.100. Article 46 of the same Regulation also provides as follows, in paragraph 1: 'The authorizing officer may make payments by instalment in accordance with the rules governing the policy concerned or in accordance with contractual provisions. Where this occurs, the first payment order shall be accompanied by documents establishing the creditors claim to payment of the instalment in question.` In paragraph 2, it is stated that 'the authorizing officer may grant advances to personnel...`.

1.101. Lastly, Article 71 provides as follows: 'Except for the advances referred to in Article 99 [EAGGF-Guarantee advances] any advance (...) shall be entered in a suspense account and settled at the latest during the financial year which follows the payment of this advance`.

1.102. There is confusion in how these provisions are applied because in the various applicable texts, in particular the operating rules and the contracts, the terms 'payments`, 'payments made on account` and 'advances` are sometimes used as if their semantic content were identical and on other occasions as if it were different.

1.103. A strict interpretation of the aforementioned rules, based on the premise that the Financial Regulation is consistent, should lead to the conclusion that a payment is a different thing from a payment made on account, which, in turn, is different from an advance. It therefore requires disbursements to be classified in one of these three categories according to the particular characteristics in each case. Payments and payments on account are entered as budgetary expenditure chargeable to the financial year during which they are made. Advances are entered in a suspense account outside the budgetary accounts, and are charged to the budgetary accounts at such time as the proof that they have actually been utilized is provided.

1.104. In practice, because of the contents of the operating rules or of the agreements and contracts signed by the Commission, the confusion alluded to in paragraph 1.102 is such that transfers of funds with no effective counterpart are described either as payments on account or as advances, but are treated as payments on account and entered directly in the budgetary accounts for the year during which they are made.

1.105. Sampling of the operations entered in the 1990 revenue and expenditure account reveals that these transfers to the bank accounts of the recipients (Member States, non-member States or private individuals) are found mainly in the fields of the structural Funds and development aid, where they accounted for around 6 000 Mio ECU paid out in 1990 (see Table 1.6). In order to obtain an idea of the volume represented by these operations at the end of the financial year 1990, a probably equally substantial sum should be added to this figure for the balances outstanding from previous financial years.

1.106. In practice, each authorizing department has set up a more or less reliable system for recording and monitoring transactions which have not yet reached a final state (payments on account or advances).

1.107. The Court recommends a re-examination of the provisions of the regulations concerning payments on account and advances so as to ensure that the current confusion does not persist. This concerns:

(a)in the first instance, the Financial Regulation itself, which, in this respect, is still burdened with the lack of consistency that betrays its origins, namely, the merging of a regulation applicable to the centralized management of administrative expenditure (including the provisions concerning payments and advances) with specific financial rules applicable to the non-centralized management of various common policies;

(b)secondly, it also concerns the various rules concerning the operational policies, of which the provisions that apply to advances and payments on account are not always coordinated.

1.108. In any case, the Court considers that the Commission should reorganize its accounting information system without delay so that it allows non-final operations (advances, but also payments on account, in so far as they concern operations still outstanding) to be identified quickly, so as to ensure that they are properly monitored and to provide information on the implementation of Community policies.

The computerized budgetary accounting system (Sincom)

1.109. The budgetary accounts for the financial year 1990 are the first to have been entirely produced using a computerized system (Sincom). The system has not yet been in use for long enough for the Court to make any general observations. However, certain specific observations may already be made.

1.110. The Sincom accounting system, which was launched one year after the first appropriations were made available again, was not modified so as to ensure separate monitoring of appropriations which have been made available again, which are lumped together indistinguishably under the label 'commitment appropriations not automatically carried over`. Annex B2 of Volume II of the revenue and expenditure account, which presents a statement of payments made in respect of the appropriations which were made available again in 1990, is the result of an ex-post analysis carried out by Commission staff. This anomaly seemed to have disappeared by 1991.

1.111. Nor is the Sincom system adequately structured for recording the appropriations entered following a contribution from third parties. Thus, in the case of the Community programme in education and training for technology project (Comett II), which is open to EFTA members, those countries' contributions (4,9 Mio ECU) are entered as revenue under the revenue item which is provided for this purpose. At the same time, in the Sincom system, they entail entering an appropriation for the same amount under expenditure Item B6310, 'Cooperation between universities and industry: training in new technologies`, in an account corresponding to the appropriations which are managed by external offices and carried over to the following financial year by the budgetary authority. In the 'Report on the implementation of the budget`, this amount is presented as deriving from transfers. In both cases, the accounting statements misrepresent the real situation.

1.112. This anomaly in the system is aggravated by the fact that, in at least one case, the appropriation entered following a contribution from a third party is not shown in the revenue and expenditure account. This is the case with an appropriation for 0,566 Mio ECU entered under heading A3052 which gave rise to a commitment of 0,495 Mio ECU and a payment of 0,187 Mio ECU (including a subsidy of 0,185 Mio ECU for the 'The Wall` concert in Berlin).

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1.113. Likewise, the consistency checks carried out by the Court's staff to ensure that they understood the part of the Sincom database to which the Court was given access identified discrepancies between the sum of the transactions recorded as entered in the accounts (the only ones accessible to the Court) and the balances shown in the accounts. These errors, which were found in the old system of the central accounting unit (CAU), are usually subject to correction after the revenue and expenditure account is published. When brought to the Commission's attention, they were corrected, since the anomaly had disappeared in the final accounts. Since the Court does not have access to all the information contained in the Sincom system, and particularly not to operations which have been refused by the system or by the managers of the system (authorizing officer, Financial Controller, accounting officer), it is not currently in a position to identify and evaluate these anomalies and the corrections which were made.

1.114. In this respect, the conditions on which the Court is granted access to Sincom remain unsatisfactory. While the Commission has undertaken to allow the Court open access to the computer programs and other components of the Sincom system, it has adopted a restrictive approach where access to the data contained in the system is concerned.

1.115. In spite of an initial promise, in October 1989, that the Court could have access to all the Sincom data in consultation mode, the Commission reneged on this promise when the system started to operate. In response to a formal request for the authorized Court officials to be allowed to consult, without restriction, all data prepared and stored on Sincom CB/D magnetic data-carriers, the Commission suggested in July 1990 that access for the Court should be granted selectively, and the parameters of the system were arranged in such a way that the Court could not access all the data it contained, and particularly not the data amended or rejected by the system.

1.116. This attitude breaches the first paragraph of Article 87(1) of the Financial Regulation, which provides that all 'documents and data created or stored on a magnetic medium` should be placed at the Court's disposal. In particular, however, experience has shown that this is a very real hindrance to the Court's work:

(a)it deprives it of the information which would allow it to check that the internal control procedures of the system are working properly;

(b)it can lead the auditors to make misguided assessments, since they are not informed when data are missing from amongst those to which they are given access;

(c)it obliges the auditors to identify, by deduction, whole slabs of information which are absolutely necessary for their work and to submit the corresponding requests for these one by one;

(d)it does not allow all the search and sort procedures inherent in the system to be made available to the Court;

(e)and, generally speaking, many of the Court's officials have to cope with anomalous reactions from a system which was initially designed to provide open access (the 'function forbidden for non-EEC` and 'unauthorized` messages are displayed).

CHAPTER 2 (\*) Revenue

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IMPLEMENTATION OF THE BUDGET

2.1. As can be seen from Table 2.1, the out-turn for revenue for the financial year 1990 was 99,0 %:

(a)in the case of traditional own resources, customs duties collected were 90,6 % of the total forecast and agricultural levies 101,6 %. Customs duties recovered in 1990 were 9,4 % down on the forecasts. This shortfall was due to the fall in the value of the dollar, the main invoicing currency, which neutralized the effects of any price rises or increases in the volume of imports

;

(b)the VAT and GNP-based own resources for the year were collected as anticipated in the budget, with due regard for the amendments made by the supplementary and amending budgets (SAB) (see paragraph 2.2); the GNP-based resources recovered on the basis of the initial budget were refunded subsequent to SAB N° 2, when it was decided that these resources need not be called up;

(c)an amount of 1 527,8 Mio ECU was recovered on the basis of Member States' annual VAT statements for the financial year 1989 (1 191,2 Mio ECU) and the Commission's controls of those relating to previous years (336,5 Mio ECU);

(d)in the case of VAT relating to the 1989 financial year, the balances referred to in (c) and remaining to be recovered in December 1990 (1 191,2 Mio ECU) were established in terms of the assessment bases mentioned in the annual statements; the results of the Commission's controls were not taken into account when the balances were established in 1990; it was noted that two Member States were late sending their statements (12 September and 9 November) and that as of the year-end the Commission had made control visits to only four Member States;

(e)as regards the statements for previous years, there were 16 unresolved 'reserves` according to the list which the Commission now keeps, following the observations made by the Court of Auditors in the annual report concerning the financial year 1988

.

2.2. The method of establishing the amount remaining to be financed

by the third and fourth resources, as well as the incidence of that amount on the calculation and recovery of the resources, gave rise to the following observations:

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(a)regarding the surplus from the preceding financial year: pursuant to Article 7 of the Council Decision of 24 June 1988 relating to the system of the Community's own resources

and Article 32 of the Financial Regulation, the balance from each financial year is to be entered in the budget for the following financial year; in fact, the surplus of 5 080,1 Mio ECU from the 1989 financial year was entered successively:

- in the initial budget, to the extent of 2 598 Mio ECU, of which 819 Mio ECU was the surplus of own resources resulting from the transfer from the EAGGF Guarantee Section chapters to the EAGGF monetary reserve;

- in SAB N° 1 for the same amount;

- in SAB N° 2 for 4 300 Mio ECU, as the GNP resource was to be called up only to the extent of the amount of financial compensation to the United Kingdom, where it exceeded 1,4 % of the VAT assessment base (four Member States: Belgium, Denmark, Greece and Italy);

- in SAB N° 3 to the extent of 4 464,2 Mio ECU, in order to finance an additional VAT refund to the Kingdom of Spain;

(b)regarding the incidence of the 1989 surplus on the calculation of VAT resources: when SAB N° 2 was being established it became clear that, having regard to the financing requirements, there was no need to call up the GNP resource and that, furthermore, after re-estimating the United Kingdom correction at 2 285 Mio ECU, instead of 2 432,3 Mio ECU, the budget could be balanced by raising to 4 300 Mio ECU the 1989 surplus that had been entered in the 1990 budget, thus leaving a balance of 780 Mio ECU which was not transferred to 1990; this latter amount thus represents a call on VAT resources in excess of requirements;

(c)regarding the EAGGF monetary reserve: faced with a surplus of resources, the Commission budgeted for the EAGGF monetary reserve to be financed by means of the VAT resource, without first amending the calculation of the resource; in the budget, however, the breakdown of the amounts of reserve financing to be borne by the Member States was calculated in terms of their VAT assessment bases, capped where appropriate, not in terms of their GNP. The result of this method of calculation was that an amount of 1 024 Mio ECU for the EAGGF monetary reserve was included in the resources provided in the budget by way of VAT; because this amount was not needed to balance the budget and was therefore not taken into account when the monthly twelfths were finally determined, the VAT resources were reduced by 1 024 Mio ECU.

2.3. The above techniques gave rise to the following observations:

(a)some reservations may arise regarding the legality of the various partial entries of the 1989 surplus, and their effect is seriously detrimental to budgetary transparency. In the case of surpluses like that for 1987

or deficits like those for 1984 and 1985

, the practice of spreading the entries for the balances over several budget years contravenes the principles of universality and annuality;

(b)in draft SAB N° 2 the Commission made the amount of own resources accruing from VAT coincide with the amount to be financed by the third and fourth resources by carrying over only part of the surplus from the previous year, on the assumption that a theoretical surplus of resources must be neutralized by a partial carry-over, without making a reduction in the uniform VAT rate; SAB N° 2 is at present the subject of an action by the Council before the Court of Justice, which demonstrates the necessity for greater legal and budgetary transparency; in fact, the regulations do not specify explicitly whether, or how, the calculation is to be adjusted in cases where the full amount of the VAT-based own resource is not needed to cover expenditure fully;

(c)the Decision of 24 June 1988 on the system of own resources is based on the assumption that the VAT own resource is not sufficient to cover all expenditure. This in turn has repercussions on the financing of the monetary reserve, which is called up only if it is needed to meet EAGGF requirements; by virtue of Article 10 of Council Regulation (EEC, Euratom) N° 1552/89 of 29 May 1989 implementing the Council Decision of 24 June 1988 concerning the system of Community own resources

, on the one hand, the additional resource - to the exclusion of the own resources for the EAGGF monetary reserve - is credited on the first working day of each month, and, on the other hand, at the end of the financial year, each Member State is debited the amount resulting from the application to its GNP of the uniform rate used for the preceding financial year, as amended in the light of the use of the EAGGF monetary reserve; the deduction of the resources earmarked for the EAGGF monetary reserve from the VAT resources does not correspond to a correct implementation of the Regulation and has consequently led to the application of a uniform VAT rate which is not in accordance with Article 2(4) of the Council Decision of 24 June 1988.

2.4. With regard to the refunds of a pro rata proportion of the VAT and GNP resources to Greece, Spain and Portugal, which were entered in Chapter 86 of the budget, it was noted that:

(a)the amounts relating to the provisional twelfths were in fact refunded directly, whereas those relating to the balances and adjustments are simply a book-keeping device, in that the Member States concerned make the amounts available net of these balances and adjustments;

(b)during 1990 the Commission nevertheless requested that the amounts paid should include the balances and adjustments, pending an increase in the appropriations available; one Member State refused this request and paid a net amount of 310 Mio ECU, instead of the 547 Mio ECU due;

(c)in order to regularize the situation, the appropriations for Chapter 86 were increased by SAB N° 3; this increase was not, however, sufficient to allow the refund to this Member State, namely 236 Mio ECU, to be taken fully into account; settlement of 96 Mio ECU was carried forward to the financial year 1991; the result was that only 451 Mio ECU (instead of 547 Mio) were entered as revenue in 1990.

2.5. These practices call for the following comments:

(a)despite the fact that the amounts of the adjustments and refunds concerned were known at the time when SAB N° 3 was drafted, the Commission did not propose including the necessary amounts for expenditure and revenue in that budget;

(b)the payment orders for the refund were made out after the net amount had been recovered, thereby obscuring the netting-out of revenue and expenditure

.

THE VAT RESOURCE

Procedure for making the resource available and the Court's enquiry

2.6. The amounts due in respect of the VAT resource are made available in several stages:

(a)the amounts entered in the budget for each Member State are paid over in the form of monthly twelfths;

(b)in the course of the following year, the final situation is established on the basis of the Member States' annual statements (corrected, if necessary, after checks by the Commission) and sums still due or paid in excess are paid over or refunded, as appropriate;

(c)in subsequent years, further payments or refunds are made if such adjustments become necessary as a result of the additional corrections made following discussion of the annual statements.

2.7. The object of this section is to examine the factors entering into the calculation process relating to:

(a)the VAT revenue collected in the Member States and the techniques employed in passing it to the accounts;

(b)the corrections made to the above revenue in order to ensure uniform treatment of the revenue base with a view to establishing the figures for corrected revenue;

(c)the compensations made to the intermediate base, or assessment base (obtained by dividing the corrected revenue by a weighted average rate), in order to obtain, finally, a harmonized definitive assessment base.

2.8. The Court examined the statements of each of the 12 Member States. It did not investigate the calculation of the weighted average rate (WAR), which will be examined at a later date, although, in order to assess the pertinence of certain corrections and compensations, it did refer to documents provided by the Member States which showed how the weighted average rates were calculated.

The revenue collected

2.9. The Community's VAT own resources are calculated on the basis of the net revenue collected by the Member States in the course of each calendar year

, the latter being dependent on the particular characteristics of the national systems.

Amounts collected to be taken into consideration

2.10. In most cases the amounts to be taken into account are not immediately identifiable in the Member States' accounts for the execution of the budget. For example:

(a)in the central accounts, VAT revenue from miscellaneous sources is not always identified separately, and in some cases it is grouped with other revenue or with VAT revenue that is to be disregarded under the regulations;

(b)where the accounts relating to the implementation of the budget do not correspond to the calendar year or - more often - where the accounts for the budget year have not been finalized by 31 July following the end of the financial year, the Member States provide interim figures which sometimes prove to be lower than the final revenue;

(c)some Member States (France, in particular) identify in the form of 'corrections` amounts collected and to be included in or excluded from the calculation of the harmonized base, whilst others apply a direct correction to the amounts of revenue collected;

(d)in one Member State (Denmark), which does not have a cash-based accounting system, the amount collected has to be reconstructed.

2.11. These features are sources of error and may have the effect of concealing amounts collected that should be taken into account. For example:

(a)an adding-up error slipped into the amount declared in one annual statement for 1988; it was notified by the Member State concerned (Spain) in October 1989 and in 1990 gave rise to the recovery of 110 Mio ECU of resources;

(b)in the case of another Member State (Italy), there have, since 1982, been difficulties in accounting for revenue collected following steps taken to settle outstanding VAT debts. Not until 1990 did the Commission recover an amount of 6,9 Mio ECU relating to revenue collected in 1986, 1987 and 1988. Despite the fact that the Court had already raised this problem in its annual report concerning the financial year 1984

, the Commission has been unable to recover more substantial sums relating to the years 1982 to 1985.

Delays in passing VAT revenue to the accounts

2.12. Delays of between several days and six months in entering VAT revenue in the accounts were observed. Although the longest delays occurred in the Member States in which collection is not centralized, a similar situation was sometimes also observed in Member States with centralized collection systems:

(a)some Member States (in particular, France, Ireland, Portugal and the United Kingdom) were slow to cash the cheques sent to them, or entered them for dates after the date of encashment;

(b)in cases where payments were effected by means of bank transfers, other Member States (including Belgium and Greece) entered the revenue for the date on which the credit advice was received;

(c)in cases where financial institutions were responsible for collection (including Spain and Italy), they could be authorized to retain revenue for several days before it was transferred;

(d)in cases where collection was carried out at local level, it was noted that, in addition to straightforward delays in centralizing the revenue, there were variations in the entering of amounts collected but not verified at central level;

(e)finally, in cases where the revenue was collected by autonomous regions there was frequently no effective centralization of the revenue collected and the amounts to be entered were established according to the national financing rules in those regions.

2.13. These delays cannot be ignored, for the simple reason that they could result in the same carry-overs being made every year. In fact they may occur at irregular intervals and vary from year to year:

(a)one Member State (France) experienced a strike in the VAT collection agencies at the end of 1989, and the same thing had occurred in others (Italy and the United Kingdom) in previous years;

(b)in one Member State (Italy) it was found that from one year to another the amount of revenue collected and not yet transferred to the Treasury had doubled, causing an unjustified postponement of own resources in 1990 estimated at 275 Mio ECU.

2.14. These postponements are a drain on the own resources by reason of the mere fact that they delay the entering of these resources and also because of the losses that may arise from the effect of monetary depreciation on the amounts carried over. Furthermore, other data used in the resources calculation change from year to year: for example, the weighted average rate, the solutions and modifications adopted by the Member States in determining the assessment base and the rate applied to that base and the GNP which determines whether it is to be capped or not.

Changes to the collection systems

2.15. Application of the principle whereby net revenue is to be collected over a calendar year poses particular problems in cases where a Member State makes significant changes to its VAT collection systems during the year. In the absence of adequate transitional provisions, these changes are frequent sources of controversy between the Member States and the Commission.

2.16. In 1990 the Commission recovered the sum of 22,2 Mio ECU of VAT resources from the Kingdom of Spain by an ad hoc reconstruction of the VAT base in order to take account of 12 months of collection in 1986 instead of the 11 months or three quarters actually collected.

2.17. Problems occurred in the case of two other Member States which had modified their collection schedules:

(a)in the case of the first (Italy), the 13th monthly payment collected in 1988 after the payment dates had been brought forward was deducted by the Member State concerned from the revenue declared for 1988; an adjustment of 175 Mio ECU was recovered by the Commission in 1990;

(b)in the second case (Denmark), the dates of VAT refunds to exporters were brought forward, thereby leading to a reduction in the net revenue collected during the 1988 financial year.

2.18. As Regulation (EEC, Euratom) N° 1553/89 of 29 May 1989 concerning the definitive system for the collection of VAT own resources opted beyond any doubt for the so-called 'revenue method`, based on revenue actually collected during the calendar year, it is now important that the Commission and the Member States abide by this rule so as to ensure the proper functioning of the own resources system.

Corrections and compensations

Introduction

2.19. For the financial year 1989 the Court identified 170 corrections or compensations; when translated into assessment bases and added to the compensations the corrections represent a total (minus the sum of 14 816 Mio ECU of French VAT refunds, see paragraph 2.10(c)) of around 146 000 Mio ECU, or 6% of the total assessment base. Table 2.2 gives the amounts for these corrections and compensations, negative or positive as the case may be

.

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General observations

2.20. The Sixth Directive

and the other texts on value-added tax

leave the Member States a very wide margin of autonomy as far as the assessment bases are concerned. It is important to note that the derogations provided for by the Sixth Directive were of a provisional nature, but most of them were still in force at the time of the enquiry

. The figures in Table 2.2 demonstrate the extent of this absence of harmonization.

2.21. Still more significant is the fact that some corrections and compensations (29 were counted) owe their origin to situations for which the regulations had made no provision. Most usually, the object of these adjustments was to neutralize the effect of exemptions or unorthodox calculations, as well as refunds wrongly made.

2.22. The large number of corrections and compensations, along with the variety of situations which give rise to them, make the establishment of the uniform base a highly complex matter. In addition, correct collection of the VAT own resource calls for accuracy in calculating the adjustments, but the peculiarities of the national systems often impair the homogeneity of such calculations; in addition, the methodological information and the statistical and fiscal data contained in the annexes to the statements vary widely in degree of detail and explanatory value from one Member State to another.

2.23. The considerable scope for estimates may have a significant effect on the values recorded. The final incidence of such calculation errors, is, however, undoubtedly less significant than failure to collect the tax, because the former partly cancel each other out. Nevertheless, because of the size of the sums involved, corrections to the assessment basis must be given full attention, even if examination of them is only one stage of a necessary investigation of Member States' collection systems.

2.24. These general observations serve to underline the fact that harmonization of the collection bases must continue to be the Commission's permanent objective and a matter of more definite concern on the part of the Member States.

The concepts of 'solutions` and 'authorizations`

2.25. In calculating these adjustments, a distinction, based on Council Regulation (EEC, Euratom) N° 1553/89 of 29 May 1989 has evolved between 'solutions` based on precise figures and 'authorizations` which allow the use of approximate data or, even, allow certain operations to be disregarded

. The possibility of obtaining an authorization concerns only the adjustments mentioned in the Regulation

.

2.26. The Court found that this is, in fact, an artificial distinction:

(a)depending on the Member State, an identical adjustment may take the form of a solution or an authorization, even in cases where the figures, methods and sources used are identical (see for example positive compensations relating to the telecommunications sector (Annex F.5 to the Sixth Directive));

(b)the precision postulated by the regulations is frequently impracticable and many 'solutions` are in reality based on approximations. This is the case with positive compensations under the system applicable to small and medium-sized undertakings (SMUs) with turnover in excess of, or less than, 10 000 ECU, as well as the positive compensations arising from the exemption for supplies of land and buildings (Annex F.16).

Harmonization of calculation methods

2.27. The use of different methods for calculating identical types of adjustment is frequently justified by the special situations encountered in the Member States; convergence of methods ought, therefore, to make it possible to minimize the risk of non-harmonization.

2.28. A 'horizontal` examination of certain adjustments shows just how difficult it is to achieve this objective of convergence. One example, a significant one in terms of the amounts involved, is provided by the calculation of the negative compensation that results from the restriction on the right to deduct VAT on certain business expenditure (cars, petroleum products, leasing, maintenance)

. Nine Member States restrict the right to deduct VAT for this type of expenditure in varying degrees, invoking the possibility available under Council Regulation (EEC, Euratom) N° 1553/89 of calculating their VAT assessment basis as though there were no limitations on this right. This results in substantial corrections of the assessment basis in some Member States (see Table 2.2). Examination of this compensation shows that:

(a)one Member State (Belgium) calculated a correction to its VAT revenue, whereas the regulations clearly provide for compensation to the base;

(b)seven Member States used their national accounts as the main basis of calculation; two others (Belgium and Greece) used VAT returns;

(c)certain Member States (in particular Belgium, Denmark, Greece, Ireland and the United Kingdom) introduced into the calculation various flat-rate coefficients corresponding to private use of company cars; others (in particular France) do not do this, as they consider that the correction is already an integral part of the ESA national accounts; in the case of two Member States (France and Italy), the Commission expressed a reservation in respect of the figures submitted since 1983, as it has been unable to clarify this point.

2.29. A harmonized approach to adjustments implies placing the Member States on an equal footing and treating similar situations in an identical manner. Situations have arisen, however, when the Commission, with no apparent justification, has allowed the use of different ratios by comparable Member States (see the level of deduction for overheads in the positive compensation for securities management under Annex F.15).

Lack of precision in the Community regulations

2.30. It may happen that differences of approach in calculating adjustments are clearly the result of omissions or lack of precision in the regulations. This problem was highlighted in a Court of Justice ruling of 23 May 1990

. It concerns the positive compensation designed to incorporate in the VAT resources base certain exempt services in the telecommunications sector (item 5 of Annex F to the Sixth Directive). The ruling upholds the use by a Member State (FR Germany) of a particular calculation method which, compared with the method recommended by the Commission, has the effect of reducing the amount of compensation markedly. According to the method adopted by the Commission and followed by the other Member States concerned (Ireland, Italy, Luxembourg and the Netherlands), the assessment base had until then been established without subtracting from the turnover the amount of VAT input.

2.31. Two Member States (Luxembourg and the Netherlands) have already aligned their methods with that upheld by the Court of Justice. In addition, since the principle of this latter method can be transposed to other adjustments, some Member States (notably Belgium and the Netherlands) have expressed reservations regarding compensations effected in earlier years. One of these Member States (Belgium) merely intended to reduce the amount of its compensations relating to Annex F, with effect from 1981. The Commission introduced a reservation for this Member State, on a negative compensation relating to Annex E of the Sixth Directive, in respect of the financial years 1987, 1988 and 1989.

2.32. The effect of allowing Member States the freedom to choose their method of calculation is clearly not neutral in terms of the result. As the compensation system operates at present, there is a continuing risk that the Member States will minimize their contributions. This problem can only get worse, unless the Commission puts forward suitable proposals to make up for the lack of precise rules regarding the methods of calculation to be applied.

The quality of the estimates

2.33. The Court observed a number of cases where the quality of the estimates could be improved, disregarding the question of whether or not their use was justified by an 'authorization`:

(a)Some elements of the calculation are obsolete, namely:

- as part of the negative compensation for petroleum products (see paragraph 2.28) one Member State (Denmark) based some of its calculations on statistical series for 1979 that are updated annually by means of prices and quantity indices; a special study carried out in 1989 showed that at after 10 years the under-estimate produced by this method was of the order of 60% of the compensation;

- in calculating the various positive compensations intended to include in the VAT assessment base the exempt operations specified in Annex F to the Sixth Directive, one Member State (Greece) systematically used 1980 input-output tables;

- another Member State (Luxembourg) determined its positive compensation for passenger transport (Annex F.17) by assuming that the percentage of turnover accounted for by sales of tickets to taxable persons had been the same each year since 1980;

- in one Member State (Belgium) the negative compensation for excluding from the VAT assessment base services provided by travel agents for journeys outside the Community (Annex E.15 to the Directive) was estimated using information dating from 1981.

(b)The quality of some sources was inadequate, or the sources could not be checked, for example:

- when calculating the positive compensation for funeral services (Annex F.6), one Member State (Denmark) calculated the average added value on the basis of a telephone survey of a sample of undertakers;

- the figures for agricultural production supplied by some Member States (Belgium and Luxembourg) were taken from unofficial statistics, even though the ESA statistics were available;

- in order to calculate the positive compensation for admission to sporting events (Annex F.1), confidential specialist statistics held by sports federations were used (Ireland);

- one Member State (Spain) which exempts its imports of military equipment from VAT produced a flat-rate estimate of them as a certain percentage of the defence ministry's capital expenditure, as the exact figures could not be disclosed.

2.34. The laxity with which some adjustments are calculated is occasionally reflected in spectacular variations in amounts. For example, in the case of the negative compensation for petroleum products (see paragraph 2.28), one Member State (Greece) submitted an amount for 1989 three times higher than that for 1988, which was 10 times lower than the 1987 figure; in the same Member State the compensation for cars in 1988 was half that for 1987 and 1989. Another Member State (Italy), which until 1986 based its calculation of the positive compensation for funeral services (Annex F.6) on statistics, reduced the amount by around 70% from 1987 onwards by basing the calculation on tax returns.

Conclusion

2.35. The main burden of budget financing has been borne by the VAT resource. In view of the expected growth in expenditure in future years, the upper limit of 1,4 % of VAT makes it imperative that the assessment bases be determined properly. Leaving aside the question of whether the tax is collected correctly in the Member States - a matter which urgently requires attention - the Court's observations illustrate the serious deficiencies in the harmonization of the assessment bases. Not only are they unlikely to promote the free flow of traffic required by the wider market, but because they are so disparate, it is impossible to have adequate guarantees of fair treatment of the various Member States.

2.36. The practices which were observed to be detrimental to the correct determination of the VAT resource concern the collection of revenue: the concept of net revenue collected is interpreted differently by the Member States; there are delays in entering revenue in the accounts; the assessment basis is reconstructed artificially in cases where the statistics for the revenue for a given calendar year are unavailable.

2.37. These practices also affect the charging of corrections to the VAT revenue and the charging of compensation to the intermediate bases, in response to the necessity of creating a collection basis that is as uniform as possible. The Court's examination highlighted the diversity of the corrections and compensations, the far-reaching nature of their effects and the complexity of the national situations which they reflect. A precise executive framework for the calculation of corrections and compensations must therefore be provided in the form of suitable regulations.

2.38. The Court recommends that the effort towards harmonization should be pursued in the following ways:

(a)improving the comparability of the statistics needed for determining the VAT resource;

(b)ensuring that all national legislation is compatible with the Community legislation;

(c)promoting the creation of a genuinely common VAT collection system, leading ultimately to the abolition of the complex system of corrections and compensations.

Such harmonization will also further equality of treatment for the Member States and ensure that the VAT resource is correctly recovered in its entirety.

IMPORTS OF MOTOR VEHICLES

Introduction

2.39. The Court selected this industrial sector for a product audit because of certain of its characteristics: the significance of the automobile sector (6% of GNP in the Community; 7% of industrial employment), the importance of imports of motor vehicles and parts (20 514 Mio ECU in 1989), the relatively high level of customs duties (10% in the case of cars and, depending on the tariff classification, 11% to 22% for transport vehicles, 5% to 7% for spare parts), the amount of customs revenue involved (1 135 Mio ECU in 1989, i.e. 10% of customs duties - see Table 2.3).

The regulations governing imports of motor vehicles are not significantly different from the general rules.

2.40. Among the main supplier countries there are some which have duty-free access to the Community market by virtue of preferential agreements (including Sweden, Austria and Yugoslavia) or the system of generalized preferences (including Brazil and Mexico), whereas others do not have the benefit of any preferential arrangements (notably Japan, the United States and the USSR). The level to which these countries have pen- etrated the European motor vehicle market varies significantly from one importing Member State to another; in the extreme case of Japanese vehicles, this rate of penetration ranges from 1% (Italy) to 44% (Ireland), with an average of around 10% for the Community as a whole.

2.41. The Commission has no precise financial data for the amount of customs duty recovered on imports for free circulation, or deferred or subject to exemption under suspension systems or preferential arrangements. It is thus not possible to use the import statistics and customs tariff rates as a basis on which to verify the accuracy, or even the probability, of the global recovery figures. The figures quoted in paragraph 2.39 were reconstructed on the basis of these statistics, and are given merely by way of indication.

The Court's enquiry

2.42. The Court's enquiry covered the Commission and six Member States (Belgium, Germany, Ireland, Italy, the Netherlands and the United Kingdom). It revealed certain weaknesses in the customs procedures; three aspects attracted attention: suspension systems, customs value and customs controls.

Suspension systems

2.43. The duty suspension systems to which the Court paid particular attention during its enquiry were temporary storage, warehousing and inward and outward processing.

Temporary storage

2.44. Temporary storage is a preliminary stage and, within a period of between 15 and 45 days according to the type of transport, must be followed by the assignment of customs-approved treatment or use. The customs use the summary declaration (manifest), which is presented when the goods arrive, to ensure that this rule is complied with. The Court found one instance where the documents were checked only once a year, when the manifest was compared with the corresponding specific declarations (Teesport, United Kingdom). It also found a case where the 45-day time limit allowed by the regulations was not being respected (Dublin, Ireland).

Warehousing procedure

2.45. The Community regulations on the warehousing procedure allow the Member States a great deal of latitude, in view of the lack of precision concerning the designation of authorized premises, entry and exit procedures, the types of handling authorized and the obligation to keep stock accounts. Furthermore, no economic justification for using this system is required.

2.46. The Court noted a number of situations that were unsatisfactory, especially from the viewpoint of Community finance:

(a)importers were authorized to convert cars into utility vehicles in the warehouse, which is contrary to the definition of 'usual forms of handling`

, and despite the fact that the duty rate for utility vehicles is higher (11% instead of 10%), which resulted in a loss of some 89 000 ECU on 2 100 vehicles over a period of 12 months (Ireland);

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(b)the use of open warehouses was authorized (Netherlands) with the result that the duty was suspended on stocks of vehicles held by authorized dealers;

(c)there were very wide variations between Member States in the way in which the customs used inventories as a way of checking warehouses' stock accounts: the frequency and extent of the checks were variable, and in some cases checks were virtually non-existent.

Inward and outward processing

2.47. In the case of inward processing (where goods are imported for processing with relief from duty and the resultant products are subsequently re-exported), the conditions on which the grant of authorization depends include the provision that the essential interests of Community producers must not be affected. This provision is deemed to have been satisfied if the value of any one type of goods, per operator per annum, does not exceed 200 000 ECU. In Belgium the term 'type` was interpreted very liberally (for each of the 30 000 or so items likely to be imported by the firm concerned), which effectively deprived the idea of economic conditions of any significance

. Moreover, at the time of the audit, the customs had not checked that the limits were being respected, and in the case of some spare parts they had, in fact, been exceeded.

2.48. As regards outward processing, the Court observed that the regime was very diversely utilized (see paragraph 2.59 et seq.).

Use of suspension systems

2.49. In the light of the horizontal approach to the customs procedures applied in respect of motor vehicles, the above findings raise certain questions regarding the use of suspension systems. Such systems are not economically neutral, especially if, depending on the decisions taken by national governments, they allow beneficiaries to obtain suspension of VAT and excise duties, as well as relief from customs duties. This applies particularly to the warehousing system, which is widely used by motor-vehicle importers. Under these circumstances the system may be inconsistent with the objective of promoting economic activity among Community enterprises. In fact the ultimate effect of these systems could be to outweigh any advantage by promoting the activities of non-Community enterprises and enabling them to export their goods to the Community under optimum conditions, which are not available to European companies. This is why, in this area in particular, it was considered necessary to envisage the production of product-by-product descriptions by the Commission. It would then be possible, on the basis of an evaluation of the real effects of the common external tariff and the other Community foreign trade measures, to define the objectives to be pursued in the economic sector concerned as regards the use of suspension systems and to standardize the terms on which these procedures are authorized, as well as the nature of the benefits themselves.

Customs value

2.50. Various methods are used to determine the customs value, allowing for certain characteristics of the sale. In general, where motor vehicles are concerned, the customs value is the transaction value specified in Article 3 of Regulation (EEC) N° 1224/80)

, i.e. the price invoiced and paid at the time of importation, adjusted as appropriate if the buyer and the seller are related undertakings.

Procedures for checking declared values

2.51. As regards the procedures for checking declared values, the Court found that:

(a)Customs declarations had been accepted without the supporting invoices (Antwerp, Belgium) or DV 1 forms

(Scarborough, United Kingdom) required by the regulations, which made it impossible to check the value;

(b)the nature of the related undertaking was not mentioned (Turin, Italy) or was wrongly stated (Brescia, Italy) in the DV 1 documents submitted. This omission was particularly regrettable because the DV 1 provides the basis for post-clearance checks on the customs value;

(c)in many instances the DV 1 documents were not produced because of statutory exemptions. Although this situation is the result of simplified administrative procedures, it robs the customs of very useful and readily available data, so that they are dependent on the importer's initiative, for example, where the commercial conditions of the sale are changed.

Value reductions

2.52. The customs' acceptance of value reductions gave rise to the following observations:

(a)In Germany value reductions were allowed in order to take account of the repair costs borne by an importer after a vehicle was released for free circulation if repairs had to be carried out under the guarantee given to the purchaser. These repair costs were covered by a non-Community manufacturer (Japan) under guarantee agreements. In the past, value reductions have given rise to direct remission of duty; at present flat-rate deductions are applied to the values invoiced at the time of importation and they are then adjusted on the basis of the actual costs; their effect is to reduce the customs duties by an amount which varies between 6 ECU and 11 ECU on each vehicle imported. This raises questions regarding the uniformity with which Community legislation is applied and the compatibility of the application procedures with the provisions of Regulation (EEC) N° 1224/80, especially the concept of value at the time of importation. This situation requires further enquiry, and was brought to the Commission's attention on 12 July 1990;

(b)The grant of reductions is legal in cases where vehicles are damaged during transport. There was found to be a substantial divergence in approach between Member States - resulting in unequal treatment for importers. Whereas in one country (Italy) no concrete examples were found, in others the damage had to be assessed by an expert (Belgium) or evaluated on a case-by-case basis according to the circumstances (United Kingdom, Ireland). Flat-rate reductions were also applied (Germany and the Netherlands) with post-clearance verification; it was found, for example, that rates of 20 ECU (Germany) and 10 ECU (Netherlands) were applied for identical vehicles. One particular case was noted where compensation for damage incurred during maritime transport was paid in the Member State where the vehicle was released for free circulation (Germany), whereas the damage had been repaired under warehouse arrangements in the Member State where the vehicle was unloaded (Netherlands).

Second-hand vehicles

2.53. During the Court's on-the-spot visits, commercial imports of second-hand vehicles were found in only one Member State (Ireland). The customs used two methods to establish the customs value: in calculating the customs duties they took the transaction value as the reference point; for the calculation of excise duty it was the recommended retail price that was taken into consideration, after adding certain additional costs and making deductions for the age of the vehicle. In one of the current cases examined, for example, the two methods gave a taxable base of 1 936 ECU (customs duties) and 6 198 ECU (excise duty) respectively.

Evaluation exercises

2.54. The above observations should be viewed in the generally very liberal context surrounding the transaction value of the imported product. The margin of discretion available to importers in determining the customs value and the limited opportunities for disputing that value that remain to the customs under the Community regulations make it all the more important for the accounting and commercial data to be checked on the undertakings' premises, particularly where sales between related undertakings are involved. However, substantial differences were found in the conduct of the evaluation exercises in the Member States visited, both as regards their frequency and the methods used and the results obtained. Centralized information and coordination of control are needed, under the aegis and guidance of the Commission.

Customs controls

2.55. The Court also looked into the checks and monitoring undertaken by the customs authorities. The Court noticed a number of weaknesses, of varying degrees of gravity, affecting the frequency, extent and quality of control and monitoring by the customs, including operations which involve importers' computer systems.

Data-processing systems

2.56. In the case of some large-scale importers, the customs clearance operations are carried out by computer using applications which are integrated with the commercial management of the undertaking (Belgium, the Netherlands and the United Kingdom). Effective control would require the customs to approve the software used and to supervise any changes to it. This latter requirement was not being applied at the time of the Court's survey. In one case it was even found that the customs had not vetted the tariff classification file used by the undertaking and that the file could be modified unilaterally by the staff of the undertaking. Post-clearance checks revealed serious classification errors. In all these cases, the customs were content to exercise traditional methods of checking the documents produced by computer. This being the case, it is imperative that customs control methods be modernized.

Traditional documentary checks

2.57. Several anomalies in the traditional documentary checks were found:

(a)due to staff shortages it was impossible to check that the summary monthly statement used as part of the simplified procedure was complete, although such a check would have ensured that all the vehicles delivered had in fact been cleared (Krefeld, Germany);

(b)lack of sample checks on customs value and the calculation of duties (Krefeld, Germany), absence of records of any checks that might have been made (Cologne-Rheinau and Deutz, Germany);

(c)a system of control was established and documented and the key control points established only after the Court's visit (Scarborough, United Kingdom);

(d)authorization to deduct amounts of interest due under a financing agreement from the customs value, without verifying the conditions applicable to such deductions (Ireland);

(e)grouping parts falling under different subheadings of the tariff under a single heading, on the grounds that in the event no duty was due by virtue of the system of generalized preferences (Italy);

(f)failure to evaluate the possible effect on own resources of a number of errors and problems that were discovered in relation to the monthly declarations for free circulation (Netherlands);

(g)weaknesses in the documentation and coordination of control activities relating to warehousing operations (Netherlands).

Conclusion

2.58. The enquiry made it possible to draw a number of conclusions concerning the substantial improvements that are required in the established systems:

(a)the need for the Commission to have fuller and more detailed information, including information of a financial nature;

(b)the desirability of coordinated studies of vehicle value and European-level harmonization of the conditions relating to value reduction;

(c)the importance of establishing customs control techniques suited to the management methods currently employed by large undertakings, particularly in the computer field;

(d)the need for rationalizing the customs treatment of operations covered by suspension systems;

(e)the highly desirable evaluation at Community level of economic conditions and the real effects of the so-called suspension systems.

THE OUTWARD PROCESSING SYSTEM

Introduction

2.59. Outward processing relief arrangements (OPR) are customs procedures

whereby goods may be temporarily exported from the territory of the Community and the products manufactured with such goods (compensating products) may subsequently be reimported with full or partial relief from the duties owed. The relief applies to the amount of duty which would have been applicable to the goods that were exported initially if they had been imported at the same time and with the same origin as the compensating products. The latter are therefore, as it were, subject to taxation on the difference, involving the processing and goods added outside the Community. The triangular traffic arrangements allow compensating products to be reimported into a Member State other than that from which they were exported

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2.60. The value of OPR trade in 1989 is shown in Table 2.4. The foreign trade statistics show a total of 5 364 Mio ECU of exports declared under the OPR scheme and a total of 6 330 Mio ECU of imported compensating products, from which the value of the components which were exported temporarily has been deducted, in order to calculate the notional taxable value. Assuming that the trade flows took place simultaneously, the taxable value taken to represent the added value would therefore be 966 Mio ECU. This is, however, a purely theoretical assumption: the duties that were recovered were not calculated on the basis of the added value; a large proportion of textile imports enjoy relief from duty under tariff quotas and, for various reasons, a proportion of the goods exported are never declared on reimportation

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2.61. Although statistics for the value of this trade are available, there are no figures for actual recoveries and the corresponding relief from own resources. This situation makes it impossible to carry out a representative check of recoveries under the arrangements. On the basis of a rate of 11% for textiles and 6% for other products, imports would give rise to own resources of 488 Mio ECU, if it were not for the OPR. In fact the waived duties corresponding to the customs value of the temporarily exported components would amount to 401 Mio ECU and the duties to be collected to 87 Mio ECU (estimated figures).

The Court's enquiry

2.62. The Court's enquiry was concerned primarily with the general operation of the arrangements. It was carried out by means of questionnaires, which were sent to all the Member States, and on-the-spot visits to Denmark, the FR of Germany, France, the Netherlands and the United Kingdom. These Member States account for a total of 80% of Community OPR traffic.

Evaluation of the economic conditions

2.63. Article 6 of Council Regulation (EEC) N° 2473/86 provides that use of the OPR arrangements must not be authorized if the proposed operations are likely to cause serious damage to the essential interests of Community processors. The Member States are required to send to the Commission every month a list of the OPR applications that have been rejected on this score. The Commission has never, so far, received any information concerning the rejection of an OPR application for economic reasons.

2.64. In fact, the Community regulations do not give any indication of the nature of Community processors' essential interests, or of the situations which might have a serious effect on them. The Member States follow their own procedures and pay scant attention to this aspect of the authorization of OPR arrangements. For example:

(a)in the Netherlands and the United Kingdom, the economic aspects were not taken into account at all when OPR applications were examined;

(b)in the FR of Germany, the economic conditions requirement was deemed to have been satisfied automatically if the proposed operation involved the 'differential method`, entailing an increase in the value of the product obtained. Accordingly the duty was calculated on the basis of that value; this was the situation in most cases;

(c)in Denmark, the applicant was required to state the reasons for using the OPR arrangements, but no use was made of this information;

(d)in France, Italy and Portugal the customs authorities had been instructed to examine the economic aspects, but no precise criterion had been specified, other than optional consultation of the ministry responsible;

(e)in Ireland, Spain and Greece, OPR applications were examined centrally.

2.65. These miscellaneous procedures clearly indicate that, in the absence of specific guidelines, the economic aspects - at Community level - of OPR operations cannot be evaluated fully in the Member States, whether at local level, where the resources are not available, or at central level, where the national interest tends to predominate. Suffice it to say, moreover, that those Member States that account for a total of 60% of OPR traffic (FR of Germany, the Netherlands and the United Kingdom) do not even consider this aspect. It is apparent, however, that there may be some problems as regards the protection of the Community's economic interests. By their very nature, in fact, the OPR arrangements essentially promote employment outside the Community. Nevertheless, in addition to providing opportunities for widening Community sales, it is also a factor in reducing European undertakings' production costs. The choice, therefore, is between achieving the lowest possible costs, and prices, by subcontracting to non-member countries, or confining the business to the Community, thereby jeopardizing the competitiveness of its undertakings. This is a choice which clearly can only be made at a high level after detailed enquiry. In the final analysis, although the rules rightly require the Community's economic interests to be satisfied, an examination of the facts only gives ground for a kind of 'favourable presumption` that this is the case, which can in no way replace an evaluation of what is really at stake at Community level.

Procedure for authorizing the arrangements

2.66. The regulations provide that OPR operations must be authorized in advance. The only exception is repair work of a non-commercial nature.

2.67. This procedure has been implemented in various ways in the Member States:

(a)in the Netherlands, the majority of authorizations were issued without any quantitative limit and for an unlimited period;

(b)this was frequently the case in Germany as well and, in addition, the technical terms of the operation (rates of yield

, identification of goods, etc.) were frequently not determined until the reimportation stage was reached;

(c)in Denmark and Portugal copies of the applications were sent to the central customs directorates;

(d)in France it was found that the practice was to issue repeated authorizations of the same type that were valid for six months.

2.68. In these ways the primary objective of prior authorization - the assessment of the economic desirability of the proposed operation - is ignored and all that happens is that the framework and technical conditions of the authorized OPR operations are formally established.

Method of calculating duty

2.69. According to the regulations, the amount of duty due on the reimported compensating products is calculated by applying the customs tariff rates to the value of the products; from this amount a sum is subtracted corresponding to the import duties which would have been due on the goods initially exported and subsequently incorporated at the same time and from the same country as the compensating products; the relative size of the deduction takes account of the accepted rate of yield for the operation.

2.70. This formula implies that for every declaration on reimportation of compensating products, the values, quantities, tariff headings and rates of yield for every component of Community origin are known precisely. In cases where an operator is involved in a continuous flow of trade, which is generally the case, the various initial export declarations also have to be cross-checked against the reimport declarations.

2.71. These complications have inevitably led to the adoption within the Member States of procedures that are intended to simplify things, whereby, for example, average rates of duty are used for the exported goods, or the duties owing on the reimported compensating products are, de facto, simply calculated on the declared added value: a method of calculation which is contrary to the provisions of the regulations.

Customs controls

2.72. Although some precautions are taken as a result of the prior authorization system, there are still a number of checks which have to be completed either on or after reimportation of the compensating products.

2.73. Given the complexity of the operations, the usual primary and post-clearance control structures responsible for this difficult work are overstretched and are confronted with a choice between carrying out very detailed checks that are out of all proportion to the financial risk, or ignoring this area. In effect the risk lies not only in the declared OPR operation, i.e. the operators who officially use the arrangements and submit specific OPR declarations. There is also a risk in the case of those operators who are operating outside the system in a de facto OPR situation, but without official authorization. At the point where the manufactured goods are reimported these operators present the customs with invoices for the added value only (i.e. they deduct the value of the components that are of Community origin), whereas, since they have not applied for OPR, they should declare the full value of the imported products and pay customs duty accordingly.

Conclusion

2.74. The OPR arrangements constitute a system of customs relief that was designed to promote Community industrial and commercial activities. In practice there are two kinds of obstacles to its satisfactory operation: the evaluation of the economic conditions of the proposed operations and the administrative complexities of managing the system. In order to rectify this and to preserve the justification for the arrangements, improvement should be sought in the following directions in particular:

(a)facilitating the obligatory evaluation of economic conditions on a case-by-case basis at national level, by laying down Community criteria of a macroeconomic nature;

(b)simplifying the prior authorization procedures, and the calculation of duty in particular, in cases where there is no significant effect on the amount of own resources recovered;

(c)defining control standards which take account of the complexity of the system and its effects and stepping up preventive measures and general information.

FINES, PERIODIC PENALTY PAYMENTS AND OTHER PENALTIES

2.75. The Court of Auditors carried out an audit of operations coming under Article 710 'Fines, periodic penalty payments and other penalties` imposed by decision of the Commission on undertakings which contravene the principles of free competition

. The enquiry covered the establishment, recovery and entering in the accounts of the revenue. In 1990, 593 608,9 ECU were recovered; at the end of the year a total of 154,6 Mio ECU was outstanding following appeals (13 decisions concerning 87 undertakings). An appeal does not impede recovery, but it has become established practice for recovery to be suspended if the person to whom the decision is addressed

accepts that the sum he owes will incur interest charges and provides an acceptable guarantee to cover the debt, including principal, interest and any increases. As a general rule payment must be effected within three months of the date of the notification.

2.76. There were certain deficiencies in the operation of the established system, which prevented operations from taking their normal course:

(a)it was noted that there were delays in formally notifying decisions and, consequently, in the time required for recovery;

(b)sometimes the recovery procedure was initiated on the date receipt of the registered letter was acknowledged, in other cases it was the date on which the addressee returned the Commission's formal acknowledgement of receipt

; frequently the department concerned delayed forwarding these acknowledgements to the authorizing officer; in most of the cases noted, the recovery orders were issued two to four months after the decision, sometimes on a date very close to the due date. There was one case in which 14 recovery orders reached the accounting officer, after approval by the Financial Controller, on the actual expiry date, even though some undertakings had already paid their debts; in another case the recovery order was made out 14 months after the due date;

(c)the making out of supplementary recovery, reduction or cancellation orders following judicial decisions was subject to similar delays in transmission to the authorizing officer by the departments concerned; it was found that one recovery order had been issued pursuant to a judgment 12 days after the fine had been paid;

(d)the rulings of the Court of Justice or of the Court of First Instance are not notified to the accounting officer systematically, even though such rulings terminate the suspension of recovery granted by the Commission.

2.77. As long ago as 1977, the Financial Controller drew attention to some of the abovementioned weaknesses. Despite the new internal rules, there has not been any fundamental change in the situation.

2.78. As for the transparency of the accounts, it was noted that the guarantees provided in cases where recovery had been suspended were not shown in the Commission's financial statements, or in the annexed financial information. In turn, there were no separate accounting entries for interest on arrears; furthermore the interest was entered in the accounts only when it was collected.

CHAPTER 3 (\*) European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee): Management and budgetary control

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BUDGETARY DISCIPLINE

Introduction

3.1. Financial information on the implementation of the guarantee Funds is presented in Tables 3.1 to 3.4, and the value of intervention stocks in Table 3.5.

3.2. In its Decision 88/377/EEC of 24 June 1988

concerning budgetary discipline, the Council limited the rate of increase of EAGGF expenditure to 74% of the rate of increase in Community gross national product. The 1988 base of expenditure from which the agricultural guideline is to be calculated was 27 500 Mio ECU. Guarantee expenditure charged to Titles 1 and 2 of the general budget in 1990 totalled 25 048,0 Mio ECU (see Table 3.3), 18% less than the limit in the guideline for 1990, which amounted to 30 630 Mio ECU.

3.3. 564,3 Mio ECU of agricultural expenditure was charged to Chapter 81 for the depreciation of stocks held at the beginning of the year. The cost of depreciating existing surplus agricultural stocks had been fully met by the end of 1990, two years ahead of the 1992 deadline set in the above Decision. 796,4 Mio ECU was also charged to Chapter 81 for the reimbursement to the Member States of the cost of butter disposal incurred in 1987 and 1988, 1 600 Mio ECU remained outstanding.

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Early-warning system

3.4. Actual expenditure in 1990 was in total 5,3% below the total appropriations voted in the initial budget, although nine of the 18 chapters in Titles 1 and 2 showed overruns of the initial appropriations (see Table 3.2). These overruns were financed by transfers from chapters with surplus appropriations.

3.5. Article 6 of Decision 88/377/EEC on budgetary discipline requires the Commission to avert cost overruns in each chapter, by establishing an 'early warning system` based on the monthly comparison between actual expenditure and the forecast profile of expenditure for each chapter, and by using its management powers to remedy overruns of the profiles. The budgetary authorities are to be kept informed of the development of expenditure through monthly reports on EAGGF Guarantee Section expenditure established by the Commission.

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3.6. As required by the decision, the forecast monthly rates of expenditure (profiles) are calculated by reference to the monthly expenditure over the three preceding years. To determine the profile for each chapter, the Commission calculates the proportion of annual expenditure which was, on a three-year average, spent in each month. When calculating the profiles for 1990, the Commission took account of certain significant changes in circumstances, in particular changes in the basis of charging the depreciation of intervention stocks, in the payment of advances for sheep and goat premiums, and in the pattern of exports in the sugar sector.

3.7. The monthly comparison of actual expenditure against the profiles has proven to be of limited value for ensuring control over costs in the current budgetary year. Given that prices, which dictate the rates of aid, are set long before the aid is paid, it takes some time before a change in prices will influence the level of quantities produced. Furthermore, the rates of export refunds may be fixed well in advance and paying agencies take up to three months to process claims. The expenditure declared in any one month therefore reflects decisions taken a considerable time earlier. A decision aimed at reducing expenditure taken when a profile is exceeded will take the same length of time to be effective in reducing the expenditure declared by the Member States.

3.8. The only significant attempt to limit expenditure in recent experience, concerning the tobacco market, illustrates this time-lag. Expenditure began to exceed the profile in early 1989, largely because of increasing production in Italy. In 1990, the Commission launched an enquiry into the Italian market and identified the main contributory factor as the rapidly increasing production of one hybrid variety. It proposed measures under the stabilizing regime to limit aids for this variety, and a reduction in the intervention purchase price. These measures entered into effect in the 1990/91 marketing year. The reduction in the level of guarantee expenditure was not expected to occur until 1991. Furthermore, such time-lags can be increased given the nature of the Community decision-making process: for example deficiencies in the control over intervention stocks, pointed out by the Court in its special report published on 8 September 1988 were to some degree corrected by measures taken by the Council and the Commission in 1990

which became effective as from 1 October 1990, i.e. in the 1991 guarantee year

.

3.9. In 1990, with the exception of the tobacco sector, the Commission took few management measures aimed at limiting expenditure. Most measures, taken in the light of the conditions in particular markets, had the effect of increasing expenditure and hence the need for transfers of appropriations (see Table 3.6). For example, the quantities of beefmeat allowed into intervention storage were increased, the levels of aids aimed at disposing of stocks of milk products were raised, and the payment of advances for sheep and goat premiums was authorized.

3.10. The accuracy of the Commission's forecasts of the requirements for appropriations is significantly reduced by the inaccuracy of the information received from the Member States regarding the dates when expenditure is expected to be disbursed, and the amounts concerned. Throughout 1990, the Member States consistently underestimated in their monthly declarations the expected disbursements over the following three months. Whilst their estimates of the next two months' expenditure proved reasonably realistic, that for the third month did not, as is shown in Graph 3.1. These inaccuracies contributed significantly to the need for last minute transfers of appropriations: whilst the guarantee financial year ended on 15 October 1990, the Commission requested transfers between chapters of 1 175 Mio ECU on 19 October 1990 and 55 Mio ECU on 19 December 1990. Transfers of 910 Mio ECU requested on 13 September 1990 had thus very rapidly proven insufficient. There is also much scope for increasing the flow of information on expenditure from the Member States in order to provide the Commission with a sound basis for analysing expenditure trends (see the 1989 Annual Report, paragraphs 3.5-3.8).

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3.11. The Commission has complemented the early-warning system specified in the Council's decision by improving its cost forecasting system which is now based on a regular review and update of the assumptions underlying the budgetary estimates regarding quantities, and rates of aid. It then re-evaluates the expected expenditure in each budget line (rather than merely at chapter level as in the case of the profiles). As from the 1991 EAGGF year, its revised forecasts of costs are communicated monthly, in summary form, to the budgetary authorities, as required since 13 March 1990 by Article 99(2) of the Financial Regulation.

3.12. The monthly re-estimate of the requirements for appropriations in each budget line gives the Commission the elements to forecast likely cost overruns well before they are signalled by the early-warning system specified in the Council's decision on budgetary discipline. Adherence to the profiles should now become for the first time a realistic objective for the Commission in its management of guarantee expenditure.

3.13. Forecasts are however not enough: the Commission needs the support of the Council if its proposed corrective measures are to be adopted and to have any significant effect on the budget before the end of a year of adverse circumstances in which there is a real risk of agricultural expenditure exceeding the limits set in the Council's decision. Furthermore, the Commission should evaluate ex post the actual financial effect of the management measures taken, which is not yet the case.

MANAGEMENT OF APPROPRIATIONS

Carry-overs

3.14. As required by Article 100 of the Financial Regulation, the Commission commits each month exactly the amount of guarantee expenditure declared by the Member States. Appropriations remaining uncommitted at the year end are normally cancelled except in isolated special cases, such as the carry-over from 1989 to 1990 of negative appropriations totalling 57,4 Mio ECU and concerning uncollected milk levies.

3.15. In January 1991, however, the Commission proposed the carry-over to 1991 of 685,5 Mio ECU of unused appropriations in six chapters. The Council approved the proposal in March 1991. Article 7 of the Financial Regulation states that 'a decision may be taken to carry over ... appropriations still uncommitted at the close of the financial year, where the appropriations made to the headings in question in the budget of the next financial year are not sufficient to cover requirements ... The carry-over of such appropriations can be proposed only for exceptional reasons in order to cope with compelling needs which cannot be met by appropriations from the next financial year. In principle, such carry-overs are intended to cover needs normally coming under the previous financial year but which, due to delays for which the authorizing officer was not responsible, could not be used in due time`.

3.16. The following carry-overs do not fulfil these criteria:

(a)the carry-over of 127 Mio ECU for olive-oil production aid was stated to be justified by delays in payments in Italy: however the payment delays in 1990 were similar to those in the previous four years, and in fact the backlog of certain payments (to non-associated producers), once reaching up to seven years, has been reduced to some two years;

(b)a carry-over of 280 Mio ECU to provide budgetary cover for part of the European Council Decisions of 14 and 15 December 1990 concerning the provision of 250 Mio ECU of food aid to the Soviet Union and 100 Mio ECU of emergency aid in the form of food and medical supplies to Romania and Bulgaria. The enabling regulation was adopted on 5 March 1991

. Under no circumstances could this cost have been related to the 1990 guarantee year which ended on 15 October 1990. Furthermore, there was little firm evidence at the date of the proposal for the carry-overs that 1991 appropriations for the relevant intervention storage budget headings would be exceeded, particularly as the exact products to be delivered had not yet been determined.

3.17. The practical effect of granting these carry-overs is to increase by 685,5 Mio ECU the Guarantee Fund's resources available in 1991, a year in which the Commission feared that the agricultural guideline might be exceeded. In previous years, the Court has criticized practices designed to maintain the semblance of a balanced budget (most recently in paragraph 1.9 of the 1987 Annual Report).

Corrections of previous years' expenditure

3.18. Substantial sums of expenditure declared by the Member States are being disallowed by the Commission under the clearance of accounts procedure: 377,9 Mio ECU were credited to the 1990 accounts through the recovery of expenditure charged in 1987, and on 30 November 1990 the Commission disallowed 575 Mio ECU declared in 1988, the recovery of which will be recorded in the 1991 accounts. Such recoveries are credited to Article 290 in the guarantee year in which the decisions are taken, as required by Article 102(3) of the Financial Regulation.

3.19. Rather than being caused by the Guarantee measures in force, an overrun of the expenditure profile in a particular market (see paragraph 3.5) may be partly due to irregular expenditure by the Member States which is corrected in a later year through the clearance decision. For example, the amount received as a result of the clearance decision regarding the 1988 year for expenditure in the milk products sector was 233 Mio ECU, little less than the 247 Mio ECU overrun of the initial appropriations for that sector in 1988. In 1990, whilst expenditure in Chapter 20 regarding the milk products market exceeded the initial appropriations by 615,9 Mio ECU, 285,2 Mio ECU was recovered from the 1987 expenditure concerning the same market.

Utilization of the corrections

3.20. Article 290, to which clearance adjustments are entered, has a token entry in the budget. After the clearance decision it is decided if and to what extent the corrections will be used to cover the financing of current year's actions through transfers from Article 290. Such decisions are at present taken on an ad hoc basis. In 1990, when there were receipts of 377,9 Mio ECU, the Commission transferred appropriations totalling 119 Mio ECU: 4,0 Mio ECU for interest payments to Member States (Article 294) and, curiously, 115 Mio ECU for a reduction of the negative appropriations for additional milk levies (Item 2071), (see paragraphs 3.21-3.24). The balance of the receipts (i.e. 258,9 Mio ECU) was cancelled. The Court recommends that the Commission proposes to the budgetary authorities guidelines governing the use of the appropriations corresponding to income arising from clearance decisions.

Negative expenditure

3.21. Within the guarantee budget, receipts from levies in the cereals and milk sectors, recoveries under clearance of accounts decisions and income from monetary compensatory amounts are shown as negative expenditure. The Court has long maintained its opinion that the practice of including negative items in the expenditure budget contravenes the budgetary principle, recognized in Article 4(1) of the Financial Regulation, that there should be no offset between income and expenditure.

3.22. In 1990, the Commission further compounded its non-respect of this principle by offsetting 113,7 Mio ECU of expenditure against income from additional levies received in the milk sector (Item 2071). The total levies actually received were 148,3 Mio ECU, but the Commission's accounts show only the net sum, 34,6 Mio ECU. Expenditure is thus being offset against income which is itself shown as negative expenditure!

Expenditure charged against negative expenditure

3.23. The abovementioned 113,7 Mio ECU was incurred by the FR of Germany in 1990 for the repurchase of milk quotas following a decision by the Commission

within the clearance of the 1987 year's expenditure. In fact, the Commission, when it came to take its decision on the clearance of the 1987 accounts, adjusted by 187,5 Mio ECU the amount of the additional levy on milk production owed by the FR of Germany. The 113,7 Mio ECU which the Commission authorized the FR of Germany to use to finance a national quota repurchasing programme concerned part of this adjustment. A similar operation took place under the 1988 clearance.

3.24. This decision is based largely on a liberal interpretation of the provisions of Council Regulation (EEC) N° 857/84 of 31 March 1984

, which implicitly authorizes such re-uses only in respect of the financial year during which the sums were recovered, and then only in so far as the Member State has distributed quotas which do not exceed the guaranteed national quantities. The ad hoc arrangement agreed upon by the Commission and the Member State, authorizing the latter to initiate a repurchase programme up to 31 March 1991 in connection with the recovery of expenditure declared in 1987 and 1988, contravenes the principle of annuality. Furthermore, this amounts to charging actual expenditure in 1990 against a negative expenditure budget item with which it has no direct connection, thus calling into question the principle of the specific nature of appropriations.

NATIONAL CONTROLS OVER GUARANTEE EXPENDITURE

Introduction

3.25. Of the expenditure charged to the Guarantee Fund in 1990, all except 11,2 Mio ECU (0,04%) was disbursed by the paying agencies of the Member States, which forward to the Commission monthly declarations of the total spent under each budget heading and a statement of intervention stock movements. They also forward annual declarations which contain further information, in summary form. Practically all the documents supporting the legality and regularity of guarantee expenditure are kept in the Member States, as is all detailed information on the verification of claims.

3.26. As required by Article 4 of Council Regulation (EEC) N° 729/70 of 21 April 1970

, each Member State has designated one or more agencies which they empower to effect guarantee expenditure. These bodies are subject to audits conducted within each Member State's national framework of financial controls, by external auditors and, in some bodies, by internal audit departments. The verification of the eligibility of claims, in particular physical inspection, is carried out either by the paying agency itself or by external bodies such as the customs departments, provincial agricultural departments or producer organizations.

3.27. In 1989, the Court embarked on a programme of audits in the Member States, aimed at examining the national controls over guarantee expenditure, and at testing the accuracy of the declarations and the adequacy of supporting documents. The Member States concerned in 1989 were Belgium and Spain. This programme was continued in 1990, in Italy, the Netherlands and Portugal, which disbursed respectively 15,7%, 11,2% and 0,8% of guarantee expenditure.

Controls over paying agencies

3.28. In four of the Member States visited, all the paying agencies are managed under the direct responsibility of government services. In the Netherlands, however, seven of the nine paying agencies are 'Produktschappen` (Commodity Boards), which are public bodies governed by representatives of the agricultural sector for which the organization is competent. The representatives are drawn from amongst farmers, processors, traders, and the employees of each. As well as disbursing Guarantee Funds, the organizations promote the agricultural sectors' interests and products. The risks inherent in such conflicts of interest are mitigated by the imposition of a regular audit by the Ministry of Agriculture of each organization's management of Guarantee Funds. (The situation in France is comparable; the majority of the commodity boards' directors are representatives of the agricultural trades; the boards have the status of public bodies under the authority of the government, which appoints the chief executive.)

3.29. The Directorate for the Implementation of Regulations, a department of the Ministry of Agriculture, is one of the two government-managed paying agencies in the Netherlands. The monthly declaration of guarantee expenditure could not be readily reconciled to the Directorate's accounting records, principally because the expenditure declared may be recorded in the records for months different from that of the declaration. Furthermore, the Directorate was late in executing payments regarding three EEC measures (premiums for suckler cows, for bulls and for the set-aside of land).

3.30. In Portugal, the Court found that the authorities have established a close level of control over the two paying agencies, there being a number of internal and external departments responsible for the audit of guarantee expenditure. However, as each audit body focused its work on the same, more financially significant measures, other measures had not been examined. Improved coordination between the bodies concerned would reduce duplication of effort and increase the audit coverage of guarantee measures.

Verification of the eligibility of claims

3.31. In its annual report on the financial year 1989 (paragraphs 3.26-3.41)

the Court commented on the insufficiency of certain paying agencies' controls over guarantee expenditure in Belgium and Spain, concerning measures for which the responsibility for verifying and authorizing claims does not rest with the paying agencies. The Court's findings in Italy indicate that such deficiencies are not confined to these Member States, and can, and do, result in the payment of significant sums for ineligible claims.

3.32. For a claim against Guarantee Funds to be eligible, a number of conditions have to be fulfilled depending on the measure concerned, for example time-limits, the size of a producer's flock of sheep, the minimum length of time animals must be kept, the variety of a crop sown and the quality of raw materials to be processed. The conditions are laid down in regulations specific to each market, as are the requirements for physical verification of the claims by the Member States, which range from 100% of all claim details (e.g. oilseeds) to a minimum of 5% of claims (e.g. sheep and goat premiums). Advances may be paid pending the submission of evidence of eligibility, but these are in most cases secured by bank guarantees until all documents are submitted.

3.33. In the Court's view, the paying agencies should ensure that the relevant conditions have been fulfilled before paying a claim, and the supporting evidence should be available on file to both national and Community auditors. This was not always the case, particularly in 'Azienda di Stato per gli interventi nel mercato agricolo` (AIMA), the main paying agency in Italy. Whereas for some measures, in the wine sector for example, supporting evidence was available in AIMA, for other measures, the payment files contained only lists of the amounts to be paid, with no other supporting documents. These are measures under which a large number of claims are made, in particular premiums for sheep and goats, production aid for durum wheat and calf birth premiums. Responsibility for approving and verifying these claims has been delegated to the local agricultural services of each region, which forward lists of approved claims to AIMA. All supporting documentation is kept in the provincial departments.

3.34. The act of delegation is not questioned, provided that the Member State, which is responsible for ensuring that transactions financed by the Guarantee Fund are correctly executed, is able to demonstrate that it has set up procedures necessary to verify this execution. Responsibility may be delegated to departments which are technically equipped to appraise and process the claims, but if there is no supervision of the execution of the delegated responsibility, the paying agency can have no assurance that the conditions laid down in the EEC regulations have been respected: its role is reduced to that of a cashier, disbursing Community funds on the simple request of outside bodies.

3.35. AIMA could present no evidence of supervision, or indeed any information on the controls exercised over claims under the measures mentioned in paragraph 3.33 above. This implies that it had executed the payments requested by the local agricultural services without any knowledge of their justification. Furthermore, unlike a cashier, AIMA was unable to demonstrate that the official who had authorized the payment request was empowered to do so, or that the signature was indeed his.

3.36. By a national law passed on 14 February 1985

, the Italian Government instructed AIMA to set up an inspection department, to be responsible for monitoring, in particular, the execution by external bodies of their duties under the mandates given by AIMA. This department was however not staffed until 1989, and at the end of 1990, had only 20 staff. It requires considerable strengthening if it is to examine the implementation of all financially significant aid measures within a reasonable time-scale.

3.37. The effect of AIMA's lack of supervision was particularly striking in the sheep and goat sector. The Court's officials found, when inspecting the records in a number of provinces, that each had adopted different interpretations of the Community regulations when determining the number of animals eligible for premiums, in particular different interpretations of:

(a)the documentary evidence to be submitted with each claim, some requiring none at all;

(b)the nature of the evidence accepted to support the existence of lambs and the age at which they had been sold (which is required to exceed two months);

(c)the proportion of claims to be verified by physical inspection, which ranged from 5 to 100%;

(d)the amount payable in the event of discrepancies between the result of the physical inspection and the number claimed (none applied the condition that a significant discrepancy entails the refusal of all aid);

(e)the documentary record of the inspection results and of the conclusion drawn (ranging from clear reports to pencilled notes on the claim form).

3.38. When examining a selection of claim files in each province visited, the Court's auditors found that a significant number of claims had been authorized and paid despite evidence to suggest that the lambs had not been kept for the stipulated two months, their weight when sold being well below the norm for their supposed age.

3.39. The differences in interpretation of the EEC requirements between the provinces not only led to the payment of ineligible sums, but also to inequity between beneficiaries, who would receive very different amounts depending on the area in which they lived. AIMA had given some instructions to the regional authorities, but these contained no guidelines useful to the inspectors when faced with the practical difficulty of appraising the evidence supplied by producers.

3.40. Furthermore, through lack of central supervision and coordination, there were no cross-checks to ensure that producers, in particular those established near the border between two provinces, do not submit claims to two provinces for the same flock.

3.41. For many other measures, even when its files contained some supporting documents, AIMA could not present the Court's officials with evidence that it had monitored the implementation of the control requirements of Community regulations. Such monitoring is particularly important in the cases of claims which are verified and certified by producer or professional organizations, which have a conflict of interest between the discharge of the control responsibilities delegated to them by AIMA and the prosperity of their members.

3.42. When the Court could trace, either in AIMA or when visiting the provinces, reports on inspections carried out, these inspections were in some cases too late to be effective (calf birth premiums) or incomplete, for example lacking evidence that the minimum price had been paid to producers (compulsory distillation of wine products). AIMA was unable to present to the auditors a report on its own verification of oilseed processors' records for the 1989 marketing year, although the results of these verifications form the basis of the release of guarantees securing advances for production aid claimed.

3.43. The Court is not alone in commenting on the delegation of AIMA's duties. The national audit authorities reported similar conclusions in 1988 and 1989, and the Commission has disallowed a significant proportion of the expenditure declared by Italy, in particular for sheep and goat premiums.

3.44. In both the Netherlands and Portugal, the Court found that the paying agencies accepted certificates attesting the nature and quality of products attracting subsidies which had been issued by the laboratories of the claimants. In order to avoid all conflict of interest, only certificates established by independent bodies should be accepted.

Community regulations

3.45. Under Council Regulation (EEC) N° 729/70 of 21 April 1970

, the Member States are required to designate the authorities and bodies which they empower to effect guarantee expenditure and to ensure that these credits are used solely for the purposes laid down (Article 4), to satisfy themselves that transactions financed by the Guarantee Fund are actually carried out and executed correctly, and to prevent and deal with irregularities (Article 8). These provisions imply an important central role for the Commission, as is made clear in Article 9, which requires Member States to keep sufficient records to allow inspectors appointed by the Commission to check:

(a)that administrative practices are in accordance with Community rules;

(b)that the requisite supporting documents exist for each transaction financed;

(c)the conditions under which transactions financed are carried out and checked.

3.46. These provisions presuppose that the Commission will evaluate the records presented and will be ready to take steps as necessary to remedy any inadequacies in the quality of information provided by Member States' paying agencies. The Court's financial audits in Member States to date suggest that the Commission has not taken sufficient action to:

(a)evaluate the information presented by the Member States;

(b)inform the Member States of the shortcomings found;

(c)take remedial action to prevent deficiencies in the control over the disbursement of Community funds.

3.47. Regulation (EEC) N° 729/70 provides a statement of principles but contains insufficient guidance with regard to practical application. For example, it is not clear which body is responsible for keeping records: they were not present in AIMA for a considerable number of transactions examined by the Court. This Regulation was adopted in 1970 and the provisions concerning the paying agencies' responsibilities have remained unchanged since then. In view of the vague definition of paying agencies' responsibilities, it is not surprising that certain have eschewed responsibility for verifying the soundness of claims paid. The Court recommends that the Commission should propose implementing rules which will define paying agency responsibilities with more precision.

Olive-oil production aid

3.48. The unclear, onerous and complex provisions regarding the calculation and verification of olive-oil production aid claims lead to the considerable difficulties noted by the Court which have been experienced by the paying agencies in administering this measure. The difficulties experienced in Spain were mentioned in paragraphs 3.29-3.39 of the Court's annual report on the financial year 1989.

3.49. In Portugal, there was a two-year delay in processing claims under this measure, and there were overpayments totalling 0,6 Mio ECU for the only marketing year paid (1986/87) at the date of the Court's enquiry.

3.50. In Italy, a register of all olive groves has been under preparation since 1981, when a contract was awarded for the compilation of the register from aerial photography, land tenure records and physical inspections. The contractual date for completion of the register was 1987, but this time-limit was extended by the Italian authorities to July 1990. The cost of this work is charged to the Community budget and amounts to some 140 Mio ECU, of which 20 Mio ECU is for the work completed during the time extension. In the meantime, and largely because of the delay in completing the register, there are considerable delays in the authorizing of payments to non-associated producers. Some 240 Mio ECU were paid to these producers in 1989, reducing payment delays from seven years to two years, but these producers are still experiencing longer delays in the settlement of their claims than members of producer organizations.

Reports on national controls

3.51. The Community relies heavily on national controls over guarantee expenditure, and in particular on the audits carried out by both internal and external audit bodies. The national authorities are required to forward to the Commission detailed information on the nature, extent and results of these audits.

3.52. Commission Regulation (EEC) N° 295/88 of 1 February 1988

requires the submission of detailed information on the audit work performed on the records of the paying and authorizing departments. Italy has not yet given any relevant information on the audits of expenditure disbursed by AIMA and by the 'Intendenza di Finanza di Roma`, which disburse 83 and 13% respectively of all payments in Italy. The reports so far submitted by Portugal were incomplete, containing no information on audits conducted by the Finance Ministry, even though these were the keystone of national controls over the paying agency.

3.53. Directive 77/435/EEC of 27 June 1977

(replaced from 1 January 1990 by Regulation (EEC) N° 4045/89

) requires a report on the audits of the records of producers and traders which have benefited from Community aids. Portugal had, at the time of the Court's enquiry, yet to submit any report on these audits. Reports from Italy were submitted two years late.

Physical checks on exports

3.54. Under Commission Regulation (EEC) N° 2030/90 of 17 July 1990

, the Member States are required from 1 October 1990 to physically verify at least 3% of goods attracting export refunds. This percentage is to be progressively increased to 5% in 1992. As the Court found in the Netherlands, a considerable effort will be required to raise the rate from the 1% of exports passing the port of Rotterdam which were previously examined. The Court recommends that the inspections which aim at meeting this requirement be targeted in particular at high-value and high-risk exports and that the paying agencies be required to record which export refund payments have been the subject of a physical check so that the rate of inspection may be readily determined.

Graph 3.1 - EAGGF-Guarantee 1990: comparison between monthly expenditure in 1990 and the estimates communicated by the Member States

>REFERENCE TO A FILM>

>START OF GRAPHIC>

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CHAPTER 4 () European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee): Organization and management of markets

Page

4.1.Export refunds for non-Annex II goods65

4.2.Operation of the common organization of markets in the sugar and isoglucose sector83

\*\* \*

4.1.Export refunds for non-Annex II goods

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INTRODUCTION

4.1.1. The institutional prices fixed by the Community for about 90% of its agricultural production in order to support farm incomes and to achieve equal prices for the same products throughout the Community, are frequently higher than the prices prevailing on the world markets for the most important basic agricultural products or substitutes of them. Thus producers of processed agricultural goods incur higher costs for agricultural input than their competitors in third countries. As a consequence processed agricultural goods are at a comparative cost disadvantage when exported.

4.1.2. In order to safeguard the overall benefits of exporting processed agricultural goods (i.e. the higher added value of such goods compared to their basic components, the retention of employment in the processing industries situated within the Community, the positive effects on the Community's foreign trade balance, and higher consumption of Community-produced basic products), the Community compensates the exporter of processed agricultural goods for the higher cost of raw materials included in the producer price of such goods.

4.1.3. In fact there are two distinct schemes available, one for 'certain goods obtained by processing agricultural products` and one for 'cereals exported in the form of certain spirituous beverages`. These goods are known as non-Annex II goods because they are not included in Annex II of the Treaty establishing the European Economic Community (hereinafter referred to as the Treaty) and therefore they are not subject to the mechanisms of a common market organization.

4.1.4. Such goods cover a wide variety of manufactured agricultural products and range from beer to baby-food from couscous to chocolate and even further to certain pharmaceutical products. Indeed, the goods concerned are almost limitless in that they are processed goods manufactured from either cereals, sugar and isoglucose, eggs, milk products or any combination of them.

REFUNDS PAID ON CERTAIN PROCESSED GOODS

4.1.5. The compensation scheme for 'certain goods obtained by processing agricultural products` (hereinafter referred to as processed goods) is based on Council Regulation (EEC) N° 3035/80 of 11 November 1980

which followed the initial Council Regulation (EEC) N° 160/66 of 27 October 1966

and its various amendments. The scheme provides for refund payments on the actual quantity of basic Annex II products used in the manufacture of the processed goods when exported to third countries.

4.1.6. The export refund rates applied are those fixed for the basic products. Thus, a biscuit made from flour, butter, sugar, skimmed-milk powder, etc. will have export refunds granted on each of the eligible basic agricultural ingredients actually used. For certain goods of a relatively standard composition (which are listed in Annex C of the Regulation (1)), a 'simplified` system is used whereby export refunds are based on a presumed composition of the goods. However, the number of processed goods to which this simplified system applies is relatively small.

4.1.7. Hence, the Community has adopted an export refund system for processed goods with an almost infinite number of composite refund rates, because it has to compensate the trader for cost differences of the precise quantity of basic products used in various combinations in the exported goods. Payment calculations and controls of payments and goods exported are therefore more complex than those for 'normal` basic products.

4.1.8. It should be noted that as refunds for processed goods are paid on the ingredients which are often altered or lost during the production process, chemical analysis on its own of the exported product is in many cases not a reliable method to determine the quantities of the basic products used. An example of the difficulties of verification is in the production of penicillin, where all of the basic product (sugar) is consumed during the production process and is therefore no longer identifiable in the final product. The control of processed goods must therefore be especially tailored to meet the specific verification problems of these particular goods.

Budgetary execution

4.1.9. Table 4.1.1 shows the expenditure on refunds for processed agricultural goods. The large differences between the budgeted and actual refunds in 1989 and 1990 are mainly due to higher world prices and consequently lower rates of refund on the basic products contained in the processed goods. The accuracy of budgetary forecasting would however be improved if the Commission services were able to use the information on tonnages of basic products exported in the form of processed goods, which Member States are now required to supply

. This is not at present possible due to the very late submission of data by Greece and Italy.

4.1.10. Table 4.1.2 shows the expenditure by Member State. Due to administrative difficulties in processing claims in the United Kingdom in 1988 and France in 1989, certain payments could not be made and had to be held over to the next year. Between 1987 and 1990, Member States incurred expenditure in the following order of importance: Netherlands 25%; FR of Germany 15%; United Kingdom 12%, France 11%; Italy 11%; Denmark 9% and Ireland 8%.

The Court's audit

4.1.11. The purpose of the Court's enquiry was:

(a)to assess whether the Commission's and the Member States' control systems provide adequate assurance that expenditure on agricultural processed goods is in accordance with Community regulations and that they ensure sound financial management;

(b)to examine whether payments for export refunds on processed goods are based on the ingredients actually used to produce the goods;

>TABLE>

(c)to examine whether the notional compositions fixed for certain exported products listed in Annex C of the Regulation are correct.

4.1.12. The audit which re-examines an area of expenditure last examined by the Court in 1979

, was carried out in Denmark, the FR of Germany, France, Ireland, the Netherlands and the United Kingdom. The audit concentrated on controls in the processing industries specific to the processed goods and did not especially deal with customs controls at export. The latter controls were covered in paragraphs 3.37-3.41 of the Court's Special Report N° 2/90 of 31 May 1990.

The application of the systems in the Member States

4.1.13. Neither Regulation (EEC) N° 3035/80 setting out the control system for export refunds on processed goods, nor the horizontal Regulation (EEC) N° 3665/87

give detailed guidance concerning the checks to be carried out for non-Annex II goods. Article 8(1) of Regulation (EEC) N° 3035/80 requires inter alia:

(a)when the goods are to be exported, 'the party concerned must declare the quantities of basic products ... which have actually been used`;

(b)'the party concerned shall, in support of his declaration, supply the competent authorities with all documents and information which the latter consider relevant`; and

(c)'the competent authorities shall verify the accuracy of the declaration made to them by any appropriate means`.

4.1.14. In addition, Article 8(2) states that 'where the party concerned does not draw up the declaration or does not provide satisfactory documentation in support of his declaration, he shall not be entitled to a refund`. The Regulation does however allow exporters who are not manufacturers (and thus may not know the precise composition of the goods) to claim a minimum refund on certain goods where the percentage of each ingredient can easily be found by analysis. The goods concerned are listed in Annex D of the Regulation.

4.1.15. In all other cases the exporter must declare the quantities of eligible basic products which have been used in the manufacture, each time he exports the goods. This may be done either by declaring the eligible ingredients each time he exports or by declaring and registering his manufacturing formula (hereinafter referred to as the 'recipe`) with the paying agency before exporting the goods, and referring to it each time goods are exported.

>TABLE>

4.1.16. In view of the general statement cited under 4.1.13(c) above, it is of little wonder that the Member States, having been left to their own devices, have adopted a variety of methods to control the regularity of their payments. The Court examined the checks applied by the Member States in order to establish whether they are sufficient or whether weaknesses exist.

Registration of recipes

4.1.17. There is no requirement in Regulation (EEC) N° 3035/80

to formally register recipes. However, its usefulness is evident. Especially when integrated in a central database, the recipe register can be used to identify, inter alia, goods where basic products can easily be misdescribed with little risk of detection and those goods receiving large payments. This information can then be used to develop and implement control programmes based on risk analysis.

4.1.18. Table 4.1.3 shows that not all Member States have adopted this approach, because some of them were not able to indicate even the number of recipes recorded. In fact, administrative practice in Member States varies considerably between central recording of recipes and completely decentralized systems with only local recording. The following paragraph illustrates the systems implemented.

4.1.19. In Ireland, the Netherlands and the United Kingdom recipes are registered centrally with the appropriate paying agency and the amounts paid for each recipe could be identified. In Denmark and the FR of Germany, this could not be done as the amounts are not recorded by recipe but only by exporter. In France, many recipes are recorded centrally by the different paying agencies, but there is a higher proportion of individual export declarations of processed goods where no recipe has been prior-lodged but where the basic products used are declared on the export form. As each export is not grouped under a recipe heading in the paying agencies' central systems, each has to be considered as an individual recipe to be checked. In addition, manual payments (which for one trader alone amounted to 37,4 Mio FF) were not included in the records of payments for each recipe.

Regular review of recipes

4.1.20. The Court considers that it is most important to establish whether a recipe is in use and up to date because in addition to the registration of new products, manufacturing processes change to adapt to technological advances, customer tastes and requirements and raw material prices. However, Table 4.1.3 also shows that some Member States were unable to furnish information on the number of extant recipes and thus they could not identify the recipes which should be considered for verification.

>TABLE>

4.1.21. In the FR of Germany and the Netherlands recipe declarations are only valid for one year and must be renewed annually. In Ireland, an annual review is carried out of all recipes in regular use and a new recipe is lodged where necessary. In the United Kingdom, recipes are registered for an indeterminate period but annual notices are sent to all exporters listing the recipes registered and requiring a declaration from the exporter that the recipes are still correct. However, an exporter failing to reply to the document will continue to be paid on the registered recipes. The United Kingdom authorities have informed the Court that they are taking steps to improve this procedure. In Denmark, no action is taken to ensure that recipes are up to date. As such, errors will only be identified when the exporter is visited in connection with an a posteriori audit which may be several years later.

4.1.22. In France, one of the paying agencies, 'Office national interprofessionnel du lait et des produits laitiers` (Onilait) requires each exporter to declare each year the composition of recipes. The other two agencies (ONIC and FIRS) concerned with making payments for processed goods do not require the renewal of recipe declarations. While the 'Office national interprofessionel des céréales` (ONIC) has indicated its willingness to introduce such a system of up-dating, 'Fonds dintervention et de régularisation du marché du sucre` (FIRS) has indicated that it has neither the manpower not the EDP resources to fulfill such a task. Thus, at present, there is insufficient assurance that the recipes declared to FIRS and ONIC and used for payment are correct.

Verification of recipes

4.1.23. The Court considers that selection for verification should be made following risk analysis. The recipes thus selected should then be checked against production records at the manufacturing premises. These documentary checks should be supplemented by a programme of sampling and chemical analysis.

4.1.24. Chemical analysis can provide some assurance that recipes are correctly stated. Indeed, in some cases chemical analysis of original or intermediate products may provide the main basis for making refund payments. Continuous (non-batch) production, computer-controlled processes and the production of intermediate compound products create particular control problems. It is generally not possible to identify the actual quantities of raw materials used to produce a particular processed good. In this case, such checks as can be made on production must be supplemented by chemical analysis of the finished exported goods. No Member State had identified products which posed such control problems nor developed solutions to deal with them.

4.1.25. The customs services of the Member States sample agricultural goods and arrange for chemical analysis as part of their normal export checks on descriptions and Export Refund Nomenclature (ERN) headings. The results of such checks on processed goods are a useful input to the planning of checks on recipes. But in Denmark, France and the Netherlands there was little liaison between the paying agency responsible for checking recipes and the customs services. Thus the results of the analysis of samples taken by customs were not used in the planning of control work. At present verification is carried out in the following manner in each of the Member States audited.

Denmark

4.1.26. In Denmark, there is no central control programme to ensure that risk products are identified and checked. There was no organized system of sampling and analysis to support the documentary checks. The Danish authorities totally rely on a posteriori controls which are frequently part of 'integrated controls`, i.e. audits not only of non-Annex II payments, but also of other export refunds, VAT, customs duties and levies, income tax and excisable transactions. Such audits give the Danish control authorities (the customs) the basis for forming an overall view of the traders' transactions. They do not however allow a conclusion to be reached on the accuracy of a particular recipe for goods actually exported. Thus reliance is placed on checks, frequently some years after the dates of export, which only give an overall impression of whether the composition of goods has been correctly declared.

FR of Germany

4.1.27. According to the internal administrative instructions in the FR of Germany all recipes are required to be checked annually by on-the-spot visits to exporters or manufacturers. However, the audit was unable to establish to what extent this was achieved in each region as there were no records either centrally or regionally of checks to be undertaken and actually carried out and of the results obtained.

4.1.28. The checks undertaken by the German authorities only permit an overall comparison of the production with recipes declared, rather than an assurance that a particular recipe actually used for export was correctly stated and that certain quantities of basic products had been exported as processed goods.

4.1.29. Although some sampling takes place under local customs initiative, there is no centrally laid down programme of sampling and analysis of processed goods to support the documentary checks carried out at the exporters' premises. This is all the more necessary given the type of controls made by the authorities.

France

4.1.30. In France each paying agency has adopted different control procedures. ONIC has no system for verifying that the recipes declared to it are correct - a situation that the Court finds unacceptable. FIRS, with some 14 000 registered recipes (about a third of which are in use) has a team of four control staff whose job it is to check the veracity of recipe declarations by on-the-spot checks. While the quality of the checks carried out in the presence of the Court's staff was satisfactory, it was clear that the resources allocated to the task were insufficient. Representatives of the paying agency admitted that payments would be made in respect of recipes which would not be checked. Furthermore there is little chance that ingredients declared on individual exports of goods, will ever be checked by the paying agency due to the large number concerned.

4.1.31. Onilait the third paying agency has an agreement with Interlait an 'interprofessionnel` body, whose inspectors may be required to carry out checks on recipes declared. However, the audit showed that the verification programme was not selected according to any recognizable risk analysis, and that furthermore Interlait had not been asked to carry out checks during the 12 months prior to the Court's audit.

4.1.32. Thus in France recipes are not selected for verification based on risk analysis and subjected to a regular programme of control by each paying agency. Furthermore, the French authorities have not laid down any programme of sampling and chemical analysis to support or supplement the weaknesses of documentary checks. Indeed although the paying agencies in France are aware that the customs authorities sample and analyse goods to verify export declarations of, inter alia, nomenclature, they do not receive all results to enable them to establish a control programme based on risk analysis.

4.1.33. From the preceding paragraphs it is clear that the checks carried out by the paying agencies in France are insufficient. The French authorities have indicated that there are to a certain extent 'compensatory controls` as part of the a posteriori audit carried out under Council Regulation (EEC) N° 4045/89 of 21 December 1989

, previously Council Directive 77/435/EEC of 27 June 1977

. The Court cannot accept that control of processed goods should entirely rely on the scrutiny of commercial documents, carried out for other purposes. Indeed, the Court was dissatisfied with the coverage and quality of work carried out as part of the audit as three out of the five companies visited by the Court's auditors were not applying the recipes registered. Furthermore, the French authorities denied the Court access to their reports of the audit work undertaken providing only names, the year in which the expenditure arose, recipes checked and results. The Court cannot accept the non-compliance of the French authorities with their obligation under Article 206a of the Treaty.

Ireland

4.1.34. In Ireland there are only 280 recipes in use submitted by 53 traders. This enables the paying agency (the Department of Agriculture) to organize detailed checks. Before goods are exported the trader supplies a sample for classification of ERN. The recipe established is based on the actual use of raw materials during a trial period of about three months. Exporters have to submit annual accounts of their usage of raw materials which are examined by control staff. Between 30 and 40 of these are verified by on-the-spot visits at least once a year. During these control visits raw materials are sampled and analysed. There is, however, no sampling programme of finished processed goods. In general the Court was satisfied with the checks carried out by the Irish authorities based on production records.

The Netherlands

4.1.35. In the Netherlands exporters (rather than recipes) are selected for verification. The selection is based on the size of the company and the total value of the export refund claims being made for processed goods. Approximately 100 exporters are checked annually by the Agricultural Inspectorate (AID), the selection being based on a limited risk analysis, using company turnover and total amounts of non-Annex II refunds. Exporters are given a rating 'a` to 'e` to reflect the frequency of control where those companies in category 'e` will be checked only once every three years.

4.1.36. The controls adopted in the Netherlands like those in the FR of Germany only permit an overall comparison of the total production and recipes declared. Furthermore, there was no organized system of sampling and analysis to support the documentary checks.

The United Kingdom

4.1.37. The United Kingdom has a well-developed system for verifying the accuracy of recipes. At present all recipes declared and registered with the paying agency Intervention Board (IB) are referred to the local customs control officer for verification against production records. The Court was not always satisfied that the customs staff have sufficiently checked production data. The United Kingdom authorities have undertaken to remind all control staff of the need to check recipes against production details. In addition, they have developed a programme of recipe control by sampling and analysis. These checks, which the Court considers to be based on objective risk criteria, ensure that all important recipes are regularly selected and analysed in order to establish that the composition of the final product is in agreement with the declared ingredients. The programme requires that other risk-based sampling is carried out by customs at export to ensure that all exporters have at least one of their main export goods sampled and analysed once every three years.

Production losses

4.1.38. In its former report on 'Export refunds on products not listed in Annex II`

the Court stated that 'procedures for allowing for losses in manufacture are not specifically laid down, although these losses may reach 30% in weight of the basic product`. The Commission's view then was that 'it is extremely difficult to introduce simple Community rules without unfair discrimination between different products and industries ... losses should be dealt with ... case by case`.

4.1.39. Since the remarks of the Court a new basic Council Regulation (EEC) N° 3035/80

has been adopted. Unfortunately, the practices identified during the previous audit remain true, as well as the disparity of treatment between the Member States. The German authorities allow only those losses which cannot be recovered or commercialized (i.e. 'cooking` losses) to be claimed for refund. In Ireland, France and the Netherlands by-products (i.e. products which can be sold) are excluded from eligibility for refund.

4.1.40. The Danish authorities accept any losses in the manufacture of the goods exported as being admissible for export refund payments. In the United Kingdom traders depositing a recipe are required to state the percentages of basic products which have been totally lost in processing, recovered but of no commercial value and recovered and sold (by-products). However, having required this information the United Kingdom authorities pay on all basic products entering the production process. They have explained that as the export refund system is aimed at compensating for the higher prices of raw materials a similar trading 'advantage` would be available to a manufacturer operating at world prices. The Court considers that there is no valid justification for granting export refunds on goods commercialized within the Community. The Commission should re-examine the matter with a view to introducing general guidelines.

The Commission's central management

Coefficients applied to processed goods containing cereals

4.1.41. Refund rates for exports of agricultural products, contained in Annex II of the Treaty are fixed by the Commission and currently published in the Official Journal. The products concerned are basic agricultural products and products derived from first processing. The relationship between the refund rates for basic products and those for products of first processing leads to an implicit coefficient which expresses the physical equivalence between the two products, e.g. between maize and maize flour. However, if a cereal product of first processing is used as an ingredient of a non-Annex II good, the current refund rate for this ingredient does not apply. Instead the refund rate applied is the one for the basic product, after having converted the quantity of the ingredient into a quantity of the basic product by using a coefficient fixed in the relevant Council Regulation (EEC) N° 2744/75 of 29 October 1975

.

4.1.42. The Court noted that the coefficients used in the refund calculation for exports of processed goods differ from the implicit coefficients derived from the currently published refund rates. From documentation prepared by the Commission, it is clear that substantial differences occur. For some products the difference is as high as 75%, thus creating considerable incentives for traders to carry out some minor processing in order to receive substantially higher refunds on cereal ingredients of processed products than they would receive when exporting the ingredient in its unaltered stage.

4.1.43. The Court was informed by the Commission services that one exporter had taken advantage of these coefficients by exporting processed maize pellets falling under the CN heading 'prepared foods obtained by the swelling or roasting of cereals or cereal products` as processed goods and received a refund approximately 75% higher than he would have otherwise received. The Commission, recognizing that the rate was too high, adopted a reduced refund rate for the product under Commission Regulation (EEC) N° 3873/90 of 28 December 1990

which, while leaving the coefficient unchanged, aligned the refund rate with that applicable to the pellets exported in the unaltered state. The introduction of the new refund rates has closed this loophole but the trader has switched his attention to other goods where favourable coefficients still exist.

Standard composition of goods

4.1.44. Annex C of Regulation (EEC) N° 3035/80

sets out the quantity of basic products contained in certain simple processed goods. The Court requested the responsible Commission service to provide evidence showing the basis for the rates used: none was available. The audits on the spot in the Member States revealed that the standard quantities in Annex C of the Regulation needed urgent review. Examples of products which require less raw materials than indicated in Annex C are: penicillin, beer, pasta and D-glucitol where the variations were found to be between 8 and 10%.

Monitoring Member States' control procedures

4.1.45. Article 8(6) of Regulation (EEC) N° 3035/80 (13) requires each Member State to inform the Commission of the controls which it applies for the various kinds of goods exported, and that 'the Commission shall inform the other Member States thereof`. This requirement was only complied with in respect of Ireland and Portugal who both supplied information in 1989. The only other information provided on Member States' systems was for the United Kingdom and was dated 1979. This failure on the part of the Commission to monitor control procedures means inevitably that overall control is weakened. The Commission should ensure that information concerning the different control procedures in force in the Member States is regularly received and examined in order to evaluate whether the control procedures adopted are indeed sufficient and whether new control measures should be proposed.

Conclusions

4.1.46. The Court's audit revealed that refund rates for certain products of first processing are higher when these products are used in manufacturing a processed good than when exported as such. There is no objective reason for this to be so. The steps taken to adopt ad hoc measures to adjust refund rates and to close the gaps have not been sufficient until now.

4.1.47. Similarly, the presumed standard compositions of goods contained in Annex C of the Regulation should be reviewed as these too may, in certain cases, lead to the payment of more refund than justified. There is a need for such matters to be closely monitored to ensure sound financial management. The Commission should seek powers from the Council to enable it to react quickly to prevent unjustified payments.

4.1.48. The Commission, during the 12 years since the Court's last audit of this subject, has not succeeded in ensuring coherent treatment of production losses, and this has led to unjustified advantages for some traders and consequently to payments of export refunds in some Member States which were based on goods not exported, which is exactly the situation which the Commission sought to avoid.

4.1.49. At present there is no general assurance that recipes are up to date. There should be a requirement that they be re-lodged annually with the paying agency, with penalties, such as non-payment of refund, introduced for non-compliance.

4.1.50. The absence of a central database for recipe control purposes in some Member States renders controls less efficient, as these Member States are not able to select recipes for verification according to an overall risk assessment and to provide for adequate staff resources to check the recipes so selected. These checks should include an examination of production records and be supplemented by chemical analysis where necessary.

4.1.51. The different quality of controls carried out in different Member States leads to considerably different levels of assurance that refund payments are based on correctly declared basic products and therefore privileges companies in some Member States.

4.1.52. The Court believes that it is the Commission's task to direct and organize the framework of control. Thus the Commission should lay down clear guidelines for the Member States, the application of which it should monitor by ensuring that Member States supply up-dated descriptions of their control systems.

REFUNDS ON CEREALS EXPORTED IN THE FORM OF CERTAIN SPIRITUOUS BEVERAGES

4.1.53. Despite its formal title this expenditure concerns export refund payments on cereals which are later exported in the form of whiskies. Under the general rules granting export refunds, goods have to be placed under customs control and exported within a set time-limit, which depends on the goods concerned but which normally may not exceed eight months. This rule, although necessary for control purposes, disadvantages certain spirituous beverages distilled from cereals, such as whisky

, which must remain in cask for a minimum of three years in order to qualify for the name Scotch whisky or Irish whiskey. Other spirits such as gin, geneva, schnapps and grain which are made from cereals but which do not need ageing receive export refund (as non-Annex II processed goods) at the time they are exported.

4.1.54. When the United Kingdom and Ireland joined the European Community the disadvantage for whisky was recognized and Protocol 19 to the 'Act of Accession` stated that the Council should 'decide the necessary measures to facilitate the use of Community cereals in the manufacture of spirituous beverages obtained from cereals, and in particular whisky, exported to third countries...`. It was foreseen that measures could be taken under the common organization of the market in cereals or under the intended common organization of the market in alcohol.

4.1.55. In the event, no common organization of the market in alcohol was introduced. However, in 1981 the disadvantage noted for whisky was dealt with and a new system of granting refunds was laid down for spirits such as whisky. This scheme is managed within the framework of the common market organization for cereals, and based on Council Regulation (EEC) N° 1188/81 of 28 April 1981

and Commission's Implementing Regulation (EEC) N° 1842/81 of 3 July 1981

.

4.1.56. The means by which such export refunds are granted is a broad-based one. Each year the Commission fixes coefficients which reflect the percentage of cereals distilled which will be exported at some later date in the form of whisky.

There are a number of elements which should be taken into account when setting the coefficients. In essence they express the ratio of exports of whisky to general releases onto the market, adjusted to take account of trends in exports and in production and stocks. A coefficient is fixed for Irish 'A` whiskey, Irish 'B` whiskey, United Kingdom malt whisky and United Kingdom grain whisky

. Thus national coefficients are set which are applied to all cereal purchases by all the different distilleries in the appropriate Member State. Therefore some distillers will receive export refunds on cereals when less of their production than indicated by the coefficient is exported. Correspondingly other distillers will export more than they are compensated for.

Budgetary execution

4.1.57. Until 1990, the expenditure was only made by two Member States, Ireland and the United Kingdom the traditional Community manufacturers of whiskies. Since 1990 the Community also pays for Spanish whisky.

>TABLE>

4.1.58. As shown in Table 4.1.4 the appropriations have increased from 34 Mio ECU in 1987 to 60 Mio ECU in 1990. Average actual expenditure during that period was 41,8 Mio ECU (84% of the budgeted amount). The fluctuations in expenditure mainly arise as a result of changes in world market prices of cereals.

4.1.59. As shown in Table 4.1.5 the United Kingdom is the most important whisky producer and accounts for approximately 98% of export refunds with Ireland accounting for the remaining 2% of expenditure.

4.1.60. The expenditure shown for the Netherlands relates to export refund expenditure on non-whisky products which should have been properly included under budget Article 251. The error was identified during the Court's audit and had existed since 1982 when the first payments were made under the scheme. The total amount incorrectly accounted for is 1,2 Mio ECU. The Dutch authorities notified the appropriate Commission service of the correct details in December 1990.

The Court's audit

4.1.61. The purpose of the Court's enquiry was:

(a)to examine the basis of the aid for whisky and the elements used in its calculation; and

(b)to assess whether the Commission's and the Member States' control systems provide adequate assurance that expenditure for whisky is in accordance with the Community regulations and that they ensure sound financial management.

The control of cereal export refunds for whisky is an integral part of the Member States' excise control of distilleries and excise warehouses. Where the Court identified weaknesses in a particular aspect of refund control it examined excise duty controls in order to establish whether other compensating checks existed.

The application of the system in the Member States

4.1.62. Claims by a distillery for export refunds for whisky are made firstly by declaring a quantity of cereals put under control and then, within one year, declaring their distillation into spirit. The date of putting under control fixes the rate of refund, while the quantity of cereals eventually distilled after the coefficient has been applied, determines the amount of the refund. The claims, which are certified by customs, are passed to the paying agency for payment. There are approximately 100 distilleries in the United Kingdom and two in Ireland which make claims every two to four weeks at the end of each of their excise duty accounting periods.

>TABLE>

4.1.63. Member States are required to verify the data used for setting the coefficients which are applied for the calculation of refunds. This means that checks must be made on the volume of total releases to the market and of exports and trends in these volumes. In addition, the quantity, quality and moisture content of grain or malt put under control must be verified by the authorities together with its eventual distillation.

Taking cereals under control

4.1.64. Regulations (EEC) Nos 1188/81

and 1842/81

foresee checks on the quantity of cereals taken under control and on their subsequent distillation. The United Kingdom authorities informed the Commission by letter dated 15.6.83 that cereals are taken under control at the 'mash tun` (where the cereals are steeped with water). However, on the United Kingdom payment declaration form the declarant states his intention to place under control on a certain date all the cereals to be used in a given distilling period. The result is that:

(a)cereals have been certified by customs as taken under control which are not at the distillery and in extremis may not be in the Member State and thus may not be in free circulation at that time;

(b)the type of cereals, their condition and moisture content are declared by the distiller and certified by customs when they cannot be known.

4.1.65. This practice does not comply with the relevant Regulations, in particular Articles 3(5) and 6(2) of Regulation N° 1188/81 (18), and Articles 1(2) and 2(1) of Regulation N° 1842/81 (19).

4.1.66. A sample of 20 claims was examined; nine showed that the cereals apparently put under control were not all distilled. The overall discrepancy was 16%, but one distillery showed a 45% difference between the quantity put under control and the quantity 'distilled`. There is no regulatory procedure for taking cereals out of control. In addition, as refund rates change regularly, the distiller could take an undue advantage from increases in refund rates. The Court is satisfied that no irregularities occurred in respect of the claims examined, but considers that the opportunity should be removed.

4.1.67. In Ireland the cereals are taken under control at remote stores. Bulk grain is put under control when the distiller is satisfied that the rate of refund is at a favourable level. Malt is put under control at the malting premises when the distiller considers there is a need to do so. However, in neither case are the cereals segregated or identifiable from the other cereals stored. In such circumstances they cannot in fact be under control. The only official check that is made is by the customs officer in whose area the store is sited, to check that sufficient cereals are in fact present in store.

4.1.68. In addition there is a problem of security of the cereal between the store and the distillery silos. The distiller maintains records of receipts of cereals at the distillery. After distillation, selected distillery receipt notes are returned by customs to the customs officer for the originating store to check that they correctly appear in the store's records. Under this system there can be no assurance that all cereal loads despatched actually reach the distillery nor that the loads once arrived, are tipped into the distillery silos and eventually distilled. The Court considers that cereals can only satisfactorily be put under control at the distillery. Such a system is also simpler and easier to manage. The Irish authorities and the distiller have indicated their willingness to introduce such a system.

Certification of distillation

4.1.69. The Regulation requires that distillation of cereals previously put under control is certified by the responsible authorities. In both Ireland and the United Kingdom, customs control staff do this based on declarations from the distiller. Normally no further checks are made at that stage.

4.1.70. In Ireland the distiller declares the quantities of different cereals distilled in each distilling period and these are written-off against the cereal stocks under control. In the United Kingdom where the quantities of cereals put under control are limited to distilling periods, certificates of distillation have been frequently signed without comment by customs control officers although the quantities of cereals distilled were less than the quantities accepted under control. Following the Court's criticisms the authorities have agreed that control officers will certify the actual quantity of cereals distilled and give an explanation where this is different from the quantity taken under control following a detailed examination of traders' records.

Sampling

4.1.71. The cereals are required to be of sound, fair and merchantable quality. The rate of refund is set for given moisture contents (7% malt, 16% cereals and between 43% and 47% green malt). The refund must be decreased by the paying agency when the moisture contents are more than these norms, thus it is important to ascertain the moisture content of the cereals at the time the cereals are put under control.

4.1.72. In the United Kingdom customs staff are required to take samples at least three times a year from different consignments of cereals put under control for subsequent analysis of moisture content. At two of the five distilleries visited on the spot, no sample had been taken in the first nine months of 1990, at a third, none had been taken during 1989 and 1990.

4.1.73. Furthermore, the sampling undertaken by customs control staff is of doubtful use as it is not necessarily representative of the cereals put under control during the entire distilling period of up to one month. The United Kingdom authorities have agreed to review procedures to ensure that samples are representative. Control staff will in future examine distillers' tests of moisture and use official tests to ensure that they are accurately recording and declaring moisture content when cereals are taken under control.

4.1.74. In Ireland a cereals inspector of the Department of Agriculture samples and arranges tests on cereals put under control. While the method of sampling is satisfactory, the fact that the cereals taken under control cannot be identified, limits its effectiveness.

Verification of distillation

4.1.75. Given the relatively superficial checks performed when cereals are put under control and distilled other checks need to be carried out in order to verify that the cereals have in fact been distilled. In Ireland there is a permanent presence of several customs staff at the distillery and key points in the distillery are under official locks. However, there are no checks on the cereals entering the mash tun. In order to verify the quantities distilled, customs control staff examine the distillers' monthly production statement which contains a detailed analysis of inputs and outputs. The main element examined as part of the check is the yield calculation (i.e. litres of pure alcohol produced from the cereals input). However, the control staff do not record the checks carried out or the results of their examination. In addition, as there are no officially laid down tolerances between the expected yield and the actual yield, follow-up action relies on the individual control officer's judgement. The Irish authorities have undertaken to introduce the necessary control procedures and record the results.

4.1.76. The United Kingdom customs do not maintain a permanent presence at the distilleries. The checks carried out are aimed at providing an overall assurance that the distillery is operating properly and that irregularities will be identified. This revenue control will also give some assurance that cereals put under control have been distilled. In addition, customs control staff are required to select a minimum of two distilling periods a year for verification of the cereal refund claims (the paying agency envisages a frequency of three to five periods a year). These verifications require inter alia an examination of cereal stock records, records of weighing of cereals into the mash tun, predictable and actual yields, the draff produced (residue after mashing) and a check that the cereal is in free circulation.

4.1.77. Such verifications were not carried out during 1989 and 1990 at four of the five distilleries examined by the Court's auditors on the spot. The absence of such controls, given the relatively superficial checks performed when cereals are put under control and when distilled, calls into question the basis for paying aid. The United Kingdom authorities have informed the Court that they will introduce a review procedure to ensure that regular verifications are carried out.

Particular control weaknesses

4.1.78. At one of the five United Kingdom distilleries visited the Court found that although a new scheme of control had not been introduced, a previous scheme had been abandoned six months previously as being out of date, and thus, at the time of the Court's audit, no effective scheme of control was being applied. Written evidence of checks was unavailable at the time of the audit. This, taken together with the fact that the customs control officer stated that official action was limited to receiving claims and stamping, certifying and forwarding them to the United Kingdom paying agency, calls into question the control and certification procedures adopted at that distillery and consequently the basis for paying aid. The United Kingdom authorities have informed the Court that they have taken steps to rectify matters.

A posteriori controls

4.1.79. The Court examined the work carried out by the United Kingdom paying agency under the terms of the Community audit Regulation

. The Court found that under these national audits not all relevant records had been examined at the distilleries nor had there been an examination of financial records as required by the Regulation. Furthermore, control weaknesses which the Court had identified had not been discovered during the national audits. The Court believes that this was a serious weakness; the United Kingdom authorities have informed the Court that they have taken measures to ensure proper coverage in future.

The coefficient

4.1.80. The basis for calculating the coefficient is laid down in Regulation (EEC) N° 1188/81

. Article 3(2) states that the coefficient reflecting the ratio between exports and releases of whisky has to be adjusted where:

(a)significant changes occur in the proportion of IPR cereals (i.e. cereals imported and processed under inward processing relief from duty) and Community cereals;

(b)foreseeable export trends show a tendency to change significantly;

(c)stocks vary inordinately.

4.1.81. The adjustments required by the Regulation had not been taken into account by the United Kingdom authorities and thus had not been notified to the Commission, although the following changes have occurred:

(a)the use of IPR by the distilling industry has decreased and in 1990 was nil;

(b)the trends in export are examined over a six year period although current average storage periods before export are about eight years;

4.1.82. In addition, no account had been taken of duty-free sales nor has there been any review of the component parts of blended whisky (i.e. malt and grain whisky) which, for the purpose of calculating the coefficients, is still assumed to contain one-third malt and two-thirds grain whisky although currently more malt whisky is used. Furthermore, in performing these calculations and advising the Commission services, the United Kingdom authorities have not taken full account of the effect of the accession of Greece, Spain and Portugal. The entry of new Member States has the effect of decreasing the volume of exports when calculating the trend for future years.

4.1.83. The Court, while accepting that final responsibility for setting correct coefficients must rest with the Commission, considers that the failure of the United Kingdom authorities to review the components used in the coefficient calculation is regrettable as they can substantially affect the coefficient and consequently the amounts of refund paid. The result of the inclusion of sales of duty-free whisky and of the use of a higher percentage of malt whisky in blends would be to increase slightly the overall amount of refund due. However, the Court has calculated that the adoption of a trend figure over an eight-year period would lead to a cut of 12% in the malt whisky coefficient and 10% in the grain whisky coefficient for the 1990/91 marketing year (a total financial effect of about 4 Mio ECU). Taking full account of the effect of accession of the three Member States would have led to a cut of about 6% in the coefficients for the 1986/87 marketing year. These figures will vary from year to year but in that year would have had an effect of about 2,6 Mio ECU.

4.1.84. In Ireland the authorities rely on the main distiller to provide detailed commercial information concerning exports and the proportion of A and B whisky in the spirit released. This information is used in determining the coefficients. The Irish authorities should have carried out more detailed checks on the information provided, to ensure that it is correct, in particular:

(a)the period of storage;

(b)the percentages of A and B whiskey exported and released onto the market; and

(c)stocks of whiskey.

The Court found that the failure of the Irish authorities to assemble and check statistics had led to errors in the coefficient. Releases onto the market of whisky used in the production of liqueur and releases from other sources (bonded warehouses etc.) had been omitted. The result of these omissions was to grant higher coefficients than justified since the commencement of the scheme, with consequent overpayment of refund. The Irish authorities have informed the Court that they will take the necessary measures to ensure that the data used is accurate.

The Commission's central management

The budget

4.1.85. The Court examined the manner in which the Commission services prepare the budget forecasts. There were a number of weaknesses caused by a general ignorance on the part of the Commission services of the way the scheme is applied in the Member States and, as a consequence, the use of incorrect data.

4.1.86. The budget is compiled using an annual average of cereals and malt put under control in the United Kingdom during the previous 10 years. To this is applied the latest known coefficients for grain and malt whisky. These final tonnages then have the appropriate forecast export refund rates applied to them. However, as the tonnages put under control in the United Kingdom are not the tonnages actually distilled on which refund is paid, there is an in-built overestimate of refund which in the sample claims examined was 16%.

4.1.87. The element in respect of Irish exports is arrived at by comparing the Irish production of litres of pure alcohol with the United Kingdom production. The figure arrived at (which is 2%), is then applied to the United Kingdom forecast refunds to arrive at the figure in respect of Irish exports. Thus, as the United Kingdom figure is inaccurate, the Irish one has the same percentage distortion. A further 2% of the United Kingdom figure is added to account for other eligible spirituous beverages (i.e. from 1990 Spanish whisky was eligible) but is similarly inaccurate. The Commission should take the necessary measures to improve the budget forecasts.

Monitoring the system

4.1.88. Under Articles 16 and 17 of Regulation (EEC) N° 1842/81

, Member States are required to communicate annually and, where available, quarterly:

(a)the quantities and types of cereals and malt in free circulation placed under control;

(b)the quantities and types of whisky exported and released onto the market;

(c)similar details concerning production from IPR cereals;

(d)annual stock figures.

The Court examined the information provided by Member States to the Commission services under the implementing rules contained in the Commission Regulation

, to establish whether it was sufficient and whether it was used for market management.

4.1.89. As the coefficients are calculated for each type of whisky a requirement to supply general information on annual stock levels is insufficient to be used for market management. Furthermore, as the cereals figures required by the Commission are the quantities put under control rather than those distilled, their use would lead to inaccuracies. The Commission services could not identify the use to which the quarterly information was put, nor any need for it. No analyses had been prepared. In its market management function it is normal for the Commission services to provide market management reports for the management committee. None could be identified relating to management of this scheme. Indeed, as the cereals figures are based on quantities put under control rather than distilled, their use as a management tool is limited.

Relationship between barley and malt

4.1.90. Article 10 of Regulation (EEC) N° 1842/81 (23) lays down a barley equivalent for malt of 1,33 (i.e. 133 kg of barley are required to make 100 kg of malt). The Court has examined this relationship. Modern malting processes have better returns on malting (taking account of moisture contents) than are indicated by this ratio. An up-to-date figure would be in the region of 1,21; the rate of aid for malt used to produce whiskies is thus about 9% higher than justified (approximately 1,5 Mio ECU). The barley equivalent should be reviewed by the Commission.

Economic importance of the aid

4.1.91. Although the annual expenditure under this particular budget article is low when compared to several others, 479,4 Mio ECU have been expended during the past 10 years on a measure which is without doubt of key importance to the industry concerned. It is clear from the audit carried out in the Member States that distillers treat the export refund system for whisky as a production aid. Distillers' accounts show that the refund represents about 6 to 8% of the production cost per litre of pure alcohol for malt whiskies (the highest value whisky spirit), it will be substantially more for other whiskies. Expressed in terms of its importance for quantities subsequently exported it can represent up to 30% of production values of grain whisky spirit. As such it is an important element in ensuring that Community producers of whisky can compete fairly on the world market with manufacturers of competing products who are able to purchase their raw materials at world prices.

Conclusions

4.1.92. Although the aid system operated by the Community is a broad-based one, leading to distillers being over or undercompensated for their whisky exports, the Court recognizes the practicality of the method used. However, the audit found that some 10 years after the introduction of the scheme the Commission services had not set out guidelines either for themselves or for the Member States as to what changes should trigger an adjustment to the coefficients. As indicated, the Court has calculated that taking account of these various factors would have led to materially lower coefficients.

4.1.93. Indeed, the Commission services have not made a critical examination of the data provided by Member States and the preparation of the coefficients. In particular they have taken no account of changes in:

(a)patterns of trade concerning IPR cereals and cereals in free circulation;

(b)average storage periods;

(c)the composition of blended whiskies;

(d)the composition of the Community which should have led to alterations in the statistics used.

4.1.94. Furthermore the Commission has not examined the working of the aid system from a sound financial management viewpoint. Its failure to assess the control procedures has led to weaknesses in control and the payment of more refund than justified.

4.1.95. The audit revealed that the regulations are not being properly applied when cereals are taken under control. Nevertheless, the Court believes that the basis for the aid should be changed. Economy, efficiency and effectiveness would be better served if the aid was based solely on quantities distilled during a given period which logically should be tied to the 'excise distilling periods`. Tests on moisture and quality would be maintained at the point of intake, which the Court considers is the only point where an accurate account can be taken. Such a system would obviate the need for a declaration of cereals under control and simplify procedures to agree with current practices. Refund rates could be fixed by using either advance fixing or by applying the rate applicable on the first day of the period.

4.2.Operation of the common organization of markets in the sugar and isoglucose sector

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INTRODUCTION

4.2.1. In its report on the financial year 1988, the Court set out its observations on the procedures used by certain Member States in the management and control of export refunds in the sugar sector, as well as on the way in which the Commission presented the relevant expenditure and revenue in its accounts. Regarding the system of central accounts, which was looked at more particularly from the point of view of the objective of self-financing, the Court observed that the accounting system, as at present conceived, did not allow for any ex post facto checks on the extent to which the abovementioned objective had or had not been achieved.

4.2.2. During 1990 discussions took place with a view to renewing the five-year arrangement then in force, which was due to expire on 1 July 1991. In the end, in accordance with the provisions of Council Regulation (EEC) N° 305/91 of 4 February 1991, the arrangements were broadly extended for a period of two years, i.e. until 1 July 1993.

4.2.3. The Court has just adopted special report N° 4/91 on the operation of the common organization of the market in the sugar and isoglucose sector

. In this report it attempted to make an economic evaluation of the organization of this market, with reference, in particular, to the principles enshrined in Articles 39 and 40 of the EEC Treaty and those others, which gained ground during the 1980s, concerning the need to bring agricultural surpluses and the related expenditure under control. The Court also drew the consequences of the features highlighted in its report, as they touch upon the public finances of the Community. In particular, in order to satisfy the request voiced by the Council in its recommendations on the discharge for 1988, and in accordance with the Parliamentary resolution on the same discharge, the question of self-financing was looked at in greater detail in this context.

4.2.4. The main conclusions of this special report are reiterated in paragraphs 4.2.8-4.2.27, following an analysis of the implementation of the budget in 1990. The renewal of the main features of the sugar and isoglucose regime, which was referred to above, is obviously not enough to solve the problems raised by the Court: they will therefore have to be looked at again in 1992.

BUDGETARY IMPLEMENTATION

4.2.5. The year 1990 saw a fall in expenditure on this common market organization, on account of changes both within the Community and on the world market. The average intervention price of 54,18 ECU per 100 kg for the 1988/89 marketing year fell to 53,10 ECU in 1989/90. Community consumption increased (particularly in the Federal Republic of Germany, as a result of purchases of processed products by the East Germans), while there was a considerable decrease in exports of quota sugar receiving Community aid. On the other hand, there was a very significant increase in non-quota sugar exports (those receiving no Community subsidy) which, due to the continuing deficit on the world market and a rise in the world market price from 28,4 ECU per 100 kg in 1988/89 to 31,2 ECU in 1989/90, has more than compensated for the fall in quota sugar exports. These factors resulted in 1990 in a reduction in gross budgetary expenditure - in respect of refunds and intervention - on sugar and isoglucose. As can be seen from Table 4.2.1, this expenditure amounted to 1 388,3 Mio ECU, as opposed to the 2 125,0 Mio ECU earmarked for it in the original budget and the 1 979,9 Mio ECU of actual expenditure in 1989.

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4.2.6. The sector's so-called 'self-financing` mechanism automatically produced a corresponding drop in revenue from the levies paid by the industry in respect of exports of surplus quota sugar, as illustrated by Table 2.1 in Chapter 2 of the annual report, which shows that actual revenue in respect of sugar and isoglucose traditional resources for the financial year 1990 was 35% down on the budgetary estimates and on the revenue for the previous year (actual revenue in 1990: 910,7 Mio ECU; original budget: 1 384,6 Mio ECU; actual revenue in 1989: 1 381,6 Mio ECU). The net sum charged to the budget, comprising gross expenditure less the above-mentioned levies, thus fell to 477,6 Mio ECU in 1990, compared with an average of 540 Mio ECU for the years 1981-89.

4.2.7. The favourable economic factors obtaining during the 1989/90 marketing year, which were reflected in the budgetary out-turn for the financial year 1990, do not appear, however, to have persisted during the marketing year 1990/91, which was marked by the appearance on the market of several major Asian exporting countries and a return to a supply surplus. The relatively evenly balanced market situation in 1989/90 was exceptional. Such situations are cyclical and often coincide with periods when it is expected that there will be a review of the Community sugar scheme. The equilibrium of 1989/90 is thus likely to be replaced by a rapid return to the surpluses which have become customary in this sector.

A SEEMINGLY COHERENT SYSTEM

4.2.8. By comparison with other agricultural markets, the sugar market is, in principle, relatively easy to manage and monitor. Sugar consumption is homogeneous and the product does not come in different qualities, any variations being a question of different ways of presenting it. The raw material obtained from agriculture is processed industrially. For technical and economic reasons, the processing is carried out in a very limited number of plants (of the order of 200), through which the product has to pass.

4.2.9. Sugar is a heavy industry, requiring substantial investment, and one where policy needs to be developed according to clear long-term guidelines. But the limited number of companies concerned (fewer than 100 at present, and the number is falling) makes it easier for the producers to unite in defence of their interests, to the point where their market position could become so dominant as to jeopardize competition.

4.2.10. The management mechanism used in this market presents manifest peculiarities by comparison with other common market organizations, whilst nevertheless sharing certain customary features, such as the prices system and the system of levies on imports and refunds on exports. These peculiarities are the following:

(a)a simple, general system of production quotas, namely a basic quota, known as the A quota, and a specialization quota, or B quota; any sugar produced over and above these quotas is known as 'C sugar` and receives no form of Community price guarantee;

(b)the cost of disposing of the excess of production over consumption is usually fully financed from production levies which are fixed at different rates for A sugar and B sugar;

(c)a system of equal distribution of storage costs between the sugar producers and the main sugar stockholders.

These peculiarities can be partly attributed to historical reasons, such as the existence, when the sugar common market organization (CMO) was being set up, of a problem of surpluses and disparities between the constituent sugar-producing economies, and partly also to the specific structure of the market. Taken together, these measures, both traditional and special, constituted one of the potentially strongest and most effective mechanisms for ensuring the regulation and control of a common market organization.

A SYSTEM ADRIFT

4.2.11. After 22 years of common organization of the markets in the sugar sector it must be concluded that the experiment of organizing these markets on a Community basis has failed. The way the system has developed has run counter to the very concept of a common market, as presented in Article 40 of the EEC Treaty, and several of the essential objectives assigned to the common agricultural policy by Article 39 of the EEC Treaty have not been achieved. The fact is that while certain principles proclaimed by this Article (increased productivity and security of supply) were achieved long ago, the same cannot be said of certain others (the rational development of agricultural production, the stabilization of the market and reasonable prices for consumers). Furthermore, an additional objective which came to the fore in the 1980s, namely the control of production and thus of the expenditure linked to surpluses, is especially far from being achieved in the sugar market, where oversupply is of the order of 150% and total spending from the Community budget is of the order of 2 000 Mio ECU.

4.2.12. As things stand at the moment, the European market in sugar is anything but a common market: it is no more than the sum of the individual national markets. Production is tied to the territories of the Member States by production quotas which are set individually, for each Member State. More effective forms of production cannot be developed because less efficient forms of production are being protected. The initial disparities which existed when the CMO was set up, or when new members joined, are still there. So-called 'transitional` measures have played a large part in this process because they have been kept in place beyond the periods for which they were originally intended to function. The then Member of the Commission with responsibility for Agriculture, who was a Vice-President of the Commission, made the following comments in a speech to the Economic and Social Committee on 28 September 1967, and therefore right in the middle of the preparatory stages of the sugar CMO: 'There are grounds for fearing that at some time in the future the Council will agree upon a system whereby after a certain period it will no longer be possible to achieve a common market in sugar (...). All the measures that we must take should be such as to make it possible to open frontiers after the transitional period, resulting in specialization in the production of sugar. This question deserves particular attention, since it is the first time that we have encountered such difficulties and that national interests have been defended so vigorously.`

4.2.13. In fact, the system of production quotas, which has been a major idiosyncrasy of this market since it was set up and is, in theory, an effective means of controlling and funding production, is the factor in the equation that has led to the ossification and failure to achieve optimum results which are the distinguishing characteristics of this market today. Instead of allowing backward regions to adapt and making it easier for overall production to develop towards a macroeconomic optimum, with a common market as the ultimate aim, the way in which the system has actually been implemented by the political authorities has tended rather to move the sugar market in the opposite direction, away from its objectives. The quota instrument has been systematically extended with every change in the system, in order to safeguard the position of producers who were less efficient from the start, especially in Italy, and subsequently to satisfy new Member States, whether their natural conditions were suited to growing sugar beet or not, so as to make them at least self-sufficient. This instrument has also been used both to offer guarantees to the former Commonwealth countries that their exports of raw sugar to the United Kingdom will be maintained and to ensure this supply of raw material for the British refining industry. The quota mechanism has even prevented isoglucose, which costs less to produce, from competing with sugar.

4.2.14. The quota system has thus produced the opposite result to what was initially planned. If one considers that it is principally the nationalization of the quotas which has made this instrument ineffective, and even counterproductive, the conclusion is inescapable that a production management system based on a system of production quotas, especially on generous price conditions (see paragraph 4.2.20), is bound to fail if it takes the form of quotas defined for and managed by each Member State and then perpetuated indefinitely, de facto if not de jure, as can be seen in the case of sugar.

4.2.15. The system thus implemented has allowed the common market in sugar to reach a rate of oversupply averaging 150% over the last 10 years. This market thus boasts the greatest surplus of all the common agricultural markets. Given that this surplus has to be disposed of on the world market, where the level of prices averages roughly half of the guaranteed Community price - a particularly unfavourable ratio - and that around two thirds of these exports receive refunds to make up for this difference, the result is an extremely expensive mechanism, particularly in relation to other markets. The truth is that sugar beet sowing in the Community could be reduced by a minimum of 20% at no risk to the internal market supply. This situation is far from the principle of economy which - the Court is bound to point out - is an integral part of sound financial management.

4.2.16. One of the objectives that the creation of a common market was supposed to achieve was regional specialization. It has to be observed that this has not been achieved, for the following reasons:

(a)In the first place, with each successive enlargement, to include countries that were not all equally well-suited to sugar-beet cultivation, national quotas have been allocated which have, in fact, allowed these countries to become more or less self-sufficient in sugar. From the very beginning, certain measures included in the basic regulation and perpetuated thereafter, such as derived prices, mixed prices and national aids, have made up for a lack of economic efficiency on the part of the national producers concerned;

(b)Originally, the B quotas, as specialization quotas, were by nature essentially mobile (the term 'migratory quotas` was used). On the one hand, they have been gradually nationalized and, on the other, the levy intended to finance exports of B quota products has ceased to be selective. The fact is that the institutional price is so generous that B sugar is produced even in the regions that are least suited to the production of sugar beet, and the collection of differentiated A and B levies, in varying proportions from one Member State to another, amounts to a mechanism for the sharing-out among the Member States of the costs that arise from exports of quota sugar. B sugar is produced with almost the same confidence as A sugar.

4.2.17. In actual fact, C sugar has become the real specialization sugar. This non-quota sugar, which receives no Community guarantees and must be sold on the world market at world market prices, is produced in quantities far in excess of the level of variations attributable to climatic vagaries. The production of these quantities is not without its effects on the budget. In fact, the volume of C sugar exports helps to depress the world price and therefore tends to increase the cost of exports of quota sugar. Furthermore, when the world rate is favourable, producers give preference to exports of C sugar, to the detriment of quota sugar. The combined financial effects of these phenomena amount (according to a detailed analysis of this subject, see paragraphs 3.8-3.20 of special report N° 4/91) to several tens of millions of ecus a year, which have to be met from the Community budget.

4.2.18. The volume of production and exports of C sugar can only be explained by the level of return obtained from C sugar production, thanks to generous institutional price conditions. Further advantages are obtained from specific measures, such as the right to carry over part of the C sugar to the following marketing year as A sugar and receive a storage allowance on the stocks concerned. In current market conditions, such facilities are no longer economically justifiable.

4.2.19. It is clear from the preceding paragraphs that the present guarantee level (quantities and prices) is too high. The B quotas are seen as self-financing export quotas, whereas in fact they amount to a surplus which ought to be competitive on the world market without the need for aid. In this way the Court considers that the overall amount of guaranteed quantities could be reduced. A large proportion, and even the totality, of the B quota could be treated on the same basis as C sugar is at present, although there would still be a distinction in terms of the level at which the levy would be set, and therefore one of pricing between A and B sugar within this reduced ceiling. This would allow production to be guided geographically towards an economic optimum, whilst the disposal costs, similarly reduced, could still be financed.

4.2.20. In sharp contrast to the remarkable oversupply of sugar, the supply of the alternative, cereal-based sweetener, in the form of isoglucose, has been frozen at a minimal level of 2% of the maximum quota. Technically speaking, around 25% of all sugar used could be replaced by isoglucose. The Court also notes that while the countries of the south are more suited to the production of high-quality cereals than to sugar beet cultivation, they have been slow to explore this interesting possibility.

4.2.21. Around one third of the Community's raw sugar exports, or 1,5 Mio tonnes, is intended to balance out preferential imports of raw cane sugar, the bulk of which comes from the countries of Africa, the Caribbean and the Pacific (ACP). While this practice could originally be explained by the existence of a sugar-refining industry in the United Kingdom and Portugal when they joined the Community, it is harder to justify in the long term, especially as the Community A sugar quota, which ACP sugar is regarded as being equivalent to for guarantee purposes, is still sufficient to meet the Community's domestic consumption needs. To the extent that this aid for the production of ACP sugar is in the nature of development aid, it ought to be treated as such in the Community budget. Furthermore, if this aid has to be for sugar specifically, the Court wonders whether a simple price guarantee system could not be set up for producers in the ACP countries concerned, thus obviating the need for the costly physical to-ing and fro-ing of the product itself.

4.2.22. In view of the relative importance of Community sugar exports on the world market, accounting, as they do, for about one quarter of the market as a whole and around one half of exports of white sugar, the impact is undeniable. This depressive effect constitutes an advantage for the often poor importer countries which procure their supplies on this market, but it is also an economic obstacle for the producer countries, particularly the developing countries among them, which are sometimes greatly dependent on this kind of production in their attempts to find profitable export outlets. A re-examination of the system would seem to be indicated, in the context of the current trade discussions taking place under the Uruguay Round.

SUBSTANTIAL COSTS

4.2.23. The characteristics of internal or external macroeconomic management generate substantial costs for the Community finances:

(a)the very high cost of the structural surplus (1 987 Mio ECU, corresponding to more than one third of the value of internal Community consumption), which is borne both by the budget and by the final consumer (see Table 4.2.2, which has been prepared by the Court on the basis of the financial flows in green ecus, per marketing year);

(b)the budgetary cost of the preferential imports, which, in the Court's opinion, constitutes an unnecessary burden on the CAP budget;

(c)the specific effects of the production and export of C sugar entail invisible additional expenditure chargeable to the Community budget.

To all of this must be added the pretence of the so-called self-financing principle, as will be indicated below.

4.2.24. Bearing in mind all its constituent parts, the sugar market is a relatively simple one to control and the administrative organization in place at Community and national level presents a fairly well-ordered picture. The management procedures are generally competently implemented, on the strength of relatively reliable data and very regular contacts between Community and national departments. There is, nevertheless, one major shortcoming. As regards the accounts, more specifically as regards the so-called self-financing mechanism, there is no ex post facto audit of the actual operation of this mechanism, as defined in the basic regulation, or of the extent to which it achieves its objectives, as set out in the recitals to the regulation, whereas the principles of sound financial management require such a check.

4.2.25. This concept of self-financing, or 'budgetary neutrality`, boils down to the principle affirmed since 1968 but fully adopted only since 1981 of the financing of the costs of disposing of the excess of Community production over consumption by production levies. In spite of its apparent simplicity, this concept calls for some qualification:

(a)In the first place, this does not mean that the entire Community surplus supply is covered by this mechanism: part of it is still a structural charge on the budget. This is mainly the cost of exporting the equivalent of the imports, a sum of around 535 Mio ECU a year. Finally, not including the equal distribution of storage costs, which is a whole system in itself, 'self-financing` covers distinctly less than half of the market cost.

(b)Next, the net burden on the budget that results, as with other CMOs, from the application of two ECU exchange rates (the agricultural rate for converting unit amounts and the budgetary rate for entering the financial consequences of such conversion in the accounts) should be highlighted: it has amounted to an average of about 44 Mio ECU over the last six years, but it has run at around 100 Mio ECU these last two years.

(c)Lastly, even though the part of the costs that is covered by production levies is paid by sugar producers, this cost is passed on to the consumer through the level at which the institutional price is set; the nub of the self-financing system is thus the fact that the consumer, rather than the taxpayer, bears a considerable proportion of the cost of the system: it is perhaps this expedient which sustains the mistaken idea that this market is self-financing and constitutes no charge on the budget or even costs the Community nothing.

4.2.26. Beyond these initial findings, the Court's analyses, while revealing that no conclusive reconciliation of the accounts is feasible within the current accounting system, nevertheless raises doubts, especially as to the accuracy of the amounts used and included in the calculation of the levies, as regards the cost of export refunds. Considering the laborious nature of these analyses, on the one hand, and in view of the importance of transparent, verifiable management, on the other, it would be desirable to provide for specific references to each marketing year in the system for the declaration of revenue and expenditure by the Member States. This could be readily achieved, especially as the Member States already have this information at hand for their own management needs.

4.2.27. The sugar market, which accounts for 2 000 Mio ECU of the Community budget for expenditure relating to this CMO and approximately 1 200 Mio ECU for revenue, costs the Community and the consumer much more than it should. This is the consequence, in particular, of non-specialization and over-supply under artificial conditions and is, more generally, a result of the tendency to short-term thinking, national protectionism and optimistic evaluation which has always characterized the process of policy-making when the system has come under review and the market has been enlarged. Indisputably, there are lessons to be learned from the past for the next revision of the CMO, which is due in 1993, at the end of the present system which has just been decided by the Council of Ministers.

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CHAPTER 5 (\*) Common policy on fisheries and the sea

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INTRODUCTION

5.1. The appropriations for the common policy on fisheries and the sea come under four chapters of Title 4 (Chapters 40, 41, 42 and 47) of the general budget (see Table 5.1).

5.2. The appropriations from Chapter 40 entitled 'Fisheries Guarantee Fund` are examined in Chapter 1 of this report.

5.3. The observations concerning legality and regularity are contained in Chapter 1 of this report.

5.4. The observations contained in the following paragraphs concern the structural measures

under Chapter 47. They represent 52,0% of the commitments made in 1990. The two main headings concerned by these observations would be Items 4701, 'Redeployment of fishing activities` and 4702, 'Adaptation and modernization`, which represent 78,3% of the commitments under Chapter 47 and 40,8% of the commitments under Title 4.

OBSERVATIONS CONCERNING BUDGETARY MANAGEMENT

Utilization of appropriations

5.5. Table 5.1 shows that 443,2 Mio ECU was committed for these four chapters in 1990, an increase of 29,8% compared with 1989, and that 325,5 Mio ECU was paid out, 24,2% more than in 1989. The table shows a high overall level of utilization of commitment appropriations (100% of the appropriations available originally, 95,1% of the final appropriations), comparable to that seen in 1989. The rate of utilization of payment appropriations represented 79,3% of the final appropriations available, a 15-point increase on 1989. This increase was mainly due to the growth of expenditure to finance international fisheries agreements, regardless of the phenomenon mentioned in Chapter 1 (see paragraph 1.74) of advance payment of the financial compensation to Greenland.

Outstanding commitments

5.6. At the end of the financial year 1989, the outstanding commitments amounted to 399,2 Mio ECU, while, at the end of December 1990, the amounts payable against commitments from the financial year 1990 and previous financial years amounted to 487,4 Mio ECU. This latter amount takes account of the cancellation, in early 1990, of 27,4 Mio ECU of commitments from 1987 which had not been used. Table 5.2 shows the situation of outstanding commitments at the close of the financial year 1990. At the rate of execution of payments for 1990, the commitments outstanding at the end of the financial year represent 9,8 years' expenditure under Chapter 41, 4,4 years' expenditure under Council Regulation (EEC) N° 4028/86 of 18 December 1986, and 5,1 years' expenditure under the other budget headings of Chapter 47. Even if the commitments for the financial year are excluded in establishing these ratios, the expected periods of execution are still 3,7 years for Chapter 41, 2,3 years for the Regulation (EEC) N° 4028/86 expenditure and 2,1 years for the other budget headings, respectively. These findings illustrate how slowly the measures in question are being executed. Thus, under Regulation (EEC) N° 4028/86, 175,7 Mio ECU of payments had been effected on 31 December 1990, out of the 800 Mio ECU provided for the period 1987-91.

OBSERVATIONS ON THE IMPLEMENTATION OF THE STRUCTURAL MEASURES

5.7. The Court carried out an inquiry with a view to assessing the extent to which the implementation of the Community measures intended to improve and adapt the capacities of the fishing fleets to the available fisheries resources is likely to achieve the objectives assigned to these measures. In this connection, investigations were carried out at the Commission concerning certain procedures for the implementation of these measures. The inquiry is also being carried on in a number of Member States and, for experimental purposes, includes joint controls carried out in liaison with the national audit institutions.

Applicable regulation

5.8. The structural measures adopted under the common fisheries policy, where the improvement and adaptation of fishing fleets and aquaculture in the Community are concerned, come under Regulation (EEC) N° 4028/86. This Regulation provides in particular for the need to continue the restructuring of the Community fleets by renewal or economically appropriate modernization and a measure, to be implemented at the same time, with the aim of eliminating fishing overcapacities. Accordingly, applications for Community financing are for construction or modernization projects or measures to encourage the temporary laying-up of vessels or the final cessation of fishing.

Admissibility conditions for applications for aid and reimbursement

5.9. To qualify for Community aid, regardless of any technical criteria, applications for financial contributions for construction projects must be received by the Commission before the date of commissioning of the vessel concerned by the application, while applications for financial aid in respect of modernization projects must be filed with the competent authority in the Member State before the work concerned by the application begins. Bearing in mind their definitions as laid down in the regulations, these admissibility conditions allow projects to be begun and executed some time before the Commission's decision to award the subsidy. The Community structural aid is thus sometimes reduced to reimbursement of expenses relating to work which was completed as long as two years previously.

5.10. In practice, the Court observes that the Commission is less than strict in applying the admissibility conditions:

(a)Article 37(1) of Commission Regulation (EEC) N° 4028/86, which provides that 'Aid applications to which no grant has been awarded for lack of funds shall be carried forward once only, to the following budgetary year`, was not observed where certain projects for construction and modernization carried over from 1987 to 1989 were concerned. Thus, of a total of 344,2 Mio ECU corresponding to projects being considered or reconsidered, it was not possible to grant 280,8 Mio ECU of aid because there were no budgetary resources available.

(b)In spite of the insertion since 1989 of a standard clause in decisions awarding aid, which stipulates that applications for reimbursement must be submitted within six months of completion of the work, the Commission attaches no importance, when authorizing the payment of aid, to recipients' failure to observe this provision.

5.11. Taking the budgetary resources available into account, the effect of the definition of the admissibility conditions for applications for financial aid contained in the regulations and the practice followed in this respect by the Commission is to reduce the impact of the investment on the achievement of the objectives pursued by the aid policy. In fact, since it is not in a position to influence the planning of investments, i.e. to intervene at the time when the operations are actually being decided on, the Commission is effectively denying itself the possibility of taking a decisive initiative in this area. The effectiveness of the aid granted in terms of the objectives of the structural policy would be enhanced by a review of the admissibility conditions laid down in the regulations and by more rigorous application of the provisions which already establish a link between the granting of public aid and the period in which the investment is effected. Prior granting of aid by the Commission would create a clearer link between the planned investment and structural policy requirements.

Aid for modernizing vessels

Reasons for not taking certain projects into consideration

5.12. The system of aid for modernizing fishing vessels does not provide for the Commission to take individual decisions by project, but for a global decision to be taken for each Member State for all the projects submitted during the six-month reference period. An examination of the decisions taken by the Commission during the financial years 1987 to 1990 showed that it was not always possible for all the investment projects put forward for Community aid by the Member States to be taken into account for grants of aid, although no clear reasons were given for their omission. Thus, of 126,3 Mio ECU of aid applications for the period in question, the projects which were rejected represented 51,4 Mio ECU. Considering that only projects entailing investment in line with the common structural policy are eligible for public aid (Community or national), decisions to reject any of them should in all cases be justified by reference to the structural objectives of the common fisheries policy. Such reasons need to be given so as to open the door to national financing for such projects in the absence of a Community contribution.

Off-setting of cost items within a project

5.13. Applications for aid are examined by the competent authorities in the Member States, which pass them on to the Commission after breaking the planned investment down into seven headings. Article 4(2) of Commission Regulation (EEC) N° 894/87 of 27 March 1987, laying down rules for the application of the system of aid for modernization, stipulates that 'changes planned in modernization projects for which Community aid has been granted must be referred to and approved by the competent authorities of the Member State before their implementation`. The Court's examination of the supporting documents enclosed with the payment orders for the modernization aid revealed that, in certain cases, the investment provided for under one heading had only partially been carried out, while the expenditure listed under another heading was distinctly in excess of the provision. Following this hypothesis, unlike many construction projects, the practice followed with regard to the payment of modernization aid allows off-setting between items on which there is under- and overspending, within the limit of the eligible sum for the project indicated in the decision, and only a brief comment is offered to explain the difference between the estimate and the real figure. The Court considers that the Commission should adopt a clear, uniform practice in this matter and, in every single case, should require the Member State to enclose with the application for payment a certificate to the effect that any changes made were subject to explicit approval by the competent authorities in the Member State prior to their execution, in accordance with the provisions of Article 4(2), as cited above.

Rate of execution of payments

5.14. Article 4(1)(c) of Commission Regulation (EEC) N° 1116/88 provides that the overall aid granted under a decision 'shall be payable as a rule in not more than four instalments`. In practice, the decisions, which embrace several score of projects, occasionally provide for a more limited number of payments - even though this provision is, in fact, not always observed when the payments are executed. In practice, such measures can penalize certain recipients. On top of the periods necessary for the national authorities to establish and check the records of expenses presented by the recipient, there may be a further, variable, but nevertheless considerable, delay. The time involved in this depends on the completion of other projects, which determines when the Member State can apply to the Commission for a part payment combining the repayments due to several recipients: actual payment to the beneficiary may thus occur several quarters later than the completion of the works. In order to correct this situation, the Court considers that the Commission ought to devise a new system for paying modernization aid. This could draw on the provisions made for the reform of the structural Funds, which provide for down payments and payments to be effected according to the observed rate at which the projects are executed. This approach corresponds to the logic of delegating responsibilities to the national authorities which to a large extent underlies aid for modernization, provided that the provision of these down payments is subject to strict compliance with the regulations on the forwarding of information on the monitoring of the execution of modernization programmes.

Aid for the adjustment of fishing capacities

5.15. Title VII of Regulation (EEC) N° 4028/86 lays down the general framework within which the Member States and the Commission implement the measures to adjust capacities in the form of aid for the laying up and permanent withdrawal of fishing vessels. These measures are executed at the initiative and on the responsibility of the Member States, which can obtain reimbursement of their expenses up to a limit of 50% of the scale defined by the Community regulations.

Failure to comply with the period for adopting decisions and with the rule of budgetary annuality

5.16. Each year, before 1 February, the Member States forward to the Commission an estimate of their planned expenditure on laying-up and final withdrawal premiums. If, after examining the estimates, it finds that the conditions for a Community financial contribution have been met, by 1 April the Commission should determine the maximum amount of eligible expenditure per Member State according to the regulations. In fact, since 1987, every decision has been taken after 1 April and has generally been followed by one, or even two, amending decisions towards the end of the year or even after the close of the financial year to which the initial decision referred. This approach is not provided for by the Regulation and, where amendment effected after the close of the financial year is concerned, has allowed the Commission to breach the bounds of budgetary annuality. The situation is even more serious where temporary laying-up premiums are concerned: from 1988 to 1990, the maximum amount of expenditure eligible for Community reimbursement in this respect was only determined in the amending decision at the end of the year, which makes for uncertainty for the Member States concerned.

Conditions for committing and effecting expenditure

5.17. Article 48(2) of Regulation (EEC) N° 4028/86 lays down that the amounts in ecus specified in the scales applicable to the temporary withdrawal and final cessation premiums are to be converted into national currencies at the agricultural conversion rates in force on 1 January of the year in which the premiums are granted. The application of this provision, combined with that of Article 26(2) concerning the Member States' forwarding of an estimate of their expenditure, ought to determine the maximum amount of the expenditure eligible for reimbursement in national currency. Likewise, the financial obligation towards each Member State, which is equal to 50% of this amount, ought also to be denominated in national currency, in line with the practice observed for the other kinds of aid granted in the context of Regulation (EEC) N° 4028/86. In fact, the Commission draws up its aid decisions (and the amending decisions) mentioned in paragraph 5.16 above in budgetary ecus, which gives rise to the problems discussed in Chapter 1 of this report (see paragraph 1.7). In any case, such problems should not arise in future if the Court's opinion of 25 April 1991 on the draft Commission regulation laying down procedures for implementing certain provisions of the Financial Regulation

are put into effect, in so far as it recommends the general use of the ecu for the implementation of the budget in accordance with uniform rules for all operations. It is true that the basic regulations fixing the Commission's obligations in this respect would then have to be harmonized with the principles declared by the Financial Regulation.

5.18. As a result of the practice adopted by the Commission in this regard, the Court found that, in 1987, the Commission had reimbursed to Germany a sum larger, both in national currency and in ecus, than the Commission had decided was due to it. In the same year, the amount repaid to Greece in national currency was greater than the sum in national currency which corresponded to that mentioned in the decision. In contrast, the authorizing officer made one repayment to Denmark in 1989 subject to a ceiling because it was more than the amount estimated and committed, whereas in fact the repayment effected did not amount to the sum laid down by the decision in either ecus or the equivalent in national currency.

5.19. Where the procedures for effecting reimbursements to the Member States are concerned, further to those already mentioned in paragraphs 1.72 to 1.76 of Chapter 1 of this report, the following points should be made:

(a)a single payment order may be used to reimburse temporary laying-up and final cessation without any breakdown of the respective sums in the accounts;

(b)the information forwarded to the Commission for the reimbursement of final cessation premiums does not allow a check to ensure that the sum of each premium paid complies with the limits laid down by the Community scale, since the figures for several vessels are often lumped together.

The Court's recommendations

5.20. The Court considers that the management of expenditure on capacity adjustment should be improved by the adoption of the following measures:

(a)A statement of the amounts to be paid to the Member States should be added to the Commission's decisions on capacity adjustment premiums. The recent amendment of the Regulation

, which provides for variable reimbursement rates, makes such detail necessary. This would allow a direct control to be carried out on the correspondence between the decisions and the accounting commitments relating to these and thus avoid occurrences such as that observed in 1989, when an accounting commitment was made for 500 000 ECU less than the sum obtained from the Commission decision.

(b)Although there is only one single decision for both types of aid and for all the Member States concerned, the accounts should present a specific accounting commitment for each measure and each Member State and these should effectively be followed up separately.

(c)Where the premium for the temporary laying-up of fishing capacities is concerned, the Commission has still not drawn up the detailed rules for this aid provided for in Article 23(5) of Regulation (EEC) N° 4028/86. Defining clear rules in this respect, particularly where the drafting of withdrawal plans is concerned, would considerably facilitate the implementation of this measure.

(d)The Commission ought to publish an annual list of vessels withdrawn from service. Furthermore, in view of the fact that this aid is granted not only to vessels which are actually scrapped but also to fishing vessels which are exported outside the Community or assigned to other activities, the Court considers that publication in the Official Journal should be backed up by publicity in the trade publications of specific details, such as transmission frequencies and fishing vessel type codes, in addition to any characteristics which have already been published. This publicity would serve to reinforce the effectiveness of the measures, by preventing any reassignment of these vessels to fishing activities in Community waters.

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CHAPTER 6 (\*) The reform of the structural Funds

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INTRODUCTION

6.1. The Single European Act, which entered into force on 1 July 1987, listed among the Community's objectives the need to reduce regional imbalances. To this end, it was decided to reform the structural Funds, namely the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Guidance Section of the European Agricultural Guidance and Guarantee Fund (EAGGF-Guidance) in order to increase their effectiveness and to ensure improved coordination of the Community financial instruments. At the same time, the amount of money allocated to the structural Funds was to be doubled over a period of five years in order to increase the impact of structural spending on the economic and social cohesion of the Member States.

6.2. The reform which entered into force on 1 January 1989 comprised three levels of legislation: a basic Regulation

, defining the organization of Community intervention in this field and the five objectives of the structural Funds; a horizontal Regulation

, specifying the ways in which the various financial instruments of the Community were to be coordinated; and, finally, for each of the structural Funds, a specific regulation laying down implementing provisions

.

6.3. The European Investment Bank (EIB) and the other Community financial instruments (the European Coal and Steel Community (ECSC) and the New Community Instrument (NCI)) are required to work together in accordance with the provisions governing their activities in order to realize these objectives. Co-ordination of the Funds, the EIB and the other financial instruments is organized by the horizontal regulation and is specified by agreements between the Commission and the Bank, as well as by ECSC guidelines

.

BASIC PRINCIPLES OF THE REFORM

6.4. The reform is intended to improve the effectiveness of Community intervention by the implementation of certain key principles, namely increasing and concentrating the Funds' resources, establishing partnership relations, coordinating and planning the operations, as well as monitoring and assessing them. The Commission and the Member States are also required to check the additionality of the aid, in order to ensure that the Community contribution has a heightened real economic impact, particularly in respect of the reduction of differences in levels of development.

6.5. The basic regulation assigns five priority objectives to the Funds with the aim of strengthening the economic and social cohesion of the Community:

(a)Objective 1: to promote the development and structural adjustment of less-favoured regions,

(b)Objective 2: to convert regions affected by industrial decline,

(c)Objective 3: to combat long-term unemployment,

(d)Objective 4: to facilitate the occupational integration of young people,

(e)Objective 5: to speed up the adjustment of agricultural structures (5a) and to promote the development of rural areas (5b).

6.6. The leading role in the realization of these objectives lies with Directorate-General XVI (Regional Policy) for Objectives 1 and 2, Directorate-General V (Employment, Industrial Relations and Social Affairs) for Objectives 3 and 4, and Directorate-General VI (Agriculture) for Objectives 5a and 5b. The other Funds or financial instruments contribute to the realization of one or more of these objectives (more specifically, the ERDF for 5b, the ESF for Objectives 1, 2 and 5b, and the EAGGF-Guidance for Objective 1).

6.7. With the exception of part of the Objective 5a measures, for which there are special provisions, the Community action is executed in three stages. During an initial stage, the Member States put forward plans for each of the objectives, setting out their priorities, how they plan to proceed and the expected size of the Community contribution. In the case of Objectives 3 and 4, the Commission establishes general guidelines, valid for at least three years, before plans are submitted by the Member States.

6.8. During the second stage, after having considered the plans put forward, the Commission draws up Community support frameworks (CSFs) for each plan and each Member State concerned, in agreement with the latter. The Community role in each measure is guided by these CSFs for the duration of the measure, which may vary between three and five years. The CSFs define the priority objectives of each measure, and the form it should take, as well as the financial planning (Community and national contributions, loans where relevant) and the duration of the operations.

6.9. The Commission may also propose that the Member States submit applications for assistance in respect of certain measures, known as Community initiatives (CIs), which are of particular interest for the Community and which are not covered by the national plans. The CSFs should also take account of all CIs that have been approved.

6.10. The final stage specifies which operations are planned by the CSFs. Such operations are to be carried out largely in the form of operational programmes (OPs) proposed by the Member States. These OPs must be made up of coherent sets of multiannual measures. Where several Funds are jointly involved in an operation which is being administered on an integrated basis, this is referred to as an 'integrated operational programme` (IOP).

6.11. The regulations lay down the follow-up, monitoring and assessment procedures for the CSFs and the OPs. The various stages, from conception to the final assessment of results, are carried out within the framework of a partnership between the Commission, the Member States and the regional or local authorities designated by the latter.

COMMUNITY SUPPORT FRAMEWORKS AND DECISIONS TO GRANT AID

6.12. For each of the objectives, the plans provided for in the legislation governing the reform were presented to the Commission by the Member States between March and November 1989. The various CSFs were adopted over the period from October 1989 to June 1990, as shown in Table 6.1, which summarizes the chronology of the Objective 1 decisions. In all, 11 CSFs have been approved for Objective 1, 54 for Objective 2, 9 for Objectives 3 and 4 and 44 for Objective 5b. In general, the CSFs have also included sums allocated for the continuation of measures, programmes and projects that are already under way.

6.13. The Regulation stipulated that the Council must, by 31 December 1989, adapt the common EAGGF-Guidance measures so as to achieve the objectives of the reform. Of the 20 measures of this type that were still in force in 1990, only six have been adapted and formally attached to the realization of Objective 5a.

6.14. As regards the 14 others, it was considered that no adaptation was necessary either because they were close to expiry or because of their nature, which meant that they were attached de facto to Objective 1 or 5b, even if the geographical areas they covered did not always coincide with the eligible zones for these objectives.

6.15. In practice a large proportion of EAGGF-Guidance expenditure will continue to concern measures decided on before the reform.

6.16. For all the objectives, the adoption of the decisions to grant aid, principally in the form of OPs designed to implement the CSFs, took place mostly in 1990. During the financial year 1989, and with the exception of several aids relating to Objectives 1 and 2, application was mainly concentrated on transitional provisions allowing operational programmes to be presented before the CSFs had been established. A considerable part of the management during 1989 and 1990 moreover concerned the implementation of decisions taken during previous financial years. For the ESF, financing by programmes constituted an important change in its working methods, since previous procedures for granting aid involved such financing only exceptionally.

6.17. On 31 December 1990, the total number of financial contributions from the three Funds to OPs could be estimated at 526: 158 from the ERDF, 329 from the ESF and 39 from the EAGGF-Guidance. The actual number of OPs is significantly lower than this total, but neither the statements of account nor the other Commission financial statements available at the end of 1990 provided enough information to compile a register of them on a uniform, consistent basis, since these documents do not specify whether the intervention of a Fund represents all the Community aid to a given OP, or whether aid chargeable to other Funds should also be included. The first issue of the information bulletin mentioned by the Commission in its reply (see also its replies to paragraphs 6.33 and 6.34) was not published until July 1991, or more than six months after the end of the period audited by the Court. Attempts to improve coordination should include drawing up appropriate documentation, which would make it possible to follow the overall development of an OP, in its various components: current methods are too closely modelled on the former procedures.

6.18. Nor is it possible, using these statements, to distinguish the various types of programmes concerned by the integrated approach. The integrated operational programmes proper (IOPs), i.e. those involving several Funds which contribute jointly to an operation that is administered on an integrated basis at the level of sub-programmes and individual measures, are at present very limited in number. The Commission has usually preferred the formula of multi-fund operational programmes (MOPs), made up of sub-programmes each of which is managed by a Fund, and in which there is far less interaction between the Funds involved.

6.19. There is, therefore, still a considerable amount of work to be done to improve integration of the operations, which is the main objective of the reform, and thus to ensure their coherence. Furthermore, little progress has been noted as regards the task of improving the accounting for cases where aid is combined with a loan. Additional information on coordination is given in later chapters of this report, in particular Chapters 7 and 10, which relate, respectively, to the implementation of Objective 1, which is the most advanced, and to the management of loans.

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6.20. The very tight deadlines for implementing the various stages of the reform have been detrimental to its effectiveness in one important regard: there is virtually no ex-ante assessment of Community operations, which undermines the value of any future ex-post assessment. In addition, little use has been made of the appropriations available for possible technical assistance; on the one hand, the potential recipients were not fully informed about the possibilities open to them, and on the other hand the Commission's methods of implementing these appropriations were poorly defined. In order to resolve these problems, the Commission has taken the step of drawing up a vade-mecum and distributing it widely. This is a laudable initiative, but its effectiveness is unfortunately likely to be very limited, because of its belatedness.

6.21. The Commission has also adopted several CIs relating to various fields (the environment, peripheral regions, research and development, etc). These are initiatives which, because of the time needed to draw them up, could not be included in the CSFs. As of 31 December 1990, only one of the proposals made by the Member States for the implementation of these CIs had resulted in a decision to grant aid by the Commission.

FINANCIAL PLANNING AND THE USE OF THE ECU

6.22. Article 12 of the basic regulation provides for the commitment appropriations allocated to the structural Funds to be doubled, in real terms, between 1987 and 1993. The Funds' resources should increase, still in real terms, from 7 200 Mio ECU in 1987 to 14 500 Mio ECU in 1993, the increase amounting to 1 300 Mio ECU for each year from 1989 to 1992.

6.23. All these guidelines have been included in the financial perspective of the 1988 Interinstitutional Agreement on budgetary discipline

, which is intended to bring the growth of Community expenditure under control. On the basis of these two estimates, the growth of commitment appropriations, as it should have been at 1988 prices, is given in Table 6.2.

6.24. The method used, during the drafting of the budget, to convert these forecasts in constant prices into their equivalent in current prices is based on provisional estimates of inflation which have so far proved to be lower than the subsequent rise in prices. For this reason, this method has resulted, for the three Funds and for the financial years 1988-90, in an undervaluation, which, on 31 December 1990, on the basis of the Commission data and subject to any subsequent corrections, amounted to 291 Mio ECU at 1988 prices and 321 Mio ECU at 1990 prices. Compared with the ceilings for all the structural measures covered by the Interinstitutional Agreement, the corresponding amounts here are 299 and 330 Mio ECU.

6.25. Table 6.3 reconstitutes the budgetary implementation of Titles 3, 5 and 6, which mainly cover the EAGGF-Guidance, the ERDF and the ESF respectively. Whilst, on the whole, the final appropriations differ only slightly from the appropriations included in the initial budget, this situation is the result of a reduction in the appropriations allocated to Title 5 (Regional development and transport) and Title 6 (Social field), and an increase in those for Title 3 (EAGGF Guidance Section and specific agricultural measures). The reductions for Titles 5 and 6 have resulted in an increase in the implementation rate of final appropriations in respect of these two titles. In the case of the whole of Title 3, the increase in appropriations has not been accompanied by an enhanced rate of utilization, since the commitment and payment appropriations ultimately proved to be less than the initial allocations because of the low rate of execution of the specific agricultural measures. For the EAGGF-Guidance proper the rate of execution of final appropriations was 99,9 %

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6.26. Overall, for the three titles referred to above, there was a slackening of the rate of implementation of the appropriations in 1990, compared with the previous financial year. This fall in the rate may be attributed to the difficulties inherent in implementing the reform. For the three Funds proper, the fall in the implementation rate concerns the commitment appropriations. In fact, the rate of utilization of final appropriations was 93,8 % in the case of commitment appropriations and 99,3 % in the case of payment appropriations, whilst in 1989 the corresponding rates were 99,1 % and 96,8 % respectively.

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6.27. Article 22 of the horizontal regulation stipulates that Community decisions, commitments and payments shall be denominated and carried out in ecus, in accordance with procedures to be adopted by the Commission. The procedures concerning the use of the ecu in the budgetary implementation of the structural Funds, which the Commission adopted on 2 July 1990 by its Regulation (EEC) N° 1866/90

, state that financing plans for CSFs and for grants shall be drawn up 'at constant prices in ecus`.

6.28. The use of the ecu at constant prices entails numerous administrative problems which the Commission has not yet properly solved, although 18 months passed between the adoption of the two regulations referred to above.

6.29. Denominating the grants in ecus has had only a limited effect on the use of the ecu. The Member States have the option of presenting their applications for aid in national currency (in which case the Commission carries out the conversions) or in ecus. During the period to 31 December 1990, the Member States only took up the first option, because of the absence of implementing procedures for the second. In addition, the national administrations responsible for the allocation of Community funds are generally not legally entitled to hold ecu accounts and therefore have to convert the sums through commercial channels.

6.30. Keeping the accounts in constant prices should be seen in the light of the desire to double in real terms the volume of commitment appropriations allocated to the structural Funds. If this approach were used for all the programming of measures financed by the Funds, management might well be made considerably more complicated. Moreover, accounting in constant prices reduces, but does not eliminate, the risks inherent in loss of purchasing power, particularly in the event of a significant time-lapse between the commitment and the payment, as well as in the event of a divergence between changes in the Community price index and changes in prices in national currency in the Member States. A measure of adaptation may, in principle, take place through the variations in the ecu exchange rate, but this is rarely concomitant with the implementation of measures receiving aid. In addition, it is not clear that the methodology of indexing programmes will double the structural Fund allocations in real terms, in particular in the event of delay in the implementation of the annual tranches, as the latter always retain the indexing of the starting year.

6.31. Greater attention should also be paid to the methods used by the Member States for drawing up financing estimates for their plans, particularly with regard to their consistency in respect of price forecasts. The Court even found a case of a Member State which, acting on its own initiative, had adjusted the data supporting an application for payment in order to take account of inflation, which does not comply with the obligation to declare only expenditure actually incurred. Difficulties may also arise when a Member State has to refund all or part of a quantity of Community aid it has advanced to a third party in national currency.

6.32. The procedures to be followed in order to index the CSF financing plans and programmes had not been adopted by the Commission by the end of 1990. The price revisions that programming in constant prices implied during the financial year thus remained provisional, pending the adoption of a definitive procedure.

6.33. As far as financial planning is concerned, it should also be noted that the reform extends the system of commitment by annual instalments and payment of advances to all the structural Funds. The Court drew attention in paragraphs 7.20-7.37 of its annual report concerning the financial year 1989 to the shortcomings of such a system, which ought to be supplemented with information that will make the accounts more transparent and, in particular, will make it possible to establish the total financial obligations borne by the Community which will have to be met from future budgets.

6.34. In response to the comments referred to above, the Commission has repeatedly said that it will provide information on its potential obligations and liabilities. The Court notes with regret that the 1990 accounts provide no such information. On the basis of a summary assessment, total legal obligations resulting from decisions already approved and not yet recorded in the accounts amount to about 27 000 Mio ECU at 1989 prices, i.e. somewhat more than 30 000 Mio ECU at current prices.

ADDITIONALITY OF THE AID

6.35. The idea of the additionality of aid emerged in 1975 in relation to the ERDF. It has taken a more precise form over the course of time and is at present defined in the reform's horizontal regulation which, in Article 9, extends it to embrace all the structural Funds. This regulation specifies that the Commission and the Member States shall ensure that increases in the appropriations allocated to the Funds have a genuine additional economic impact in the regions concerned and result in at least an equivalent increase in the total volume of official or comparable structural aid in the Member State concerned, bearing in mind the macroeconomic circumstances in each case. Increasing the volume of aid in the regions concerned is not necessarily enough to guarantee an additional economic impact, as this may also depend on the general situation and on an improvement in the quality of the administration, such as is expected to result from the reform as a whole.

6.36. Since the introduction of the concept, the Commission has met with the greatest difficulties in ensuring that it is correctly and effectively applied. Additionality has often been reduced to a simple transfer of resources, which facilitates the relaxation of budgetary constraints, with positive effects on budgetary equilibrium, fiscal pressure or the redeployment of economic and social policies but without having any impact on the resources devoted to regional development. Since the early 1980s, moreover, there has been a tendency for the Member States to reduce their expenditure on regional aid

, even though these years have, in general, seen an upturn in the economic cycle.

6.37. The additionality principle is of prime importance because the effectiveness of Community measures in terms of structural development is dependent on the application of it. Without it, the Community contribution takes the place of contributions by the Member States and has no additional effect on the regions. Nevertheless, the efforts made by the Commission during the period 1975 to 1988 did not provide the means to check, even summarily, the effectiveness of the additionality aspect. The reform Regulations, which enshrined in law the obligatory nature of additionality and extended it to all the structural Funds, ought to provide the Commission with an opportunity to develop a more all-embracing assessment methodology which would apply to all the structural Funds. A considerable effort remains to be made, especially as neither the RDPs nor the CSFs give any indications as to the approaches adopted for such an assessment.

6.38. In August 1990, and on the basis of the provisions of the horizontal regulation and of those contained in the CSFs, the Commission sent the Member States a request for information that would enable it to check the presence of additionality on the ground, together with an explanatory note on the purport of the regulation: according to this, the additionality requirement has been met if the Community contribution constitutes an addition to the sum which could normally be expected to be spent out of national resources on the objectives of the reform. In that case, additionality may take the form of an increase in the scale of the operations planned, an increase in the speed at which they are carried out, or new measures, thus increasing total eligible expenditure by the Member States to a level at least equal to the Community contributions. According to the note mentioned above, the geographical scope, the duration and the nature of the expenditure that is to be taken into account for the purpose of checking additionality are factors that are separately determined for each CSF.

6.39. This kind of interpretation is in line with the Regulations but constitutes a minimalist view of additionality. What it implies, in effect, is that the additional structural effort may be reduced to the Community contribution alone, without any corresponding contribution by the Member States, whose only obligation, ultimately, is to keep their own development effort constant. This approach is feeble when looked at in the light of the concern expressed in the Regulations to strengthen the economic impact of structural measures and in the light of the importance which the Single European Act ascribes to the objectives of economic and social convergence and cohesion.

6.40. This minimalist interpretation ought to urge the Commission to check particularly carefully that the additionality requirement is being respected. However, in the absence of an ex-ante assessment, as required by the regulations, the checks which the Commission is currently attempting, even if they succeed, risk only confirming the actual established facts, without offering any real possibility for making corrections.

6.41. At the practical level, it is difficult to measure additionality because it is difficult to decide what amount of expenditure could normally be expected. This latter figure may fluctuate according to the economic situation or to budgetary constraints, and variations in regional expenditure in respect of the reference period are often no more than indicators, with little probative value. In this respect, the Commission chose 1988 as the reference year, a year which, as indicated above, is in harmony with the general trend that has been observed since the beginning of the 1980s whereby the regional aid granted by the Member States is reduced.

6.42. In the case of several Member States, replies to the Commission's request for information were still being prepared when this report was being written. The replies that had been received were generally not very satisfactory and the Commission was planning to send out additional requests for information. The Commission has ruled that the principle of additionality should apply at the level of the CSFs but it has not yet clearly indicated which of its departments will be responsible for checking this.

CONCLUSION

6.43. The reform aims to increase the effectiveness of the measures, principally by a more concentrated and convergent approach by the structural Funds and by Community policies in general. To this end, it introduces changes to the Funds' activities which concern the main aspects of management. Coordination must none the less be strengthened, so as to ensure that the organization which the reform seeks to bring about is not modelled on traditional administrative methods, which would put it at risk of being reduced to somewhat superficial elements and which would add to the existing methods without really modifying and improving them.

6.44. The technical aspects of the planning procedures must be proportional to the expected benefits. It would be regrettable if Commission departments whose work would be completely taken up with complex administrative procedures could no longer, ultimately, pay sufficient attention to other especially fundamental aspects such as ex-ante and ex-post assessment.

6.45. Additionality and improved management are the prerequisites for achieving the increased impact sought by the reform of the Funds. The doubling of the Funds is the concrete manifestation of the importance which the Commission and the Member States attach to social and economic coherence and convergence. The concept of additionality, introduced as long ago as 1975 to the provisions concerning the Community structural policy, should have been given verifiable operational effect to a greater extent than has been the case.

CHAPTER 7 (\*) The promotion of the development and structural adjustment of underdeveloped regions (Objective 1 of the reform of the structural Funds)

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INTRODUCTION

7.1. Objective 1 of the reform of the structural Funds is directed towards promoting the development and structural adjustment of regions whose development is lagging behind. This is the major objective in financial terms: in fact, nearly two-thirds of the resources of the Funds, and 80% of those of the European Regional Development Fund (ERDF) in particular, have been devoted to achieving that objective during the period 1989-93. The regions which are eligible for Objective 1 (Objective 1 regions) can also receive Community aid under Objectives 3, 4 and 5a of the reform, which are sectoral.

7.2. What is more, this is also the objective which is closest to being fully achieved, which is why the Court considered it would be useful to analyse the Commission's actions for the implementation in the context of Objective 1 of such essential principles for the reform as the concentration of aid, partnership, coordination and programming of measures and the monitoring and assessment of them.

IMPLEMENTATION OF OBJECTIVE 1

Financial implementation

7.3. The Court of Auditor's concern was to establish what progress had been made in the implementation of Objective 1 for 1990 and for the period 1989-90. However, the Commission was only in a position to provide the data which allowed Tables 7.1 and 7.2 to be drawn up some days before the finalization of this report and, accordingly, the Court has not yet been able to verify these data, which are presented here for information only. It should be noted that around one-half of the commitments for the period 1989-90 relate to measures which were launched before the reform. For the same period, the commitments entered into under the Community support frameworks (CSFs) were validated to the extent of 61%, while the rate for the ERDF, at 56%, was slightly higher than that for the advances agreed when the instalments were committed (50% of commitments).

7.4. The operational programmes (OPs) decided since 1989, which represent the bulk of the new assistance decided in the context of the reform, absorbed 25% of the commitments in respect of Objective 1 in 1989 and 64% of those in 1990, or 49% for the period 1989-90. The 49% average conceals a range of very different situations, according to which Fund is concerned. Thus, while the weight of commitments for these same OPs under the ERDF (48%) is average, it is distinctly lower for the EAGGF (7%), both for reasons of the conditions for the implementation of this Fund and the importance of continuing earlier measures. The high rate for the ESF (99%) is explained by the fact that 1990 was the first year this Fund was affected by the reform and by the fact that the majority of earlier contributions concerned short-term measures. The OPs approved during the period 1989-90 were 52% disbursed. This rate, which is barely higher than that forecast for the payment of the first advance, reflects the fact that the CSFs for Objective 1 could not be approved before late October 1989, which had repercussions on the rate of commitments and particularly on payments in respect of the new programmes.

Selection of eligible regions and allocation of aid

7.5. The characteristic feature of the reform is the concentration of the aid on the most disadvantaged regions. Thus, areas of France, Italy and the United Kingdom which were formerly eligible for ERDF are no longer considered under Objective 1. In contrast, Greece, which has the lowest per capita gross domestic product (GDP) in the Community, has become eligible in its entirety.

7.6. The Council decided on the list of Objective 1 regions at the same time as Regulation (EEC) N° 2052/88, to which it is annexed. This Regulation also provides that the regions concerned by Objective 1 are in principle those with a GDP of less than 75% of the Community average. First, it should be noted that this criterion is not on a par with that taken for the definition of disadvantaged regions for the purposes of the application of Article 92.3(a) of the Treaty concerning areas which are eligible for regional aid in the context of the competition rules

.

7.7. In addition, examination of the figures for the period 1983-88 contained in the last two periodic reports on the situation of the regions and those published by the Statistics Office suggests that four regions (Community of Valencia, Asturias, Corsica and Abruzzo) do not satisfy the criterion of Regulation (EEC) N° 2052/88.

7.8. Lastly, it should be noted that, up to 1990, a considerable part of the autonomous Community of Valencia had received nothing under any regional aid arrangements. Likewise, the Commission decided to re-examine the Abruzzo region's eligibility for regional aid before the end of 1990, but the results of this examination were not available on that date. These observations would indicate that the preferred course in certain cases was to apply the less restrictive provisions of the Regulation instead of rigorously pursuing the objective of concentrating aid.

7.9. The per capita GDP criterion is by nature global and only takes very indirect account of the factors that are of importance for assessing structural problems, such as employment, the quality of agricultural structures or whether or not the regions concerned are situated in frontier areas or on the periphery of their countries.

7.10. Community aid foreseen in the CSFs has not been allocated on the basis of the gravity of the regions' specific problems, as was intended by the framework Regulation

: instead, it has been distributed between the Member States on the basis of their populations and the average per capita GDP for the whole of their eligible regions, as well as on their per capita gross national product (per capita GNP) at national level. In theory, such an approach takes account of the relative prosperity of the Member States and, therefore, of their capacity to solve their regional problems unaided. Furthermore, the Commission adjusted the allocation to suit the circumstances of each Member State, using the GDP/GNP ratio at national level. This correction only produced a significant difference in the case of Ireland, which has a GNP 12% lower than its GDP, primarily due to substantial repatriations of profits, as a result of the tax concessions extended to foreign firms.

7.11. An analysis carried out by the Court which includes indicators on employment and agricultural structures shows that the level of need is manifestly highest in Greece and Portugal and, to a lesser extent, in Ireland. Spain, Italy, France and the United Kingdom follow. The distribution of Community aid per head of population in the Objective 1 regions, however, is entirely different: Ireland receives the most aid (1 037 ECU), ahead of Greece and Portugal (724 and 722 ECU), which are followed by France (564 ECU) and the United Kingdom (506 ECU), certain regions of which (the overseas departments of France and Northern Ireland) face acute problems and, finally, Spain (419 ECU) and Italy (365 ECU).

7.12. Community aid has essentially been allocated by Member State and not at regional level. The regional distribution of aid derives from the breakdown presented by the Member States in the Regional Development Programmes (RDPs). Thus, in the case of Italy it is based on the national provisions, which are heavily biased towards criteria of population and surface area. In the case of France, on the other hand, it was the Commission which arbitrated between the requests expressed in the RDPs for the regions concerned.

7.13. In practice, Community aid seems to have been allocated among the underdeveloped regions essentially in proportion to their populations (see Graph 1).

7.14. A graph comparing Community aid per capita and the per capita GDP in the Objective 1 regions (see Graph 2) does not point to any precise conclusions regarding the ratio between the intensity of the aid and the degree of development of the region as measured by its per capita GDP.

7.15. In fact, Graph 2 clearly shows that, for equivalent levels of development as measured by regional per capita product (represented on the horizontal axis), the dispersion of per capita Community aid (represented on the vertical axis) can vary in a proportion of one to five. Attempts to explain this, taking criteria such as the rate of unemployment, agricultural employment or the remoteness of the location, have not produced any clearer conclusions.

7.16. Lastly, the characteristics of the Objective 1 regions are very variable: their population can vary from 100 000 inhabitants to nearly seven million. Furthermore, since the vastest regions often present marked contrasts at subregional level, a more discriminating geographical approach would enhance the effectiveness of Community measures and would take a more faithful account of local requirements when allocating regional aid.

7.17. Of course, the Commission cannot rely solely on the criterion of requirements: it must also take account of the development potential of the regions and of their capacity effectively to mobilize the available resources so as to guarantee optimum efficiency in the attainment of Objective 1. It ought, however, to have taken greater care to make the criteria it selected for granting aid more consistent and more transparent.

Partnership

7.18. Partnership, defined as the closest possible form of collaboration between the Commission, the Member State concerned and the national, regional and local authorities, is an essential principle of the reform and should be achieved at every level of structural measures. It is in fact a manifestation of the principle of subsidiarity, according to which the Commission, while assuming responsibility for Community policies, must coordinate its actions with those of the Member States so as to concentrate its efforts in those areas where it can contribute real added value. In the case in hand, partnership is meant to allow those who are administratively, economically and socially responsible to slot their measures into national and Community strategies. If it is to be effective, partnership must take effect at the various stages of programming, monitoring and assessment.

7.19. Now, an examination of the RDPs shows that they are often culled from plans or programmes which have already been decided by the Member States, substantial sections of which are sometimes not translated into regional terms. For example, the RDP for Portugal is essentially an adaptation, for the purposes of formally meeting the requirements of the regulations, of a national programme in which the sectoral dimension is predominant, and it makes hardly any concessions to regional concerns. Moreover, the very short regulation deadlines did not allow an effective partnership to be organized. At the level of the RDP, therefore, there is a tendency for partnership to be reduced to a procedure for informing the parties concerned after the event. Thus, although the local authorities in Portugal play an important role in implementing the measures, they have not been sufficiently involved in the preparation of the RDP and the CSF.

7.20. The Commission has tried to make up for these shortcomings by establishing contact with the authorities, with a view to giving a more regional cast to the proposals for the RDPs. These efforts have had varying degrees of success: the share of the expenditure provided in the CSFs for regional measures in the strict sense of the term can range from zero, as in Ireland, to a little over 50% in Italy, a country in which regional structures are nevertheless well developed.

7.21. These shortcomings recur at the other levels of the reform. In Ireland, there is no representative of the regions on the committee for monitoring the CSF; various sectoral OPs in Ireland and Italy make no provision for the representation of regional or local authorities on their monitoring committees. Of course, considerations of administrative effectiveness occasionally call for centralized administration of the measures, but the regional partners should be given an appropriate role to play in such cases. An indication of the somewhat intangible nature of partnership is to be found in the fact that only in a very limited number of cases do the CSFs for Objective 1 provide for any assistance in the form of global subsidies, which require very broad involvement of the driving forces in the regions.

Graph 1 - Community aid and population of the Objective 1 regions

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>START OF GRAPHIC>

<?þ><?þ><?þ><?þ><?þ><?Ð8><?±><?©><?©><?©>Community aid <?²>(1 000 Mio ECU)<?±>

<?þ> <? 3><? 5><?÷>8 <?½><?þ><?þ><?ue>7 <?½><?þ><?þ><?ue>6 <?½><?þ><?þ><?ue>5 <?½><?þ><?þ><?ue>4 <?½><?þ><?þ> <?ue>3 <?½><?þ><?þ><?ue>2 <?½><?þ><?þ><?ue>1 <?½><?þ><?þ><?ue>0 <?½><?÷><? 8><?þ><?¨><?¦>0<?©><?©><?©> <?¦>1<?©><?©><?©><?¦>2<?©><?©><?©><?¦>3<?©><?©><?©><?¦>4<?©><?©><?©><?¦>5<?©><?©><?©><?¦>6<?©><?©> <?©><?¦>7<?©><?©><?©><?¦>8<?©><?©><?©><?¦>9<?©><?©><?©><?¦>10<?©><?©><?©><?¦>11

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<? 9><?©><?×15><?ú><?ù><?÷><?×30><?©><? û><?Cp04><?¥> <?Ý>

<? 5><?¨><?¦> <?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue> <?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ><?ue> <?DLH200002N> <?Ý><?þ><?þ><?ue><?DLH200002N> <?Ý><?þ><?þ> <?½>

<? 8><?ú><?ú><?ù><? 8><?©><?©><?©><?©> <?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe> <?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦> <?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe> <?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦><?DLV200002N> <?Ý><?oe><?©><?©><?©><?¦> <?DLV200002N> <?½>

<?ý><?ý><?ue>Population <?î><?²>(Mio)<?±> <?¾>

<?þ><?þ>(thousands) <?¾><?þ><?©> <?©><? ©><?²><?«8> <?½><? 3>

<?DlA0900><?DlC0303><?ý><?ue><?Ð8> <?©><?©>Regions<?«0>Population <?©> <?©>Regions<?«0>Population <?©><?©>Regions<?«0>Population

<?©><?©><? ©><?²><?«8> <?½>

<?ý> 1. Melilla 55,00 10. Murcia 1 004,70 19. Cast.-L. 2 603,00

2. Ceuta 65,00 11. Extremadura 1 068,30 20. Galicia 2 844,90

3. Guyana 100,00 12. Asturias 1 122,10 21. Ireland 3 640,60

4. Corsica 245,70 13. Abruzzo 1 252,10 22. Valencia 3 738,60

5. Molise 333,80 14. Canaries 1 454,60 23. Apulia 4 015,70

6. Martinique 335,00 15. Northern Ireland 1 566,80 24. Sicily 5 098,20

7. Guadeloupe 337,00 16. Sardinia 1 641,00 25. Campania 5 060,80

8. Reunion 570,00 17. Cast.-M. 1 679,50 26. Andalusia 6 770,30

9. Basilicata 619,50 18. Calabria 2 135,40 27. Greece 9 934,80

28. Portugal 10 207,90

<?÷><?²><?©><?©><? ©><?«8> <?½><?AE2><? 8> <?©><? |> <?½> <?©> <? |> <?½><?ae><?Â"END OF GRAPHIC>

Graph 2 - Per capita Community aid and per capita GDP in the Objective 1 regions

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>START OF GRAPHIC>

<?þ><?þ><?þ><?þ><?þ><?Ð8><?±> <?Dmt0600><?Cmt><?DlB2600><?ClB> <?½>Per capita Community aid <?í><?²>(1 000 ECU)<?±>

<?þ><? 3><?÷> 1,1 <?½><?þ><?ý>1 <?½><?þ><?ý>0,9 <?½><?þ><?ý>0,8 <?½><?þ><?ý>0,7 <?½><?þ><?ý>0,6 <?½><?þ><?ý>0,5 <?½><?þ><?ý>0,4 <?½><?þ><?ý>0,3 <?½><?þ><?ý>0,2 <?½><?þ><?ý>0,1 <?½><?÷><? 8><?þ><?¨><?¦><?©><?©> 30<?Di0608><?Ci> <?Ý>50<?Di0608><?Ci> <?Ý>70<?Di0608><?Ci> <?Ý>90

<?AE2><? 3><?¨><?¦><?©><? |> <?Ý> <?«8> <?½><?ae><? 9>

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<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù> <?oe><?oe><?©><?©><?©><?©><?©><?¨><? ue><? ÛA01406C> 5

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?oe> <?oe><?©><?©><?©><?©><?©><?©><?©><?¨><? ÛA01406C> 6

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù><?©> <?©><?©><?©><?©><?©><?©><?©><?¨><? ÛA01406C> 7

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<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ù><?×09><?©><?¨><?¦> <? û><? ÛA01406C> 9

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù><?×10><?©><? ÛA01406C> 10

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<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ú><?ú><?×11><?©><?¨><?¦><? ÛA01406C> 14

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<? 9><?¨><?¦><?©><?ú><?oe><?×12><?©><?¨><?¦><? ÛA01406C> 16

<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ù><?×14><?©><?¨><? ÛA01406E> <?í>17

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<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?×15><?©><? ÛA01406C> 19

<? 9><?¨><?¦> <?©><?ú><?ú><?ú><?oe><?oe><?×15><?©><?¦><? ÛA01406E> <?í>20

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú> <?oe><?oe><?×15><?©><? ue><? ÛA01406C> 21

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?oe><?oe><?×15><?©><?¨><?¦> <? ÛA01406C> 22

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?ú><?oe><?oe><?×16><?©><? ue> <? ÛA01406C> 23

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ù><?×16><?©><?¨><?¦><? ÛA01406C> 24

<? 9> <?¨><?¦><?©><?ú><?ú><?ú><?ú><?ú><?ú><?oe><?×16><?©><?¨><? ue><? ÛA01406C> 25

<? 9><?¨><?¦><?©><?ú> <?ú><?ú><?ú><?ú><?ú><?ú><?ù><?oe><?×17><?©><? ue><? ÛA01406C> 26

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú> <?ù><?oe><?×17><?©><? ue><? ÛA01406C> 27

<? 9><?¨><?¦><?©><?ú><?ú><?ú><?ú><?ù><?×19><?©><? ÛA01406C> 28

<? 3><?¨><?¦><?¨><?¦><?¦><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý> <?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?ý><?DLH200002N> <?Ý> <?Ý><?þ><?ý><?DLH200002N> <?Ý> <?Ý><?þ><?ý><?DLH200002N> <?Ý><?þ><?þ> <?½>

<? 8><?oe><?oe><?¨><?¦><?©><?Di0104><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý> <?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý> <?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý><?oe><?Di0304><?Ci> <?Ý><?DLV200002N> <?Ý> <?½>

<?Ð8><?¨><?¦><?þ><?þ><?ý>Per capita GDP in 1985 (EUR 12 = 100) (<?ó> 1<?ò>)

<?½><?þ><?²><?«8> <?½><? 3>

<?©><?º> 1. Ceuta<?×14><?©><?º>15. Ireland

<?»> 2. Melilla<?»> 16. Canaries

<?»> 3. Guyana<?»>17. Sicily

<?»> 4. Reunion<?»>18. Cast.-L.

<?»> 5. Guadeloupe<?»>19. Valencia

<?»> 6. Extramadura<?»>20. Campania

<?»> 7. Martinique<?»>21. Corsica

<?»> 8. Portugal<?»>22. Apulia

<?»> 9. Andalusia<?»>23. Basilicata

<?»>10. Greece<?»>24. Sardinia

<?»>11. Cast.-M.<?»>25. Northern Ireland

<?»>12. Murcia<?»>26. Molise

<?»>13. Calabria<?»> 27. Asturias

<?»>14. Galicia<?»>28. Abruzzo

<?÷><?²><?«8> <?½><? 8><?AE2><? 3><?×14><?©><? |> <?½> <?ae>

<?½><?þ><?þ><?þ><?Ð7><?±>--------- <?í>(<?ó>1<?ò>) <?º>The data used for this graph were extracted from the 26th edition of the <?²>Basic statistics of the Community<?±> published in 1989 (Regional per-capita gross domestic production corrected by standard purchasing power).

<?

mt><?Cl0><?Â"END OF GRAPHIC>

7.22. However, although the results fell below expectations, the Commission has laid the foundations for future cooperation between the various decision-making levels which should be taken further in the implementation of operational measures and when the time comes to make adjustments to the CSFs in order to extract maximum benefit from the concentration of effort to reduce development discrepancies.

Coordination

7.23. Partnership can only be fully effective if it is accompanied by coordination of the various Community and national policies, whether these are macro- or micro-economic, general or specific. The aim of coordination is to combine the use of the instruments in such a way that they make the optimum contribution to achieving the objectives. At the very least, it requires a wide-ranging exchange of information between the managing departments, which should lead to harmonization of procedures and criteria so as to increase the impact of the various measures and thus result in integration. In this respect, coordination is of prime importance if the additional resources deployed by the Community to achieve regional development are to produce a multiplier effect on the growth of the regions.

7.24. The regulations provide that the regional programmes should take account of the other Community and national policies, and that the CSFs should co-ordinate the various financial instruments for structural purposes.

7.25. Generally speaking, the RDPs presented by the Member States are a juxtaposition of sectoral proposals, with no real coordination or integration of the operations envisaged in them. More often than not, they may be considered to be no more than applications for category aid, with no great desire to make the fullest use of possible synergies between the planned measures. This is particularly noticeable in the case of agricultural measures, which more often than not are conceived independently of other measures.

7.26. The Commission has made an effort to improve coordination during the preparation and discussion of the CSFs. To this end, it has introduced new procedures which, while they have not always produced the expected results, will make it possible to intensify coordination and make it more thorough.

7.27. Thus, it has attempted to locate the CSFs within the context of the macroeconomic policies of the countries concerned, particularly those for which Community aid carries significant weight. The overall economic context is in fact an important element when assessing the impact of structural measures, particularly in terms of additionality. This initiative has had little effect, inasmuch as the CSFs tend to take over the Member States' assumptions.

7.28. The coordination Regulation allows the coexistence of different objectives for a single region. This does not make for optimum coordination. Thus, in the Objective 1 regions, the European Social Fund (ESF) can intervene autonomously under Objectives 3 and 4, and EAGGF-Guidance under Objective 5a. This phenomenon is far from negligible, since the proportion of ESF aid which is allocated to Objectives 3 and 4 in the Objective 1 regions represents more than 50% of the aid from this Fund in the majority of the Objective 1 regions, and in certain cases can rise to over 75%. There is no coordination between certain ERDF programmes provided for in the CSFs, such as those for training equipment, and the ESF, even though the benefits would seem to be obvious. An examination of the OPs decided for Objective 1 in which the ERDF and the ESF operate simultaneously reveals scant synergies between the two Funds.

7.29. Nearly three-quarters of the expenditure provided

by the EAGGF Guidance Section in the Objective 1 regions for the period 1989-93 will be effected on measures decided before the reform.

7.30. Thus, the CSFs for Objective 1 only provide for five Integrated Operational Plans (IOPs), which are the type of assistance which entail the greatest degree of integration. Another sign of the Commission's difficulties in ensuring coordination between Funds is to be found in the time lags for the adoption of the sections relating to the various Funds participating in IOPs when, in certain cases, these are only another reworking of proposals for integrated development operations presented in the context of the previous ERDF Regulation. In practice, moreover, it is often difficult on the basis of the regulations to determine whether programmes are integrated or not. As an examination of decisions taken in 1990 shows, the Commission uses the terms IOP or Multi-fund Operational Plan (MOP) indiscriminately to describe the same programme even though there are differences in the nature and degree of the coordination in these programmes.

7.31. The Commission also takes the view in certain cases that the existence of a single monitoring committee for the Funds concerned is an adequate administrative structure at national, regional and local level for the purpose of ensuring the integrated implementation of a programme. The Commission's past experience has demonstrated the difficulties involved in integrated operations. This therefore raises the question of whether the monitoring committees are in a position to carry such difficult and delicate measures to a conclusion in view of the technical and administrative constraints to which they are subject and which limit their decision-making powers and their management capacity.

7.32. In practice, coordination between Funds is more a matter of an exchange of information than real cooperation, much less integration. In spite of the advances already achieved and under way in terms of the harmonization of the Funds, therefore, coordination between the structural Funds seems to be more a matter of presentation and procedural formalities than actual reality.

7.33. Although some limited success has been achieved, the coordination with the other Community policies is the area that reveals the most serious shortcomings. Thus, during the process of negotiating the CSFs, the Commission was able to push through its objectives as regards research and development and ensure that greater efforts were made in this area. It also included clauses in the CSFs concerning compliance with the Community guidelines for important sectoral policies, such as the industrial and markets policies, the environment, transport, agricultural policy or policy on behalf of disadvantaged groups.

7.34. These clauses are more a matter of information than real coordination, however. Thus, the CSFs hardly reflect either the volume or the location of the projects which are included in the Community's medium-term programme for transport infrastructures and implemented by various specific decisions

.

7.35. Thus, the transport infrastructures programme assigns major priority to the improvement of the Belfast-Dublin rail link. Yet neither the CSF for Ireland nor the one for Northern Ireland provide for any measures in this connection, mainly because of the problems of security on this line. In Spain, the national transport policy gives priority to the Madrid-Seville rail link, whereas the only project specifically mentioned by the CSF concerns the improvement of the railway network in the Community of Valencia. In the case of Sicily, only the Messina-Palermo road is cited in the CSF, while the Community priorities are distinctly more ambitious. Moreover, as the Court has already stressed, in its previous report, there are persistent inconsistencies between the financing terms offered by the ERDF Regulation and those of the specific measures for transport infrastructures.

7.36. Coordination with the Community loan instruments, particularly with the European Investment Bank (EIB), is also laid down in the regulations. At the RDP stage, the Member States hardly took any account of the possibilities of financing by Community loans.

7.37. The Commission has attempted to correct this situation, but the estimates of loans available from the EIB and the European Coal and Steel Community (ECSC) in the CSFs seem to fall far short of a straightforward continuation of the trends observed in the past, except in the case of Greece. Of course, the EIB's range of activity may not coincide exactly with the priority lines contained in the CSFs. Nevertheless, the partial, imprecise description of the EIB's operations in the Objective 1 regions cannot fail to reduce the effectiveness expected of the coordination between the Bank and the structural Funds. The roots of this situation are to be found partly in the project-based approach adopted by the EIB and the ECSC, which is difficult to harmonize with the programme-based approach recommended by the reform.

7.38. In order to minimize these disadvantages, the Commission has entered into agreements with the EIB in order to avoid excessive Community financing, particularly in the case of public service infrastructures of a commercial nature, and also to involve the bank as closely as possible in its decision-making and monitoring procedures. It has also drawn up guidelines for the ECSC, in order to improve the integration of its loans in the programming of measures. Rather than real coordination, however, this is more a matter of measures aimed at preventing excessive Community financial cover for certain operations.

7.39. At the level of the OPs, the coordination rules jointly decided by the Commission and the EIB are not always observed. Thus, they provide that Community financing in the form of subsidies or loans may not, in principle, represent more than 75% of the total cost of operations. This indicative ceiling is rarely observed. The Italian multiregional 'Telecommunications` programme, for example, will be 94% financed from Community resources, although this is a sector that generates substantial revenue. For Spain as a whole, the rate of Community loan and subsidy cover for financing hydraulic infrastructures averages 90%. For the 'railway` measures, the rate is 80%. In Greece, the 'railway` measures are being financed at a rate of 79%. In other cases, the loan offers mentioned in the CSFs are not taken up in the OP financing programmes ('Water`, 'Energy` and 'Industrial Areas` multiregional OPs in Italy).

7.40. Generally speaking, the Commission should encourage coordination at every level at which the reform is to be implemented so as to optimize any possible synergies between the instruments it deploys. Thus, one specialized department of the Commission has expressed surprise at the inadequate extent to which the measures which it manages are taken into account in the CSFs and yet, when consulted on a proposed OP in the area which concerns it, it offered no opinion.

7.41. The Commission should also offer constant encouragement to the Member States to improve the co-ordination of their administrations among themselves and with the Community guidelines in order to give it more substance. In Italy, for example, it emerged that the regional authorities were very poorly informed on the content and, a fortiori, the implementation of the multiregional measures, even though they represent nearly 50% of the expenditure planned for Objective 1 and the greater part of the planned operations can be localized.

7.42. The CSFs represent a major attempt by the Commission to achieve a complete, global view of its structural measures. It is important to ensure that they are not reduced to a simple, more or less exhaustive financial framework. The main obstacle in this respect is an approach to structural policy as a juxtaposition of sectoral policies. Therefore, when it comes to make the half-way assessment of the CSFs which it has itself laid down, the Commission ought to make every effort to make coordination in the CSFs, and the measures which follow on from them, more specific.

Programming

7.43. The reform has made the programme-based approach the rule in the Community's structural measures. This change is intended to allow the Commission to concentrate more on the results to be obtained by the measures in which it plays a part. In actual fact, the programme-based approach does not make Community assistance subject to the execution of specific projects, but allows flexibility in their management so as to take better account of the development of the economic and social context and thus guarantee the coordination of the means deployed and the achievement of the objectives pursued. It must be noted that the Funds have very different histories in this respect: this approach was already being applied by the ERDF and the EAGGF-Guidance before the reform; in contrast, it is a novelty in the case of the ESF, which continued to apply the earlier regulations in 1989. As for the EIB and the ECSC, the nature of the loan activities they are involved in and their dependency on the markets make precise programming of their financing activities difficult. Neither did the deadlines imposed by the regulations make the Commission's and the Member States' work any easier, even though they do not account for all the shortcomings observed.

Regional development programmes

7.44. The first stage of programming consists of the drawing-up by the Member States of RDPs which are supposed in particular to describe the lines chosen for regional development and the measures to be applied to this end. Furthermore, they should state the priorities chosen and the measures for which Community aid is being requested, plus the forms of assistance and amounts involved.

7.45. The Member States have adopted different approaches to the task of drawing up their RDPs. As a general rule, as authorized by the regulation, these include substantial multiregional aspects which, as already pointed out, do not always allow the effective application of partnership terms.

7.46. In certain cases, such as France, Italy or Portugal, the RDPs derive from programmes which have already been decided. For this reason, since the nature and volume of the measures proposed for Community financing have already been decided, it is hard to see how the Community action has any impact on the stepping-up of the Member States' regional development effort, since, in the end, it is only their financing conditions which have changed.

7.47. The RDPs should clearly highlight, on the one hand, the Member States' own commitments against the objectives which they expect to achieve, independently of any Community aid and, on the other, the additional efforts envisaged in the light of the possibilities of assistance from the Community instruments. The individual and combined contributions of the various measures to attaining the objectives should also be analysed in the RDPs. Such a presentation would allow optimum exploitation of these programmes and would be a fundamental factor in the quality of planning at the CSF stage and during the operational measures.

7.48. While, generally, the socio-economic analysis carried out in the RDPs may be considered to be satisfactory, the same cannot be said for the other aspects. The objectives are rarely specified and it is often difficult to see to what extent the proposed lines of development contribute to their attainment. Such shortcomings obviously only allow a very summary and general assessment of the effectiveness of the planned measures and do not allow priorities to be chosen.

7.49. Very few Member States present quantified objectives. In the few cases where such objectives exist, it is hard to check their validity against the proposed development strategies. Thus, the RDP for Ireland has set the target of creating 35 000 jobs each year, or 175 000 for the duration of the programme: 100 000 of these jobs are to be provided by the industrial sector and 25 000 by the tourism sector. That leaves 50 000 jobs to be created on which the RDP remains silent, beyond mentioning the possibility of creating 4 400 in the fisheries area, which is a risky proposal given the situation of this sector. A more thorough analysis of the problems is called for, especially as the attainment of the objective, which takes no account of the possible shedding of jobs, would not cover the unemployment recorded in 1988 alone, nor would it allow even the natural increase in the workforce, estimated at 25 000 units per annum, to be absorbed.

7.50. The priorities often remain unclear and only in rare cases, such as the RDP for Martinique, are they explicitly stated.

7.51. Other than the general provisions contained in the regulations, the Commission did not adequately inform the Member States on the principles and methods which it wished to see applied for drawing up the RDPs. They therefore tend to amount to no more than global aid applications aimed at obtaining the maximum Community contribution and do not necessarily correspond to precise commitments on the part of the Member States. This marks a regression from the previous provisions, which provided for a common scheme

, backed by a recommendation from the Commission

, as well as information on development budgets, broken down into regional terms, and on the execution of the regional development programmes

.

7.52. In fact, the RDPs have more often than not been drawn up as a formal response to the requirements of the regulations and hardly permit any assessment of the impact of Community measures, particularly as regards their additionality. Moreover, even though the CSFs draw on the RDPs, the regulations do not provide for any repercussions on the CSFs from amendments made to the RDPs.

Community support frameworks

7.53. The CSFs are drawn up by the Commission on the basis of the RDPs and approved by it after the Member States have agreed their contents. They are required to define the objectives, priorities, means and forms of assistance and specify the Commission's methods of managing and assessing their realization.

7.54. There is still considerable room for progress on these various aspects. The regional development objectives set out in the CSFs are couched in general terms which do not allow any clear relationship to be established between the means deployed and the results expected. The priorities are not clearly stated.

7.55. While, overall, the resources of the structural Funds and of their national counterparts are clearly indicated in the CSFs, the shortcomings in coordination have sometimes impeded a full view of the Community effort: it seems that the possibilities of loans from the EIB and the EEC have been underestimated and other measures, such as the specific measures in support of transport infrastructures, seem to have been overlooked.

7.56. The regulations also state that the CSFs should take Community initiatives into account, but this provision is still not being complied with. This is partly to be attributed to the time needed to prepare them.

7.57. In more technical terms, the presentation of the CSFs leaves something to be desired and lacks transparency. The financial tables, for example, often mix data at current prices and constant prices, which is contrary to the fundamental rules of economic statistics. Certain data for Greece are missing. Furthermore, the available information hardly allows important parameters for assessment of the CSFs to be analysed, particularly as regards the impact on growth and employment in the disadvantaged regions.

7.58. It is difficult to judge on the basis of the CSFs the financial weight of continuing measures which pre-date the reform. However, greater transparency in this area would allow a better assessment of the room for new initiative afforded by the doubling of the Funds. An analysis of past experience would have been useful in order to anticipate the problems of implementing new measures and possibly to improve the effectiveness of the earlier measures by adapting them to the principles of the reform.

7.59. The programming of the aid is absolutely inadequate: the only calendars available are drawn up at too global a level to allow effective monitoring of the CSFs and of the measures which derive from them.

7.60. The effort made on behalf of productive activities is hard, if not impossible, to measure, even though this is one of the Commission's major guidelines. Summary estimates do not show progress in relation to the previous situation, which was itself very far short of the objective of allocating 30% of the aid to the productive sector which was planned and then abandoned by the ERDF. Thus, less than 15% of the aid for Spain is going to industry and less than 20% in Italy.

7.61. The reform provides that, in principle, the total cost of an operational programme in which the ERDF is involved should reach 100 Mio ECU for the Objective 1 regions. However, various OPs in Spain, Greece, Portugal and the United Kingdom cost considerably less than this sum and, given the number of measures they include, there is no small risk of dispersion of efforts similar to what has been observed in the past.

7.62. The regulations provide that every CSF should include an outline of the forms of assistance to be implemented which, especially for the OPs, is to include the specific objectives and the main types of measure planned. Most usually the CSFs go no further than a brief comment on the forms of assistance to be implemented and sometimes this is vague and imprecise, as in the case of the CSF for Spain. As for a description of the specific objectives and main measures of the OPs, when it is given, it is often insufficient.

7.63. It is sometimes hard to establish the link between the strategy set out in the CSFs and the priorities chosen. The CSF for Molise, in accordance with the RDP, makes the improvement of the road network a priority, in order to open up the region. Yet the only measure planned in this respect consists of building country roads, which play no part in opening up the region, and it has already attracted a comment from the Court

.

Operational programmes

7.64. The forms of assistance should give some operational content to the priorities set out in the CSFs. In the overwhelming majority of cases, the form of assistance chosen is the OP, which often reproduces the shortcomings already cited as regards partnership and co-ordination.

7.65. Often, objectives and priorities are not clearly defined. In Northern Ireland, the 'Transport` OP describes its objectives in general terms and the explanations given on the projects, some of which will not be operational at the end of the OP, do not allow any clear conclusions to be reached on their respective priorities, their effects in terms of traffic increase or, by extension, on economic growth. Furthermore, investment in the transport system in Northern Ireland can only have any effect on the opening up of this region through coordination with the efforts made in the adjacent regions. Yet the OP makes no mention of this aspect.

7.66. In many cases, the grounds stated for projects and the information regarding them contained in the OPs are unsatisfactory. In Greece, one OP for exploiting thermal resources on the island of Ikaria forecast a disproportionate number of jobs in relation to the island's population. The same OP provides for major extensions to the industrial areas of Heraklion, Patras and Tripoli whereas, as the Court already noted in previous controls, these are little used and, in the case of Heraklion, insufficiently equipped.

7.67. Lastly, it must be observed that the first OPs decided by the Commission in late 1989 refer to provisions which still had to be drafted, particularly those concerning the use of the ECU and the recovery of undue payments. This situation shows how unprepared the Commission is for the specific procedures for implementing the regulations, even where long standing problems are concerned. For example, the problem of recovering unwarranted payments is inherent in any financing granted to third parties and the Commission acquired experience of the problems posed by the use of the ecu when the Community interest programmes provided by Regulation (EEC) N° 1787/84 were implemented.

7.68. In general terms, the Commission, in conjunction with the Member States, should improve the content of programming at every level, paying particular attention to making objectives and priorities specific and to the relation between the results to be obtained and the means to be deployed to that end.

Monitoring, control and assessment

7.69. If it is to be effective, the programming of structural measures must be accompanied by monitoring and assessment so that the execution and the results can be appraised against physical and financial indicators. The latter should highlight the progress of the measures and any problems in their implementation, thus allowing a check as to whether the objectives pursued are being achieved. The monitoring should allow some flexibility in programming so that it can be adjusted to any new circumstances that may arise. Concurrently, a control mechanism should be instituted to check the compliance and regularity of measures which are financed by the Community. It must be pointed out that the regulations do not require either monitoring or assessment for the RDPs, which reduces their scope and does not make it easy to pick out priorities.

7.70. At the level of the CSFs, the aim of monitoring should be to coordinate all the Community and national operations and propose any adjustments to the CSFs. This activity should be carried out by a monitoring committee on which the Commission, the Member State and the EIB are represented as partners and which has considerable powers to amend the CSFs. This monitoring activity should be completed by the drafting of annual reports by the Member States. A monitoring system for the OPs follows the same principles.

7.71. It must be observed that, as of the end of 1990, the Commission had still not submitted the specific reports on the activities of the structural Funds which are laid down in the context of the reform, and by the co-ordination Regulation in particular.

7.72. Two observations may be made on this monitoring structure which requires participation and a considerable effort from the Commission. In the first place, its effectiveness depends on the capacity of the monitoring committees actually to influence the behaviour of the administrations concerned, in order to avoid any deflection of Community assistance from its proper targets.

7.73. Secondly, the quality of the work of the monitoring committees is highly dependent on the quality of the information which is communicated to them. In the regulations, the CSFs and the OPs, the Commission has taken steps to specify the nature of the information which it wishes to receive. It should ensure that these conditions are strictly applied, particularly those concerning the production of progress reports.

7.74. Difficulties and delays are coming to light in the appointment and operation of some monitoring committees, although their role in the starting-up stage is essential for ensuring the optimum implementation of the assistance subsequently. While in certain countries, such as Portugal, the monitoring committee has already been able to meet on several occasions, it was more than a year after the approval of the CSFs before the monitoring committees for Spain, France and Italy met for the first time.

7.75. An examination of the documents on the monitoring committees' activities revealed considerable omissions. As far as partnership is concerned, in Ireland there is no regional representation on the monitoring committees for the CSF and such important OPs as those for industry and tourism. The same holds for the committees to monitor multiregional OPs in Italy.

7.76. The effort that goes into coordination at the level of the monitoring committees is still inadequate. In certain cases, managing departments play very little, if any, part in these committees' activities. Thus, as far as the involvement of Community bodies is concerned, the EIB has only been on the monitoring committees for the CSFs concerning Italy and Portugal. Yet its participation should be considered indispensable, in view of the delicate problems posed by the combination of subsidies and loans and the failings observed in this area at the programming stage. The problem of the execution and the coordination of Objectives 3 and 4 with the other objectives in the Objective 1 regions is practically never raised.

7.77. The documents and reports to be produced by the monitoring committees, when they exist, do not always provide information on the financial and physical progress of the measures, and even less information on their impact at the level of the CSFs or the OPs. Thus, the first meetings were largely concerned with questions of procedure, and it is a fact that, one year after the approval of the CSFs and the first OPs, the monitoring committees have only estimates and no hard figures on how they are advancing.

7.78. Member States' compliance with the provisions of the CSFs in terms of the appointment of the monitoring bodies and the description of the monitoring systems is less than adequate, even though the OPs are required to provide a full description of the control and financial management mechanisms to be implemented. It is regrettable that the Commission did not make the practical procedures of the principles of management and checking laid down in the regulations more specific, particularly in the form of a common control system included in the CSFs or the OPs. Since no thought was given to the application of the regulations beforehand, there is a serious risk that different solutions will be adopted by the Community or national departments concerned and that these will be less than satisfactory in the end. Including a detailed control plan at the CSF stage would have helped the national administrations, which are often ill informed in this regard, better to meet the requirements of the controls carried out or required by the Community authorities: it would have been all the more useful since the make-up of the monitoring committees has left little room for the national and Community control authorities.

7.79. Assessment seeks to appraise the expected results or actual achievements of a measure more than the execution or conformity of the measure. If it is to have any real meaning, assessment has also to be carried out ex ante so as to allow for comparison with the results which emerge in the course of, or on completion of, the measures.

7.80. For the purposes of the regulations, assessment should take place at three levels: in terms of the economic and social cohesion of the Community, at the CSF level and lastly at the operational measures level.

7.81. In theory, the principles of and procedures for assessment should be defined by the CSFs. The first observation to be made is that it will be hard, if not impossible, to assess the results obtained by the CSFs. There are no precise objectives set out in the CSFs to serve as a reference by which to evaluate any progress made. Moreover, the directions on ex-ante assessment contained in the CSFs are more concerned with problems of conformity and administrative and economic feasibility than with an assessment which would determine the results expected as a function of the resources deployed.

7.82. Where the assessments to be carried out subsequently are concerned, the CSFs contain only general considerations, giving no precise indication of what lines should be followed. To date, the Commission has not been able to adopt a method for assessing the CSFs. In fact, a substantial part of the assessment work was assigned to external consultants and the Commission did not receive the final results of the studies until after the CSFs had been adopted. It is also hard to see to what extent their often very critical assessments were taken into account in the CSFs.

7.83. At the level of the OPs, the Commission has tried to make its intentions more specific, particularly by drawing up lists of indicators which are likely to help in the assessment. For the OPs which had already been adopted, however, the ex-ante assessments have not been carried out systematically. Such a situation would certainly make the assessment of the results more difficult and, in the absence of predefined objectives, would reduce the significance of the ex-post assessments, on which practically everything remains to be done, since the OPs usually contain only general methodological information on this subject.

7.84. In this respect, the hitherto low level of utilization of the appropriations reserved in the CSF for technical assistance is to be regretted, because these could usefully have helped the administrations in charge to improve the content, the monitoring and the assessment of the measures and could also have made the programming more effective.

CONCLUSION

7.85. The regulations on the reform of the Funds may be considered to constitute a step forward inasmuch as they have irreversibly established fundamental principles for the effectiveness of Community measures. However, it is important that these advances should take the form of a correct implementation of the regulations, failing which the intentions behind the Community legislation will be rendered devoid of meaning. In this respect, our appraisal of the first two years of the reform points to certain successes and reveals failings which the Commission ought to make its best efforts to reduce as quickly as possible.

7.86. The first principle of the reform is the concentration of aid on the poorest regions. Progress has been made in concentrating the resources of the Funds in the Objective 1 regions. However, it is to be regretted that the Commission has not taken sufficient account of the specific situations of the regions in allocating its aid.

7.87. A second principle is that of partnership between the various levels of decision-making involved in devising and implementing structural policy. This is the area in which the greatest difficulties arise because it involves the greatest innovation of the reform, which affects deep- rooted patterns of behaviour. In spite of the Commission's efforts, the regional and local authorities, and of course other important agents of local development such as both sides of industry, are at present still insufficiently involved at the various levels of the structural measures. The Commission ought to continue to ensure that this partnership is thoroughly established at every level, and its effectiveness thus guaranteed.

7.88. The third principle, the natural consequence of the previous one, is that of coordination between the various Community and national instruments and policies. Coordination between the structural Funds should be taken beyond its current stage of development, which tends to reduce it to a consultation procedure, so as to achieve real integration. More particularly, the Commission should ensure that the resources of the ERDF, the ESF and the EAGGF-Guidance, are coordinated in the Objective 1 regions so as to guarantee that the Community measures achieve the maximum effectiveness. Particular attention should be paid to coordination with the loan instruments, especially the EIB, so as to bring market forces to bear in the regional development effort. Coordination cannot be left solely to the Community. On the contrary, for as long as Community policy is drawn up on the basis of proposals from the Member States, without effective coordination at national level, coordination at Community level can only be an illusion.

7.89. The fourth principle is extending the programme-based approach to every Community structural measure. In theory, this should allow the Commission to concentrate its efforts on the definition of objectives and the selection of priorities for the realization of the Community's goals while leaving the national administrations a large degree of autonomy in the actual implementation of the measures to which it lends its support. Unfortunately, all too often the objectives and priorities remain vague, the links between the ends pursued too unspecific and the timetables ill defined. To avoid the effort which goes into programming being reduced to a presentational expedient, the Commission should take particular care to define the objectives and priorities and grade them precisely, failing which the Community's efforts will be vitiated by an absence of management disguised as flexible management.

7.90. Programming is futile unless it is accompanied by a fifth principle, which is effective monitoring and assessment by the Commission. The principle of subsidiarity, which allows the physical management of the measures supported by the Commission to be delegated to the Member States, should not result in the Commission's abandoning its responsibilities for their correct execution and their effectiveness. Therefore, while respecting the latitude left to the managers to ensure the flexibility of any large-scale multiannual measure, the Commission should strengthen the monitoring, control and assessment of the measures and implement them strictly. There are numerous gaps in this area and assessment, in particular, has still not been adequately developed. The Commission should be sure to make the provisions of its regulations as workable and as effective as possible.

7.91. The success of the reform and, in the longer term, the success of the Community's structural policy depend on the application of all of these essential principles and their elaboration. The very short deadlines imposed by the regulations have not allowed the Commission to implement the principles of the reform fully. There is still room for progress in numerous areas as fundamental as additionality (see paragraphs 6.35 to 6.42 of this report). The difficulties and problems encountered in the past show that giving substance to the spirit of the reform is a long and exacting task, which calls for perseverance and close attention from the Commission and the Member States if the mistakes of the past are not to be repeated.

7.92. In this respect, it is important that the Commission should ensure maximum transparency in terms of information on the progress of the measures decided in the context of the reform, particularly as regards the financial information relating to their implementation. The conditions of management by instalment and their inherent flexibility, which was further augmented at the end of 1990, actually mask the difficulties encountered on the ground, as the Court has already explained in its previous annual report (see paragraphs 7.58-7.60).

7.93. The Court hopes that the Commission will be able to make the changes which are needed when it comes to assess the structural policies, a task which, in its first report on the implementation of the reform, it announced it would undertake by the end of 1991, particularly since this general assessment coincides with the specific in-depth assessment provided for in the Community support frameworks. Moreover, this seems to be the only conceivable approach in view of the precise provisions of the very regulations governing the reform, which call for a report on the 'extent to which the Community has become cohesive and the impact of the implementation of Community policies` before the completion of the internal market, i.e. before the end of 1992.

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CHAPTER 8 (\*) Social field

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(\*) The Commission's replies are on page 267.

INTRODUCTION

8.1. The chapter on the social field sets out, firstly, observations on the winding-up of the former European Social Fund (paragraphs 8.4-8.34) and, secondly, observations relating to Community measures within the framework of the Erasmus programme (paragraphs 8.35 -8.78).

IMPLEMENTATION OF THE BUDGET

8.2. Table 8.1 shows how many appropriations were available under Title 6 as well as the use that was made of them.

8.3. The main observations concerning the legality, regularity and procedures for the accounting presentation of the financial operations carried out in 1990 are contained in Chapter 1.

WINDING-UP OF THE FUND WHICH ENTERED INTO FORCE ON 23 OCTOBER 1983

Introduction

8.4. Whilst the financial year 1990 saw the first ESF financial operations carried out in accordance with Council Regulation (EEC) N° 4255/88 of 19 December 1988

laying down provisions for implementing Council Regulations (EEC) Nos 2052/88 of 24 June 1988

and 4253/88 of 19 December 1988

, it was also marked by the financial operations governed by Council Decision 83/516/EEC of 17 October 1983

, amended by Council Decision 85/568/EEC of 20 December 1985

. Thus, during this financial year, the former Fund gave rise to 964,1 Mio ECU of payments of final amounts and 100,7 Mio ECU of established entitlements. Commitments for the new Fund amounted to 3 545,8 Mio ECU, while payments of first and second advances were 1 705,4 Mio ECU and 557,3 Mio ECU respectively.

8.5. Table 8.2 reveals that the winding-up of the former Fund was far from finished at 31 December 1990.

8.6. The former Fund will not be truly wound up until the problem of outstanding claims has been resolved, without which it risks being hampered by a serious burden of the past. In view of its continuing importance, the Court has once again examined this problem

. Moreover, the discharge authorities urged 'the Commission to reduce the period required to recover advances wrongly paid by the Social Fund`

.

8.7. The audit carried out by the Court was based on an updating and an analysis of Community and national procedures. It was also based on a sample of files and on audit visits to Belgium, Spain, Italy and Portugal. With regard to the problem of outstanding claims, the audit made it possible to establish how far the Court's main observations made in the past have been taken into account or are still relevant, more especially as regards the Commission measures set out in its memorandum of 25 May 1988

.

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Outstanding commitments

8.8. Column (e) of Table 8.2 shows that at 31 December 1990 the volume of outstanding commitments for the former Fund, i.e. 1 282,6 Mio ECU, was higher than the corresponding amounts at 31 December of the four previous years. Column (c) of the same table shows, moreover, the absence in 1990 of decommitments in respect of commitments for the previous financial years. The financial year 1990 has therefore not proved to be effective as regards the settlement of the former Fund's commitments.

8.9. The Court specifically examined the oldest outstanding commitments. For the financial years 1985, 1986 and 1987

, they still amounted to 129 Mio ECU at 31 December 1990. The majority of files examined showed late decommitments.

8.10. In Belgium, Spain and Italy the Court noted quite a considerable number of applications for final payment in respect of which the Commission had still not made known its decision and had not requested any additional information or in respect of which the decision was late - possibly even after additional information had been obtained - without any apparent reason for these delays.

8.11. In Portugal, several bodies in receipt of ESF aid were audited by the Portuguese authorities following presumed irregularities (for example, sums received for professional training being used for the day-to-day running of undertakings and invoices from other undertakings within the same group being charged to ESF files). The Dafse

, the national body responsible for managing ESF operations, thus blocked the payment of final amounts for the 1986 and 1987 files of these bodies in order to check them, even though they had already been formally approved by the Dafse and the Commission. For the financial year 1987, this involved 140 files out of a total of about 1 200. The Commission also suspended payments in respect of these files.

8.12. The Court's on-the-spot audit revealed that many of the blocked Portuguese files brought together measures initiated by different promoters. Even the sections of the files that were in order remained blocked as were those which had received a favourable report from the national audit authorities. The Commission has only gradually set up an information procedure enabling it to monitor the audits carried out by the Portuguese authorities.

Recovery of unwarranted payments

8.13. The volume of claims in respect of advances paid under the former Fund (1984-89) has continued to increase and will, in the end, amount to over 800 Mio ECU

. The amount of the claims is not inconsiderable, both in absolute value terms and in comparison with the payments of advances amounting to 8 131 Mio ECU. The same applies to the commitments concerned, which total over 1 600 Mio ECU, compared with the total of 16 438 Mio ECU of commitments entered into for approved measures under the former Fund.

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8.14. Since 1986 a characteristic feature of outstanding claims has been their volume, as illustrated by Table 8.3. Settlement is slow and usually fails to respect the due date fixed. Table 8.4 shows the settlement in 1989 and 1990 of claims outstanding as at 31 December 1988. The Court would like to point out that 56% of advances paid in error, not recovered as at 31 December 1988 - and relating to 405 claims in respect of authorizations for 1986 and previous financial years - had still not been repaid over four years after the advance had been disbursed.

8.15. Above all since 1988, there has been a problem of disputed claims. Although the problem of contested files has not been fully clarified (see paragraph 8.23), it may be estimated that around 100 claims established before 31 December 1989, amounting to approximately 28 Mio ECU and still outstanding as at 31 December 1990, were contested by the Member States or by the bodies concerned by the claims. Belgium, Italy and the Netherlands are involved for 7%, 91,4% and 1,4% respectively of the estimated overall amount. A considerable part of the claims still contested covers the financial years 1984 and 1985. There are also 10 organizations that are either bankrupt or in liquidation which are involved in 25 claims worth 1,3 Mio ECU and four organizations which have given rise to judicial proceedings and which are involved in seven claims worth 0,4 Mio ECU. Whether these claims will ever be recovered is a moot point.

Weaknesses in the establishment of entitlements

8.16. The procedures for appraising and checking the applications for final payment have not substantially changed

, do not differentiate between those applications showing excess payments in the form of advances and others, and do not give priority to the establishment of entitlements. They can therefore do nothing to prevent the fact that many entitlements are never established. The audit revealed that a considerable number of debit notes had still not been issued at the time of the audit or had been issued very late, even for the applications for final payment which showed a debit balance and often without there being any explanation for these delays.

8.17. Many recovery orders could have been issued earlier had the Commission been notified without delay of any change in the circumstances on which the decision approving assistance was based, in accordance with Article 5 of Commission Decision 83/673/EEC of 22 December 1983

. It has in fact been found that the Community regulations and decisions still do not provide

for sanctions for failure to comply with the abovementioned obligation. It appears, moreover, that the Commission has not sent the Member States the statement, referred to in its reply to the Court's annual report for the financial year 1988, to remind them of this obligation

. The Court again notes that the Commission has only sporadically been notified without delay of these changes and that the national procedures for monitoring measures and notifying the ESF of the differences between the measures implemented and the forecasts have hardly changed.

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8.18. The Commission recommended in its statement of 25 May 1988

that the authorizing officer should 'issue a recovery order as soon as possible in cases where the recipient recognizes, in his application for final payment, that the advance or a part thereof should be repaid`. It was noted, however, that few recovery orders had been drawn up automatically on the basis of the applications for final debt payments.

8.19. In 1990 the ESF drew up only a few recovery orders making possible the immediate regularization in the accounts of unrequested repayments

, even though this measure had also been recommended by the Commission

. Without this regularization, the revenue accounts do not, however, correspond to reality; it thus appears that for the ESF the balance of the suspense account amounted to 39 Mio ECU at 31 December 1990, i.e. 78% of the total balance of the suspense account whereas it had been 4 Mio ECU at 31 December 1987, 24 Mio ECU at 31 December 1988 and 6 Mio ECU at 31 December 1989.

Observations on the settlement of claims

8.20. The practical measures recommended by the Commission in its statement of 25 May 1988, which aimed at rapid settlement of outstanding claims, have still not been applied systematically or satisfactorily.

8.21. For example, the Commission has not formally reminded the national authorities of the 'recipients` obligation to repay advances obtained in error, without waiting to be asked to do so by the Commission'

. Consequently, the volume of unrequested repayments is still low and some Member States - such as France and Spain - refuse to make this type of repayment or to encourage it.

8.22. As for the task of 'giving priority to attempts to recover major claims`

, the accounting officer continues to send general reminders to certain Member States, but on a rather unsystematic basis. As regards the service of notice on individual debtors and the invoking of the secondary liability of the Member States concerned, the accounting officer relies entirely on the authorizing officer and the Commission's Legal Service. He cannot act until the ESF has decided, for each case in turn, on the confirmation, amendment or cancellation of the recovery order and has notified the Member State of its decision. Outstanding claims, whether disputed or otherwise, are thus discussed solely by the ESF's geographical departments and the national authorities. The accounting officer takes no part in these discussions, is unaware of the reasons for the dispute and does not have access to the files concerned. In practice, as at 31 December 1990, the accounting officer had served notice on only a small number of debtors and had invoked the Member States' secondary liability for only five litigious debtors.

8.23. In 1990 the Fund's departments have mainly devoted themselves to clarifying the problem of outstanding claims and, in so doing, have identified a large number of disputed or litigious claims, as well as those which have not been repaid and have no special features but none the less constitute the majority of outstanding claims. The audits carried out by the Court have shown that by 31 December 1990 the Fund's departments had not managed to determine the precise amount of contested claims: some so-called 'disputed` claims were not in fact disputed, others had been repaid or concerned files for which the final amount had been paid, and, finally, some claims which were really disputed had not been recorded as such.

8.24. The Court noted that where claims were disputed by the Member States it was very often only on formal grounds, but resulted, nevertheless, in repayments being blocked.

8.25. Little attempt has been made to settle the disputed files. Prior to 31 December 1990 they had not given rise to appeals to the secondary liability of the Member States concerned or to the service of notice on debtors

. Only some reminders had been sent to the Member States concerned. It would have been advisable for the Commission to inform Belgium officially of its position as regards this Member State's Community obligations

, which would have undoubtedly helped save time in settling disputed and litigious claims. Moreover, it should be pointed out that there is a risk that the claims may become barred by lapse of time if national legislation is applied in the absence of precise Community rules. The Court again noted

that the Commission has not officially stipulated the way in which the secondary liability applies, although the Legal Service clarified this matter at internal level at DG XIX's request.

8.26. Pursuant to Article 29(1) of the Financial Regulation

the accounting officer 'shall exercise all due diligence to ensure that the resources ... are recovered at the due dates indicated in the recovery orders`. The authorizing departments and the accounting officer did not, however, give priority treatment to claims that were undisputed but which failed to observe the due date and which in some Member States (such as Italy, Belgium and Spain) represented significant sums. The setting-off procedure should have been applied more extensively.

8.27. The accounting officer was instructed, 'in conjunction with DG V`, to make 'more frequent use of the procedure of recovering claims by setting them off against debts`

. It was further noted that the accounting officer depends entirely on the ESF's initiative: the setting-off operations are proposed by its geographical departments. Moreover, in practice, in the absence of any formal rule, the ESF has chosen to use the setting-off procedure solely for the sums to be paid as final payments, contrary to the Court of Auditors' observation that the setting-off procedure should also concern advances

. As at 31 December 1990 the setting-off procedures carried out still concerned only 12 debtors for 58 unwarranted payments relating mainly to the period 1984-87, spread over Belgium, Italy and the Netherlands for an amount of 5,4 Mio ECU which represents barely 2% of total outstanding claims as at 1 January 1990 plus entitlements established in 1990.

8.28. The Court considers, however, that the setting-off procedure could have been applied more extensively and earlier. In Belgium and Spain (although for Spain no setting-off procedure had been envisaged by the Commission prior to 31 December 1990), for example, internal setting-off procedures had been carried out by the authorities responsible for factual and accounting certification. Final amounts paid by the Commission were blocked in accounts opened by national authorities pending an internal agreement on setting-off and then followed by a repayment to the Commission after an administrative procedure which was in some cases lengthy (Spain). Setting-off procedures could have been considered earlier by the Commission for major national professional training bodies such as INEM (Spain) and Forem (Belgium), enabling the quick recovery of relatively high amounts.

8.29. The accounting officer did not apply interest on late payment prior to the entry into force of Commission Regulation (EEC) N° 1865/90 of 2 July 1990

. Since then, in some cases, he has notified the Member States concerned of a new deadline for old unrecovered claims and has informed them that interest on late payment will be charged if they fail to pay by the set deadline. These notifications have not, however, been followed up. The Court notes here that Commission Regulation (EEC) N° 1865/90 applies only to claims referred to in Article 24(3) of Regulation (EEC) N° 4253/88 and regrets that there is still no legal basis for the application of interest on late payment for claims relating to the former Fund's authorizations.

Re-use of revenue

8.30. In 1989 an amount of 73 Mio ECU was committed for files on which an authorization decision had already been taken on 22 March 1989. According to the ESF, the files chosen were priority, had to be characterized by optimum implementation and be capable of absorbing this additional instalment. An examination of a sample of files revealed that the majority reached a level of implementation which barely made it possible to absorb the initial authorization. In 1990 an amount of 45,6 Mio ECU in revenue to be re-used was allocated - at the same time as 91 Mio ECU of appropriations made available again - to the 1990 instalment of 49 operational programmes.

Conclusions

8.31. Certain recommendations made by the Court in its annual report on the financial year 1988 (paragraph 9.86) for speeding up the identification of unwarranted payments and the settlement of claims have not been followed by the Commission. These recommendations were that the Commission should introduce procedures for issuing and sending out debit notes more quickly, systematically apply the setting-off procedure, propose charging interest on late payments in order to reduce the period for which unduly paid sums are held and provide a more precise definition of the idea of guaranteeing the successful completion of operations and that of secondary liability, which is closely related. Thus the ESF's financial management has not proved to be effective in this field.

8.32. In order to prevent the creation of a fresh burden of the past, the Commission should ensure that:

(a)the authorizing departments monitor the files until they are really closed, i.e. until the recovery of claims;

(b)there is real coordination between the Commission departments concerned (DG V, DG XIX, DG XX and the Legal Service);

(c)it makes systematic use of all the means available to resolve the problem of disputed claims and to recover undisputed claims quickly.

8.33. With regard to the Fund which entered into force on 1 January 1989

the Commission should use the lessons

learnt from past experience in order to prevent a recurrence of the weaknesses found in the winding-up of the former Fund.

8.34. More effective recovery procedures, involving quicker recovery of claims, would save the Community the unnecessary financial cost caused by the blocking of the corresponding resources in the Member States. Such a procedure would, moreover, enable new appropriations to be made available without delay and thus be better utilized.

COMMUNITY MEASURES WITHIN THE FRAMEWORK OF THE ERASMUS PROGRAMME

Introduction

8.35. The European Community Action Scheme for the Mobility of University Students (Erasmus) was implemented as from 1 July 1987 by Council Decision 87/327/EEC of 15 June 1987

. The amounts allocated for carrying out the programme totalled 153,7 Mio ECU for the years 1987 to 1990.

8.36. By its Decision 89/663/EEC of 14 December 1989

, which was applied as from 1 January 1991, the Council laid down new rules for applying the Erasmus programme for a second phase of five years. The 'amount considered necessary` for the first three years of the second phase was 192 Mio ECU.

8.37. The objectives of the Erasmus programme as defined by Article 2 of Council Decision 87/327/EEC are as follows:

(a)to achieve a significant increase

in the number of students from universities spending an integrated period of study in another Member State;

(b)to promote broad and intensive cooperation between universities in all Member States;

(c)to harness the full intellectual potential of the universities in the Community by means of increased mobility of teaching staff;

(d)to strengthen the concept of a People's Europe;

(e)to ensure the development of a pool of graduates with direct experience of intra-Community cooperation.

8.38. In order to achieve these objectives, four kinds of action were defined by Council Decision 87/327/EEC:

(a)the establishment and operation of a European university network (action 1), including study visit grants for teaching staff;

(b)the student grants scheme (action 2);

(c)measures to promote mobility through 'academic recognition` (action 3);

(d)complementary measures (action 4).

8.39. The actions as expressed during the first phase of application of the programme (1987/88-1989/90) and the corresponding Commission measures are summarized in Table 8.5.

8.40. The rules on granting the aid available under the Erasmus programme were laid down in general terms in a document drawn up by the Commission department responsible in 1987

. This basic document was slightly amended for the academic year 1989/90

.

8.41. As Table 8.5 shows, the actions of the Erasmus programme which are described by the Council Decision are grouped together by the Commission in several measures. The observations below relate in particular to three of these measures: the interuniversity cooperation programmes (ICPs), the student grants and the study visit grants for teaching staff. There are also comments on the management by Erasmus Bureau, the Commission's contractor, and on the monitoring of expenditure by the Commission's Task Force.

8.42. Given that the first phase of the programme, set up as from the academic year

1987/88, was completed in 1989/90, the Court's audit inquiries were able to deal with the measures relating to all this first phase. The checks on records and on the spot were made at the Commission and Erasmus Bureau and in four Member States: Germany, France, Greece and the United Kingdom. In connection with this, 35 ICPs were checked on the spot.

The Erasmus programme's management system

8.43. The department responsible for carrying out the Erasmus programme is the Commission's Task Force for Human Resources, Education, Training and Youth, which is a separate unit not attached to a Directorate-General. The Task Force, whose director is the deputy authorizing officer for expenditure, has laid down in this respect administrative procedures which are very diversified and in some cases complex.

8.44. Management of the programme has for the most part been entrusted to the European Cultural Foundation, a private, non-profit-making foundation under Dutch law which, acting as a subcontractor, manages the programme by means of its Erasmus Bureau located in Brussels

. Relations between the Commission and the Foundation are regulated by annual contracts for the provision of services (see paragraph 8.62). Erasmus Bureau draws up lists of potential recipients of aid under each measure. These lists are submitted for approval to the Task Force, which remains the authorizing officer for expenditure. The Task Force transfers the necessary appropriations, as a global payment, to Erasmus Bureau, which then distributes the aid. Even though the Task Force is the authorizing officer, in practice it is Erasmus Bureau that examines the final claims presented by the aid recipients and determines the expenditure. It is also this Bureau that monitors the implementation of the programme and draws up the management reports to be sent to the Commission. For each measure managed by Erasmus Bureau, there are special administrative rules drawn up by the Bureau on behalf of the Commission.

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8.45. Some expenditure is managed directly by the Commission's Task Force, namely some of the aid under the complementary measures (see Table 8.5) and some items of operating expenditure on administration and staff. Table 8.6 shows the implementation of the Erasmus programme for the period 1987-90.

Aspects of the implementation of the Erasmus programme

Inter-university cooperation programmes (ICPs)

8.46. The European university network (see Table 8.5) is composed of universities which, in the framework of the Erasmus programme, conclude agreements and organize ICPs, programmes which provide for exchanges of students and teachers with universities of other Member States and ensure full recognition of study periods thus accomplished outside the home university.

8.47. Whatever the number of universities taking part in a single ICP (the number is generally three or four universities), a single aid application has to be submitted by one of the universities, which will act as the coordinator on behalf of all the participants. Where aid is granted, it is paid to the coordinating university, which must take responsibility for managing it and for distributing it to the participating universities. The coordinating university administers the financial aid allocated for the implementation of the ICP within the framework of a contractual agreement with Erasmus Bureau. The financial aid to the universities which cooperate under an ICP is allocated for one year and may be renewed on the basis of information supplied in each new aid application.

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8.48. Through Erasmus Bureau, the Commission publishes aid application forms which are distributed every year to the interested circles. The latter must send in their aid applications by 31 January of the year in which the academic year begins. As of the academic year 1990/91, however, the deadline set has been earlier, namely 31 October of the year n P 1.

8.49. Given that the selection or priority criteria published by the Commission have not been sufficiently transparent for the selection of the ICPs, a great many aid applications are received every year (868 for the academic year 1987/88, 2 041 for 1988/89, 2 223 for 1989/90). The main difficulty encountered by the Commission and Erasmus Bureau is therefore the selection of the ICPs and the fixing of the level of the individual amounts of aid. Added to this difficulty is the fact that all the applications are based on estimates and not on actual data. Furthermore, in the absence of any precise criteria, appraisal becomes more and more difficult

. For 1989/90, of the 2 223 aid applications received, corresponding to 56 Mio ECU, the Commission accepted only 1 507 ICPs (68%), corresponding to aid worth 16 Mio ECU (29%).

8.50. When a project is accepted, Erasmus Bureau makes aid contracts, on behalf of the Commission, with the universities coordinating the ICPs. The payments by cheque, which are made out to the coordinating university, are sent direct to the coordinator (the professor), however, and not to the coordinating university which is the contractor. With this method of payment there is the risk that appropriations may be managed outside the official accounts of the universities and that they may be used for purposes other than those planned by the Erasmus programme. A safer method would be to use bank transfers, with a copy of the notification being sent to the coordinating professor.

8.51. The coordinating university is responsible for managing the grants. Some universities have divided up the grants between the partner universities, others have centralized all the payment operations. At the time of the on-the-spot checks, it was not always possible to inspect all the supporting documents at the coordinating university. For mission expenses declared, for example, some universities have not kept the travel tickets as supporting documents. In this case, there is always the risk of the travel being financed twice over, as these expenses could be declared under other measures.

8.52. In order to obtain the maximum Community aid, some universities are tempted to increase the expected number of students for the exchange and/or the number of months of study abroad. As a result, the aid granted corresponds to measures which the audit revealed consisted of fewer exchanges than planned.

8.53. For example, one ICP was allocated Community aid of 78 500 ECU. It was a cooperation project between five European universities (two of which in a peripheral country), with a view to organizing exchanges of 110 students for a total of 470 months of study. In the end, only 20 students, all from the same university, spent a total of 80 months of study in a single other university. Despite the low rate of implementation, the Community aid was paid virtually in full.

Student grants

8.54. The student grants (see Table 8.5) are managed by the National Grant Awarding Authorities (NGAA)

, with which Erasmus Bureau makes contracts every year. It is therefore these authorities that deal with the distribution of the student grants at national level. Community appropriations are divided up between the Member States according to the total number of students at universities and the total number of 18 to 25-year-olds in each Member State. The number of students taking part in the ICPs was not taken into consideration in the first phase of the programme. Table 8.7 shows that the level of grants allocated varies considerably from one Member State to another. According to Erasmus Bureau's calculations, the lowest grants are those allocated to Irish students (106 ECU/month) and the highest those for Portuguese students (367 ECU/month).

8.55. The Commission first pays the Community appropriations to Erasmus Bureau, which in turn transfers them to the respective national authorities. The latter make contracts with the universities participating in an ICP and distribute the appropriations to them. The universities then have to pay the appropriations to the students who are to receive the grants. For this purpose, the universities made grant contracts with the students and the individual transfers were usually made between Christmas and the following May. This is why most students did not receive their grants until they had already completed a considerable part of their studies abroad. Because of the excessively lengthy administrative procedures, many of the students were obliged to find advance financing for their studies. This problem has been aggravated by special difficulties which were brought to light by the on-the-spot checks:

(a)accommodation has become a major problem in all the countries visited. For Erasmus students, it is very difficult to find accommodation on the market at reasonable prices;

(b)the Erasmus grants are distributed without always taking the cost of living in the host Member State into consideration;

(c)exchange with some countries is difficult because of limited knowledge of the respective languages.

8.56. In the FR of Germany, a 'Bafoeg`

State grant system has been set up, enabling study abroad to be financed for students whose parents have low incomes. Of these students, however, many receive only part of the national grants in so far as the amount of the latter is fixed in accordance with the parents' income. These two categories of students, for which the Erasmus grant is limited to 100 DM (±50 ECU) per month, are thus in a less-favourable situation than those who, even though better off, are entitled to a far higher Erasmus grant (between 410 and 718 DM/month, i.e. between 200 and 350 ECU/month).

8.57. There are no rules governing the use to be made of the interest accruing from the investment of Erasmus programme appropriations by the national authorities. In Germany, for example, these appropriations earned interest amounting to 291 220 DM (±142 000 ECU) between 1988 and 1990. Similarly, in the United Kingdom, the interest corresponding to the academic year 1988/89 amounted to 36 500 ECU. In both countries, the respective amounts were not declared to the Commission.

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8.58. With regard to student mobility in 1988/89, the Commission report of December 1989

on the Erasmus programme relates to 15 000 students and 102 710 months. According to the national authorities' data, the rate of implementation for the same period was 10 634 students (71%) and 57 913 months of study (56%). In the FR of Germany, for example, the rate of implementation of projects inspected on the spot (on the basis of the number of students) was 78%, in France 59% and in the United Kingdom 53%.

8.59. Council Decision 89/663/EEC provides, amongst other things, for new criteria for distributing the grants as from 1990. An amount of 200 000 ECU is thus allocated to each Member State for the first phase, whilst during the second phase the remainder is distributed on the basis of a number of factors (such as the total number of students, the number of 18 to 25-year-olds in each Member State, the cost of the journey between the student's country of origin and the host country, etc.). Even though the Commission has laid down very complex methods of calculation for dividing up the appropriations, disparities in the level of grants between the Member States none the less persist.

Study visit grants for teaching staff

8.60. The objective of this measure is to enable teaching staff in higher education to carry out visits to other universities, one of the purposes being to make or extend an agreement to organize an ICP, or for short lecture visits (see Table 8.5). The total duration of a study visit may not exceed the equivalent of four weeks.

8.61. For all types of visit, the maximum aid granted is 1 500 ECU per person, an amount which usually proves to be insufficient to finance all the travel expenses. Despite this, there is considerable interest in this type of Community aid (2 377 applications in 1987/88, 3 510 in 1988/89 and 3 777 in 1989/90). The aid is granted to the recipients personally. The recipient is obliged to present a declaration of costs and a report on the subsidized visit. The fact that Erasmus Bureau does not require supporting documents to be submitted for payment of the subsidy could mean that there was a risk of duplicate financing.

Remarks concerning Erasmus Bureau

8.62. As stated in paragraph 8.44, the European Cultural Foundation (ECF), entrusted with management of the programme, provides its services, through Erasmus Bureau, on the basis of contracts for the supply of services concluded annually by the Commission (see Table 8.6). According to the terms of the contracts, Erasmus Bureau carries out the following tasks:

(a)management of subsidies under the Erasmus programme (including transfer of appropriations to the aid recipients);

(b)the organization and carrying-out of information activities;

(c)work on 'academic recognition`;

(d)continuous assessment, monitoring and general development of the programme;

(e)general administrative back-up.

8.63. Erasmus Bureau has set up and developed a large administrative structure which is external to, but dependent upon, the Commission. The current contract for the supply of services provides for the possibility of a review in the event of the number of aid applications for the ICPs exceeding 3 500 the first year or in the event of an increase of over 10% in the Bureau's financial forecasts or in the financial estimates for the measures. Furthermore, according to Article 3 of the contract, in the event of the contract being broken off by the Commission, the latter will take responsibility (without limit) for all Erasmus Bureau's legal obligations. The Court must emphasize that such a breach of contract (unless it was due to the unsatisfactory quality of the services rendered) would have serious financial consequences for the Community.

8.64. Moreover, a check made by the Commission's Financial Controller concerning the administrative expenditure between 1 May 1988 and 31 January 1989 showed that, according to the service contract, Erasmus Bureau should, at the Commission's request, have presented all the documents required to enable the Commission to recover the VAT paid in the context of carrying out the contract. However, the Commission has never followed this procedure. The Court considers that, for the first three years of the Erasmus programme, the resultant amount to be recovered was around 700 000 ECU.

8.65. The contracts for the provision of services drawn up between the Commission and Erasmus Bureau lay down that the latter must present its financial report to the Commission every year by a certain date. Table 8.8 shows the financial operations declared by Erasmus Bureau for the programme's various measures. The Court of Auditors has found that the deadlines for presenting the reports were not met.

8.66. It has been found that the accounts kept by Erasmus Bureau in respect of contracts are no more than a mere statement of banking transactions. As the accounting system does not include financial transactions on contract, it is very difficult to check the overall situation regarding the contracts against the bank accounts and to establish a comprehensive financial position.

8.67. In 1989, the Commission recovered a total of 817 071,26 ECU from Erasmus Bureau. These were appropriations from the academic year 1987/88 which had been repaid by the final recipients to the European Cultural Foundation in Amsterdam, which at that time kept the accounts of Erasmus Bureau in Brussels. The Commission recovered the amount in question by means of setting-off, i.e. by making an equivalent reduction in the appropriations corresponding to the academic year 1989/90. As of that date, Erasmus Bureau in Brussels had an overdraft because the Bureau had not received the amount from the central department in Amsterdam. Erasmus Bureau's deficit was covered by new Commission appropriations, intended for the Erasmus programme.

>TABLE>

8.68. This resulted in a temporary misuse of Community funds

and gave rise to expenditure which the Community had to bear because for the academic year 1988/89 bank charges of ±10 000 ECU, relating to the abovementioned deficit, were booked to the Community by Erasmus Bureau. The Commission also lost income arising from the interest, because the amounts used temporarily to finance the deficit were not invested. The Court considers that the amount of interest lost was some 50 000 ECU in 1990.

8.69. The Court points out that, depending on the kind of annual contracts for the provision of services, Erasmus Bureau makes payments on behalf of the Commission as an intermediate department. At the close of each financial year, the Commission should ask for a statement of the financial transactions and should incorporate these transactions into the Community accounts, according to the budgetary rules. When the checks were made, however, no sign of any such transactions was found.

Inadequacy of the auditing

8.70. The Task Force, the Commission department responsible, has not set up a satisfactory system for auditing the expenditure of the Erasmus programme. With regard to the use made of the appropriations managed by Erasmus Bureau, the Commission accepts the Bureau's statements. Erasmus Bureau's work is mainly confined to approving the final statements of costs received from the aid recipients. There are few checks on the use made of the aid by the recipients.

8.71. At national level, the grant-allocation authorities are not all subject to suitable audits. In France, for example, the national authority is subject to audit by the French 'Cour des comptes`; in Germany, the authority is audited by an external audit firm; in the United Kingdom, on the contrary, no audits are performed on this subject.

Conclusions

8.72. For managing the Erasmus programme, the Commission is for the most part assisted by the European Cultural Foundation, through its Brussels unit, Erasmus Bureau. The administrative procedures for implementing the programme have proved to be complex. The Commission, as authorizing officer for the expenditure, ought to lay down a better framework for the measures and improve its auditing of the Bureau's activities.

8.73. The financial responsibility of the coordinating university should be better defined. Moreover, in several of the universities visited, there is a tendency to overestimate the number of potential recipient students in the aid applications. The Commission should improve its monitoring of the implementation of the ICPs in order that better account can be taken of data on actual mobility when new applications for aid are being appraised.

8.74. Throughout the first phase of the Erasmus programme, the lengthiness of the administrative procedures relating to the transfers made to students was detrimental to the effectiveness of the aid measure itself. These delays put students who did not have sufficient personal funds in advance to pay for their studies in a difficult position. Moreover, the difficulty of finding reasonably priced accommodation, the cost of living abroad and language problems are further obstacles to mobility.

8.75. At the level of Erasmus Bureau, the management must be strengthened by setting up a suitable accounting system and by improving the existing system for selecting and monitoring aid recipients.

8.76. The Commission must set up a satisfactory system of auditing the Erasmus programme, all the more so since it has chosen a management system which is carried out by a subcontractor.

8.77. At Member State level, it has been found that the message and objectives of the programme have not been received in the same way. The countries which are most famous for their university education and for the internationality of their languages have benefited more from the programme than the other countries where implementation of the programme has been laborious and where there have been a number of obstacles to overcome.

8.78. Despite the fact that there was a considerable disparity between the achievements and the forecasts for the measures relating to the whole of the first phase (see paragraph 8.58), the Commission's report on the implementation of the first phase of the Erasmus programme states only the forecasts.

CHAPTER 9 (\*) European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance): The compensatory allowance granted to farmers in less-favoured areas

> TABLE POSITION>

INTRODUCTION

9.1. The main observations concerning the legality, the regularity or the procedures for the presentation in the accounts of the operations charged to the part of the budget concerning the Guidance Section of the EAGGF (EAGGF-Guidance) are set out in Chapter 1 of this report (see, more particularly, paragraphs 1.54 and 1.68).

9.2. The situation regarding commitments and payments for the financial year compared with the appropriations allocated to the original budget and the final appropriations available is summarized in Table 9.1.

9.3. Given the very limited effects of the reform of the structural Funds on expenditure chargeable to the EAGGF Guidance Section during 1990, the Court concentrated its audit activity on one 'classic` measure, the compensatory allowance, which is now part of a measure aimed at achieving Objective 5a.

THE COMPENSATORY ALLOWANCE

Legal framework and content

9.4. The compensatory allowance, which is governed by Articles 13-15 of Council Regulation (EEC) N° 797/85 of 12 March 1985

on improving the efficiency of agricultural structures, and by Articles 1-3 of Council Directive 75/268/EEC of 28 April 1975

on mountain and hill farming and farming in certain less-favoured areas, is a form of financial aid which the Member States may choose to pay once a year to farmers in certain less-favoured agricultural areas in order to correct the effects of permanent natural handicaps. Depending on the regions concerned, the EAGGF-Guidance reimburses between 25 and 65% of Member State expenditure in this field.

Financial significance

9.5. In 1990, Community expenditure on the compensatory allowance, which amounted to 441,9 Mio ECU, represented 55% of expenditure under Regulation (EEC) N° 797/85 (808,2 Mio ECU in total) and 24% of total expenditure chargeable to the EAGGF-Guidance (1 825,3 Mio ECU). The breakdown of expenditure by Member State is shown in Table 9.2.

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National provisions

9.6. The Member States enjoy considerable discretionary power in the adoption of the national provisions, which supplement and give specific form, according to the local situation, to the general criteria established by the Community legislation. The Commission, for its part, has to check that the national provisions, which it examines and approves in accordance with a specific procedure laid down in Articles 24 and 25 of Regulation (EEC) N° 797/85, conform with this legislation.

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Less-favoured areas

9.7. The less-favoured farming areas for which the compensatory allowance may be granted are set out in the lists adopted by the Council by means of specific directives. Only areas of land corresponding to one of the following categories may be included in these lists

:

(a)mountainous areas which are handicapped for reasons of altitude and climatic conditions and/or because the land is steeply sloping;

(b)areas in danger of depopulation where there is a need to conserve the countryside. These areas must exhibit all of the following characteristics: low agricultural productivity, results that are appreciably below average for the main indices of the economic aspects of agriculture, and a low or dwindling rural population;

(c)areas where there is little arable land, which are affected by specific handicaps and where farming must be continued in order to conserve the countryside and to protect the coastline or to preserve the tourist potential of the area.

Recipients of the aid

9.8. The compensatory allowance may be granted to farmers who are farming a usable agricultural area (UAA) of at least three hectares and who undertake to pursue farming activity for at least five years from the first payment of the allowance. The minimum UAA is reduced to two hectares in the case of the Italian Mezzogiorno, the French overseas departments and in Spain and Greece

, to one hectare in mainland Portugal, and to half a hectare in the Azores and Madeira

. If the farmer is in receipt of a retirement pension, expenditure on the compensatory allowance is not eligible for reimbursement by the EAGGF

. At present some 1,2 million farmers are receiving the compensatory allowance (Table 9.3 shows the breakdown by Member State).

Amount of the aid

9.9. The amount of the compensatory allowance is fixed by the Member States according to the severity of the permanent natural handicaps affecting farming activities and can be adjusted in the light of the economic situation of each farm and the farmer's income. The Regulation fixes the minimum and maximum amounts

. The minimum amount applies only in mountainous areas, where the allowance may not be less than 20,3 ECU per livestock unit (LU, defined in the Annex to the Regulation) or, where appropriate, per hectare. Subject to certain special conditions set out in the Regulation, the maximum amount is 102 ECU per LU in the case of the production of cattle, equine animals, sheep and goats, and 102 ECU per hectare of land farmed in the case of other types of production. In areas that are affected by particularly serious permanent natural handicaps, the maximum allowance that may be granted is 121,2 ECU per LU or, where appropriate, per hectare. If the recipient has converted an area of open land that is used as the basis for the calculation of the allowance into woodland this area may still be taken into account for the calculation. However, in the case of areas of land which have undergone afforestation since 18 June 1989, the farmers receive an annual premium instead of the compensatory allowance

.

Objectives of the aid

9.10. The objectives of the aid are defined in the following terms in Article 1 of Directive 75/268/EEC:

- to ensure the continuation of farming, thereby maintaining a minimum population;

- to conserve the countryside;

- to raise farm incomes.

The Court's audit

9.11. The Court has already commented previously on the compensatory allowance, in a 1980 special report on Directive 75/268/EEC and in the annual report concerning the financial year 1984. Problems relating to the extension of the less-favoured areas were considered in the annual report concerning the financial year 1985. In view of the increasing volume of Community expenditure, the high number of recipients and the increase in the surface area of less-favoured areas, in 1990 the Court examined the way in which the measure was being applied in several regions in six Member States (Germany, Spain, France, Ireland, Portugal and the United Kingdom).

9.12. The present audit looked at the Commission's role in approving national provisions, the extension of the less-favoured areas, the national administration systems and the effectiveness of the measure.

OBSERVATIONS

National provisions

9.13. Not one Member State has made use of the provision contained in Regulation (EEC) N° 797/85 which makes it possible to adjust the amount of the compensatory allowance in the light of the economic situation of the farm and the farmer's income. None the less, the national legislation of some Member States has adapted the rates of the allowance according to the specific handicaps of the various sectors into which a large less-favoured area may be subdivided. In the case of Lower Saxony, however, the Court noted that the Commission had approved a piece of national legislation which provided for the allowance to be granted at one single rate under identical conditions for the entirety of the less-favoured area, which is definitely not in harmony with the spirit of the Community legislation.

9.14. Outside mountainous areas, dairy cows can only be taken into account (up to 20 per farm) in areas where the production of dairy products accounts for a large part of farming activity

. This restriction makes it necessary to delimit, within non-mountainous less-favoured areas, those areas where dairy production constitutes a large part of farming activity. This has been done in France, by specific prefectoral orders. In Germany, on the other hand, the national legislation merely provides for the permitted number of dairy cows to be taken into account throughout the less-favoured area. The national legislation in Portugal refers to subsequent administrative provisions, which were adopted, for continental Portugal only, in April 1991. In spite of the absence of these provisions, dairy cows were taken into account for the purpose of awarding the compensatory allowance, as the Court was able to observe in the Azores.

9.15. According to Article 15, paragraph 1(a), of Regulation (EEC) N° 797/85, 'in the case of production of cattle, sheep, goats and equines, the allowance shall be calculated in relation to livestock numbers`. Using a table annexed to this Regulation, cattle, equines, sheep and goats - to the exclusion of all other animals - can be converted into livestock units. In the case of 'production other than cattle, equine, sheep and goat production`, the compensatory allowance is calculated according to the area of agricultural land. Article 15, paragraph 1(b), states that the land used to produce fodder for these animals must in that case be deducted from the calculation base. The aim is to ensure that animal production which the Community legislation has not seen fit to include amongst the eligible categories of production is not encouraged by basing the calculation of the allowance on areas of land that are used to produce fodder.

9.16. However, this is not how the legislation on the deduction of land areas used to produce livestock fodder has been carried over into the national legislation, where the view was taken that only those animals already taken into account for the purpose of calculating the livestock units should be included. Interpreting the Community legislation in this way makes it possible for the compensatory allowance to be granted for land areas used to produce livestock fodder, which does not qualify for the allowance, and, in particular, as the Court has found, for land used to grow cereals intended for intensive pig farming. Within the framework of the current common agricultural policy guidelines, the market situation, together with the need to protect the environment, are factors that militate against encouraging this type of farming. The Community's attitude is clearly expressed in the text of Regulation (EEC) N° 797/85, which imposes very strict conditions for investment aid relating to the pig production sector

and which does not include pigs in the list of types of animal production which may be considered for the compensatory allowance. It is surprising that the Commission, by approving the above interpretation, should allow the compensatory allowance to be granted to a type of farming which was not contemplated by the legislation on the allowance.

9.17. As regards land areas, the Court also found that the Baden-Wuerttemberg legislation allowed the compensatory allowance to be granted, in mountainous areas, on the basis of areas used for extensive grazing. Since these pastures are intended for cattle and sheep farming, the compensatory allowance should only be granted in terms of the number of LUs belonging to the farmer. As a result of the special method applied in this Land, the limits fixed by the Community legislation have been exceeded. For example, a farmer with 12,4 LUs and 40,12 hectares of extensive grazing used exclusively for feeding these 12,4 LUs receives an allowance calculated on the basis of the 40,12 hectares of grazing, resulting in a sum that is considerably bigger than an allowance based only on the number of LUs, as required by the Community legislation.

9.18. The local provisions in this same Land also allow deer, a species not included in the Community legislation, to be taken into account for the payment of the compensatory allowance. These provisions therefore depart from the conditions set out in the Community legislation

and should not have been allowed by the Commission.

Community reimbursements

9.19. Reimbursements of expenditure effected as above, on the basis of national provisions which in the Court's view do not comply with Community legislation, cannot be considered to be regular.

9.20. In Lower Saxony and Portugal, the gross amounts granted to recipients are subject to a deduction (0,6% in Lower Saxony and 0,5% in Portugal) intended to meet part of the administrative costs of the public financial institutions which act as paying agents for the allowance. Applications for reimbursement are based on the gross amounts, which also correspond to the appropriations allocated to the financial institutions in question from the regional or national budget for the purpose of disbursing the compensatory allowances. Regulation (EEC) N° 797/85 does not prohibit the EAGGF-Guidance from accepting statements of expenditure other than those corresponding to the net amounts received by the beneficiaries; however, in order to ensure that all the Member States are treated in the same way, and to facilitate an exact assessment of the final destination of Community reimbursements, the Commission should define, by means of rules of application, the circumstances in which such expenditure may be included in the annual applications for reimbursement.

Less-favoured areas

9.21. The total surface area of the less-favoured areas, expressed as a percentage of the usable agricultural area (UAA) of the Community, went up from 45,4% in 1985 to 53,4% in 1990, following an increase due to the accession of Spain and Portugal and to repeated extensions in other Member States. The Court had already noted a significant increase in the surface area of less-favoured areas in its annual report concerning the financial year 1985. Since then, there have been other extensions, principally concerning the FR of Germany (from 33,1 to 50,9% of UAA in 1986 and from 50,9 to 53,5% in 1989) and France (from 40 to 45,1% of UAA in 1989).

9.22. The continuous growth of the less-favoured areas raises the following points:

(a)The extensions essentially concern non-mountainous areas, whose handicaps are determined using statistical criteria relating to national averages (productivity of the land, economic results of farms, population density, etc). The less-favoured areas can be extended by relaxing the criteria (e.g. the land productivity rating, below which a handicap situation is considered to exist, can be raised) or by modifying the classification of 'normal` regions each time new statistical data are made available which show that the development of these regions is negative in comparison with the national average;

(b)Classification as a less-favoured area makes it possible to qualify for the compensatory allowance and has other advantages too, such as a more favourable rate of aid for farming investment, exemption from the dairy co-responsibility levy and a higher ewe premium. It is therefore understandable that there should be growing pressure from both farming and political circles in the Member States for a continuous extension of the less-favoured areas, aimed more at increasing the number of farmers able to benefit from certain financial advantages than at compensating for specific handicaps. In this context, the aim of offering German farmers some compensation for the loss of revenue they have suffered as a result of the revaluation of the Deutschmark's green rate has certainly played a role in the very considerable extension of the less-favoured areas in Germany, which was decided in 1986 and criticized by the European Parliament

. More generally, the more recent requests to extend the less-favoured areas have also been motivated, according to the information which the Court has obtained from the national authorities, by the financial consequences of current adjustments in market policy (quotas, agricultural stabilizers, etc) on farmers' incomes;

(c)The continuous extension of the less-favoured areas is inevitably bringing with it a gradual reduction in the differences between these areas and 'normal` areas, as far as general averages are concerned. At the level of individual farms, on the other hand, very large less-favoured areas cover very varied individual situations and the degree of handicap in relation to farms in the 'normal` area can vary considerably. Moreover, the development of very large areas cannot be homogenous: the possibility cannot be ruled out that a regular assessment of the actual level of handicap in all the less-favoured areas of the Community will lead to the discovery that, in certain parts of these areas, there are no longer any handicaps left.

Administration of the measure

The national administration systems

9.23. The main problems in administering the compensatory allowance are due to the very large number of recipients and to the fact that this aid is not paid out in response to a specific act, such as making an investment, but is based on the mere fact of a situation declared to exist by the applicant (occupation as a farmer, possession of a certain number of animals, availability of a certain agricultural area). It is only possible to verify the declarations made by the applicants for aid properly if the national administration is sufficiently well organized and uses effective methods of control.

9.24. The most essential task in the administration of the compensatory allowance is the monitoring of the applicants' declarations. With effect from 1990, Regulation (EEC) N° 797/85

requires Member States to 'make provision for effective monitoring`, including 'on-the-spot controls to verify that the information contained in the application corresponds to the true situation`. However, the actual verification procedures used are at present determined solely by the Member States: the result is significant variations in the quality of the checks carried out. For other types of aid (the suckler cow premium, the ewe premium, the special premium for bulls and the set-aside premium) which, from an administrative point of view, are similar to the compensatory allowance, the Commission legislation stipulates specific monitoring procedures. There is no reason why the compensatory allowance should be treated any differently. In view of the growing number of types of Community aid that are granted according to the number of livestock units held or surface area of land farmed, it would, moreover, be a good idea if the Commission were to propose the adoption of a harmonized and rationalized Community verification system, to include, in particular, the drawing-up by the Member States of a register of agricultural holdings. This register should provide information on factors such as the number of livestock units held and the surface area of land farmed, both of which serve as a base for the calculation of several types of aid.

9.25. Among the Member States visited, the Court thus uncovered two different systems, as described below:

(a)In Ireland and in the United Kingdom, each farm is subject to regular, systematic on-the-spot controls in order to check the accuracy of the factors that determine the amount of aid granted, i.e. in these two countries, the number of livestock units declared. This type of control, which in Ireland is carried out annually for sheep and every two years for cattle and in the United Kingdom is carried out every two years for cattle and every four years for sheep, involves a body of field officers who are geographically spread out over the whole less-favoured area;

(b)In the other Member States the Court visited the system is based on the administration's trust in the farmers' declarations, even though a very limited number of applicants, for the most part selected at random, may be subjected to a more or less in-depth, on-the-spot check. The administration systems of the Member States differ from each other in the level at which the checks on the applications for aid are carried out. These checks may be limited to an assessment of the plausibility of the applications or may include cross-checking using supporting documents. Even in those cases where a documentary check is carried out it never covers the determining factor for calculation of the amount to be paid, i.e. the number of LUs or the number of hectares farmed and the types of crop grown.

9.26. The administrations of those Member States which do not carry out exhaustive controls consider that the cost of setting up such a system would be exorbitant in relation to the financial benefits (recoveries and rectifications) that it would bring. There is undoubtedly some truth in this claim, but it should also be remembered that whenever in-depth controls are carried out, a number of irregularities and inaccuracies are detected. There are, in addition, cases such as the one discovered by the Court in the Portuguese province of Entre Douro e Minho, where the differences between the statistical estimates and the data on payment of allowances should lead to more detailed controls.

The verification procedures available and the use made of them

Supporting documents

9.27. The simplest way of checking the accuracy of applications for aid is to ask the applicants to provide supporting documents where they exist, such as for the amount of land available to a farmer. During its on-the-spot audits in Ireland, England, Wales and Castile-la-Mancha, for example, the Court found that applicants are systematically required to present or supply documents which prove their right to farm the land (title deeds, written farm tenancy contracts, certificates based on official registers, etc). In the other regions visited no supporting documents were requested, for reasons that were given time and again in connection with aid based on the amount of land: the land registers are not up to date, land is traditionally rented by word-of-mouth agreement, etc. Such tolerance is not however justified, since all the Member States have legal means of proving title, ownership or other rights in respect of land. Proof could therefore also be furnished for the purposes of receiving aid.

Cross-checks

9.28. The data contained in the application for the compensatory allowance can be compared with those from other sources. In order to carry out cross-checks, it is absolutely essential that the compensatory allowance application form should itself be fairly detailed. In this respect, it has been found that, except in the case of Ireland, where such an identification system for cattle does exist, the numbers for each animal have to be quoted in the application for the suckler cow premium or for the special premium for bulls, but not in the application for the compensatory allowance. As for land areas, the information required varies, according to the region, from a mere total of hectares eligible for aid to a detailed list of the types of crop and the location of the land. The land registry coordinates for each piece of land are never asked for, however.

9.29. Of the Member States visited which do not carry out exhaustive on-the-spot controls, none have set up a comprehensive administrative control system using existing sources of information available within the national administration to check all the information essential to the application for the allowance. The extent of the control carried out often depends on the organization and initiative of the local departments responsible for granting the allowance. In France, for example, in the four departments visited, the applicants' declarations are checked using computer lists from the mutual agricultural association. These show whether the farmer is working or retired and the amount of land for which he subscribes. In three French departments out of the four visited, moreover, there is also a cross-check with any applications for other types of aid for livestock. In Germany, on the other hand, the local departments visited do not carry out systematic checks of applications for aid by cross-checking with other sources of information.

9.30. The administrative cost of systematic manual cross-checking is high because of the large number of farmers in receipt of the compensatory allowance. Using computers, on the other hand, cuts the costs considerably, whilst at the same time increasing the rapidity and effectiveness of the control. In this connection, the German and French authorities have objected that national legal standards concerning data protection prevent databases from being used for any purpose other than that for which the data were originally acquired. No such problem exists in the other Member States: in Portugal, a comparison is made by computer between the list of recipients of the compensatory allowance and the list of retired persons receiving State pensions, whilst in Ireland the departments granting the compensatory allowance are allowed to consult the computer files of veterinary surgeons.

On-the-spot controls

9.31. A wide variety of approaches to on-the-spot controls was also observed. For the year under consideration, with the exception of Ireland and the United Kingdom, the number of controls carried out varies, according to the local departments visited, between 0 and a maximum of 5% of applications. Furthermore, even the number of controls carried out is not, in itself, an indication of efficiency: the results of controls also depend on the experience and qualifications of the controllers. It has been found that controls are sometimes entrusted to persons who lack any specific technical qualification, or even to persons employed on a temporary basis solely for the purpose of carrying out these controls.

Effectiveness of the measure

Continuation of farming activities and maintenance of the population

9.32. In most of the regions visited, the number of farms continues to diminish, in the less-favoured areas just as much as in the 'normal` areas, but without there being any reduction in the total surface area of land farmed, since land which is abandoned by one farmer is usually taken over by those who are left. The compensatory allowance system is based on the principle that, if the continuation of farming activity in the less-favoured areas is to be encouraged, the farmers must be induced to stay by means of a compensatory allowance paid in return for a commitment to continue farming for at least five years. It is by no means certain that such a method actually contributes to the continuation of farming activity. The best guarantee of the continuation of farming is in fact profitability: in the least-favoured areas, i.e. in mountainous areas and areas of low altitude with similar pedological features, the farmer has to make up for the reduced productivity of the land by farming larger areas of land. In a large part of the less-favoured areas, particularly in Ireland, Portugal and certain parts of Spain, increasing the size of the farms, as part of the development of agricultural structures, is a constant necessity. To attempt to thwart this development by encouraging the short-term survival of unviable farms, at the expense of building up economically more sound farms, does not constitute a contribution to the long-term continuation of farming activity.

9.33. Some less-favoured areas in Wales and the West of Ireland show similar natural production conditions (notably non-arable land used as permanent grassland) and type of agriculture (extensive sheep and cattle farming). The situation in the United Kingdom differs from that in Ireland in that the farming population is remarkably stable, incomes are higher than the Community average, and the average surface area of a farm is 10 times that in Ireland. This latter factor plays a much more important role in the stability of agricultural structures in the less-favoured areas of Britain than does the payment of the compensatory allowance, because it allows economically viable forms of farming to be carried out.

9.34. Most of the Member States visited excluded farmers who were in receipt of a retirement pension from the benefit of the compensatory allowance; in some Member States, however, farmers of retirement age may be found who do not receive such a pension. The compensatory allowance is not in such cases an adequate substitute for an old-age pension, and at the same time is not a very effective means of maintaining viable farming activity. Moreover, whilst the compensatory allowance encourages farmers of retirement age to continue their farming activity, instead of releasing the land for younger farmers, it constitutes a hindrance to the establishment of young farmers, something which is recommended by the same Regulation (EEC) N° 797/85.

9.35. Less-favoured areas which are not mountainous and not pedologically comparable to mountain areas include, as a result of repeated extensions, more and more arable land, as well as land where the type of farming activity carried out is the same as that in 'normal` areas. In these areas, where, ex hypothesi, the continuation of farming activity is under threat, the financial encouragement to continue this activity, represented by the compensatory allowance, is accompanied by a far more powerful encouragement to suspend production, represented by set-aside aid. Even taking into account the fact that set-aside lands are not all eligible for the compensatory allowance and that set-aside status ought to be reversible, one may ask whether, in areas where the continuation of farming activity is in question, it is sensible and appropriate to offer, as results from the maximum limits set by the Community legislation, a form of aid that is six times greater for the suspension of the activity than for its continuation.

9.36. The extension of less-favoured areas has also resulted in the inclusion of areas with a less pronounced agricultural character, classed as areas threatened with depopulation. Thus, some less-favoured areas include areas with a varied economy where the maintenance of the population depends on the existence of a balanced network of economic activities, rather than on the continuation of farming activity. In these areas, where farms are often managed on a part-time basis, the continuation of farming activity is linked more to the possibility for the farmer or his family of obtaining income from non-agricultural sources than to the payment of a compensatory allowance. This extension of the less-favoured areas has also resulted in the appearance, particularly in Germany, of areas which are close to the towns but which are still classed as being 'in danger of depopulation`. In these areas there is absolutely no question of maintaining a minimum population by means of the continuation of farming activity; here, as the Court has found, the very size of the non-farming population puts special obstacles in the way of farmers.

Conservation of the countryside

9.37. It should be noted that, up to 1990, there was no mention of conserving the countryside in any of the conditions for granting the compensatory allowance. With effect from 1991, the Member States are free to adjust the amount of compensatory allowance in line with the use of farming methods that are compatible with the need to protect the environment and to conserve the countryside. It is therefore left to the discretion of the Member States to decide whether or not to contribute to the achievement of this important Community objective.

9.38. On-the-spot inspections have shown that the compensatory allowance does contribute to the pursuit of a form of farming activity that is favourable to the environment in the original less-favoured areas, which are characterized by non-arable permanent grasslands intended for extensive farming. However, in one part of these areas, a natural extension of the forest would be the only consequence of abandoning farming activity. This would not have a negative effect on the countryside and would be in keeping with the Community objective of encouraging the afforestation of agricultural areas (see paragraph 9.9 above). In the enlarged less-favoured areas, on the other hand, the compensatory allowance, as noted in paragraph 9.16 above, may benefit those types of agriculture or intensive farming which are identical with those in the 'normal` areas and which carry the same environmental risks.

Improvement of farmers' incomes

9.39. As the compensatory allowance is paid according to the surface area of the land farmed and the number of head of livestock owned, and as the Member States do not adjust the amount according to farmers' incomes (see paragraph 9.13 above), those farmers who already have better production resources, and thus a higher income, benefit more from it. Such a linear improvement of incomes is in contradiction with the objective of maintaining the farming population, because it is obvious that the temptation or the need to give up farming is inversely proportional to the income made from it.

9.40. In less-favoured areas affected by serious natural handicaps, where extensive breeding for meat production predominates, the improvement in income due to the compensatory allowance is analogous with that due to other types of aid that are mainly granted to this type of farming, i.e. the suckler cow premium. In this case, there are no substantial differences between the 'structural` aid and aid provided by the common market organizations; the basis for the calculation (number of livestock), the administration and the economic effects of these types of aid are in effect much the same. In the rest of the less-favoured areas, the compensatory allowance is also additional to aid provided within the framework of the common market organizations but, the crops and types of production being just as varied here as in the 'normal` areas, it is more difficult to compare the improvement in income due to the compensatory allowance with that due to other subsidies.

9.41. The reduction of differences between 'normal` and less-favoured areas, following the extension of the latter, leads one to wonder whether an improvement in income is necessary for all the less-favoured areas. In Germany, in 1987/88, the average income of farms receiving the compensatory allowance exceeded that for farms in 'normal` areas

. Moreover, the recent measures to provide income support, adopted at both Community and national level

, are intended for farmers with particular income problems, irrespective of whether they are in a less-favoured area or a 'normal` area. Other similar measures are forecast within the framework of a reorientation of the CAP: generally applicable income support, adjusted according to the needs of the farmers, could improve incomes as well, if not better, than the present compensatory allowance.

CONCLUSIONS

9.42. In the Court's opinion, the Commission should play a much more active role in the administration and monitoring of the compensatory allowance. The Commission should:

(a)require the Member States, when examining and approving national provisions, to abide strictly, in both form and content, by the conditions laid down in the Community legislation;

(b)propose and set up a system for reviewing the situation of less-favoured areas which may lead with equal probability to those areas being either reduced or extended;

(c)establish, so as to avoid excessively large distortions in the quality of the controls carried out by the Member States, minimum control standards to be respected when checking applications for aid or carrying out on-the-spot controls, similar to the standards provided for in respect of other types of aid (the suckler cow premium, the ewe premium and the set-aside premium);

(d)propose, bearing in mind, on the one hand, the number of different types of Community aid granted on the basis of the number of livestock units or the amount of land farmed, and, on the other, the need to ensure the follow-up and control of this aid, that the Member States set up standardized computer records on farms, livestock and land areas;

(e)give some thought to the usefulness of the compensatory allowance and draw up proposals for the necessary amendments. In fact, in view of the extension of the less-favoured areas, the compensatory allowance is, in many cases, no longer a form of compensation for specific handicaps and has become a general aid for the countryside, an addition to the other subsidies provided for under the CAP.

9.43. Finally, the Court notes that the reform of the structural Funds does not affect the validity of the above comments. In fact, as the Court has already pointed out in its annual report concerning the financial year 1989, the reform of the structural Funds has not resulted in any significant modification to the measures provided for in Regulation (EEC) N° 797/85 which, as measures to achieve Objective 5a, continue to be applied in the same way.

CHAPTER 10 (\*) Loans, borrowings and interest-rate subsidies

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INTRODUCTION

10.1. Under the Treaties and other legislative provisions, the Commission of the European Communities is empowered to contract borrowings in order to finance New Community Instrument (NCI) loans

, European Atomic Energy Community (Euratom) loans

and balance of payments (BP) loans

. The Commission enjoys similar powers in the case of European Coal and Steel Community (ECSC) loans and borrowings carried out in accordance with the terms of the ECSC Treaty. The Court of Auditors produces a separate report

on the ECSC activities. The borrowing and lending operations concerning the countries of Central and Eastern Europe are dealt with in Chapter 12.

10.2. As part of the annual budget procedure, the budgetary authority includes in the general budget the amount of interest subsidies relating to NCI loans and loans made by the European Investment Bank (EIB) from its own resources for reconstruction measures in the regions of Greece and Italy affected by earthquakes. The budgetary authority also decides whether to include the budgetary guarantee for borrowing transactions in the form of token entries.

10.3. The Community loans and borrowings are set out in the balance sheets of the European Economic Community and the ECSC respectively.

10.4. The Commission has a direct legal obligation to service and repay borrowings contracted by it on behalf of the Community. For this purpose the following Articles, which represent a budgetary guarantee for the above-mentioned Community borrowing mechanisms, are included in the 1990 general budget as a precaution against any possible default by beneficiaries of the primary loans:

(a)Article 830: EEC guarantee for Community loans raised for balance of payments support;

(b)Article 831: EEC guarantee for Euratom loans raised;

(c)Article 832: EEC guarantee for loans raised to promote investment in the Community;

(d)Article 833: EEC guarantee for Community borrowings and for EIB loans to finance large-scale infrastructure projects of Community interest.

In addition, Article 969 of the budget includes an EEC guarantee for loans granted by the EIB to third countries.

10.5. EEC guarantees are currently identified in the general budget as 'p.m.` entries. The Court expects the Commission to assess the level of risk attached to its loan operations and to provide full disclosure of this information.

SUMMARY OF FINANCIAL INFORMATION

10.6. Tables 10.1 and 10.2 provide a summary of the various borrowing and lending mechanisms and of the changes in lending and borrowing operations during the financial year 1990.

OBSERVATIONS ON THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS FOR THE NCI AND EURATOM MECHANISMS

10.7. The Court examined the NCI and Euratom balance sheets as at 31 December 1990 and the revenue and expenditure accounts relating to the two mechanisms for the financial year 1990. The management of the accounting for that year did not call for any specific observations.

FOLLOW-UP REVIEW OF ACTIONS TAKEN BY THE COMMISSION TO IMPROVE THE CONTROL OF ITS BORROWING AND LENDING OPERATIONS

10.8. In both its annual report concerning the financial year 1988

and its special report N° 3/90 on ECSC, Euratom and NCI loans and borrowings

, the Court put forward recommendations for improving the management of Community borrowing and lending operations. Table 10.3 provides a summary of the Court's recommendations.

10.9. The Court undertook a preliminary review to establish whether the Commission had taken any measures, during the course of 1990, concerning this matter. The Court found that, in response to the recommendations set out in Table 10.3 items (a) to (h), the Commission had introduced various measures aimed at improving both the control and efficiency of its borrowing and lending operations. The Court concludes that the measures introduced so far by the Commission have, in principle, provided an improved procedural basis upon which to conduct these operations. However, the Court encourages the Commission to continue to review and update its working methods in order to respond efficiently to the increasingly complex techniques employed by the financial markets.

10.10. At the same time, the preliminary review also revealed that further progress was to be made by the Commission to implement the Court's recommendations concerning the administration of interest subsidies in respect of ECSC loan operations, as summarized in Table 10.3, items (i) to (m).

10.11. The Court notes that the Commission intends to introduce a computer system, during 1991, for the collection of data from financial intermediaries which will then be analysed to assess the use made of interest subsidies and their impact on employment objectives. The Court also notes that the Commission is in the process of delegating more administrative responsibility to the intermediaries, in order to reduce the volume of reports currently received from intermediaries and final beneficiaries.

10.12. Whilst the Court welcomes these proposed measures it encourages the Commission to make further progress to implement its recommendations aimed at simplifying the administration of interest subsidies concerning ECSC loan operations. The Court concludes, therefore, that, as a matter of urgency, the Commission should follow up the recommendations made on this subject by the Court in its special report (paragraph 7.2 (c) (i) to (iv).

AUDIT OF NCI LOANS IN THE MEMBER STATES

10.13. As the Court noted in its annual report concerning the financial year 1988

, an agreement relating to procedures for the Court's on-the-spot audit of NCI lending operations was concluded between the Commission, the EIB and the Court in June 1989.

10.14. In broad terms the agreement provides for the Court to inform the Commission of operations for which it considers an on-the-spot audit to be necessary and to examine EIB documents forwarded to it by the Commission. The Commission then requests the EIB to invite its Audit Committee to carry out these on-the-spot audits and to associate the Court in the audits.

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10.15. In order to make a start with the practical application of the agreement, the EIB provided the Court with an indicative list of borrowers, prepared on the basis of selecting those Member States in which loans, from both EIB own resources and the NCI, had been granted with interest-rate subsidies from the Community budget. The list included Ireland because of interest-rate subsidies granted under the European Monetary System (EMS) in accordance with Council Regulation (EEC) N° 1736/79 of 3 August 1979, and Italy under both the EMS and earthquake reconstruction in accordance with Council Decision 81/19/EEC of 20 January 1981. The list provided the Court with a number of operations from which to select a programme of visits, estimated by the EIB at six visits to Member States over the three-year period covered by the agreement.

10.16. During the course of 1990, this agreement was put into operation and the Court has executed two on-the-spot audits, one in Ireland and one in Italy, with the EIB's Audit Committee. The two projects were selected because they involved large NCI loans, 3% EMS interest-rate subsidies on both the NCI and EIB loans and had been the subject of recent evaluation by the EIB. In each project visited the Court verified from the documentation made available that the procedures for controlling the initiation, appraisal and authorization of the loan operation had been applied. The information provided by the EIB's monitoring and evaluation procedures together with the on-the-spot audits enabled the Court to review the progress of the two individual projects examined and to assess whether in each case the NCI loans and EMS interest-rate subsidies had been used for the purposes stated in the relevant Council decisions. The results of the Court's review of these two projects are set out in the following paragraphs.

Observations arising from on-the-spot audits

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10.17. The first project reviewed involved the construction of a coal-fired power station in Ireland. The project aimed to provide new generating capacity to meet the forecast growth in electricity demand, create some 250 permanent jobs and contribute to the diversification of energy supplies. The project involved NCI loans of 94,56 Mio ECU, and interest-rate subsidies from the Communities totalling some 43 Mio ECU on six loans (two NCI and four EIB) over the duration of the loans. The project commenced in 1979 with site development work and was completed in 1987.

10.18. In accordance with the terms of Council Decisions 78/870/EEC of 16 October 1978 and 79/486/EEC of 14 May 1979, the Commission decided that the project was eligible for NCI loans as it would amongst other things 'guarantee less dependence on imported energy and greater security of supplies`. The consequence, however, of investing in a coal-fired power station is that at the same time as decreasing dependence on imported oil supplies, dependence on imported coal supplies was increased. Furthermore, the Court notes that the coal supplies being used at the project were imported totally from sources outside the Community (America and Colombia) as it costs less than Community coal. In the case of this project it was possible to combine the benefits of NCI loans subsidized under the EMS with cheap coal from outside the Community. The Court notes that this would not have been possible under the ECSC loan facility which aims to ensure a market for coal from Community origins.

10.19. The Commission decided that the project was also eligible for NCI loans, in accordance with the terms of Council Decision 78/870/EEC of 16 October 1978 as it took account of 'the need to combat unemployment`. The Court found that at the planning stage it was estimated that the project would create some 250 permanent jobs. In 1988, it was reported that the project employed a workforce of 370 staff thereby exceeding the target figure. This does not necessarily mean that these were all new staff, since at the same time there was a company-wide rationalization process which led to a significant overall reduction in staff.

10.20. The provision of new generating capacity was meant to meet an 8% per annum long-term growth in electricity demand forecast for the 1980s. However, over the 10-year period since 1980-81 the real growth in electricity demand increased by only 2,9% per annum. This led to the borrower having a high reserve margin for electricity generation. At the end of 1989, the borrower's total installed generating capacity of 3 932 MW exceeded the peak demand of 2 466 MW by 1 466 MW (59%). The project contributes 900 MW (23%) of the borrower's total installed generating capacity.

10.21. In 1982, when the EIB and Commission were considering loan financing for the construction of the third generating unit at the project, it was recognized that the growth in electricity demand would be much lower than originally forecast. The borrower now estimated that the level of electricity demand originally foreseen for 1987, when the third unit was due to be commissioned, would not arise until 1992 at the earliest. Economic analyses, carried out by the borrower on the basis of 1982 coal and oil prices, indicated that as long as growth in electricity demand exceeded 1% per annum it was more economical to commission the third unit as planned rather than defer it. The EIB and the Commission decided, therefore, that construction of the third unit should proceed as originally planned and that NCI loans should continue to be made available to the project.

10.22. On the basis of the information supplied by the borrower, the Court concluded that the new generating capacity thus installed, albeit economically justified from an investment costing viewpoint, would not be needed to meet the forecast growth in electricity demand until at least five years after completion of the project.

10.23. The second project reviewed aimed to construct 5370 low-cost housing units in Italy for occupation by industrial and service workers, which would contribute to the economic and industrial development of selected regions by providing an ancillary housing infrastructure. The project involved NCI loans of 59,6 Mio ECU and interest-rate subsidies from the Communities totalling some 33 Mio ECU on both the NCI and EIB loans. The beginning of the construction work was expected to be in early 1982 and its completion by the end of 1984.

10.24. In accordance with the terms of Council Decision 80/1103/EEC of 25 November 1980, the Commission decided that the project was eligible for NCI loans as it would provide housing that 'forms part of a total project of economic and industrial development presenting a regional interest`. Although the Court found that the NCI loans had been utilized for the purpose of housing construction, it was unable to substantiate the connection to 'a total project of economic and industrial development` thereby proving the eligibility criteria.

10.25. The project was also presented by the Italian authorities as an essential part of an overall programme to construct 30 000 low-cost housing units. The Court found, however, that this programme only achieved construction of some 13 000 housing units (43% realization) with the Community project contributing 5 453 housing units (83 units more than planned) to this total. This means that there was a shortfall of some 17 000 housing units (69% non-realization) by the Italian authorities on their part of the programme. In the Court's view it is doubtful that existing industrial undertakings would be encouraged to expand or that new industrial initiatives would be attracted to regions when the necessary housing infrastructure had only been partially realized.

10.26. Although the total cost of the completed project exceeded estimated costs by 12,5%, this did not result in any additional NCI loans or interest subsidies being made available by the Commission. Whilst the average cost of a housing unit (84,2 Mio LIT) based on actual project costs indicated a 10,8% increase per unit on estimated costs, the Court found some significant variations in regional costings. These variations ranged from a 22% decrease on the project average in one region to a 44% increase on the project average in another. The regional variations in the average cost of a housing unit are presented in Table 10.4.

10.27. The Court was informed that one of the main reasons for the 12,5% increase in the cost of the project was problems with the release of land by the regional authorities. These problems were resolved either by outright purchase of land areas at increased prices or by renegotiation of building rights which led to delays in construction and related increases in costs. As a matter of fact the delays in construction led to the project being extended to 1990. Table 10.5 provides details of the number of housing units constructed each year.

10.28. Another reason to explain the increased project costs concerned the numerous amendments made to the original forecast of the number of units to be constructed in each region. The Court found that these amendments had resulted in variations ranging from a 100% reduction in the number of units in one region to a 255% increase in the number of units in another. The EIB explained that this flexibility in the original forecast allowed for substitutions to be made to the project, provided that any new proposal fitted properly into the aims of the overall project.

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10.29. The Court considers that the extension in construction to 1990 may have delayed the project's ability to provide the ancillary housing infrastructure necessary for the economic and industrial development of the selected regions.

10.30. The Court found that the NCI loans together with the interest-rate subsidy of some 33 Mio ECU had been advanced to the financial intermediaries during the period June to November 1983. The justification for this action was that it would help to secure the best financial terms for the project's final beneficiaries, as the intermediary banks involved would know from the outset how much the loan was going to cost. In accordance with this type of global loan, the intermediary banks act as a project manager and provide specific services in return for their administrative margin. In the context of this project the services provided included:

(a)initial selection of the most appropriate construction proposals;

(b)individual assessment of the creditworthiness of the prospective property owners;

(c)assurance that the project conformed with national housing laws;

(d)examination of building work-in-progress before disbursement of loan funds;

(e)providing the EIB with a full guarantee for the loan.

10.31. The Court noted that, in view of the delays in construction, the intermediary banks had exercised prudent financial management in staging the disbursement of loan funds over the extended period of the project.

10.32. The first attempts at implementation of the agreement on the auditing by the Court of EIB operations show that the practical conditions for the application of this agreement are still too rigid. The Court is of the view that on-the-spot audits should be further intensified, which presupposes greater collaboration between the Commission, the EIB and the latter's Audit Committee.

REVIEW OF COMMISSION ELIGIBILITY PROCEDURES

10.33. During the course of 1990, the Court carried out a review of the Commission's procedures for ascertaining the eligibility of projects for loans from NCI, Euratom and EIB own resources. The aim of the review was to:

(a)confirm that formal procedures had been established;

(b)ascertain whether adherence to these procedures would ensure that projects approved for loan financing were in fact eligible in accordance with the conditions laid down in both the Treaty establishing the European Economic Community and the relevant NCI and Euratom Council decisions.

10.34. The Court noted that whilst the Commission is required to give a decision on the eligibility of projects for NCI and Euratom loans, it is only required to give an opinion on the eligibility of projects for EIB loans in accordance with Article 21(2) of the EIB's statute.

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10.35. The Commission had established a single procedure for ascertaining the eligibility of projects for loan financing. This procedure involves consideration of each project proposal by the Inter-Service Coordination Group Commission's (comprising all relevant Directorates-General) in order to check that it complies with Community legislation and policies and that it is eligible under the provisions of Article 130 of the EEC Treaty. Furthermore, according to this procedure supplementary information may be requested from the EIB, in particular in the case of complex project applications. The Court notes that the different conditions contained in both the NCI and Euratom Council decisions and the Treaty establishing the EEC are taken into account by the Inter-Service Coordination Group during the eligibility process. On the basis of its review, the Court concluded that a formal procedure was in place to ascertain the eligibility of a project application for loan financing.

10.36. The Court carried out a detailed review of all applications for NCI loans (13 in total) received by the Commission during the three-year period 1988 to 1990. It found that all applications had been processed in accordance with the formal procedure and that the specific conditions of the appropriate Council Decision 87/182/EEC of 9 March 1987 had been taken into account when ascertaining eligibility.

10.37. Of the 13 applications processed by the Commission, 12 were considered eligible for NCI loans and one case was withdrawn. The 12 applications approved for NCI loans amounted to approximately 391 Mio ECU and were all in respect of global loans for the financing of small and medium-sized industrial and related service sector enterprises (SMEs) and aimed to increase both the productivity and competitive capacity of the SMEs and contribute to economic growth and employment in the regions concerned. The 12 projects were spread amongst the following four Member States - Italy (6 projects), United Kingdom (4 projects), France (1 project) and Spain (1 project).

10.38. The Court noted from its review that, as the project application only included a brief description of its proposed activities, it was difficult to ascertain how the loan would contribute to the Community policy objectives set out in the appropriate Council decision. In most cases examined the Court found that the project application only provided details regarding the intermediary, the amount of the loan and a general statement that the loan would increase productivity, improve competitiveness and contribute to economic growth and employment. The Court concluded that project applications should be improved by the inclusion of performance indicators relating to the anticipated improvements in productivity, competitiveness, economic growth and job creation. These performance indicators would then serve as a benchmark against which the Commission would be able to monitor the progress and effectiveness of each project towards achieving its objectives.

10.39. The Court noted that, with regard to project applications for loans from the EIB's own resources, the Commission would consider them in accordance with the criteria set out in Article 130 of the Treaty establishing the EEC. This Article establishes that the eligibility of project applications can be ascertained under one or a combination of the following criteria:

(a)projects for developing less-developed regions;

(b)projects for modernizing or converting undertakings or for developing fresh activities called for by the progressive establishment of the common market, where these projects are of such a size or nature that they cannot be entirely financed by the various means available in the individual Member States; and

(c)projects of common interest to several Member States, which are of such a size or nature that they cannot be entirely financed by the various means available in the individual Member States.

10.40. In order to ascertain the extent of Commission activity under each of these three criteria, the Court carried out a statistical analysis of all projects which had received positive eligibility opinions from the Commission over the three-year period 1988 to 1990. It found that out of a total of 646 projects, 611 (94,6%) were in respect of criteria (a) and (c). Criterion (b) was only individually represented by 2 projects (0,3%) but that a further 33 projects (5,1%) existed involving criterion (b) jointly with criteria (a) and (c). Table 10.6 provides a detailed breakdown for the period 1988 to 1990 of all projects which had received positive eligibility opinions from the Commission under the criteria set out in Article 130 of the Treaty establishing the EEC.

10.41. It is evident from the statistics set out in Table 10.6 that the most significant element of the Commission's eligibility activity is occupied with considering projects for less-developed regions and those of common interest to several Member States. This complies, to some extent, with the terms of the Single European Act (1986) as set out in Article 130a of the Treaty establishing the EEC, which aims to reduce the disparities between the various regions and the backwardness of the least-favoured regions. It could, however, be questioned whether the criteria applied by the Commission during the eligibility procedure are still appropriate. These criteria, which are based on Article 130 of the Treaty and date back to 1957, may require modification to bring them into line with the aims of the Single European Act and the reform of the structural Funds. In the Court's view, it is important that the Commission should be able, during the eligibility procedure, to assess the anticipated impact that projects should make in achieving Community policy objectives. All project applications should, therefore, include performance indicators which identify the progress that is expected to be made in contributing to the overall aims and objectives set out in Article 130a of the Treaty. The Court is unable to comment on whether the individual project applications analysed in Table 10.6 included performance indicators, as its audit mandate does not provide for an examination of projects receiving loans from the EIB's own resources.

CONCLUSION

10.42. As regards the follow-up review of actions taken by the Commission to improve the control of its borrowing and lending operations (paragraphs 10.8-10.12), the Court considers that:

(a)the actions taken so far by the Commission provided in principle an improved procedural basis upon which to conduct its borrowing and lending operations;

(b)the Commission should, however, continue to review and update its working methods in order to respond efficiently to the increasingly complex techniques employed by the financial markets;

(c)the Commission should make further progress to implement the Court's recommendations concerning the administration of interest subsidies in respect of ECSC loan operations;

(d)as a matter of urgency the Commission should follow up the recommendations made on this subject by the Court in its special report (paragraph 7.2 (c) (i)-(iv).

10.43. As regards the audit of NCI loans in the Member States (paragraphs 10.13-10.32), the Court considers that:

(a)although the construction of a coal-fired power station (paragraphs 10.17-10.22) had been achieved, there was serious doubt as to whether:

(i)the new generating capacity installed would be needed to meet the forecast growth in electricity demand, until at least five years after completion of the project;

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(ii)the project's total dependence on coal supplies imported from sources outside the Community was in line with the intentions of the relevant Council decision; and that

(iii)the project had created new permanent jobs in accordance with the intentions of the relevant Council decision.

(b)although the construction of low-cost housing for industrial and service workers (paragraphs 10.23-10.32) had been achieved, the Court could not satisfy itself that the economic and industrial development objectives of the project had been achieved, due to the absence of verifiable criteria;

(c)the practical conditions for implementing the agreement between the Court, the Commission and the EIB concerning the Court's audit of NCI lending operations need to be improved. Continued and strengthened cooperation between the three parties is needed and more on-the-spot audits with the EIB's Audit Committee should be undertaken in the future.

10.44. As regards the review of the Commission's procedures for ascertaining the eligibility of projects for loan financing (paragraphs 10.33-10.41), the Court considers that:

(a)a formal procedure was in place for ascertaining the eligibility of project applications for loan financing;

(b)all project applications for loans, regardless of their source of funding, should include performance indicators against which a project's actual progress could be monitored and its contribution to the overall aims and objectives of Article 130a of the Treaty evaluated;

(c)almost all the Commission's activity concerning project applications for EIB own resource loans is devoted to ascertaining the eligibility of projects for less-developed regions and those of common interest to several Member States.

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CHAPTER 11 (\*) Research and energy

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IMPLEMENTATION OF THE BUDGET

General observations

11.1. Table 11.1 compares the 1990 budgetary appropriations for Title 7 of the general budget with the funds actually committed and paid. The overall utilization of commitment appropriations was satisfactory. The overall utilization of final payment appropriations (94%), however, fell compared to 1989 (98%). This is largely explained by delays in approving transfer requests resulting in insufficient time for payments to be made in the year. A second factor was a shortfall, again, in the Joint Research Centre's work for third parties. The low utilization of appropriations made available again (which arise from receipts from non-member countries participating in the Communities' programmes) is explained by some receipts arriving late in the year.

Joint Research Centre (JRC)

11.2. Within the budget of the JRC (budget headings 7301 to 7309), overhead and general costs were charged to appropriation accounts during the year and then apportioned to the budget headings at the year-end. This apportionment was done on the basis of the research manpower effort expended on each budgetary item. Because of the shortfall in work for third parties, overheads fell more heavily than anticipated on other activities of the JRC. However, insufficient payment appropriations were available on budget headings 7302 and 7303 to absorb these overheads. The balance was thus charged instead to heading 7307. As a result, budget headings 7302 and 7303 are understated by 0,03 Mio ECU and 1,13 Mio ECU respectively, and budget heading 7307 overstated by 1,16 Mio ECU. This problem should not arise in future years since, under the new budgetary nomenclature, there are distinct budget headings for JRC overhead and general costs.

Verification of costs of research contracts

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11.3. As part of its examination of the implementation of the 1990 budget, the Court has given particular attention to controls carried out by the Commission over the costs claimed by external organizations participating in research contracts. In particular the Court has examined the use by the Commission of external audit firms to verify claims submitted by contractors. The Court last referred to this in its annual report on the financial year 1984

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11.4. External audits provide assurance as to whether or not costs claimed by contractors are reasonable. The Court found that the audits do not provide this assurance promptly. In the great majority of cases, the Court found that final reports had still not been agreed one year after the end of the period covered by the audit. In addition, the use of external audits to verify costs is an expensive control procedure - as are on-the-spot visits by Commission officials - and thus it is not possible to cover all research contracts. The examination revealed that both the Directorate-General for Science, Research and Development (DG XII) and the Directorate-General for Telecommunications, Information Industries and Innovation (DG XIII) have established procedures that allow them to accord priority to particular contracts for auditing. Thus efforts have been made to make the best use of available resources in this area.

11.5. Whilst precise written instructions are given to the audit firms, the Court identified a number of differences between the two Directorates-General and within DG XIII, as well as between the Esprit and RACE programmes, as regards external audit procedures. These concern:

(a)the number of staff coordinating and following the audits (DG XII - one person part-time; DG XIII - four people);

(b)the scope of the audits.

The Court considers that there is scope for much closer coordination, involving the adoption of unified procedures.

11.6. The audit showed that the weak point of the control of costs lies in the percentage of overheads included in the hourly rate charged to the contracts. In fact, this control calls for exhaustive checks on the contractors' accounting systems, which is something that is not easy to carry out within the limits of the controls at present being carried out. A recent study of the administration of the Communities' research activities

has recommended that the principle of shared cost be replaced by pre-negotiated fixed-price contracts. The Court points out that the verification of payments made to contractors under such a system would be considerably easier and less demanding of the Commission's resources.

11.7. Furthermore, DG XII is currently developing a new computer system for the management of its operations, whilst DG XIII has embarked on modernizing its own system, without there being any provision for making these two systems compatible with each other. The Court considers that here too the necessary steps should be taken to harmonize these systems.

OBSERVATIONS ON ENERGY INTRODUCTION

11.8. Improving the security of supply and reducing the level of dependence on oil have pride of place in the objectives of the European Community's energy policy

. That is why the Community grants financial support to energy projects at all stages of the innovation process, i.e. at the stage of basic research as well as at the subsequent stages of development and demonstration which precede commercial exploitation. This chapter concentrates on two programmes, one relating to technological development in the hydrocarbons sector and the other to the demonstration of new energy technology.

11.9. As of 1973, following the first oil-price crisis, a programme of promoting and developing new technologies was set up in the hydrocarbons sector

. This programme was followed in 1978 by two others concerning the granting of financial support for projects to exploit alternative energy sources and for projects in the field of energy saving

. These programmes, which differed both in the aim of the objectives pursued and in the scale of the resources used, were then continued without interruption.

11.10. In this chapter, the Court first of all describes the main features of the programmes under way during the four-year period from 1986 to 1989. It then analyses the degree of success and the shortcomings of these programmes as at the end of 1990. Lastly, the Court examines whether the single Thermie programme, which has taken over since 1990 from the previous programmes that had expired, has been designed and implemented in such a way as to avoid the difficulties encountered in carrying out the earlier programmes.

THE PROGRAMMES OF THE PERIOD 1986-89

Regulations

11.11. During the four-year period from 1986 to 1989 the Commission carried out two programmes on the basis of the following two Regulations:

(a)Council Regulation (EEC) N° 3639/85 of 20 December 1985 on a programme of support for technological development in the hydrocarbons sector

(shortened hereinafter to 'hydrocarbons programme`);

(b)Council Regulation (EEC) N° 3640/85 of 20 December 1985 on the promotion, by financial support, of demonstration projects and industrial pilot projects in the energy field

(shortened hereinafter to 'energy demonstration programme`).

11.12. On the basis of these Regulations, the Community granted financial support of 535,6 Mio ECU to 1 035 projects.

Eligibility criteria applicable to the projects

11.13. According to these Regulations, projects - in order to be eligible - had to meet the following conditions, amongst others:

(a)-hydrocarbons programme: 'they develop innovatory techniques, processes or products or exploit a new application of techniques, processes or products for which the research stage is completed`;

- energy demonstration programme: 'they must exploit innovatory techniques, processes or products or a new application of techniques, processes or products which are already known; they must be based on completed research and development work`;

(b)-hydrocarbons programme: 'they offer prospects of industrial, economic and commercial viability`;

- energy demonstration programme: 'they must, at the demonstration stage, offer promising prospects of industrial, economic and commercial viability...`;

(c)-hydrocarbons programme: 'they present difficulties with regard to finance because of the considerable technical and economic risks involved, such that they would very probably not be carried out without Community financial support`;

- energy demonstration programme: 'they must present difficulties with regard to finance because of the considerable technical and economic risks involved to the extent that the project would very probably not be carried out without national and/or Community public financial support`;

(d)-energy demonstration programme: 'they must envisage actions and means for replicating the same type of project`.

Management principles

11.14. These two Regulations also contained the following management principles:

(a)projects are assessed 'on the basis of the information provided by applicants`;

(b)the level of support is to be determined for each project individually. 'Support shall not exceed 40% of the eligible cost of the project`. In determining the level of support the Commission must take account of other aid received or expected. With regard to projects under the energy demonstration programme, the sum total of Community support and national support may not as a general rule exceed 49% of the total cost of the project;

(c)the Commission must examine 'the content of the projects in relation to other Community programmes and shall avoid all duplication` in respect of the energy demonstration programme;

(d)'the support granted by the Community must not affect the conditions of competition in a manner incompatible with the relevant provisions of the Treaty`;

(e)in the event of commercial success, the Commission may demand that the support granted be repaid. This provision applies only to the hydrocarbons programme, however, and does not concern the energy demonstration programme.

Selection procedure

11.15. The energy projects were submitted to the Commission by legal or natural persons. The Commission analysed the content of the projects as part of an annual selection procedure and decided on the support to be granted after consulting an Advisory Committee composed of two representatives from each Member State. For the projects selected, a contract was then drawn up between the Commission and the promoter of the project.

THE COURT'S OBSERVATIONS

Number of projects selected

11.16. In all, 256 projects connected with hydrocarbons exploration, production, storage or transportation activities were selected by the Commission between 1986 and 1989 as part of the hydrocarbons programme (Table 11.2); the amounts committed were 152,0 Mio ECU and the amounts paid 86,2 Mio ECU. Under the energy demonstration programme, 779 projects were chosen between 1986 and 1989 (Table 11.3), 383,6 Mio ECU were committed and 182,1 Mio ECU paid. The breakdown of the projects by energy sector is shown in Table 11.4. It is in the field of alternative energy sources that the largest number of projects received support. In second place are projects relating to energy saving.

Projects in progress

11.17. Table 11.5 shows the state of progress and the evaluation, as at the end of the financial year 1990, of the projects chosen. It shows that 65,6% of the projects under the energy demonstration programme and 50,8% of the projects under the hydrocarbons programme are still under way. This proportion of projects still in progress one year after the closure of the programmes is partly due to the fact that the selection and management procedures are extremely slow moving. For example, in general, several months elapse between the Commission's decision to support the project and the signing of the contract. It must be pointed out that, of the projects under way, no contract had been signed for 12 of them, despite the expiry of the period fixed for carrying out the programme and committing the corresponding appropriations. Since it would be premature to embark at this stage on an evaluation of the projects currently in progress, the following observations are based on an analysis of projects which have been abandoned or completed.

Abandoned projects

11.18. Table 11.5 shows that at 31 December 1990 a total of 214 projects had been abandoned. For most of them there was not even a contract after a lengthy period of time. But these projects have nevertheless required a considerable amount of management work, starting with the selection procedure, then the commitment of appropriations, and lastly the collection of the basic data for possible future contracts.

11.19. There are a large number of reasons for these abandoned projects. Bankruptcies, withdrawal of partners from the project, lack of national capital, overestimation of the prospects of profitability or the impossibility of forecasting energy price trends are often some of the explanations given by the aid recipients. The Commission, for its part, has cancelled contracts where certain contractual provisions (such as that stipulating the regular presentation of reports on the state of progress of the project) have not been complied with.

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11.20. Although the high number of abandoned projects can probably be explained by the presence of considerable technical and economic risks, it also implies that the Commission has not required the aid applicants to supply sufficient information and that the information they have provided has not been adequately checked. The selection procedure has therefore not enabled the non-viable projects to be eliminated from the outset.

11.21. At 31 December 1990, the amount of appropriations committed for these abandoned projects was 84,6 Mio ECU. These appropriations have remained committed for months, if not years, until cancelled. The Court considers that they should be cancelled as soon as the corresponding legal obligations disappear.

Commercial exploitation

11.22. It is the level of commercial exploitation achieved that constitutes the deciding criterion of success for the evaluation of the programmes. To date the hydrocarbons programme has resulted in only one project which partially achieved the commercial exploitation stage (see Table 11.5). The other completed projects have not yet been able to demonstrate their industrial, economic or commercial viability, even though for 67 of them, which have achieved the stage of technical feasibility, this is not excluded in the medium or long term. Only time will tell whether these technologies will be accepted by the market.

11.23. Under the energy demonstration programme, 38 projects in all were regarded by the Commission as having totally achieved the stage of commercial exploitation (see Table 11.5). Fourteen other projects have achieved partial commercial exploitation. This programme thus seems to achieve more commercial successes than the hydrocarbons programme. The latter is further upstream from the marketing stage. It is also to be feared that the Commission's evaluation of the projects of the energy demonstration programme has tended to be more favourable because of the lack of a repayment clause (see paragraph 11.14(e)). It should be noted too that the description of 'commercial exploitation totally achieved` does not necessarily mean that a project is commercially of interest beyond the exploitation carried out by the promoter himself. What matters in terms of the planning of future programmes, however, is whether the project which has been supported has been used as a model for carrying out other projects and, if so, how many have been based on it. The Court observes that the Commission does not have enough information on this matter.

11.24. It should also be noted that some projects in the energy demonstration programme which have been very successful would most probably have been carried out even without Community aid. Most of these projects concern energy saving in the industrial sector and industry, for cost reasons, has every interest in reducing its consumption of energy. The use of new, more energy-saving techniques may thus prove profitable even without any extra incentive measures. This is particularly true in situations where investment to replace or modernize plant is necessary in any case, because of the demands of competition or because stricter rules concerning the environment prohibit processes used previously. Thus, for about 15 projects, there are various indications which give rise to the fear that Community support has not always been the determining factor for carrying them out:

(a)short length of time needed to recoup the cost of investments, even without Community aid;

(b)lack of financing difficulties;

(c)starting-up of the project considerably in advance of Community agreement having been given for supporting it;

(d)investment intended essentially for the replacement or modernization of plant and where energy saving is no more than an automatic consequence of this investment.

11.25. In the Court's opinion, the Commission has not taken sufficient account of all these factors before agreeing to promote a project or determining the rate of aid to be granted.

Effects on competition

11.26. According to the Regulations, the support granted by the Community 'must not affect the conditions of competition in a manner incompatible with the relevant provisions of the Treaty`. The files show, however, that hardly any checks seem to have been made on whether this provision has been complied with.

11.27. The Commission seems in part to be implementing a policy of active intervention of a kind which is forbidden in the Member States. Thus:

(a)the Directorate-General for Competition (DG IV) checks the national aid arrangements and in particular the main aid granted to research, so as to avoid aid being used improperly, on the pretext of carrying out research and development, to promote the normal development of a product or for replacement or modernization investments. The Directorate-General for Energy (DG XVII), for its part, does not seem to have any worries of this kind with regard to its own aid policy;

(b)the Commission's policy with regard to national research and development aid aims to make the rate of these subsidies vary according to the degree of progress of the project towards a practical application. Thus the rate of aid must not exceed 50% for the basic research and 25% for applied research. Beyond that the rate of aid applicable gradually drops to zero for normal investments in industrial plant. For the energy demonstration programme, however, the sum total of Community aid and national aid must not exceed 49% of the total cost of the project. The level of aid is thus virtually equivalent to the rate which the Commission, in its competition policy relating to national programmes, stipulates exclusively for basic research. In addition to this, there is the fact that the Commission has not always checked the volume of the national support. The Commission is not therefore aware of how many times the sum total of the Community support and the national support has exceeded the stipulated maximum rate of 49%. Checking the amount of national aid has been made difficult because of DG XVII's lack of knowledge of the national aid schemes. It is only since December 1990 that DG XVII has had at its disposal an initial report on the Member States' programmes in the energy field.

11.28. DG XVII has largely given up determining the rate of support project by project and, as a general rule, has granted the maximum rate of 40% of the expected eligible costs. In one particular case, it continued to grant the 40% rate even when it subsequently discovered that the project was in addition going to receive national aid. The sum total of public support therefore exceeded 60%. Instead of making a proportional reduction in the Community aid, DG XVII continued to pay this rate of aid contrary to the competition policy.

11.29. Moreover, for the same project, the checks on the eligibility of the declared costs were very incomplete. The promoter had in fact declared investment costs which were already partly covered by a national subsidy. DG XVII ought to have asked the promoter of the project for the necessary explanations; it would then have been able to see that a national subsidy had already been paid covering the eligible costs of the project. The Court considers that the Commission should recover the amount (about 0,1 Mio ECU) of aid wrongly granted.

Coordination with the other Community programmes

11.30. For both these programmes, Community aid is provided only for projects where the research stage has already been completed. This provision aims to achieve a greater degree of progress towards practical application. The relatively poor prospects of industrial, economic and commercial viability for some of the assisted technologies are due, for some projects, to the fact that the research stage had not been completed. For these projects, support under the special Community research programmes in the energy field (the Joule programme

or its predecessors) would have been more appropriate. It would, moreover, be desirable for the projects completed under these research programmes to be systematically evaluated by DG XVII in order to allow better assessment of the support to be granted to certain technologies beyond the research stage. This problem does not occur in the coal sector because this sector is managed by a single Directorate-General.

11.31. Moreover, the Commission has not always examined the content of projects in relation to the special Valoren programme

in the energy field. Thus, in one case, the promoter of the project withdrew from the energy demonstration programme, after having received agreement of support, and turned instead to the more attractive Valoren programme. In terms of their objectives, the programmes do not really compete. Valoren, as a regional economic programme, is intended to support only projects which concern tested processes, whereas the energy demonstration programme aims to promote only innovatory processes. The eligibility under Valoren excludes eligibility for this programme. The system of mutual information and checking is therefore not sufficiently effective to prevent the Commission from supporting the same type of project under different programmes.

11.32. Lastly, the Court considers that, with regard to the dissemination and publication of the results of development and demonstration activities, DG XVII should make more effective use of DG XIII's departments specializing in technology transfer. Indeed, as the Court's special report on the utilization of the results of Community research

pointed out, the Directorate for the exploitation of research and technological development, technology transfer and innovation (DG XIII-C) takes very little action with regard to making optimum use of demonstration projects in the energy field, despite the fact that in the strict sense of Article B 753 of the budget (as from 1991, Article B 5.503), it is responsible for taking joint action with DG XVII to make optimum use of these projects. The Sprint

and Value

programmes carried out by Directorate XIII-C ought also to be able to play a part in DG XVII's dissemination and publication of findings.

Community value added

11.33. These two programmes put forward two reasons for justifying promotion at Community level:

(a)to develop cooperation between undertakings in two or more Member States in order to carry out Community projects;

(b)to extend the dissemination and publication of findings beyond national frontiers throughout Europe.

Promotion at Community level must be such as to satisfy these two requirements and thus to obtain Community value added.

11.34. The Court has tried to determine whether the Community programmes met these requirements. With regard to the first one, it was found that the Community programmes frequently supported only purely national projects and not multinational projects. It was only in the case of a minority of projects that a partnership between undertakings in different Member States was arranged in order to carry out the projects. Nevertheless, this minority mainly concerns projects carried out by international oil companies, which have been assisted under the hydrocarbons programme. To date, specific promotion of European cooperation beyond normal trade relations has therefore not been attained to any significant extent.

11.35. With regard to the second requirement, the Commission has set up a databank called Sesame, where data on the assisted projects are stored. This databank, together with the organization of conferences and the production of brochures sent on request to interested firms, is an important instrument in the dissemination of findings. About 1 500 sectoral compendia, combining extracts from Sesame in brochure form, are distributed every year. The Commission is nevertheless aware of the fact that many improvements are still needed before Sesame can fully fulfil its function. Its main weaknesses include: data inputs rarely updated for certain fields, a lack or inadequacy of information on commercial successes, unclear presentation, restricted consultation facilities and texts only in English. The number of users and the duration of its use are therefore limited. In 1989, 27 users had consulted the databank for a total of 21 hours.

11.36. This means that the knowledge accumulated has not always been made use of. There is therefore the risk of 'reinventing the wheel` for one technology or another in the context of the many European development activities or, on the contrary, of once again coming to a dead-end. The potential benefit which could arise from carrying out programmes at Community level is therefore very small. Thus the Commission does not manage to disseminate the findings effectively throughout the Community. This is partly why the main objective of the programmes - improving security of supply or reducing the level of dependence on oil by means of broad commercial exploitation of assisted technologies - has been achieved to only a very limited extent.

11.37. The Court therefore wonders what benefits the Communities derive from implementing these programmes. It is all the more relevant to put this question in so far as the Commission has granted the four countries which develop the biggest national programmes (FR of Germany, France, Italy and the United Kingdom) almost three quarters of the amount committed under these two programmes.

External evaluations

11.38. In 1988, the Commission commissioned consultants to draw up evaluation reports on the two programmes from the time of their introduction in 1973 and 1978. The findings of these external evaluations, examined by the Court below, were sent by the Commission to the Council

.

Report on the hydrocarbons programme

11.39. The report concerning the hydrocarbons programme reveals that since 1985 no project which has received Community aid has been exploited commercially, whereas in 1975 one in two projects was still used commercially. Even bearing in mind the fall in the price of oil and the uncertainties about its future evolution, this lack of success shows that the hydrocarbons programme has lost some of its effectiveness over the years. There is, moreover, a risk that this aid, which was started in 1973, will encourage many undertakings always to rely on an additional 'back-up Regulation`, rather than on their own performance in the face of competition.

Report on the projects relating to energy saving and to renewable sources of energy

11.40. One of two reports on the energy demonstration programme, the report on projects relating to energy saving and to renewable sources of energy makes two basic recommendations:

(a)to grant greater priority to 'consolidation activities`;

(b)to reduce support to projects in the usual form and work out a new form of support.

11.41. By 'consolidation activities` the report means:

(a)the gathering of consistent, exploitable information on the findings of projects by means of independent audits;

(b)the making of assessments of the technology by sector - including the findings of the Member States - and access to these assessments by improving the databank;

(c)evaluation of the market;

(d)coordination of the promotion of findings - especially those coming from the Member States - on a European scale and the involvement of specialist bodies in exploiting transfrontier information networks;

(e)coordination between the various activities in order to improve the financing decisions.

11.42. With regard to drawing up a new form of support, the report recommends concentrating efforts on 'targeted projects`, i.e. projects with a specific objective regarded as priority by the Commission (for example, protection of the environment) and 'dissemination projects`, i.e. projects which have already been carried out and which are likely to be the subject of demonstration in other regions of the Community under different regional conditions (for the latter projects, it would be best to make provision for the setting-up of joint ventures).

THE THERMIE PROGRAMME OF 1990

11.43. On 29 June 1990, the Council, on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee, adopted a new global programme concerning the promotion of energy technology in Europe (the Thermie programme)

. This programme is applicable until 31 December 1994. The Community funds considered necessary for its implementation amount to 350 Mio ECU for the period 1990-92. The first selection of new projects took place in 1990 and, out of 228 projects, 84 were selected. The allocation of 45 Mio ECU provided for 1990 has been used up completely.

11.44. This Regulation reflects in its wording the recommendations of the report referred to in paragraph 11.40. Moreover, with regard to the 'consolidation activities`, the Court recognizes that a considerable effort was made in 1990, even though it did not have any effect on the initial selection of projects for the Thermie programme. With regard to this selection, the analysis carried out by the Court revealed, however, that in practice very little account had been taken of the recommendations made. For example, 30% of the first projects selected relate to energy saving in the industrial field, whereas the report referred to in paragraph 11.40 recommended that before continuing to support such projects evaluations of the technology used should be made. These evaluations have still not been made available to the Commission. Moreover, 19% of the projects selected relate to hydrocarbons, a sector which has also not yet been the subject of a review aiming to increase the commercial success of the assisted projects. Lastly, in almost all the energy sectors, the Commission has sometimes given its backing to projects which are borderline cases in terms of eligibility: poor economic viability, or insufficient likelihood of replication, or technical and economic risks which are not high, or the lack of true innovation.

11.45. Article 4 of the Regulation on the Thermie programme provides for the possibility of encouraging and coordinating 'targeted` projects. The Commission has not yet been able, however, to set up the conditions for such a selection. With regard to the dissemination projects, out of 15 projects selected, only three relate to joint ventures, despite the fact that the report referred to in paragraph 11.40 recommended that only joint ventures be supported.

CONCLUSIONS

11.46. The Court has found that:

(a)one year after the closure of the programmes, more than half the projects are still under way and many have been abandoned (see paragraphs 11.17 to 11.21);

(b)the degree of commercial exploitation has to date been very low (energy demonstration programme), or even non-existent (hydrocarbons programme); but given that the time needed for the assisted technology to penetrate the market may stretch to several years after the completion of the project, an improved commercial success in the medium and long term is still possible. With regard to certain projects which have had commercial success, Community support may well not have been a deciding factor (see paragraphs 11.22 to 11.24);

(c)there seem to have been hardly any checks on the impact of the subsidies on the rules of competition and the Commission has to a certain extent practised a policy of intervention of a kind which it forbade in the Member States (see paragraphs 11.28 and 11.29);

(d)some projects which have not yet had commercial success in fact belonged under the specific Community research programmes in the energy field and not under the programmes examined, since the research stage had not been completed; the coordination with other Community programmes still needs to be improved (see paragraphs 11.30 and 11.31);

(e)the Community value added, which was to have been expected from the carrying-out of Community programmes of this kind, has hardly been apparent (see paragraphs 11.33 to 11.37).

11.47. The foregoing observations and the recommendations contained in one of the external evaluations would make it possible, if they were taken into account and applied by the Commission, to ensure that the Thermie programme achieved more satisfactory results. For this reason, the Court invites the Commission:

(a)to continue without delay the consolidation activities or support measures started in 1990 (all the more so since the Thermie programme allocates them 10% to 15% of all the appropriations);

(b)to pay greater attention to becoming familiar with and coordinating national energy policies, as provided for in the new Regulation;

(c)to ensure that the selection procedure enables any non-viable project to be eliminated from the very outset.

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CHAPTER 12 (\*) Aid to the countries of Central and Eastern Europe

>TABLE>

INTRODUCTION

12.1. Within the framework of the measure intended to support the process of reform and democratization throughout Central and Eastern Europe, the European Communities have instituted two categories of measure:

(a)Financial aid: -Subsidies: Operation Phare (Poland and Hungary: aid for economic restructuring), -Loans: Community financial instruments.

(b)Support activities: -Coordination of the group of the 24 OECD donor countries.

12.2. At the same time as these measures, and in order to alleviate the effects of the collapse of the Comecon market, the European Communities have also instituted a trade policy

, improving access to Western markets, which in Poland and Hungary has already resulted in a change in trade flows. So-called 'first generation` trade and cooperation agreements already exist with certain countries of Central and Eastern Europe.

12.3. The aim of these various measures is to contribute to the progress and reconstruction of those countries of Central and Eastern Europe which undertake to observe and put into practice the principles of parliamentary democracy and a market economy.

12.4. This Community aid was differentiated and adapted according to the specific requirements of each country. Table 12.1 summarizes its overall volume for 1990.

12.5. In this starting-up stage, the Court's examination was mainly based on an evaluation of the systems in place.

BUDGETARY IMPLEMENTATION

12.6. The year 1990 was characterized as regards the supplementary and amending budget by a significant increase in appropriations and by an extension of the number of beneficiary countries. The nature of the appropriations (budget heading B996) thus changed from 'non-differentiated` to 'differentiated`.

12.7. Table 12.2 shows that the degree of compliance between the budgetary estimates and the utilization of the appropriations allocated is relatively high. However, an analysis of the figures reveals that utilization was concentrated at the end of the year: the last quarter of 1990 accounted for 48% of commitments and 74% of payments (Table 12.3).

12.8. This situation may be explained, on the one hand, by the increase, as from the fourth quarter of the year, in the number of countries benefiting from the programmes and, on the other, by delays in the implementation of programmes.

12.9. An examination of the financial statements drawn up by the Court in Table 12.2 suggests that there has been a certain degree of implementation at financial level, but it would be unwise to draw conclusions therefrom as regards the actual progress of projects or operations on the ground. Indeed, at the level of payments, the Commission's financial data only give a very imperfect picture of the physical implementation of the projects, in particular on account of the system of payment by advance (60,6 Mio ECU, i.e. 36% of payments). In addition, there is also the effect of retroactive cover by the Phare operation of expenditure already effected in the form of emergency food aid to Poland and Romania (44,55 Mio ECU), which was pre-financed by the EAGGF-Guarantee, and emergency medical aid to Romania (8,48 Mio ECU)

. In this connection, the remarks concerning the financial audit are set out in Chapter 1 of this report (paragraphs 1.80-1.83).

12.10. None of the advances paid out under the work programme were subject to detailed justification in 1990. It should be noted, however, that the Community has stipulated that an audit should be carried out in respect of the various programmes by an external audit firm, normally once every six months. As the advances were only paid towards the end of the year, it has not been possible to assess the quality of the system for monitoring these advances.

OBSERVATIONS IN RESPECT OF THE VARIOUS TYPES OF AID

Subsidies: Operation Phare

12.11. The legal basis for the Court's audit is now formed by the framework agreements concluded between the Commission and the various countries of Central and Eastern Europe, the necessity for which the Court pointed out in its 1989 annual report

.

12.12. The Court noted that no agreement of this type had been concluded with Romania and the Soviet Union. The Court again insists upon the need to establish such agreements before the European Community grants aid.

12.13. The Court examined the system for managing the Phare programme established under Council Regulation (EEC) N° 3906/89 of 18 September 1989, as amended by Regulation (EEC) N° 2698/90 of 17 September 1990. The general objectives, described in the abovementioned Regulations, are as follows:

(a)the choice of measures to be financed must meet the wishes expressed by the recipient countries concerned (Article 3(2) of Regulation (EEC) N° 3906/89);

(b)the aid must be used primarily to support the process of reform (Article 3(1) of Regulation (EEC) N° 3906/89) and to provide humanitarian assistance (Article 1(4) of Regulation (EEC) N° 2698/90).

Description of the system of implementation

12.14. The rules for implementing this aid are jointly established in a framework agreement signed by the Commission and each of the countries concerned. It stipulates, on the one hand, that every measure should be taken by the recipient country to ensure that this aid is properly implemented (Article 1 of the framework agreement) and, on the other hand, that the Commission should implement this aid according to the practices of sound financial management (Article 3).

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12.15. The main participants in the distribution of this aid are respectively:

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(a)the Phare management committee (made up of representatives of the 12 Member States and chaired by the Commission), which is called upon to deliver opinions on the projects presented by the recipient country and submitted to it by the Commission. The corresponding amounts are then committed by the Commission;

(b)the national coordinator, appointed by the government, who is responsible for coordinating the aid within the recipient country;

(c)the Commission, with its on-the-spot delegations, and the national coordinator who are jointly responsible for the preparation, implementation and monitoring of the programme;

(d)the operational management units, set up with the aid or the participation of European experts, which are, where necessary, set up on the premises of the various national ministries.

12.16. The main features of the system are thus defined by the following:

(a)an annual target programme established on the basis of priorities given by the national coordinator and signed by the recipient country and the Commission. It contains sectoral allocations for this aid in the form of programmes or projects;

(b)feasibility studies are then drawn up, where necessary, usually by external consultants, in order to pinpoint and identify the main parameters of the project or programme in question;

(c)a financing proposal, covering factors that have been examined beforehand, may then be presented to the Phare Management Committee and approved by the Commission;

(d)the financing agreement for a programme or project, which is then adopted by the two parties concerned, i.e. the Commission and the national authorities of the country concerned. This agreement adopts the main principles of the previous proposal;

(e)the control and follow-up of the implementation of the project, which is carried out by consultancy firms in liaison with the Commission and its delegations, whilst the ex-post assessment is carried out by the Commission and the appointed national coordinator.

The multiplicity of the programmes

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12.17. At the end of 1990 a total of 37 programmes had been concluded. These programmes are themselves divided into sub-programmes or projects and mainly concern the following areas: agriculture, investments (privatization), the environment and training (Table 12.4).

12.18. This sectoral diversification, to which may also be added an extensive local dispersion, related to the recipient countries' requests and economic requirements, places considerable constraints on the management, from the point of view of effectiveness, for both the local administration and the Commission departments.

12.19. It should be pointed out here that the roles of the Commission and its Delegations in the countries of Central and Eastern Europe ought to be more clearly and more thoroughly defined.

Consistent framework for the aid

12.20. The Court was not able to establish the existence of a single consistent framework covering subsidies and loans for aid to the countries of Central and Eastern Europe.

12.21. The drawing-up of a multiannual programme should encompass both Community subsidies, the Community financial instruments and aid supplied by the group of 24 donor countries of the OECD (G-24) and coordinated by the Commission. In this way, the Commission could check that there is a sound balance and rational utilization of the loans and subsidies. In order to achieve a measure of synergy, the Court recommends that all the aid tools be effectively integrated and considers that this integration should take the form of the drawing-up of a multiannual programme.

State of progress of the programmes

12.22. According to the Commission's budgetary data, at the end of 1990 only the sectoral programme for importing crop-protection products (50 Mio ECU) of the Phare operation had been carried out, bearing in mind the emergency related to the agricultural cycle in Poland.

12.23. The aim of this pesticides programme was to save the harvests before winter, and it was the first programme to be implemented within the framework of operation Phare.

12.24. In general, the Court was able to establish that the plant health products had been delivered by the Commission in compliance with the time-limit which had been fixed beforehand and that they had used four different distribution channels: the Foundation for the Development of Polish Agriculture (FDPA), which was also the only body responsible for importing pesticides, Hortex, Samopomoc and Chemikolor.

12.25. Nevertheless, the Court would like to make the following comments:

(a)in respect of stocks,

- the results of the analysis of the management of these deliveries of pesticides show that approximately 20% of these products were still in store at the end of the year, in particular in the distribution centres;

- the replies given to the Court's auditors during their visit were not adequate to check the reasons for this storage. Nevertheless, given the cost of storage and the risks related to inflation or the insolvency of intermediaries, the Court recommends that the Commission take the steps necessary to see that stocks are disposed of;

- the value on the Community market of these remaining stocks amounts to approximately 10 Mio ECU, whereas the minimum global value of the batches for sale at the local price is estimated at 5 Mio ECU. The proceeds of this sale will be added to the already existing Phare counterpart funds (see paragraphs 12.39-12.40);

- moreover, the Polish authorities plan, in future, to distribute products on the spot by tender, so as to ensure that operations are carried out in a manner which is regular and can be checked;

(b)the Court carried out an analysis of tenders and contracts. The pesticides cycle usually took the form of a contract concluded between FDPA and a European supplier, the latter being approved beforehand by the Commission. During its audits at the Commission, the Court noted a lack of strictness in the generally accepted formalities, which may be explained by the urgent nature of the programme, but ought not to recur in future;

(c)in respect of the impact on the environment,

- before these plant health products were delivered the Court made certain at the Commission departments that there was actually a compliance certificate which confirmed that these pesticide products complied with the technical standards laid down in Directive 79/117/EEC of 21 De-

cember 1978

prohibiting the placing on the market and use of plant protection products containing certain active substances;

- the Court was unable to establish the existence of any post-use control report on these pesticides. In fact the FAO's international code of conduct for distributing and utilizing pesticides (United Nations Organization for Food and Agriculture) lays down this type of control for the country using pesticides and the drawing-up of a report (Article 12(6) of this code);

(d)in respect of the final destination of the pesticides,

- the Court was not able to establish whether the Commission had checked the final destination of the pesticides, when they reached the Polish farmers. It did not see the list of final beneficiaries. The Court is of the view that the Commission's responsibility does not cease when these goods have been delivered and a system of management and monitoring should also be instituted (see also paragraphs 12.41 and 12.42);

- similarly, the Court was not able to make certain of the reliability of the procedure for the physical receipt and the vetting of the products by the Foundation for the Development of Polish Agriculture (FDPA).

Counterpart funds

12.26. During the period from August 1989 to May 1990, at the request of the Polish authorities, the Commission delivered foodstuffs, valued at a total of 140 Mio ECU, plus 20 Mio ECU in transport costs, free of charge to Poland

.

12.27. A counterpart fund was created with the proceeds of the sale of these agricultural products under Polish market conditions. The resources that have been thus allocated to this fund are intended to finance projects for the structural improvement of Polish agriculture.

12.28. The delivery of the abovementioned aid was not based at the time on any actual analysis of requirements, either by the Polish authorities or by the Commission. The Court has already discussed this matter, in its 1989 annual report(6).

12.29. When the 1989 and 1990 deliveries of food aid were decided upon and implemented, the Commission acted on the assumption that there was an emergency in Poland. Subsequently, especially in the case of the 300 000 tonnes of wheat delivered in May 1990, it became evident that actual requirements in Poland were not on this scale. Because of the fact that the new harvest was imminent, Polish farmers had obviously brought hitherto hoarded quantities of foodstuffs to market. They were afraid that the large quantities of available foodstuffs would not all be purchased. According to information in the possession of the Court, Poland had in July 1990, for example, stocks of grain amounting to approximately 2 Mio tonnes. The fact that the foodstuffs delivered by the Commission had not all been sold by the beginning of 1991 serves to emphasize the truth of the above statements.

12.30. Under such circumstances there is obviously a risk that products delivered free of charge will be misused, especially in the form of re-exports or through the sale of comparable, domestically produced products, at world market prices, outside Poland. Although such re-exports are not in contravention of the letter of the agreement, the Court (and, for its part, the Commission) have drawn the attention of the Polish authorities to the fact that re-exports of this kind are inconsistent with the objective of these deliveries of EC produce free of charge.

12.31. The Polish authorities made it quite clear to the Court, during its audits, that their own production position was such that no further help of this kind was needed.

12.32. During its audits the Court was not able to obtain, either at the Commission or on the spot, a list from which it could have traced the distribution network for the food aid. The Court calls upon the Commission to insist on the need to compile such a list for future deliveries of aid to Central and Eastern European countries.

12.33. In its 1989 annual report

the Court criticized the slow start to the process of financing projects from the counterpart funds. The Court attributed this situation in particular to the fact that the Polish authorities took too long to make the proceeds of sales available to the institution responsible for the counterpart funds.

12.34. At 31 December 1990, the Court was able to establish that considerable progress had been made since the audit for its 1989 report in the making-available and use of these resources. At that time 746 280 Mio zloty (57 Mio ECU at the 31 December 1990 exchange rate) had been paid into the counterpart fund from the proceeds of sales, and of that sum 565 850 Mio zloty (43 Mio ECU at the 31 December 1990 rate) had been set aside in the form of low-interest loans to finance 4 024 private farm projects. In addition to these loans, the fund granted advances to the 'rural water supply` (17 000 Mio zloty (1,3 Mio ECU at the 31 December 1990 rate)) and 'telephone network` (57 543 Mio zloty (4,4 Mio ECU at the 31 December 1990 rate)) projects.

12.35. While the counterpart funds are already at the disposal of the Polish authorities from the outset, the use that may be made of them, however, is subject to the Commission's approval. Rules of procedure in this respect have been agreed by the Commission and the Polish authorities, and in this connection one may speak of shared responsibility. These official agreements are meant to guarantee that these resources do not simply disappear into the Polish budget but are channelled to specific predetermined investment projects.

12.36. The Court has established that the counterpart funds are partly distributed in the form of low-interest loans, which result in a revolving fund, and partly in the form of non-repayable advances. The Court was unable to establish which criteria were used to decide whether to make the allocation in the form of low-interest loans or in the form of non-repayable advances, and in which proportions. The Court asks the Commission to ensure that clear criteria are laid down in this respect.

12.37. Moreover, the Commission has not yet drawn up an assessment report on the utilization of the food aid delivered in 1989 and 1990. The same is true of the utilization of the counterpart funds from the proceeds of sales. The Court must ask the Commission to carry out this assessment as soon as possible.

12.38. To date, the counterpart fund has already waived loan obligations for a number of debtors. The Court was able to establish that these waivers had been decided on an ad hoc basis at the suggestion of the Bank for Food Economy, which is involved in managing these loans. The Court was unable to obtain the criteria for deciding such waivers, either from the managers of the counterpart fund or at the Bank for Food Economy, which, moreover, has no relevant experience in this field. The Commission is asked to ensure that clear and consistent criteria for such decisions concerning the counterpart fund are established.

12.39. In addition to the abovementioned 'Food aid` counterpart fund, there is another one in Poland which was created from the proceeds of sales of pesticides delivered under the Phare programme (50 Mio ECU) (see paragraphs 12.23-12.26), as well as deliveries of animal food supplies (20 Mio ECU). This fund is managed in Poland by a different body from the institution responsible for the food aid counterpart fund mentioned above (namely, the Foundation for the Development of Polish Agriculture mentioned in paragraphs 12.24-12.25).

12.40. Unlike the 'Food aid` counterpart fund, the Court established during its audits that in April 1991 no projects had yet been decided upon or financed from the 'Pesticide/Animal Food` counterpart fund, although the pesticides had been delivered in July and August 1990. The Court calls upon the Commission to take the necessary steps in this case also to ensure that correct and rapid use is made of these counterpart funds as soon as possible.

12.41. The comments made earlier as regards the risk of misuse on delivery, especially in the form of re-exports, are equally valid for pesticides, the market value of which in Poland is 50% below what may be obtained from sales in the Member States. The Court was unable to consult any list of final recipients (farmers) in respect of the sale of these products.

12.42. The Court is aware of cases of re-export to three EC Member States. It was not until November 1990 that the Polish Council of Ministers made a decision to prohibit the re-export of pesticides delivered by the European Communities in July and August 1990. Until this measure was adopted the Polish customs authorities had no legal basis on which to intervene by means of checks and, where necessary, seizures in order to prevent the re-export of these pesticides, which were identifiable as EEC deliveries. The Commission is requested to ensure, for future aid programmes of this sort, that the necessary administrative steps are taken prior to delivery of the aid, so as to ensure that the goods are used in the country in question in a regular manner and in accordance with the objectives. This also includes the setting-up of an efficient monitoring system. Once again, the Commission is also requested to draw up an assessment report.

12.43. The Court has, moreover, established that co-ordination of the management of the various resources arising from the counterpart funds and the other Phare measures, the EIB loans and G-24 aid programmes, has been inadequate and in some cases even non-existent.

12.44. The audit further revealed that there were no uniform conditions for administering the resources of the various counterpart funds, e.g. for determining the level of interest rates or for the granting of interest-rate subsidies on loans. The Court calls upon the Commission to remedy this situation.

Loans: Community financial instruments

12.45. In 1990 the Court examined the EEC's progress as regards the setting-up of the various financial instruments used to supply aid to Hungary and Poland. The results of this examination are given in the following paragraphs.

The Community's medium-term loan to Hungary

12.46. Council Decision 90/83/EEC authorizes the Community to grant a medium-term (five-year) loan to Hungary for a maximum amount of 870 Mio ECU. This loan, commonly referred to as a 'balance of payments` loan, should make it possible for Hungary to re-establish its international financial credibility and smoothly carry out the adaptations to its economy that are set out in its restructuring programmes, thereby facilitating the transition to a market economy as well as tackling the negative effects or symptoms deriving from past failures. The Commission is required to manage the loan in full cooperation with the EEC's Monetary Committee in a way which is compatible with any agreement concluded between the International Monetary Fund (IMF) and Hungary.

12.47. The loan must be paid out in three instalments, each payment being subject to the observance of certain conditions. The first instalment, for an amount of 350 Mio ECU, was made available to Hungary in April 1990 after it had been confirmed that a stand-by agreement had been concluded between Hungary and the IMF in March 1990. This instalment is fully covered by a Community guarantee entered under Article 997 of the 1990 general budget.

12.48. The payment of the two subsequent instalments is subject to the observance of the performance criteria listed in the Agreement Protocol (Memorandum of Understanding), dated 30 March 1990, concluded between the Commission and Hungary:

(a)the reduction of the deficit of the national budget deficit on current account;

(b)the country's unpledged international reserves in convertible currencies should be equal to at least 400 Mio USD before the second instalment is paid and equal to at least the sum of the first and second instalments before the third instalment is paid;

(c)the implementation of a borrowing programme concluded with the IMF which aims to ensure the continuous participation of commercial banks;

(d)pursual of the extension of the programme to lift price controls in 1991 and 1992;

(e)reduction of subsidies for consumption, production, investment and housing, as defined by the International Bank for Reconstruction and Development (IBRD), from 13,2% of GDP in 1989 to 9% in 1990, 6,5% in 1991 and to less than 5% in 1992.

12.49. The protocol agreement also provides for monitoring procedures, under which the National Bank of Hungary is to provide the Commission with information certifying that the five performance criteria have been observed. By applying these procedures, the Commission was able to establish at the end of November 1990 that the performance criteria in respect of the current account deficit, the lifting of price controls and the reduction of subsidies would be observed before the end of 1990. It was not able to confirm, however, that the increase in the level of unpledged international reserves would be achieved. Moreover, the programme of borrowing from commercial banks had not been fully implemented and the Commission confirmed that this particular performance criterion would not be observed.

12.50. Although the protocol agreement stipulated that payment of the other loan instalments would be subject to the observance of the five performance criteria, the Community decided

to grant the second instalment (260 Mio ECU) of the medium-term loan. This amount was paid on 14 February 1991. The Court has observed that the general budget of the European Communities in respect of the financial year 1991 makes provision for a Community guarantee for the first instalment only, in order to enable the Commission to ensure the debt service in the event of default. The Court calls upon the appropriate authorities to take the steps required to see that the budgetary guarantee also covers the possibility of default as regards the second instalment.

Loans from the EIB's own resources to Hungary and Poland

12.51. In reply to a Council request, the EIB's Board of Governors decided in November 1989 to authorize the EIB to grant loans from its own resources for a total amount not exceeding 1 000 Mio ECU to finance investment projects in Hungary and Poland. Lending operations in these two countries are fully guaranteed by Article 997 of the 1990 Community budget, within the framework of Council Decision 90/62/EEC of 12 February 1990. All EIB loans to Hungary and Poland are guaranteed either by the State or by the national bank. The Community guarantee, which covers every aspect (reimbursement of capital, interest and associated costs) of the debt service only comes into play where both the borrower and the guarantor default in respect of one of the loans. The Court noted that the total possible theoretical debt corresponding to the Community guarantee could range from 1 600 Mio ECU to 1 900 Mio ECU.

12.52. During 1990 the EIB approved loans for a total of 235 Mio ECU in respect of six investment projects. The Court's examination confirmed that the Commission's procedures described under Chapter 10, paragraph 10.35 had been applied to all of these projects in order to confirm their eligibility for financing by loan. The Court considers that it is too early to assess the progress of each of these projects, but it is taking care to discuss the procedures for its audits of these Community-guaranteed loans with the EIB and the Commission.

Loans from ECSC resources to Hungary and Poland

12.53. In May 1990 the Council of the European Communities agreed, pursuant to Article 95 of the Treaty establishing the European Coal and Steel Community (ECSC), to grant ECSC loans for a total amount of 200 Mio ECU to finance industrial projects in Hungary and Poland. ECSC loans are not guaranteed by the general budget of the Communities but by the ECSC's own guarantee fund. In 1990 no financing operation by loan had been approved and the Court believes that one of the reasons for this inactivity on the part of the ECSC compared with the EIB (described under paragraph 12.51) may be traced to the difference in the guarantee offered by the two financial instruments.

COORDINATION OF THE GROUP OF 24 OECD DONOR COUNTRIES

12.54. Following the 'Paris Summit` Decision (15 July 1989), the Commission was entrusted by the group of 24 OECD countries with the task of co-ordinating the aid and setting up a framework for the aid decided upon.

12.55. It appears, however, that this active role of co-ordination is not sufficiently well known in the recipient countries.

12.56. Dialogue and information should be promoted within a framework of programming under which Community measures should be effected. The Court has already insisted on the important aspect of coordination, namely in its 1989 annual report

.

12.57. For this reason it would be useful to set up a data bank which would be accessible to all donors and which would cover a wider diversity of situations and improve management of the extensive aid resources. This data base would incorporate information concerning the measures and instruments provided for by the public authorities. It would thus promote co-financing measures or joint projects and prevent measures from being duplicated.

12.58. Such coordination of aid would also considerably relieve the recipient countries' national authorities.

OBSERVATIONS COMMON TO THE VARIOUS TYPES OF AID

Capacity to absorb the aid

12.59. During its missions in Hungary and Poland respectively the Court was made aware of the real difficulties facing the persons involved in Community aid measures. These difficulties reflect the economic, sociological and technological changes in process. What is more, historical experience provides only limited help in understanding this transition from a rigid planned economy to a market economy.

12.60. The following are examples of some of the restrictions and disincentives generally existing: a fragile macroeconomic framework (high public debts, high potential unemployment, fluctuating purchasing power, balance of payments' deficits, etc.), an incomplete legal and fiscal framework, a rudimentary financial and banking structure, very partial privatization, unavoidable bureaucracy and lack of know-how and expert knowledge as regards market economies.

12.61. Thus the Court noted certain delays in the implementation of the projects, caused, for example, by an incomplete definition of the environmental projects in Hungary or the failure to utilize a credit facility (30 Mio ECU) for Polish farmers.

12.62. During its on-the-spot audits the Court observed the negative effects of the absence of an efficient and competitive banking system on the functioning of Community aid. That is why it is important for the Commission and the national institutions to take account of this factor in future aid programmes. An improvement of the banking system could play a central role in further development, for example in connection with the privatization of agriculture, in the creation of small and medium-sized undertakings, the management of external aid, the payment of counterpart funds, private and public investments, the granting of loans, guarantees, joint ventures, the channelling of savings to finance investments, etc.

12.63. The Court considers that the difficulties as regards these countries' capacity to absorb aid must not be underestimated, and recommends that more account should be taken of these difficulties by the Commission when drawing up the programme of Community aid.

Technical assistance

12.64. During its examination of the various projects or programmes, the Court was able to establish that the Community financing programme makes provision for one section for technical assistance and another for material investment.

12.65. Technical assistance, financed mainly by operation Phare, very often represents the main feature of the machinery of these projects and programmes.

12.66. Local training measures are required in this context. The Court considers that this transfer of knowledge is indispensable for mutual understanding and that it should accompany every programme. The Court would also like recourse to local technical assistance to be taken more into consideration in the future within the framework of a progressive transfer of know-how and technologies.

Structural adjustment and sectoral investment approach

12.67. The objectives of Community assistance presuppose a sustained effort of concentration on the structural and strategic measures required for the development of a market economy. For example, decisions in respect of demonopolization should precede privatization. Similarly, permanent rules should be laid down as a matter of necessity to ensure a reliable accounting system, correct evaluation of assets and standardized audit procedures.

12.68. The concentration of these objectives, finally, calls for a specific effort of coordination and consistency as regards the overall Community aid compared with the strategies followed at local, regional or national level in the recipient country, so as to increase convergence of economic performances and achieve a situation of synergy.

12.69. The question of ownership and formation of capital, both for national and foreign capital, is very important for the subsequent economic development of these countries. Uncertainties in this area may considerably slow down the flow of capital needed, or even halt it completely.

12.70. The Court recommends that sectoral investment should be optimized and adapted to the structural adjustment policy, given that the specific requirements of the recipient country are taken into account in the annual programme.

12.71. Although the Community is clearly one of the principal donors (mainly on account of the combination of subisidies and loans), this aid should be used mainly as a consistent link and as a catalyst between the structural, politico-economic and social measures carried out in the recipient country.

Performance criteria

12.72. An assessment of the socio-economic impact of Community aid and its effectiveness can only be made in relation to pre-defined performance indicators, by which success or failure can be measured and which will provide a periodic measure of the implementation of the programme. These criteria, which may be updated, will make it possible to adjust the programme in mid-course, in order to provide an improved response to actual economic and social trends. This process will thus make it possible to identify on a regular basis the correspondence between objectives and results, risks and consequences or alternative solutions and revised results.

12.73. During its audits the Court found no evidence that any such performance criteria had been laid down in the Commission's programmes. The Court considers these criteria to be essential to any ex-post assessment and to capitalization on the experience gained.

GENERAL CONCLUSION

12.74. Despite the difficulties encountered, in particular because of the administrative procedures, the information systems and the economic changes in these countries, the European Communities, through their Phare programme, have provided substantial aid to accompany the first stages of the reform.

12.75. The efficiency of European Community aid is fundamentally linked to the effectiveness of the national authorities and to the clarity required in demarcating responsibilities between the various departments (ministries between themselves, subordinate departments, agencies, foundations, funds, etc.).

12.76. The multiplicity of the programmes involved in operation Phare imposes serious constraints at management level. The Court would like to draw attention, in this process, to the importance of absorptive capacity, which should be taken seriously into consideration. By way of example, food aid to Poland was not based on any realistic analysis of needs.

12.77. The Court is of the view that the European Community should concentrate for the moment mainly on the financing of technical assistance. It should ensure that its aid is not spread too thinly in measures which can hardly guarantee that the desired and necessary overall result will be obtained.

12.78. Correct functioning of the banking system is a principal prerequisite for the economic development that these countries desire. This objective should thus be given priority in the aid measures undertaken.

12.79. Steps should be taken to ensure that the Commission, and the countries of the Group of 24, do not finance technical assistance of different kinds in several sectors, without any general relation or any clearly defined common objective.

12.80. An effective integration of all the aid instruments (direct, coordinated or financial aid) within a consistent framework, would make it possible to draw up a multiannual overall plan.

12.81. As regards the management of counterpart funds, the Commission must devote all the necessary attention to the use of these important resources.

12.82. The EEC guarantees are shown in the general budget as 'for the record` entries. The Commission is now examining the question of risk and potential debt and intends to submit a report to the budgetary authority.

12.83. The 'balance of payments` loans are certainly important but are only justifiable on a temporary basis, given that they are only a remedy for the symptoms, not for the cause. The granting of aid should aim to eliminate the causes themselves.

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CHAPTER 13 (\*) Cooperation with developing countries

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IMPLEMENTATION OF THE BUDGET

13.1. This chapter deals with the 'Cooperation with developing and non-member countries`

financed using appropriations from the Community budget, i.e. for the most part the appropriations relating to food aid, cooperation with Asian and Latin American developing countries and some Mediterranean countries, joint financing of projects implemented by non-governmental organizations (NGOs) and some emergency aid.

13.2. All the appropriations available and the way in which they have been used are shown in Table 13.1. The relatively high rates of utilization of the appropriations for the financial year have been achieved by making considerable use of transfers of appropriations (six between chapters and 32 within chapters) and of advances entered in the accounts as final expenditure (see paragraph 1.85). The fact that only 43,2% of the appropriations for payments carried over have been used is due to the partial payment (78,7%) of commitments against non-differentiated appropriations from 1989 which have been automatically carried forward and to the minimal utilization (20,6%) of the payment appropriations carried forward by the Commission, which nevertheless used them in accordance with the regulations, i.e. after the appropriations of the current financial year had all been used up.

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13.3. There would be little point in making an assessment of the implementation of the budget on the basis of overall ratios covering all the cooperation measures, because of the diversity of the basic regulations and of the budgetary rules and procedures which apply. A wide variety of aid measures, most of them multiannual, are in fact authorized under the same budgetary title. For this reason the Court considers that its earlier recommendations on making the use of differentiated appropriations more widespread

(recommendations which were largely shared by the Commission

and the principle of which was incorporated into the revision of the Financial Regulation

) are still relevant. This is particularly true for this area of aid measures, which is characterized by growth in both its geographical scope and its needs and by a proliferation in the number of parties involved and aid recipients.

JOINT FINANCING WITH NON-GOVERNMENTAL ORGANIZATIONS

Introduction

13.4. The Community's cooperation with the non-governmental organizations (NGOs) consists of food aid, emergency aid, joint financing of projects in developing countries, public information campaigns in Europe and a number of specific measures with the European and local NGOs. This chapter deals only with the joint financing of projects and the information campaigns financed from Article 941 of the budget (B7-5010 as from the 1991 budget).

13.5. During the 1980s, the NGOs became increasingly important as partners in development cooperation. The NGOs are often regarded as being more efficient than public organizations in reaching the poorest sections of the population. Almost all the Member States have set up a system of joint financing of projects carried out by their national NGOs. The Community funds paid to these same NGOs have been steadily growing throughout the past decade, reflecting the high priority which the Community gives to supporting the initiatives of NGOs. Public funds at present represent a large source of financing for the NGOs, which have thus been able to expand and diversify their activities.

Budget trends

13.6. The appropriations of Article 941, entered in the budget for the first time in 1976, have grown very rapidly from their original 2,5 Mio ECU, in keeping with the wishes expressed by the European Parliament. In 1989 they amounted to 80 Mio ECU and this was raised to 90 Mio ECU in 1990. At present they account for almost one-third of the Community contribution to the NGOs (± 300 Mio ECU per year), and 3% of the Community's financial commitment for all its development cooperation, including the EDFs. The development and budgetary implementation of the appropriations are shown in Table 13.2, as are the jointly financed measures. The Community's total contribution from 1976 to 1989 was 455,6 Mio ECU and this enabled the joint financing of 3 523 projects in the developing countries (representing 91% of the appropriations) and 659 information campaigns in Europe (9%).

Geographical distribution

13.7. The geographical breakdown shows that 43,9% of the funds were allocated to Africa, 30,3% to Latin America, 18,6% to Asia, 5,1% to the Mediterranean area, 1,3% to the Caribbean and 0,8% to the Pacific. The ACP countries received about 44% of the funds and the non-associated countries around 56%.

13.8. The number of NGOs with which the Commission has jointly financed projects has risen from 33 in 1976 to 602

in 1989. During this same period, the funds paid to the NGOs of Belgium, the FR of Germany, France, Italy and the United Kingdom have shown a similar trend to that of the appropriations available, whereas those paid to the NGOs of Denmark, Ireland and Luxembourg have remained at a very low level. The Netherlands is a special case, since it has developed in a manner which is midway between these two groups. Since 1986, the funds paid to the NGOs of Spain have tended to follow the same trend as that of the first group, and those paid to the NGOs of Portugal have followed that of the second group.

The Court's audit

Earlier observations

13.9. In 1984, when it was carrying out an audit on the system of joint financing of projects with the NGOs

, the Court noted that the Commission was rarely in a position to monitor the actual use of the Community funds which were managed by the NGOs. The difficulties which were encountered related chiefly to the imprecision of the General Conditions, insufficient information about the use of Community funds, the lack of transparency in the European NGOs' accounting systems and shortcomings in the monitoring of projects by the Commission departments.

13.10. The conclusions, which, as regards the need for an improvement in the management systems, were shared by the Commission, recommended greater precision in the General Conditions, more effective and more uniform monitoring of the projects by the Commission and, in particular, better choice of the NGO partners and more stringent selection of projects.

Objectives and scope of the audit

13.11. The objectives of the audit were:

(a)to check the proper application of the General Conditions of joint financing drawn up by the Commission;

(b)to assess the administrative and financial management systems of the NGOs as managers of Community funds;

(c)to assess the application of the principle of partnership between the Commission and the NGOs;

(d)to assess the effectiveness of the management procedures and the quality of the monitoring and evaluation of results by the Commission.

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After carrying out checks in the Commission departments on the procedures adopted for selecting projects, the appraisal of files and the monitoring and checking of joint financing, the auditors then proceeded to check at the NGOs' head offices whether their management information systems enabled clear, reliable monitoring of the funds paid to the projects. In order to make the conclusions more specific, on-the-spot checks were made on some projects.

13.12. A summary of the Community contributions granted by Member State, for the NGOs which were audited and the projects examined on a random sample basis, is shown in Table 13.3. The 53 NGOs visited received 46% of the total amount of joint financing from 1984 to 1988 and the projects audited on a random sample basis represented around 25% of the funds granted by the Commission to the audited NGOs.

Legal framework of the joint financing

13.13. There is no Council Regulation within the meaning of Article 189 of the Treaty. On 28 November 1977, the Council

('cooperation and development`) gave its agreement on the basic guidelines and the procedure to be followed for using the appropriations for joint financing with the NGOs. These provisions, applicable for the appraisal, implementation, monitoring and checking of the joint financing, are laid down in the text of the General Conditions, the first version of which remained in force from 1976 to 1981. After a first revision in 1982, a second revision of the text was made in 1988.

13.14. Once this second revision was completed, the General Conditions were better systematized and included more detailed data-sheets. The General Conditions specifically for the public information campaigns stipulate that from now on projects whose objective is the financing of the day-to-day running of the NGO, the collection of funds or the promotion of the NGO will be explicitly excluded.

Observations on the joint financing with the NGOs

Eligibility of the NGOs

13.15. NGOs officially established in a Member State of the European Community are eligible to take part in the joint financing arrangements provided that they satisfy a number of criteria, which are laid down in three articles of the General Conditions and summarized below:

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(a)only autonomous, non-profit-making NGOs which have their head office in a Member State and of which a major proportion of the financial and human resources is of Community origin may make an application for a joint financing grant;

(b)in determining whether an NGO is eligible to receive a joint financing grant, the Commission considers its ability to mobilize solidarity and private resources in Europe, its experience in and the priority it gives to development aid in developing countries or to public information campaigns in Europe, the efficiency of the organization and its capacity to ensure the competent formulation and viable implementation of projects and the financial and operational contribution of the NGO itself to the projects presented for joint financing;

(c)applications made by NGOs which satisfy the above requirements but which are acting on behalf of other NGOs which are not qualified to submit applications will not be eligible for Community assistance.

13.16. The Court's audit of 53 NGOs revealed that:

(a)the Commission agreed to finance projects presented by four Iberian NGOs despite the fact that the latter failed, on some important points, to satisfy the eligibility criteria: because of a lack of appropriate legal provisions, because of a financing structure for their activities which deviated substantially from the principles laid down in the General Conditions, or because of a lack of vocation for and experience in development cooperation. Even though, at the time of the enlargement of the Community in 1986, the Commission was obliged to be less strict than with the NGOs of other Member States, it should have set up exceptional arrangements. In the absence of any such arrangements, the Court points out that the eligibility criteria summarized in paragraph 13.15(b) should be applied strictly, and not just be regarded as secondary factors;

(b)there are doubts as to the eligibility of a Danish NGO because in fact there is no separation between its political activities and its development activities. Its human and organizational resources and its management information system were common to both. Moreover, the Court's checks showed that the NGO had submitted as an 'own contribution` estimates of work which it could not prove. This procedure, according to the official representatives of the NGO, was the only possible way of making up for its inability to mobilize private financial support;

(c)the four Dutch NGOs with which the Commission has jointly financed projects are financed exclusively by public funds from the Dutch Government. No private funds are therefore mentioned in these projects.

The NGOs' financial contribution to the projects

13.17. According to the General Conditions, the Commission's contribution to projects may not normally exceed 50% of the total cost of the measure (project)

. The NGO's contribution may include funding from its own resources, from other NGOs, from governmental joint financing schemes and from local beneficiaries. The Commission gives priority to projects where the own non-public NGO financial contribution is at least 15% of the total cost. Since 1988 the General Conditions have laid down that the Commission may accept, as part of the NGO contribution, an estimate of the human and material resources which the NGO has used for these projects. In this case, the estimate must be substantiated and the method of calculation identified.

13.18. The audit shows that, during the period from 1984 to 1988, more than 20% of the 53 NGOs visited had, in fact, made financial contributions to projects of amounts much lower than 15%. In itself, that is not inconsistent with the policy of the Commission. Nevertheless, the Court's audit has revealed shortcomings in the application of this policy because, in several cases, the Commission has not been able to assess precisely the true contribution of the NGOs, as can be seen in the following paragraphs:

(a)for the three projects which were audited at the head office of a Danish NGO, the NGO's own financial contribution was about 5, 2 and 1% respectively. Several estimates had been charged to the projects and accepted by the Commission as the NGO's contribution. At the time of the audit, the NGO did not have any material enabling it to prove that these estimates were acceptable. For one of the projects, some of the estimates declared to the Commission concerned the receipt and dispatch to Nicaragua of 10 000 pairs of used spectacles, which had been donated in Denmark; the local partner, however, had received only 2 463 of them;

(b)other NGOs have used procedures which make it difficult to ascertain the amount of their own contribution, by sometimes failing to make any reference to the estimate of their own contribution when they presented their application for joint financing. These procedures are estimates of 'work` and 'services` calculated in proportion to the salaries of the permanent staff at the NGO's head office (including senior management). In five cases, the NGOs visited did not have any analytical accounts, which made it impossible to assess whether the amounts entered against the projects were reasonable;

(c)in other cases where the Commission had taken the joint financing decision on the basis of an NGO own financial contribution of at least 15%, it was found that in reality this contribution was much lower. In respect of two projects submitted by a German NGO, the NGO's own contribution was 2,6 and 2,8% respectively. The funds granted and paid by the Federal German Ministry of Economic Cooperation were not identified as stipulated by the General Conditions. For three French NGOs, the contributions of other partners were not identified separately with the result that the apparent own contribution of the NGO was higher than it was in reality. In these cases it was no higher than about 5%.

13.19. At least prior to 1988, some NGOs with very limited resources used to forward their projects to other NGOs, which submitted them for Community joint financing. Once the necessary funds had been obtained, the projects were returned to the 'prime contractor` NGO, which carried them out without contributing financially to them, as stipulated by the General Conditions.

13.20. The Court considers that, in view of the difficulty of evaluating contributions in the form of human and material resources and the possibilities of abuse, the Commission should no longer accept such estimates as part of the NGOs' own contributions. In return, the Commission could consider a lump-sum contribution of up to 10% of the direct costs of the projects as part of the general administrative expenses. The NGO's own financial contribution would have to be identified separately.

Observations on the management by the NGOs

Payment of funds to local partners

13.21. In accordance with the procedures laid down, the Commission makes the payments in one or more successive instalments and at the request of the NGO. Part of the funds is then sent to the local partner responsible for carrying out the project in the recipient country. The monitoring of funds should be made project by project.

13.22. Some NGOs, which have several projects in the same country and sometimes in the same region, deposit the funds in a foreign currency bank account on behalf of the NGO representative in the recipient country personally. In most cases there are no documents to substantiate the transition of the funds from the NGO representative's account to the project, which means that the system of transferring funds is not very transparent and that the actual amounts paid to each project cannot be identified. In these cases, it is not possible to trace the flow of funds right down to the projects.

13.23. Another practice which tends to obscure the system of monitoring funds right down to the projects is the use of triangular operations. The funds are paid into accounts held outside the recipient country, sometimes even in Europe, on behalf of the project leader personally or a third party. Even though, in some cases, the receipt note for the funds paid into these accounts is available in the head office of the European NGO, there is no trace whatsoever of the amounts received by the project in the recipient country. The Commission should demand proof of the receipt of funds by the local partners at the time the reports are submitted.

Interest earned by Community funds

13.24. According to the General Conditions laid down by the Commission, the European NGO must notify it of any interest earned on the funds advanced by the EEC. This interest may either be used to promote the projects concerned or be refunded to the Commission. Since 1988, the General Conditions have specified that the allocation to the project of the interest earned is not allowed to reduce the contribution of the NGOs or of the other donors.

13.25. Of the 53 NGOs audited by the Court, only five systematically abided by the provisions of the General Conditions concerning bank interest.

13.26. The system whereby the Commission pays advances and then the NGOs send the funds to the local partners means that the funds often remain in Europe for lengthy periods. These funds are normally paid into a bank account which the NGO uses for all its activities. When the NGO has a large amount of funds available, it makes financial investments. Since it is impossible to establish the share of the Community funds which was invested, it is likewise impossible to check on the interest earned.

13.27. In examining the extent to which the fact that funds remained on the accounts of the European NGOs benefited the recipients of the projects, it was found that in more than 40% of cases the funds had remained in Europe for a period ranging from several days to several months and in some cases more than a year, but that no interest had been paid to the project or even refunded to the Commission. Other NGOs held bank accounts specifically for Community funds, but they had not paid the interest earned to the projects either. If the Commission does not know the amount of the interest earned, it can neither authorize this interest to be used on behalf of the projects nor ask for it to be refunded.

Implementation and financial management by the NGOs

13.28. Some NGOs to which the Commission has for several years been granting funds for the joint financing of projects have not set up even the most rudimentary system of management accounting. In other NGOs which have set up such a system it does not always satisfy the principles of clarity and completeness. Community funds are not shown. The Commission should urge its partners to improve their management tools further and should assess the management abilities of the NGOs before deciding on the joint financing grant and paying them a contribution.

13.29. A good illustration of the need for an adequate management system is the example of a United Kingdom NGO, which is one of the group of 10 NGOs that received the most joint financing from 1980 to 1989. This NGO, having received a large increase in its financial resources, expanded its activities without making the necessary arrangements for proper financial and administrative monitoring. Consequently, it became insolvent and had to suspend its activities. Because of its failure to assess the NGO's management systems and abilities, the Commission was faced with a fait accompli. Despite the fact that for over six years the Commission had not received any project implementation reports concerning previous joint financing grants, it continued to pay funds until the NGO itself informed the Commission of the suspension of its activities. Inquiries are still under way to determine whether Community funds have been misappropriated.

Financial implementation of the projects

13.30. The General Conditions in force in 1984 made it an obligation for the NGOs to maintain 'separate book-keeping for each project`. The 1988 revised version of the General Conditions now stipulates that the bookkeeping must be separate for each project by means of a specific bank account and/or by an accounting document which specifies the revenue and expenditure and their respective dates.

13.31. Amongst the NGOs visited, compliance with this stipulation ranged from the formal keeping of a document not based on the accounts and concerning solely the flow of funds, to 'project` accounts integrated into the management accounts. Three of the NGOs visited did not abide by this stipulation.

13.32. The chief objective of keeping separate accounts is to enable each NGO to prove at any moment its various contributions to the project and the financial implementation of all the budget presented in support of its request for joint financing. This objective has not been attained in a significant number of NGOs. The accounts are often badly kept and, in several cases, they do not include the contributions of donors other than the NGO or the EEC, and the total expenditure incurred in Europe and in the recipient countries is not specified.

13.33. Over 20% of the NGOs visited had not entered the expenditure incurred in Europe in the accounts for their projects. These were in general 'information on development` expenditure and 'study costs`, the amounts of which had been entered in the financial statements sent to the Commission. These amounts of expenditure could thus not be verified.

13.34. For the expenditure incurred in the developing countries, two basic approaches were adopted by most of the European NGOs visited:

(a)according to the first approach, it is the local partner who is responsible for the implementation and financial management. He has to give an account at predetermined intervals. In this case, the project accounts in Europe include only the transfers of funds to the project. The Court has found that the local partners are often unaware of the project data-sheet which has been submitted to the Commission, with the result that the financial statements are presented according to a different structure, thus making it very difficult or even impossible to reconcile the two;

(b)according to the second approach, the financial implementation of the project is the responsibility of the local representative of the European NGO, who must send a list of his expenditure each month, with or without supporting documents. In this case, the project accounts include the expenditure incurred in the recipient country. The Court's audit inquiries have shown that frequently, where the local representatives are running several projects in the same country, they draw up general lists of expenditure for all the projects without specifying those relative to each project and at the head office of the European NGO the expenditure is roughly allocated to the various projects.

13.35. The Commission should consider preparing guidelines with the aim of harmonizing the accounting procedures and the presentation of the financial statements of the projects. Similarly, the European NGOs should send their local partners all the information necessary for the presentation of financial data which can be reconciled.

Reports supplied by the NGO

13.36. For each project or information campaign the European NGOs are obliged to give an account of the use of the funds paid by the EEC and by the other donors and to notify the progress by means of project progress reports (where the Community contribution is paid in several instalments), a final implementation report and an operational report

. Payment of the next instalment is dependent on the approval of the progress report.

13.37. In most of the projects audited, the progress reports and the final reports are late (ranging from a few months to several years, see paragraph 13.49) and, in a not inconsiderable number of cases, the financial statements do not give a true picture of the financial implementation of the project. This is very often the result of shortcomings in the management systems set up by the European NGOs. For example, in the case of a project carried out in Madagascar by an Italian NGO, the acquisition in Europe of fixed assets had been recorded in the project accounts by the European NGO. These assets had also been recorded by the local partner. When the financial statements were being drawn up, the same expenditure was entered twice. The situation is similar in the case of a project implemented in India by a German NGO where the purchase of a vehicle was entered three times in the financial statements sent to the Commission.

13.38. Some European NGOs have a tendency to increase the expenditure of the projects in a rather fanciful manner. In the case of a project carried out in Nicaragua, for example, which was unquestionably of benefit to the local people, the gap between the actual expenditure of the project and the expenditure recorded in the financial statements sent to the Commission by the European NGO was around 25%. The financial statements presented by the local partner and checked by random sample, however, were well kept and did not lead to any observations at the time of the on-the-spot audit by the Court.

13.39. In some cases the financial statements could not be verified because the NGO had no project accounts, no summary lists of expenditure nor even any supporting documents, or because the financial information received from the local partner could not be reconciled with that sent to the Commission.

13.40. The operational reports due for all the projects jointly financed up until 1988 were in general missing from the Commission's files. For the Commission departments, however, these reports should constitute the main means of assessing the development of the projects after the end of the outside joint financing and their socio-economic impact on the recipient sections of the population. Since the revision of the General Conditions in 1988, this report has no longer been systematically required. The Commission thus has no means of assessing the actual viability of the jointly financed projects nor of knowing the extent to which the living conditions of the recipient people have been improved.

Observations on the Commission's management

Appraisal of files

13.41. The number of applications for joint financing and that of files to be appraised increase in proportion to the appropriations available. In 1989, the department responsible was faced with more than 1 000 applications, submitted by over 200 NGOs and involving a total Community contribution of 162,4 Mio ECU.

Information available

13.42. The Court's audit showed that, although as a rule the Commission had at its disposal the NGOs' articles of association, in more than 55% of cases it had neither the annual accounts nor the activity reports of the NGOs since 1986. Moreover, as paragraph 13.50 shows, it has not set up any system enabling it to carry out regular monitoring of the current joint financing grants for each NGO. The Commission does not have all the information necessary for taking decisions on new joint financing grants in full knowledge of the general situation of the NGO and of the state of progress of previous joint financing grants. The present system may lead to situations such as that concerning the United Kingdom NGO described in paragraph 13.29.

13.43. The Commission should consider keeping up to date a permanent file for each NGO. In addition to the legal articles of association, the certified annual accounts, activity reports and any evaluations made by independent experts, it should include a summary data-sheet showing the way in which the NGO has fulfilled its obligations arising from previous joint financing contracts.

Prior analysis of projects

13.44. The Court has identified several projects which have been jointly financed despite information available, including opinions from Delegations or technical departments, indicating that the long-term viability without outside funds was doubtful, or that the project was not consistent with the actual priorities of the country. The Commission's files for these projects contain neither explanations stating the reasons why it has not followed these unfavourable opinions nor the Financial Controller's observations on these opinions.

13.45. At the time of the Court's audit, these Commission files did not contain any implementation reports making it possible to assess the degree of success of the projects, even though some of them were supposed to have been completed some time ago.

13.46. The Court considers that the grounds for any decision to overrule the opinions of the technical departments or Delegations should be clearly stated in the joint financing file.

Appraisal times

13.47. The increase in appropriations and the consequent growth in the number of projects to be handled have not been accompanied by any strengthening of the human resources in the departments concerned, and the studies on the computerization of the activities of the managing department, to which the Commission made reference in its replies to the Court's 1985 report, have not resulted in any concrete action. Consequently, the average length of time taken for appraising the files has risen from five months in 1985 to eight months in 1989 and 1990. Checks on a sample of 60 files have revealed certain circumstances underlying the excessive increase in these periods of time:

(a)the fact that projects are carried over from one year to another (because of a lack of appropriations) means that the files remain pending for several months until the contract is signed;

(b)the files of the NGO projects constitute a further addition to the list of normal tasks of the technical departments and the external relations departments, which already have a heavy workload. Consequently, these departments sometimes take several months to give their opinion;

(c)the lack of precision in some of the provisions of the General Conditions is often the cause of repeated exchanges of letters between the Commission and the NGOs. In this case, the period of time before a decision is taken often exceeds a year.

13.48. For the small NGOs which do not have adequate financial capacity, an inordinately long file-appraisal time and, consequently, a belated Commission decision often mean that their activities are blocked. For the NGOs which are bigger in financial terms and which are able to start a project with their own resources, the major consequence is that when the NGOs receive the joint financing contract the projects are already well advanced. In several cases of projects jointly financed with the Dutch NGOs, the contract reached the NGO only a few months before the completion of the project.

Monitoring of implementation and checking

13.49. Monitoring the implementation of the jointly financed projects is the responsibility of each manager and is based on project progress reports and/or an implementation report. The periods of time within which these reports must be submitted are laid down in the General Conditions. The findings of the Court's audit of a sample of about 50 of these projects are as follows:

(a)in the case of multiannual projects, about 70% of the progress reports had been submitted late. In more than 25% of cases, this delay was longer than one year, and could even be several years;

(b)in the case of the implementation reports which the NGO is obliged to submit after having received the final payment, around 75% of reports were submitted late. In 23% of these cases, the delay exceeded two years.

13.50. At present the Commission has no system offering it an overall view of the situation with regard to expected implementation reports and has no efficient procedures for issuing reminders about reports still outstanding. It is left up to the initiative of each manager. In some cases, an annual campaign of issuing reminders has been launched by the Commission but the results have been poor. In only 20% of the cases examined, there was a reminder letter which had been sent several months or even several years after the deadline set for sending the report. It is only very rarely that these reminders are followed up at the appropriate time.

13.51. One of the consequences of the shortcomings of the Commission's and the NGOs' monitoring procedures is that committed appropriations may lie idle for long periods of time. The successive instalments of the joint financing grant cannot be paid if the progress reports have not been submitted or are not satisfactory or if an NGO fails to make a request for the payment of an instalment. Circumstances such as these result in the committed appropriations sometimes remaining unused for several years.

13.52. The shortcomings in the monitoring of the project implementation reports show that the Commission resources available for handling these reports are insufficient and that the system adopted by the Commission is unsuitable.

13.53. The Court has observed that even where the technical departments of DG I and DG VIII give an opinion on the financing applications, they do not monitor the implementation of the projects and are not involved in evaluating the reports.

Role of the Delegations

13.54. The Commission's Delegations have only a marginal role to play in the present system of managing the NGO projects. An opinion is requested on the proposal for joint financing. But the number of applications on which they are supposed to give an opinion is often so high that they are not able to give more than a superficial evaluation. The resources available for monitoring in the field are sometimes extremely limited or even non-existent. Usually the Delegations receive the implementation reports only for information purposes.

Conclusion

13.55. The Court does not question the Commission's strategy of jointly financing projects with the NGOs as an instrument of development cooperation. It should be emphasized, however, that the budgetary appropriations devoted to this have grown considerably in volume and that it is consequently all the more essential that suitable management systems be set up which make it possible to account for the use of Community funds in an intelligible manner and to minimize the risk of misappropriation of these funds and which permit effective monitoring of the projects which have been carried out.

13.56. The observations presented above show that, even though the Commission has improved the General Conditions and certain procedures since the Court's special report of 1985, the system set up for the management and monitoring of joint financing with the NGOs still does not adequately meet the management needs at the level both of the NGO and of the Commission. The very high number of projects to be jointly financed and managed each year is hardly compatible with the requirement that prior, in-depth study be made of the files of the individual projects, and this high number is detrimental to stringent monitoring of projects at the financial level and in terms of actual implementation in the field.

13.57. The Court considers that the Commission should review the present system, in order to establish a system of joint financing by means of a programme of projects within a multiannual framework for the NGOs with which it has worked for several years and which have shown proof of efficient management and effective project work. Such a system could include, for example:

(a)a multiannual framework agreement with the NGO defining the key objectives and the mutual responsibilities of the Commission and the NGO;

(b)an annual activity plan presented to the Commission which would serve as a basis for the Commission's financing decision;

(c)the annual submission by the NGO of certified accounts and of an activity report.

13.58. In return for this flexibility there should be increased stringency in the monitoring and evaluation of jointly financed projects. The certified accounts which have to be submitted each year should include annexes showing the state of financial progress of each project. Upon completion of the implementation of a project, an evaluation report should enable the Commission to assess the extent to which the objectives have been attained and the socio-economic impact on the target population. In addition, the Court emphasizes, as it did in its 1985 special report

, the need for the Delegations, which are closer to the actual projects than the Commission's central departments, to play a greater role.

13.59. The shortcomings identified by the Court in the systems of certain NGOs are such that the system proposed above could be applied only to NGOs for which the Commission has ascertained beforehand that they meet the defined management criteria. For the others, an extra effort, with the support of the Commission if necessary, should be demanded before they are allowed in their turn to benefit from these flexible arrangements. It is also important that the Commission stops jointly financing projects with NGOs which have no management systems enabling them to give account of the use of Community funds in a satisfactory manner and which have shown themselves to be unable to carry out projects in an efficient way.

CHAPTER 14 (\*) The European Development Funds

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INTRODUCTION

14.1. This part of the annual report deals with the financial and technical cooperation up to 31 December 1990 with 66 African, Caribbean and Pacific (ACP) States financed, in accordance with the first, second and third Lomé Conventions

, by the EC Member States outside the general budget of the European Communities. The fourth Lomé Convention, which includes another three ACP States, only came into effect on 1 September 1991. The period between the expiry of the third Lomé Convention and the commencement of the fourth was covered by transitional measures provided for in Article 291 of the third Lomé Convention

. The Court's observations on cooperation with non-ACP States financed from the general budget of the European Communities will be found in Chapter 13 of this volume and in paragraphs 0.13 and 0.14 of the introduction. Readers are also referred to Volume II, paragraphs 17.3-17.25 in Chapter 17 concerning the administration of the Commission's Delegations in third countries.

14.2. The need for better harmonization of accounting procedures, better exchanges of information and improved cooperation between donors of development aid is a theme which the Court has often raised in past annual and special reports. In pursuance of this objective the Court has assisted in strengthening links between the Commission's Directorate-General for Development and the Development Administration Division of the United Nations.

14.3. In the Court's view the administration of aid would achieve considerable improvements in effectiveness in beneficiary countries were aid donors to harmonize their financial procedures and controls.

EXECUTION OF THE EDFs UP TO 31 DECEMBER 1990

Utilization of appropriations

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14.4. Table 14.1 illustrates the utilization of the fourth, fifth and sixth European Development Funds at 31 December 1990. Figures for the fourth EDF are final since it was closed on 31 December 1990 after 15 years' existence. For the three Lomé Conventions in operation during the year new payments amounted to 1 256,3 Mio ECU and new primary commitments amounted to 992,7 Mio ECU.

14.5. After 10 years of implementation 83,2% of the fifth EDF has now been disbursed. The disbursement rate for the fourth EDF at this stage of implementation had been 88,3%. Five years after the sixth EDF entered into force payments amounted to 44,6% of funding. At the same stage of the fifth EDF similar progress had been made (44,0%) although without the rapid disbursement sectoral import and special debt programmes which were introduced under the sixth EDF (see paragraph 14.6).

Financial statements

14.6. The presentation of the financial statements furnished to the European Parliament and the Member States has been improved compared with previous years in so far as the evolution of allocations to the various aid instruments is now disclosed. However, sectoral import programmes which represent accumulated commitments of 493 Mio ECU, in addition to the 273,5 Mio ECU of the special debt programme, are still not shown separately in the sixth EDF accounts for 1990.

14.7. The clearance of expenditure already effected has not improved in 1990. The uncleared amount over the last three years for all EDFs in the course of being implemented has increased by 223%. There was 28 Mio ECU at the end of 1988, 67,2 Mio ECU at the end of 1989 and 90,6 Mio ECU at the end of 1990 still to be cleared. The Court therefore stresses again the necessity for the Delegations and the authorizing services of the Commission to be mindful of the need for rapid and complete clearance of expenditure if proper accounting control is to be maintained over operations.

14.8. Once more in 1990, the Court has been unable to obtain complete and reliable financial information regarding counterpart funds in the Commission's central services. Because of the amounts concerned and the importance of the issue for the development of ACP countries, the Court calls for complete information to be disclosed on this matter in the end of year financial statements for the EDFs.

Outstanding commitments as at 31 December 1990

14.9. Commitment decisions still to be cleared at 31 December 1990 are 807,1 Mio ECU for the fifth EDF and 3 530,9 Mio ECU for the sixth EDF. Included in these amounts are 338,4 Mio ECU and 1 400,9 Mio ECU respectively which correspond to contracts placed with third parties and still to be settled (outstanding secondary commitments).

14.10. An analysis of the secondary commitments relating to the fifth EDF has shown that 1 403 contracts placed before the beginning of the 1990 financial year and representing outstanding amounts of 100,8 Mio ECU had not been the subject of payments in 1990. Out of these, 30% had been placed more than three years earlier and represented 38% of the slow-moving commitments. Among the uncompleted operations most frequently encountered were risk-capital commitments and interest subsidies, both managed by the European Investment Bank (EIB).

14.11. For the sixth EDF, slow-moving items represented 17% of open contracts and a total of 284 Mio ECU. As for the fifth EDF, risk capital and interest subsidies represented an important share of the total: 206,4 Mio ECU, i.e. 73%. It is the Court's view that the Commission should carry out a review of all EIB- managed operations under both EDFs in order to identify the reasons why, according to the Commission's accounts, agreed payment schedules are not being adhered to. Wherever necessary, commitments not required should be cancelled and appropriations reallocated to new actions.

CLOSURE OF THE FOURTH EDF

14.12. The fourth EDF, which had entered into force on 30 January 1976, was formally closed on 31 December 1990. However, in order to enable the closure to take place, it was necessary to transfer 125,1 Mio ECU of fourth EDF funds which had not been disbursed by 31 December 1990 to the accounts of the sixth EDF. Transfers of undisbursed appropriations were effected at financial instrument, country and project level. The amount transferred was in addition to 1,1 Mio ECU reallocated from the grant allocation of the fourth EDF to the sixth EDF Stabex allocation in 1990, and to a total of 68,7 Mio ECU which had been transferred from the fourth EDF to other EDFs in previous years.

14.13. Table 14.2 provides an analysis of the transfers of funds at financial instrument level.

14.14. At country level, funds allocated to the indicative programmes of individual States that remained undisbursed were transferred to new sixth EDF accounts for utilization by those States. While the proportion of allocations which remained unused varied significantly from country to country, 21 ACP States and six overseas countries and territories (OCTs) were in the position of having more than 5% of their allocation undisbursed at 31 December 1990. Four ACP States and three OCTs actually had more than 10% of their allocation undisbursed: Barbados 26%, Jamaica 17%, Nigeria 13%, Trinidad and Tobago 65%, Belize 38%, Falkland Islands 95%, Montserrat 14%.

14.15. In addition to the transfer of indicative programme allocations, undisbursed allocations made to three countries from the Rehabilitation and Revival Plan financed from fourth EDF funds also had to be transferred to the sixth EDF. The countries concerned were Chad (504 000 ECU), Mali (754 000 ECU) and the Sudan (855 000 ECU). The plan, designed to grant special relief to countries which had suffered worst from the drought in 1984 and 1985 had been intended to be implemented within two years from January 1986.

14.16. At project level, outstanding commitments amounting to 44,7 Mio ECU on 107 Lomé I projects which had commenced prior to 1990 and were not yet completed at 31 December 1990, were transferred to the sixth EDF accounts. These projects will thus continue to be implemented using the funds transferred. While the uncompleted projects covered a wide range of different types of EDF project, it is noted in particular that the Lomé I scholarship programmes for 10 countries (Burkina Faso, Cameroon, Côte d'Ivoire, Guinea Bissau, Jamaica, Madagascar, Mali, Sudan, Swaziland and Togo) were still in the course of implementation. The accounts for these projects had all been open since June 1976 while, overall, more than half of the projects (55) are 10 or more years old. For 18 of the projects there were no disbursements in either 1989 or 1990.

EDF-FINANCED OPERATIONS, OUTSIDE PROGRAMMES AND PROJECTS

ACP General Secretariat

14.17. The Brussels-based General Secretariat of the ACP States, which was set up under an agreement of 6 June 1975, is charged, under the authority of the ACP Council of Ministers

, with overseeing the application of the Lomé Conventions and with assisting the organs of the ACP group and the joint bodies. Since July 1977, 18,4 Mio ECU has been allocated by the Commission to the Secretariat

.

Financing agreements

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14.18. Financing agreements providing for reimbursement by the Commission of approved expenses, including salaries, have been concluded with the Secretariat but they are rather vague. They do not, for instance, set out the number or the functions of experts employed by the Secretariat with the rank equivalent to category A officials whose salaries are reimbursed by the Commission. They do not make obligatory the presentation to the Commission of annual budgets with staff details and audit reports. The Secretariat is required to furnish the contracts of experts to the Commission. When, as late as April 1991, the Court was examining the payments for 1989 and 1990 and sought the contracts governing the employment of 26 experts, only two could be identified and made available at the Commission.

Expenditure to be covered by ACP States

14.19. In regard to experts, the financing agreement of 16 September 1988 covering the period 1 January 1988 to 31 December 1990 provides that only expenditure arising under a contract and which is justified in the execution of such contracts should be reimbursed. In this context only the expenditure covered by the Secretariat's Staff Regulations are reimbursable. The financing agreement also provides that an additional 1% of the eligible expenditure be paid to cover miscellaneous overheads. The Court found, however, that the following miscellaneous overheads were otherwise reimbursed although they were not authorized by any financing agreement:

(a)telefax and translation charges (100 000 BFR or 2 371 ECU)

;

(b)charges connected with cultural activities and relations with the Press (500 000 BFR or 11 853 ECU);

(c)fees for external audit of the Secretariat in 1989 and 1990 (780 000 BFR or 18 491 ECU), the results of which were not passed to the Commission until the Court requested them;

(d)entertainment expenses (330 000 BFR or 7 823 ECU).

In addition, contrary to Protocol 2 of the third Lomé Convention, the Commission paid the mission costs of the Secretariat staff who attended the general sessions of the Council and the Joint Assembly, amounting altogether to approximately 150 000 ECU for 1989 and 1990.

Uncleared advances

14.20. An advance of 13,5 Mio BFR (287 000 ECU) was paid to the Secretariat by the Commission to meet running expenses in 1977. The advance was 'topped up` in June 1985 to bring it to 19 Mio BFR (420 000 ECU). The amount concerned is not included as a recoverable item in the EDF balance sheet as at 31 December 1990 whereas it is recorded as a liability in the accounts of the Secretariat itself. The accounts for the fifth EDF, furthermore, showed another advance at 31 December 1990 of 8,5 Mio BFR (227 000 ECU) yet to be cleared. This second advance was not foreseen by the financing agreement.

1989-90 expenditure

14.21. The Commission paid a total of 8 Mio BFR

(190 000 ECU) to two experts whose contracts, without the authorization of the ACP Council, lasted for 12 and 16 years respectively, whereas according to the Secretariat's Staff Regulations (Article 12), the length of its staff's mandates should not exceed five years (except with the authorization of the Council). Furthermore, financial compensation was paid for unused annual leave of 193 days and 187 days respectively although such compensation for leave in excess of 60 days is not provided for (Article 39).

14.22. It is the Court's view that the Commission should not accept to refund severance grants unless the employment of the experts involved ceases. However, the two experts concerned were still on the payroll for all of 1990 with the same level of remuneration as before their 'termination` of service. To give legal cover to the payments, 'special temporary contracts` were arranged.

14.23. Not only had the experts continued in the employment of the Secretariat but their families also remained in Brussels. Even so, personal and family repatriation costs were paid on the basis of an estimate (1,6 Mio BFR or 37 929 ECU) up to the maximum amount permissible without the experts being required to justify the real costs.

14.24. Similarly in the case of three temporary contracts, the Commission reimbursed 830 000 BFR or 19 676 ECU as 'end of service benefits` although all contracts have since been extended in some cases more than once. In a further case, an amount of 52 000 BFR or 1 233 ECU was paid for 'accumulated leave` after a working period of three months only.

14.25. Experts' mission costs for 1990 amounted to 142 000 ECU, approximately. Examination of the relevant accounts and available vouchers gives rise to the following comments:

(a)mission costs are frequently paid on a 'demande de mission` without a check on the actual situation after the mission; in several cases the documents presented in support of reimbursement indicated neither the purpose nor the location of the mission;

(b)these were reimbursed on the basis of travel agency bills only (1,1 Mio BFR or 26 076 ECU);

(c)frequently business-class flight tickets have been paid for whereas entitlement according to the Secretariat Staff Regulation (Article 55) was to economy class. In view of the changes which have occurred in air travel tariffs since that provision was adopted, the Court calls for procedures to be established to ensure compliance with the principle of economy;

(d)transport fares for home leave entitlements were paid without taking advantage of usual tariff reductions (e.g. excursion tickets); overcharge in 1990 can be estimated at 1 Mio BFR or 23 706 ECU.

14.26. The files are lacking in supporting documents for other Secretariat expenses. In December 1989, for example, 185 285 BFR or 4 392 ECU were paid to an expert over and above her normal salary without any documentary support or reason being given.

14.27. Article 48 of the Staff Regulations provides for education grants without any ceiling. As a matter of comparison the ceiling under Community Regulations is 156 792 BFR or 3 717 ECU a year. In the school year 1990-91 as much as 530 000 BFR or 12 564 ECU was paid for one child's school fees. In 10 cases education costs have been reimbursed without supporting documents (420 000 BFR or 9 956 ECU). For 21 pupils in 1990 excess payments in comparison with the Community ceiling were 4,1 Mio BFR or 97 194 ECU.

14.28. An expert was paid 169 702 BFR or 4 023 ECU in February 1990 based on two receipts from a school in Kenya without any further information. Indeed, one of these receipts which was dated 15 January 1989 is made out to a name other than that of the expert claiming and no explanation is given.

Control by the Commission

14.29. Despite the weaknesses of the reimbursement system evident in 1989 and 1990, the Commission has not sought to correct them, and it has authorized payments even where the Financial Regulation was being breached. What is more, authorizations have received the approval of the Financial Controller without any notes of significance being kept in the authorizing officer's files

. Indeed, the accounting officer for the EDF has never suspended payments even when Article 31 of the Financial Regulation obliges him to suspend payment in cases where the validity of the discharge is contested. This is facilitated by the lack of separation of functions of the authorizing and the accounting officer in the Commission as regards EDF operations, a situation which the Court has criticized in its 1988 and 1989 annual reports and, most recently, in its Opinion N° 1/91 on the draft Financial Regulation applicable to the internal financing agreement under the fourth Lomé Convention

.

Participation of ACP States in meetings organized by the Joint Assembly

Financing agreement

14.30. Annex XXXI of the third Lomé Convention provides, for the period of the Convention, for 1 Mio ECU to be paid to the ACP States towards the expenses of participating in meetings organized by the Joint Assembly outside of general sessions. For this purpose a financing agreement was concluded on 26 November 1986 with retroactive effect to cover meeting costs from the time the Convention entered into effect (April 1986). Even though the financing proposal approved by the EDF Committee limited the contribution of the Commission to 80%, the financing agreement between the Commission and the ACP General Secretariat put 1 Mio ECU as the only limit.

14.31. At 31 December 1990 the Commission had, in fact, contributed the full 1 Mio ECU to the Fund while the ACP Member States' contribution was only 45 000 ECU or 4,5% of the Fund.

Justification of expenditure

14.32. The financing agreement provided for the payment of the EDF contribution in five successive annual tranches on the basis of a detailed explanation of the use made of earlier tranches. However, the final fifth tranche was paid on 18 December 1990 without the supporting documents for the fourth tranche having been received. These were only submitted at the end of January 1991. The documents on file call for the following observations:

(a)in 55 out of 61 cases (90%), the lists of attendance setting out the daily allowances for payment did not include any certification of attendance by the beneficiaries;

(b)most travel costs were reimbursed by the Commission on the basis of a simple declaration without the relevant travel ticket vouchers being attached;

(c)the third tranche included the payment of 298 000 BFR or 7 064 ECU for costs already reimbursed out of the first and second tranches. No corrective action had been taken by the Commission at the time of the audit;

(d)one trip which was cancelled was reimbursed as if it had taken place. The amount involved was 134 500 BFR or 3 188 ECU and no corresponding reduction was made in the amount released under the following tranche. Another trip amounting to 162 600 BFR or 3 855 ECU has been accepted by the Commission without adequate supporting documentation;

(e)for the fourth tranche for which an advance of 215 000 ECU had been paid, supporting documents were only submitted for operations representing 82 600 ECU (i.e. 62% without supporting evidence);

(f)some daily allowances, exceeding the standard allowances under the Secretariat's internal Regulation, and for which no evidence of authorization was on file, were paid (200 000 BFR or 4 741 ECU).

In all these cases the Commission should have deducted from the next tranche all unjustified expenditure relating to the previous tranche. The supporting documents for the expenditure of the last tranche (225 000 ECU for the period 1 March 1990 to 28 February 1991) were inspected by the Commission at the Secretariat in August 1991.

Financial charges

14.33. The Court examined the financial costs charged to the EDF in 1989 and 1990. These costs are all merged into one account in Table 14.3.

14.34. Most entries arise out of currency-exchange differences which may be positive or negative. The remaining transactions are mainly bank charges and commissions.

Exchange differences

14.35. Most exchange differences arise out of the system of adjusting bank accounts kept in national currencies into ecus whereby the balances in national currencies are globally adjusted from time to time. This automatically consolidates any exchange losses or gains which occur during the period in question and it can conceal accounting errors which may have occurred on the various bank accounts. For example, in 1990 an adjustment carried out on 30 September partially hid the fact that revenue of 940 000 UKL had only been accounted for to an amount of 340 000 UKL in the previous year. The end-1989 adjustment of an account hid an overvaluation of the balance by 200 000 DM which arose from an erroneous accounting entry the previous October.

14.36. The Court considers that any global adjustment should be preceded by a detailed check on the accuracy of the bank balances. It should also be borne in mind that, given late entry into the accounts of certain expenditure, the balances are not always up to date

. During its audit the Court noted that some bank balances have never been adjusted.

Bank charges and commissions

14.37. EDF bank accounts should not generate overhead charges. The Commission does not carry out any systematic checks to ensure that banks do not wrongfully impose such charges. Indeed, it was only incidental that the Commission sought a refund of 76 400 ECU at the end of 1989 from an English bank which had debited such charges throughout the year, and also obtained an assurance from a Dutch bank in early 1990 that charges would no longer be imposed. For other bank accounts which are still subject to overhead charges notwithstanding existing agreements, the Commission has not taken steps to avoid the imposition of such bank charges. In the case of operations made under the accelerated semi-direct payment procedure the Commission takes the view that overhead charges are acceptable. The Court questions this approach.

Operations carried out on the financial charges account

14.38. Any bank interest obtained by the European Association for Cooperation (EAC) on funds advanced to it by the Commission should, in principle, be paid over by the EAC to the Commission. The EAC procedure is to enter such interest in the accounts as a negative charge. As this is, in fact, a receipt it should not be treated as a negative charge but as revenue (147 000 ECU).

14.39. Amongst charges noted in the account were expenditure not covered by an accounting commitment and penalties for late payment incurred in relation to particular projects or contracts. These charges should have been allocated to the relevant projects.

TEXT CONTINUED UNDER DOC.NUM : 391Y1213(04).9Overall appraisal

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14.40. The financial charges account covers many different types of operation and the control thereof is weak. Separate accounts for the different types and a clearer accounting structure separating receipts from expenditure as well as administrative procedures strictly in line with the provisions of the Financial Regulation would facilitate better management.

IMPLEMENTATION OF DEVELOPMENT AID IN VARIOUS SECTORS

Scholarships

14.41. At 31 December 1990 unsettled scholarship advances paid by the EDFs amounted to 6,5 Mio ECU. As from the third Lomé Convention, scholarships cannot be readily identified in the EDF published accounts because they are included in various projects at country level and are considered as the training element in those projects. The Court has nevertheless examined the global management of scholarships through the various advances paid to outside agencies which have been allocated the tasks of detailed scholarship management in the Member States and in the ACP countries. This examination was carried out taking account of the observations made in the 1982 and 1986 annual reports

.

14.42. Three observations need to be repeated. These concern:

(a)the delays with which individual scholarships are accounted for;

(b)the level of fees paid to outside agencies entrusted with scholarship management;

(c)the unavailability at Commission level of an overall control system to assess the extent to which scholarships have met indicative programmes' objectives.

Delays in recording individual transactions

14.43. Accounting commitments recorded by the Commission often include various scholarships which make the follow-up of actions at individual level difficult. Moreover, some of the outside agencies in Member States, especially France, Italy and the FR of Germany report on the utilization of advances entrusted to them on a yearly basis only. Some Delegations which manage scholarships in ACP countries are reporting with even longer delays for example: Nigeria, Rwanda, Jamaica and Sierra Leone. Thus accounts do not constitute an adequate basis for following up the actual utilization of funds.

Fees paid to outside agencies

14.44. The European Association for Cooperation (EAC) which manages scholarships in Belgium has made considerable efforts to remedy most shortcomings identified in the past. The relatively high level of management fees which it charges to cover its operating costs has, however, still to be dealt with by the EAC.

14.45. Despite directives and general implementing provisions adopted by the Commission relating to the administrative, operational and financial management of scholarships, only one out of eight agencies reimbursed to the Commission financial interest received from banks on advances granted by the Commission (see paragraph 14.38). Such moneys unduly increase the revenue earned by the agencies and are a loss of income for the EDF. Undertakings of the Commission in 1983 (reply to paragraph 15.54 of the 1982 annual report) were obviously not followed up adequately by its services. Moreover, it has been noted that in some Member States school fees applied to ACP scholarship beneficiaries are still higher than those applied to nationals. In this case also the Commission has failed to follow up the previous observations of the Court

.

Scholarship computerized control system

14.46. In its replies to the Court's 1986 annual report, the Commission stated its awareness of the fact that the scholarship data-processing system no longer met requirements and should be adapted. The Court examined the adaptations made and noted that they had not been developed as intended and that the existing system was so inflexible that only standard management information could be obtained without the assistance of a computer programming expert. This constituted such a handicap that users had almost ceased to have recourse to the system. It was also noted that basic information for the proper management and evaluation of scholarships like their rates of success, average duration and actual costs, as compared to forecasts, were not available. The Court cannot but repeat its previous recommendation that a computerized control system be introduced to assess the cost of training of each person with regard to educational effectiveness and relevance from the point of view of the objectives of indicative programmes. This is all the more necessary since the accounts themselves no longer facilitate the easy identification of training funds and the uses to which they have been put.

Technical assistance managed by the European Association for Cooperation

14.47. The European Association for Cooperation (EAC) is a private non-profit making organization which recruits and manages individual experts in the framework of technical cooperation measures financed by the EDF. In carrying out this mission the EAC acts on mandate from the Commission, which itself initiates action at the request of an ACP State. In practice, the EAC plays little part in the selection of experts. This is principally carried out by the Commission with the ACP State concerned. The essential role of the EAC is to provide the ongoing management of the individual technical assistance contracts which it has been asked to handle.

14.48. In recent years, EAC-managed expenditure on technical assistance has evolved as shown in Table 14.4.

Management of accounts

14.49. In general the EAC's accounting system is of a high standard, but better use could be made of it. It can provide a detailed budget per expert which should make it possible to control expenditure. However, the system cannot ensure that there are no overruns of local expenditure, which, even if monitored on the spot by the Delegation, can easily exceed the agreed limits. During its audit the Court noted such overruns.

14.50. Too often the accounting commitments are only cleared well after the contracts to which they relate have expired. In many cases delays have been as long as two, and in some cases three, years. For example, five commitments cleared on 15 May 1990 related to contracts which had expired two or three years previously. A similar situation has already been reported upon by the Court

in relation to other areas of EDF intervention. Such occurrences needlessly block appropriations which could be usefully invested in other measures, projects or programmes.

14.51. Details of local expenditure are frequently unnecessarily slow in being sent to the EAC head office by the Delegations. At the head office there are long delays before the information is entered into the accounts. At mid-February 1991 the Delegations had not all yet sent their statements of expenditure for the closing months of 1990 to the head office. For its part, the head office only processes once or twice a year the statements it receives. At the same date it had not yet entered into the accounts the most recent statements received from 15 Delegations. This situation makes the management of contracts rather risky. Although the clearance of suspense accounts has started to improve, cases remain where regularization is slow in being effected. At 1 February 1991, for example, the imprest account in Uganda still showed amounts of 36 103 ECU and 1 484 ECU not yet regularized since 1989.

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14.52. The Court has noted that the EAC and the Commission experience difficulties in coordinating their activities in relation to management and accounting. For example, it was necessary for the Commission to remind the EAC at end-1990 to forward commitments to the appropriate authorizing officer for entry into the accounts. In addition, the EAC is slow in forwarding details of expenditure which leads to accounting delays in the Commission. This situation is aggravated by the fact that the Commission itself delays entering the details into the accounts.

Financial management

14.53. The financial cost of technical assistance should be better controlled. The EAC monthly cost per expert has been calculated at 9 500 ECU, taking into account salary, allowances and related charges. A comparative study by the EAC of its technical assistance costs and those of bilateral aid supplied by Member States has shown that the EAC costs are generally higher. The Court itself has recently found in Uganda that EAC technical assistance was about twice as expensive as non-EAC technical assistance.

14.54. Technical assistants on contract to the EAC benefit from the reimbursement of various expenses, particularly for housing and transport (car allowance), in addition to their normal salary. Generally, the EAC reimburses the full costs incurred which is no incentive to the beneficiaries to seek to economize. Apart from this the reimbursement of numerous detailed claims imposes a significant accounting and administrative burden both on the spot and at head office. A lump-sum payment, based on local conditions as necessary, would eliminate unnecessary bureaucratic control of numerous small payments and lead to a reduction in costs.

14.55. In regard to the housing and car allowances it is, in any event, questionable that the full cost should be borne by the EAC. Housing allowances and related charges (furniture, security, etc.) cover what is essentially a private matter and, furthermore, the expert will already benefit from allowances such as overseas, expatriation, first installation and reinstallation allowances. Where local administrations give logistical support, for instance a car, accommodation or other facilities, the EAC should be careful to avoid duplication.

14.56. A tax deduction from salary equivalent to the tax on Community officials is imposed on the technical assistants managed by the EAC. Where deductions are made to meet Community tax liability, they should be paid over to the general budget of the European Communities and not, as in the case of the EAC, retained for the purpose of financing additional expenditure on projects

. Moreover, net salaries of technical assistants are sometimes taxed by national authorities, in which case the national taxes are refunded by the EAC and thus are a charge on the projects. A review of these tax arrangements should be undertaken.

14.57. To sum up: greater control of the EAC's expenditure is essential in the interest, finally, of EDF projects. For legal reasons it may not be possible to introduce desirable changes into existing contracts. However, even for these, a detailed statistical analysis of pay and allowances should be undertaken in order to identify where anomalies or excesses exist within the present rules.

Sysmin

14.58. In order to help compensate ACP States for reductions in their exports of mineral products to the Community, the second Lomé Convention instituted a special financing facility called Sysmin. Like Stabex which compensates for losses relating to the exportation of certain agricultural products, Sysmin is non-programmable aid. However, unlike Stabex, aid is not automatic and its level is not based on the export losses alone. Its original aim was to support economically viable production units suffering temporary or unforeseeable set-backs. The following amounts were originally allocated for Sysmin (Mio ECU):

Lomé II:280,

Lomé III:415,

Lomé IV:480.

14.59. Under Sysmin, ACP States receive aid in the form of loans under certain conditions and for specified metals or ores, i.e. copper-cobalt, phosphates, manganese, bauxite, alumina, tin and iron ore (second and third Lomé Conventions) if they derive at least 15% of their export earnings from any of these products. Article 180 of the third Lomé Convention allows for derogations on a case-by-case basis, to include all mining products (other than precious minerals, gas and oil), where there is a dependence rate of 20% or more on revenues from the exportation of such products. Lomé IV provides for the systematic eligibility of these pro- ducts

. For eligible products, access to Sysmin assistance is granted where a substantial drop in production capacity, or in exports, or in export revenue

is noted.

14.60. The amount of EDF aid is fixed by the Commission on the basis of available funds and taking account of the gravity of the situation. The projects or programmes which are funded are aimed at offsetting the negative consequences of the disruption in mining revenue by putting the mining bodies back on a viable footing or by promoting diversification which would replace, even partially, export-earnings capacity lost in the mining sector (Lomé III, Article 182).

14.61. The Court has commented on Sysmin in its 1983 and 1985 annual reports

. In 1983, the Court reported that the Zambian authorities had not made adequate amounts of foreign currency available to the mining sector thus jeopardizing its investment capacity and long-term viability. In 1985, the Court commented on the cumbersome administrative procedures which led to slow implementation of Sysmin aid schemes. The Commission said at the time that the slow implementation was due to delays by the ACP States in setting up projects and programmes.

Financial situation as at 31 December 1990

14.62. At 31 December 1990 five ACP States had received aid under Sysmin from the fifth EDF (Lomé II) out of a revised total allocation of 275,64 Mio ECU

. Commitments amounted to 91% of this allocation and payments were 60%. Out of a commitment of 49,3 Mio ECU, only 3,68 Mio ECU had been paid in the case of Liberia. Clearly, if the remaining 45,59 Mio ECU are not likely to be used in the near future, the financing agreement should be renegotiated so that such funds can be made available to other projects. A request from Jamaica received by the Commission in October 1985 was still awaiting a decision.

14.63. At 31 December 1990 six other ACP States had received Sysmin aid from the sixth EDF (Lomé III) out of a revised allocation of 305,4 Mio ECU

. Commitments amounted to 117,8 Mio ECU or 39% of this allocation and payments amounted to only 4%. At end-1990 Zambia, Zaire and Papua New Guinea were awaiting a response from the Commission to their further requests for Sysmin aid.

14.64. Before the expiry of the second and third Lomé Conventions

, the ACP-EEC Council of Ministers should have decided on where to allocate the amounts remaining unused under Sysmin. At 31 December 1990 no decision had yet been taken in respect of 25 Mio ECU available under Lomé II and 202,6 Mio ECU available under Lomé III.

Processing of demands for aid and conclusion of agreements

14.65. Table 14.5 illustrates the slowness with which requests for Sysmin aid are processed. To help in remedying this, the fourth Lomé Convention provides for eligibility and financing to be decided at the same time.

14.66. Under Lomé II and III Sysmin aid was only granted to remedy the damaging consequences of serious disruptions which were of a temporary nature and which were not brought about by the ACP State itself. The Court has, however, noted that frequently the problems of the mining sector are due to insufficient local investment and renewal of plant and machinery rather than falling prices on the world market. This low level of investment is often due to excessive tax burdens and to inadequate access to foreign currency - both matters which are under the direct control of the ACP States. Zambia and Zaire provide examples of this. Even so, the Commission continues to respond favourably to requests from these States for Sysmin aid on the basis of commitments that they will in future abandon their damaging practices.

14.67. The financing agreements for Sysmin aid generally specify how the aid is to be used (e.g. in purchasing equipment) but the main objectives of the aid are rarely spelt out in any greater detail than those already set out in the Lomé Conventions. In the absence of clearly defined and quantified objectives, it is very difficult to assess whether the aid has achieved its objectives or not. In the case of assistance granted to Zaire and Zambia, for example, it would have been useful to have set operational and profit targets for the different production units. Indeed, for management purposes the operational units are the appropriate levels at which to fix quantified targets and to measure results.

Implementation of projects

14.68. The financing decisions for 10 ACP States which have benefited from Sysmin funds cover a total amount of 353,4 Mio ECU. Table 14.6 illustrates the situation per type of forecast expenditure.

14.69. The proportion of the funds devoted to management (3%) is low given that the key to mining companies' viability is cost control. This depends as much, if not more, on the quality of management and technical expertise as on plant and equipment. Also noteworthy in the picture provided by Table 14.6 is the absence of conversion and diversification operations.

14.70. Although the Lomé Conventions emphasize rapid implementation of aid, the reality is that, generally, implementation is slow:

(a)in Zaire contracts for the second project were concluded with a delay of over two years;

(b)in Zambia a significant share (5,5 Mio ECU, i.e. 20%) of the equipment for the second project was delivered with a delay of three years or more;

(c)in Mauritania railway sleepers which were delivered (3,9 Mio ECU) did not all correspond to the technical specifications set out in the contract. As a result, the project will be delayed at least two years according to the most optimistic forecasts;

(d)the potential beneficiary of Sysmin aid in Botswana was unable to wait for the processing of its demand to be completed before embarking on its planned investment programme. The enterprise accordingly found another financing source thus making its original Sysmin claim obsolete. However, this important development was not brought to the attention of the EDF Committee although 21,65 Mio ECU had been committed;

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(e)in the Republic of Guinea three years elapsed before the first contracts valued at 0,87 Mio ECU were signed. Thus the original completion date (mid-1991) will be seriously delayed.

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14.71. In most cases of Sysmin intervention the loans on special conditions are made available to the ACP State which onlends it to the mining companies on less-favourable terms (shorter-term and higher-interest rate). The Lomé Conventions

require any profits which accrue to the ACP State to be used for development purposes on the conditions laid down in the financing agreement or loan contract. In this context the conventions provide for the setting-up of a fund to which is credited any profit accruing to the ACP State and this fund can only be used with the agreement of the Commission's Delegate.

14.72. Enquiries carried out in Zaire and Zambia have revealed practical difficulties with the handling of these funds. In Zambia only the interest-rate differentials were credited to the Fund with no account being taken of the profit from the difference in the repayment schedules of the loans concerned. Furthermore, the independent evaluator which assessed the performance of the Zambian projects in August 1990 noted that the Social Fund was used for the sole benefit of the mining industry employees and, in fact, operates as a salary supplementation scheme. In this case the control by the central services of the Commission was symbolic rather than real. As regards Zaire, at the time of the audit, in January 1991, while details of the Fund and the use to which it is put were only available in Lubumbashi with the beneficiary enterprise, the Commission central services had no clear information as to whether the Zaire authorities were respecting their obligations or not.

Financial execution

14.73. The Lomé Conventions provide for the issue of advances

when the means of production call for precautionary measures. No advance can be paid before eligibility is determined and agreed by the Commission and it must be included in the aid accorded upon the signing of the relevant financing agreement. In the case of Guyana advances of 3 Mio ECU were issued in 1985. This was not included in the financing agreement for the main project (31,5 Mio ECU) but was considered as a separate project.

14.74. Although Zambia did not receive advances before the signing of a financing agreement, the project related to this agreement operated under an advances system. In doing so, the Commission only carried out checks on expenditure a long time after the payments were made. By allowing what was, in effect, an imprest account system the Commission was in breach of Article 34 of the Financial Regulation applicable under the third Lomé Convention.

Conclusion - Sysmin

14.75. Sysmin's major innovation since Lomé III is the financing of actions to convert or diversify out of the mining sector. However, in practice, this objective has not been pursued.

14.76. The Sysmin facility in practice is subject to a number of weaknesses:

(a)contrary to what is expressly stipulated in the Lomé Conventions, projects which benefit from it are characterized by slow implementation. This arises both at the stage of processing the aid demands (principally due to cumbersome administrative procedures) and to the implementation stage;

(b)the financing agreements, which are quite explicit in relation to the technical interventions to be financed, are vague when it comes to profitability and the need to reduce costs. The latter is particularly important given that cost reductions are essential for the viability of the mining sector;

(c)the financial envelope for Sysmin is substantial, so much so, that ACP States appear to have difficulty in identifying suitable projects for Commission approval. Already a significant part of the funds originally earmarked for Sysmin have been usefully diverted elsewhere. Of the original allocation under Lomé III, 26% was so diverted;

(d)certain ACP States benefiting from Sysmin have not been respecting their obligations particularly in regard to making available adequate amounts of foreign currencies to the mining companies for productive investment.

14.77. Sysmin, in effect, allows certain ACP States whose income from Stabex is minimal or non-existent, to receive funds for amounts which often exceed those of their national indicative programmes (see Table 14.7 at the end of the chapter). Where Sysmin assistance is used to compensate for unreasonable withholding by an ACP State of foreign currencies needed for reinvestment, it can have adverse effects through encouraging the State to finance non-development expenditure at the expense of development aid. In such situations the Community clearly cannot guarantee that the EDF funds contribute to the achievement of the objectives of the Lomé Conventions

.

14.78. To avoid the use of Sysmin funds to rehabilitate inherently unprofitable enterprises, the Court recommends that more attention be given to conversion and diversification projects and that the rehabilitation of mining enterprises should be mainly financed with risk capital.

COMPUTERIZED PROJECT MONITORING SYSTEM

14.79. In its resolution for discharge in respect of the financial management of the EDFs for the 1989 financial year, the European Parliament stressed the need for better budget management and accounting procedures.

14.80. In replies to previous Court reports

, the Commission stated that major improvements in the financial management of EDF projects would be derived from the introduction of a new computerized on-line accounting system (OLAS). The Court has reviewed the development phases of the new system and the Commission's wider computer strategy in order to assess the extent to which management objectives are likely to be achieved.

14.81. The review indicated two serious weaknesses which cast doubt over the extent to which the financial management of the EDF will be improved as a result of these new developments.

(a)Budgetary control at project level is not provided within OLAS in so far as the system does not have a facility for monitoring project expenditure in relation to the cost estimates for the individual components of projects as set out in the financing agreements. As a result, project budgetary control will continue to have to be carried out manually, outside the accounting system itself, by technicians and desk officers, who according to the Commission are too few in number to properly carry out all their tasks and responsibilities.

(b)OLAS itself has been designed as a purely accounting system primarily intended to service the Commission's departments. However, sound financial management is dependent not only on financial information but also on operational information. The latter is outside the scope of OLAS itself and has not been adequately catered for by the wider computer strategy. Weaknesses in project monitoring found by the Court in the course of its audits of EDF projects can often be attributed to a failure by the Commission's services to define and collect the necessary information relevant to decision-making at the different stages of the project. A revised computer strategy based on a detailed review of the monitoring responsibilities at Delegation and central services levels and recognizing the significant responsibilities of programme and project managers throughout the Commission's services should be considered in order to lay the basis for sound financial management under Lomé IV.

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The Commission's replies to the Court of Auditors' observations concerning the financial year 1990

INTRODUCTION

Within the Community, 1990, the year to which the Court's report relates, saw completion of the implementation of the 1988 reform of the structural Funds and application to all the Funds of a new management system, one of the main features of which is partnership.

In the space of two years the Fund system has been radically altered. The guidelines are now as follows:

- management on a project-by-project basis has been dropped in favour of programme-by-programme management;

- programmes have been incorporated into an overall development concept, the Community support frameworks;

- all the financial instruments have been coordinated to maximize their effects;

- regional government departments are involved in the planning and management of programmes and in monitoring their implementation.

In introducing these principles the Commission has applied the lessons learned from shortcomings in previous practice and from criticism levelled at it, not least by the Court of Auditors.

Two years is obviously not long enough to achieve complete success. The Court's report cites some of the problems and shortcomings: the very short deadlines for preparing programmes have hindered proper ex ante assessment of their impact, there is room for improvement in the coordination of financial instruments, monitoring committees have not yet started playing the part assigned to them and it is not always obvious that Community aid satisfies the additionality condition.

The Commission is aware of these shortcomings and is doing its best to rectify them. As a whole, though, it sees the Court of Auditors' report as an endorsement of its policy and of the basic thinking behind it and as encouraging it to continue moving actively along its chosen path. Basically, the years from 1988 to 1990 were intended as a time for planning and setting up the CSFs and management structures. From now the Commission's attention will be focusing on management, monitoring and assessment.

In that connection, the Commission initiated a series of studies of financial circuits in the Member States. It hopes that the results of the research will serve as a basis from which organizational steps can be taken to make sure that funds flow a great deal more rapidly from the Commission to end-recipients.

On the external front, the changes in Central and Eastern Europe severely tested the capacity of the Community's financial and budgetary procedures and instruments to react to developments. The food and humanitarian aid for Poland and Romania, the development of the Phare programme for all the former Warsaw Pact countries other than the USSR and the Soviet Union's requests for aid all required imaginative use to be made of every available instrument.

The first checks carried out by the Court (see Chapter 12 of the report) give a first impression of the difficulties encountered, as well as evidence that the Commission rose rapidly and effectively to these new challenges.

The difficulties the Commission faced have prompted it to give thought to ways of amending the financial and budgetary procedures for the supply of humanitarian aid. It is hoped that specific proposals will shortly emerge from this process and can be submitted to the Council and Parliament.

Similarly, the appearance and development of a new budgetary risk associated with the budget guarantees attached to the Community's loans to non-member States, particularly those for the East European countries and the Soviet Union, have persuaded the Commission and Parliament of the need to set up a facility for mobilizing these guarantees. It has undertaken to put forward a practical solution in the context of renewing the Interinstitutional Agreement.

SUBSIDIARITY

0.4. Regarding subsidiarity, the Commission, like the Court of Auditors, believes that it must have as much information as possible about Member States' management in the implementation of Community policies, so that it can discharge its monitoring responsibility. It has no intention of shirking that responsibility by invoking the subsidiarity principle.

0.5. The Court considers that successive extensions of the compensatory allowances for farmers in less-favoured areas to new beneficiaries are due to a passive approach by the Commission and are thus an example of the principle of subsidiarity not being applied correctly. The Commission believes that the Court is barking up the wrong tree. The extensions were deliberate and were decided on by the Community's legislative authority; they comply with the basic provisions of Directive 75/268/EEC defining the criteria for classification (see paragraphs 9.21 and 9.22). The underlying motivation for the extensions may seem to the Court to be open to criticism, but cannot be used as grounds for accusing the Commission of failing to apply the principle of subsidiarity correctly.

Nor do there seem to be any solid grounds for the Court's claim that the premium in question has an adverse effect on the environment. In paragraph 9.38 the Commission outlines the measures taken to reduce intensive stockbreeding.

0.6. The Commission also takes the view that proper application of the subsidiarity principle presupposes that relations between the Commission and the Member States are based on reciprocal trust and that the Commission is able to advise on and supervise the action taken by Member States pursuant to Community provisions.

The supervision of Member States' management is, however, generally ex post. In the case to which the Court refers, the Commission discharged its duties correctly. When checks carried out in the course of clearing the accounts brought to light cases of failure to apply Community law, the Commission quite properly reduced the refunds to the Member State concerned (see paragraphs 3.35 to 3.40). On the other hand, the resources available to the Commission do not, generally speaking, enable it to advise national bodies on the details of Community regulations in all cases and in a preventive sense. It does, however, respond to any request for an interpretation of the difficulties facing national administering departments. It answered numerous requests, for example, for explanations of the system of sheepmeat and goatmeat premiums. None of the points listed by the Court in paragraph 3.37, however, gave rise to any such request for interpretation.

0.7. The Commission agrees with the Court about the difficulties of putting the principle of subsidiarity into practice in the context of the structural Funds. It is taking two courses of remedial action. First, it is seeking to ensure that partners from all territorial levels of authority sit on the monitoring committees. Second, it is looking at practical ways of expanding these committees to include bodies representing social and occupational groups. It also considers that the regional level should be more involved at the planning stage of regional development strategies.

However, the Commission still has to take account of actual institutional practice in the Member States, where internal structures may sometimes impede the establishment of a completely satisfactory relationship of partnership with the end-recipients of Community grants.

SOUND FINANCIAL MANAGEMENT

0.8. A number of points need to be clarified in relation to the Court's remarks on sound financial management. The Commission has never regarded the agricultural guideline as a spending target. The 1990 budget, for example, was more than ECU 2 billion below the guideline figure. It did not in any way use that margin as an argument for deciding to increase expenditure where there was no real need to do so. In fact it had to take steps to manage certain markets in order to restore them to balance, which is the object of Article 39 of the Treaty; in the short term this may have the effect of creating additional expenditure. In any case there was convincing justification for its decisions.

Like the Court, the Commission has never considered that the availability of appropriations under a budget heading justifies using those appropriations without due regard for the principles of sound financial management. It is surprised that the Court feels able to level such an accusation at it, even through the indirect channel of a statement of principle.

0.9. The Commission attaches great importance to compliance with the principle of 'additionality`, which is a prime guarantee of the effectiveness of the Community's structural action. It believes that the practical scope of that principle is sufficiently clear. Article 9 of Regulation (EEC) N° 4253/88 states that an increase in the appropriations for the Funds should result in at least an equivalent increase in the total volume of official or similar aid.

The problem arises, in fact, at the point where practical checks have to be carried out. At the CSF preparation stage, checking has proved to be difficult, largely owing to the lack of information about official expenditure in the base year. In August 1990 the Commission told the Member States what information it had to have to be able to make a proper assessment of compliance with 'additionality`. The information received is at the moment being studied in the Commission. The degree of difficulty in analysing it varies according to the objective and the Member State concerned.

0.10. 0.11. The Commission, like the Court, regrets the fact that prior appraisal of the impact of structural operations in terms of the objectives selected was not carried out as planned. As the Court says in paragraph 6.20, one of the reasons for this state of affairs is that the time limits for implementation of the various stages of the reform were extremely short. Another was the considerable methodological difficulties which had to be overcome, particularly as regards the development of appropriate macroeconomic models. These difficulties are on the way to being solved. Initial results from the appraisal process, which is under way at the moment, will be available in the annual report for 1990.

0.12. In the case of the NCI loan to Italy for the construction of low-cost dwellings for secondary and tertiary sector workers, the Court criticizes the absence of verifiable criteria whereby the Commission could satisfy itself that the objectives had been achieved.

The fact is that the NCI loan in question was part of a development strategy which included the building of 30 000 dwellings, of which the Community loan was supposed to cover the building of 5 370. The dwellings covered by the NCI loan were all built.

The Community institutions cannot be blamed for the fact that another part of the overall programme, i.e. the measures to be financed using national resources, was not completed.

As regards the food aid to Poland, the Commission explains in Chapter 12 that, because of the urgency of the matter, it was not possible to carry out a detailed analysis of needs in Poland, but it did express its doubts to the Polish authorities as to whether the amount of aid requested was appropriate. They, however, urged that the aid continue. Nevertheless, the Commission eventually reduced the amount of aid from 500 000 to 300 000 tonnes.

0.13. The Commission believes that the ways in which the EIB, NGOs and the ACP Secretariat-General are involved in the implementation of development programmes are not comparable.

As far as NGOs are concerned, the strictness with which the Commission can impose monitoring and control arrangements has to be assessed against a particular background. The machinery for joint financing of development projects with NGOs, for example, enables original, high-quality and often successful schemes to be carried out with limited human and financial resources. Even if it is important to ensure that NGOs manage the funds properly, steps must be taken to prevent red tape dampening the efficiency and enthusiasm of the NGOs, which sometimes act in a charitable capacity (see the closing remark in Chapter 13).

As for the ACP Secretariat, the Commission would refer to its replies to the Court's observations in Chapter 14.

The Commission's view, lastly, is that the EIB cannot really be regarded as a third party like NGOs and the ACP Secretariat. Relations between the Commission and the EIB are governed by a set of very comprehensive rules and agreements.

The Commission is, incidentally, constantly at pains to improve the use of Community resources to achieve its objectives and to take the consequences of existing programmes into account so as to make the best possible use of such resources.

The Commission's system of follow-up

0.17 0.23. In its replies to the Court of Auditors' annual report for 1985, to which the Court refers, the Commission made a distinction between follow-up action on undertakings given to the Court of Auditors and follow-up to Parliament's observations in its resolution accompanying the discharge decision.

As regards Parliament's observations, there is a very comprehensive procedure, and the Commission regularly follows up on its obligations as well as checking that they are being met.

As regards the Commission's undertakings to the Court of Auditors, it should be made clear that the Court's remarks are often no more than one factor among many in determining the Commission's policy. On occasion, for example, the Court criticizes this or that aspect of a Community policy. The Commission's reply is that it will take this into account when the policy next comes up for review. A review of this kind generally covers a range of issues including those raised by the Court. Once the review has been carried out, the practical effect of the Court's observations is difficult to ascertain with any accuracy, although in essence the Commission has honoured its undertaking.

How precise these undertakings are is not always stated in so many words, for example when the Commission undertakes to give thought to a problem raised by the Court or to discuss an issue with the Member States.

In this context the Court refers to the questionnaire sent to the Directorate-General for Agriculture. In the questionnaire it set out a selection of 50 observations taken from the reports for the period from 1983 to 1988. In so doing, it made no allowance for the fact that some of the points had been covered again in more recent reports - for example, public storage and clearance of accounts. Furthermore, the Commission referred to any documents and decisions which existed and forwarded copies of them to the Court as a matter of course so that it could monitor Commission management.

Nevertheless, the Commission did also try to set up a system for following up its undertakings to the Court. The system chosen was a combination of a manual compilation of undertakings and computerization of the results. It required lengthy inputting based on defining key words and no check could be kept on what happened after the discharge period. The system was dropped as it was not judged to be reasonably cost-effective.

The Commission is at the moment researching a more economical and efficient system. This would consist of a regularly updated data base of undertakings given. There will be a multi-criterion interrogation system whereby cases can be selected according, for example, to the DG concerned, the reference year, the paragraph in the report concerned, the type of measure involved and the progress achieved in the case in question.

The Commission's thinking, in other words, is moving in the same direction as that of the Court. Once the system is operational, the Court of Auditors will be linked to it, which will no doubt make for even closer collaboration between the two institutions.

CHAPTER 1 Financial audit of the Commission's revenue, operating expenditure and financial accounting and the consolidated accounts

THE IMPLEMENTATION OF THE BUDGET IN 1990

The adoption and presentation of the budget

Presentation of the budget

1.2. Since the budget voted by the budgetary authority contains the definitive revenue and expenditure figures for one financial year, the Commission maintains that there cannot be any 'budget authorizations` or 'funds available for payment` which differ from them.

Carryovers of appropriations

1.5. The reasons are set out in the reply to paragraph 3.16. The carryovers, which were decided by the budgetary authority, concerned the Italian olive cultivation register and the European Council decision of 14/15 December 1990 to grant food aid to the USSR under the 1990 agricultural budget.

1.6. The ESF carryovers concerned 58 measures.

The Court's remarks concern just six measures which were almost ready to be concluded; the consultations on the programme or draft decision were virtually finished at 31 December 1990 but had yet to be translated into book commitments. The six measures represent a total of ECU 35.44 million.

In future, the Commission will take care to comply strictly with the rules.

The use of national currencies to implement appropriations authorized and booked in ecus

1.7. The Commission has proposed to the Council that Regulation N° 1676/85 concerning the use of the green rate in EAGGF/Fisheries transactions be amended. Once the amendment is adopted by the Council, the problems connected with the exchange rates between the ecu, green ecu and national currencies should be greatly reduced.

Administrative expenditure charged to the section of the budget devoted to operating expenditure

Quantification of the mini-budgets

1.12. The Commission takes the view that mini-budgets could be created either directly through the remarks in the budget or indirectly using the legal bases set out in the remarks. As regards the Phare mini-budget (Item B-9960), the Commission admittedly gave a wide interpretation to Article 6(2) of Council Regulation N° 3906/89 of 18 December 1989 authorizing operating costs to be covered. The situation has now been finally clarified by the introduction in 1991 of a specific heading in the budget.

1.13. It is correct that the internal regulations relating to mini-budgets prescribe an upper limit for each budget heading to be fixed by the Commission. A procedure exists for adjusting these ceilings. Some ceilings may have been exceeded independently of this procedure for technical reasons to do with the problems which emerged when the internal regulations were being introduced. However, the full and definitive entry into force of the internal regulations on 1 January 1991 has completely solved the problem.

1.14 1.15. The reason why mini-budgets have such a low utilization rate is explained below.

The new internal regulations only came into force fully on 1 January 1991, after a start-up period during which a number of difficulties had been encountered in accurately defining and assessing mini-budget expenditure.

The budgetary authority, however, wanted to have the allocation between expenditure on operations and support expenditure fixed in the 1991 budget. This allocation was based on initial estimates so there was a possibility of the actual requirements being different.

However, since one of the main objects of the internal regulations was to tighten budgetary discipline over the mini-budgets, a low utilization rate could be considered a sign of success especially when it is borne in mind that unutilized appropriations are systematically transferred to the operational part of the policy concerned.

1.16. The Commission believes that the accounting system set up, and the booking codes in particular, meant that in 1990, for the first time, it was possible to clearly identify headings concerned by the mini-budget arrangements and the amounts involved. The situation is presented in an annex to the revenue and expenditure account which sets out the budgetary implementation of 'mini-budget` items in 1990.

1.17. The reasons why 100% of expenditure for some headings is of the mini-budget type - and not additional to expenditure on specific measures - is that, as shown by the Court's examples (trade cooperation, GATT talks, generalized system of preferences), there may be some Community policies and activities which do not themselves give rise to operational expenditure but which do require some support expenditure.

In any event, the headings themselves and the comments clearly show the nature of the expenditure (e.g. Article 940 - Organization of seminars on the Community's generalized system of preferences).

1.18. It is true that, prior to adopting the internal regulations on mini-budgets, the Commission had experimented with various types of booking code. Since the internal regulations were adopted, however, there has been far less change in the definition and scope of the booking codes; the system was even further simplified by the elimination of over 80 analytical codes at the beginning of 1991.

It is also true that there was some uncertainty about the correct booking of some expenditure during 1990. As was said at paragraph 1.15 above, these were teething problems and the situation has become much clearer in 1991.

1.19. The Commission's internal regulations were not in force for the carryovers from 1989 to 1990, while no appropriations from 1990 operational budget headings were carried over to the new 1991 headings for mini-budgets in Titles A4 and B8.

1.20. The Commission believes the Court's criticism about the system's unreliability is somewhat premature as it was only set up in May 1990 and did not become fully operational until the beginning of 1991. By judging so hastily a system which has done much to improve the transparency and the control of mini-budget expenditure, the Court has paradoxically called into question the value of a serious attempt at administrative rationalization.

The Court also questions the validity of the listings given to it, but this simply reflects the difficulties encountered at the start of the system and which were referred to at paragraphs 1.15 and 1.18 above. When the revenue and expenditure account was drawn up, these difficulties had been resolved and the annex to it gives a fairly accurate picture of the financial year.

1.21. With reference to the research objectives, only ECU 71 million can be considered mini-budget expenditure. The other expenditure is made up of the salary costs and administrative and technical costs of the JRC and shared-cost measures which have always been part of the operational research budget. The details are set out in the tables of equivalence which form an integral part of the budget.

The mini-budget total associated with the structural Funds was ECU 370 000 in 1990.

The infrastructure quotient

1.22 1.24. Given that the budget remarks on the mini-budget headings generally allow any related expenditure to be booked to the measure in question, the Commission took the view that the mini-budget appropriations used for employing certain staff in house should also cover the related infrastructure costs.

The 1990 quotient of ECU 13 433 represents the average annual infrastructure costs per official.

In July 1990, it was decided that in view of the appropriations available under Title A2 of the 1990 budget and of the forecast outturn, not all the quotient needed to be used and only 89,887 % of the cost of using outside personnel in house was booked.

Because of the type of expenditure involved (rent, insurance, security and maintenance) and the need to make certain payments on fixed dates, it is not possible to match the calculation of the infrastructure quotient to actual recruitment procedures. The calculation therefore has to be based on recruitment forecasts.

On 11 July 1990 the budgetary authority approved supplementary and amending budget 2/90 concerning financial aid to the countries of Eastern and Central Europe other than Poland and Hungary (geographical extension of the Phare programme). In order to finance the new requirements resulting from this decision, the Commission had no other choice than to book, in November 1990, the total installation and infrastructure cost of new staff to the headings concerned.

Since this calculation was based on forecasts, the infrastructure quotient had to be adjusted in 1991 to take account of the numbers actually recruited in 1990 and of the recruitment forecasts for 1991.

Given that each DG has a different quotient and since the Directorate-General for External Relations is based for the most part in the Berlaymont and is responsible for Phare, it is not unreasonable for the part of the rent corresponding to staff paid from mini-budgets to be charged to the infrastructure quotient.

Observance of the financial perspective

1.25. The mini-budgets do not consist just of administrative expenditure resulting from the daily management of the Commission's activities. Although the expenditure is of an administrative nature, it is also used directly and specifically in support of policies and certain operational measures so that it becomes, to some degree, part of the measure itself. It is, therefore, quite logical for it to be classified under heading 4 of the financial perspective.

The Commission does, however, agree that the difficulties and constraints connected with heading 5 were also a contributory factor in the growth of mini-budgets.

The management of mini-budget expenditure

1.26. The Commission has provided for implementing rules to complement the new regulation on mini-budgets which came into force on 30 April 1991 so as to improve control of certain kinds of expenditure by the central departments responsible for administrative expenditure and by the Financial Controller, and to make sure that all equipment is inventoried.

DG IX, which had its role recast by the Commission in January 1991, will be expected to provide the necessary supervision to ensure that a coherent personnel (officials and non-officials) and administrative policy is carried out.

In practice, this means that DG IX will be expected to define, introduce, and supervise common, coherent rules and mechanisms for the management of personnel and administrative appropriations allocated to specific operations.

1.27. The 1990 budget remarks made explicit provision for the financing of auxiliary staff under headings other than Item A1110.

1.28. While it is true that various kinds of appropriation are used to finance auxiliary staff, the latter are all managed in the same way and according to the same criteria, with all contracts being approved by DG IX.

Conclusion

1.29 1.31. The Commission considers that the Court's interpretation of Article 19 of the Financial Regulation is too restrictive in that it attempts to rank the various criteria for classifying expenditure items according to their type or use - something which the Regulation itself does not do.

Since the expenditure concerned is of an administrative nature but is used for operational purposes - in that it provides direct support for specific measures - booking the expenditure to Part B of the budget is not, in the Commission's opinion, a breach of the provisions of the Financial Regulation. Such expenditure is, indeed, subject to the provisions of the Financial Regulation in just the same way as other appropriations.

1.32 1.33. The Commission's new system has more advantages than those noted by the Court, since support expenditure can now be identified, monitored and controlled. This represents a serious attempt at administrative rationalization and budgetary discipline. Although there have been some initial problems, they are not so serious as to justify the pessimistic attitude taken by the Court.

The weaknesses identified by the Court are nothing more than teething problems for which the Commission has made the necessary budgetary and accounting adjustments.

The case of the priority publications programme

1.34 1.43. The management and accounting system used for the priority publications programme was chosen by the Commission as being the most suitable in that it provides a coherent and transparent framework for the specific programme of priority publications on the main Community policies and activities.

The Commission has carefully studied the Court's comments. In fact, it had already modified its approach by entering a special heading for the programme (B3-305) in the preliminary draft budget for 1992. The Commission hopes that the budgetary authority will approve this action and allocate it the necessary resources. A transfer of appropriations has been proposed as a transitional measure for the 1991 financial year.

The role of the Financial Controller

Withholding of approval by the Financial Controller and the overruling of such refusal

1.44 1.45. There are a number of ways in which the Financial Controller can express a negative opinion in writing concerning a proposal from an authorizing officer; these range from the standard memo sent back by an authorized member of the Financial Controller's staff, to a formal withholding of approval by the Financial Controller himself.

During 1990, there were no cases of formal approval being withheld by the Financial Controller.

The Commission can see no justification for taking this situation to mean that Financial Control is not operating properly. Rather, it demonstrates the effectiveness of Financial Control's action with authorizing officers during 1990. There was no need for formal withholding of approval - still a very effective deterrent - because contentious transactions were always settled in some other manner (e.g. dialogue, suspension of the dossier).

In order to understand what Financial Control does, it is essential to take into account all aspects of its operations. Accordingly, the Commission would refer the Court to the detailed replies given to the Court's comments on the internal control system in its report on the 1988 financial year.

1.46. In the cases mentioned by the Court, there was no question of conditional approvals or of any dilution of the approval system.

Financial Control gave its approval after establishing that the expenditure was in order, conformed to the relevant provisions and satisfied the criterion of sound financial management, as required by the Financial Regulation. Each case was examined on its merits, with particularly close attention being paid to the financial management aspects.

Approval was only given if all the relevant criteria were satisfied.

None the less, the approval procedure is a useful opportunity for Financial Control to make suggestions to authorizing officers for improving management.

The firm tone of the memos sent by Financial Control shows its determination to improve financial management without this in any way undermining the system of approval.

OBSERVATIONS ON THE LEGALITY AND REGULARITY OF THE OPERATIONS PASSED TO THE ACCOUNTS DURING THE YEAR

Supporting documents used to validate operations passed to the accounts

1.48. The Commission accepts that the supporting documents used to validate operations passed to the accounts in respect of the 1990 financial year were sent to the Court too late; this was due to pressure of work on accounting staff owing to the introduction of a new computer system.

The Commission agrees in principle to the Court's suggestion that documents be forwarded at monthly intervals. Although this has not been easy to put into practice so far, the Commission has taken steps to ensure monthly transmission in the future.

1.49. (a) Payment orders transmitted for the ERDF and the EAGGF Guidance Section are always accompanied by the documents required by the rules. It is true that the documentation may not always appear to be complete. Sometimes, its sheer volume makes it difficult for it to be forwarded to the Court.

(b) The Commission shares the Court's concern regarding the supporting documents for payment of advances relating to the local costs of development projects.

The supporting documents were not always available for the following reasons:

- the cumbersome administrative structure in recipient countries;

- the imbalance between the constantly increasing financial volume of the aid granted and the Commission's staff resources;

- the priority given to some projects forced the Commission to postpone its own controls.

The Commission is strengthening and extending control measures by employing local auditors to check project accounts and by not making advances unless proper supporting evidence is provided for the costs already incurred and the estimates on which the request for an advance has been based.

Traditional own resources

Implementation of the separate accounting system

1.50 1.52. Since Council Regulation (EEC, Euratom) N° 1552/89 implementing Decision 88/376/EEC, Euratom on the system of the Communities' own resources was only adopted on 29 May 1989 (OJ L 155, 7 June 1989), it was not until the second half of 1989 that Member States were able to take steps to implement the provisions of Article 6(2) of the Regulation, which introduces separate accounts for established entitlements that have not been recovered.

The new features of the Regulation have forced national administrations to make a considerable effort to adapt their procedures by setting up new accounting structures, drawing up implementing rules and, for some, converting their computer systems. None the less, nine Member States forwarded to the Commission quarterly statements which, because of the difficulties mentioned above, did not all follow the same format.

For its own reasons of cost-effectiveness, Denmark does not wish to keep the separate accounts described at Article 6(2)(b) of Regulation N° 1552/89. However, it has agreed to enter all established entitlements, whether or not they have been recovered, in the main accounts, and to provide all the information required by the other provisions of Regulation N° 1552/89.

On 14 June 1989, at a meeting of the Advisory Committee on Own Resources, the Commission presented the Member States with a working paper analysing the provisions of the new rules concerning the establishment, entry in the accounts and inspection of traditional own resources. Throughout 1990, the Commission continued its efforts to secure uniform application of the Regulation, particularly in ACOR discussions, and made proposals for establishing common interpretation criteria and for facilitating the setting up of standardized national procedures.

On 19 and 20 February 1991, the Commission organized a seminar on the innovative aspects of Regulation N° 1552/89; the points raised then were taken up by the Commission in a statement made at the ACOR meeting on 27 June 1991. In addition, the 1991 programme of Commission controls in Member States provides for systematic control of separate accounting arrangements.

1.53. The Commission has regularly reminded Member States, especially at ACOR meetings, that they are required to forward a quarterly statement by the due date. On 5 February 1991, the final reminder for 1990 was sent out in writing to Member States, including the three referred to by the Court.

1.54. The 1990 revenue and expenditure account shows, as separate items in its table of revenue, all the established entitlements still to be recovered derived from the separate accounts statements received from Member States by the end of the 1990 financial year.

EAGGF

EAGGF Guarantee Section

National controls over expenditure

1.55 1.56. The Commission considers that the responsibilities of the paying agencies are clearly set out in Council Regulation N° 729/70 (see also its reply to paragraph 3.47). It carries out checks to see if Member States are complying with their obligations under the terms of the Regulation and, if necessary, recommends improvements. Where appropriate, it makes corrections during clearance of the accounts.

In paragraph 3.34 of its report, the Court maintains that it has no objection to the powers of paying agencies being delegated to other bodies, provided there is adequate verification.

The Commission agrees that such supervision is necessary and it has approached Member States whenever it has judged the situation to be unsatisfactory. It has also carried out checks on the bodies responsible for the controls. Where they have been found wanting, the necessary corrections have been made during clearance of the accounts.

The Commission also agrees that the delegation of powers referred to by the Court should identify the body responsible for keeping the records (supporting evidence).

Central accounts for expenditure

1.58. As pointed out by the Court, there was a delay in entering commitments owing to problems with the new computerized system, particularly as regards the transfer to Sincom of data from the declarations of Member States held in authorizing DG systems. No such delays occurred in 1991.

Coordination of checks on elements common to guarantee and guidance expenditure

1.60. The Commission is just as aware as the Court of the great variety of control systems in Member States. However, it has more faith in the effectiveness of the controls carried out by national authorities than does the Court (see also the reply to paragraphs 9.23 and 9.24).

1.61 1.62. The Commission shares the Court's concern about poor coordination of checks on elements common to guarantee and guidance expenditure.

In the context of reform of the common agricultural policy, it will try to adopt a comprehensive approach by encouraging Member States to group together, under a single mechanism, all the management and control procedures for the various Community agricultural measures. Such a rationalization would be facilitated if each farm kept records of all the essential data.

The EAGGF Guidance Section

1.63. The national legislation concerned was approved by the Commission as complying with Regulation (EEC) N° 797/85. The Commission therefore believes that the expenditure effected under this legislation was regular (see replies to paragraphs 9.17 to 9.19).

Veterinary measures

1.64. The Commission charged the last two commitments to Items 3800 and 3810 because it wanted to make the best use of the appropriations.

In the case of Item 3800, commitment of the ECU 88 000 still available was made on the basis of Council Decision 90/424/EEC

in the light of the expenditure estimate sent in by Italy in November, following the outbreak there of the cattle disease CBPP.

The same applies to Item 3810. The ECU 3.1 million available was committed following examination of the expenditure statement sent in by Spain in much the same way as for Item 3800.

1.65. After Parliament had entered an amount of ECU 0.5 million in the 1986 budget for varroatosis control, the Commission took a decision (SEC(86) 2075) laying down the procedures for granting aid to recognized Community beekeeping organizations.

These provisions were extended by other decisions for subsequent financial years whenever the relevant appropriations were entered in the Community budget.

Since it was a pilot measure of uncertain duration, it was judged preferable to ascertain the results obtained in the first few years before proposing that the Council adopt a regulation. The Commission will soon be deciding whether to continue the measure and feels that it has so far proceeded in a legally correct manner.

1.66. There are sound practical reasons why the deadline set in Article 4 of Council Decision 89/455/EEC

providing for the notification of the programme by the Member State prior to its implementation has not been respected.

Oral vaccination of foxes should, for technical reasons, take place in spring and autumn each year.

The Commission was informed of the imminence of the Council's decision in July 1989 (finally adopted in August) and it was then that it took the initiative to convene the representatives of all the Member States concerned on 25 July. All the detailed plans for the autumn season were informally approved by the Commission with Member States being requested to submit them officially as soon as they were able.

The plans were submitted between September 1989 and January 1990. Since these were national projects embracing adjacent frontier zones and thus necessitating transfrontier cooperation, it was decided to approve all the plans at the same time.

Thus it was that the decisions taken on 23 May 1990 provided for the entry into force of these plans prior to their official submission.

Fisheries

1.67. The problem of commitments in the field of fishery agreements being drawn up late has to do with the fact that the funds the Community commits vis-à-vis non-member countries are only decided when the negotiations are over and cannot therefore be fixed beforehand.

None the less, all commitments and payments made by the Commission complied with the amounts stipulated in the fisheries agreements.

1.68. Some payments were finalized late because the agreement had been drawn up much later than expected. This is not a problem that has ever been raised by the non-member countries in question.

1.69. This operation was carried out so as not to delay the payment due to Greenland at the beginning of the year and to allow Community fishermen immediate access to Greenland's waters.

1.70. Since the laying-up of fishing vessels was organized by the competent authority, the Commission checked whether the amount of aid corresponded to the amount eligible under the regulation for overall tonnage laid up. The checking was done on an overall rather than a boat-by-boat basis. In view of the Court's comments, the Commission will take steps to recover the sums in respect of the three vessels concerned.

1.71. This error could not have been detected by the control system in use at the time. Since then, the system has been improved so that an application which is submitted can be checked against any previous application. The Commission is taking steps to recover the undue payments.

The social field

1.72. Where the recovery of debts is concerned, it is best to allow the debtor sufficient time to pay. In this connection there is a general rule which sets the deadline at the end of the month following that in which the debit note was sent to the debtor (see Internal Rules - 1991 edition, p. 277 - Internal procedure provisions concerning the collection of debts under the EEC and Euratom Treaties; and p. 357 - additional information relating to the procedures for utilizing the batch of forms making up the recovery order).

Since some internal procedures can be rather lengthy, if the accounting officer finds that the debtor does not have enough time to pay the debt, he will alter the deadline in accordance with the principles laid down in the internal rules.

This is what makes the debt recovery procedure work in practice, since otherwise the authorizing officer would be forced to set a much longer deadline.

1.73. The cancellations scheduled for 1990 were delayed for administrative reasons. They will be made in 1991.

1.74. On 21 November 1989, the Commission agreed in principle to contribute towards the events organized as part of Europalia Japan. The agreement clearly stated that funding would be decided on a case-by-case basis and for specific projects ('detailed concrete projects`).

In a letter dated 29 January 1990, the Europalia foundation requested funding/cofunding for five specific events in the programme.

The commitment referred to by the Court covers only these five events and not Europalia's final deficit.

A final expenditure statement was submitted to the Commission on 23 July 1990, which was accompanied by photocopies of invoices supporting the expenditure declared.

The absence of a final report is explained by the fact that three of the five measures concerned publications of which the Commission had already received copies. The two other measures were already over when the application for financial aid was made (which is not contrary to the policy on the granting of unregulated subsidies by the Commission) and were described in the annex attached to the application.

In giving his approval, the Financial Controller had full knowledge of the facts and all the necessary supporting documentation.

Research and energy

1.75. The revenue and expenditure account gives a fair indication of the actual costs of the COST and Teleman programmes even though, as the Court remarks, the launch of a programme may occasionally involve using staff paid for out of other programmes.

In the case of the COST and Teleman programmes, this 'personnel policy` was a consequence of particularly low staff levels and the need to ensure that the programmes got under way quickly and effectively; however, compensation was made later so as to restore the balance between the various programmes.

As regards the fields of information technology and telecommunications, it is true that some posts paid for out of research appropriations, for example some Esprit posts, appear in the DG XIII establishment plan as allocated to units other than the programme directorate.

For the most part, these posts are to be found in central units with an interdepartmental role such as finance or personnel management, which are themselves engaged in tasks that benefit Esprit.

At the same time, some staff in the Esprit programme directorate actually come under the general budget. Consequently, the directorate's overall resources are at much the same level as that provided for by the programme decision.

1.76. Systematic monitoring of dormant commitments has been going on since 1 July 1989 following the discharge resolutions for 1988 and 1989, and has meant that, in 1989 and 1990, 622 cancellations were made in respect of commitments between 1984 and 1989.

The cases looked at by the Court all belong to what was in 1990 sub-heading 5 of the Esprit programme, which mainly covered research and technological development projects to which the Community contributes 50% of the costs actually incurred (the remaining 50% being borne by the industrial consortium).

The reason for not cancelling the commitments for these research and technological development projects is as follows:

When commitments are established to cover contracts the Commission is to sign on behalf of the Community with a consortium of industrial partners, these commitments cover the maximum Community contribution. The Community contribution can in no event exceed the amount of the commitment, although it may be (and often is) below it: a project may cost less than expected to implement or it may be cancelled if things do not go as planned or if it is overtaken by other technological developments, in which case, the corresponding commitments are not paid in full

and the sums involved remain unused.

On the other hand, some projects - and this is not unusual in RTD activities - cannot be finished within the deadline laid down in the contract (sometimes three years in advance), or an extension might be required if their scientific and technical objectives are to be fully achieved. Clearly, this only becomes apparent towards the end of the project.

Thus it is only towards the end of a programme that it can be said whether certain areas of research and technological development require an additional input in order to bring their overall objective within reach.

Furthermore, because appropriations corresponding to cancelled commitments are in principle allowed to lapse, and because appropriations which lapse during year n P 1 can only be made available again at the beginning of year n (Article 7 of the Financial Regulation), it was decided to make the cancellations in 1991 (93 cancellations as at 30 June 1991) and request that they be re-entered in 1992, the last year of the programme, depending on the needs of projects requiring extension or completion.

It should be added that there were seven non-RTD projects concerning contracts for the provision of services which had a small surplus of man-days still available (amounting to ECU 250 423): these have been cancelled since the Court's audit.

Operations under Title 9

Aid to non-member countries

1.77. (a and (b) The Commission agrees with the Court as regards the closure of projects and the cancellation of outstanding commitments. Unused commitments usually account for only around 5% of the total but the procedure is very cumbersome and time-consuming, particularly when it comes to obtaining the agreement of the recipient country.

In 1990 a closure operation was undertaken in respect of 22 projects committed between 1978 and 1988 for a total of ECU 132 million. In 1991, 15 projects (amounting to ECU 15 million in commitments) were cancelled.

The operation continued in 1991, targeting 73 projects committed between 1977 and 1987 (ECU 30 million). Of these, 27 projects have so far been cancelled for a total of ECU 7 million.

(c) The main reason why no start was made in implementing the commitments referred to by the Court is that the recipient countries were not ready. The Commission will discuss the matter with them further and then act accordingly.

1.78. The Commission plans to introduce a six-monthly procedure for cancelling balances in order to improve control of the utilization of appropriations for non-member countries.

1.79. The Court's proposal will be considered once the computerized financial management system has made sufficient progress.

Aid to the countries of the East

1.81 1.82. For political reasons, the Commission considered that any assistance to Romania should come under the Phare programme. However, humanitarian aid was needed so urgently at the time that it was not possible to wait for Romania to be included among the beneficiaries of the Phare programme - although such an extension to the Phare regulation was already envisaged. The Commission accordingly decided to provisionally charge the aid to Article 950 with a view to recharging it later to Article 996 after amendment of the Phare regulation.

OBSERVATIONS ON THE PRESENTATION AND KEEPING OF THE ACCOUNTS

The financial balance sheet of the Communities

1.84. The institutions have always sought to achieve as close a reconciliation as possible between interinstitutional current account balances: for several years, the procedure has been that one institution immediately informs another of any reciprocal transaction concerning it.

However, it will never be possible to achieve perfect reciprocity because the institutions do not close their accounts on the same date; the new Financial Regulation, by obliging each institution to transmit its accounts to the Commission by 1 March, may even lengthen the gap between the closure of the accounts in the other institutions and the closure of the Commission's own accounts. Once the other institutions have closed their accounts, the Commission may still have to charge their current accounts in its books, (e.g. late imprest account entries); because it is too late for such transactions to be recorded in the books of the other institutions, they appear as an unreconciled balance once reciprocal entries are cancelled out prior to consolidation.

This leaves two possibilities: either create an artificial situation of perfect reciprocity by transferring the unreconciled balance to some form of revenue or expenditure suspense account, or else recognize the fact that unreconciled transactions are an interinstitutional peculiarity and leave the balance in the current accounts. The Commission considers the latter solution to be more transparent; moreover, the situation is correctly described by the remark accompanying the relevant item in the consolidated balance sheet.

The keeping of the accounts in the Commission's balance sheet

Treasury management

1.86. The Commission agrees with the Court about the maintenance of minimum bank balances.

The computerization of the Treasury function which is now under way provides for a procedure based on objective data allowing the optimal level for cash balances to be determined systematically.

1.87. The Commission will set down the appropriate rules in writing.

Information concerning payments

1.88 1.90. The Commission agrees that information on payments needs to be improved. The situation will be better by the end of 1992 once Sincom has been extended to the cash and treasury functions. One of the modules deals specifically with treasury management.

Sincom data are not currently accessible in a form adapted to treasury requirements; the Commission will be looking into simple ways of giving the Treasury the information it requires.

Cash transmission

1.91 1.92. The Commission has begun to comply with the Court's request that cash transmission duties should be segregated. Thus the official responsible for arranging transfers only has access to the cash transmission coding system if staff shortages necessitate it; once the situation is back to normal, the password giving access to the transmission system is always changed.

Reconciliation of accounting systems

1.93 1.94. The delay in the reconciliation of the bank accounting system and the general accounts was due to the heavy workload. It was brought up to date before the Commission's balance sheet as at 31 December 1990 was produced.

More generally, the Commission agrees with the Court that the reconciliation of the two accounting systems should be performed in a systematic manner. This procedure will be introduced as soon as the computerization of the treasury function is completed.

Balance sheet item

1.95. The JRC has taken the Court's comments on board and now physically checks items listed in the inventory. The gradual decentralization of the JRC, which is accompanied by increased responsibilities for the various institutes, will facilitate implementation of the necessary measures.

1.96. JRC accounts will in future require the authorizing officer to supply detailed supporting documents. Some such documents relating to 1990 have already been sent to the Court.

1.97. The Commission apologizes for not having detected this posting error during the final controls before publication of the accounts. In mitigation, this was the first time the Commission had only a month to prepare the accounts and the final controls were not as extensive as in previous years.

However, the two items concerned by the reversal of the amounts come under the same heading in the consolidated balance sheet and it is only the breakdown given in the remark accompanying the heading which is incorrect.

The revenue and expenditure account: recording of payments, payments on account and advances

1.98 1.108. In the Commission's view, the new Financial Regulation is perfectly coherent on the distinction between payments by instalment ('acomptes`) on projects and contracts, and the payment of advances which - apart from the special case of the EAGGF - are limited to the staff of the institutions.

Although payments by instalment are sometimes also described as 'advances`, a clear distinction is maintained in the accounts:

- payments by instalment ('acomptes`) are charged directly to the commitment concerned and to budgetary payment appropriations;

- advances to staff (for instance on mission expenses) are charged to an extra-budgetary holding account until the advance is repaid or cleared by payments on the appropriate budgetary lines.

Staff receiving advances are debtors of their institution until the advances are refunded or cleared. Outstanding advances at the end of the year appear under 'debtors` in the balance sheet of the institution.

The beneficiaries of payments by instalment, on the other hand, are creditors of the institution and receive the instalment as Article 46 paragraph 1 of the financial Regulation makes clear 'in accordance with the rules governing the policy concerned or in accordance with contractual provisions` or on the same terms as any other budgetary payment.

The payment arrangements are similar to those for subsequent payments except that the first payment order 'shall be accompanied by documents establishing the creditors claim to payment of the instalment in question`.

The settlement of this claim does not create a debt to the institution, unless the beneficiary fails at any stage to comply with the regulations or the contract concerned, in which case all stage payments so far received and not just the first instalment, are subject to review.

The legislator did not follow the Court's proposal that 'definitive` payments should be identified in the account: the Financial Regulation makes no further distinction between payments by instalment and other budgetary payments. The notion that some interim payments made under regulations or contracts are more 'definitive` than others is in any case questionable until the project/contract is completed and the final payment is due.

In the Commission's view, current projects or contracts need to be monitored at all stages up to final closure and not just after the payment of the first instalment.

In programming the development of its computerized accounting system (Sincom), the Commission has included the means of systematically monitoring the status of outstanding commitments, whether at the first instalment stage or any other intermediate payment stage.

The computerized budgetary accounting system (Sincom)

1.110. Since the systems analysis of the Sincom project took place before the concept of appropriations made available again was introduced into the Financial Regulation, the system started out without any proper facility for separately monitoring them. Appropriations made available again had therefore to be grouped together with another type of appropriation - appropriations carried over - during the system's first year of operation. Alterations have now been made to the system so that these new appropriations can be separately monitored in future. The new version, which ensures that the two types of appropriation are not mixed up, became operational on 1 January 1991.

In response to the Court's request in its report on the 1989 financial year (paragraph 1.10), the Commission did in fact take steps to show execution of the two types of appropriation separately once the 1990 accounts had been closed. It accordingly carried out an ex post analysis based on individual commitment transactions so that the information in the new annexes (B2 and B5) to Volume II of the revenue and expenditure account would be accurate.

1.111. Like the old system, the new one did not, in its first year, allow separate monitoring of appropriations entered following a contribution from third parties to Community programmes. To avoid any confusion in the computer bases between these appropriations and the appropriations for the financial year, the Commission entered the appropriations relating to the contributions of third parties to the Comett programme in an account normally used by the external offices for the management of appropriations carried over. However, just as it did for the presentation of appropriations made available again (see paragraph 1.115), the Commission segregated these appropriations from appropriations carried over for the purpose of their presentation in the revenue and expenditure account (the appropriations relating to contributions from third parties are covered in Annex B4 for commitment appropriations and Annex C3 for payment appropriations). In the closure of the 1990 accounts the Commission was thus able to satisfy the request made by the Court in its report on the 1989 financial year (paragraph 1.7).

The new version of the Sincom programme came into operation in January 1991 with a facility for separate monitoring in the databases of financial contributions from third parties, so there will be no need in future to adopt the expedient used in 1990.

As regards the presentation of appropriations relating to contributions from third parties in the monthly report on the implementation of the budget, this too was changed in January 1991 in response to the Court's remarks in its report on the 1989 financial year - as a result, these appropriations and appropriations deriving from transfers can no longer be confused. The tables group together the appropriations available in three large homogeneous categories: appropriations entered in the budget (including supplementary and amending budgets and transfers); additional appropriations (appropriations made available again and those relating to contributions from third parties); and appropriations carried over.

1.112. The Commission does not consider the case mentioned by the Court to be an anomaly in the accounting system. To avoid all misunderstanding, it is worth recalling that the management of funds from third parties falls into two distinct categories:

- one is where the Commission manages contributions from third parties which are officially entered in the budget and to which Article 4(2) and Article 96 of the Financial Regulation generally apply - cases such as Comett and some of the JRC's research activities;

- the other is where the Commission, as has sporadically been the case for a number of years, provides, at the request of third parties and in the course of its duties, facilities of an exclusively logistic nature for the management of funds entrusted to it by these third parties. For example, some third parties - mainly from EFTA - approached the Commission in connection with European Tourism Year to ask it to manage certain funds for them, since the Commission, with the appropriations in Item A-3052, was already active in this area. Funds falling into this second category are actually posted to an account outside the budget and, since there is absolutely no overlap with the budget itself, there are no authorization procedures, accounting implications, or statements of accounts either.

The Commission is well aware of the distinction between these two categories of transaction and has clarified their treatment in the recent draft regulation laying down detailed rules for the implementation of certain provisions of the Financial Regulation (SEC(91) 201 final, of 18 February 1991) by laying down the appropriate framework for each case (see Articles 145 to 149 of the draft). The Court of Auditors has already given a favourable opinion of the Commission draft.

Although the way in which the second category of funds is managed means that they do not figure in the revenue and expenditure account, for procedural reasons they are monitored in line with the provisions applicable to budgetary appropriations and within the same Sincom module. Until the end of 1990, there was no facility in Sincom for monitoring these funds separately; they were therefore booked to an unused budget account for the heading in question (without this entailing any entry in the revenue and expenditure account).

Since January 1991, there has been a separate Sincom facility for monitoring these transactions so there should not be any danger of them being confused with transactions involving budget appropriations.

1.113. The Commission recognizes that there were a few problems with Sincom in its first few months. It has closely checked the consistency of the system's databases by, for example, producing listings designed to detect any discrepancy between the individual transactions and account balances. As a result of these checks, some year-end corrections were made before producing the final accounts.

1.114 1.116. The Court's access to Sincom was arranged in July 1990 through an exchange of letters between the Directorate-General for Budgets and the Secretary-General of the Court. The Court was connected to Sincom on-line (screen) in September, as soon as the system was sufficiently advanced and continued to receive the paper 'batch` output as from the previous (NCR) accounting system. The Court's access to the Commission's accounts has in fact improved considerably. Since then, there have been no changes affecting the Court's access to Sincom.

In this connection, the application of the provisions of the Financial Regulation referred to by the Court should be designed to maintain an appropriate distinction between the means available for internal management control on a daily basis and those required by an ex post external audit which is restricted to transactions entered in the accounts. It was on this latter basis that the Court was given access, provision being made to allow open access for systems audit purposes.

The Commission is willing to cooperate with the Court in working out a system of access which would take account of the points raised by the Court while maintaining the distinction between functions and between means of control referred to above.

CHAPTER 2 Revenue

IMPLEMENTATION OF THE BUDGET

2.1. (d) When the balances were established in October 1990 it was quite impossible for the Commission to take account of the results of its controls on national VAT returns for 1989. VAT returns for year n must as a rule be notified to the Commission by 31 July of year n+1. The Commission carries out its controls in the course of the following few months and corrections that are then needed, and accepted by the Member States, can only be taken into account for the balances established in October of year n+2.

(e) Regarding controls carried out in 1989 and earlier years, there were still five Commission reserves outstanding on 31 August 1991.

These should be settled by 2 December 1991 in accordance with the rule laid down by the Commission (see answers to the Court's report for 1989, point 1.80 on page 228) to the effect that all reserves entered on a VAT control for year n generally lapse on the first working day of December in year n + 2.

There may be exceptions if problems arise with the interpretation of legal instruments or if there are technical problems in compiling the requisite data.

2.3. (a and (b) As the Commission stated in its answers to the 1989 report (point 1.65), it did not enter the entire 1989 surplus in the 1990 budget by way of an SAB because this would have had the result of applying a VAT rate not complying with Article 2(4) of the Council Decision of 24 June 1988 on the system of the Communities' own resources. Parliament supports the Commission's interpretation but the Council, which does not, has referred the question to the Court of Justice.

(c Article 6 of the Decision of 24 June 1988 provides that 'The revenue referred to in Article 2 shall be used without distinction to finance all expenditure entered in the budget of the Communities`, and this in the Commission's view includes the EAGGF monetary reserve. The Commission accordingly considers that by including the monetary reserve in the calculation of the VAT resource it has applied the rules correctly. The GNP resource is a back-up resource to be used to balance expenditure and revenue and need not be used unless the others fail to cover the full amount of expenditure, including the monetary reserve.

2.5. (a When preparing SAB N° 3/1990 at the beginning of October 1990 the Commission was lacking part of the information it needed to calculate the final amount of the refunds to Spain and Portugal, and particularly the figures for the GNP correction used to calculate the GNP balance.

Moreover, the margin available under heading 5 of the financial perspective for 1990 was not wide enough to cover all the appropriations needed. The Commission accordingly proposed that the margin be entered in SAB N° 3/1990 to finance part of the amounts due and, in its 31 October 1990 proposal for revision of the financial perspective, called for technical adjustment of heading 5 to release enough money to cover the Community's obligations to the Member States. After the budgetary authority had taken the decision approving the revision, the Commission then entered a supplementary appropriation of ECU 110 million in the 1991 budget to cover refunds due in respect of 1990.

(b) A Member State which at the beginning of December 1990 owed balances and adjustments to VAT and GNP resources for 1989 and 1988 and to which the Commission was to refund part of these resources preferred to pay over the net amount, that is to say the difference between its debit and credit positions, instead of paying over the gross amount and receiving the refund.

As soon as the appropriations were available the Commission made out payment orders for the refunds. The amount authorized for the Member State that had paid the net amount of VAT and GNP balances and adjustments was not paid to it but offset against its debt. The full amounts of the revenue and expenditure were entered in the budget; so this was a simple debit/credit operation requested by the Member State.

THE VAT RESOURCE

Revenue collected

Amounts collected to be taken into consideration

2.10. (b) The Commission would point out that in these cases its controls on national annual VAT base returns give an opportunity to correct the intermediate figures in the light of final revenue figures ascertained from national accounts.

2.11. (b) The observation made by the Court in its 1984 report served to illustrate the difficulties of applying the revenue method (the old 'B` method). It did not warrant a conclusion that amounts collected by Italy under the 'condono fiscale` law were not included in the VAT revenue to be used for calculating the VAT base.

As soon as the fact was realized by the Commission in 1989, it was able to recover resources due for 1986, 1987 and 1988 which, for a posteriori corrections, fell within the limits set by Article 10b(2) of Regulation (EEC) N° 2892/77 (as amended).

Delays in passing VAT revenue to the accounts

2.12. The Commission would recall that national VAT accounting procedures have not been harmonized in the Community.

2.13. (b) The Commission is aware that in certain Member States, including Italy, there is a time-lag from one year to the next between the collection of VAT revenue by local offices and the entry of amounts collected in the budget of the State concerned.

The Commission considers that this is an acceptable state of affairs, provided the revenue not entered at the end of year n is properly registered in year n + 1.

Analysis of this phenomenon in Italy for the period from 1979 to 1988 has revealed that amounts entered in the budget are not routinely lower than the amounts collected by local offices in the same year.

Considering more specifically the 1989 VAT revenue carried forward to 1990 as observed by the Court in Italy, the amount is indeed higher than usual. The Commission's information is that the rise is due to exceptional circumstances such as a bank strike and the introduction of a new revenue centralization system which, while potentially more efficient, has been difficult to put into operation.

The Commission is studying the problem with the Italian authorities.

Changes to the collection system

2.16. Given that Spain introduced the Community VAT system only in 1986, and Greece only in 1987, and given the scheme of periodic VAT returns, the VAT revenue actually collected by the Member States in the relevant years did not correspond to the equivalent of a year's total VAT revenue. The Commission therefore felt the need to ask those countries to reconstruct one year's VAT receipts in order to determine VAT bases equivalent to those of the other Member States.

2.17. (a) The Commission already explained this point in its answer to the Court's report on 1989 (point 1.76 on page 127). Since the Commission was not in a position to draw attention to the problem before making its controls in 1989 on the return for 1988 notified to it in 1989, the amount involved was recovered when the balances were established on 1 December 1990.

(b) The accelerated reimbursements to Danish exporters are due to the fact that the deadlines for lodging VAT returns have been changed, now being weekly rather than monthly in many cases. This is authorized by the Sixth VAT Directive, which leaves the Member States to establish return periods, and entails no corrections to the VAT base for Denmark.

Corrections and compensations

General observations

2.20. Some of the derogations allowed by the Sixth Directive were abolished by the 18th Directive in July 1989 and the Commission will shortly be proposing abolition of most of the rest.

2.21. Corrections not provided for in the rules are evidence of temporary infringements of the Community legislation; proceedings are in hand accordingly.

The concepts of 'solutions` and 'authorizations`; Harmonization of calculation methods

2.26 2.28. The Court's remarks highlight the complexity of the technical problems surrounding the determination of the national bases; the Commission has always endeavoured to find consistent solutions through the horizontal examination of calculations of compensations.

The Commission agrees with the Court that the distinction between 'solutions` and 'authorizations` is a purely formal one as regards the calculation of certain compensations, but the sometimes artificial nature of the distinction has no impact in practice on the actual calculations.

2.28. (a and (b) In order to intensify this effort to apply consistent solutions, the Commission's controls on the 1989 returns concentrated on a series of compensations common to several Member States.

The compensation singled out by the Court, relating to limitations on the right to deduct in respect of vehicles for business use, was one such case.

To place the Member States on an equal footing and produce comparable results, the same calculation formula was used for all the Member States.

If it is to achieve its aim this formula must, however, be based on the best available figures and on parameters reflecting the differences between national tax law systems.

This explains the divergences observed by the Court.

(c) The coefficient for private use of company cars was studied by the Commission on this horizontal basis; it was ascertained that the parameters were perfectly comparable except in Belgium, France and Italy.

Following Commission requests for correction:

- Italy corrected the calculation of the compensation and paid additional own resources of ECU 16 million or so;

- Belgium agreed to review its calculation in the light of a special study to be completed in 1992;

- discussions already commenced with France should be concluded by the end of 1991.

2.29. Positive compensation (in favour of the Commission) for the exemption of securities management was calculated for three Member States:

- the input deduction rates for overheads in Germany and Luxembourg are quite comparable, given the differences between the two countries' banking structures;

- Denmark refrained from making the deduction, which increased the amount of the positive compensation as it cannot break overheads down between these operations and other banking activities.

Lack of precision in the regulations

2.31. Since all the Member States are considering the possibility of using the calculation method accepted by the Court of Justice for compensations for operations in Annex F to the Sixth VAT Directive, this method will probably constitute the new uniform method.

As for the calculation of compensations for operations listed in Annex E to the Directive, the Commission has withdrawn the reserve referred to by the Court.

Compensations of this type will consequently be calculated in accordance with the applicable uniform method.

2.32. As the Commission explained in relation to point 2.28, it certainly does not leave the Member States free to select their own methods of calculating compensations but has regularly taken the initiative of proposing harmonized methods so as to achieve consistent solutions and comparable results.

Since several derogations from the common system of VAT have already been abolished (see point 2.20), the risk that the Member States might cut their VAT liability by means of minimalist compensations is unlikely to grow worse.

Despite the risk alluded to by the Court, the fact is that certain Member States overestimated the compensations, to their own detriment (see points 2.29 and 2.33(a)(i) regarding Denmark and point 2.34 regarding Italy).

The quality of the estimates

2.33. (a)(i)It was at the Commission's request that Denmark updated the calculation of the compensation for petroleum products, which was based on 1979 statistical series.

VAT bases for recent years will be corrected in Denmark's favour.

(a)(ii)It is inevitable that Greece uses 1980 input-output tables for calculating compensations, since they are the most recent available.

(a)(iii)This is the positive compensation calculated by Luxembourg for the proportion of international rail passenger transport occurring in its territory.

Since the compensation is calculated from approximate estimates, the percentage relating to the sale of tickets to taxable persons in relation to total sales is set at a standard 20%.

There is no reason to believe that it will vary from one year to another.

(a)(iv)The negative compensation for taxation in Belgium of services rendered by travel agencies in respect of journeys outside the Community is based on the most recent sources of the three kinds of information:

- the number of journeys is based on a 1985 survey, whose results are updated using more recent figures supplied by the trade;

- the unit price per journey is based on a 1981 survey, whose results are updated by the consumer price index;

- the profit margin is set periodically by Belgian tax legislation.

(b)(ii)This point was considered in the course of the Commission's last control on the 1989 return.

It was found that agricultural statistics used for determining the VAT base and ESA data were obtained from the same source. The differences are due to the very nature of the calculation that has to be done for own resources purposes.

To calculate the upstream tax burden, the data are modified to exclude the activities of non-taxable persons from the VAT field.

(b)(iii)These are the only available data; they are vital to the correct calculation of the compensation.

(b)(iv)All the data used by the Member States to calculate the compensation for the exemption of military procurement are classified as secret.

The Commission can only check for plausibility and see that the data are properly used. External trade statistics give at least a partial view of the problem; the Commission concluded from them that Spain's orders of magnitude were plausible.

2.34. The Commission considers that the calculations of some compensations do not qualify for a general accusation of laxity.

As the Commission's explanations show, they are all controlled by the Commission, which makes every effort to see that they are calculated by the strictest parameters, both in terms of each national compensation and horizontally for each type of compensation in relation to all the Member States.

Regarding the two compensations referred to by the Court in Greece and Italy, the Commission would make the following remarks:

- it can be seen from control papers for 1987 and 1988 that the Commission did not accept the figures used in 1987 for Greece's calculations for the negative compensation for petroleum products and cars;

- the downward variation referred to by the Court in Italy's calculation of a positive compensation flows from the greater accuracy of the data now used in the calculation. The current data are taken from tax returns, whereas estimates were used previously.

Conclusion

2.35. The Commission does not agree with the Court that deficiencies in the harmonization of VAT assessment bases preclude any kind of guarantee of fair treatment of the various Member States.

The Commission would recall that the very purpose of the Community rules is to treat the Member States fairly by calculating the corrections needed to offset the positive or negative effects of these deficiencies.

Moreover, the calculations made by the Member States to this end are examined by all the Member States in the Advisory Committee on Own Resources.

The Commission believes it has done all it could - and in any event it will continue to do all it can - to see that the rules are strictly applied despite the complex variety of disparate situations to which the Court rightly refers.

2.36. At points 2.12, 2.13(b), 2.16 and 2.18, the Commission explained that the variety of practices engendered by differing national tax rules was no bar to the proper collection of own resources.

2.37. The Commission believes that, since there are so many cases of so many different kinds in which corrections or compensations have to be calculated, it would be inconceivable to try and implement detailed rules specifying the calculation methods.

But, as it stated in answer to points 2.26 and 2.28, the Commission sees no need to seek uniform solutions for the determination of corrections and compensations.

2.38. The Commission agrees with the Court that full attainment of the objective of fair treatment for all Member States entails a further Commission effort to improve the comparability of data needed for the establishment of the national VAT assessment bases (see answer to point 2.37), to see that national VAT laws are in conformity with the Community legislation (see answer to point 2.21) and to pursue the harmonization of those laws (see answer to point 2.20).

IMPORTS OF MOTOR VEHICLES

Suspension systems

Temporary storage

2.44. Under the current directive it is for the national authorities to assign a customs arrangement to goods in temporary storage where there is a breach of the prescribed periods. The Community rules applicable from 1 January 1992 are clearer on the approach to be followed.

By Article 19 of Regulation (EEC) N° 4151/88, the customs authority is required without delay to take all necessary measures, including the sale or destruction of the goods, to regularize the situation of goods when formalities are not commenced within the prescribed period.

Warehousing procedure

2.45. A proposal for a Regulation was laid before the Council which, on 25 July 1988, adopted Regulation (EEC) N° 2503/88 on customs warehouses. The new rules will be implemented from 1 January 1992 under Commission Regulation (EEC) N° 2561/90 of 30 July 1990.

Among other things these regulations specify the places that may be approved as customs warehouses, the standard and simplified entry and exit procedures, usual types of handling and the obligation to keep stock accounts.

There is also a requirement to demonstrate the economic justification for the procedure when applying for it.

2.46. (a) The current rules give an exhaustive list of operations that may be regarded as usual handling. The conversion of passenger cars into utility vehicles is not on the list and cannot therefore be within the definition; it can only be done under the inward processing arrangements, complying with the rules applicable thereto. The new rules preserve this situation.

The Commission's services will examine this case with the country in question in order to clarify the situation revealed by the Court, and to determine whether there are own resources to be recovered.

(b) Open warehouses are expressly provided for in the new rules and will be authorized in all Member States. The current directive covers the customs warehousing procedure, which can be applied to goods held in places not authorized as warehouses provided other conditions are satisfied.

(c) The current rules are silent on the frequency and scope of checks on the customs warehouse procedure. The general principle that checks are to be made in the light of the risks that each procedure can generate applies here, the customs authorities of the Member States being responsible for them.

Inward and outward processing

2.47. It is true that the rules on inward processing allow the economic conditions to be considered satisfied when the value of imported goods per authorization and per annum does not exceed ECU 200 000.

The amount of detail to be borne in mind when deciding whether one item is in the same class as another is not specified. The result may well be differences of interpretation as between Member States. The Commission will consider, with the appropriate Committee, whether there are such differences and whether the rules should be tightened up.

It is for the customs authorities in the Member States to check for compliance with authorizations given.

Use of suspension systems

2.49. The Commission considers that too many products are concerned for the preparation of product monographs to be a practicable exercise.

Customs value

Procedures for checking declared values

2.51. (a) Where the customs value is determined by the transaction method, the Member States should ensure that invoices are always presented with the declarations for release onto the market or no later than the prescribed periods.

(b) The DV 1 document must be properly and accurately completed if the rules on customs evaluation are to be applied correctly.

(c) To simplify formalities Regulation (EEC) N° 1496/80 provides for derogations from the obligation to present a DV 1 form (e.g. where the imported goods are worth less than ECU 3 000 or have no commercial value).

The derogation for goods imported on a regular basis on the same terms from the same supplier to the same buyer is that the importer must supply all the DV 1 particulars whenever there is a change in circumstances and in any event once every three years.

This last derogation is optional, but the customs authorities are entitled to check a posteriori for accuracy of the particulars on a customs declaration.

Value reductions

2.52. (a) The proper treatment for customs value purposes of repair costs borne by the importer under a guarantee given to the purchaser is being considered in the context of the existing legislation, and an inquiry is in motion into the operation of the procedure used by the authority concerned in this case. The Court will receive a separate answer as soon as possible.

(b) Commission Regulation (EEC) N° 1495/80 (as amended) provides that for the purposes of the second paragraph of Article 4 of Regulation (EEC) N° 1224/80 'Apportioning the price actually paid or payable shall also apply in the case of the loss of part of the consignment or when the goods being valued have been damaged before entry into free circulation`.

The techniques used by the customs authorities to establish the scale of the damage may vary according to the customs techniques being applied but always respect the principle that the change to the price paid or payable in respect of such damage will not exceed the real estimate.

Regarding the specific cases mentioned here, it is vital for customs procedures to ensure that damage to vehicles in transit should be registered at the proper time and that the amounts corresponding to it do not exceed what the Regulation allows.

Second-hand vehicles

2.53. It is true that the general Community rules on value for customs purposes must be applied to determine customs duties payable on commercial imports of second-hand vehicles.

But the Member States may apply different evaluation techniques for the purposes of assessment to purely national taxation such as excise duties.

Evaluation exercises

2.54. The Community rules follow the GATT Agreement on customs valuation in designating the transaction method as the first method to be used for the purpose. The attraction of the Agreement is that it is based on the reality of a liberal trading system. But it also means that importers enjoy no 'room for manoeuvre` outside what has to be proved, with documentary evidence, on customs declarations.

The GATT Agreement was adopted in response to the need for a fair, uniform and neutral system of customs valuation, recognizing that value has to be determined by fair and simple criteria respecting commercial usage. Its aim is to avoid giving favoured treatment either to importers or to the customs authorities in the operation of the valuation rules.

The customs authorities always have the power to reject requests for the transaction method to be applied if there are doubts - or insufficient evidence - as to the factors to be used in determining the value.

Customs controls

2.55 2.57. The Commission takes note of the Court's observations regarding customs controls and shares its concern.

It must emphasize that the organization and practical operation of controls are the Member States' own responsibility. It is not possible for Community law to regulate every detail of them.

The Commission is fully aware of the difficulties they can engender. The problem could be solved if two basic instruments were put in place (but this has not been possible so far, given the new priorities imposed by the target of achieving the internal market by 1993):

- the coordinated development of computerized administrative procedures (CD project approved by the Council Decision of 4 February 1986

) in the Caddia context, with a view to establishing data-processing facilities enabling the Commission and the Member States to retrieve and process any information needed to perfect the customs union rules;

- the Community Customs Code and its implementing rules, combining the current mass of dispersed provisions in the interests of simplicity, clarity and transparency for the benefit of the authorities and traders alike.

In addition the Commission is currently working with the Member States on the possibility of introducing new working methods throughout the customs services, and in particular new risk analysis and audit techniques. The introduction of these methods was recommended by a study on 1992 and the customs union prepared by the Maastricht European Institute for Public Administration in 1990.

THE OUTWARD PROCESSING SYSTEM

2.59 2.74. The position here is different from that for inward processing in that the economic conditions are defined in purely negative terms. A further difference is that neither the Council Regulation nor the Commission implementing Regulation gives any details as to the evaluation of these negative conditions. This flexibility is the result of the difficult negotiations to attain the requisite majority for adoption of these instruments in the Article 113 Committee.

Even so, the customs authorities have to evaluate the economic conditions before authorizing outward processing (Article 3(1) of the implementing Regulation): the Commission will draw the Member States' attention to this at the next Committee meeting.

The Commission has also noted the Court's observations on the consequences of the failure to spell out the economic conditions for outward processing and will propose that the Committee consider adopting Community legislation to define and specify them.

Procedures adopted by the Member States to 'simplify things` when calculating the amount of the exemption will be examined in depth and appropriate measures will be taken if they turn out to be contrary to Community rules.

Delegations to the Committee on Customs Procedures with Economic Impact will be asked, at the next meeting, to verify the checking procedures used by their authorities and to strengthen them if necessary.

FINES, PERIODIC PENALTY PAYMENTS AND OTHER PENALTIES

2.76. (a) As the Court observes, it sometimes takes time to notify a decision imposing a fine. This is because the full text has to be translated into all Community languages. In 1990 there was only one case of late notification.

(b and (c) The only means the Commission has of ascertaining the date of receipt of the letter notifying its decision is the advice of delivery returned to it by the postal services.

In some cases it has been returned late and in some it has never come. Consequently every letter of notification contains a form on which the addressee declares that he has received the letter on a specified date. In any event, if the postal services return the advice of delivery, that is what counts since it is issued by a third party (the post office).

The recovery order is no more than an accounting paper in the case of a fine whereas in the general case it constitutes the debit advice to the debtor; it cannot be established before the Commission receives the advice of delivery.

The due date has to be established on the basis of the advice of delivery which, as we have seen, is not always returned by the postal services.

(d) The routine notification of judgments given by the Court of Justice or the Court of First Instance to the Accounting Officer has suffered somewhat as a result of the recent reorganization of the European Courts and their jurisdiction.

Practical measures to deal with the problems observed have been agreed on by the departments involved.

2.77. The system of imposing fines and obligations comprises two quite separate parts: the procedural part leading to the notification of a fine, followed by the financial part directed at the collection of the fines imposed.

Even if the Court has detected procedural deficiencies, it is not true to say that 'there has not been any fundamental change in the situation`. The Court's criticisms have not highlighted any specific deficiencies in the financial area stricto sensu.

2.78. The Commission accepts the Court's proposal and will henceforth include bank guarantees in its accounts.

The Commission enters interest on arrears in the same item as the principal (Article 710) because Article 700 (interest on arrears) is reserved for interest due on own resources. In the preliminary draft budget the Commission proposed opening a specific item for interest on arrears in other areas; this would help distinguish interest from principal in the case of fines.

The Accounting Officer has to await collection of the principal before entering interest in the accounts, since interest is calculated from the date the fine falls due to the date of actual payment. It is only from the latter date that the amount can be established.

The argument against entering the amount of the fine in the accounts from the date of notification - the fine being payable regardless of any appeal to the Court of Justice (Article 185 EEC) - is that interest on arrears depends wholly on the Court's judgment. Consequently there is no credit position to be established since it is not certain, not liquidated and not recoverable.

CHAPTER 3 The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee): Management and budgetary control

BUDGETARY DISCIPLINE

Early warning system

3.5 3.8. Decision 88/377/EEC on budgetary discipline must be taken as a whole: Article 6 cannot be considered in isolation from its context.

Under Article 5 of the Council Decision, constraint, i.e. compliance with the guideline, is global.

The objective of controlled growth of expenditure by chapter is difficult to achieve in practice, at least under the current CAP system, because of the many unpredictable factors affecting expenditure. EAGGF Guarantee appropriations by chapter are therefore to be seen as evaluations, in that they relate to requirements which may develop as the budget is implemented. Article 8 quite logically provides for the possibility of making transfers.

Article 6 defines the nature and scope of management by chapter. It contains two main notions:

- monitoring of expenditure by chapter, with the aid of the early warning system as a tool for information, reference (monthly indicator) and monitoring;

- the Commission is obliged to react to the signals given by the early warning system by taking or proposing the appropriate rectifying measures, as laid down in Article 6.

However, the Commission would point out the limits of the early warning system, which have to do with:

- the relative nature of the expenditure profile, which cannot take account of time-lags or extensions in payment times during the course of a financial year, nor of exceptional circumstances affecting agricultural markets;

- the time elapsing between a budget overrun being noted and corrective action being taken; this time-lag is a result of the joint effect of the nature of the agricultural rules and the decision-making process.

With regard to the expenditure profile, the Commission takes the view that corrective measures should not be taken blindly whenever there is a deviation from a profile, without account being taken of the reasons for the discrepancy. The causes could be economic, but discrepancies can also arise because payments have been delayed or brought forward for various administrative reasons, or even because of a fortuitous shift of expenditure from one month to the next. The impact of any measures to be taken must therefore be assessed from the point of view of sound market management as well as the application of budgetary discipline.

Lastly, the Commission would point out that the presentation of the monthly report on EAGGF Guarantee Section expenditure has been considerably improved in the 1991 financial year. Where the appropriations for a chapter are overrun or in danger of being overrun, the report includes an assessment of the market situation and details the management measures which the Commission has taken or intends to take within the limits of its powers, on the one hand, and any proposals it might have presented to the Council on the other hand. Furthermore, the reports incorporate the lessons the Commission has learned from the situation updates which are also transmitted to the Budgetary Authority.

With regard to the tobacco sector, as soon as the budget or market problems arose, the Council adopted strong measures for the 1990/91 marketing year, consisting in:

- classification of Badischer tobacco produced in zone B as a separate 'new` variety called 'Badischer Guedertheimer hybrids`;

- reduction of the premium for the 1990 harvest by about 25%, in addition to the 15% reduction due to the overrun of the maximum guaranteed quantity;

- reduction of the buying-in price, from the 1989 harvest, by about 35% in order to discourage an explosive increase in production.

Once these measures had been taken, the Commission used its management powers in December 1990 to make a 15% cut in export refunds for the 1990 harvest for those varieties which had exceeded their maximum guaranteed quantity.

In order to contain expenditure in this sector, the Commission included in its 1991/92 price proposals reductions of between 4 and 17%, depending on the variety, in the prices and premiums for all varieties. A further reduction of up to 15% will come into effect for varieties which exceed the MGQ.

In addition, the broad lines of a reform have been presented to the Council (COM(91) 258 final).

3.9. In 1990 the Commission was faced with difficulties on certain agricultural markets. The danger of market instability was so acute that the Commission had no reasonable option but to take market management measures, which did not result in savings. Any measures taken in certain sectors to limit expenditure at that stage would in all likelihood have worsened the situation. The Commission would draw the Court's attention to the fact that overall market management during 1990 led to a level of actual expenditure, as the Court noted, 5.3% lower than the initial appropriations. For more details, the Commission would refer the reader to its reply to points 3.5-3.8.

In 1991, however, the Commission used its management powers under Article 6 to contain expenditure. It adopted economy measures which resulted in total savings of ECU 385 million in the 1991 financial year. In addition, it presented to the Council price proposals for the 1991/92 marketing year and related measures which entailed savings of ECU 540 million for the 1991 financial year, which the Council only followed to the tune of ECU 460 million.

3.10. The Commission is aware of the unreliability of the Member States' forecasts.

It has launched an enquiry in the Member States with a view to examining the methods used and identifying the difficulties encountered when drawing up forecasts.

The enquiry should be completed by early 1992.

3.11 3.12. The Commission regularly conducts an overall critical examination of the economic assumptions underlying the budget. Its findings are reflected in the monthly reports of the early warning system.

The Commission takes the view that this analysis, which has been gradually improved, should help to reduce the reaction time of the Commission and the Council but cannot entirely eliminate the time-lag between an overrun being noted and a corrective measure being adopted, since this time-lag is due to the nature of the decision-making process and the agricultural regulations.

3.13. The Commission too feels that ex-post financial evaluation can be useful and enlightening. However, such analyses are not without difficulty and are in danger of being purely theoretical.

The Commission would stress that an evaluation is carried out whenever this is necessary or warranted. It should also be pointed out that no measure can be considered in isolation. Each is part of a general framework within which a number of factors come into play to influence the measure in question. This being the case, when a given economic framework is used for the purpose of forecasting the budgetary effects of a measure, that framework is generally found to vary to such a degree that it is as good as impossible to isolate ex-post the effect of a specific measure.

MANAGEMENT OF APPROPRIATIONS

Carryovers

3.16. (a) Being aware of the delays in olive-oil production aid payments in Italy, the Commission had set deadlines for payment to beneficiaries. The backlog was due to be cleared in 1990.

However, deadlines have had to be extended again in order to allow the Italian administration to adjust to the accelerated rate of payment of expenditure. Furthermore, the entry into use of the olive cultivation register created certain start-up problems which hindered the clearing of the backlog. Further difficulties arose as a result of the introduction of the 'anti-mafia` law.

From the 1991/92 marketing year the Commission will no longer authorize any extensions in payment deadlines.

3.16. (b) The European Council's decision of 14 and 15 December 1990 provided for the ECU 250 million for food aid to the Soviet Union to be included in the 1990 agricultural budget. The carryover was effected pursuant to that decision.

3.17. In addition to the justification given above, the justification for the other carryovers which were the subject of document COM(91) 269 final of 13 February are sufficiently detailed to explain the need for such carryovers. These carryovers increase the overall funds available in the EAGGF-Guarantee budget without however increasing the availability of appropriations to cover the requirements of the 1991 financial year. Carryover appropriations are booked separately.

There can therefore be no question of charging against them expenditure not covered by carryover appropriations, and any such appropriations which are left unused will lapse at the end of the financial year. A clear distinction is made in the monthly reports on utilization of appropriations between expenditure against new appropriations and expenditure against carryover appropriations. Perfect transparency is therefore guaranteed.

Corrections of prior year expenditure

3.19. The Commission believes that any deviation from the expenditure profile must be analysed in depth before corrective measures are decided (see detailed reply to points 3.5-3.8.).

In addition, the Commission stresses that corrections made in an accounts clearance operation do not necessarily mean that expenditure has not been made, even if that expenditure is not paid by the Community.

3.20. The financial outcome of all corrections made in an accounts clearance operation, be it positive or negative, must, in accordance with the obligations imposed by the Financial Regulation, be booked solely to Article 290 of the budget, as the Court itself recognizes in point 3.18.

There is no cause to make a distinction between headings having negative appropriations and all other EAGGF-Guarantee headings.

These appropriations must therefore be considered as appropriations of the same type as those entered under any EAGGF Guarantee heading, on condition that:

- since they cannot be foreseen in advance, a token entry is entered in the budget for that heading;

- since these appropriations originate in the Commission's clearance decision, they are therefore an integral part of the appropriations for that financial year, be they positive or negative.

Therefore, since these appropriations, positive or negative, relate to the financial year, they have the same characteristics as other EAGGF-Guarantee appropriations, with the exception of their different origin.

When there is a deficit an appropriation must be entered under a heading by means of a transfer from another heading or, where no funds are available, by recourse to a supplementary and amending budget. Conversely, when the Community is in credit, a negative appropriation should be entered under the heading. When implementing the budget, the Commission decides on the use of this appropriation by means of transfers, taking due account of the requirements and priorities. In the Commission's view, there is no need to lay down guidelines as the Court suggests.

The transfer of ECU 115 million to Chapter 20 (Milk products), Article 207 (Financial contribution of milk producers) was the result of the application of a recital in the clearance of accounts decision for the 1987 financial year relating to Germany, pursuant to which the amount was initially paid by Germany and subsequently, after it had communicated its programme for buying back milk quotas, the Commission reimbursed it the maximum amount provided for, namely ECU 115 million. It was therefore quite regular for that amount to be charged against the item under which it had been provisionally booked as negative expenditure (Article 280) and rebooked under Item 2071 which provides, inter alia, for the financing of any expenditure arising from the programme for buying back reference quantities, following the clearance of accounts for 1987.

Negative expenditure

3.21. The Commission refers to the sections on negative expenditure in its replies to the 1979, 1982, 1983, 1985 and 1989 reports.

3.22. There is a direct link between the income and expenditure booked under Item 2071, given that the levies received following the overrun of the individual quota are intended for the national buying back of quotas if the national quota has not been exceeded.

Expenditure charged as negative expenditure

3.24. The interpretation of Article 9(4) consisted in accepting that a national programme to buy back quotas should be financed from the sums 'recovered` from the Member State by the EAGGF in the clearance of accounts, and not from the sums received by the Member State from producers, as the abovementioned provision dictates. However, it is in any case in accordance with the objective of Article 4(1)(a) of the said Regulation, which is to reduce the existing reference quantities, and made it possible to bring Germany's guaranteed global quantity back to the correct level. In addition, this interpretation should be seen in the context of the difficult negotiations with the Member States concerned, which led to the solution as it stands.

NATIONAL CONTROLS OVER GUARANTEE EXPENDITURE

Introduction

The Commission notes the Court's comments. It will make the contacts necessary to see to what extent the information the Court can provide will enable it to assess the cases described.

Verification of the eligibility of claims

3.35 3.40. The Commission, like the Court, addressed observations relating to the lack of supervision concerning the sheep and goat premium on the part of both the central (AIMA) and the regional (Assessorati all'agricoltura) authorities on the routine work which is carried out by the Ispettorati di Agricoltura and/or the communes themselves. These observations were first addressed to the Member State concerned in the context of the clearance of the 1988 EAGGF accounts. The Court had been made aware of these observations.

The Commission notes that the Court's observations confirm its own observations which were addressed to the competent national authorities following the audits carried out for the clearance of the 1988 EAGGF accounts. These audits led to significant disallowances of expenditure in the framework of the clearance of the 1988 EAGGF accounts and will involve such disallowances in the upcoming clearance of the 1989 EAGGF accounts.

The Court's staff had access to and examined all the pertinent current audit files, audit reports and clearance documents of the sheep and goat premium expenditure.

Community rules

3.46. The Commission examines the documents presented by the Member States as part of its analysis of management procedures, book-keeping and internal auditing of the paying agencies and other departments involved in the payment procedures. Once examination is completed, the Member State concerned is informed of any recommendations for improving these systems.

In addition, the Commission takes measures at Community level where necessary by amending the control provisions in the regulations.

The Court may judge these measures to be inadequate, but any additional action would require a substantial increase in human resources for the EAGGF and the market divisions.

3.47. The Commission is of the opinion that the responsibilities of the paying agencies are sufficiently clearly defined in Council Regulation (EEC) N° 729/70.

It must be ascertained that the Member States fulfil their obligations under Regulation (EEC) N° 729/70, which specifies, in particular, that:

- the administrative and accounting conditions in accordance with which payments are made relating to the implementation of the Community rules within the framework of the agricultural market organizations must be laid down in writing;

- Member States must ensure that (EAGGF) appropriations are used exclusively for the purposes laid down;

- Member States must, in accordance with their national laws, regulations and administrative provisions, take the necessary steps to satisfy themselves that transactions financed by the Fund are actually carried out and are executed correctly, prevent and deal with irregularities and recover sums lost as a result of irregularities or negligence;

- Member States must inform the Commission of the measures taken for those purposes and in particular of the progress of any administrative or legal proceedings.

CHAPTER 4 The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee): Organization and management of markets

4.1.Export refunds for non-Annex II goods

REFUNDS PAID ON CERTAIN PROCESSED GOODS

4.1.7. The number of refund rates is relatively limited. It is the subject of three monthly publications (cereals, milk, sugar) and a quarterly publication (eggs).

It is the combinations of agricultural products (listed in Annex II) in different forms which are practically unlimited.

4.1.8. Even though the ingredients used in certain products are entirely lost as such, chemical analysis of the end products and any losses and residues can be very useful in determining the nature and origin of the ingredients as well as their quality and the likely accuracy of the quantities declared.

Budgetary execution

4.1.9. Commission Regulation (EEC) N° 1762/89 applies only from the first quarter of 1990; the information gathered under this Regulation was therefore not yet available when the 1990 and 1991 budgets were being prepared.

The application of the systems in the Member States

4113 4140. With regard to the weaknesses noted by the Court in the application of the system in the Member States, the Commission will examine with the representatives of the administrations concerned the specific cases which the Court mentions.

4.1.13. The Commission does not agree that the rules give only minimal guidance.

The body of regulations applying to the export of and checks on non-Annex II goods covers those provisions which can be adopted on a common basis.

If, as the Court stresses, additional detailed rules must be adopted, such rules must be tailored to specific cases given the excessively wide variety of goods produced and manufacturing processes. For example, analytical checks on goods could prove to be the best control method for certain goods but they could better be replaced by a different set of on-the-spot checks in the case of large production units.

4.1.16. In the Commission's view, the Member States must be able to adapt their control methods to the specific cases they meet, which can vary considerably from one part of the Community to another, as well as to certain products which are specific to certain regions.

Registration of recipes

4.1.17. With the redrafting of Regulation (EEC) N° 3035/80 the Commission will propose that the registration of recipes is harmonized so as to facilitate the exchange of information between Member States provided for in Article 8.

However, application of Article 3(2) of Regulation (EEC) N° 3035/80 requires henceforth that Member States possess all the necessary information; the Court's request therefore concerns registration of these data in a formal file.

The Commission does not feel that it should impose detailed implementing procedures, such as a file of this kind, on Member States, except to the extent desirable for the exchange of information between Member States.

The Commission also refers to its reply to point 4.1.51.

Regular review of recipes

4.1.20. As the Court points out, the frequent appearance of new products or changes in the composition of certain goods requires the registration of a considerable number of standard recipes, several thousand or even tens of thousands, some of which are practically never used (they could, however, concern old stocks in certain cases).

As a result, a risk analysis based on the registered recipes is not necessarily efficient, given the large number of recipes and the use to which they are put. More generally, the Commission would point out that the checks organized by the Member States must ensure that the amounts of refunds granted to the same firm are correct. Since refunds relate to the raw ingredients used, checks should focus primarily on verification of the quantities the firms actually use; such checks must also be supplemented to ensure that refunds are not granted for goods marketed within the Community. Consequently, a risk analysis based on the registered recipes must above all contribute to supplementing the orientation of checks.

(See points 4.1.38-4.1.40 and 4.1.51).

Verification of recipes

4.1.24. The difficulty encountered in obtaining analytical confirmation (chemical analyses) of declarations resides in establishing coherent methods. However, Commission Regulation (EEC) N° 4056/87 lays down certain rules on chemical analyses applicable to Regulation (EEC) N° 3035/80 and intends to continue its work in this area.

Production losses

4.1.38 4.1.40. A distinction should be made between residues (by-products from the processing of certain agricultural products, of little or no commercial value, the characteristics of which are clearly distinct from the exported goods) and losses proper (products with characteristics similar to those of the exported goods, such as waste, misshapen products, etc. which cannot therefore be exported as such).

Since the Court's last report on export refunds for non-Annex II goods (1979) the Commission has regularly discussed the question of losses or residues within the 235 Group (see reply to point 4.1.45). These discussions have helped clarify the situation for a considerable number of cases by making this distinction.

In the case of losses in the strict sense of the term, the Commission intends to confirm the following rules in guidelines for application to be used by all the Member States:

- no refund can be granted for products marketed in the Community;

- no refund can be granted for residues with a commercial value (since such cannot be considered as residues);

- the admissibility of losses must be established on the basis of the most up-to-date production techniques;

- where losses exceed a certain threshold (the Commission proposes 2%) cases must be notified to the Commission; below this threshold Member States will be responsible for deciding on admissibility.

The Commission has no knowledge of any cases where losses (products with characteristics similar to the exported goods) are as high as 30%; losses of more than 5% are very rare. The same is not true of residues. Residues of more than 30% appear justified.

The Commission's central management

Coefficients applied to processed goods containing cereals

4.1.42. This point concerns agricultural raw materials which are not normally among the ingredients of typical non-Annex II goods.

In the case of the main ingredients of this category (starch, glucose, etc.), the coefficients fixed in Regulation (EEC) N° 2744/75 are identical or very similar to those used for exports of those products in the unaltered state (e.g. 1,61 instead of 1,60).

4.1.43. The cases mentioned in this paragraph concern marginal products and wrongful use came to light only recently (1990). In all, three cases have been notified. An initial adjustment of refund rates was introduced from 1 May 1990, in Commission Regulation (EEC) N° 1100/90 of 30 April 1990 (OJ L 111, 1.5.1990, p. 39).

In order to stop attempts at misuse, the general purport of the annex to the monthly regulations fixing the refunds for cereals exported as non-Annex II goods has been modified since August 1991 (Commission Regulation (EEC) N° 2315/91).

An amendment of the coefficients themselves also affects the calculation of import levies on processed cereals.

Standard composition of goods

4.1.44. The coefficients for pasta are reviewed in a study on processed cereals commissioned by the Commission with a view to establishing technical coefficients and economic relationships between the basic cereals and the products resulting from their processing.

As regards the other coefficients, it should be noted that:

- the coefficient for penicillin (1 530) cited by the Court corresponds to a maximum grant. This coefficient is applied only in cases where the quantity of sugar used is greater than 1 530 kg/100 kg of penicillin;

- the coefficient for beer does not represent the quantity of barley actually required for the production of 1 hl, but the equivalent of the difference between the price of the agricultural raw ingredients converted into a quantity of barley. Nevertheless, the situation should be re-examined in the light of the technological advances in beer production.

Monitoring Member States' control procedures

4.1.45. The role of the Commission is to ensure uniform application of the rules and to seek solutions for problems brought to its attention by the Member States and by firms. A group of experts (the 235 Group) was set up for this purpose to debate the problems encountered.

This group meets at least four times a year. It examines all questions concerning the application of the rules and the amendments which are necessary or desirable in order to adapt the rules to technical progress, developments in trading practices and international agreements as well as to changes in other CAP rules. It is preparing the redrafting of Regulation (EEC) N° 3035/80 and the review of the system applicable to imports of non-Annex II goods with a view to adapting it to the developments in international agreements.

On the basis of the information gathered in this group, the Commission believes that the rules of application introduced by the Member States are in conformity with the regulations.

Following the Court's observations, the Commission has reminded the Member States of their obligations with regard to information, with a view to examining whether for the purpose of applying these rules certain lacunae in the checks should be remedied.

The Commission acknowledges the usefulness of ensuring better information on the detailed rules of application of the regulation introduced by the Member States.

Conclusions

4.1.47. The Commission intends to replace the ad hoc measures referred to above with a more clearly drafted version of the Regulation. It has therefore embarked on a study of the coefficients, including certain goods referred to in Annex C.

The Commission is of the opinion that it needs more resources in order to be able to react more quickly to cases of misuse, and it will make the appropriate proposals.

An amendment of Regulation (EEC) N° 3033/80 is planned, to take account of the evolution of international trade agreements, particularly the agreements on the EEA currently under discussion, and to give the Commission the power, through the management committee procedure, to fix the quantities of basic products to be taken into account for the calculation of import duties (currently fixed by Council Regulation (EEC) N° 3034/80).

Similarly, certain provisions of Regulation (EEC) N° 3035/80 should be removed from that Regulation and included in a Commission regulation; the provisions in question are the annexes to the Regulation and the conversion coefficients, with a view to allowing the rules to be adapted more rapidly when necessary.

4.1.48. The Commission feels that it has taken care to ensure coherent treatment of production losses. As mentioned in points 4.1.38-4.1.40, only residues and losses which are not marketed must be included in the calculation of the additional supply costs for certain agricultural raw materials in the Community. The Commission confirms that export refunds must not be granted on goods marketed in the Community.

4.1.49. Article 3(2) of Regulation (EEC) N° 3035/80 implicitly requires that operators notify any changes to their recipes. The Member States are responsible for establishing how this must be done.

The Commission has recommended to the Member States that they restrict the validity of recipes to the end of the year following their registration at the latest.

Regulation (EEC) N° 3035/80 is clear on the matter of wrongful use of recipes. However, strict application of the rules, which leads to non-payment or recovery of the amounts granted, may in some cases be out of proportion to the error committed.

The Commission will continue its efforts to avoid fortuitous errors (misinterpretation of the rules) or mistakes due to administrative complexity. If necessary appropriate penalties will be introduced for those cases which cannot be considered as fraudulent claims.

4.1.50. The creation of a central database in each Member State is very expensive in relation to the objective (which is to pay refunds equal to the price difference of the agricultural raw materials).

The best way of identifying abnormal discrepancies and thus of making the best risk analysis will be either at regional or at national level, depending on the nature of each product. The recorded data should therefore be used to supplement checks and direct them more rapidly once the risk of certain types of fraud or misuse are identified.

However, the Commission shares the Court's opinion that checks must be based on a full range of information (physical and analytical checks, sampling, audits, etc.), hence the need to allow the Member States enough leeway to determine the surest method on a case-by-case basis.

The risk to a firm of having a product which is not in conformity and the steps taken by that firm to reduce the risk may prove to be a better guarantee of the accuracy of declarations than many other forms of control.

4.1.51. 'Distortions` of this type are also due to excessive precautions on the part of the Member States.

While the Court has noted differences in the quality of controls, these do not necessarily privilege companies in some Member States; they can simply reflect different strategies for ensuring the same general objective.

4.1.52. The Commission feels that its task is to ensure that the results obtained are as close as possible to the objectives of the rules (while achieving some balance between fairness and efficiency); consequently, in the spirit of paragraph 4.1.52 as drawn up by the Court, its task is to harmonize as much as possible the procedures introduced by the Member States and not to ensure that the same procedures are applied everywhere (since the economic and institutional environment is in any case different). Its task is more one of organizing collaboration between the Member States and of verifying the efficiency of the controls introduced by the Member States than of dictating to them general control rules. The latter should be there as a supplement to fill in gaps.

REFUNDS ON CEREALS EXPORTED IN THE FORM OF CERTAIN SPIRITUOUS BEVERAGES

4.1.56. The Court itself recognizes the practical nature of the method used, even if that method results in certain distillers being over- or under-compensated (see point 4.1.92). Despite certain possible drawbacks, a simple fixed-rate scheme is preferable to any other arrangements, which would generate a lot of paperwork and bureaucracy for an overall result which would be little different from that of the current system.

Budgetary execution

4.1.60. The Commission confirms the classification error pointed out by the Court and has since corrected it. In any case, it has no implications for overall expenditure.

The application of the system in the Member States

General observation

Where checks are concerned, the Commission's job is not to control all expenditure but to control the checks carried out by the Member States. The expenditure in this sector was the subject of a systems audit in Ireland and the United Kingdom in 1982 and 1983. The observations arising from those audits, which concerned in particular the taking under control of cereals and checks on the quantity and quality of the cereals distilled, were the subject of dialogue with the Member States concerned.

However, the Commission notes the Court's comments concerning the correct application of the rules by the Member States and will take them into account when it makes its own checks.

Taking cereals under control

4.1.64 4.1.65. The Commission notes the Court's observation and will make corrections during the clearance of accounts if its own checks confirm that the Member State is not applying Community rules.

4.1.66 4.1.67. The Commission notes the Court's comment that cereals may be taken under control only at the distillery in order to avoid the risk of a difference between the quantity of cereals taken under control and those actually distilled. It will examine the situation and take any necessary measures.

The coefficient

4.1.80 4.1.84. The Commission notes the Court's information. It will examine the Court's findings with the Member States concerned with a view to adapting the rules at a later date.

The Commission's central management

The budget

4.1.85 4.1.87. The Commission will review the data used for the budget estimate on the basis of the information provided by the Court.

Monitoring the system

4.1.88. The Commission will review the information required from the Member States after making a fresh analysis of its requirements.

The Commission presents no reports on the management of this limited market because there is no market organization for alcohol. The measure in force refers only to cereals and is included in the cereals market organization. The Commission therefore presents tables summarizing the data on the production and export of whisky to the management committee for cereals, when the coefficients are determined.

Relationship between barley and malt

4.1.90. The coefficients for turning barley into malt are currently being reviewed in collaboration with the management committee for cereals.

Economic importance of the aid

4.1.91. The purpose of the export refund for cereals in the form of whisky is to compensate distillers for the difference between the Community and world prices for cereals.

Conclusions

4.1.92 4.1.95. The Commission notes the Court's observations. It will make an in-depth examination of the system. This examination will comprise, on the one hand, an analysis of the basis for the aid, the coefficients and their adaptation and the data to be supplied by the Member States and, on the other hand, the control procedures. It will then take any necessary measures. It does not agree that the rules provide only minimal guidance.

4.2.Operation of the common organization of markets in the sugar and isoglucose sector

INTRODUCTION

4.2.3 4.2.4. The Commission refers interested readers to the special report on the operation of the common organization of markets in the sugar and isoglucose sector and the Commission's detailed commentary thereon.

The Commission's replies to the main conclusions of the Court's special report, set out in points 4.2.8-4.2.27, are given below.

A SEEMINGLY COHERENT SYSTEM

4.2.8. The Commission is convinced that after more than 23 years of application of the common organization of the markets in sugar, which has evolved considerably despite appearances, the management and checks in this sector are very effective, at the level of the Member States and producers as well as the Commission. The rules may be complex, but although appearances belie this, the sugar sector is a complex one which requires firm management and strict control.

The production of sugar from beet and cane grown in the Community is only one factor in the management of a sugar campaign, since disposals, either for domestic consumption or for export, also depend on imports, intra-Community trade and stock fluctuations. In addition, sugar is an industrial as well as an agricultural product, which induces market behaviour unlike that of any other product covered by a market organization.

4.2.9. Community competition rules also apply to the sugar sector. The Commission is constantly vigilant in this area and ready to take the necessary measures in the event of infringements, as was the case in 1973 (Commission Decision of 2 January 1973, OJ L 140, 26.5.1973, p. 17).

A SYSTEM ADRIFT

4.2.11. The market organization for sugar is in conformity with the principles of the Treaty. Both the Commission and the Council ensure that each measure respects these principles.

In the Commission's opinion, the best proof of the success of the 'Communitization` of the sector has been the introduction of the principle of Community financial solidarity with the introduction of the system of self-financing (provided for in Articles 28 and 28a of the basic regulation, Council Regulation (EEC) N° 1785/81) and the compensation system for storage costs, also self-financed (Article 8 of Regulation (EEC) N° 1785/81).

In the Commission's view, as far as the objectives of Article 39 of the Treaty are concerned, implementation broadly corresponds to the objectives laid down.

The Commission stresses that there have always been stabilizing measures in the sugar sector, in the form of production quotas and the system of self-financing. The latter, introduced in 1968 and strengthened in 1981, 1986 and 1988, currently aims in particular at ensuring on an annual basis that Community producers fully cover the costs arising from the disposal of surplus Community output.

The level of self-sufficiency quoted by the Court (150%) includes imports, which are, by definition, not produced in the Community

.

Expenditure related to Community production surpluses is fully covered by the producers as production under A and B quotas.

4.2.12. It is true that quotas are set on a regional basis (and allocated to individual companies thereafter) and managed in the first place by the Member States (according to strict Community rules). But this policy clearly illustrates the Community's wish to safeguard a certain level of production in all regions of the Community - all-important in the Commission's view - so as to contribute directly to rural development as regards both beet cultivation and sugar manufacture.

4.2.13 4.2.14. The Commission acknowledges that it would in theory be preferable not to have to apply a system of production quotas, but experience has shown the effectiveness of such a system as a tool for managing the sector and containing production.

The fact that production continues in regions which are, according to the Court, less efficient, shows that profitability per hectare is still satisfactory, even without aid. Nor should one lose sight of the agricultural, socio-economic and political aspects of the question. When fixing the quotas, the Commission took into account existing production levels in each region, and the decisions taken in the case of Portugal clearly show the Community's will to stimulate the production of sugarbeet for lack of other suitable agricultural products and to avoid total dependence on imports.

The Commission feels that it is absolutely necessary to apply a system of production quotas for isoglucose. In view of the similarities between isoglucose and liquid sugar, and because the production of isoglucose forces a corresponding quantity of sugar into export, it is quite justifiable that isoglucose producers should take responsibility for their share of the surpluses.

The Commission does not consider that prices in the sugar sector are 'generous`, particularly when compared with those in other industrialized countries; and prices obtained in developing countries usually bear no relation to the economic situation. However, this does not mean that guaranteed prices in this sector should not be reduced.

Furthermore, the management of the sugar sector requires a great deal of administrative work which, until now, could only be done by the Member States. Therefore, the Commission sees no advantages, in terms of cost efficiency, to justify transferring these activities to the Commission. Moreover, in 1974 it unsuccessfully proposed that quotas be allocated directly to companies.

4.2.15. The market organization in the sugar sector has always been characterized by total freedom of production, while the quantities guaranteed by the Community are restricted by production quotas.

Given that the system of self-financing ensures, in the Commission's view, that the producers cover the cost of disposing of surplus production in the Community under A and B quotas and that exports of non-quota sugar (C sugar) are also financed fully by the producers, the Commission does not see in what way the principle of economy is being ignored. Nor does it see the 'financial need` to reduce sugarbeet plantings, which would in any case have serious consequences for the rural economy of the regions which the Court has in mind.

4.2.16. The quotas of the new Member States were set on the basis of traditional production during a reference period. The Commission stresses that as a matter of principle national aid schemes have always been limited in duration but could be extended. The current system provides for a 30% reduction in aid by 1992/93 in relation to the aids authorized in 1988/89.

In the Commission's view, economically efficient production is an important factor in a complex agricultural policy in which the ideal goal must be to optimize all factors. In this respect, mixed prices have never been applied throughout the Community, but only in those regions which can be considered as most suited to sugarbeet production (such as the Netherlands and Belgium). The Commission has in any case twice proposed that the option of using a so-called mixed price system should be abolished, but its proposals were never accepted.

4.2.17. The possibility of producing non-quota sugar (C sugar) guarantees the principle of free production of sugar and isoglucose in the Community while leaving the producers fully responsible for disposing of it without guarantees on non-Community markets. Exports of C sugar depend closely on the quantities of sugar carried forward, but nevertheless contribute to stabilizing world sugar prices, because of the elasticity of these exports due to price fluctuations.

The Commission does not agree with the Court's view that exports of sugar as such contribute to keeping down world sugar prices. The Community's exports help for the most part to supply countries which cannot produce their own sugar. In the unlikely event of the production of C sugar being reduced, or even eliminated, this would have an unavoidable short-term inflationary effect on the world price level, but in the medium and long term Community sugar exports would of course be replaced by white sugar produced by other exporting countries, and we cannot know whether that production would be any less artificial than the Community's is now. Besides, in periods when world prices have been favourable, Community exports of C sugar have not been found to depress the world market to the detriment of Community exports with refunds. On the contrary, operators continue to submit acceptable bids during tendering procedures. For these reasons the Commission does not feel that C sugar leads indirectly to an additional burden on the Community budget. In addition, any discontinuation in the planting of beet for C sugar would automatically be followed by increased planting of other crops such as cereals, which would result in increased expenditure for the Community budget in the sectors concerned.

4.2.18. The fact that the production of C sugar depends on high world prices and that this cyclical situation is fairly rare for sugar (once every 7 to 10 years) makes it reasonable to affirm that the existence of C sugar has only a marginal effect on the world market.

With regard to the eligibility of carried-over C sugar for reimbursement of storage costs, the Commission's recent proposal aiming to abolish such eligibility was not adopted.

4.2.20. It would seem to be incorrect that the southern Member States such as Italy are reticent with respect to the possibility of substituting sugar with isoglucose. In fact, there was a plan to manufacture isoglucose from a variety of sorghum in southern Italy. The sugar arrangements permit the unlimited transfer of the sugar quota to isoglucose quota within the framework of restructuring plans in Italy. The Commission would not object to such transfers.

4.2.21. The ACP/EEC sugar Protocol provides that 'the Community undertakes for an indefinite period to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw or white, which originate in the ACP States and which these States undertake to deliver to it`.

It also provides that its implementation is 'carried out within the framework of the management of the common organization of the sugar market`.

The physical importation of this sugar into the Community is a fundamental element of the agreement concluded with the ACP States. If the Court's suggestion were to be followed, the immediate placing on the world market of raw sugar in the unprocessed state would no doubt affect world sugar prices and the Community's undertaking to respect traditional trade patterns, made at the time of the 1973 enlargement, could not be kept.

With regard to the budget, the Commission must comply with the nomenclature for the classification of budget expenditure, but it explains the special situation regarding this Protocol and the specific Agreement with India in its comments on Chapter B1-11 and in the general observations at the end of subsection B1.

This budgetary classification of the expenditure on preferential imports does not preclude recognition of their special nature, as was the case, for example, in the Community rules on budgetary discipline.

4.2.22. While sugar exports, following the reasoning of the Court's observations, benefit importing developing countries, the Community's obligation physically to import 1.3 million tonnes of sugar from exporting developing countries at guaranteed prices benefits the latter.

SUBSTANTIAL COSTS

4.2.23. The Commission is unable to agree with the Court's conclusions for all the reasons given in its replies above.

4.2.25. The Commission does not agree with the Court. The budgetary impact mentioned by the Court is only seen when a comparison is made between the effect on the expenditure and revenue of the sector of what has come to be known as the 'double-rate effect`. Since the sector's revenue covers part of the expenditure charged to the Community producers, the difference noted by the Court is merely the double-rate effect on the other part of the expenditure, charged to the Community budget.

4.2.26. The Commission notes with interest the Court's suggestion regarding verification of whether the self-financing mechanism is justified, and has no difficulty in accepting the suggestion.

CHAPTER 5 Common policy on fisheries and the sea

OBSERVATIONS CONCERNING BUDGETARY MANAGEMENT

Outstanding commitments

5.6. The Commission would point out that it took a decision on the first measures in December 1987, at the end of the first year of the new regulation. As the time allowed by the regulations for the implementation of shipbuilding and aquaculture projects exceeds three years (see below), the main burden of implementation is naturally delayed.

The decision to grant assistance sets the following deadlines:

- 12 months to begin work;

-24 months to complete the project;

-6 months to submit the application for payment to the Commission.

OBSERVATIONS ON THE IMPLEMENTATION OF STRUCTURAL MEASURES

Admissibility conditions for applications for aid and reimbursement

5.10. The Commission believes that the admissibility conditions have been applied in accordance with the regulations.

(a)On 7 December 1988 the Commission decided, in the interests of the sound management of the structural policy on fisheries, not to finance certain investment projects from 1987 and 1988, which it declared eligible for 1989.

The Commission does not contest the Court's legal analysis. However, it has requested the Member States to reconfirm that the projects are still valid. This avoids administrative work and the resubmission of dossiers by the Member States to the Commission.

(b)The delay in the submission of dossiers is often due to the checks required by the national authorities. The Commission accepts some delay in dossiers as it cannot automatically cancel assistance without adequate legal instruments. The Court of Justice has held that delays in the submission of applications for payment do not in themselves provide the Commission with sufficient grounds to withhold payment.

5.11. The Commission seeks to influence the programming of investments during discussions with the Member States on the multiannual guidance programmes for fishing fleets and aquaculture. However, it is difficult to make very detailed forecasts because these investments are initiated by the private sector, which has to take account of both the current economic climate and fluctuations in resources.

Aid for modernizing vessels

Reasons for not taking certain projects into consideration

5.12. The Commission examines applications for aid for modernization and takes decisions to grant Community aid on the basis of the admissibility of the projects. The reasons requested by the Court are sent to the Member States through the Standing Committee for the Fishing Industry and will be forwarded to the Court regularly.

Offsetting of cost items within a project

5.13. These are grouped measures which are managed principally by the Member States. Instructions on the investments eligible have been attached to the implementing regulation. It is clear that some adjustments between categories of expenditure must be permitted between the estimate and the final invoice because the conformity of the estimate to the works cannot be checked until the modernization work begins. The Commission's inspections show that there are normally explanations to justify the amendments made.

The Commission will inform the Member States through the Standing Committee for the Fishing Industry that they must show that they have given their prior approval to any variations requested by the beneficiary.

Rate of implementation of payments

5.14. The Commission welcomes the Court's proposal. A system of advances could be considered as part of the incorporation of the structural policy for fisheries into the reform of the Funds. However, the present system requires the Member States to check progress on modernization work, which tends to speed up implementation of this measure.

Aid for the adjustment of fisheries capacity

Failure to comply with the period for adopting decisions and with the rule of budgetary annuality

5.16. The Commission reminds the Member States of the need to submit their budget forecasts, some of which arrive late and require clarification. These factors make for some delay in the Commission's initial decision.

The sound management of this measure, which is closely linked to the objectives of the multiannual guidance programmes for fishing fleets, requires the Commission to revise its estimates in the light of actual results. Permitting the Member States which have been able to implement their programmes to reduce fishing capacity to use the appropriations which other Member States have been unable to use is also a more effective management strategy. Since the effort to reduce capacity is made at Community level, compensations should be allowed and such adjustments are not forbidden by the basic regulation. The first decision on the adjustment of capacities contains a clause permitting possible amendments if required by information provided by the Member States.

The amendment of a decision at the end of the year is a realistic step because it enables the Member States to provide the most up-to-date information on progress in implementing the measure at national level.

Conditions for committing and implementing expenditure

5.17 5.18. Pursuant to Article 26(3) of Regulation (EEC) N° 4028/86, the Commission decides on the maximum amount of eligible expenditure per Member State on the basis of its planned expenditure and the appropriations available. For purely budgetary reasons, the Commission is not always able to accept all the expenditure in the Member States' estimates.

The Commission therefore fixes the maximum amount eligible for Community reimbursement for each Member State in the light of the resources available. These amounts are expressed in accounting ecus and the rates used for converting ecus into national currency (the accounting rate for the ecu for the month in question) are also stated in the decision.

The ceiling of eligible expenditure for each Member State in national currency should therefore be calculated from the amount fixed in ecus and the conversion rate for that currency for the month stated in the decision.

The difference between this method and the accounting method to convert ecus into national currency is of little importance since the Commission normally makes only a single commitment to cover all the Member States. The Commission will therefore make reimbursements to the Member States in accordance with the method described above up to the limit for each Member State set out in the decision. It should be noted that the available appropriations have so far never been used up.

The method now used by the Commission to determine the ceiling of expenditure eligible for Community reimbursement by Member State has permitted the Danish application for 1989 to be settled.

5.19. (a) The supporting documents annexed to the payment order show the breakdown by type of expenditure.

(b) Since the measure is managed by the Member States, the Commission receives only outline information. However, if it has doubts about whether expenditure is eligible, it requests further information.

The Court's recommendations

5.20. The Commission is considering these suggestions.

CHAPTER 6 The reform of the structural Funds

BASIC PRINCIPLES OF THE REFORM

6.7. Even though the legislation governing the reform of the structural Funds does not expressly provide, in respect of Objective 5a, for the system in stages envisaged for the other objectives, Community intervention can none the less be carried out along the same lines.

This was indeed the case in respect of Regulations (EEC) N° 4042/89, N° 866/90 and N° 867/90.

COMMUNITY SUPPORT FRAMEWORKS AND DECISIONS TO GRANT AID

6.15. The Commission wishes to point out that EAGGF Guidance Section expenditure results from commitments arising from Regulations in force before the reform of the Funds but adapted since then (see paragraph 6.13 of the Court), from Regulations still in force in their original form but shortly to expire (see paragraph 6.14 of the Court) and from operational programmes recently adopted following the reform of the Funds.

The share of expenditure arising from measures which have not been adapted will get smaller progressively.

6.17. The accounts relating to structural intervention are kept per Fund. With regard to the other statements, the Commission points out that the DGs responsible for each objective monitor the progress of the CSFs by forms of intervention via trend charts in which a clear distinction is made between single-fund and multi-fund programmes, and the Commission departments can provide full information on all the programmes

approved. The Commission is none the less aware that instruments need to be developed which will give a better overall view of the state of progress of Community operations. To this end, it is developing an information system called Arinco, which should allow a more appropriate follow-up of all the components of the CSFs and the OPs.

6.18. Regulation (EEC) N° 4253/88 provides that operational programmes may be implemented in the form of an integrated approach, but it does not explicitly mention integrated operational programmes (IOPs) or multi-fund operational programmes (MOPs). The Commission invited Member States to present programmes called multi-fund programmes, providing for operations financed by several Funds, relating to the same territory or the same sector and accompanied by a single monitoring system. At the same time these programmes provide for autonomous financial management for the part of the programme financed by each Fund so as to simplify their implementation. Past experience (IMPs, IDOs) had in fact shown that when financing of the individual measures from the various sources overlapped too much, financial management could become unnecessarily complicated. What is important is not so much the financial integration of the Funds but the combined effect of the various measures in a programme.

The term 'integrated operational programme` refers to programmes which involve a higher degree of integration among financial instruments. The Commission considers this desirable in a limited number of situations.

The multi-fund operational programmes and the integrated operational programmes are operational programmes implementing the integrated approach.

In all 85 programmes implementing the integrated approach (MOPs and IOPs) have been approved since the reform of the structural Funds in respect of Objectives 1, 2 and 5b up to 31 December 1990.

6.19. The Commission agrees with the Court that there is still work to be done to improve integration of the operations.

It feels that substantial progress has already been achieved and intends, on the basis of experience gained, to make such integration still more effective.

It is true, however, that the formula of aid combined with a loan has been used very little.

6.20. The Commission agrees with the Court's opinion according to which the very tight deadlines for implementing the various stages of the reform have hampered its ex ante assessment.

However, as regards the ex ante assessment of proposed measures which precede the decision giving rise to Community intervention, it should be recalled that efforts were made during the planning stage by both the Member States and the Commission to carry out assessments. An examination process did in fact take place when the plans, Community support frameworks and various forms of intervention were drawn up and this led to the range of possible actions being looked at in detail and to the selection of the measures through which the objectives could be attained.

Moreover, as regards the assessment of the potential impact of the Community operation in relation to the objectives for which it was established, various methodological difficulties had to be resolved, particularly with regard to the creation of appropriate macro-economic models. Also, to make such an assessment, it was necessary to know the content of a Community support framework in detail in terms of the forms of intervention approved or in the process of approval. Delays therefore ensued before the work of assessing the potential impact could start. The Commission has currently, however, set up an extensive system for assessing the potential impact of Community support frameworks, and a number of the findings will appear in the 1990 Commission annual report.

As regards the utilization of the 1990 appropriations for technical assistance, the Court's comments are well-founded. It should be said, however, that the Member States' needs in respect of technical assistance depend to a large extent on progress made with the implementation of the reform and that currently, in 1991, there has already been a significant increase in applications which has led the Community to intensify the use made of these financial resources.

FINANCIAL PLANNING AND THE USE OF THE ECU

6.24. The appropriations allocated each year to the structural Funds at 1988 prices are adjusted to price trends in accordance with the mechanism set up for the purposes of such adjustment by the inter-institutional agreement. The Commission currently estimates at ECU 594 million (1991 prices) the gap between the 1988-91 appropriations calculated by applying this method and the amounts which would be calculated on the basis of the most recent prices recorded.

An initial correction of this gap was made within the framework of the 1991 budget, and the Commission proposed that a flat-rate and provisional second correction of ECU 200 million be made as part of its preliminary draft budget for 1992.

The Commission also points out that Section 2 of the financial perspective contains elements other than the structural Funds proper and that only these have had assigned to them an expenditure target in real terms. It therefore considers that the amounts in question were mentioned by the Court for information purposes and that they do not raise any particular problems.

6.25. The Commission points out to the Court that Table 9.1 of its report concerning the EAGGF Guidance Section shows a utilization rate of 99.9% in the case of commitment appropriations and 98.9% in the case of payment appropriations.

6.26. The Commission takes the view that budgetary implementation in the first two years of the reform was largely satisfactory.

In 1990 the rate of utilization of the commitment appropriations of the Guidance Section and the ERDF was adequate. In the case of the ESF there was under-utilization, and an in-depth analysis was made of this state of affairs. In part it was due to the majority of the Member States showing a preference for more extensive recourse, in the context of the CSFs, to the operations financed by the other Funds than had been anticipated at the time of the preparation of the 1990 budget.

As regards the attainments per objective, there were delays in the case of Objectives 1 and 5b, while for the other objectives, particularly Objective 2, the attainment rate was higher than expected. The unused appropriations will, however, be transferred to the financial years 1992 and 1993 under Articles 10 and 11 of the inter-institutional agreement.

6.28. The procedures concerning the use of the ecu in the budgetary implementation of the structural Funds were adopted by the Commission on 2 July 1990 (Regulation (EEC) N° 1866/90) after having been discussed at length within the committees provided for in Article 17 of Regulation (EEC) N° 2052/88. It was decided on this occasion that Community grants and financing plans for the CSFs and the forms of intervention were to be at constant prices.

The procedure for indexing financing plans for the CSFs and the forms of intervention was adopted by the Commission on 11 June 1991 and was communicated to the Member States.

The indexation of these plans is currently being carried out.

The problems involved are complex and have entailed adaptations of procedures and administrative rules for the Commission and in the Member States.

6.29. Article 5(2) of Commission Regulation (EEC) N° 1866/90 provides for the arrangements enabling Member States to submit their payment requests in ecus. Portugal and Greece have submitted requests for grants and for payment in ecus since 1991.

6.30. The Commission agrees with the Court's comment that accounting in constant prices does not wholly eliminate the risks inherent in the depreciation of purchasing power (total elimination of such risks was not feasible), but it points out that indexation is carried out on the basis of the depreciation rate of the ecu and is not intended to compensate changes in prices in national currency. It stems, as the Court indicates, from the will, at Community level, to respect the principle of the doubling of the structural Funds in real terms over the period ending in 1993, as is laid down in Article 12(2) of the basic Regulation.

Indexation, it should be pointed out, applies to the annual instalments of a financing plan in force at the beginning of a financial year, reviewed if need be to take account of the progress of the operations.

6.32. The indexation procedure adopted by the Commission on 11 June 1991 provides for the indexing of financing plans according to relatively simple, clearly defined rules of which the Member States will have prior knowledge.

6.33 6.34. In a bulletin published at regular intervals, the Commission gives information relating to the multi-annual decisions for the granting of aid from the structural Funds. The first issue of this bulletin

shows the decisions taken and the aid granted, by objective and by country, between 1 January 1989 and 31 December 1990 as well as the decisions taken prior to that but for which the financing is included in the CSFs. Subsequent issues will give detailed information on their budgetary implementation.

ADDITIONALITY OF THE AID

6.37. The Commission now has an operational methodology for assessing the application of the concept of additionality, as referred to in the coordination Regulation. The Member States were informed of this methodology when the Commission sent them a formal request in August 1990 to supply the statistical data required for its implementation. The methodology was defined by the Commission in such a way that it could be applied to all the objectives of the reform. Experience gained so far has shown that its application is more difficult for the objectives in respect of which the CSFs cover geographical areas for which statistical and budgetary data are not directly available.

6.38. The Commission wishes to point out that the purpose of the letter addressed to the Member States in August 1990 was to render the concept of additionality operational. The explanatory note related therefore to the practical application of Article 9 of the coordination regulation. Moreover, since additionality relates to the objectives as a whole, including the horizontal objectives, reference should be made more to eligible total expenditure than to the total regional expenditure of the Member States.

6.40. The methodology for verifying additionality which the Commission has been in the process of implementing since last year involves an analysis over the whole period covered by the CSFs and a regular updating of data.

Since verification of additionality is an operation carried out at regular intervals, within the framework of the partnership, corrections can always be made where the partners find that the Community funds do not have an additional effect on the regions.

6.41. At the practical level, verification of additionality depends to a very large extent on statistical information which only the Member States are in a position to supply. Hence, measuring additionality gives rise to difficulties of a technical order. The problems, for example, concerning statistical data and, more especially, disaggregated data, are substantial. In this connection, the Commission has already informed Member States that it may base its assessment on qualitative information.

To this, all the problems mentioned by the Court inherent in any ex ante assessment must be added.

With regard to the base year, a year preceding the entry into force of the reform had to be chosen. That year could have been either 1987 or 1988 or, for reasons of representativeness, the average of the two years.

Assuming the Court's comment concerning a reduction in regional aid in the 1980s is true, it should be borne in mind that additionality relates to eligible expenditure as a whole, only a part of which concerns regional aid.

6.42. The replies sent in by the Member States following the Commission's two requests for information in August 1990 and April 1991 are presently being discussed in a series of bilateral meetings with the national authorities so that the specific problems concerning, in particular, the statistical data may be examined.

In 1991, the Commission departments are checking additionality as and when the statistical data become available.

The responsibilities within the Commission have been defined since the beginning of the financial year, and an inter-departmental group has been formed (to assess and check the data forwarded by the Member States). The Directorates-General connected with structural policy are all represented in this group.

CONCLUSION

6.44. The Commission agrees with the Court's comment.

Experience so far has shown that the planning procedure is appropriate for planning Community operations mobilizing resources which exceed a certain critical level. Using the procedure to plan resources not exceeding a few tens of million ecus might possibly encumber the planning mechanisms to some extent.

6.45. For additionality to take concrete form in legal and operational terms, the 1988 reform had first to take place. Indeed, the principle of additionality was defined in 1988 in Article 9 of coordination Regulation (EEC) N° 4253/88, as mentioned by the Court in paragraph 6.37.

It found expression in operational terms after the adoption in 1990 of the most recent CSFs by way of a request formulated to the Member States which also contained methodological elements for the verification of the principle (see answer to paragraphs 6.37 to 6.42).

CHAPTER 7 The promotion of the development and structural adjustment of underdeveloped regions (Objective 1 of the reform of the structural Funds)

IMPLEMENTATION OF OBJECTIVE 1

Financial implementation

7.3 7.4. In Tables 7.1 and 7.2 and in the paragraphs concerned, the Court gives the commitments and payments for new operational programmes decided since 1989.

This does not give a full picture of all the new types of measure adopted on the basis of the reform. Big projects, aid schemes, global grants and technical assistance, which are all types of assistance provided for under the reform, are not included in the tables. The Court's tables do not therefore show the proportion of measures begun before the reform.

The CSFs, in accordance with the rules, include a certain number of operational programmes (Community programmes, IMPs, IDOs, NPCIs) which have similar features to the new programmes. The Court therefore gives an incomplete picture as regards the programme-based approach.

With regard to the relative rates of payment, it should be recalled that the systems used by the different Funds are not always identical, owing to regulations existing before the reform. For example, certain indirect EAGGF Guidance Section measures are Community aid schemes for which Member States submit their expenditure during the financial year ex post facto. That part of the expenditure which is the responsibility of the Community is then reimbursed. In this case, Community commitments and payments coincide. In the light of the above, a direct comparison cannot be made between the rates of payment referred to by the Court.

Selection of eligible regions and allocation of aid

7.5 7.8. The Commission recalls that the list of regions drawn up by the Council is based on the strict application of Article 8 of Regulation (EEC) N° 2052/88, which specifically provides for a certain flexibility with regard to the statutory threshold of 75 % of the Community average. In addition to Northern Ireland and the overseas departments specifically mentioned on the list, other regions could be included where their per capita GDP was close to the threshold and taking account of their regional characteristics.

7.9. The Court has criticisms of the global nature of the objective criteria used by the Commission.

The other structural problems referred to by the Court are, indirectly, taken account of by the global criteria: regional development is a global rather than a sectoral problem, although development problems must be tackled on the basis of their specific causes.

Furthermore, the use of multiple objective criteria is limited by the difficulty of finding a reliable arithmetic weighting.

7.10. Account has been taken of the gravity of the regions' specific problems by using the regional per capita GDP to adjust the region's population. The national per capita GNP has been used as an indication of the Member State's ability to resolve its development problems unaided.

7.11. A significant effort has been made to aid the least prosperous regions. The ability of Member States to solve their regional problems unaided and their ability to mobilize the resources available effectively (Ireland in particular) have also been taken into account. This explains the fact that the allocation of Community aid between Member States does not always correspond strictly to the needs.

See also paragraph 7.17.

7.12. The Court points out that the allocation between regions within Member States is often based on the regional development plans the States have submitted, which have been very difficult to change despite the Commission's efforts.

The Commission points out that the tight schedule for the implementation of the reform means that the principles on which it is based can only be applied progressively and has prevented it from having a greater influence on the regional distribution of Community aid. The Commission intends to intervene more effectively in future.

7.13. See paragraph 7.10.

7.14. The variable relation between the intensity of Community aid per capita and the per capita GDP is because the per capita GDP, as explained above, is not the only criterion used to decide upon the allocation of aid.

7.15. See paragraphs 7.10 and 7.11.

7.16. The Commission also considers that a geo- graphical analysis at subregional level would enable the definition of more discriminating measures, particularly for those large regions which show subregional variations. It is pursuing the efforts already made to refine the available indicators.

7.17. When determining the allocation of aid, the Commission has indeed used, amongst other criteria (see paragraph 7.11), that of the regions' capacity to mobilize resources.

It also wishes in future to increase the transparency and coherence of the criteria used, but stresses that, at this stage, implementation of the principles of the reform can still only be gradual (see also paragraph 7.12).

Partnership

7.18. If it is to be effective, partnership must take effect at the various stages of programming, monitoring and assessment.

However, the Commission has noticed that the internal institutional structures of the Member States can act as a brake or impose a limit on the success of the partnership on the ground, despite the efforts being made. It therefore intends to intensify these efforts yet more in the future.

7.19 7.20. The document prepared by the Commission for the attention of the Member States specifies that the Commission expects the plans submitted to it to have been the subject of a wide-ranging consultation with the competent regional, local or other authorities. This was repeatedly stressed during the high-level meetings organized in the various Member States to explain the main principles of the reform to the authorities concerned.

The Commission points out, however, that for certain types of intervention the maximum structural effect can be achieved at the national or at the very least multi-regional level.

Furthermore, the very short deadlines have not always allowed as full and wide-ranging consultations as desired to be organized. This problem should disappear as the principles of the reform are actually implemented more and more fully.

7.21. As regards monitoring, the regional authorities are represented on the overwhelming majority of the committees for monitoring the CSFs and programmes, even in those Member States where, strictly speaking, there are no regional structures.

Although deadlines were too short to enable an 'official` partnership to be organized every time, the Commission managed, in most cases, to establish a 'pragmatic partnership`.

The case of Ireland, where the Commission has not yet managed to organize a regional partnership due to the lack of suitable regional structures, illustrates the effort that still needs to be made, although a system for the regular exchange of information with the regional level has been established and numerous local authorities are involved in the implementation of the CSF.

The Commission attributes the limited use of global grants in the CSFs for Objective 1 to the present lack of involvement by the regions and other economic operators in the negotiation of the CSFs. To remedy this situation, the Commission has drawn up a guide to global grants detailing the specific advantages to potential beneficiaries and encouraging them to make use of such grants.

Coordination

7.25. The Commission is aware of the shortcomings in structural coordination, for some of which it is responsible. The CSFs and the monitoring committees can make an important contribution to solving these difficulties.

As regards the remaining problems of coordination within the Member States, see paragraph 7.18 above.

7.27. In its efforts to locate the CSFs within the macroeconomic context of the Member States concerned, the Commission has tried to take account of the general conditions in which Community financing is granted. In Greece, for example, the Commission's aim was to promote macroeconomic adjustment without hindering the investment necessary for development.

7.28. Of course, optimum coordination of sectoral measures as diverse as the combating of youth unemployment and the modernization of farms cannot be achieved immediately or easily. For the Commission, the important thing is to integrate these measures into the overall development strategies. This permits an assessment of their respective roles to be made and therefore enables gradual changes to be made on the basis of the overall objectives being pursued, leading to the introduction of medium-term adjustments to improve the synergy between Funds.

7.29. See paragraph 6.15.

7.30. See reply to paragraph 6.19.

7.31. See paragraph 7.18.

7.32. The Commission recognizes that progress is still to be made on cooperation and coordination between Funds. However, the regular exchange of information which has been established between them and the considerable progress made towards harmonizing their respective procedures and working methods are necessary preconditions for any coordination.

7.33 7.35. Despite certain shortcomings, coordination with other Community policies (competition, industrial policy and environment in particular) has led to the inclusion in decisions to grant aid of clauses laying down the conditions for the implementation of the CSFs and operational programmes in the different sectors.

As well as providing information to operators, these conditions contained in the decisions to grant aid enable the Commission to suspend financial support where it is established that these requirements have not been fulfilled.

The fact that the programme-based approach excludes a specific examination of each project concerned sometimes makes it difficult to make the connection between structural measures and transport infrastructures.

The Commission regards this as a minor drawback considering the decentralization of management that can be achieved in CSFs and operational programmes through this approach.

7.37. The Commission points out that the Community loans provided for in the CSFs in no way represent the full range of the Bank's activity in the Member States concerned, EIB financing always having covered a multitude of projects which are not necessarily covered by the priorities adopted in the CSFs. A comparison between the Bank's previous activity in a Member State and the loans specified in the CSFs therefore seems inappropriate.

Furthermore, as the Court points out, the approaches of the Bank and the Funds, through projects and pro- grammes respectively, are often difficult to reconcile on the ground.

7.38. Although the Commission has involved the EIB very closely in the negotiation of the CSFs and has kept it systematically informed about the evaluation of the various operational programmes, the Commission recognizes that this close cooperation has not brought the results expected.

The Commission believes that insufficient use is made of the Community loan instruments for the following reasons:

- in certain Member States, EIB loans are unattractive compared with facilities offered by other financial institutions;

- on an operational level, the project-based approach of the EIB and the programme-based approach of the Commission are difficult to harmonize.

7.39. The Commission points out that, because of the fact that EIB loans usually cover wider-based operations than those it itself supports, implementation of the rules on coordination agreed between the Commission and the Bank raises certain technical difficulties because the Community intervention rates are based on different criteria and are not immediately comparable.

7.40. The overwhelming majority of requests for aid on which consultation is sought give rise to a significant number of comments and observations from the various departments, concerned to ensure that the various Community policies are respected.

7.41. The Commission also considers that shortcomings, sometimes serious ones, exist with regard to administrative coordination within certain Member States. Already, and on several occasions, it has insisted on the vital need to resolve this problem and is pursuing its efforts in this direction. The Commission refers to the comments made under paragraphs 7.25 and 7.18.

Programming

Regional development programmes

7.45. The different approaches adopted by the Member States in drawing up their regional development plans are a result of the regulations, which lay down that the Member States have responsibility for drafting these plans.

The organization of the plans is a reflection of the administrative organization of the Member States themselves. Commission intervention at this level is sometimes hindered by the limits referred to under paragraph 7.18.

7.46. The Commission considers that the fact that certain plans are taken from programmes already decided at Member State level shows that the Member States are discussing regional development strategy, which cannot be a bad thing. Although it is perhaps true that in such cases Community intervention does not necessarily give rise to the implementation of new measures, this situation does enable the contribution made by Community funding to initiatives already taken at national level to be determined, thereby increasing the transparency of Community structural measures.

7.47. The Commission is pursuing its efforts to define more clearly the commitments of the Member States themselves, particularly in the current bilateral discussions on the additionality of Community funding with regard to national expenditure on development.

7.48 7.50. The Commission stresses that, for certain Member States at least, a programme-based approach involves such an organizational change and such a qualitative leap that, initially, no more than a gradual improvement in implementation can be expected.

If the results of the exercise appear, in certain respects, less than perfect, the Commission considers that the qualitative leap aimed at by the reform has, in the main, been achieved. Moreover, it recalls that the role of these plans differs slightly from the role of the regional development plans previous to the reform. The latter provided a frame of reference for the granting of aid from the structural Funds and more particularly from the ERDF. Since the reform, this role has, to a certain extent, been taken on by the CSFs. At this level it is essential that the objectives be quantified and the priorities set out in detail so that the effectiveness of the planned measures can be assessed.

7.51. It is true that a common scheme was not drawn up for the current plans as was the case with the regional development plans. This is because, as stated above, the role of the plans is different from that of the regional development plans and because the shortage of time caused the Commission to concentrate its efforts on the CSFs.

Furthermore, the Commission points out that the Regulation makes the Member States responsible for drawing up the regional development plans.

7.52. See paragraphs 7.46 and 7.47.

Community support frameworks

7.54. Progress still needs to be made in making the objectives and the regional development priorities in the CSFs more precise. Most of the remaining problems are the result of the very tight schedule imposed on Member States.

The Commission emphasizes that, for the first time, proper negotiations took place between the partners, both on the priorities for the development of the regions concerned and their respective responsibilities.

7.55. The Commission is anxious to improve coordination, particularly with regard to the Community loan instruments. See also paragraphs 7.34, 7.35 and 7.38.

7.56. This problem should disappear during the next financial year since operational programmes resulting from Community initiatives, where already approved when the CSFs were negotiated, were included in them. The other operational programmes will be incorporated as they are approved, through revisions of the CSFs.

7.57. The mixing, in certain tables, of current prices and constant prices is because of the fact that some measures already decided upon in current prices have had to be included in CSFs. This problem should disappear in the future.

7.58. The difficulty in reading certain tables may be a result of the fact that certain measures adopted before the reform were priced in current prices whilst the rest of the CSF is in constant prices.

The Commission points out that it has not had sufficient time to draw fully the lessons of the past with regard to analysing the experience gained.

7.59. Since it provides an overview of all financial measures in a specific region, whether implemented before or after the reform, the CSF can only give a global timetable. The Commission considers that the detailed timetable of Community measures should be drawn up when the various types of measure are adopted.

7.60. The development of productive activities is a constant aim of the Commission's regional policies.

The difficulty of precisely determining the effort made in this area is a result of the fact that this must not only include direct investment aid but also all measures to improve the business environment.

In the cases cited by the Court, the inclusion of all these measures and not only aid to industry would give considerably higher percentages than those shown.

7.61. Article 16(4) of Regulation (EEC) N° 4253/88 lays down that the total cost of an operational programme in a region covered by Objective 1 should, as a general rule, come to ECU 100 million.

The Commission's efforts to establish a true regional partnership have sometimes resulted in the negotiation of regional or even subregional CSFs, involving relatively small sums even in Member States with a large Community allocation.

7.62 7.63. Being the first exercise of its kind for Member States and also from the Commission and carried out under pressure of time, the drafting of the CSFs has not yet achieved the level of accuracy and coherence desired. The Commission is aware of this and is continuing its efforts to resolve the problem.

Operational programmes

7.65. Despite its attempts to obtain more clarity, the Commission would like yet more precision in the objectives and priorities contained in the operational programmes proposed by the Member States.

The Commission draws attention to the fact that, in numerous cases, the planning specified by the reform represents a significant change to the previous way of working. Such a change can only be implemented gradually and with the inevitable problems.

7.66. The same volume of detailed information on individual projects as provided by the project-based approach cannot be available with the programme-based approach. The Commission has also encouraged Member States not to describe each project in the operational programmes in detail except in special cases or, of course, when the regulations so specify (large projects) so as to get full benefit from the flexibility of the operational programme method.

The Commission therefore considers that operational programmes should only describe the selection criteria for projects under each measure, the selection of individual projects being made as the programmes are carried out. This has the effect of making the operational programmes a coherent set of measures rather than just a catalogue of unconnected projects.

7.67. The shortcomings pinpointed by the Court have now been overcome, with all the operational programmes having been completed both with regard to the use of the ecu and the recovery of undue payments.

7.68. See paragraphs 7.54 and 7.65.

Monitoring, control and assessment

7.69. The principles of the reform with regard to monitoring, control and assessment are crucial. The Commission would, however, draw attention to the administrative difficulties of implementing a new structural Fund approach without any transitional period. Both Member States and the Commission still have things to learn with regard to the application of the principles governing assessment and monitoring.

7.70. The Commission shares the Court's regret that, in certain cases at least, the time taken, particularly to convene monitoring committees, was much longer than planned. The Commission stresses, however, that these delays have had a very limited effect on the implementation of the reform.

7.73. The Commission has specified the information required on financial management and control, both in the vade-mecum for Objective 1 and 2 operational programmes and the guide for the control of operational programmes, each of which has been widely distributed amongst operational programme managers at regional, national and Community level.

7.74. See paragraph 7.70.

7.75. As regards regional representation on the monitoring committees for Ireland, see paragraph 7.21 above. With regard to Italy see paragraph 7.18.

7.76. As regards Fund managing departments within the Commission, a preparatory meeting is organized before each monitoring committee meeting to define the Commission's position on the agenda which has been drawn up.

The Commission, moreover, attaches particular importance to systematically informing all of the departments concerned both about monitoring committee meetings themselves and about the points with which they are to deal.

7.77. The Commission is very aware of the patchy nature of the work carried out up till now by the various monitoring committees.

Some of the meetings during the period under consideration were devoted to drawing up working methods and procedures rather than to detailed discussions of the progress of the CSFs.

This is inevitable when entirely new bodies, particularly from the point of view of their composition and functions, are being established. Once the 'framework` has been fixed, there will be no further need to discuss it.

The Commission would also point out that most of the CSF monitoring committees have concentrated on financial analyses. Numerous committees have produced harmonized tables containing the necessary indicators.

The physical indicators are much more difficult to establish and use. Some committees have decided to carry out monitoring at the level of the types of operational measures (programmes, etc.).

7.81. The CSFs are still not a satisfactory instrument with regard to prior assessment, particularly of the results expected.

Their content should therefore be improved in this respect.

The methodology of prior assessment contained in the CSFs is important, however, since this is an entirely new exercise both for Member States and for the Commission.

7.82. The Commission did not in fact have the assessments of the external consultants in time. It believes, however, that even though full advantage could not be taken of their work this time, it will in future enable the effectiveness of Community measures to be improved.

Furthermore, aware of the difficulties involved in assessment, the Commission points out that to a large extent these are the result of a lack of appropriate methodological guidelines for the drafting of CSFs.

A study of current assessment practices in Member States reveals numerous problems. The Commission hopes that the results of the work now being carried out by independent assessors under the direction of its staff will help to solve these problems.

7.83. This situation, which is mainly due to the conditions under which the reform has been implemented, will complicate assessment, particularly of operational programmes already adopted.

7.84. The Commission points out that a number of operational programmes have already received external technical assistance enabling, amongst other things, the definition of more accurate objectives and the establishment of quantified physical and financial indicators of the progress of implementation (Ireland in particular).

CONCLUSION

7.85. With regard to the implementation of the principles of the reform, the Commission points out that:

- temporal constraints made a transitional period impossible;

- the lack of such a period has forced the Commission and the Member States to learn as they go along, resulting in a gradual implementation;

- the quality of implementation of the principles also depends on the quality of the partnership established with the Member States.

7.87. The quality and intensity of the partnership varies from Member State to Member State. The Commission stresses however that the reform and the instruments concerned have not yet been in place a sufficient time for a totally reliable assessment to be made of the implementation of the principles of the reform.

7.89. The Commission stresses that the programme-based approach is, in most cases, completely new, therefore requiring that the various partners undergo a gradual learning process.

7.90. The Commission draws attention to the difficulties, particularly the administrative difficulties, inherent in the implementation of entirely new principles in the absence of any transitional period.

The Commission also considers that the efforts already made will improve future relations with the Member States.

7.91. The Commission is aware of the need to pursue its efforts and to encourage those of Member States to ensure that the principles of the reform are implemented as satisfactorily as possible. With regard to the difficult problem of additionality, it recalls that, since this principle was newly defined in the Regulation resulting from the reform, it had initially to 'construct` the concept before implementing it.

7.92. The Commission, which shares the desire for maximum transparency expressed by the Court, considers that the periodic bulletin referred to in paragraph 6.17 will meet this requirement.

7.93. Aware of how important it is that its measures be assessed, the Commission has established an assessment mechanism which will be implemented systematically with the help of external experts.

CHAPTER 8 Social field

WINDING-UP OF THE FUND WHICH ENTERED INTO FORCE ON 23 OCTOBER 1983

Introduction

8.5. The payments schedule set out in the remarks to the 1990 budget provides for most of the commitments entered into under the former fund to be settled in 1991, except in a few special cases. The Commission will do its utmost to ensure that the schedule is respected.

8.6. The Commission agrees with the Court that the old fund cannot be considered truly wound up until all operations pending and therefore also all outstanding claims have been resolved. The Commission will step up its efforts to achieve this.

Outstanding commitments

8.8. Specific procedures were introduced in 1990 in order to ensure more effective monitoring of the settlement of commitments within the ESF.

A detailed plan for the implementation of the budget was drawn up as early as February 1990. The plan served as a point of reference for measuring the progress of budget implementation at any time, particularly as regards the settlement of commitments made under the old fund. Tables specifically produced for the purpose and periodic monitoring reports made it possible to steer implementation throughout the year, resulting in the settlement of ECU 964.1 million in commitments made under the old fund (as against ECU 956.5 million in 1989 and ECU 890.8 million in 1988). This result was achieved in 1990 despite the extra workload entailed by the new fund's first year of operation.

It should be noted that, out of the ECU 1 282.6 million which, at 31 December 1990, remained to be settled under the old fund, ECU 576 million is attributable to an overassessment of pre-1990 commitments. Commitments for this amount will be cancelled in the books in 1991. Consequently, the amount to be settled by means of payments is approximately ECU 700 million.

The ECU 576 million corresponding to cancelled commitments will be re-used in accordance with Article 7(2) of the Financial Regulation and point 11 of the Interinstitutional Agreement on budgetary discipline (OJ L 185, 15.7.1988, p. 33).

8.9. Of the ECU 129 million which, at 31 December 1990, remained to be settled in respect of commitments from 1985, 1986 and 1987, only ECU 27.1 million was still outstanding at the end of the second quarter of 1991; the remainder had already been paid (or was in the process of being paid). It should be noted that almost ECU 15 million of this ECU 27.1 million relates to Portuguese files, for which there are specific problems (see reply to paragraph 8.10 et seq.).

The decommitments which the Court describes as late concern cases involving problems or requiring further information, which is the main reason for the time needed to process them.

It should also be borne in mind that in 1990 the ESF departments had to contend with the priorities connected with the examination and approval of the operational programmes during what was the first year of implementation of the 1988 reform. Save in exceptional cases, it should not take such a long time to close files in future.

8.10. It is true that at the time of the Court's audit, a considerable number of files had not yet undergone their first examination or had not been re-examined in the light of additional information received. This was due in large part to the start-up of the procedures relating to the new fund, which in 1990 took up most of the departments' operational capacity.

Since then things have improved and, at the end of June 1991, the number of files which had not yet been subject to departmental examination numbered - as regards the Member States referred to by the Court in its report - 17 for Spain, 16 for Italy and 26 for Belgium (as against 125, 377 and 198 respectively at the beginning of February 1991).

8.12. Talks with the Portuguese authorities produced an agreement on 16 May 1991 entitling the Commission to conduct examinations and make payments in respect of individual projects included in a group file which have been carried out by bodies not suspected of any irregularities. Once these payments have been made, the remaining amounts still committed in respect of bodies suspected of irregularities will be released from commitment.

Provision has also been made for recommitting the appropriations needed to make additional payments should the courts decide in favour of the bodies concerned.

The Portuguese authorities have kept the Commission regularly informed of investigations begun or in progress.

Furthermore, the Commission has decided to bring civil action in all cases where this is warranted (roughly 25 cases to date). It should be noted, however, that in most cases the national authorities have immediately repaid the amounts unduly received by the bodies in question.

Lastly, under the agreement of 16 May 1991, the Portuguese authorities undertook to inform the Commission after one year of the state of play regarding files which were the subject of legal proceedings.

Recovery of unwarranted payments

8.13. Given the rules in force from 1984 to 1989, the management results could not have been any better. It should be noted, however, that advances increased - on average - by around 11% per year between 1984 and 1989, whereas claims relating to the same period increased on average by about 5.3% per year.

8.14. It is a fact that the rules which emerged from the 1983 revision afforded the Commission few effective legal means of compelling the debtor bodies and, by virtue of their secondary liability, the Member States to pay back - by the due dates set - the amounts of advances not corresponding to work done. It should be noted however that, at the end of 1990, unsettled claims were roughly ECU 19 million lower than at the end of 1989. This is a noteworthy improvement.

A point to be noted for the future - in connection with the new fund - is the adoption of Regulation (EEC) N° 1865/90, under which interest on amounts overdue can be charged to the debtor bodies. The purpose of this regulation is to reduce the time taken to recover claims. However, this Regulation implements Article 24(3) of Regulation (EEC) N° 4253/88 and therefore cannot be extended to cover authorizations under the former fund.

8.15 More than 90% of disputed outstanding claims relate to files dating from 1984, 1985 and 1986, the recipients being, in the majority of cases, public bodies and, in particular, ministries. These claims arise mainly as a result of difficulties encountered by some ministries in adapting to the changes in the rules and the introduction - with effect from 1984 - of time limits for the submission of applications for final payments as well as for the provision of further information needed for the examination of payment files.

The Commission will do its utmost to find a solution for the particular problem posed by these contested recovery orders.

As regards the 10 bankrupt bodies and the claims on them, in the first half of 1991, the Commission solved the problem in five cases. A solution is in view for the other claims. Lastly, in one case the claim will be the subject of legal proceedings since the secondary liability of the Member State cannot be invoked.

As regards the other bodies which are the subject of legal proceedings in the Member State, the Commission will take whatever measures are necessary to recover the claims.

The above analysis gives an idea of the wide variety of situations and difficulties hindering rapid solution of the problems posed by the various categories of outstanding recovery orders.

Weaknesses in the establishment of entitlements

8.16. In the Commission's opinion, there will be no substantial change in the field of ESF recoveries - as regards procedures for both appraising and checking applications for final payment - unless the new rules which emerged from the 1988 reform are implemented. Unlike the Court, the Commission does not think that the solution lies in giving priority to the establishment of entitlements. Indeed, experience shows that, where the ESF is having to contend with too many files, staff energies are, quite naturally, primarily devoted to the overriding need to process those files which require departmental examination before any commitment or payment can be made.

This is clearly shown by the insistent lobbying by the recipient bodies to obtain payment of the amounts due to them as swiftly as possible. It has to be admitted that in many cases, an excessive delay in payment threatens to have more serious consequences for the recipient body and for the Commission's credibility than the settlement of a file where the advance has been enough to cover expenditure.

Despite these difficulties, the Commission ensures that a recovery order is duly issued in respect of all claims. In 1990, for example, 2 169 new recovery orders were issued (as against 2 130 in 1988 and 2 106 in 1989). This effort will continue in 1991, particularly as regards established claims relating to 1989 (information about which reached the Commission in late 1990/early 1991).

In this context, applications for final payment showing a negative balance are a special case in the same way as unrequested repayments. (As regards the priority governing the way in which these two types of file were treated in 1990 from the point of view of recovery orders to be issued, see the replies to paragraphs 8.18 and 8.19.)

These recovery orders are obviously not all issued together but one by one as the result of work staggered throughout the year. Under these circumstances, it is not surprising that some orders were issued in 1990 immediately after the various deadlines provided for in the old fund whereas others were made out only much later, well into 1990

.

8.17. The Commission agrees with the Court that it should have been informed immediately of any change affecting the circumstances on which the decision approving an application for aid had been based. This was the reason why the 1988 reform of the structural Funds introduced totally new ad hoc monitoring provisions (see Article 25 of Regulation (EEC) N° 4253/88). It should be pointed out, however, that, under the former fund, the management system was extremely inflexible owing to the excessive number of files in progress and requiring processing every year. In this connection, it must be borne in mind that - some exceptions apart - the national authorities had great difficulty in monitoring the progress of each of the very many projects financed by the ESF on their territory.

Penalties against Member States failing to comply with their obligation under Article 5 of Decision 83/673/EEC would require an amendment of the regulation. However, the regulation expired at the end of 1988.

Under the new rules introduced by the 1988 reform, it is expected that the Commission will be informed more rapidly than in the past about any programmes which Member States decide not to carry out. This will be achieved by the work of the monitoring committees and the smaller number of programmes receiving ESF assistance (at present some 400 operational programmes - not counting the Community initiatives - as against 10 000 projects a year under the old fund).

The Commission accepts the observation that it did not send the Member States the statement referred to in its reply to the Court's annual report for the financial year 1988, the reasons for which are set out in the reply to paragraph 8.21.

8.18. It is true that few recovery orders were drawn up automatically on the basis of applications for final payments showing a debit balance. The reason for this lies in the fact that in reality the issue of such recovery orders is not always automatic. The Commission has processed this type of application for final payment in such a way that the recovery proposal is made only after examination of the general statement of expenditure. This ensures that the ESF accounts department does not have to issue two different recovery orders for the same file.

8.19. It is true that in 1990 the ESF issued few recovery orders allowing the immediate regularization in the accounts of unrequested repayments. The reason for this is that in 1990 the Commission considered it more urgent to process those files for which accounting documents needed first to be issued in order to speed up the recovery of claims. Under these circumstances, the regularization of revenue already received was of secondary importance. This goes to explain the increase in revenue on the suspense account at the end of 1990 whereas a record number of recovery orders were issued in the course of the year.

Observations on the settlement of claims

8.20. At 31 December 1990 recovery orders issued in respect of claims under the old fund totalled approximately ECU 788 million. At the same date, roughly ECU 645 million of this amount had been settled, some ECU 129 million having been recovered in 1990. At the same time, preparations were made for other operations such as the settlement of disputed claims and settlement by means of setting-off. The Commission will continue to take action, particularly as regards outstanding and disputed claims.

8.21. In 1990, in response to the comments made by the Court in its annual report for 1989, the Commission, with the cooperation of the national authorities, began a detailed examination of outstanding claims. In this context, rather than send an official letter, the Commission chose to give the officials concerned in the relevant national departments a personal reminder of their obligation under Article 5 of Decision 83/673/EEC.

The French and Spanish administrations tend to be candid about their dislike for an obligation which, given the large number of projects which was a characteristic of the way the old fund operated, they know to be difficult to comply with. Under the rules introduced to give effect to the 1988 reform, this should no longer be a problem, mainly because of the expected fall in the number of files. The activity of the monitoring committees is also a major factor in determining how soon the ESF administration can be notified of the cancellation of certain programmes.

8.22. At the end of 1990, the amount of ESF claims unrecovered at the due date was some ECU 19 million less than at the end of 1989. This result at the end of 1990 reflects the efforts made during the year to improve the situation with regard to claims on advances.

At all events, experience has shown that the Commission has only limited physical and legal means available to deal with such massive numbers of recovery operations as those caused by the activities of the ESF from 1984 to 1989. Furthermore, the observations made by the Member States in reply to certain reminders from the Accounting Officer have tended to impede the systematic sending of reminders. In such instances, it became clear that, as the authorizing department, the ESF had first to clarify the situation of the files concerned with the national authorities. This clarification work began in 1990.

8.23. The volume of disputed claims was impossible to ascertain in 1990. The lists of files successively drawn up by the Commission departments - lists which could, if necessary, have been used to determine the volume of disputed claims - were no more than working hypotheses, which explains why they were adjusted several times. In reality, experience has shown that late recoveries require case-by-case examination. Only such an examination reveals whether an outstanding claim is disputed or not and whether the reasons for the dispute are founded or not. Consequently, the overall volume of late claims which are disputed can only be determined reliably and definitively by statistical means at a later date.

8.25. Case-by-case examination of files relating to outstanding recovery orders began in 1990, resulting, in some cases, in acceptance of the arguments put forward by the debtor and, consequently, in cancellation of the recovery order.

As a rule, the Commission does not hesitate to invoke the secondary liability of the Member State where the case warrants it.

In the case of Belgium, the positions adopted by that State did not justify the dispatch of a letter in 1990 concerning the claims established under the ESF.

In the Commission's opinion, clarifications concerning the way in which secondary liability applies to the Member States can only be provided by a court ruling in a real case.

The Commission will not fail to bring legal proceedings when an appropriate case arises.

8.26 8.27. A number of outstanding claims have been settled by means of a setting-off procedure. However, this rather complex procedure requires the following preliminary steps:

- identification of one or more final payment files relating to a body named as debtor in a recovery order;

- examination of these final payment files and issue of a payment proposal. This phase of the procedure may take some months, especially where problems arise or further information has to be sought;

- formal consultation of the Member State concerned in compliance with the general obligation laid down in Article 6(2) of Regulation (EEC) N° 2950/83 (generally, two months allowed for reply) and, in this connection, the need to ensure that the claim which is to be recovered by setting-off is not disputed.

For these reasons, the results of the efforts made by the ESF departments were not entirely evident in 1990. Furthermore, in a number of cases, the mere announcement by the Commission of its intention to set off claims against debts was enough to impel the body concerned to repay the amounts it owed forthwith. Notwithstanding, at 30 June 1991, 141 additional claims had been, or were in the process of being, settled by setting-off (as against 58 in 1990).

As regards the Court's observation that the setting-off procedure should be applied not only to final payments but also to advances, it is justified from the strictly accounting point of view. On a more general level, the Commission cannot accept the risk of jeopardizing the completion of projects which it has approved.

8.28. The Commission has taken note of the Court's suggestion and will see whether it can be applied to the Community procedures.

8.29. The Commission is at one with the Court in deploring the legal situation whereby the files covered by the old fund fall outside the scope of Regulation (EEC) N° 1865/90 on interest on late payment and would refer to its efforts to secure acceptance of rules which would have simplified its management role in this connection (see observations in paragraphs 9.53 and 9.54 of the Court's report for the financial year 1988 and the Commission's replies: OJ C 312, 12.12.1989, p. 1). In the Commission's opinion, no new circumstances have arisen to warrant a new proposal in this matter.

Re-use of revenue

8.30. The decision to authorize an additional amount, which the Commission took at the end of 1989 with a view to re-using most of the ESF appropriations corresponding to revenue, was based on reasonable forecasts which, unfortunately, turned out to be inaccurate.

Conclusions

8.31. Any judgement passed on the financial management of the ESF in 1990 should, the Commission believes, allow for the fact that, as regards the ESF, 1990 was above all the first year in which the new rules introduced in December 1988 were implemented. Most of the Commission's energies were therefore taken up with the need to examine and approve the operational programmes designed to give tangible form to the assistance objectives defined in the Community support frameworks.

However, in 1990, the Commission did also devote its attention to recoveries, as illustrated by the large number of 'orders` issued (2 169). Any operation intended to speed up the recovery of claims depends on the fastest possible issue of new recovery orders.

Furthermore, a systematic, case-by-case examination of claims corresponding to overdue recovery orders was begun in 1990 in order to determine the reasons for the delay in certain repayments. This resulted in many files being closed once and for all. At the same time, the ESF departments carried out recoveries by setting off claims against debts, a technique and procedure introduced in 1990 and intended for application on a greater scale in 1991. It should be noted however that in several cases written notice of the Commission's intention to use the setting-off procedure was enough to make the body concerned take swift action to pay back the amounts it owed. Clearly, all these various cases cannot be recorded as recoveries by setting-off, but the files concerned have nevertheless been finally closed.

Lastly, a Regulation providing for the charging of interest on late payments on any sum not repaid by the set deadline was drafted and approved in 1990. However, this Regulation is to implement Article 24(3) of Regulation (EEC) N° 4253/88 and so cannot be applied to amounts to be recovered in cases dating from before then.

In the light of the above, there would appear to be no justification for criticizing the financial management of the ESF as ineffective.

8.32. The Commission shares the Court's concern to prevent a situation arising as regards recoveries which would tend to create a new type of 'burden of the past`. The Commission's policy in 1991 is to continue the practice adopted in 1990 with the ESF - as the authorizing department - monitoring recovery files until their final closure. This monitoring will be intensified with the establishment of an internal working group whose specific task will be to identify the problems still posed by the different categories of claims and to propose an appropriate solution for each of them. In addition, procedures will be adapted so that recoveries can be processed more effectively by suitable computerized means.

8.33 8.34. As regards the future, the Commission is relying on the fact that, by radically reducing the number of files and establishing monitoring arrangements, the new rules introduced by the reform will enable the ESF to adopt a different approach to the handling of claims and recoveries. In this context, the fact that a regulation now exists allowing interest to be charged on late payments means that a solution can be found so much more quickly for the few claims which are recorded.

COMMUNITY MEASURES WITHIN THE FRAMEWORK OF THE ERASMUS PROGRAMME

Introduction The Erasmus programme's management system

8.40 8.43. The Commission takes the view that the diversity and complexity of the administrative procedures are mainly the result of differences in the nature and degree of decentralization of the four kinds of operation provided for under the Council Decision.

8.44. Contracts concluded by Erasmus Bureau on behalf of the Commission are based exclusively on a standard contract designed in cooperation with and under the responsibility of the competent Commission departments. Furthermore, Erasmus Bureau complies with the list of beneficiaries issued by the Commission and the standard contract terms laid down. The final claims are drawn up by Erasmus Bureau using a format set out as an annex to the standard contract and on the basis of the criteria defined in the guidelines drawn up with the department responsible, approved by that department and communicated in advance to the contractors.

Aspects of the implementation of the Erasmus programme

Inter-university cooperation programmes (ICPs)

8.49. The selection criteria can be broken down into qualitative and organizational criteria deriving from the recommendations published in the Guidelines for appli- cants and criteria of 'balance` - more especially between Member States and areas of study - which can only be applied after an initial selection is made on the basis of the published criteria and the relative influence of which depends on the outcome of that selection. In this way, the Decision invests the Commission with powers of discretion.

In response to the Court's observations, the Commission has taken steps to give greater transparency to the qualitative and organizational selection criteria in the Guidelines for applicants.

Lastly, while any advance application for aid is necessarily based on an estimate of expenditure, the introduction, as from 1991, of a multiannual perspective in the programming of aid for ICPs will make it possible to take account, in the selection for year n, of the real mobility by institution for year n-1, an interim report regarding which will be submitted at the same time as the application for aid for year n (see also paragraph 8.54).

8.50. Subsidies are paid by cheque made out to the coordinating university and not to the programme coordinator, to whom the covering letter attached to the cheque is addressed. This procedure has proved effective in speeding up the identification of funds allocated to the universities and their utilization.

In response to the Court's observations, the Commission undertakes to study the most reliable method of payment for each Member State.

8.51. With effect from 1990, the Commission applies rules concerning the documents to be produced in support of expenditure eligible for the subsidy as well as the mutual exclusion of expenditure between different contracts (Article 7(8) and (9) of the general conditions governing ICP contracts). Moreover, in its statement of expenditure, the university coordinating the ICP is required to give details of other contracts held by each ICP participant under other Community programmes.

The obligation to retain proof of expenditure - especially original transport tickets - is not contractually binding on the coordinating university but on all the beneficiary universities and the Commission requires the contract and statement of expenditure to be signed by the highest authority of the coordinating university (rector, vice-chancellor) or his representative.

8.52. As from 1991, the introduction of a multiannual perspective into the ICPs will make it possible to obtain interim reports sufficiently early in the calendar year for actual student mobility at each university to be taken into account in the granting of aid for the following year.

Furthermore, since October 1990, Erasmus Bureau has been placing all data - including applications - relating to mobility by institution on computer in such a way as to be able to identify more readily those institutions which might be tempted to inflate their student mobility forecasts.

8.53. The Commission shares the Court's reaction to the case referred to, which cannot, however, be considered typical of inter-university coordination contracts. The project in question did appear to offer every guarantee as regards its execution and the Commission had proposed a maximum Community contribution of ECU 78 500 in line with the expenditure forecasts for the four types of inter-university cooperation.

This matter has already been scrutinized by the Commission and Erasmus Bureau and the appropriate steps have been taken.

Student grants

8.54. While it is true that the number of students taking part in the ICPs was not taken into consideration during the first phase of the programme, since 1990 this has been a factor in the distribution of the 5% of the annual budget for financing student grants which serves as a reserve fund to ensure a certain balance between countries and disciplines.

The policies pursued by the national authorities as regards the distribution of grants also go to explain the differences observed by the Court (distribution amongst the greatest number in Ireland or, in Portugal, limitation of the number of recipients so that, compared with other Member States, the individual grant is relatively high).

8.55. The following facts will put another perspective on the Court's observations concerning the flow of funds:

- the Commission endeavours to issue the list of beneficiary universities as soon as possible and encourages the national authorities to simplify the distribution of grants so that grants are actually paid to students if possible before they go abroad;

- Erasmus Bureau - acting on behalf of the Commission - transfers the grants to the national authorities as soon as it receives the signed contracts from them and at all events well before the start of the academic year;

- most students only receive their full grant well on into their stay abroad owing to the fact that the national authorities apply a procedure whereby grants are distributed in several stages (so as to redistribute unspent grants);

- depending on the Member State concerned, the national authorities distribute the grants to students by means of contracts with the universities, the ICP directors or the students themselves;

- Erasmus grants are mostly regarded as a supplementary contribution to the national system for financing students and the distribution system differs from one Member State to another.

(a) The problem of student accommodation is general and is a real obstacle to mobility. Several countries and universities are in the process of releasing funds for the building of more student residences. The Commission has just received the results of a survey commissioned on this subject and it will give particular consideration to the possibility of regional, national and Community measures in this connection.

(b) The national authorities have been requested to take account of the cost of living in the host Member State and a table showing travel and subsistence costs - within and between the various Member States - has been sent to them for reference purposes.

(c) Lack of knowledge of the less widespread languages in particular is unquestionably a major obstacle to mobility towards the countries where these languages are used. The Commission has been behind serious efforts to remedy this shortcoming, the Community Lingua initiative being an illustration. Special priority is given to operations designed to promote the teaching and learning of the less widespread languages.

8.56. 'Bafoeg` grant-holders who take part in the Erasmus programme in fact receive a supplement to the German national grant based on the estimated travel expenses and the difference in cost of living between Germany and the host country.

However, it is for the university authorities to gauge students' financial needs and adapt the individual Erasmus grants accordingly.

8.57. The Commission must guard against proposing a measure which might give rise to discrimination between Member States, i.e. depending on whether the national authority invests the Community funds in transit with a bank or not. With effect from 1991, and as a result of the observation made by the Court, the contracts with the national agencies have stipulated that any interest earned on funds in transit must be repaid to the Commission.

8.58. When the report referred to by the Court appeared, the data on student mobility for 1987/88 and 1988/89 were not fully available.

For each academic year, the mobility data are communicated in detail by the universities to the national authorities, which, after verification and synthesis, send them to Erasmus Bureau, in principle by 15 October 1990 in the case of the 1989/90 academic year. In actual fact it has so far been impossible to adhere to this deadline owing to the difficulties encountered by the universities in producing their reports. The Commission will try to ensure that the deadlines set are more strictly adhered to in future.

The differences observed by the Court between forecasts and outturn are mainly attributable to the policies concerning the distribution of grants adopted by the Member States and their national authorities. It should also be borne in mind that if the planned number of exchanges do not take place, the national authorities use the extra funds to increase the average level of grants (see also paragraph 8.59.).

The multiannual perspective introduced into the management of ICP contracts from 1991 should enable the universities to plan student exchanges more effectively and thereby help them to enhance the profile of their exchange programmes for the purpose of the Commission's annual selection exercise as well as subsequently in the eyes of their national authority.

8.59. This year, the Commission was able for the first time to award an average monthly grant of at least ECU 91 under the budget for Action N° 2 and with the aid of the 5% reserve fund designed to ensure balanced participation. The average monthly grant in Ireland has gone up from ECU 56 to ECU 91, in Belgium from ECU 62 to ECU 91 and in the Netherlands from ECU 84 to ECU 91. Greece and Portugal have also benefited from this reserve fund, with their average monthly grants rising to ECU 154 from ECU 116 and ECU 125 respectively.

There is an average 25% drop-out rate (difference between the ICP director's initial estimate and the actual number of stays abroad), the effect of which is a commensurate rise in the level of the average grant.

Furthermore, with the financial resources of the programme it is not possible to iron out the differences between Member States in the total amount of aid granted to the student. The national aid component, where it exists, remains decisive.

Grants to teaching staff for visits

8.61. Documentary proof of the completion of study visists is not required under the terms of the contract concluded between Erasmus Bureau (on behalf of the Commission) and the recipients. However, under the general conditions governing contracts, teaching staff are obliged to keep all supporting documents for five years for possible inspection by the Commission or the Court of Auditors.

The Task Force for Human Resources, Education, Training and Youth has just set an annual target of 5% for the audit of subsidies awarded to the universities (ICPs) to be conducted with the assistance of Erasmus Bureau and is planning to take advantage of these on-the-spot operations to inspect a similar percentage of subsidies granted for the purpose of study visits.

Remarks concerning Erasmus Bureau

8.62. (d) In July 1991, the task of ex-post evaluation was assigned to an outside firm of consultants.

8.63. The increase in the number of staff employed on indefinite-term contracts in the Erasmus Bureau department of the European Cultural Foundation from 21 in September 1987 to 58 in September 1991 reflects the exceptional expansion of tasks required by the implementation of a programme - in nine languages - the resources for which have risen from ECU 10 million to ECU 74 million, the number of ICPs from 350 to 1800 and the number of students involved from 3 000 to 60 000.

The review clauses referred to by the Court in the technical assistance contract have been substantially simplified in the 1991/92 contract. Reference is now made only to the amount of the contract, with any increase in excess of 10% entailing renegotiation of the contract as well as a new procedure in accordance with Article 60 of the Financial Regulation (ACPC opinion) prior to the authorizing officer's decision. Article 4.2 of the contract limits the financial consequences in the event of non-renewal by the Commission as follows: 'The Commission shall indemnify the Foundation in respect of any losses arising as a result of any legal obligations (including financial commitments such as depreciation costs) entered into by the Foundation in execution of this contract except where this contract is terminated by the Commission on grounds of the failure of the Foundation to perform its obligations under this contract satisfactorily. In the event of termination of this contract by the Commission, the Foundation shall take all reasonable steps to mitigate any such losses as referred to above.`

The form of contract adopted - i.e. repayment of real costs subject to a ceiling for each period, with the exception of a management fee of less than 5% of the total - has prompted the Commission to lay down specific provisions relating to the termination of the contract. The other party is thus obliged to take any reasonable measure to limit the cost.

The Commission would also stress the efficiency and flexibility which recourse to an outside contractor lends to the daily management of the programme.

8.64. At the invitation of the Commission, Erasmus Bureau took the necessary steps to obtain VAT exemption on the purchases of goods and services which it makes under the technical assistance contract it has with the Commission.

The Belgian authorities accepted the principle of back-dating exemption to 1987. They conducted a detailed on-the-spot inspection on 16 July and agreed to the amount mentioned by the Court.

8.65. Only two reports are due to the Commission to date, relating to the 1987/88 and 1988/89 academic years. As regards the first of these, account has to be taken of the difficulties inherent in the programme's first year of implementation.

The report for the 1988/89 academic year was submitted, with the agreement of the Commission's departments, in October 1990. The report for 1989/90 was received at the end of July 1991.

8.66. The Commission acknowledges the fact that Erasmus Bureau's accounting system does not yet extend to the management of movements relating to each contract in isolation and that incorporation of this feature would enhance the speed and reliability of the information provided by the statements of account at any time. The Commission therefore plans to take steps in this direction.

8.68. The Commission has already instructed the contractor to repay the bank charges and the interest lost. The Commission has ensured that the contractor takes the necessary organizational measures to prevent any repetition of the incident reported by the Court.

8.69. The contracts which Erasmus Bureau concludes on the Commission's behalf with the universities, national authorities and other beneficiaries provide for 100% advances, which themselves are first paid by the Commission to Erasmus Bureau.

At the close of the financial year, most of the commitments for the Erasmus item have therefore been provisionally paid, pending settlement of the authorized advances, which is not possible until the following year at the earliest.

The Commission will take steps to ensure that the latest available data relating to a given financial year are recorded in the accounts as part of the procedure for closing the accounts that year.

Inadequacy of the auditing

8.70. In view of the rapid growth of the resources allocated to the programme, the Commission recognizes the need to strengthen the structure and resources required for the auditing of the programme. This aspect will be addressed in the first phase of the external evaluation survey which has just been commissioned.

8.71. It should be emphasized here that the national authorities - whatever their legal status - are designated by the Member States in accordance with the Council Decision adopting the programme. The UK national authority, in particular, has declared its readiness to submit to a detailed annual audit.

Conclusions

8.72. The decentralization of certain activities provided for by the Council Decision on the one hand and the fact of resorting to external technical assistance on the other inevitably make the administrative procedures more complicated than in the case of a programme managed entirely by Commission departments.

The interplay of the Community and national measures also poses the problem of the demarcation of responsibilities in terms of management, especially as regards the determination of the individual amounts of Erasmus grants and their complementarity with the national systems for financing student mobility.

The Commission sets out the framework for action in the Guidelines for applicants as well as in the contracts with the beneficiaries. The activities of Erasmus Bureau are audited in the relevant department, with which close contact is maintained throughout the management cycle of any financial year.

8.73. The Commission has already taken steps to incorporate actual mobility results more rapidly into the selection process (paragraph 8.54).

8.74. A detailed answer to the criticism concerning the conveyance of funds to students is to be found in the reply to paragraph 8.55.

Despite the time taken to convey the funds, there is already evidence to suggest that Erasmus students come from a variety of socio-economic backgrounds reflecting the university population as a whole. This has been confirmed more particularly in the Commission's recent bilateral consultations with the authorities of each Member State concerning the arrangements for monitoring the Erasmus programme. Furthermore, specific guidelines are addressed to the national authorities and the universities requesting that they endeavour to take account of the needs of the less advantaged students. However, in some Member States, action of this nature comes up against barriers of a legal nature.

8.75 8.76. The Commission will take account of the Court's observations (paragraphs 8.66 and 8.70).

8.77. In the period 1987 to 1991, the percentage of total student mobility accounted for by student stays in France, Germany and the United Kingdom declined from 62 to 35%, thanks partly to the information campaigns conducted by the Commission in the peripheral countries and the attention paid to this aspect in the selection of ICPs and partly to the efforts of the Member States concerned.

8.78. The Commission has initially published indicative figures for applications for assistance for student mobility as well as those relating to the subsidies granted. In September 1990 the Erasmus Committee was presented with the mobility results for the years 1987 and 1988.

The first results of the evaluation survey launched in July 1991 are expected for January 1992 and, in particular, will show the drop-out rates. This same survey will provide the first independent assessment of the machinery for the management of the programme.

CHAPTER 9 European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance): The compensatory allowance granted to farmers in less-favoured areas

OBSERVATIONS

National provisions

9.13. Member States may adjust the amount of the compensatory allowance in the light of the economic situation of the farm and the income of the farmer receiving aid. Although they did not make use of this possibility, they took account of the economic situation of farms and farmers' incomes in the general conditions for application of the measure. Two Member States (Germany and France) fixed an income limit for granting the allowance to beneficiaries, and a large number of countries restrict the grant of aid to a certain number of units.

As regards Lower Saxony, the natural production conditions in less-favoured areas do not call for as much differentiation as in other regions of the Community (for example in France: high mountains, mountains, piedmont and other less-favoured areas), which would entail disproportionately high administration costs.

For this reason the regional legislation concerned is not contrary to the letter or spirit of Community rules.

9.14. Although France has defined areas for the purpose of granting the compensatory allowance for dairy cows, this does not constitute an obligation. The determining factor is that milk production must account for a major part of farming activity.

The Commission is anxious to point out that allowances have never been granted for dairy cows in non-mountainous less-favoured areas in Portugal, with the exception of a very limited number of communes which, from April 1991 onwards, has been definitely fixed at two.

Furthermore, in the Commission's opinion, it was not necessary to define special conditions for the Azores, since this region is, by vocation, a milk-producing area.

The Commission will ensure that such a distinction is drawn in the FRG if the need arises.

9.15. Community rules authorize the paying of allowances for areas (crop units) other than those given over to feed for livestock already receiving the allowance intended for livestock units.

Recently the Commission forwarded to the Council a report

containing an interpretation of the first subparagraph of Article 15(1)(b) based on the fact that the word 'livestock` refers only to the species mentioned in the sentence in question, i.e. those already receiving the allowance provided for in point (a) of the same paragraph (cattle, equidae, sheep and goats).

9.16. The national provisions concerned are based on the same interpretation as that supported by the Commission under point 9.15. In a situation where, for example, two farmers in the same area produce barley, it would be discriminatory if one of them could benefit from the allowance for the product by placing it on the market and the other could not benefit from it on the pretext that he could feed his animals with his product.

It would be all the more unfortunate to penalize the second farmer since he practises a more autonomous form of production contributing towards a reduction in imports of cereal substitutes from third countries and in the build-up of surpluses on the cereals market.

In the Commission's opinion, the compensatory allowance should be distinguished from investment aid. The aid scheme is restrictive in that Article 3(4) of Regulation (EEC) N° 797/85 lays down that aid may be granted only if the holding can produce at least the equivalent of 35% of the quantity of feed consumed by its pigs.

For this reason the Commission considers that payment of the compensatory allowance to this type of farmer complies with Community rules.

9.17. The same agricultural holding may receive the two types of compensatory allowance simultaneously, i.e.:

- for cattle, sheep, goat or equidae production, an allowance calculated on the basis of the number of livestock units (LUs);

- for other forms of production, an allowance calculated on the basis of the number of hectares, certain areas being deducted, in particular those given over to feeding the cattle, sheep, goats and equidae on the holding.

As a result, in areas where the stocking density is one livestock unit per hectare - as is the case in Baden-Wuerttemberg - a holding of 40 ha with 12 LUs of cattle, sheep, goats or equidae may receive an allowance for the 12 LUs (corresponding to 12 ha) and an allowance for the remaining 28 ha given over to other forms of production.

Since in Baden-Wuerttemberg the amount of the allowance is the same per LU or per ha, the total amount of allowance granted to this farm of 40 ha is 40 times the amount per ha.

9.18. Although the Community provisions do not allow aid to be paid directly for deer, the grant of a compensatory allowance based on fodder areas used for feeding animal species other than cattle, equidae, sheep and goats not explicitly provided for in Community rules is consistent with these rules (see reply under point 9.15). The Commission recently reminded the German authorities that allowances may be granted for deer only on the basis of the fodder area.

Community reimbursements

9.19. In line with its interpretation of Community rules, the Commission considers these reimbursements to be in order.

9.20. The case mentioned by the Court leads to a much more extensive and complex problem affecting the majority of aid granted by the EAGGF as a whole.

The Commission is studying at present the expediency of taking an initiative on the matter.

Less-favoured areas

9.21. The Commission considers that all the extensions made satisfy the classification criteria defined pursuant to Directive 75/268/EEC.

9.22. (a) The achievement of technical and economic results which are considerably lower than the national average for classification as a less-favoured area is verified for each homogeneous farming area over several years (three consecutive years). Two Member States, Germany and the Netherlands, apply the land productivity index. In the case of Germany, the index has increased, reflecting unfavourable natural production conditions. However, the index used is still significantly lower than the national average.

(c) Directive 75/268/EEC makes no provision for a periodic revision of the Community list of less-favoured areas.

Nevertheless, if it is found that some areas no longer satisfy the conditions which made it possible for them to be included in the list of less-favoured areas, they will be removed from it.

The Commission will draw the attention of the Member States to the need to verify that areas which have been classified still qualify as having handicaps.

Administration of the measure

The national administration systems

9.23 9.24. The Commission stresses that Regulation (EEC) N° 797/85 provides that control methods are to be determined by the Member States. The reason for this provision is that the aid is granted to more than one million individual beneficiaries.

The compensatory allowance is an optional measure largely part-financed by the Member States (75 % in the case of the main beneficiaries).

For this reason they have a direct interest in the introduction of efficient control systems specially adapted to their agriculture and to their administrative organization.

This major national financial contribution characterizing the compensatory allowance distinguishes it clearly from the other aid cited by the Court which is financed in full by the EAGGF Guarantee Section.

When approving national and regional implementing measures, the Commission is informed of the control methods introduced by Member States. It receives all the administrative control provisions when the first reimbursement application is made and verifies the effectiveness of these control systems in on-the-spot checks carried out in the Member States.

However, it will examine the expediency of defining minimum Community control standards when a number of aid measures similar to the compensatory allowance are introduced as part of the reform of the common agricultural policy. Furthermore, it is proposing, in the same context, that the administration and control methods for all direct aid measures should be grouped together under one single mechanism which could also be applied to the compensatory allowance. In particular, it would be useful to draw up a register for each holding, providing all the essential data. It also proposes to promote the use of computerized methods in this field.

The verification procedures available and the use made of them

Supporting documents

9.27. In the Commission's view it is inevitable that the type of supporting document requested will vary according to the legal situation in each region. Therefore, the letting of land without a written contract, a traditional contractual practice, may mean that no supporting documents are submitted in support of applications submitted by tenants.

Effectiveness of the measure

Continuation of farming activities and maintenance of the population

9.32. The Commission thinks that the scheme for the grant of compensatory allowances eases the situation of farmers in mountainous and less-favoured areas in that each year it provides them with a source of stable income, ensuring the maintenance of agricultural activity in these regions.

The farm structure situation in the Community varies considerably. It has never been established that the grant of a compensatory allowance in certain Member States has prevented the development of structures and the growth in the size of farms in less-favoured areas. The development of farm structures in Portugal is no more unfavourable in classified areas than in non-classified areas.

9.33. It was established in a Commission study

that almost all the agricultural income in mountainous and less-favoured areas in the United Kingdom was made up of direct aid, and in particular the compensatory allowance. Therefore the payment of the compensatory allowance is a determining factor, even in the United Kingdom, for the maintenance of agricultural activities. Furthermore, compensatory allowances already existed in the United Kingdom prior to accession in the form of hill-farming subsidies.

9.34. The grant of the compensatory allowance is linked to the practice of agricultural activity. Recipients of a retirement pension are excluded from the scheme once they cease to farm.

In cases where farmers, in a country where there is no provision for a retirement pension, continue to exercise their profession, they do so in order to ensure their livelihood. Therefore the social objective of the measure is achieved in full. Furthermore, structural improvement is not permanently thwarted: it will be achieved somewhat later than in regions in which farmers can obtain a retirement pension.

9.35. The Commission stresses that the two situations mentioned by the Court are not comparable in any way.

Under set-aside, farmers lose income drawn from previous production, which justifies a premium amount higher than the compensatory allowance, which is intended only to compensate for the lower productivity of farms resulting from their natural handicaps.

In addition, Member States may request not to apply the set-aside scheme in areas where natural conditions or the risk of depopulation militate against reducing production.

9.36. The definition of a less-favoured area is based on the averages of several criteria. For this reason it may happen that in some parts or for some criteria the situation is less unfavourable. This explains the Court's findings.

Article 3(5) of Directive 75/268/EEC also allows areas in which the maintenance of agricultural activity is necessary in order to ensure the protection of the environment and the conservation of the countryside to be treated as less-favoured areas.

Conservation of the countryside

9.37. It is left to the Member States to decide on the conditions for the grant of the compensatory allowance linked to environmental protection requirements, because it is at this level that needs can best be assessed. However, it is important to remember that, like all national provisions for the application of Regulation (EEC) N° 797/85, these conditions are examined by the Commission and the Member States in the STAR Committee.

9.38. The natural afforestation which could result from the uncontrolled abandonment of agricultural activity could damage ecological diversity and the countryside and would not result in rational forestry.

In order to prevent the compensatory allowance from promoting intensive livestock farming methods, its grant is limited to 1.4 livestock units per hectare of fodder area.

Improvement of farmers' incomes

9.39. Community part-financing does not increase linearly as a function of the number of units held (livestock, hectares). An answer has already been given to the question of the adjustment of the amount of allowances in point 9.13. In addition, Community part-financing is limited to the equivalent of 120 units per farm.

9.40. Being able to benefit from the compensatory allowance in addition to the premiums granted under the common organizations of the markets makes it possible to compensate for the extra costs linked to agricultural activity in less-favoured areas.

9.41. One of the objectives of the compensatory allowance is to narrow the income gap between normal areas and less-favoured areas. As regards Germany, Commission data harmonized for all the Community referring to 1985

do not justify the conclusion that incomes are higher in less-favoured areas than in normal areas. On the contrary, the latest available index for the income of farmers and their families per man-work unit is 106 in normal areas and 89 in less-favoured areas.

CONCLUSIONS

9.42. The Commission does not share the Court's view on the flexibility left to the Member States in the administration and monitoring of the compensatory allowance. Furthermore, it considers the Member States' administration of this measure to be on the whole satisfactory.

In reply to the Court's recommendations its comments are as follows:

(a)The national provisions for the application of the compensatory allowance have already been approved by the Commission, which has ensured that they comply with Community rules. It will continue to pay attention to compliance in the event of any subsequent text amendments.

(b)The possibility of removing some areas from the Community list of less-favoured areas is already open to Member States, to which it will address a communication as indicated under point 9.22 (c).

(c)It is examining the expediency of laying down control standards in the wider context of the aid measures to be introduced following the reform of the common agricultural policy (see points 9.23-9.24).

(d)As indicated under point 9.24, it intends to promote the use of computerized methods in the Member States for the control and administration of the various aid schemes.

(e)It is keeping this measure under constant review to improve it, given that its multiple objectives have extended its field of application. Far from being a general aid measure, the compensatory allowance makes it possible to modulate the effects of aid granted by the EAGGF Guarantee Section.

9.43. The Commission points out that, in order to take account of the objectives of the reform of the structural Funds, Regulation (EEC) N° 797/85 has been amended, in particular on the following points:

- promotion of the diversification of farm activities,

- emphasis on the protection of the environment, farm hygiene and livestock welfare,

- increased aid for young entrants,

- restrictions on eligibility for the compensatory allowance in less-favoured areas.

CHAPTER 10 Loans, borrowings and interest-rate subsidies

INTRODUCTION

10.5. The Commission undertakes continual and close assessment of the level of risk to the Community budget related to the various loan operations guaranteed by the general budget.

Indeed, in view of the increased loans to third countries, the Commission has formally declared its intention to propose improvements in the budgetary procedure for these cases in the context of the renewal of the IIA. Moreover, the Commission will report twice-yearly on the situation concerning budget guarantees and the corresponding budgetary risks.

As far as New Community Instrument (NCI) and Euratom loans are concerned, each year the EIB informs the Commission of any risks of non-recovery. As in previous years, then, the EIB signalled that at 31 December 1990 none of the loans awarded under either instrument could be considered 'doubtful` for reasons of legal proceedings against borrowers or financial difficulties affecting them.

OBSERVATIONS ON THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS FOR THE NCI AND EURATOM MECHANISMS

10.9. In line with the Court's wishes, the Commission is working to improve its procedures and is also making an effort to adapt to new techniques on the financial markets subject to the limits imposed by its special status.

10.10 10.12. The Court's special report N° 3/90 putting forward recommendations regarding interest-rate subsidies was published in the Official Journal on 29 June 1990.

Since then, specific action has been taken to simplify matters, as urged by the Court, as regards both the number of subsidy payments made (reduced from 10 to 3) and the reports that have to be submitted by intermediaries and/or final beneficiaries (Court's recommendation (m) in Table 10.3).

The Court's other recommendations ((i) to (l) in Table 10.3) specifically relating to the management of interest-rate subsidies are being considered as part of the Commission's current reflections on the integration of ECSC loans into the reform of the structural Funds. The Commission would refer to its replies to the Court's observations in Chapter 4 of the report (Annex to the ECSC annual report 1990) on the accounting and financial management.

Observations arising from on-the-spot audits

10.18. The Court suggests that investment in a coal generating station could be considered in contradiction with the eligibility criteria for NCI loans of reducing dependence on imported energy since though reducing dependence on imports of petrol it increases dependence on imported coal. The Court also notes that imports of coal are from outside the Community.

These comments should be viewed in the context of Ireland's absence of known oil deposits or commercially viable coal deposits of any significant size, and its dependence on imported energy. The difference between these two sources of energy is that whereas coal is plentiful on the world market, without difficulties regarding supply, the availability and price of oil have both been volatile in the past. Excessive dependence on imported oil threatens the security of energy supply. In diversifying its energy resources from oil to coal this project therefore reduces dependence on imports of the more unreliable energy source and assures a greater security of energy supply.

Moreover, given that the primary objective of the project is to lower electricity generating costs in Ireland, importation of coal from the cheapest source of supply (whether from within or outside the Community) is essential from an economic point of view.

10.19. The Court suggests that though the project itself increased employment above what was forecast, the promoter reduced overall staff because of rationalization.

The Council Decision (78/870/EEC of 16 October 1978) speaks of attaining priority Community objectives in the various sectors, 'taking account inter alia of the regional impact of the projects and the need to combat unemployment`. This is a much broader concept than whether or not employment increased in the company. In reducing relatively high electricity generating costs, and thus charges to Irish industrial users, the competitiveness of Irish industry is improved, permitting increased employment creation. It is the overall impact on the economy which is relevant.

10.20 10.22. The Court notes that installed capacity was underutilized in consequence of optimistic demand forecasts.

The objective of the project was to provide more efficient and cheaper base load generating capacity, and its economic justification is recognized by the Court in paragraph 10.22. Minimization of the cost of producing electricity throughout the entire system is a more important economic objective than full utilization of older and less efficient generating units.

It is true that the promoter was optimistic about future demand trends, as were many other similar establishments in the Community prior to the second oil price shock of 1979-80.

10.24. The Court has indicated that it was unable to substantiate the integration of the project with an 'overall project of economic and industrial development`.

In Italy there was no formal overall development programme covering all aspects of regional development at the time. There was, however, a development strategy consisting of actions aimed at specific objectives. In this context the project can in fact be considered as part of an overall industrial and economic development initiative. The Italian State, through the Cassa per il Mezzogiorno, intervened essentially for infrastructure and infrastructural networks, but not for housing.

The NCI project was designed to provide low-cost housing principally for industrial workers. Each sub-project financed was located close to a new Cassa industrial zone, with the objective of complementing the contribution of these zones to economic development in various regions of the Mezzogiorno. During the appraisal it was ascertained that each of the sub-projects was justified both in the light of housing conditions and of the economic structure of the local economy concerned.

The promoters, a combination of public sector, private sector and the Italian cooperative movements, acted under the auspices of the Italian public authorities in bringing this project to fruition.

10.25. The aim of the Community project, which was to build 5 370 housing units, was met with room to spare. In fact, 5 453 units were built. The Commission regrets that construction under the responsibility of the Italian authorities, where the Commission and the EIB have no powers of control, was not as successful.

10.26 10.29. In practice, given the type of project involved, the 12.5% cost overrun and the delays were within reasonable limits. To put matters into perspective it should be borne in mind that between 1981 and 1989 housing construction costs in Italy approximately doubled, so that cost increase for this project was small by comparison.

10.32. The Commission takes the view that the tripartite agreement between the EIB, the Court of Auditors and the Commission has operated well initially. Discussions were held between the three institutions in September 1991 to improve practical implementation. These talks resulted in an agreement on arrangements for closer collaboration.

10.38. The Commission is willing to examine with the EIB the scope for expanding upon, where possible at the stage of decision-making on eligibility, information on expected performance of investment projects within the Community which are financed by future Community loan operations and managed on behalf of the Community by the EIB.

10.41. As noted with respect to paragraph 10.35 the Commission's examination relates to conformity with Community legislation and objectives and not only to the criteria given in Article 130. The examination already takes account, as has the EIB in revisions to its own eligibility criteria, of the Single European Act. As far as the reform of the structural Funds is concerned it has been agreed with the EIB that information should be supplied on each project which indicates whether it falls within a region covered by the structural Funds and which permits an examination of the scope for combined operations with the structural Funds. The EIB subjects all projects submitted to it to a rigorous economic and financial appraisal, covering where applicable expected employment creation, productivity increases, improvements in competitiveness, etc. Detailed information on these aspects cannot, however, always be verifed at the time decisions on project eligibility are taken. At that stage the Bank provides the Commission with the information then at its disposal, which is normally adequate to enable the Commission to take its decision. Where necessary, the Commission seeks additional information in order to be able to reach a decision on conformity with the provisions of Community policy, including notably Article 130 of the Treaty. The Commission discusses regularly with the Bank possible improvements in the data provided when the Article 21 procedure is launched. It is willing to explore with the Bank the usefulness and practicality of expanding, where appropriate and feasible, pre-appraisal information on expected performance, as suggested by the Court. The Commission doubts, however, the realism of trying systematically to provide an assessment in quantitative terms and in advance of the contribution of specific projects to particular Community policy objectives such as environmental improvement and protection, cohesion, competitiveness, etc. It should be emphasized in any case that following project completion the Bank produces detailed evaluation reports concentrating on the extent to which initial forecasts and policy objectives have been achieved. Reports on projects involving Community funds are made available to the Commission.

CONCLUSION

10.42. (b) The Commission would refer back to its reply to paragraph 10.9. It agrees with the Court on the importance of adapting its procedures.

(c and (d) The Commission would refer back to its reply to paragraphs 10.10-10.12. The Court's recommendations form an integral part of the Commission's current reflections on the integration of ECSC loans into the reform of the structural Funds.

10.43. (a (i) As indicated at paragraph 10.18, the Commission believes that the project has helped to increase the Community's security of energy supplies. Dependence on energy imports has been reduced in relative terms. From an economic point of view it was more efficient to create and operate new capacity, which explains the temporary under-utilization of existing capacity.

Besides the fact that the project created more jobs than planned, it should also be noted that by reducing what were relatively high electricity generating costs, it has enhanced the competitiveness of Irish industry, allowing higher job creation throughout the economy.

(a (ii) See the reply to paragraph 10.18.

(b) Because of the poor record of the projects outside the control of the EIB and the Commission, the knock-on effects were probably weaker than anticipated.

(c) As stated in reply to paragraph 10.32, there has been an agreement between the EIB, the Court of Auditors and the Commission on improving the arrangements for applying the tripartite agreement.

10.44. The Commission is willing to discuss with the EIB the scope for expanding upon the information supplied on expected performance of projects, where appropriate and feasible, in relation to both agency operations and investments supported by the EIB's own resource loans. Precise quantification, however, will often not be possible for many of the objectives involved.

CHAPTER 11 Research and energy

IMPLEMENTATION OF THE BUDGET

Verification of costs of research contracts

11.4 11.6. The actual duration of the audits carried out varies according to the quality of the contractor's accounting system, the documentation, the cooperation given to the auditors, and so on. This in turn affects the level of costs. Secondly, audits cannot be carried out until after the accounts for the financial year in question have been closed and until the costs have been accounted for and, where appropriate, balanced. The Commission has taken the necessary steps to reduce the overall period of time between the start of an audit and the submission of the final report.

The Commission shares the Court's view that simplifying the financial conditions applicable to shared-cost R& TD contracts would considerably facilitate the negotiation and management of such contracts and the verification of costs. A proposal for a fixed hourly rate is under examination.

DG XII intends, in line with the practice adopted by DG XIII, to increase the number of controls on costs relating to a single year, widening the scope of the audit if it reveals problems for the year in question. This method reduces costs and implementation times; it also has the advantage of enabling the audit to be carried out before the end of the research project, thereby facilitating any financial adjustments.

The reform of management structures undertaken by the Commission in DG XII and DG XIII in the field of control, as for all 'horizontal` services, involves the gradual introduction of unified procedures and a strengthening of the coordination that already exists, particularly through the exchange of information on current audits.

11.7. DG XII and DG XIII do use different computer systems for managing operations relating to projects, contracts and financing. While this is admittedly partly due to historical reasons, it is also a response to the specific features of the programmes and their management. The problem of compatibility between the systems only arises in terms of the convergence and consistency of the information which the systems produce for management. The joint Framework programme management information system (FPMIS) is being developed to address this problem. The Information systems managers (ISMs) in the two DGs are working closely together on the development of this system.

As Sincom is the only accounting system used by the Commission, and local systems are a basic component of its architecture, DG XII and DG XIII have always maintained compatibility with the Commission's central accounting system in the past.

The local systems for accounting and financial management are modules designed for day-to-day management, their aim being to improve departmental efficiency, on the one hand, and to supply data to the general accounting system, which is the official Commission system, on the other. The development of interfaces with Sincom therefore helps with data convergence, a process which is made easier by the gradual alignment of management procedures.

THE COURT'S OBSERVATIONS

Projects in progress

11.17. The Commission sees nothing unusual in the fact that more than half of the projects are still in progress one year after the closure of the programmes. The average duration of a contract is between five and seven years and contracts are concluded at different times during the four-year programme period.

The relatively long time-lag between the Commission's decision and the signing of the contracts is due to the fact that the technical annexes to the contracts, which differ in many cases from the initial proposal, have to be adapted to the provisions of the decision. Another reason is the need to consult the departments involved and to complete the financial procedures. In most cases, however, these delays do not interfere with the implementation of the projects inasmuch as the notification of the Commission decision constitutes the original legal undertaking enabling the successful tenderers to start work on the projects without waiting for the contracts to be signed. In 12 of the cases mentioned by the Court, the fact that these contracts had not been signed by the end of the programmes was due to difficulties during the negotiation of the technical annexes. There are still difficulties with four contracts.

The Commission feels that the Court's observations, based on an analysis of the projects completed at the end of 1990, should be considered in the context of a constantly evolving situation. There is not necessarily a correlation between the extent of market penetration by innovatory projects which have received Community support and the end of the contracts. In a good many cases, an additional period - which varies in length according to the individual case - is essential in order to gauge the full effect.

Abandoned projects

11.20. The form prepared by the Commission for submitting applications for Community support is a complex document which enables tenderers to check for themselves whether they have sufficient technical, economic and financial information at their disposal to submit the application and to enable the Commission to take its decision.

The Commission's departments themselves carry out an evaluation of the files, which are likewise evaluated by external consultants and by the Advisory Committee. There is therefore a three-tier evaluation process in which a large number of qualified experts are involved. The percentage of abandoned projects noted by the Court, without being excessive, is inherent in the nature of risk investment in innovatory projects.

11.21. The Commission has been endeavouring for a number of years to cancel committed appropriations as soon as the state of the files permits, i.e. some months after the unilateral cancellation by the Commission of its legal obligations.

Commercial exploitation

11.22. The criterion of commercial exploitation adopted as the determining criterion for evaluating the success of the programme, while undoubtedly valuable, should be handled with care.

By their nature, technological development projects in the hydrocarbons sector entail a technical or financial risk; hence their financing difficulties which provide the justification for Community support. Furthermore, at the application stage these are projects which merely offer a prospect of commercial viability and which have no guaranteed market.

Experience has shown that commercialization of results takes place within three to five years after the closure of a project; this period can be as long as eight years in a few exceptional cases. The extent of commercialization becomes a far more meaningful concept if it is applied to all projects since 1973, since this eliminates the time factor. In 1988, 65 of the projects supported since the beginning of the programme had reached the commercialization stage. This figure has now grown to 74, indicating that commercialization of the techniques developed is continuing. It should be noted that, in the case of projects receiving aid under the programme to which the report refers (1986-89), the number of examples of commercialization has increased slightly since the Court's review and several cases which are likely to have a favourable outcome are under discussion. This confirms how important it is to see the figures against the background of an evolving situation, in order to avoid drawing premature conclusions.

11.23. The Court observes that 'under the energy demonstration programme, 38 projects in all were regarded by the Commission as having totally achieved the stage of commercial exploitation`. It should also be said that these projects make up 38% of the completed projects (99). The Commission regards this as a remarkable percentage for a programme whose projects inevitably entail technical and economic risks.

The Court rightly points out that the Commission does not have sufficient information about whether projects which have been supported and successfully completed have served as a model for other projects. The Commission is evaluating this question as part of the Thermie programme.

11.24 11.25. The Commission feels that, in practice, it is extremely difficult to establish after the event whether or not a project would have been carried out without Community aid. Referring to the evidence put forward by the Court concerning 15 completed projects, the Commission would point out that:

(a)the short length of time needed to recoup the cost of investments is linked to the profitability of projects which, because of the financial risk involved, could not have been carried out without Community aid;

(b)the aid granted has acted as a catalyst for the implementation of projects. In a good many cases, by providing financial backing and a 'seal of approval` Community aid unlocks other non-Community aid or bank loans, and this multiplier effect is conducive to sound financial management (Article 2 of the Financial Regulation);

(c)while it is natural that the non-eligible part of a project should start in advance of the Commission decision, the same is not true of the eligible part (see reply to point 11.17);

(d)the Commission takes account of the multiplier effect of projects in its evaluation of submissions.

The three-tier evaluation process (see reply to point 11.20) allows a decision to be taken between inherently contradictory criteria, namely financing difficulties which justify support and prospects of economic viability which present the issue in terms of an investment. Clearly, a promoter would not wait a year (or even longer) for possible financial aid from the Commission for a project which was certain to succeed without Community aid.

Effects on competition

11.26. Under the Commission's operating procedures, the agreement of the Directorate-General for Competition (DG IV) is required prior to the decision to grant Community support in the energy sector.

11.27. (a) As stated at point 11.26, it is for DG IV to decide on aspects related to competition and on the compatibility of national government aid with Community law.

(b) In the case of national aid to research and development, the 50% maximum rate of aid applies to basic industrial research and not to fundamental research (OJ C 83, 10.4.1986, p. 2). Moreover, the rate of 25% is permitted for applied research and development.

In the energy sector the Commission is simply abiding by the rules which stipulate that aid may not exceed 40% of the total project cost. The Commission would stress that in the large majority of cases, even if the level of aid is at or close to the 40% mark, it is only the innovatory part of the project that is financed. This means that the actual level of aid granted is well below 40% of the total cost of the project.

As regards any additional aid which may come from the Member States, the Commission would stress that this aspect is taken into account in the decision-making process. In fact, the majority of the projects submitted did not have national financing secured at the decision-making stage. In accordance with the Community framework for State aids for research and development, higher aid levels than those generally permitted may be approved, including cases where the project is linked to a Community programme or where the results are widely disseminated. The additionality of the aid is one of the criteria which qualifies a project for the exception provided for in Article 92(3)(c) of the EEC Treaty authorizing a higher rate of aid compatible with the common market.

11.28. In most cases the Commission has deliberately opted to provide support at the maximum rates (35% or 40%, depending on the case) so as to ensure that a limited number of projects receive a substantial amount of aid rather than spreading the aid too thinly, thereby avoiding an increase in the number of abandoned projects referred to by the Court at point 11.20.

11.29. This is an isolated case which accounts for 0.2 of the programme budget. The Commission has taken steps to recover the ECU 100 000 paid to the contractor.

Coordination with the other Community programmes

11.30 11.31. In accordance with the Commission's operating procedures DG XVII consults the other DGs involved before proposing a decision. DG XVII is likewise consulted on projects under other Community programmes with which it is associated.

Coordination took place with DG XII for the programme of support for technological development in the hydrocarbons sector. All the project proposals received were sent to DG XII for scrutiny, while DG XVII gave its opinion on those submitted under the Joule programme. This made it possible to improve the technology evaluation and to rule out projects which were too far upstream. The Regulation 3639/85 Committee also had occasion to recommend that a project be transferred to the Joule programme with a favourable assessment. That transfer was carried out.

Moreover, the distinction between research activities and development activities is clearly not an easy one to make, a fact which the Regulation on support for technological development took into account. This explains why, in the case of a few projects, research activities may have been included in development activities. None the less, this is a minor aspect in terms of the programme as a whole and the Commission considers that this shortcoming is not in evidence to any marked extent in the majority of the projects at which the Court has directed this criticism.

11.32. Since 1986 DG XVII has played an active part in the preparation of the Cordis (Community R& D information system) project run by DG XIII-C. It was one of the first Directorates-General to supply information for this database, which now contains data on all the projects managed by DG XVII. Moreover, Cordis also contains synopses of every EUR report on demonstration projects published by the Office for Official Publications. Because of the scale of the programme and the need to disseminate the results, the Commission has developed the OPET network as part of the Thermie programme, in parallel with the Sprint and Value programmes.

Community value-added

11.33 11.34. In recent years the Commission has found that more and more projects are in fact being submitted jointly by undertakings from several Member States. Although this was not the case in the early days of these programmes, one-third of projects are now multinational, as the graph in Annex 2 clearly shows. Ad hoc measures have been taken under the Thermie Regulation to strengthen this Community element.

In the case of the Regulation on support for technological development in the hydrocarbons sector, the criterion that preference should be given to collaborative projects was applied, but under the terms of Article 4(4) of the Regulation this criterion was merely an adjunct to the criteria defining the nature of the project. Nevertheless, the trend has been favourable, as the table below shows.

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The right-hand figure in each case represents the number of cooperative projects involving oil companies.

11.35. This point only deals with Sesame, when in fact the dissemination of information on projects involves numerous other activities and publications. Apart from direct consultation of Sesame, some 3 000 requests for information catalogues describing energy demonstration and hydrocarbons projects have been answered. Data contained in Sesame are also sent out in response to requests from undertakings (averaging two per week).

Since 1989 the number of bodies exploiting Sesame commercially has quadrupled as the number of users has increased. The energy departments in the Member States now use Sesame when evaluating proposals for new projects in the energy technology sector.

11.36. It is highly unlikely that the results obtained through the hydrocarbons and energy demonstration programmes will go unnoticed in the various development activities in Europe, since the 'potential customers` for whom these programmes are intended are specifically targeted.

11.37. The fact that four Member States give national aid to technological research does not mean that they should be precluded from receiving Community aid. The subsidiarity principle dictates that Community support be allocated where it is most effective. Dissemination of results is not confined to each individual Member State but extends to the Community as a whole. Moreover, these programmes did not set out to correct regional imbalances, as was the case subsequently with the Thermie programme.

External evaluations

Report on the hydrocarbons programme

11.39. There is nothing unusual about the fact that no projects supported between 1975 and 1985 were exploited commercially between 1985 and 1988, the year in which the evaluation referred to by the Court was ordered by the Commission. This situation is explained by economic trends, including the fall in oil prices. Since 1988, there have been examples of commercial exploitation of these projects which, in fact, were supported under the regulation which preceded Regulation 3639/85. As the Smith-Rea evaluation report explains (p. 26), 'There is a considerable time delay before project commercialization can occur`. In fact 65 projects, representing 20% of completed projects, were commercialized during the period 1975-83.

In the Commission's opinion there is nothing to suggest that similar figures will not be achieved in years to come. As mentioned earlier, the development that is taking shape will take several years to reach its peak.

Report on the projects relating to energy saving and to renewable sources of energy

11.40 11.41. The Commission agrees with the Court's recommendations, which it has already taken into account to a large extent in the implementation of the Thermie programme.

11.42. The Commission intends to undertake targeted projects in 1991 and expects to step up this action in subsequent financial years.

THE THERMIE PROGRAMME OF 1990

11.43 11.45. In its assessment of the implementation of the new Thermie programme the Commission points out that this analysis was made six months after the formal adoption of the Regulation by the Council on 29 June 1990. In this new programme the Council and Parliament took the view that an initial report evaluating the results obtained and examining the compatibility between national and Community action (Article 17) should be drawn up by 17 July 1993, i.e. three years after the entry into force of the Thermie Regulation. This shows that the Community authorities appreciate the influence of a programme's duration on the evaluation of its results.

The Commission has implemented without delay a number of support measures, including market analyses, dissemination activities and, in particular, the setting up of a network of 35 bodies to promote energy technologies (OPET).

CONCLUSIONS

11.46. The Commission would like to elaborate on the Court's conclusions as follows:

(a)It is normal in the case of projects spanning several years that more than half of the projects should still be under way one year after the last decision taken under the programmes. This finding is not to be regarded as evidence of delays in implementation (see point 11.17). The percentage of abandoned projects noted by the Court, without being excessive, is an inherent feature of risk investment in the innovation process (see point 11.20 and Annex 1).

(b)The reference period chosen by the Court (1986-89) for its assessment is too recent to be a meaningful indicator of commercial success, since some projects may not achieve market penetration until several years after being completed. The evaluation of the results obtained in 1990 on projects completed between 1986 and 1989 is, in the Commission's opinion, premature and will not provide a true measure of the success of these programmes (see points 11.10 and 11.22).

The Commission has difficulty in accepting the premise that the commercial success of certain projects is unrelated to Community support. The evidence put forward by the Court is not conclusive in this regard (see points 11.24 and 11.25).

(c)The impact of subsidies on competition rules has been the subject of an interdepartmental study, which showed that the generally accepted 25% threshold for national aid to demonstration projects could be raised in the case of projects linked to a Community programme or where the results are widely disseminated. Additionality of support is one of the criteria for applying the exception in Article 92(3)(c) of the EEC Treaty (see point 11.26).

(d)The projects receiving Community aid under the hydrocarbons and energy demonstration programmes have been evaluated by comparison with the special Community research programmes in the energy sector, and the Commission has made the necessary transfers (see points 11.30 and 11.31).

Coordination with the other Community programmes is working properly. This coordination applies not only to the research programmes but also to other programmes such as Valoren, which covers a more limited area and pursues regional policy objectives (see points 11.30 and 11.31).

(e)Community value-added lies in the increase in cooperation between undertakings in different Member States, which in turn strengthens the industrial fabric and gives Community industry an edge over its competitors. Moreover, because of the scale of the funding requirements in certain technology sectors, it is essential that efforts be coordinated and implemented at Community level if this cannot be done in the Member States. Such are the objectives of the Thermie programme. It is important to emphasize that Community value-added is reflected not only in the dissemination of results at Community level but also in the implementation of projects which would not have materialized without Community support (see points 11.33 and 11.34 and Annex 2).

11.47. The Commission is continuing with the consolidation activities or support measures under the Thermie programme, and with the coordination of national energy policies. However, it has reservations about the scope for tightening up the project selection procedure, which it sees as offering sufficient guarantees taking into account the high-risk nature of the projects submitted for Community support.

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CHAPTER 12 Aid to the countries of Central and Eastern Europe

BUDGETARY IMPLEMENTATION

12.7 12.9. The pattern of commitments and disbursements observed by the Court does not necessarily allow the conclusion that there were delays in the implementation of programmes. The sequencing of commitments and disbursements is in fact typical for the programmes funded by Phare, where an initial commitment is followed by gradual disbursement in accordance with the schedule of implementation which varies from one operation to another.

In the case of 1990 activities, the fact that both commitments and payments tend to be concentrated towards the end of the year is the inevitable consequence of:

(a)the time necessary for proper appraisal and preparation of proposals, and

(b)the fact that the amendment to Council Regulation (EEC) 3906/89 admitting Czechoslovakia, Bulgaria, Romania, Yugoslavia and the German Democratic Republic was not adopted by Council until 17 September 1990.

OBSERVATIONS IN RESPECT OF THE VARIOUS TYPES OF AID

Subsidies

12.12. A framework agreement with Romania was concluded on 12 March 1991 at the time when Romania was deemed to have met the conditions necessary for access to Phare funds; these conditions were agreed between the Commission and the G24. For the USSR, a protocol containing the equivalent stipulations was signed in August 1991, three weeks after the Regulation covering technical assistance to the USSR was adopted by the Council. The Commission is at present examining whether the protocol can still cover the rapidly changing political situation in the USSR.

Description of the system of implementation

The multiplicity of programmes

12.18. When the Phare action commenced in January 1990 both parties recognized that they were launching a programme of assistance in respect of systemic and structural reform which was, in terms of both content and scale, totally unprecedented. Given the absolute obligation for the Commission to commit all funds before the end of 1990, the time available for reflection and planning was strictly limited. In addition, the processes by which the recipient countries selected the sectors and projects considered to be of national priority had not been fully developed (Article 3 of Regulation (EEC) N° 3906/89 obliges the Commission to take account of the priorities set by the recipient countries). In these circumstances it is clear that the consequence was a wider range of programmes than would have been ideal. This situation has since been restricted by the adoption by the Commission of a limited number of 'core activities` which formed the basis for programming in 1991: restructuring of public enterprises, modernization of financial services, promotion of the private sector, and development of the labour market and the social sector. The core areas are complemented by support in related sectors such as energy, environment, telecommunications, transport, health, housing and education.

12.19. The respective roles of delegations and headquarters have been developed and clarified. Delegations have been given detailed guidelines on their roles in the various phases of the programming and project cycle. The Commission is now testing how these guidelines are working in practice and will make further clarifications in the light of experience during programme implementation.

Consistent framework for the aid

12.21. Since 1991, the Commission and its partners have both adopted a two-year approach to programming, allowing more pragmatic and flexible use of Phare assistance, including improved coordination with other instruments and sources of aid.

State of progress of the programmes

12.25. (a) Various circumstances in 1990 were behind the storage of 20% of the plant health products delivered as observed by the Court:

- spring came very early (a month), which meant that some products arrived too late;

- even though the prices of the products were subsidized, they were still far higher than in previous years and were thus beyond the means of the users; this is because farmers' financial resources are very limited and borrowing costs are high. By contrast, during that period the prices of agricultural produce did not rise to the same extent;

- the Polish Government's distribution system was in the process of reorganization and did not always function satisfactorily.

In order to see the programme through, even subject to these constraints, the Commission took the following steps in April 1990:

- an independent monitoring mission was set up to pinpoint the shortcomings in the distribution system and to make recommendations for strengthening it;

- the Ministry of Agriculture was given aid to enable it to complete the technical assistance component of the programme, in particular the measures for the development of a new distribution network;

- a contract was concluded with Polish specialists to help the Polish Government organize an auction of the products in store in January and February 1991, after which all the stocks were disposed of on the terms approved by the Commission.

(b) The Commission will draw the attention of the Polish Government to the need to produce a report on the utilization of the pesticides, as required by the FAO's international code of conduct for distributing and utilizing pesticides.

(d) The Commission agrees with the Court that there must be a management and monitoring system covering more than just the delivery of the plant health products. However, it is convinced that it took all the necessary steps to set up this system, with due respect for the objectives of the programme as described in the financing agreement. The Commission concluded a contract on behalf of the Polish Government with the Foundation for the Development of Polish Agriculture (FDPA), which was assigned certain logistical and training functions (programme monitoring, training in the use of pesticides, operations for the development of the distribution network).

In addition, since April 1990 the Commission has had a contract with an independent bureau of consultants which should enhance the monitoring of the programme. This has involved the following:

- control of delivery dates;

- identification of reasons for any delays and/or errors or difficulties;

- description of the system for organizing sales to farmers, including on-the-spot inspections of a number of final recipients (private farmers, agricultural cooperatives, State farms);

- description of the method of collecting the counterpart funds created by FDPA;

- drafting of appropriate new proposals for improving the operation of the programme;

- check on irregularities to eliminate the risk of re-exports to third countries.

The various monitoring missions identified failings in the system so that they could be rapidly corrected. One thing revealed by the monitoring reports is that the physical receipt of the products by FDPA was satisfactory.

Counterpart funds

12.28 12.29. At the beginning of food deliveries in 1989, assessment of the needs was extremely difficult. The severity of the food supply situation in Poland was, however, demonstrated by empty stores all over the country. In the circumstances, an urgent decision on the delivery of food aid to Poland was necessary; this was taken in July 1989. However, when the Polish authorities approached the Community again in January 1990 for delivery of an additional 1 million tonnes of breadmaking wheat, since, in their view, the supply of bread was endangered, the Commission expressed its doubts to the Polish Government on the need for such a shipment. However, the then Prime Minister of Poland, Mr Mazowiecki, personally insisted that at least 500 000 tonnes were necessary. In response the Commission agreed to send another 300 000 tonnes.

12.30. The Commission has no evidence that any re-exports of products delivered as food aid or exports of comparable products from Poland took place. Indeed, even now, there exists an embargo on all exports of wheat from that country.

12.36. From the beginning, the principle determining the method of financing was that loans were provided to private farmers, and grants to public utilities (telephone, water and gas supply organizations). However, since the beginning of 1991, public utilities have also been financed through loans, and grants are no longer provided.

12.37. The Commission is currently preparing such an evaluation, and will present it to the Budgetary Authority.

12.38. Wherever a credit is cancelled, the decision is taken by the Board of the counterpart fund after consultation of the Commission. The Commission considers the criteria to be on the whole uniform and clear, in the sense that they only refer to serious unforeseeable events such as fire or the death of the beneficiary. However, a certain amount of subjectivity in such cases is inevitable.

The Commission and the Polish authorities have been very well aware of the shortcomings of the Bank for Food Economy, whose main advantage has been its extensive network of offices throughout the country. It is, however, expected that the Bank for Food Economy will shortly be replaced.

12.40. The Commission recalls that, according to the Memorandum of Understanding made on 30 October 1990 between the Polish Government and the Commission, the utilization and the management of the counterpart funds are the responsibility of the Polish Government. Under the decision procedure contained in the Memorandum, an indicative programme of counterpart funds utilization is required to be approved, in principle each year, by the Minister in charge of aid coordination and the Commission. The first such indicative programme remains to be finalized. One cause for the delay may be attributed to the change of ministerial responsibilities for aid coordination in the aftermath of the presidential elections at the end of 1990. The Polish authorities have been actively engaged in preparing options for the indicative programme. The Commission, for its part, has been kept informed and has impressed on the Polish authorities the need to finalize the programme and the corresponding management rules for the various types of chosen expenditure. In the interim, the funds have been placed on interest-bearing accounts.

12.41 12.42. As soon as the Commission's attention was drawn to the question of re-exports of pesticides, the Commission approached the Polish Government in September 1990 asking it to take steps to impose a ban.

The Commission also contacted the exporting firms in the Community and studied Community import statistics during the period in question. It was found that the re-exports were on a limited scale (around 350 tonnes of pesticides out of a total of 7 000 tonnes) and also that the products were not smuggled back into the Community but were cleared through customs. Following the contacts with the Polish authorities, measures were taken and this traffic was halted in November 1990.

There is to be an evaluation as part of a sectoral study on pesticides.

12.43. The Commission takes note of the Court's concern about coordination of the various financing instruments and will continue its efforts to improve coordination further.

Regarding coordination between Phare operations and the use of counterpart funds, the Commission refers to its reply to point 12.40. Coordination and complementarity will be assured by means of the annual 'indicative programme` for the use of counterpart funds. While a situation of complete transparency has not yet been reached, coordination with other G24 donors is already very active and is steadily being improved, especially by means of coordination 'in the field` (meetings of G24 representatives with Commission delegates and with visiting mission teams in the capitals). This includes coordination with the EIB, which is, of course, also taking place directly between Phare and the EIB through regular coordination meetings.

12.44. See reply to paragraph 12.36.

Loans: Community financial instruments

The Commission's medium-term loan to Hungary

12.50. The 1991 budget passed by Parliament does in fact provide a guarantee for the second instalment of the loan to Hungary. However, in the version published the necessary adjustment to Article B0-210 was not made, only the remarks being amended. A corrigendum is to be published shortly.

Loans from the EIB's own resources to Hungary and Poland

12.51. The amount of the risk mentioned by the Court tallies with the Commission's estimate.

Loans from ECSC resources to Hungary and Poland

12.53. The Commission considers that the main reasons for non-disbursement of ECSC loans in 1990 include the following:

- The Polish and Hungarian Governments' delay in drawing up overall and sectoral plans of government priorities and the consequent difficulty for the Commission of appraising projects in sectors which will need complete restructuring.

- Changes in internal procedures, personnel, law and policies in the countries concerned.

- The necessity at that time for a joint venture for industrial projects in the coal and steel sectors.

- European companies' reluctance to commit themselves to joint ventures at an early stage in the coal and steel sectors.

- The fact that infrastructure projects using Commmunity steel are generally large and very expensive and require long periods of planning involving detailed feasibility studies and government approval.

The Commission has subsequently proposed an amendment to the rules which would have the effect of removing the joint venture requirement for industrial projects in the coal and steel sectors.

COORDINATION OF THE GROUP OF 24 OECD DONOR COUNTRIES

12.55. In the field of medium-term financial support for the balance of payments of the countries of Central and Eastern Europe, the Commission plays an active coordination role within G24. The authorities of the recipient countries are well aware of this role and appreciate it greatly. The Commission is none the less looking at ways of directly informing the sectors concerned and the national media in the recipient countries about its action. One planned move is to have Community loans for the Central and East European countries signed in the capitals of these countries rather than in Brussels.

12.57. The Commission is already establishing a data base to serve as an information system for all G24 members on their respective activities, on a project-by-project basis. This system will facilitate coordination and increase transparency.

OBSERVATIONS COMMON TO THE VARIOUS TYPES OF AID

Capacity to absorb the aid

12.61. Regarding delays, the Commission refers to the general comments made on paragraphs 12.7-12.9.

The 1990 environment sector programme for Hungary was based on the recommendations from a G24 environmental fact-finding mission visiting Hungary early in 1990 for only one week. Due to the urgent political wish to start up activities, the project was initially not very well defined. In order to ensure effective utilization of the Phare funds it has since been necessary to redefine and further concentrate the project in line with newly emerging government policies before implementation could start.

This has been further complicated by changing priorities for environmental management in Hungary, and personnel and organizational changes in the Ministry of the Environment.

As to the agricultural credit line for Poland, it had been agreed at the request of the Polish authorities to set up the line with the Polish agricultural cooperative banks, which are presently being restructured.

The ongoing restructuring is supported by Phare and by the World Bank but has not yet reached a stage where the use of these funds for investments in the agriculture and food processing sectors is possible.

12.63. The absorptive capacity for technical and other assistance is a major factor covering the rhythm of commitments and payments. Recognizing this, the Commission has engaged a team of experts to work within recipient ministries to help elaborate proposals and manage the implementation of projects.

Structural adjustment and sectoral investment approach

12.67 12.71. The Commission has taken note of the points made by the Court concerning the objectives of Community aid. They are without doubt an interesting addition to the ideas of its own departments. Whenever the need arises, new priorities are set and the objectives of this aid are adjusted by the political authorities of the Community in conjunction with the other G24 members and the recipient countries concerned.

Performance criteria

12.72 12.73. The Commission shares the views of the Court regarding the importance of incorporating evaluation criteria to enable monitoring of programmes. A formal system of identifying criteria for automatic monitoring and assessment of projects has now commenced. It is based on the logical framework approach and will integrate appraisal and evaluation criteria, so that project progress and impact can be checked against the original objectives and targets.

GENERAL CONCLUSION

12.76. See replies to paragraphs 12.18 and 12.63.

12.77. While the Commission agrees that in the initial two to three years Phare assistance should be concentrated on technical assistance, and has adopted this approach, it notes that by the end of 1991 most countries will have a Phare-financed programme of technical assistance covering the major reform areas for three to four years ahead. It will be necessary therefore to develop other forms of assistance (credit lines, risk-capital finance support, etc.) for 1993 and beyond.

12.78. The Commission shares the view that a banking system which functions well is essential. This is reflected by the choice of the financial sector as one of the 'core areas` as from 1991 (see comment on paragraphs 12.18-12.21). Financial sector reform programmes are being financed or are planned in all Phare recipient countries.

12.80. As indicated in its reply to paragraph 12.21, the Commission has now adopted two-year programming, which will enable improved coordination of the various sources of aid.

CHAPTER 13 Cooperation with developing countries

JOINT FINANCING WITH NON-GOVERNMENTAL ORGANIZATIONS

Observations on the joint financing with the NGOs

Eligibility of the NGOs

13.16. (a) If the Commission acted in this way with regard to the four Iberian NGOs, in order to help Spanish and Portuguese NGOs get off the ground, it did so in the conviction that it was acting in accordance with the General Conditions (Chapter I, Articles 1 and 2). The Commission considered that these distinguished between obligatory conditions for eligibility (Chapter I, Article 1) and additional, non-obligatory criteria for appraisal, which were of a more qualitative nature (Chapter I, Article 2). The introductory paragraphs to these Articles and the fact that there were two Articles seemed clear on this point. Since opinions on this matter have differed, the General Conditions should be made clearer on this point.

This did not prevent the Commission from monitoring the management of these NGOs' projects in the same way as those of other NGOs. In this respect, the Commission would point out that it has ensured that the Court's fundamental observations with regard to their management have been followed up.

(b) This Danish NGO is legally separate from the associated solidarity movement.

They broadly overlap in terms of personnel, resources, etc. However, the NGO was created quite openly and was presented to the Commission as being indispensable in order to comply with the relevant Danish legislation.

None the less, the Commission will in future examine similar cases more closely, particularly with regard to the main point, i.e. the NGO's real financial autonomy and decision-making power vis-à-vis the movement which inspired it.

(c) The four Dutch NGOs were accorded this treatment because it was necessary to take account of decisions taken by the Member State concerned, without which these NGOs could not have participated in the Community mechanism for projects in developing countries. Not to do so would have meant financing almost no Dutch NGOs' projects. It was partly for this reason that Article 19.1 of the General Conditions sets out the principle of a 15% contribution 'as a rule`, as the Court notes at the start of point 13.18.

The NGOs' financial contribution to the projects

13.18. While it is true that in principle, under the old General Conditions, an NGO's own financial contribution had to represent at least 15% of the total cost, the revised General Conditions which entered into force on 1 January 1988 are more precise and Article 19.1 now states as follows: 'As a rule, the NGO presenting the application must contribute at least 15% of the direct costs from private European funding.` This funding may, for example, be provided by another European NGO.

It is true that in the cases cited by the Court in paragraphs (a), (b) and (c), subject to the following remarks, the Commission was unable to check all the factors which would enable it to determine precisely the NGO's contribution.

(b) The valuation of the human and material resources contributed to the project by the NGO is permitted under Article 19.1 of the General Conditions. Nevertheless, the Court is right to point out that it found certain failings in calculating the value of the contributions.

This will be taken into account.

With regard to point 13.18.(b), last sentence, the current General Conditions do not require NGOs to keep analytical accounts, but the problem of proper accounting merits attention.

(c) With regard to the German NGO, Commission officials decided in 1985 to treat it in the same way as the Dutch NGOs referred to in point 13.16.(c) because of the distribution of financial resources and responsibilities within the group of NGOs linked to the Evangelical Church; 15% of the funds managed by this NGO come from the Church, the rest from the government. For this reason, this NGO does not call on additional private funding for individual projects.

13.19. Since 1988, Article 3 of the General Conditions has excluded only those NGOs acting as intermediaries who do not contribute towards financing and have no influence in the execution of the projects. The underlying principle is to allow experienced NGOs to help new NGOs get off the ground. The Commission sees to it that at least one of these conditions is fulfilled, in accordance with the General Conditions.

13.20. The Commission is already trying to solve these problems. It notes with interest the Court's suggestion that it should stop estimating the NGOs' non-financial contributions, which would tackle the problem at the roots, and perhaps provide compensation for the NGOs.

This question will be discussed in the review of management procedures, including the General Conditions, which is currently under way (see below, 13.56 et seq.).

Observations on the management by the NGOs

Payment of funds to local partners

13.23. The Commission agrees with the Court's obser- vation. It accepts the recommendation and will put it into practice.

Remuneration on Community funds

13.25 13.27. The General Conditions do not specify the NGOs' obligations with regard to the remunerative investment of Community funds entrusted to them. They only provide for any interest accumulating when the funds are with the NGO to be either passed on to the project or paid back. Moreover, in some cases the progress of the project in the developing country inevitably means that funds are held by the European NGO for longer periods than could have been foreseen.

With regard to the last sentence of point 13.27, the Commission wishes to point out that increasingly, where necessary, it checks up on the interval between the NGO's receipt and payment of the funds and if need be reminds the NGO of its responsibilities in terms of proper financial management and its consequent obligations. It will continue to draw the NGOs' attention to this matter.

In future it expects the revised General Conditions to contain detailed provisions on the management of and interest derived from Community funds.

Implementation and financial management by the NGOs

13.28. The Commission regularly monitors the management abilities of the NGOs. It continually urges its partners to improve their management tools further, as a way of gradually increasing their professionalism as well as for the reasons recommended by the Court. In particular it tries to encourage and assist relatively inexperienced NGOs which have interesting projects, so as not to restrict unduly the number of NGOs which benefit from the system.

13.29. To illustrate this point, the Court has selected a quite exceptional case, that of the British NGO War on Want. This was a rare case of an NGO going bankrupt (without there being any question of fraudulent bank- ruptcy) through concentrating too much on its development operations at the expense of its financial management. This took not only the Commission by surprise, but also the public and other providers of funds including the British Government. Having access to project implementation reports would not have made any difference to its knowledge of the NGO's overall financial situation. The projects financed jointly with War on Want have been taken over in an orderly manner by other NGOs, which have committed themselves to their completion, so as to avoid their beneficiaries in the Third World losing out through this quite extraordinary occurrence.

At the Commission's request, the NGO provided all the necessary information in 1990-91. The Commission took all the appropriate steps to avoid any losses; it is unlikely that there will be any. It has kept the Court informed.

Financial implementation of the projects

13.30 13.33. The Commission fully shares the Court's concern regarding the need for NGOs to keep orderly and clear accounts.

It continually urges its partners to become more professional and in particular to keep separate accounts for each project. It considers that the situation has improved since the entry into force in 1988 of the new General Conditions, which are much more precise and which particularly emphasize the points made above.

The Commission suspended the joint financing of new projects with certain NGOs until their accounts were in order, and it will continue to do so. The overhaul of their accounts was checked by audit firms.

13.35. The Commission will take these recommendations into account in its current review of the system of joint financing.

Reports supplied by the NGOs

13.37 13.40. The Court's observation wholly co- incides with the Commission's concern and regular attempts to ensure that the NGOs supply the various reports required on time. However, in the experience of both the Commission and the Member States, it is often difficult to obtain the reports within the time limit (this varies greatly from one NGO to another). While it is to some extent understandable that NGOs give higher priority to their work in the field, this is an important matter, particularly in the light of the Court's conclusions from point 13.55 onwards and the Commission's comments on these.

The Commission continually seeks to improve monitoring and to obtain the required reports sooner. In some cases it has been forced to suspend cooperation with certain NGOs while they sort themselves out. It has also done this in response to other management failings by NGOs.

Nevertheless, the Commission would point out that if a report is not submitted or is late it does not necessarily mean, by any means, that the jointly financed project has failed. Here, and more generally, the Commission would refer to its closing comments on this chapter.

13.40. In our experience, systematically requiring operational reports was not justified: it imposed an extra burden on NGOs, often for no real purpose. Such reports have no longer been required for all projects since the General Conditions were revised. However, there is still provision for requiring operational reports where they might be useful, and the Commission does make use of this provision. It could certainly make better use of it, and will draw attention to this matter. The other solution to this problem lies in the evaluation exercises which have been emphasized since 1988 and which will be stepped up.

Observations on the Commission's management

Appraisal of files

Information available

13.42 13.43. The Commission would point out that an NGO's financial record should be evident from the 'NGO file` (set out in Annex 1 of the General Conditions) which the NGO is required to update each time it presents a project.

As for keeping a 'summary data-sheet` for each NGO, such a data-sheet exists but is admittedly under-used because of the lack of available resources in the department. In addition, the performance of each NGO is regularly assessed by the manager responsible for monitoring it.

It is difficult to make more stringent demands, because there are limits to what can be expected of the Commission in terms of checking on the financial situation of NGOs, and it is desirable to limit the administrative burden on NGOs to what is strictly necessary.

Prior analysis of projects

13.44 13.46. The NGOs unit sometimes has to overrule these opinions, when they are quite clearly ill-founded. In most cases, the opinions are discussed with the NGO; the project is accepted when the NGO has provided an explanation or made changes as necessary. The unit now systematically gives reasons for any decision to overrule, even (and this has been the case for some time) when the reasons are obvious. The opinions, the comments on them and the outcome are always incorporated in the file on each project.

Financial Control's approval is given after all the information referred to above has been examined, and after supplementary information has been obtained from the NGO unit if necessary.

Appraisal times

13.47. Although, within limits, some accommodation to change is possible within available resources, this cannot go on indefinitely and it cannot be done at the expense of the quality of management and monitoring demanded by the Court itself.

Unfortunately, the workload is increasing all the time, while the Commission's management staff has remained practically unchanged. Indeed, between 1980 and 1990, the number of new loans committed each year per manager increased fourfold and the total number of commitments (all requiring control, monitoring, etc.) by a factor of 7.7. However, while average appraisal times did deteriorate temporarily, particularly in 1988, the situation stabilized and even improved somewhat in 1989-90.

As for the fact that projects are carried over from one year to another, this is done within reasonable limits. The present system allows the appraisal of files to be rolled over and financing to be agreed as and when possible. The Commission and the NGOs prefer this method to a system in which requests which cannot be financed immediately because of the limits of the annual budget must be rejected altogether.

With regard to computerizing the NGO unit, the Commission at last received the resources to conduct a study, but had to reject the first report received and recently began the operation again with a different firm.

It is true that there are numerous exchanges of letters between the Commission and the NGOs, but this is hardly caused by a lack of precision in the General Conditions as most NGOs, even the new ones, have few problems with these.

Monitoring of implementation and checking

13.49 13.50. See comments on point 13.37 (the Commission's efforts to obtain the reports required and the measures taken to this end), and points 13.56 and 13.57, which explain how the Commission intends to review its management goals and methods.

13.52. The Commission's resources are indeed insufficient.

Conclusion

13.55. The Commission registers its agreement with these observations, which it entirely shares.

13.56 13.58. The Commission shares the Court's opinion that, because of the problems encountered and the growth in the funds to be managed, the management emphasis should be shifted from the prior study of individual files to monitoring and evaluating projects.

In general, the Commission appreciates the fact that the Court has tried to take into account the rapid and substantial growth in the number of projects and NGOs involved in joint financing, administered by the same number of staff, and to propose solutions aimed at streamlining and improving this administration.

The Commission considers it essential to recall here that NGOs have their own way of working, based on small projects aimed at grassroots development, partly relying on volunteers and at all events conducted in conditions very different from those obtaining in large public administrations or private companies. While it is vital that they provide proper management, the rules of joint financing must nevertheless take account of these factors and must not seek to turn NGOs into something they are not.

With regard to the review of management goals and rules, the Commission departments have already begun considering and examining this, focusing on two areas:

- examination and incorporation of proposals for improving management procedures, within the framework of existing principles and objectives, from its own managers, from Financial Control or the recipient NGOs, and now also the Court of Auditors;

- project reforms required by fundamental changes in developing countries, in approaches to development and in the guiding principles of the NGOs, particularly with regard to the growing and increasingly well-organized role of grass roots organizations in the developing countries.

This exercise will have to be completed in stages: some improvements can be rapidly made within the existing rules, others will have to await the results of the evaluations of jointly financed projects (which the Commission intends to launch on a wider scale shortly, in addition to the selective evaluation of projects currently in progress), and still others will represent fundamental shifts in direction. In some areas, measures have already been taken to solve the problems raised by the Court (see in particular the comments concerning points 13.33 and 13.37).

The procedure to be followed by the Commission in conducting this review of NGO joint financing is as follows. It has begun an internal examination (while taking account of external suggestions - see above) of management methods, with a view to changes which could be made within the existing General Conditions. It is also launching evaluation exercises by sector and by problem, within the limits of the budgetary resources available in 1991 and 1992. Lastly, it has also started the process of revising certain provisions of the General Conditions; this work should be brought to a conclusion in the course of 1992, with a view to their entry into force in 1993.

The whole exercise will be conducted in close consultation with the NGOs, which will offer their own suggestions and ideas.

13.59. With regard to the last sentence, see comments on points 13.33 and 13.37.

FINAL REMARK

The Commission accepts the substance of some of the Court's criticisms of management weaknesses. It intends, as stated in points 13.56-13.58, to introduce changes aimed at improving management. None the less, it would emphasize that these criticisms do not cast doubt on the quality and success of joint financing projects as a whole. It remains convinced that the NGO projects and the existing system of joint financing are eminently positive for the development of developing countries. In effect, the mechanism of NGO joint financing allows original, high-quality and very often successful projects to be produced with the limited human and financial resources of the NGOs.

CHAPTER 14 The European Development Funds

INTRODUCTION

14.2 14.3. The Commission plays an active part in meetings of development aid donors, the aim of which is to harmonize the financial and accounting requirements imposed on the recipient countries by donors.

The Commission considers this a necessary exercise, although the desired objective is ambitious. The expected results should assure donors of the reliability and proper use of the funds granted, and at the same time standardize their accounting requirements.

EXECUTION OF THE EDFs UP TO 31 DECEMBER 1990

Financial statements

14.6. There are three categories of sectoral import programmes (SIPs). Firstly, there are SIPs within the special debt programme and those outside that programme. Secondly, within the special debt programme, there are SIPs funded from additional resources decided by the Council, and those funded from programmable aid - the national indicative programmes.

The situation of decisions at 31 December 1990 was as follows:

>TABLE>

As the accounts are classified by source of funding, those SIPs under 1 above are shown separately, but SIPs under 2 and 3 must be included in the programmable aid under the national indicative programmes. Nevertheless, for internal purposes, they are identifiable within those indicative programmes by means of statistical codes allotted to them.

14.7. The figures quoted by the Court relate to payments already made by the ACP delegations, usually in the local currency, which had been registered on suspense accounts by the DG VIII accounting unit in Brussels, but not yet formally passed by the DG VIII authorization unit and Financial Control for final inclusion in the accounts. Although the figure at the end of 1990 is a useful indicator of the increasing work burden on staff in the authorization unit and in Financial Control, it should be borne in mind that the total of uncleared local payments at the end of 1990 represents only 7% of the total payments authorized during the year.

14.8. In order to improve its information on, and control over, counterpart funds in local currency held in ACP States, a circular note was issued on 14 March 1991 to all ACP delegations on the principles of utilization, modalities of constitution and financial management of counterpart funds, including standardized formats for the reporting of these accounts to the Commission's central services.

Copies of these notes have been sent to the Court.

Outstanding commitments as at 31 December 1990

14.10. A check carried out by the EIB of fifth EDF statistics shows that for interest subsidies only two loans had not been closed at the end of 1990 and that for risk capital operations only 12 projects are being carried out.

This situation was not reflected in the official accounts to 31 December 1990, as several projects which had been completed by the EIB had not been formally closed.

A review of the conformity of the EDF accounts with EIB records is now being undertaken, to ensure that all closed projects have been duly registered as such.

14.11. With regard to the sixth EDF, the rate of payment for operations managed by the EIB is slightly slower than for the fifth EDF. At 31 December 1990 payments represented ECU 224 million or 33% of commitments in the form of own resources loans and ECU 215 million or 40% of commitments in the form of risk capital operations. This rate is none the less comparable to that of other financial institutions.

The main reason for this situation is the adverse economic and financial climate obtaining in the last few years in the recipient countries, which does not make quicker payment any easier.

Also, in many cases the EIB co-finances projects with other institutions and it cannot always avoid the legal and technical constraints of this type of operation.

Nevertheless, as stated in point 14.10 above, the number of open contracts in the EDF accounts at 31 December 1990 is not so much a result of delays in the real implementation of EIB projects, but simply delays in reflecting the real situation in the accounts. This situation is being rectified by a comparison of EIB records with the EDF accounts.

CLOSURE OF THE FOURTH EDF

14.14. It should be noted that most of the cases mentioned are relatively small programmes in which the blockage of a single project can have a major effect in percentage terms on the disbursement of the programme as a whole.

14.15. Practical implementation of the rehabilitation and revival plan was completed well before 31 December 1990. The few projects remaining open in the fourth EDF had to be transferred to the sixth EDF pending clearance of certain advances not yet fully justified by supporting documents.

14.16. Expenditure has now ceased in all of the 10 programmes mentioned, which are only awaiting final supporting documents from the delegations concerned before closure, which will take place shortly.

All 18 of the projects for which there were no disbursements in 1989 or 1990 were reviewed before the end of 1990, but could not be closed mainly because of uncleared advances.

EDF-FINANCED OPERATIONS OUTSIDE PROGRAMMES AND PROJECTS

ACP General Secretariat

Financing Agreements

14.18. Although the Financing Agreement does not mention the number of experts, the financing proposal presented to the Member States included the number of posts financed (28, of which 26 filled) and every month the ACP Secretariat provides the Commission with a complete list of the experts employed and their salaries. This list backs up the monthly request for reimbursement presented to the Commission.

In addition, each time a new expert is taken on, a copy of his contract is sent to the Commission with the first request for reimbursement concerning him. The contract states his functions clearly.

The next Financing Agreement to be concluded under Lomé IV will, however, take account of the experience of previous agreements.

The ACP Secretariat draws up an annual budget which is approved by the Council of ACP Ministers. It provides for all the expenditure connected with experts' work, the financing of which is covered by the Convention. This expenditure includes, in addition to that connected with the terms of employment of the Secretariat's experts, mission expenses, including experts' participation in general meetings of the Council of ACP Ministers and the Joint Assembly. This expenditure varies between 40 and 45% of the Secretariat's overall budget. The budget also provides for expenditure connected with the work of the other members of staff, administrative expenses and the cost of equipment. This expenditure, which varies between 55 and 60% of the budget, is financed by contributions from the ACP States.

The Secretariat has sent its budgets for the financial years 1989 and 1990 and its audit reports for 1986 to 1989 to the Commission. The audit for the financial year 1990 is under way.

The Commission has the experts' contracts and they have been available to the Court since July this year.

Expenditure to be covered by ACP States

14.19. Before the financing proposal for the period 1988-90 was presented to the Member States, the Commission received from the ACP Secretariat a detailed cost estimate covering the three years, giving details of the various items which were proposed for financing by the Commission. After discussion, these were accepted by the Commission as the proportion of the ACP Secretariat's total budget financed by the EDF was still under 50%.

The Secretariat's budget approved by the Council of ACP Ministers takes account of the Community declaration on Protocol 2 (Annex L), which is as follows:

'Having noted the request by the ACP States concerning a financial contribution towards the operating expenditure of their Secretariat, the Community, in the spirit of the relevant undertaking made at the second meeting of the ACP-EEC Council of Ministers in Fiji, states its readiness to examine with particular attention the specific requests to be made to it in due course with a view to enabling the Secretariat to avail itself of such personnel as may appear necessary.`

All of the items at (a) to (d) were included in the original cost estimate sent to the Commission by the ACP Secretariat. The telefax machine was specifically required for the Lomé IV negotiations, and the external audit was included under the heading 'consultants`. This audit is required annually by the financial regulation of the ACP Secretariat, and includes expenditure not financed by the EDF.

Nevertheless, when the Court requested the document, it was provided voluntarily by the ACP Secretariat.

It was not considered necessary at the time of the preparation of the Financing Agreement to include therein the details of the three-year budget, as both sides understood clearly the scope and limits of the financing, and felt able to continue together in a climate of mutual trust.

Nevertheless, the next Financing Agreement within the framework of the Lomé IV Convention will be more precise in this respect, as mentioned in the previous paragraph.

Uncleared advances

14.20. It is true that the Commission provided the Secretariat with an advance of ECU 19 million, which corresponds to about three months' expenses. It is used as working capital, in other words to cover expenditure connected with the work of the Secretariat's experts and consultants. This expenditure is then submitted to the Commission for reimbursement. The advance is reconstituted every month when the Secretariat's expenses are reimbursed by the Commission.

It is not included as a recoverable item in the EDF balance sheet as it is already shown as an uncleared advance at project level. Inclusion in the balance sheet would of course be possible, but then the project advance would have to be cleared.

As regards the second advance of BFR 8.5 million, this represented an advance of salaries for the months of July and August 1985 which was paid in June 1985. The clearance of this temporary advance has been overlooked, but this is now being rectified as supporting documents were received in September 1991.

1989-90 expenditure

14.21. According to Article 12 of the ACP Secretariat's Staff Regulations its staff's mandate should, wherever possible, last as long as the Convention.

At least three months before the end of each contract the appointing authority informs the member of staff of its intention to renew or extend the contract.

The second part of this Article shows clearly that it was not the Council of Ministers' intention to limit the length of its staff's mandate to the lifetime of a single Convention. Just as the Convention is renewable, so are the staff's contracts. This is particularly the case of the two experts who left the Secretariat after more than 12 and 16 years' service respectively.

Article 39 of the Staff Regulations states that unused annual leave in excess of 60 days cannot be carried over. The two employees had accumulated more than 60 days' leave. They were paid because they were at the end of their contracts and because it was not possible, due to service requirements, to give them all their leave owing. The Committee of ACP Ambassadors was none the less informed of the situation and confirmed the payments.

The amounts paid to the two experts were worked out on the basis of the scale adopted by the Council of Ministers.

14.22 14.23. At the 49th meeting of the Council of Ministers, held in Lomé (Togo) on 14 December 1989, it was decided that these two experts should retire on 28 February 1990 and that, on an exceptional basis, a six-month temporary contract, renewable once for a further six months, should be given to each of them.

From 1 March 1990 these two experts were no longer permanent members of the Secretariat's staff. All their entitlements connected with their previous service therefore had to be settled, including repatriation costs in accordance with the rules of procedure then in force. These rules no longer apply. The temporary contracts granted to these experts expired on 28 February 1991 and they are no longer in the employment of the ACP Secretariat.

The ACP Secretariat accepts that in future repatriation costs should only be payable when evidence of the removal has been presented.

14.24. The contracts of the three employees in question expired on 30 June 1990. All their previous entitlements were settled. Subsequently, new contracts were given to these experts starting on 1 August, 17 August and 1 September respectively.

The sum of ECU 52 000 was paid for duly approved overtime which, in accordance with the rules of procedure in force, gave rise to additional leave. This unused leave had to be paid for at the end of the contract.

14.25. (a) A brief description of the system in force for approving and checking missions is needed in order to understand the situation better.

When it is decided that the Secretariat should attend a meeting outside Brussels, the following steps are taken:

(1)The employee chosen for the mission fills in the mission request form on which he indicates the purpose of the mission, its length and the estimated cost (daily allowances and return travel costs). The details of the mission are usually attached to the form.

(2)When the request is approved by the authorizing officer, the original of the form is sent to the accounting unit, which commits the expenditure (daily allowances plus travel expenses) and then pays the daily allowances on the basis of the number of days approved.

A copy of the form is given to the administrative department so that an order form can be drawn up for the travel tickets. On the order form economy class tickets are always requested for experts.

(3)When the expert returns from the mission he must give his ticket voucher to the accounting unit.

(4)When the accounting unit receives the travel agency's invoice, it checks that it tallies with the order form and then settles it.

(b) In future, for mission travel expenses, the Secretariat will provide, in addition to travel agency bills, the order form and the used ticket voucher.

(c (d) Whilst fully agreeing with the Court on the need to ensure compliance with the principle of economy, the Commission is prepared to reimburse air tickets up to the value of the full-fare economy class, even though this is considered by many airlines to be equivalent to business class on certain flights, especially within Europe. This is acceptable because the various cheaper alternative tickets impose restrictions particularly on dates of travel, which can lead to the loss of the entire ticket when dates of meetings are changed.

14.26. The sum of BFR 185 285 paid to an expert in December 1989 represented compensation for 12 days of unused annual leave and 32 days of compensatory leave. The expert was at the end of his contract. The Commission was provided with the supporting documents in June this year.

14.27. The Secretariat draws up and regularly updates the list of schools attended by its staff's dependent children. The Secretariat receives information direct from these schools about the official cost of school fees.

When staff claim for payment or reimbursement of fees, the Secretariat compares the amounts claimed with the information previously provided by the schools in question.

With regard to these amounts, in November 1990 the Council of ACP Ministers decided to set ceilings per child ranging from BFR 128 000 to BFR 275 000 depending on the level. This decision will come into force from the 1992-93 school year.

14.28. It is true that one of the receipts was in the name of the child's guardian in Kenya, but the ACP Secretariat has verified with the school that the fees reimbursed in respect of the child have indeed been charged by the school for that child.

Control by the Commission

14.29. As the Commission has already explained in its replies to the Court of Auditors for the financial year 1989 (points 14.26 to 14.28), the vast majority of Financial Control's comments are recorded by controllers on standardized forms which are sent with the disputed dossier to the authorizing officer and returned to the controllers with replies. Copies of these replies have been in the possession of the authorization unit since mid-1991.

The Commission can provide the Court with copies of the comments made in 1989 and 1990 by Financial Control on the accounts submitted by the ACP Secretariat.

These comments, which also tie in with some of the questions raised by the Court, mainly concerned:

- the need to improve the presentation of supporting documents;

- the payment of unused leave;

- school fees.

In each case Financial Control did not give its approval until explanations had been provided by the authorizing department.

In the Commission's opinion, these interventions by Financial Control demonstrate how well internal control works in this area. The Commission would also point out to the Court that the very nature of the costs reimbursed to the ACP Secretariat (numerous expenses of a relatively modest unit cost) means that Financial Control has to use spot check methods.

As the validity of the discharge was not contested at the time of the payments, the accounting officer for the EDF had no particular reason to suspend payment.

The Court's comment on the lack of separation of functions of the authorizing and accounting officer does not in this case have relevance; the Commission services are however making arrangements for the transfer of the accounting officer to a unit hierarchically unlinked to the authorizing officer, so as to comply with the Parliament's resolution on this matter following the Court's annual report for 1989.

Participation of ACP States in meetings organized by the Joint Assembly

Justification of expenditure

14.32. The ACP Secretariat has provided to the Commission a complete analysis of all payments under this project from 1986 to date, and two Commission officials have inspected the supporting documents on the spot in August 1991 at the ACP Secretariat and found them to be satisfactory.

Over the period of the project the ACP Secretariat has justified expenditure totalling BFR 45.2 million, and has been paid ECU 1 million (BFR 42.4 million).

(a) The travel tickets submitted are considered satisfactory evidence of attendance; nevertheless the ACP Secretariat will in future provide a more systematic certification of attendance.

(b) The ACP Secretariat has based its reimbursement claims on existing ticket vouchers, which as mentioned above were checked by Commission officials in August 1991.

(c) Within the framework of the complete analysis of expenditure over the period of the projects which was carried out in August 1991, the amount of BFR 298 000 was allowed only once.

(d) The amount of BFR 134 500 has now been disallowed from the ACP Secretariat's claim. The Commission accepts that the supporting documentation for the trip amounting to BFR 162 000 was unclear, and is carefully investigating this point. There is no doubt, however, about the attendance of the individual concerned at the meeting in question.

(e) As mentioned above, all supporting documents have since been inspected, and the Commission is satisfied that the expenditure incurred is justified.

(f) These increased per diem payments were made for a working party on refugees in the horn of Africa after a special dispensation had been granted by the co-president of the Joint Assembly.

Financial charges

Exchange differences

14.35. The Commission acknowledges that errors due to the inaccuracy of bank balances can be concealed in the short term, if these balances are not checked against the corresponding bank statements. For example, the Court refers to two cases where because bank balances were not compared with bank statements when they were adjusted into ecus, the exchange difference attributed to the financial charges account was erroneous.

It should, however, be stressed that the readjustments made during a financial year have a merely indicative value. It is only at 31 December, the annual closure of the financial year, that it is vital to know the exact balances in ecus for the final drawing up of statements, which enables the necessary exchange adjustment to be carried out.

14.36. The reason why exchange adjustments are carried out during the financial year is to be able to establish whether the amount of the approved commitment is sufficient to cover all the possible losses incurred for the whole financial year. What is important is to update the accounts for the annual closure. In any case, the indicative estimates made during the financial year will in future probably be closer to the actual situation with the introduction of the OLAS computerized accounting system.

Bank charges and commissions

14.37. It is true that the agreements with the EDF's paying agents stipulate that banks will not be paid for their services. Correspondence costs (charges for telex and other communications) cannot be considered as remuneration and are therefore borne by the Commission, which none the less endeavours to check them.

In addition, the contracts that have been concluded with all banks in Europe are currently being reviewed and this should give rise to new contractual provisions.

Operations carried out on the financial charges account

14.38. The proceeds paid over by the European Cooperation Association (ECA) have been credited to the financial charges account because they were considered attributable to the projects managed in general terms by the ECA. The Commission acknowledges that in future it would be wiser to enter these proceeds in a revenue account.

14.39. The case of payments exceeding a commitment involved a sum of ECU 1 834,09 for an emergency aid operation. Because it was not possible to make a payment of ECU 215 000 to Western Samoa in ecus, this amount had to be expressed in Western Samoan tala. In the time between submission of the transfer request and its dispatch, Western Samoa's currency was revalued and the payment in question had to be entered in the accounts for ECU 1 834,09 more than expected. As it was a question of emergency aid, where each operation has a ceiling, it was decided, with Financial Control's agreement, to consider this unexpected amount, which was the result of a monetary fluctuation, as an exchange loss.

With regard to penalties for late payment, it should be borne in mind that since the delay in the commitment and payment procedure was not the fault of the National Authorizing Officer, the Commission was of the opinion that late payment interest should not be charged to the project but to the financial charges account.

Overall appraisal

14.40. In order to ensure greater transparency in the monitoring of financial charges, special accounts will be opened for each category of operation concerned and receipts will be separated from expenditure in the new OLAS accounting system.

IMPLEMENTATION OF DEVELOPMENT AID IN VARIOUS SECTORS

Scholarships

Delays in recording individual transactions

14.43. The Commission agrees that the system of advances to management organizations in the Member States, and to the delegations in ACP States, give rise to delays in recording expenditure in the EDF accounts.

However, the amounts involved are insignificant (only 3% of the sixth EDF had been committed in the field of education and training at 31 December 1990), and will in future diminish further and perhaps even disappear as two trends take effect:

(1)Training will be carried out more and more in the ACP States and less and less in Europe.

(2)Training in the ACP States will be within the framework of EDF projects rather than generalized scholarships, and will not normally require utilization of scholarship advance accounts, unless training of nationals from one ACP State is carried out in another ACP State.

Fees paid to outside agencies

14.44. The EAC has already taken steps in 1990 to reduce the number of staff working in the scholarship section, thus reducing its management costs to a level comparable with other management organizations.

14.45. In conformity with its reply to the Court in the 1983 annual report, the Commission has tried to insist on the opening of separate bank accounts for EDF-financed students, but the larger management organizations in the Member States have refused to do so as they are responsible for students from several sources of financing, and need the economies of scale inherent in a jointly managed system. In addition, due to the general downward trend in the numbers of the EDF-financed students in Europe, the smaller management organizations in the Member States are finding it ever harder to cover their fixed and recurrent costs, and some are now running at a loss.

In these circumstances, further attempts by the Commission to reclaim interest on funds advanced to these organizations will only give rise to higher management charges by them.

As regards the level of school fees, the Court is presumably mainly referring to the situation in the United Kingdom.

It should be remembered that for many years British education policy included the charging of higher rates of fees to overseas students than to UK nationals. The principle of equality of treatment of all EC nationals required that policy to be amended to allow reduction of the fees charged to EC students to the same level as for nationals, but the higher level of fees remains in place for other overseas students. These fees are chargeable irrespective of the source of funding of the scholarships, whether EC, UN, or bilateral aid, and the policy concerning their level is a national prerogative.

Scholarship computerized control system

14.46. The EDF scholarship data-processing system - Boursfed - was set up only recently. Although still in its running-in phase, it has proved its worth.

The system is not difficult to use. Each scholarship manager receives half a day's training to teach him how to access data. The specialized statistical tables are drawn up by an executive with special responsibility for managing Boursfed (collecting data, updating, use etc.). This job, which calls for wide experience in data processing, has more to do with the efficient organization of the unit's work than the complexity of the data-processing system.

The Court's previous recommendation that a computerized system be introduced to assess individual costs, educational effectiveness and relevance to indicative programmes was valid in respect of the old multiannual training programmes, and the Commission's response was to progressively abandon these programmes in favour of project-linked training, usually on the spot, for which there are no doubts about costs, effectiveness or relevance.

Technical assistance managed by the European Cooperation Association

14.47. With regard to the selection of experts, the ECA has a file of candidates.

Furthermore, the role of the ECA is not confined just to the management of contracts. Any recruitment implies contacts between the ECA and potential experts and a procedure for setting out the rights of these experts in their contracts.

Management of accounts

14.49. In order to improve the management of local expenditure for TA contracts, the ECA is going to set up a computerized system for collecting technical assistance imprest account data. The system provides for an allocation of provisional appropriations before expenditure is recorded (locally) by the delegation.

In this way some autonomous control/freezing will be possible at delegation level for expenditure expressed in local currency. This does not rule out, when the data are checked, a posteriori monitoring by Commission departments in Brussels.

14.50. Certain costs, due for example to back-dated salary increases or final payments of insurance costs, may not emerge until well after the expert concerned has stopped working. This is why the ECA was forced to delay clearing commitment. However, in order to speed up clearance in the future, the ECA is considering the possibility of partially releasing appropriations at the end of TA experts' contracts, pending entry in the ECA's central accounting system of all the expenses relating to a contract.

The ECA is also studying ways of reducing delays as part of its examination of the system referred to at points 14.53 and 14.57.

14.51. According to the ECA's internal procedure the delegation should send details of imprest accounts to the ECA every month.

Delays in the regular transmission of imprest accounts are often justified because of the delegations' lack of staff.

The ECA itself has recently taken steps so that expenditure in local currency is entered in the central accounts on a quarterly rather than annual basis.

With regard to the imprest accounts of the 15 delegations referred to by the Court, the process of entering the statements in the central accounts had been virtually completed at 31 March 1991.

As for Uganda and the unsettled items, when in March 1991 the ECA received imprest account statements for the financial year 1990, it was able to settle almost all the amounts in question.

14.52. ECA/DG VIII administrative and accounting coordination poses no real difficulties, even though, as the Court pointed out, in a few cases the ECA had forgotten to forward the commitments authorized by Financial Control to DG VIII.

With regard to entering details of expenditure in the accounts, which is done at the ECA head office on the same day, there is obviously a time lag before expenditure is entered in the EDF's central accounts. It should, however, be noted that the ECA regularly sends details of commitments and payments, which are at once entered in the accounts by DG VIII.

Financial management

14.53. The Commission considers that the monthly cost quoted by the Court for ECA contracts corresponds to the cost of the services of experts from private consultancy bureaux. None the less, the cost of technical assistance can vary widely, depending on the nature and length of the work and the expert's qualifications. The example given of Uganda is a good illustration - the ECA expert in question was of a very high level; he was expensive but he achieved some particularly significant results.

The ECA is currently drawing up a simpler ad hoc salary and management system for TA experts, based mainly on information gathered in the Member States.

It is, however, vital to maintain the standard of quality and ability of ECA technical assistance experts.

14.54 14.55. The reimbursement of expenses referred to by the Court is the practice generally followed when drawing up technical assistance contracts financed by development aid agencies. The deteriorating economic situation in most of the ACP countries means that they can no longer provide logistical support (provision of offices and office equipment) for technical assistance experts. The corresponding costs are therefore included in the experts' budgets and the equipment is returned to the project in question when the experts finally leave the country.

It is worth pointing out that in regard to accommodation and a car, it is not the recipient who chooses them. The delegation on the spot makes a proposal to the ECA, which gives its authorization on a case-by-case basis, if necessary using information provided by the Directorate for the Administration of Delegations (DAD).

The provisions of the contract forbid the private use of a staff car.

14.56. The tax deducted from the salary of technical assistants is calculated on the basis of the Community system (reference to the Community scale). This ensures equal pay for all technical assistance experts, whatever their country of origin, and it reduces the cost of technical assistance accordingly. The tax could not be paid to the general budget of the European Communities because this would result in EDF appropriations, in principle intended for development, being diverted to the administrative part of the Commission's budget.

It is extremely rare for national taxes to be refunded by the ECA (twice in 25 years).

14.57. The ECA is examining the existing system in order to revise contractual and management rules with a view to simplifying and improving control over costs. It must, however, maintain the standard of technical assistance and give it the means to be immediately operational. This implies offering both an attractive salary and essential facilities in the current situation of many developing countries.

Sysmin

Financial situation at 31 December 1990

14.62. In the mean time because of the civil war the funds reserved for Liberia have been decommitted and the project has been cancelled. The redistribution of the funds will require a decision by the ACP-EEC Council.

Jamaica was declared eligible in April 1987 and will be the subject of a decision for ECU 25 million in due course. The delay in the decision has been due to a change in the nature of the project foreseen (diversification instead of bauxite).

14.63. Papua New Guinea was declared eligible in April 1990, and a Commission decision was made for ECU 18 million on 2 May 1991.

Zambia and Zaire have not yet been declared eligible, and their requests remain under inquiry.

14.64. Under Lomé II, ECU 25 million is reserved for the Jamaica project as mentioned in paragraph 14.62. The amount remaining unused under Lomé III cannot be finalized at the present stage because several requests and projects remain under examination. Nevertheless, a proposal for partial re-utilization of funds will be made to the Council this year.

Processing of demands for aid and conclusion of agreements

14.66. Indeed ZCCM's (the Zambian mining corporation) fiscal burden is a heavy one, and of the receipts of foreign exchange of more than USD 1 billion, only USD 350 million is available to ZCCM for necessary replacements, tools and other inputs. However, this question cannot be discussed exclusively at ZCCM level. Issues like tax regimes and foreign exchange regulations should be discussed at national level. The Government of Zambia is attacking these issues under the guidance of the IMF and the World Bank within a structural adjustment programme. These institutions consider that the provision of USD 350 million in foreign exchange would be sufficient for ZCCM to be able to function properly.

It is true that in Zaire the tax burden hinders investment. However, the case mentioned by the Court concerns the retroactive payment of taxes normally due. No changes were made to the tax treatment applied to the mining company within the meaning of the statement of common agreement between the Government and the Community.

14.67. The observation that production goals and profitability are unclear has already been analysed in an evaluation report prepared by an independent firm and financed by the Commission. In its recommendations for a Sysmin 3 programme it suggests: 'Rationalization plans to be discussed on a yearly basis, and unit production costs per mined ore source could constitute parameters enabling the lenders to follow the progress of the company`.

This suggestion is to be followed up in the joint ACP-EEC evaluation of Sysmin towards the end of 1991.

Implementation of projects

14.69. Sysmin only finances a small proportion of the total needs of a mining firm, so it is not possible to see from the composition of the Sysmin expenditure whether other sources are financing management needs. Diversification has been planned in two cases (Niger and Papua New Guinea) and is foreseen in Jamaica (see paragraph 14.62). It is also foreseen to add a diversification element to the Guinea project.

14.70. (a) The delay was caused during the tendering procedure, in which the Commission was unable to accept the proposals of the Zaire authorities for adjudication of the offers. It should be pointed out that, in accordance with the regulations, the Commission insists that the most advantageous tenders should be accepted. In order to decide on the tenders the Commission did, in this case, bring in experts to examine the Zaire authorities' proposals for adjudication. Against the advice of these experts, the authorities in some cases stuck to their proposals, as a result of which the Commission cancelled part of the Sysmin 2 financing.

(b) The rules of origin, and competition rules in particular, were rather difficult to apply in the context of a longstanding ZCCM-suppliers relationship and led to long delays in the delivery of equipment in Zambia.

(c) There is, in fact, a dispute between the supplier and Mauritania's national authorizing officer on this matter.

(d) The unfortunate delay in the availability of Sysmin funds from the Commission does not mean that the Government has found another source of financing. It changed its procurement schedule in the face of the delay, substituting other funding for what had been foreseen for the European Community. The EC resources are to be used for a later stage (deepening the mine).

From the beginning it was foreseen, and still is, that the financing plan exists from two sources, which are the Commission and BCL (Botswana Copper Ltd) itself. The Sysmin loan covers an amount of ECU 21.65 million whereas BCL has budgeted ECU 19.12 million.

As the funds from the EC were not available at the early stage of the project, BCL has started, out of its ECU 19.12 million budget, the financing of the development of the Selebi ore body below the 550-metre level.

As mentioned, what has changed is the timing of the financing. BCL's own funds are used fully at the moment and this will be reduced when EDF funds become available. The reason for the recent mission of the project consultant was to develop and suggest a new schedule for EDF funds, and identify areas which should be covered by EDF financing.

This means that there is no delay in the project itself, although the availability of EDF funds is considerably delayed.

(e) The delay in the execution of this project is mainly due to the time that it took for the signature of the loan agreement between the State and the Frigula factory, followed by major problems in drawing up the invitation to tender, which had to comply with both the Lomé Convention's rules of origin and competition and Frigula's equipment purchasing policy.

14.72 The technical problem of the calculation of profits accruing to ACP States from the onlending of funds on less favourable terms will be simplified under Lomé IV, as Sysmin transfers will be in the form of grants instead of loans.

In conformity with the Financing Agreement, the fund created for Zambia was to be used for development projects with the approval of the delegation; the central services were informed by the delegation of this use of the fund.

Because of hold-ups over the invitation to tender, the Sysmin 2 'social` fund for Zaire is only now beginning to be financed. The delegation on the spot provided the central departments with the financial details of the account in June this year. Further explanations about the actual use made of these funds have been requested by the central departments.

Financial execution

14.73. The ECU 3 million advance is of course considered an integral part of the overall project in Guyana. It was referred to in the commitment proposal for ECU 31.5 million.

The two amounts are entered in the accounts as separate projects because a separate Financing Agreement and loan agreement had to be concluded for the amount of the advance and for the balance.

This does not, however, prevent the two accounting numbers from being considered as forming a single project.

14.74. According to an evaluation report prepared by independent auditors and financed by the Commission: '... the use of advances is inefficient and increases the difficulty in controlling expenditure. In our view a disbursement approach (where funding occurs at the time of expenditure) is preferable from a control point of view.`

The constitution on the spot of imprest accounts within projects is the subject of detailed instructions in the manual of instructions.

These instructions adapt the provisions of Article 34 of the sixth EDF Financial Regulation to take account of the special situation of advances managed in the delegations. These instructions were complied with as far as possible in the case of the advances system for Sysmin in Zambia.

Conclusion - Sysmin

14.76. (a) The Commission agrees with the Court's comment about the slow implementation of projects. This issue will be examined in greater detail in a joint ACP-EEC evaluation of Sysmin as part of the evaluation of the mining sector planned for the end of 1991.

(b) The explicit objective of Sysmin is to contribute to the efforts made by the State and the companies concerned to restore the profitability of an otherwise viable and economic production tool. Any intervention which is described in the technical details of Financing Agreements is defined according to this objective.

Having said this, the Commission shares the Court's view that it would be easier to monitor the progress achieved by mining companies if some of the secondary objectives were expressed in figures.

This issue will also be discussed in the evaluation referred to under point 14.76(a).

(d) Where an ACP State fails to respect its obligations, it is liable to face refusal by the Commission for renewed Sysmin funds unless visible measures are taken by that State to rectify the situation.

14.77. Every effort is made when negotiating Sysmin loans to ensure that 'unreasonable` actions by the beneficiary State are avoided, by setting out the State's obligations clearly. See the previous reply above concerning the respect of those obligations.

14.78. The Commission cannot abandon the basic idea of Sysmin, which is to rehabilitate viable mining enterprises. This does not exclude a parallel use of risk capital as has already been done in a number of cases.

The Convention specifically forbids the use of Sysmin funds to rehabilitate inherently unprofitable enterprises.

COMPUTERIZED PROJECT MONITORING SYSTEM

14.80. The Commission can confirm that the introduction of the new computerized accounting system (OLAS) will give rise to major improvements in the monitoring of the financial management of EDF projects.

OLAS will also mean that the PICS (Project information and control system) application is far more useful as it will be able to access up-to-date accounting data, which is not the case at present.

From this point of view, the introduction of OLAS is therefore a necessary, but not the sole, condition for other improvements in this area.

14.81. This is why the Commission shares the Court's view that once OLAS becomes operational it will be necessary:

(i)to set up a system for the financial monitoring of projects according to their components. In this connection the Commission has already taken appropriate steps to begin an operational analysis on the basis of a pilot scheme, with the aim of applying the results to seventh EDF projects;

(ii)to discuss the development of its information technology strategy with a view to involving the delegations and showing them the advantages to be gained from the central data base. The Commission will none the less continue, as in the past, to build step by step on sound and reliable foundations.

OJ L 24, 29.1.1990.

OJ L 62, 12.3.1990.

OJ L 239, 3.9.1990.

OJ L 381, 31.12.1990.

In so far as the aim of the perspective is to provide a framework for the budget procedure, the implementation figures used are the figures for operations linked directly to the 1990 budget appropriations (use of these 1990 appropriations in 1991, fate of the appropriations still unused: carry-over to 1991 or cancellation), rather than for operations effected in 1990 (utilization of 1990 appropriations, appropriations carried over from 1989 and appropriations made available again in 1990).

And, in some cases, Chapter B73 (research).

SEC (90) 2473 of 13 December 1990, p. 2.

Special report N° 2/91, OJ C 133, 23.5.1991, paragraph 5.32.

SEC (90) 2473 of 13 December 1990, p. 3.

OJ C 342, 31.12.1980, p. 59.

Regulation implementing Decision 88/376/EEC, Euratom on the system of the Communities' own resources (OJ L 155, 7.6.1989).

Council Regulation (EEC) N° 729/70 of 21 April 1970 (OJ L 94, 24.4.1970).

See Chapters 4.2 and 4.4 of the annual report concerning the financial year 1989.

In particular: OJ C 348, 31.12.1984, paras 9.4-9.5; OJ C 321, 15.12.1986, paras 1.23, 5.8-5.9, 9.13; OJ C 336, 15.12.1987, paras 2.50-2.53; OJ C 316, 12.12.1988, paragraph 1.23.

SEC (89) 2260 of 22 December 1989, SEC (89) 2326/7 of 24 December 1989, SEC (90) 132 of 19 January 1990.

Council Regulation (EEC) N° 2698/90 of 17 September 1990 amending Regulation N° 3906/89 in order to extend economic aid to other countries of Central and Eastern Europe (OJ L 257, 21.9.1990).

OJ C 72, 20.3.1989, p. 6, paragraph 5.2.

For an evaluation of revenue from sugar, see paragraph 4.2.6 in this annual report.

OJ C 312, 12.12.1989, p. 46, paragraph 4.21.

The amount remaining to be financed is the portion of expenditure that is not covered by traditional own resources (customs duties and agricultural levies) and miscellaneous revenue.

OJ L 185, 15.7.1988, p. 24.

See paragraph 1.64 of the annual report concerning the financial year 1989, OJ C 313, 12.12.1989, p. 24.

See paragraphs 1.8 and 1.10 of the annual report concerning the financial year 1985, OJ C 321, 15.12.1986, p. 13 and paragraph 1.6 of the annual report concerning the financial year 1986, OJ C 336, 15.12.1987, p. 9.

OJ L 155, 7.6.1989, p. 1.

Contrary to Article 36 ff of the Financial Regulation, Article 10 of Regulation (EEC/Euratom) N° 1552/89 and Articles 187 and 374 of the Acts of Accession of the Kingdom of Spain and the Portuguese Republic.

Articles 3 and 11, Regulation (EEC, Euratom) N° 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value-added tax, OJ L 155, 7.6.1989, p. 9.

OJ C 326, 16.12.1985, p. 31, paragraph 3.13.

This is a table which is prepared from Member State data. Consequently it does not neutralize the accounting peculiarities of certain Member States, such as France, which do not include certain VAT refunds in their total for gross revenue collected. Table 2.2 consists of two parts. The first provides an overview of the corrections and compensations. The second part shows, in detail, firstly, the 'other corrections` (items I.5.a and I.5.b of part 1) and, secondly, the 'compensations under Annexes E and F` (items IV.2.a and IV.2.b of Part 1).

OJ L 145, 13.6.1977, p. 1.

See in particular, Regulation (EEC, Euratom) N° 1553/89, OJ L 155, 7.6.1989, p. 9, the Acts of Accession of the Hellenic Republic, the Kingdom of Spain and the Portuguese Republic; the 11th Council Directive of 26 March 1980 on the French overseas departments (80/368/EEC), OJ L 90, 3.4.1980, p. 41; the 20th Council Directive of 16 July 1985 on aids granted to German farmers (85/361/EEC), OJ L 192, 24.7.1985, p. 18.

The 18th Council Directive on the harmonization of the laws of the Member States relating to value-added taxes laid down a timetable for abolishing some of the derogations provided for in the Sixth Directive with effect from 1 January 1990, OJ L 226, 3.8.1989, p. 21.

Any Member State may, not later than 30 April in year n+1, propose the 'solutions and amendments` which it proposes to adopt in order to determine the VAT resources base relating to its corrections and compensations. Only the authorization decisions are published in the Official Journal; the solutions are recorded in the minutes of the meetings of the Consultative Committee for Own Resources.

See Doc. COM(85) 170 final, p. 24.

At the time when the statements for the 1989 financial year were compiled, 41 authorizations to use estimated figures and 31 authorizations not to take certain operations into account were in force.

The revenue collected by the Member State was increased by the fact that entitlement to deduct VAT paid upstream is limited; the 'negative compensation` has the effect of adjusting the own resources base by deducting from it the tax base corresponding to this limitation on the deduction entitlement.

Judgment in Case C 251/88.

Council Directive 71/235/EEC of 21 June 1971 on harmonization of the provisions laid down by law, regulation or administrative action relating to the usual forms of handling which may be carried out in customs warehouses and in free zones, OJ L 143, 29.6.1971, p. 28.

In the United Kingdom, the distinction operates at the eight-figure level of the nomenclature, i.e. in respect of 101 different items.

Council Regulation (EEC) N° 1224/80 of 8 May 1980. The 'transaction value` is the price actually paid or payable for goods sold for export to the Community net of various adjustments (Article 8: commissions, packing... charges, transport...) and subject to compliance with certain conditions in the case of related undertakings.

The DV 1 document is the form which must be used in cases where the customs value is based on Article 3 of Regulation (EEC) N° 1224/80.

Council Regulation (EEC) N° 2473/86 of 24 July 1986, OJ L 212, 2.8.1986; Commission Regulation (EEC) N° 2458/87 of 31 July 1987, which lays down certain implementing procedures, OJ L 230, 17.8.1987.

Council Regulation (EEC) N° 1970/88 of 30 June 1988 concerning triangular traffic, OJ L 174, 6.7.1988.

This would explain the negative figures for added value in Table 2.3, which should normally not exist.

'Rate of yield`: the quantity or percentage of compensating products obtained from the processing of a fixed quantity of temporarily exported goods.

Articles 3, 79, 85 and 86 of the Treaty and implementing Regulations (Council Regulation N° 11 (EEC) of 27 June 1960, OJ 52, 16.8.1960; Council Regulation N° 17 (EEC) of 6 February 1962, OJ 13, 21.2.1962; Regulation (EEC) N° 1017/68 of the Council of 19 July 1968, OJ L 175, 23.7.1968; Council Regulation (EEC) N° 4064/89 of 21 December 1989, OJ L 395, 30.12.1989.

Article 6 of the provisions concerning the Commission's internal procedures of 29 October 1986 for recovering fines and other penalty payments imposed under the EEC Treaty.

In the case of penalty payments, the final amount is fixed when the undertaking has fulfilled its obligations.

OJ L 185, 15.7.1988, p. 29.

Commission Regulation (EEC) N° 618/90 of 14 March 1990 (OJ L 67, 15.3.1990, p. 21); Council Regulation (EEC) N° 3492/90 of 27 November 1990 (OJ L 337, 4.12.1990, p. 3); Commission Regulation (EEC) N° 3597/90 of 12 December 1990 (OJ L 350, 14.12.1990, p. 43).

The financial year of the Guarantee Fund ends on 15 October, except public storage accounts which are closed on 30 September.

Council Regulation (EEC) N° 598/91 of 5 March 1991 (OJ L 67, 14.3.1991, p. 19).

Commission Decision N° 89/627/EEC of 15 November 1989 (OJ L 359, 8.12.1989, p. 23).

OJ L 90, 1.4.1984, p. 13.

OJ L 94, 28.4.1970, p. 13.

As rectified, in the Spanish-language publication only, in OJ C 331, 31.12.1990, p. 14.

Gazzetta Ufficiale N° 43, 26.2.1985.

OJ L 94, 28.4.1970, p. 13.

OJ L 30, 2.2.1988, p. 7.

Council Directive 77/435/EEC of 27 June 1977 (OJ L 172, 12.7.1977, p. 17).

Council Regulation (EEC) N° 4045/89 of 21 December 1989 (OJ L 388, 30.12.1989, p. 18).

OJ L 186, 18.7.1990, p. 6.

OJ L 323, 29.11.1980, p. 27.

OJ 195, 28.10.1966, p. 3361.

Commission Regulation (EEC) N° 1762/89 of 20 June 1989 (OJ L 172, 21.6.1989, p. 23).

Special report of the Court of Auditors on various measures affecting the management of the EAGGF Guarantee Section - Part 3 (OJ C 258, 6.10.1980, p. 7).

OJ L 351, 14.12.1987, p. 1.

OJ L 323, 29.11.1980, p. 27.

OJ L 388, 30.12.1989, p. 18.

OJ L 172, 12.7.1977, p. 17.

Special report of the Court of Auditors on various measures affecting the management of the EAGGF Guarantee Section - Part 3 (OJ C 258, 6.10.1980, p. 7).

OJ L 323, 29.11.1980, p. 27.

OJ L 281, 1.11.1975, p. 65.

OJ L 367, 29.12.1990, p. 107.

OJ L 323, 29.11.1980, p. 27.

The two main products are Irish whiskey and Scotch whisky. In this report the word 'whisky` should be read to include Irish whiskey except where the context indicates otherwise.

OJ L 121, 5.5.1981, p. 3.

OJ L 183, 4.7.1981, p. 10.

'Grain whisky` means whisky made from malt and cereals; 'malt whisky` means whisky made exclusively from malt; 'Irish whiskey, category A` means whisky obtained from malt and cereals, the malt content being less than 30%; 'Irish whiskey, category B` means whisky made from barley and malt, with at least 30% malt.

OJ L 121, 5.5.1981, p. 3.

OJ L 183, 4.7.1981, p. 10.

OJ L 388, 30.12.1989, p. 18.

OJ L 121, 5.5.1981, p. 3.

OJ L 183, 4.7.1981, p. 10.

OJ L 183, 4.7.1981, p. 10.

OJ C 290, 7.11.1991.

Council Regulation (EEC) N° 4028/86 of 18 December 1986 (OJ L 376, 31.12.1986, p. 7).

Opinion N° 5/91 adopted by the Court of Auditors at its meeting on 25 April 1991 and forwarded on 6 May 1991 to the Community institutions concerned.

At the rate of 70% since 1 January 1991 for vessels effectively scrapped after their withdrawal from a Community fishing fleet. Council Regulation (EEC) N° 3944/90 (OJ L 380, 31.12.1990, p. 1).

Council Regulation (EEC) N° 2052/88 of 24 June 1988 (OJ L 185, 15.7.1988, p. 9).

Council Regulation (EEC) N° 4253/88 of 19 December 1988 (OJ L 374, 31.12.1988, p. 1).

Council Regulations (EEC) Nos 4254/88, 4255/88 and 4256/88 of 19 December 1988 relating to the ERDF, the ESF and the EAGGF-Guidance respectively (OJ L 374, 31.12.1988, p. 15).

OJ C 188, 28.7.1990, p. 9.

Interinstitutional agreement on budgetary discipline and improvement of the budgetary procedure (OJ L 185, 15.7.1988, p. 33).

Commission Regulation (EEC) N° 1866/90 of 2 July 1990 (OJ L 170, 3.7.1990, p. 36).

Fourth periodic report on the situation of the regions.

Communication 88/C 212/02 (OJ C 212, 12.8.1988, p. 2).

See the recital and Article 13 of Regulation (EEC) N° 2052/88 of 24 June 1988 (OJ L 185, 15.7.1988, p. 9).

First report on the implementation of the reform of the structural Funds, COM(90) 516, p. 33.

See COM (86) 340 of 27.6.1986 and the last Regulation concerning transport Regulations (Council Regulation (EEC) N° 3359/90 of 20 November 1990, OJ L 326, 24.11.1990, p.1).

OJ C 69, 24.3.1976, p. 2.

Recommendation N° 79/535/EEC of 23 May 1979 (OJ L 143, 12.6.1979, p. 9).

Council Regulation (EEC) N° 1787/84 of 19 June 1984 (OJ L 169, 28.6.1984, p. 1).

The Court's annual report concerning the financial year 1987.

Laying down provisions for implementing Regulation (EEC) N° 2052/88 of 24.6.1988 as regards the ESF, OJ L 374, 31.12.1988, p. 21.

On the tasks of the structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, OJ L 185, 15.7.1988, p. 9.

Laying down provisions for implementing Regulation (EEC) N° 2052/88 of 24.6.1988 as regards coordination of the activities of the different structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments, OJ L 374, 31.12.1988, p. 1.

On the tasks of the European Social Fund, OJ L 289, 22.10.1983, p. 38.

Amending, on account of the accession of Spain and Portugal, Decision 83/516/EEC of 17.10.1983 on the tasks of the European Social Fund, OJ L 370, 31.12.1985, p. 40.

The Court made observations on this subject in its annual report concerning the financial year 1988, OJ C 312, 12.12.1989, paragraphs 9.33-9.87.

Resolution embodying the comments which form an integral part of the decision granting a discharge in respect of the implementation of the general budget of the European Communities for the financial year 1988, OJ L 174, 7.7.1990, p. 49.

SEC(88) 752-E/618/88, memorandum to the Commission from the Member responsible for financial control on the recovery of claims in the ESF field. Following the meeting of 25.5.1988, the Commission instructed the DG V departments concerned, the accounting officer and the Financial Controller to implement the practical measures referred to in this memorandum. Some measures were taken from those proposed by DG XIX and DG XX and included in the 16th report of the Commission's Financial Controller drawn up pursuant to Article 29(3) of the Financial Regulation of 13.3.1990, SEC(90) 840 final, 10.5.1990.

The Court's audit did not cover the 1988 and 1989 files in order not to interfere with their processing.

Dafse: Departamento para os Assuntos do Fundo Social Europeu.

It is not yet possible to calculate the exact amount of the entitlements established since many debit notes have still to be drawn up in 1991 for files relating to the financial year 1989.

The Court's annual report concerning the financial year 1988, OJ C 312, 12.12.1989, paragraph 9.58.

On the management of the ESF, OJ L 377, 31.12.1983, p. 2.

The Court's annual report concerning the financial year 1988, paragraph 9.57.

According to the reply, 'in the statement which it will be sending to the Member States on recovery, the Commission will recall the obligation to be notified without delay of any change in the circumstances on which the decision approving assistance was based`, OJ C 312, 12.12.1989, p. 309.

SEC(88) 752-E/618/88. The observation made in this paragraph refers to that contained in paragraph 9.44 of the Court's annual report concerning the financial year 1988.

The majority of the amounts shown in the suspense account 'sundry revenue to be allocated` concerned unrequested repayments which could have been regularized quite easily.

See note 16, p. 125.

The abovementioned SEC(88) 752-E/618/88. The observation made in this paragraph refers to that contained in paragraph 9.42 of the Court's annual report concerning the financial year 1988.

The abovementioned SEC(88) 752-E/618/88. The observations made in paragraphs 8.30-8.35 refer to those contained in paragraph 9.45 of the Court's annual report concerning the financial year 1988.

The observation made in this paragraph refers to that contained in paragraph 9.47 of the Court's annual report concerning the financial year 1988, OJ C 312, 12.12.1989.

Internal note of 26.4.1990 from the Legal Service sent to the Director-General of Directorate-General V, JUR(90) D/02679, according to which Belgium cannot escape its Community obligations by taking advantage of its internal organization and, in particular, the allocation of certain responsibilities to its communities and regions.

The Court's annual report concerning the financial year 1988, OJ C 312, 12.12.1989, paragraph 9.62.

OJ L 70, 16.3.1990.

See note 16, p. 125.

The Court's annual report concerning the financial year 1988, OJ C 312, 12.12.1989, paragraph 9.46.

Concerning interest on account of late payment to be charged in the event of late repayment of assistance from the structural Funds, OJ L 170, 3.7.1990, p. 35.

OJ L 374, 31.12.1988.

With regard to unwarranted payments, the Commission needs to provide itself with a full framework of appropriate rules on the information which it must be sent on the implementation of measures, the obligation to repay assistance without being requested, the appraisal of negative claims, the establishment of entitlements, the fixing of the deadline, the sending of debit notes to the authorities concerned, the application of interest on late payment, the setting-off procedure, the handling of disputed claims, the serving of notice and the recourse to secondary liability.

OJ L 166, 25.6.1987, p. 20.

OJ L 395, 30.12.1989, p. 23.

See also the European Parliament Resolution of 16.5.1986, OJ C 148, 16.6.1986, p. 124.

Document V/1200/87 of September 1987 concerning the Erasmus programme.

Document V/394/88 of September 1988 ('Candidates` guide').

The academic year is usually the period from the end of September until July. In the context of the ICPs, the Commission regards the academic year as the period from 1 July to 30 June.

The problem of subcontracting concerns not only the Erasmus programme but also the management of other measures in the social field.

The applications for aid are also examined by a group of experts. This group is obliged to examine and judge at least 7 000 pages in two days.

NGAA: National Grant Awarding Authority.

'Bafoeg`: 'Bundesausbildungsfoerderungsgesetz` (Federal German Law for the promotion of training).

'Report on the experience acquired in the application of the Erasmus programme 1987-89`, SEC(89) 2051 final, 13.12.1989.

The situation was adjusted at the end of the financial year 1990, following the Court's audit.

OJ L 93, 10.3.1985.

OJ L 128, 19.5.1975.

See Article 3, paragraphs 3, 4 and 5 of Directive 75/268/EEC.

Regulation (EEC) N° 797/85, Article 14.

Council Regulation (EEC) N° 1316/86 of 22 April 1986 (OJ L 115, 3.5.1986).

Regulation (EEC) N° 797/85, Article 14, paragraph 2.

Regulation (EEC) N° 797/85, Article 15.

Council Regulation (EEC) N° 1609/89 of 29 May 1989 (OJ L 165, 15.6.1989).

Regulation (EEC) N° 797/85, Article 15, paragraph 1(a).

Regulation (EEC) N° 797/85, Articles 3(4) and 4(1).

Article 13, paragraph 2, of Regulation (EEC) N° 797/85 prohibits the granting to less-favoured areas of a compensatory allowance which exceeds the limits set out in the Regulation or which fails to satisfy the conditions established in the same Regulation.

Resolution of 11 July 1986, OJ C 227, 8.9.1986, p. 159.

Regulation (EEC) N° 797/85, Article 31a, introduced by Regulation (EEC) N° 3808/89 of 12 December 1989.

Agrarbericht 1989 (1989 agricultural report of the German Federal Government), p. 25.

Council Regulation (EEC) N° 768/89 of 21 March 1989 setting up a transitional system of aids to agricultural income (OJ L 84, 29.3.1989).

Council Decision 78/870/EEC of 16 October 1978 (OJ L 298, 25.10.1978). Council Decision 82/169/EEC of 15 March 1982 (OJ L 78, 24.3.1982). Council Decision 83/200/EEC of 19 April 1983 (OJ L 112, 28.4.1983). Council Decision 87/182/EEC of 9 March 1987 (OJ L 71, 14.3.1987).

Council Decision 77/270/Euratom of 29 March 1977 (OJ L 88, 6.4.1977).

Council Regulation (EEC) N° 397/75 of 17 February 1975 (OJ L 46, 20.2.1975).

Disseminated as an annex to the ECSC annual report (1990).

OJ C 312, 12.12.1989.

OJ C 160, 29.6.1990.

OJ C 312, 12.12.1989.

OJ C 326, 16.12.1985, paragraphs 9.6 to 9.8.

'Study of the administration of the research activities`. This study, commissioned byVice-President Pandolfi, was made by an external consultant from April to October 1990.

OJ C 241, 25.9.1986, p. 1.

OJ L 312, 13.11.1973, p. 1.

OJ L 158, 16.6.1978, pp. 3 and 6.

OJ L 350, 27.12.1985, p. 25.

OJ L 350, 27.12.1985, p. 29.

OJ L 98, 11.4.1989, p. 13.

OJ L 305, 31.10.1986, p. 6.'Valoren` is the Community programme for the development of certain less-favoured regions of the Community by exploiting endogenous energy potential.

OJ C 133, 23.5.1991, paragraph 4.13.

OJ L 112, 17.4.1989, p. 12.

OJ L 200, 13.7.1989, p. 23.

COM(89) 164 final, 20.3.1989.

OJ L 185, 17.7.1990, p. 1.

Council Decision 90/468/EEC of 27 July 1990 (OJ L 259, 24.9.1990).

Council Regulations (EEC) Nos 456/90 and 457/90 of 22 February 1990; Regulation (EEC) N° 2698/90 of 17 September 1990; SEC(89) 2260 of 22 December 1989; SEC(89) 2326/7 of 24 December 1989; SEC(90) 132 of 19 January 1990.

OJ C 313, 12.12.1990.

OJ L 33, 8.2.1979, p. 36.

Council Regulations (EEC) Nos 2247/89 of 24 July 1989 and 457/90 of 22 February 1990.

OJ C 313, 12.12.1990.

Council Decision 90/681/EEC of 21 December 1990 (OJ L 375, 31.12.1990).

OJ C 313, 12.12.1990.

The Court's observations in this chapter relate to neither aid for African, Caribbean and Pacific countries financed by the Member States through the European Development Funds (see Chapter 14 of this report), nor aid for the countries of Central and Eastern Europe (see Chapter 12 of this report). The observations concerning the administration of Commission delegations in non-member countries are in Volume II of this report.

The Court's Opinion on the proposals for amendments to the Financial Regulation, adopted respectively on: (a)21.5.1981, OJ C 232, 11.9.1981, paragraph 3, pp. 4 and 5; (b)9.2.1989, OJ C 72, 20.3.1989, paragraph 4.1(b), p. 2.

Commission proposal for amendments to the Financial Regulation COM(88) 838 of 16.12.1988, OJ C 115, 8.5.1989, p. 1 (ninth recital).

Financial Regulation of 21.12.1977 (as amended by Council Regulation (Euratom, ECSC, EEC) N° 610/90 of 13.3.1990): Article 1(4), second subparagraph.

Some NGOs are active in the 'development` sector and/or in the 'public information campaigns` sector.

Special report N° 5/85 of 12.12.1985 (not published) on the Community contribution towards schemes concerning developing countries carried out by non-governmental organizations (NGOs).

Council R/207/78 (GCD) of 26.1.1978, summary of the Decisions of the 485th session of the Council of 28.11.1977 (Annex 4).

By way of an exception, the Community contribution may cover up to 75%.

Report not systematically required since the revision of the General Conditions in 1988.

Special report N° 5/85, paragraphs 64 and 65.

Fourth EDF, OJ L 25, 30.1.1976; fifth EDF, OJ L 347, 22.12.1980; sixth EDF, OJ L 86, 31.3.1986.

OJ L 86, 31.3.1986.

Which differs from the ACP-EEC Council in so far as EC Member States and the Commission are not represented (Protocol 3 to the third Lomé Convention).

Fourth EDF 2,3 Mio ECU; fifth EDF 6,3 Mio ECU; sixth EDF 9,8 Mio ECU.

Where the account entries or calculations were made in Belgian francs only, the figures have been converted into ecus for comparison purposes at the official exchange rate at 31 December 1990: 1 ECU = 42,1839 BFR.

Severance grants, 5 Mio BFR; annual leave claims, 2,5 Mio BFR; resettlement, 0,5 Mio BFR.

The Commission undertook to do so in its reply to the Court's 1989 annual report (OJ C 313, 12.12.1990, points 14.26 to 14.28).

OJ C 113, 29.4.1991.

For example, the exchange-rate adjustment carried out at end-October 1990 on one account related to the balance of 2 July 1990, while on another account the balance related to the 25 May 1990.

Annual report 1982, paragraphs 15.50-15.60 (OJ C 357, 31.12.1983); Annual report 1986, Part two, paragraphs 23-56 (OJ C 336, 15.12.1987). Annual report 1982, paragraph 15.51(b).

Annual report 1989, paragraph 13.10.

Court of Justice, Case 85/86 of 3 March 1988 concerning the payment by the EIB of the tax levied on its staff salaries to the general budget of the EC.

The 15% rate of dependence is reduced to 10% and the 20% rate is reduced to 12% for the least-developed, land-locked and insular ACP States.

Article 52 of the second Lomé Convention; Article 179 of the third Lomé Convention.

Annual report 1983, paragraphs 15.76 and 15.77 (OJ C 348, 31.12.1984); Annual report 1985, Part two, paragraphs 67-72 (OJ C 321, 15.12.1986).

280 Mio ECU plus 2 Mio ECU added on accession of Zimbabwe minus 6,36 Mio ECU transferred to the sixth EDF-Stabex.

415 Mio ECU minus 109,6 Mio ECU transferred to Stabex.

Second Lomé Convention, Article 51, last paragraph (28 February 1985); third Lomé Convention, Article 178(2) (28 February 1990).

Second Lomé Convention, Article 103(3); third Lomé Convention, Article 197(10).

Second Lomé Convention, Article 55; third Lomé Convention, Article 183.

Third Lomé Convention, Articles 19 and 186(d): financial and technical cooperation shall 'contribute to the fullest participation of the majority of the population in the benefits of development, as well as support the necessary structural changes`.

Annual report 1989, Part two, paragraphs 13.6-13.11 (OJ C 313, 12.12.1990); Special report N° 1/91 on the revival and rehabilitation plan, paragraph 4 (OJ C 83, 27.3.1991).

Council Decision 90/424/EEC of 26 June 1990 on expenditure in the veterinary field, OJ L 224, 18.8.1990, p. 19.

Council Decision 89/455/EEC of 24 July 1989, OJ L 223, 2.8.1989, p. 19.

Note that these outstanding commitments have not meant unnecessarily immobilizing some of the payment appropriations requested, since in recent years the utilization rate for payment appropriations under the Esprit programme has been very high (99.95% in 1988, 99.96% in 1989 and 99.99% in 1990).

OJ L 33, 8.2.1986, p. 28.

The traditional calculation of the degree of self-sufficiency, i.e. the relation between total Community production and domestic utilization, gives an average of 127% for the Community for the first four marketing years in which the current quota system was applied (1989/90: 129%, 1988/89: 128%, 1987/88: 122% and 1986/87: 129%).

A summary of this information is given on a regular basis in a bulletin prepared by the Commission departments (see paragraphs 6.33 and 6.34).

Community structural operations - Statistical bulletin N° 1.

With reference to the current year, it should be noted that in July 1991 - out of a total of 2 163 claims recorded on 1989 commitments - 1 149 recovery orders had been issued, but this is in no way to be interpreted as meaning that the Commission will not be issuing recovery orders for the remaining 1 014 cases.

SEC(91) 751 final, 29.4.1991.

Farms in mountainous and less-favoured areas of the Community. Commission of the European Communities, 1989.

The data are being updated to take account of the situation in 1988/89.

Part IV, Chapter 6.

ANNUAL REPORT concerning the financial year 1990 VOLUME II

The report, together with the institution's replies to the Court's

observations, was transmitted to the authorities responsible for giving

discharge and to the other institutions by 30 November 1991

Aldo ANGIOI (President)

André J. MIDDELHOEK

John CAREY

Josep SUBIRATS

Carlos M. MORENO

Richie RYAN

Fernand HEBETTE

Ole Joergen WARBERG

Konstantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

FOREWORD 1. This 14th annual report (on the financial year 1990) of the Court of Auditors of the European Communities is in two volumes.

2.The first volume contains observations on the operating budget of the Commission and on the consolidated accounts of the European Communities, along with observations on the European Development Funds. The Commission's replies to the Court's observations conclude this first volume.

3.The second volume contains all the observations that concern the administrative appropriations of the institutions. Three chapters are each devoted to one institution and are followed by the replies received from the institution concerned. The last chapter deals with the European Schools. This volume contains, in addition, a list of reports and opinions that have been adopted by the Court of Auditors over the last five years, together with a financial and statistical annex.

4.The key to the abbreviations and symbols used in this report is given on the first page of Annex II (Volume II).

5.The references to the Official Journals in which the annual reports in respect of previous financial years were published are listed below:

- 1977: OJ C 313, 30.12.1978

- 1978: OJ C 326, 31.12.1979

- 1979: OJ C 324, 31.12.1980

- 1980: OJ C 344, 31.12.1981

- 1981: OJ C 344, 31.12.1982

- 1982: OJ C 357, 31.12.1983

- 1983: OJ C 348, 31.12.1984

- 1984: OJ C 326, 16.12.1985

- 1985: OJ C 321, 15.12.1986

- 1986: OJ C 336, 15.12.1987

- 1987: OJ C 316, 12.12.1988

- 1988: OJ C 312, 12.12.1989

- 1989: OJ C 313, 12.12.1990

6.Unless otherwise stated, the observations set out in this report refer to the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977) as amended by Council Regulations (EEC) N° 1252/79 of 25 June 1979 (OJ L 160, 28.6.1979, p. 1), N° 1176/80 of 16 December 1980 (OJ L 345, 20.12.1980, p. 23), N° 1600/88 of 7 June 1988 (OJ L 143, 10.6.1988), N° 2049/88 of 24 June 1988 (OJ L 185, 15.7.1988, p. 3) and N° 610/90 of 13 March 1990 (OJ L 70, 16.3.1990, p. 1).

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INTRODUCTION

1. This volume deals with the Court's examination of the Community institutions' management of staff and administrative expenditure.

2. As regards staff expenditure, in 1990 the Court carried out in particular an audit of expenditure on staff posted to the Commission's delegations in third countries; the administrative expenditure of these delegations was also examined.

3. With regard to the European Parliament, the observations relate to various aspects of the accounting system and of the institution's expenditure.

4. With regard to administrative expenditure, the observations cover the acquisition of computer equipment at the Commission and the Council. Some observations on the Commission's contribution to the European Schools' budget have also been included.

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5. Table 1 summarizes the institutions' staff. All the institutions' staff and administrative expenditure is shown in Tables 2 and 3.

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CHAPTER 15 (\*) Parliament

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INTRODUCTION

15.1. For the financial year 1990 the Court of Auditors examined Parliament's budgetary and general accounting system, including all subsystems furnishing data to the main accounting system.

GENERAL AND BUDGETARY ACCOUNTING

15.2. Parliament maintains its accounting record by means of a LogAbax computer system. A copy of the records is transferred every three days to a supplementary system, SIRC, to provide an on-line interrogation facility. Both systems are old, and a project ('Finics`) to replace them is now under way.

Functioning of the present accounting system

15.3. Article 29 of the implementing measures

requires that the accounts department's registration procedure should make it possible to ascertain at any given moment, for each budget item or heading, the commitments and payments made and the resulting balances. There are severe practical constraints on interrogating the LogAbax system, since all other processing must be suspended while this is done; and in view of the delay of one to three days before the data are transferred to SIRC, present arrangements do not in practical terms meet the requirement.

15.4. Moreover, because of the abovementioned shortcomings of these systems (LogAbax and SIRC), the Financial Controller is not able to check at any given moment the accuracy of the revenue and expenditure entries. This being so, he has been obliged to keep parallel accounts in order to be in a position to carry out these tasks. The Court considers, however, that it is the clear implication of Articles 29 and 30 of the implementing measures that any check ought to be made with the prime accounting record maintained by the accounts department.

15.5. Article 83(4), second indent, of the implementing measures requires that bank reconciliations should be made every month. Although a constant watch is kept on bank accounts, complete formal reconciliations which are examined by the accounting officer are only done every three months. There is a risk that errors might not be discovered in good time, making it more difficult to trace their causes and correct them.

15.6. Job descriptions and instruction manuals have not been prepared for the accounts and treasury departments. These are necessary both to achieve and to demonstrate good management control of any financial system.

15.7. There are several control weaknesses in the LogAbax and SIRC computer systems. In particular, the LogAbax machine operates in a normal office and access to it is not restricted, nor is it kept locked outside office hours. Programmed controls over the completeness and accuracy of data stored in the two systems are limited and the transfer of data from LogAbax to SIRC is not wholly reliable.

15.8. In general, because of the limitations of these controls, the accounts department relies mainly on ex post checks carried out by its staff to detect any errors. This dependence solely on ex post controls in principle gives the accounting officer less good assurance regarding the correctness of accounting. It may also represent inefficient use of staff resources overall. The Court suggests that increased use of preventive controls rather than ex post checks should be considered in the new system Finics.

Accounting for and recovery of receipts

15.9. A review of the situation regarding debtors accounts as at 31 December 1990 brought to light that they related, in particular, to:

(a)old or long-outstanding debts (0,2 Mio ECU);

(b)debts for which the establishment or recovery procedures had not been followed (1 Mio ECU).

15.10. The Court considers that debtors accounts should include only amounts which are recoverable; that recoveries should be made as soon as possible; and that any bad debts should be indicated and, where necessary, cancelled.

15.11. Some credit notes are addressed directly to the various authorizing officers. This involves potential risks for receipts; the Court recommends that the internal rules should include an instruction to authorizing officers to ensure that credit notes are addressed to the accounts department and not to individuals.

15.12. Not all authorizing officers indicate the due date for recovery on recovery orders. In case of non-payment by the due date the accounting officer does not always immediately initiate the legal procedures to recover the debt required under Article 16(4) of the implementing measures. The Court recommends that steps to recover amounts due should always be taken without delay.

15.13. The Members' general allowance is recoverable as to 50 % from any Member who is absent for more than half the parliamentary year. Parliament had not normally raised a recovery order as required by Article 28(2) of the Financial Regulation. This lacuna was corrected only during the audit performed by the Court for the financial year 1990. The Court recommends that Parliament should carry out a special exercise to ensure that collections due from previous years have all been made.

The BUDG project

15.14. The LogAbax and SIRC accounting systems, even taken together, do not provide adequate support to management of the Institution. In July 1983 the Bureau of Parliament approved a priority project to provide the Institution with a management information system enabling it to be run on a highly cost-effective basis.

15.15. A consultancy firm was employed to establish the project specifications and in December 1986 a contract was signed for development of the whole project on a turnkey basis. The bulk of the project was in fact to be carried out by a subcontractor. The system should have gone live on 1 January 1989 at a cost of 1,3 Mio ECU.

15.16. During the development, the users asked for several changes to be made to the configuration of the initial project and considerable problems of project control arose. In the end, the start of live operation was postponed, the immediate reason being that one of the main components of the software failed to perform as required. In 1989, the progress of the project having been put in serious doubt, payments to the contractors were suspended.

15.17. A new deadline had to be fixed. Despite earlier assurances, however, the contractors failed to meet the new deadline of 19 March 1990. This being so, Parliament formally notified them on 5 April 1990 that the contracts were terminated by reason of breach. By that date Parliament had paid 1,9 Mio ECU.

15.18. Because of the increased needs of the accounting department and the fact that it still has to use the old LogAbax machine, Parliament has been obliged to undertake as a matter of urgency a much smaller computer accounting project (Finics) to take over the basic general and budgetary accounting functions of the LogAbax system. This is expected to be ready for operation in January 1992, at a total cost of 0,4 Mio ECU.

15.19. The delays in and then the cancellation of BUDG meant the loss of specific control improvements as well as of the expected financial management capability for which the project was designed. The cancelled project represents expenditure totalling 2,5 Mio ECU for which no usable system has been received.

15.20. The Court considers that, besides the specific difficulties noted above, the BUDG project was seriously hampered by problems at a strategic level: introducing cost-control and financial management systems is not solely a question of computer development, but requires changes of attitude and of working methods in many parts of the institution. Although many aspects of project management were clearly a matter for the contractors, the Court considers that better project management methodology on Parliament's part would have prevented the project being begun with a specification which apparently did not fully match user needs (see paragraph 15.15).

15.21. There has been a significant increase in Parliament's administrative spending since the BUDG project was approved. The Court recommends that Parliament should urgently re-assess the need, and, if it is confirmed, ensure that the aspects mentioned above are examined before undertaking a successor project.

MISSION EXPENSES

Imprest with funds

15.22. The most significant imprest fund is held permanently by an official in the Members' allowances service for paying Members' travel and subsistence allowances. It is kept in 12 different currencies, involves the use of 12 bank accounts to allow for payments by cheque, and has a ceiling of 2,5 Mio ECU. In 1990 payments through this fund totalled 28,8 Mio ECU, 6,8 % of Parliament's budget. The Financial Regulation (Article 54) permits establishment of imprest funds for 'certain categories of expenditure`; but taking into account the amounts flowing through this imprest fund and the fact that at any given moment a certain amount beyond entitlement is advanced, and considering that expenditure through an imprest fund is not subject to the prior approval of the Financial Controller, the Court considers that this is not an appropriate use of the imprest mechanism.

15.23. An imprest fund is supposed to be used only for expenses and not for recovery of debts. It was found, however, that the Members' imprest was also used as a means of recovering debts. These amounted to some 258 000 ECU on 4 September 1990, to 176 000 ECU on 11 October 1990 and 252 000 ECU on 21 November 1990. Of these amounts, 215 000 ECU, 119 000 ECU and 111 000 ECU respectively had been outstanding for over two months. At the end of the year, amounts due since June, July and August were still entered in the accounts and pending recovery.

15.24. Article 54 of the implementing measures requires that the decision setting up an imprest shall specify the maximum amount which can be set aside as an imprest. The decision should be taken by the President of Parliament (as budgetary authority); in practice it is delegated under the internal rules

, and is made on a proposal from the authorizing officer, after a favourable opinion has been given by the accounting officer and the Financial Controller (Article 51 of the implementing measures). For this fund the ceiling was raised from 2 Mio ECU to 2,5 Mio ECU in October 1987 without a new decision having been taken by either the President or the person delegated by him. The new ceiling is indicated only in a letter from the Financial Controller and in a treasury operation signed by the accounting officer. In the Court's view a new formal decision is needed whenever the maximum amount of an imprest fund is changed.

15.25. The Quaestors' rules governing travel, subsistence and other allowances to Members are complicated (for example, triangular trips) and some of the supporting procedures in the Members' allowances service are not in accordance with the Financial Regulation (specifically, debt establishment - Article 28(2) of the Financial Regulation). The Quaestors' rules, and the administrative procedures which they make necessary, should be reviewed together with the aim of achieving improved clarity and simpler procedures.

15.26. Payments to Members are made against their declaration of intentions and not on the basis of the attendance list; they are corrected later, if necessary, following a check against the attendance lists. Outside the three normal working places, undue or duplicate payments may occur temporarily because the most recent computer records cannot be checked on-line at the time of payment.

Imprests without funds

15.27. For paying staff mission expenses, and auxiliary staff during sessions, the Parliament uses an imprest system without any actual advance of funds ('régies d'avances sans fonds`). The imprest regimes are established normally but payments are made by the accounting officer's department. The effect is to allow specified payments to be made without establishment of a payment order and hence without the prior approval of the authorizing officer and the Financial Controller. The Court considers that such use of the imprest method is not consistent with the purpose for which imprests are intended by the Financial Regulation and the implementing measures (hich clearly envisage a fund managed by the administrator and provide for its replenishment by the accounting officer), but amounts to an arrangement to bypass the normal authorization procedures preceding payment by the accounting officer. As such the arrangements are inadmissible and should be replaced by a normal payments circuit.

15.28. For Parliament's meetings in the three usual working places and elsewhere, officials travel on the basis of mission orders. Advances are paid to the staff either in cash or by bank transfer; normally, authority for the advance is given to the cash office on a copy of the mission order. With regard to these staff mission expenses, the 'imprest-holder` is also the operational head of the department ('Division des décomptes`) which, by means of a computer system, controls the advances and the final settlement of mission expenses. This is not in keeping with the principle of separation of duties. In 1990, 32 000 mission orders were issued, the expenditure covered being 14,1 Mio ECU.

15.29. According to Parliament's internal rules

, payments to staff should be made 'wherever possible` by bank transfer. The level of routine payments in cash is excessive in the light of this rule.

15.30. The rates of mission expenses and the tables used to calculate the amounts due can be changed by any of the staff in the 'Division des décomptes` who use the computer. The correct operation of the system depends completely on the accuracy of these data: they should therefore be given better access protection, and the head of the division should ensure that there are independent checks that only authorized alterations have been made.

15.31. Balancing payments or recoveries of mission expenses are made through the payroll (the PAIE system). However, the missions department does not check that the processing in the PAIE system matches the amounts input except for net sums above about 20 000 BFR. The risk of material error is high and the Court recommends reducing this threshold.

15.32. The system does not provide the capability of regularizing advances within a reasonable time. Because of the time allowed for submission of claims, combined with the timetable for input to the PAIE system, January missions are not regularized until May's salary. For the same reasons, reconciliations can only be done quarterly, and so undue payments might be allowed to stand for longer than they should. These aspects of the system should be reviewed by Parliament in the light of the requirement (Article 2 of the Financial Regulation) for sound financial management.

15.33. The authorizing officer's checks on staff mission expenses are insufficient to ensure that there are no excesses over commitments, and where excesses relate to carried-forward appropriations there is a consequent violation of the annuality principle which is central to the Communities' financial rules (Article 1 of the Financial Regulation).

15.34. For missions within the EC, daily allowance rates are specified by the Staff Regulations, and the power to modify them lies with the Council

. Parliament, however, pays at rates fixed by application of a Bureau decision

, which in 1990 were variously between 4 % and 26 % higher. This contravention of the Staff Regulations should be discontinued.

INVENTORIES OF MOVABLE PROPERTY

15.35. Inventory management is dispersed, and despite two reports from the Financial Controller, in 1987 and 1991, Parliament has not yet established effective administrative control over all aspects of the inventory.

15.36. Parliament's balance sheet as at 31 December 1990 includes movable property valued (at cost) at 52,1 Mio ECU, representing 84 000 items. About 17 000 of these, costing 7,4 Mio ECU, could not be identified in the latest physical check of the inventory, done in November-December 1988, and had still not been located in December 1990. Property not located includes furniture (9 804 items valued at 1,6 Mio ECU), technical equipment (3 219 items; 2,0 Mio ECU), office machines (1 571 items; 0,6 Mio ECU) and computer equipment (2 384 items; 3,2 Mio ECU).

15.37. The discrepancy resulting from the 1988 physical check must be accounted for by locating the items concerned or by following the required procedures to write them off. The delay in dealing with it demonstrates that Parliament's inventory management and control is not yet on a sound basis. This matter is a continuing breach of Article 65 of the Financial Regulation. Furthermore, Article 78 of the implementing measures requires checks on items over 150 ECU to be done on a three-year cycle; no such checks exist.

15.38. The delay clearly also risks making investigation of any thefts and losses ineffective, and will make it more difficult to assign specific responsibility for losses (as envisaged by the Financial Regulation, Article 67(2)).

15.39. Parliament's internal regulation

on the inventory makes authorizing officers responsible for the initial entry of each item acquired and for keeping the record up to date. Parliament should consider also ensuring that the responsibility of individual members of staff for items issued for their use is explicitly defined.

15.40. The regulation requires that a print-out from the computer records should be posted in each location, and that nominated inventory officers should exercise control over the whereabouts of property and ensure the recording of items; but this appears to be a dead letter. The computer system used to register property does not provide all the facilities needed for exact execution of the internal regulation. Much of its operation is left to one official, who has privileged access to the system; access permission has been established for officials in other locations in such a way that manipulation of the record could be done; and entries are not subject to the level of check normally applied to accounting systems.

15.41. During 1990, some items (with a total value of 0,2 Mio ECU) were sold before the meeting of the 'Comité de déclassement` (Committee on surplus equipment) at which their disposal was to be discussed. It is evident that the prior opinion of the 'Comité de déclassement` should always be obtained before final action connected with disposal or write-off is taken.

ACCOUNTING BY THE POLITICAL GROUPS

15.42. In its annual report concerning the financial year 1989

the Court noted that improvements were required in the methods of accounting used by the political groups for information campaign expenditure (budget Item 3708). In the reply published in December 1990, Parliament did not give a definite response on this issue. The Court has been involved with Parliament in discussions on the matter and reiterates its view that improvements in the accounting by the political groups are necessary.

GENERAL AND BUDGETARY ACCOUNTING

15.2 15.4. The European Parliament is aware of the shortcomings of the LogAbax-SIRC system. A new Finics system is therefore in preparation and will be operational from the beginning of 1992 if the test phase scheduled for November 1991 is successful.

The Finics system is designed in such a way as to meet the requirements of the Court of Auditors.

15.5. A comparison between the accounting entries relating to movements of funds and statements of account is carried out on every working day. Complete formal reconciliations are then carried out every three months. The daily check enables any error to be detected in good time. By way of example, according to the Bank reconciliations of 31 December 1990 there are no reconciliation entries older than those for 5 December 1990. The system used thus guarantees a check which, in many respects, is more thorough than that required by the Financial Regulation. In future, however, the Administration will comply with the provision in the Financial Regulation which provides for monthly reconciliation.

15.6. The accounting officer addresses regular memoranda to the departments concerned (e.g. Accounts/Treasury, authorizing officers or imprest account administrators) providing them with the necessary instructions regarding the accounting procedures. Job descriptions already exist for each post in the accounts department.

Parliament is, however, aware of the need to provide more specific details. This matter is currently in hand.

15.7. As regards surveillance of the rooms in which the LogAbax system is installed, checks at the entrances to the building and the surveillance carried out by the security guards are the appropriate means of guaranteeing the security of the system. The European Parliament has rejected the use of a magnetic card system.

It is intended to ensure the security of the Finics system by restricting access to authorized staff. With regard to controls over the completeness and accuracy of data, the new Finics system incorporates the necessary data control protection.

The transfer of data from LogAbax to SIRC has not been responsible for any errors.

15.8. The Finics system also incorporates a preventive control system enabling ex-post controls to be reduced.

15.9 and 15.10. According to Article 29(2) of the Financial Regulation, the authorizing officer must propose a cancellation of an established debt. For this purpose, authorizing officers are informed every three months by the accounting officer of the non-recovery of old debts and requested to consider the possibility of waiver. At 31 December 1990, the authorizing officers considered that no debt was doubtful.

With regard to point 15.9 (a), the real amount is ECU 170 000, consisting of cash losses amounting to ECU 98 000 dating back to 1982 (case pending before the Court of Justice), ECU 18 000 in debts of two former Members, and ECU 54 000 owed by various debtors.

The figure quoted in point 15.9 (b) is misleading. It is composed of amounts to be settled under the Members' imprest fund, phased repayments from staff and ECU 624 000 representing the minimum amount to be refunded by the BUDG project contractors.

15.11. At the European Parliament all invoices and credit notes arrive first at the mail service which forwards them to the accounts department for registration in the suppliers file. The accounting officer is then responsible for distributing them to the authorizing officers. This arrangement guarantees the security and conservation of the documents. The procedure needs to be formalized however.

15.12. With regard to the recovery of debts, reminders are sent to debtors at the end of each quarter. The attention of authorizing officers has been drawn to the need to indicate the due date for recovery of the debt to enable the accounting officer to effect the recovery in good time.

15.13. The European Parliament drew up recovery orders, in accordance with Article 28 of the Rules governing the payment of expenses and allowances to Members, for all Members having resigned. As regards Members who remained in office, half of the general allowance was refunded directly to the European Parliament or a deduction was made from the general allowance which was to be paid to them.

With the exception of one amount outstanding, which is the subject of legal proceedings, all the amounts unduly paid in respect of half the general allowance due from previous years have been recovered.

15.14 15.21. The European Parliament is considering the advisability of introducing a modern management system enabling the responsible officials of the institution to take decisions on the basis of real costs and to decentralize management responsibilities and ensuring better and more economic use of budgetary appropriations and human resources. An external study to determine the institution's needs in this area is in progress.

The BUDG project had to be abandoned because of problems which arose in relation to the consultancy firm and the subcontractor. As the Court of Auditors points out, the contractor was not able to deliver a full turnkey system in accordance with the project specifications by the prescribed deadline.

Negotiations are currently in progress with the firm in question with a view to reaching an amicable settlement. Should they prove unsuccessful, legal proceedings will be initiated in order to secure damages and interest in respect of the expenditure incurred, which will also result in the imposition of fines.

MISSION EXPENSES

15.22. The imprest fund for Members of the European Parliament operates in the eleven Community currencies, plus the ecu, and currently uses twelve bank accounts.

To prevent any misunderstanding, it should be pointed out that it is not possible to establish a link between the ceiling on the imprest fund and the total amount of payments for the year 1990. Payments are kept within the limits of the fund's ceiling, a management instrument which compels the fund administrator to ensure that his accounts are kept up to date on a daily basis.

The imprest fund arrangement constitutes an exception to the principle of prior control of expenditure. The fund enables payments to be made without prior authorization. Only commitments intended to cover expenditure of the imprest fund and the budget regularization order are subject to the approval of the Financial Controller.

The European Parliament does not share the Court of Auditors' view that the imprest fund for Members is not an appropriate use of the imprest mechanism. Article 54 of the Financial Regulation authorizes the setting up of an imprest account for the payment of certain categories of expenditure. The Regulation does not stipulate any conditions as regards the level of amounts to be paid.

Moreover, it is difficult to see how any system other than the imprest fund could be applied on the basis of the rules currently applicable.

The decision as to the advisability of setting up an imprest account is the responsibility of the President of the European Parliament (Articles 54 and 22 of the Financial Regulation and Article 51 of the Implementing Rules), who has the power to delegate this decision to the administration pursuant to the European Parliament's Internal Rules on the implementation of the budget (Article 51(c)).

15.23. As noted by the Court of Auditors, the amounts to be refunded by Members are deducted from the allowance paid to them under the existing imprest mechanism. It is impossible to proceed in any other way if the amounts due are to be recovered, as urged by the Court, in the shortest possible time.

The application of a procedure whereby the authorizing officer would be required to draw up a recovery order every time would make this system more cumbersome and would make it necessary to take on extra staff.

The European Parliament considers that the system used for the payment of Members' entitlements must be fast and efficient.

In order to carry out recovery operations on an ongoing basis and ensure that this area is subject to monitoring and checks, an official from the Members' Accounts Office will be transferred to Brussels by the end of this year.

15.24. The European Parliament takes the view that it is not necessary to approach its President for a decision modifying the ceiling for an imprest, since the principle of setting up imprests is firmly established. Pursuant to Article 52(d) of the Internal Rules for the implementation of the European Parliament's budget, furthermore, such action can be taken by the authorizing officer concerned after the Financial Controller and the Accounting Officer have given their approval, the latter being responsible for placing funds in the imprest in accordance with the commitment covering the expenditure to be effected from that imprest.

15.25. The Court of Auditors rightly notes that the rules drawn up by the College of Quaestors, and approved by the Bureau, concerning Members' travel and subsistence allowances are complicated.

The European Parliament would point out that the complex nature of those rules is closely bound up with the duties to be discharged by Members of the European Parliament, Members being required to travel very frequently between their place of origin, the working places, Member State capitals and other places across the Community as well as outside the Community. Under the circumstances, it does not seem straightforward to act on the Court's call for the rules to be simplified.

15.26. The European Parliament would stress that, given the frequency of meetings imposed on Members because parliamentary activities take place throughout the Community, it is inevitable that undue payments, to which the Court makes reference, will be made in a very few cases.

With the help of Members and cashiers, these incidences are being kept to an absolute minimum.

Undue payments outside the normal working places make up a negligible proportion of the recovery operations pending.

15.27. The European Parliament takes the view that the Financial Regulation does not prohibit the setting up of an imprest without funds, provided, however that there is every guarantee as to checks on the expenditure effected from such an imprest.

Given the geographical spread of Parliament's activities, as a result of which staff are obliged to travel frequently between the three working places, the use of an imprest without funds has been deemed appropriate with regard to mission expenses.

15.28. The European Parliament is as alive as the Court of Auditors to the need for the duties of authorizing officers, the Financial Controller, the Accounting Officer and imprest administrators to be separate, with a view to carrying out mutual checks.

As the Court of Auditors has pointed out, the Head of the Staff Pay and Allowances Division controls the advances to be paid. He subsequently carries out final monthly settlement in respect of the imprest on the basis of the declarations submitted by staff sent on mission. It is entirely normal and in keeping with the duties of an imprest administrator that he or she should carry out these operations.

It is not the same person, however, who signs the authorization order for budget regularization. Final settlement for budgetary purposes is handled by the appropriate authorizing officer, who signs the authorization order drawn up for that purpose.

Accordingly, the principle of separation of duties is observed in full.

15.29. Parliament agrees with the Court that, as yet, not enough use is made of payments by bank transfer. This is true both of payments of Members' allowances and of officials' mission expenses.

It is not always possible, however, to pay advances on mission expenses by bank transfer, given the frequency of missions and the urgent nature of some missions.

Under the circumstances, the fact is that there are practical reasons why it is impossible to insist that staff be paid advances by bank transfer only.

15.30 15.31. Regular checks are made to protect data held in the computer system. With regard to the rgularization balances handled via the PAIE system, more rigorous checks will be implemented; as recommended by the Court, this will extend to sums below the threshold of BFR 20 000.

15.32. The interval between the date of a mission and the date of regularization results, in the first instance, from the fact that an official who is sent on mission has 30 days in which to submit a mission expenses declaration after carrying out the mission; the number of missions and the timetable for data input into the PAIE system are further factors. That system allows netting-off of amounts to be paid or recovered.

The Administration is contemplating an arrangement for paying balances without using the PAIE system. If the enquiries prove conclusive, it will be possible to pay in balances in 1992 without using the PAIE system; this will make it possible to cut the average settlement period, after an official has submitted his declaration that the mission has been carried out, from 30 days, as it is at present, to about 15 days.

15.33. The European Parliament is examining the points raised by the Court of Auditors concerning the quality of the information required for drawing up expenditure commitments.

The measures recently taken to monitor more closely the rate at which the appropriations entered in budget Item 1301 are utilized will make it possible to rule out the risk that mission expenses will exceed expenditure commitments.

It is proving difficult to forecast actual expenditure against the sub-items, one reason being that political decisions are taken which involve unforeseen mission expenses.

15.34. The European Parliament pays daily allowances at rates laid down in the Bureau decision of 13 May 1986 because of the Council's dilatoriness in taking a decision on revising the rates laid down in the Staff Regulations in the light of the objective data on real cost increases.

The Council acted on 22 July 1991, enabling the European Parliament to bring its rates into line, in the main, with the daily allowance rates for missions paid by the other Institutions on the basis of the Council decision.

15.35. Administrative efficiency is being enhanced through:

- more active involvement by all the Directorates-General in the inventory and in the three-yearly control exercise,

- improved management procedures (introduction of new inventory control plates, systematic registration of items entering and leaving the warehouse, reorganization of depot areas, checks on equipment movements, improved computerized management, enhanced security.

INVENTORIES OF MOVABLE PROPERTY

15.36. Some of the inventory-related discrepancies, which are being looked into, have already been accounted for. Following the last inventory, in 1988, there were discrepancies concerning some 20 000 items. By the start of the year, that figure had been reduced to 16 978. The provisional figure as at 15 June 1991 was 11 821. The active involvement of each official has made it possible to locate items to a greater extent.

With regard to computer facilities, a large number of items have not been located because they are computer software or electronic cards fitted into microcomputers; they are difficult to locate for inventory control staff who do not specialize in computing.

A considerable proportion of the remaining discrepancies concern property with a current value of less than ECU 75. The threshold above which items must be inventoried has been raised; in the absence of new instructions to the contrary, however, property previously entered is still recorded in the inventory.

15.37. In accordance with Article 78 of the Rules implementing the Financial Regulation and with the internal rules on the keeping of inventories, a three-yearly programme is now being implemented in the normal working places.

The relevant services are endeavouring to complete the inventory control exercise as quickly as possible, but it is necessary to take account of a number of factors specific to Parliament:

- property that has been relocated during the inventory and property that, by its nature or of necessity, is movable,

- the fact that inventoriable property is located in several working places,

- property belonging to different Institutions (Strasbourg) and to political groups or Members (Brussels) in a large number of offices,

- the fact that removal operations may have taken place between inventories,

- the fact that inventory control plates may have been lost during removals, which take place often,

- equipment installed directly in offices by the supplier because of its specific technical features,

- property which, by its very nature, is difficult to log (computing and audiovisual facilities, headphones, etc).

15.38. Each authorizing officer has clearly defined inventory-related responsibilities, as the Court of Auditors itself indicates in paragraph 15.39: 'Parliaments internal regulation on the inventory makes authorizing officers responsible for the initial entry of each item acquired and for keeping the record up to date.`

In addition, the authorizing officers in each Directorate-General have appointed an official to be responsible for controlling inventoriable property.

15.39. Since each authorizing officer is responsible for the equipment acquired under his management, it would appear difficult to issue rules making each member of staff responsible for the equipment he or she uses - except in cases of theft, damage or in flagrante delicto - particularly in view of the fact that many offices in each working place are occupied simultaneously or successively by more than one person.

15.40. An inventory record is indeed displayed in each office. Modifications have very recently been made to the relevant software to enable such records to be produced directly. Only a small number of officials or other staff are authorized to access the system. A new application will be introduced at the end of 1991 which, in particular, will enhance system security.

15.41. The few items of property that were sold before the matter could be discussed by the 'Committee on Surplus Equipment` were an exception; the action was taken as the committee was being constituted. There should be no repetition of this in future. All other rules have been complied with at all times.

ACCOUNTING BY THE POLITICAL GROUPS

15.42. The European Parliament notes the Court's observations with regard to accounting by the political groups for information campaign expenditure (budget Item 3708). The political groups have drawn up a harmonized accounting scheme. The rules governing the use of appropriations under Item 3708 will be amended; the amendments should come into effect on 1 January 1992 and take account of the remarks made by the Court on this problem in its report on the financial year 1989.

CHAPTER 16 (\*) Council

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Data-processing expenditure

INTRODUCTION

16.1. The Council's expenditure on data processing and office automation is charged to Article 222 (technical equipment and installations) of the budget and covers in particular the purchase, hire and maintenance of the equipment and the cost of studying and of developing and acquiring the software, including the services of outside staff.

IMPLEMENTATION OF THE BUDGET

16.2. The 8,4 Mio ECU of appropriations entered under Article 222 of the Council's budget in 1990 was in fact intended to cover expenditure falling under the remit of several authorizing officers. The appropriations actually committed for data processing represented the largest share of the costs charged to this Article. They amounted to 6,9 Mio ECU (82,5 % of the total).

16.3. This kind of management of appropriations by several authorizing officers has certain drawbacks in terms of surveillance of the use of appropriations and budgetary transparency and requires a degree of coordination between the authorizing officers. In view of the ever-increasing share of data-processing appropriations, it would be more in keeping with the principle of budgetary transparency and management of appropriations if the various items of expenditure charged to this Article were presented under separate budget headings.

DATA-PROCESSING STRATEGY AND PLANNING

16.4. The Council's policy-making and planning in the field of data processing/office automation are at present based on an action programme adopted in 1986 concerning the development of applications connected with data processing. Independent data-processing systems which are not covered by this action programme are being developed at the same time for administrative use.

16.5. In the mean time, the programme in question has not been formally updated. The updating of the General Secretariat's computerization programme is being carried out when the annual budget estimates are being drawn up.

POWERS IN THE DATA-PROCESSING FIELD

16.6. Introducing and developing data processing/office automation at the Council are chiefly the responsibility of two separate units: the 'New technology` division and the 'Data-processing` unit.

16.7. An analysis and a comparison of the powers of these two units show that:

(a)on the technical level, the two units each work independently;

(b)they each make their plans separately;

(c)the use of appropriations is monitored without any interface between the two systems;

(d)each unit has its own system for recording and managing equipment.

16.8. In view of the benefits to be gained at organizational level from having one single management, the present situation at the Council should be altered. The Council should make all the activities related to data processing more consistent and should draw up a multiannual data-processing programme as such.

PURCHASE OF DATA-PROCESSING EQUIPMENT

16.9. With regard to the purchase of data-processing equipment by the Council, an examination of a sample of relevant files gave rise to the following remarks:

(a)whereas until recently the practice was to hire equipment, preference is now given to purchasing it. This change has been made, however, without any programme having been laid down in this area;

(b)the Council should develop a purchasing policy since, for a period of 60 months, the cost of hiring is up to 76% higher than the cost of purchasing equipment;

(c)the hire policy followed to date is not very consistent. There were found to be substantial differences in the hire terms, especially with regard to the duration of contracts with the same supplier, which varied between 36 and 60 months. In this case, were the contracts to be cancelled, this would have to be drawn out over several years, thus imposing heavy dependence on the supplier;

(d)with some suppliers, the periodic fees are fixed either globally per contract or analytically per item of equipment. In cases where a comparison can be made, different fees are at present being paid for similar equipment.

KEEPING OF THE INVENTORY

16.10. An inspection to ascertain the physical presence of the equipment and to check that it tallied with the entries in the inventory revealed that data-processing equipment which, according to Article 65 of the Financial Regulation, was required to be included in the inventory was not in fact entered. This was the case in particular for equipment which was purchased by the Council and installed on hired machines.

16.11. Similarly, software is not entered in the inventory. In view of the amounts of money involved (in 1990, the software purchased cost 0,3 Mio ECU), the Council should lay down specific rules concerning the safeguarding of software administratively and as an asset.

16.12. The inspection also showed that some of the equipment was not located in the places marked in the inventory and that some machines were used outside the premises of the Council without their removal to another location being recorded. There should be better monitoring of the transportation and use of portable items of equipment outside the Council's premises in order to prevent the equipment in question from being dispersed.

BUDGETARY IMPLEMENTATION

16.2 and 16.3. The two units which administer the informatics appropriations under Article 222, namely the Data-processing service in DG A/I and the New technologies division of DG A/II are both part of Directorate-General A. There is as a result close cooperation between these two services both during preparation of the budget and during its implementation. Information is exchanged regularly, with the result that the existence of several computers has never caused any problems.

The Council notes that the question of the presentation of the appropriations under the administrative budgets will be the subject of an interinstitutional study with a view to harmonization. The Council will involve itself in that study so as to take account of the Court of Auditors' recommendations.

INFORMATION STRATEGY AND PLANNING

16.4 and 16.5. The independent informatics systems in the above two services meet different requirements. Traditional administrative data processing has been applied in all the sectors involved in staff management in DG A/I's Data-processing service since 1979, while in DGA/II's New technology division informatics have been applied since 1988 to the Council's operational services in areas such as word processing, production control, electronic archives, etc. Work in this latter sector is based on an action programme adopted in 1986 which is covered by annual situation reports. Studies began in 1990 on the updating of this programme and are still in progress, with the objective of establishing a blueprint for the Council's informatics architecture for the next five years. This will be consistent with the Council Decision of 22 December 1988 on standardization in the field of information technology and telecommunications. At the same time, DG A/I's informatics applications are under study with a view to the preparation of a new master plan, scheduled for 1992.

RESPONSIBILITIES IN THE INFORMATICS SPHERE

16.6 to 16.8. As is clear from the above, there is close consultation and cooperation between those responsible for the New technologies division in DG A/II and the Data-processing service in DG A/I. This cooperation is particularly apparent during the planning of activities concerning applications of interest to both services simultaneously. Monitoring of the use of appropriations also takes place in a coordinated manner. The Council accepts the Court of Auditors' suggestion that in future strategic forward planning in these two sectors be merged and coordination reinforced.

ACQUISITION OF INFORMATICS EQUIPMENT

16.9. The policy of renting data-processing equipment followed hitherto by the Council was warranted in view of the speed of developments in this area. Sound financial management of budget appropriations would in certain cases warrant further application of such a policy even today. However, the Council agrees with the Court of Auditors that a purchasing policy in this area makes increasing sense in cases where it allows the greater financial burden of certain rental contracts to be avoided and increased flexibility to be enjoyed, particularly in the context of 'open` informatics systems. For that reason, since 1990 a policy favouring purchase over rental of data-processing equipment has been adopted.

STOCKTAKING

16.10 to 16.12. As was pointed out during the audit, it is difficult to make an inventory of equipment installed out of sight within machines (this equipment is acquired under Item 2223). In any event, the Council will draw up rules allowing such equipment to be inventoried as soon as the new procedures for the implementation of Article 65 of the Financial Regulation are adopted.

Furthermore, hitherto software has not been regarded as subject to inventory, since it loses its value extremely quickly as a result of the production of new versions and rival products (software is purchased under Item 2224). The relevant Council departments will review the existing rules for software management so as to ensure it is covered by the inventory.

As regards the problems experienced during checking of the inventory, it should be noted that although some of the equipment was not to be found at the place specified in the inventory, the system of equipment management within the Council's departments allowed the equipment to be located.

Moreover, the portable computers, which are intended particularly for use outwith the Council's premises, are allocated to individual users by name for use on mission. Henceforth, their allocation will be recorded in the way the Court of Auditors suggests.

CHAPTER 17 (\*) Commission

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Expenditure of the Commission delegations in third countries

INTRODUCTION

17.1. As at 31 December 1990 there were 110 delegations or offices located world-wide outside the Community. On the same date the staff employed there totalled 541 officials and temporary staff and over 1 500 local staff. This structure is managed by the Directorate for the Administration of Delegations and Information Offices (DAD). This management takes place under a system of cooperation with the delegations, which in turn effect the expenditure via imprest accounts.

SUMMARY OF FINANCIAL INFORMATION

17.2. The appropriations for these delegations' expenditure cover both the staff expenditure entered under Chapter 18 'Staff serving in third countries` (77,8 Mio ECU) and the administrative expenditure entered under Chapter 28 'Buildings, equipment and miscellaneous operating expenditure` (34,4 Mio ECU), i.e. a total of 112,2 Mio ECU in 1990. The use made of these appropriations in 1990 is summarized in Table 17.1.

IMPREST ACCOUNTS - REGULARIZATION PROCEDURE

17.3. The management of the delegations relies heavily on the use of imprest accounts, through which very large amounts of money pass (44 Mio ECU in 1990). The procedure which the DAD follows for regularizing this expenditure is therefore of the utmost importance. An examination of the procedure for charging this expenditure to the various budgetary articles resulted in the following observations:

(a)none of the decisions to set up an imprest account specifies the maximum amount of each item of expenditure to be incurred, as laid down in Article 54 of the Financial Regulation;

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(b)the DAD department responsible does not have sufficient access to the information and documentation required to carry out the regularization operations. The documentation available at the Brussels headquarters is very widely dispersed, often incomplete and in many cases it was difficult to have access to it. Some supporting documents are not even forwarded by the delegations;

(c)the checks currently carried out by horizontal sampling do not appear to be adequate in relation to the scale of management at delegation level or where there is insufficient documentation at the head office. Selective audits by delegation or by subject should be introduced in order to strengthen the checks on the accuracy and comprehensiveness of the supporting documents sent to the DAD.

STAFF MANAGEMENT

Remuneration of officials outside the Community

17.4. During the financial year 1990, 53,0 Mio ECU were paid out as remuneration or for the reimbursement of expenses. This expenditure is paid by means of the data-processing application known as 'Paie hors Communauté`. The audit findings are given below.

Determination and settlement of entitlements

17.5. With regard to the DAD's establishment of entitlements, it was noted that for the expatriation allowance, family allowances and fixed service allowances in particular, the decisions to grant such allowances are not signed by the Appointing Authority responsible as stipulated by the Staff Regulations.

17.6. The Commission has not yet delegated its Appointing Authority responsibilities for any of the entitlements arising from Annex X to the Staff Regulations adopted on 5 October 1987. These decisions are therefore taken by the administrating department without its responsibility in the area having been determined beforehand.

17.7. Except for decisions on the allocation of the expatriation allowance and those relating to the fixed service allowance, no decision with a financial impact is sent to the Financial Controller.

17.8. With regard to certain entitlements (in particular travel and removal expenses), almost all the settlement decisions are signed by a member of staff who is not of authorizing officer status and some are not signed at all.

'Paie hors Communauté` data-processing application

17.9. Management by the 'Paie hors Communauté` data-processing application has various types of weakness. In particular there are no written instructions for the staff responsible for operating the payroll system stating which documents may be accepted for inclusion in the application. Moreover, the same department decides upon the determination of entitlements and their entry in the files and checks the entries. This situation, which is contrary to the principle of the separation of duties, should be reviewed in order to ensure that adequate internal controls are carried out.

17.10. Virtually none of the available technical documentation needed for maintenance of the payroll-application is up to date and there is also hardly any documentation for information purposes on running the payroll system (user manual).

17.11. Under these circumstances, a number of specific improvements would appear necessary for the proper running of the application. In particular, there needs to be the possibility of producing an accounting breakdown by delegation, of calculating the installation allowance in local currency and of encoding the data in respect of the non-fixed education allowance without restriction.

Advances on travel expenses

17.12. Every March the DAD pays the delegation staff an advance of up to 90 % of the expected amount of travel expenses (401 cases in 1990, involving 2 Mio ECU). This practice is based on Article 9 of the general implementing provisions relating to the application of Article 8 of Annex VII to the Commission's Staff Regulations of 1 January 1982.

17.13. The procedure adopted, however, does not comply with the abovementioned rules. Neither an application nor an estimate is required. The amounts of the advances are automatically calculated and then paid with the remunerations for the month of March. Moreover, these advances are directly charged to the budget.

17.14. In 1990, 77 payments made in this way, for amounts which in some cases exceeded 22 000 ECU and which totalled approximately 0,4 Mio ECU, had still not been adjusted by March 1991, even though by that time the advances for the new financial year had been paid to the persons concerned.

Installation allowances and service accommodation

17.15. In 1990 approximately 1,4 Mio ECU was paid out in installation allowances to officials who either were leaving the head office to take up a posting in a delegation or were changing delegation. However, following the entry into force of Annex X to the Staff Regulations

, service accommodation, for which the rent is paid by the Commission, is made available to all delegation officials. The Commission also fits out and furnishes the accommodation for a cost of around 14 200 ECU per lodging. The cost of removing personal effects, furniture or decorations is also borne by the Commission. Officials therefore continue to have the benefit of both the installation allowance and the accommodation made available by the Commission. Under these circumstances, the Commission should examine whether the Staff Regulations need to be amended in order to abolish or adjust the installation allowances for members of staff living in service accommodation.

Local staff

17.16. At 31 December 1990 the delegations' personnel included over 1 500 members of local staff. During the financial year their actual overall cost amounted to 17,3 Mio ECU. Of these members of staff, 463 belonged to the External Relations delegations (cost: 10 Mio ECU) and 1 064 to the Development delegations (cost: 7,3 Mio ECU). It should be noted that the first category of delegation (External relations and press and information) has always been part of the Commission departments, while the second category (Development), formerly under the European Association for Cooperation (EAC), has been managed by the Commission since 1988.

17.17. An examination of the current management of the staff in question gives rise to the following observations:

17(a)these members of staff are recruited and classified and their remuneration is determined by the Authority Empowered to Conclude Contracts of Employment (AHCC) on the basis of a proposal by the Head of Delegation, without the AHCC having at its disposal the necessary supporting documents, in particular those attesting to the candidate's level of training and professional experience, which are kept in the delegation's personal file on the person concerned. It is obvious that the classification and assignment of step thus become subjective and do not allow the Financial Controller, who is required to approve the AHCC's decisions, to have sufficient data on which to base his decision, especially since the decisions concerning the Development staff are never sent to the Financial Controller for approval;

(b)the personal files kept by the DAD are incomplete. In many cases a final assessment of the situation of a member of staff is possible only by comparing the file available at the head office with that kept by the delegation;

(c)there is no complete, consistent system of computerized administrative management. The existing databases do not provide a complete and reliable view of the staff's administrative position;

(d)unlike the position of the External Relations staff, who are subject to the provisions of the Staff Regulations in force, the position of former EAC staff has not been settled by the DAD, which has not adopted the rules that are provided for in Article 79 of the CEOS and are intended to replace those formerly drawn up by the old EAC. There are now therefore two different sets of rules governing the working conditions of the Commission's local staff.

MANAGEMENT OF THE LOGISTICAL INFRASTRUCTURE

Management of buildings

17.18. At the end of 1990 the DAD managed 621 buildings including 507 units (houses/flats) of residential accommodation (38 as own property) as well as 114 delegation offices (9 as own property), i.e. a total of 574 rented buildings and 47 owned. The expenditure relating to these buildings amounted to 20,3 Mio ECU, of which 16,4 Mio ECU was for the payment of rent, 3,2 Mio ECU for associated costs and 0,9 Mio ECU for fitting-out and major repairs, 0,5 Mio ECU having been entered under Chapter 100 for the construction and purchase of buildings.

17.19. These buildings are managed in accordance with a Commission Decision of 26 October 1988. This management calls for the following observations:

(a)the rental of new housing is not subject to the prior opinion of the Advisory Committee on Procurements and Contracts (ACPC) required for all contracts exceeding 35 000 ECU;

(b)the special provisions adopted by the Commission refer only to residential accommodation and offices. However it was noted that the delegations rent other premises such as car parks and warehouses, thus avoiding any check by the DAD and the Financial Controller's prior approval;

(c)the Commission Decision on officials' accommodation is still in fact applied in a somewhat random manner, given the failure to date to comply with the circular explaining the procedures to be followed in this field;

(d)half-yearly reports listing all the rental operations made, the amounts authorized in relation to the previous amounts and the special payment provisions, stipulated by the Commission Decision of 1988 have never been drawn up;

(e)accommodation is rented directly by officials and the rent is paid for by the Commission. The latter should only have to fulfil obligations entered into by itself and not those made by its staff. It should be noted, furthermore, that such contracts are often concluded without applying the prior authorization procedures in force;

(f)in certain cases, no agreement is made stipulating the respective rights and obligations of the official and institution in respect of the accommodation made available by the Commission. In order to remedy this situation the Commission should draw up rules laying down the respective rights and obligations in this area.

Real-estate policy

17.20. The real-estate policy followed hitherto has mainly been pragmatic and dependent upon current budgetary resources available. Thus the 50 buildings owned by the Communities have been purchased with ECSC funds, EDF funds, budgetary appropriations from the former EAC or the Commission's budgetary appropriations.

17.21. The inclusion, since 1989, of a specific budget heading entitled 'Construction and acquisition of buildings` under Chapter 28 of the budget should prompt the DAD to submit to the budgetary authority its general view of a property purchasing policy. One approach should be to buy or construct rather than rent in all cases where this would prove to be the most advantageous solution. Such an approach would depend on a systematic exploration of the markets in order to define a regional or local purchasing policy.

Transfer of property from the former EAC to the Commission - Furniture and inventory

17.22. The operations for transferring the property of the former EAC to the Commission were practically finished by the beginning of 1991. With regard to the rentals, around 80 % of the former EAC's leases had been formally taken over.

17.23. There are problems in respect of the inventory. It was noted during an on-the-spot audit that the External Relations delegations were experiencing difficulties in applying the general provisions governing this area. However, so long as new provisions are not adopted the delegations are obliged to apply the old ones. As regards the Development delegations, although 75 % of the property has been entered in an inventory, the goods listed are not included in the Commission's general inventory (approximately 60 000 items).

Vehicle fleet and transport allowances

17.24. As regards the vehicle fleet and transport allowances, the situation at present varies depending upon the type of delegation concerned. The Development delegations have a sizeable vehicle fleet. No transport allowances are paid. In the External Relations delegations, by contrast, the vehicle fleet is smaller and specific transport allowances are granted to officials who use their own car for official purposes. Indeed, cars are assigned to the various delegations (the vehicle fleet comprised 493 vehicles at the end of 1990) without any specific criteria having been laid down by the DAD.

17.25. A comparison made between the number of A and B category officials (who may, in principle, be called upon to travel in the interests of the service) and the fleet of cars revealed that the External Relations delegations had 102 cars for 203 posts (10 of which were vacant) whereas the Development delegations had 316 cars for 309 posts (25 of which were vacant). In view of the fact that the number of cars exceeds that of officials in the latter delegations, the requirements of each delegation should be assessed in order to bring the vehicle fleet into line with the real needs of the service.

Expenditure on data processing

INTRODUCTION

17.26. The Court examined the expenditure of Part A of the budget in respect of the procurement, leasing and maintenance of computers, peripherals and software and the procurement of equipment, supplies and documentation relating to the operating of the Computer Centre and the computer network. The use of appropriations in respect of the services of outside computer staff and the computer operations handled outside was also audited.

IMPLEMENTATION OF THE BUDGET

17.27. The appropriations of the financial year 1990 initially entered under Chapter 21 of the Commission budget amounted to 39,0 Mio ECU. An increase (1,4 Mio ECU) during the financial year brought the budgetary resources up to 40,4 Mio ECU. Revenue available for re-use, which was re-used in 1990, amounted to approximately 2,0 Mio ECU. For the financial year 1990, the data-processing expenditure of Part A of the budget thus totalled about 42,4 Mio ECU.

17.28. It should be pointed out that the Commission's Directorates-General also finance part of their computerization from the operating budget headings (Part B of the budget). The amount of appropriations from Part B thus used for data-processing expenditure was 25,8 Mio ECU.

ACQUISITION OF EQUIPMENT

17.29. The acquisition of data-processing equipment by the Informatics Directorate (at central level) and by the various Directorates-General is carried out on the basis of framework contracts made with the suppliers, selected after invitation to tender, with a view possibly to making repeat supplies of equipment. By contrast, orders are placed by direct negotiation for single contracts. Only equipment included in the 'list of products` may be ordered, irrespective of the budget heading or the authorizing officer responsible.

17.30. The procedure followed by the Informatics Directorate gives rise to the following observations:

(a)the issuing of periodic invitations to tender is restricted to the hardware for normal use and is designed to enable the Commission to acquire equipment on the basis of appropriate technical criteria from pre-selected specialist firms without the invitation to tender itself involving an obligation to purchase the equipment;

(b)the ACPC is therefore called upon to decide on economic and/or technical aspects before the conditions for awarding a specific contract have been laid down;

(c)there are not usually any invitations to tender for equipment for special use or for software. These contracts are awarded directly by private treaty, in accordance with Article 58(d) (particular supplier) and/or (e) (contracts which cannot be separated from the main contract) of the Financial Regulation.

17.31. In the Court's view this procedure does not fully comply with the provisions in force, especially in view of the absence of the ACPC's (compulsory) opinion on the acquisition of the equipment. Current practice should be reviewed in order to enable the ACPC to deliver its opinion at the time of the actual conclusion of contracts and not only on the selection of equipment and potential suppliers.

PROVISION OF SERVICES

17.32. In the computer field, the Commission entrusts a number of activities to outside staff, such as systems analysis and programming, technical back-up, training, application management, data acquisition, etc.

17.33. The contractual framework for these services is based mainly on either the framework contracts concluded directly with the equipment suppliers or a framework contract concluded with specialist firms.

17.34. An examination of the payments made in the first six months of 1990 showed how frequently the Commission had recourse to outside staff and how much this cost. The prices paid per day of service were between 132 and 1 158 ECU. In 1990 the amount of appropriations intended to cover the provision of services was 9,0 Mio ECU for Part A of the budget and 10,7 Mio ECU for Part B, which represents approximately 210 man-years of service (average unit price per day 390 ECU).

17.35. These services and the application of the framework contracts concerned give rise, in particular, to the following observations:

(a)the supervision and checking of the presence of staff on contract are the responsibility of the requesting departments. This checking is not consistent (lack of a standard form to record hours and days worked) and the contracts do not clearly define the hours to be worked;

(b)certain specific agreements concluded in accordance with the same framework contract determine the prices of services either on the basis of a specific number of days of service or by an overall fixed amount or in relation to the two criteria (both the number of days and the maximum amount). This means that different controls have to be made even for the services performed by the same firm and makes it difficult to check the invoices;

(c)the framework contracts currently applicable to the provision of services were concluded in 1989 with 78 different firms, depending on the type of work to be performed. As for the equipment, the framework contracts do not obligate the Commission to place orders. The contracts are concluded with selected firms on the basis of an invitation to tender sent each time to certain contractors (maximum 10) selected from all the contractors approved for each type of work. All the contractors are, in this way, consulted in turn over a given period. It is obvious that this practice does not always favour the contractors offering the best terms amongst all the tenderers.

MANAGEMENT OF EQUIPMENT

Systems of managing equipment

17.36. The data-processing equipment is managed by the Informatics Directorate on the basis of a computer application known as 'base déquipements`. The check carried out at two Directorates-General in order to check whether the data contained in the 'base déquipements` tallies with the actual location of the property revealed that only 70 % and 59 % respectively of the equipment was in place. Similarly, a comparison of the computer equipment installed with that listed in the inventory revealed equipment that did not appear on the 'base déquipements` list.

17.37. The local management applications at Directorate-General level were developed without interface with the 'base déquipements` managed by the Informatics Directorate. Moreover, it should be noted that all the data-processing equipment listed in the inventory is also recorded in the Commission's Sysbien

system, also without interface with the Informatics Directorate's 'base déquipements`. The Commission thus has three separate computer applications which cover the same equipment but are not interlinked.

Inventory of data-processing equipment

17.38. The data contained in the inventory and the on-the-spot check of equipment revealed the lack of precise criteria to be applied when making entries in the inventory. It was found that items of equipment of the same type are sometimes listed and sometimes not. Moreover, it was noted that the software and supplementary equipment (for example: mouse) for computers that were already installed were considered impossible to be listed in an inventory. On account of their omission from the inventory, the value of these items of equipment is not included in the Commission's assets.

Software

17.39. According to the estimates of the administrators concerned, at the Commission there are currently approximately 100 types of software in use, for which the 'base déquipements` contains some 870 software entries. It should be noted that the relevant expenditure concerning only new acquisitions exceeded 2,9 Mio ECU in 1990. In view of its increasing financial and operational significance, it is both urgent and necessary that the Commission draw up specific rules for the handling of software from the administrative point of view and in terms of its assets.

Expenditure of the Commission delegations in third countries

IMPREST ACCOUNTS - REGULARIZATION PROCEDURE

17.3. (a) It would be almost impossible to specify a maximum amount for each item of expenditure in view of the intolerable administrative burden this would entail (see the Commission's reply to paragraph 1.125 of the 1989 annual report). The Commission took this into account in its proposal for a regulation laying down detailed rules for implementing the Financial Regulation (Title X), on which the institutions are at present being consulted.

(b) The dispersion of documents is due to the way responsibilities are allocated between the DAD units. Nevertheless documents are accessible to any individual or department requiring them. However, the Commission agrees with the Court about the need for full, easily accessible documentation.

(c) In May 1991 the DAD elaborated a set of work sheets initially setting out the steps to be followed for the monthly audits of imprest accounts and subsequently covering the methods to be used for management control, although this is limited for the moment to the vehicle fleet and local staff.

STAFF MANAGEMENT

Determination and settlement of entitlements

17.5 17.6. It is true that the table of appointing authority responsibilities within the DAD has not yet been updated.

Pending the decisions concerning the future of the DAD and in order not to paralyse operations, the administering departments have acted in their capacity as subdelegated authorizing departments.

Once the new structures are in place, the table of appointing authority responsibilities will be updated.

17.7. The DAD administrative departments will do all they can to ensure that the procedures followed at headquarters for all decisions with financial implications are also applied outside the Community.

17.8. The problems regarding signatures have been dealt with and decisions on the settlement of entitlements are now signed by the competent authorizing officers by delegation (Director or Head of Unit).

'Paie hors Communauté` data-processing application

17.9. It is true that not all input procedures have yet been formally set down. The DAD will endeavour to remedy the situation by reallocating responsibilities within departments in line with the principle of separation of duties (determination of entitlements, input and checking).

It should be noted that in practice those operating the payroll system take the data determined by the appointing authority before the official concerned was posted abroad. Where necessary the situation is regularized once the DAD takes over responsibility for administering the staff in question so as to minimize the delay in the transition from one system to the other.

17.10. The Commission agrees that the user manual/guide for the payroll application needs to be updated. However, an outside expert is currently engaged in making improvements to the 'paie hors Communauté` system. Once this priority task is completed, the manual can be brought up to date.

17.11. The improvements suggested come within the remit of the expert referred to above.

Advances on travel expenses

17.12 17.14. In view of the many different departure points and destinations involved, it was felt that the most economical answer was to pay advances on travel expenses together with salaries for March, on the basis of the IATA rates communicated by a travel agency for the most direct and cheapest route available.

The advances are calculated in the light of the most up-to-date information regarding the family situation and place of origin of staff.

At the end of 1990 the advances charged directly to the budget that year were adjusted.

As regards the 77 advances for 1990 that had not been adjusted in March 1991, the sums paid to officials who had not submitted supporting documents by then were recovered. There remain 6 cases where supporting documents have been presented, and these are in the process of being regularized.

The administration of staff outside the Community is rather special, and there should be specific implementing provisions for applying the rules of the Staff Regulations in these special circumstances.

Installation allowances and service accommodation

17.15. The installation allowance is not to offset any quantifiable or detailed expenses, but instead reflects the fact that at least some costs have been incurred (see the analysis of the allowance by the Court of Justice in Burg).

Although officials serving outside the Community are provided with accommodation and are reimbursed removal costs for their personal effects, the fact remains that installation in a foreign country and settling down there entails some costs.

These minimum costs, which vary very widely from one official to another, are what the (flat-rate) installation allowance covers. The Commission considers it quite justified and therefore does not see any need to propose an amendment to the Staff Regulations on this head.

Local staff

17.16 17.17. The procedures currently used for staff outside the Community are intended to afford the same guarantees as regards compliance with the rules as at headquarters, while allowing the decentralization that is essential in this area.

Administering more than 1 500 locally recruited staff working in 115 countries and governed by a variety of different rules poses enormous difficulties. Centralizing all the data in Brussels and updating it there does not appear feasible. But checks on the personal files of local staff constitute an important part of on-the-spot inspections.

As far as employment contracts and classification decisions for local staff are concerned, a list of the supporting documents that have to be submitted to the DAD is going to be drawn up in agreement with Financial Control, with a view to simplifying procedures and improving decentralization.

As for paragraph 17.17. (d) regarding the existence side by side of two sets of rules governing the conditions of employment of local staff, on 21 November 1989 the Commission adopted framework rules (SEC(89)2022/2, dated 22.11.1989) which will make it possible for all Commission local staff serving in non-member countries to be treated on the same footing, while still allowing specific local conditions in each country to be taken into account.

MANAGEMENT OF THE LOGISTICAL INFRASTRUCTURE

Management of buildings

17.19. (a) Although the general rule requires the prior opinion of the Advisory Committee on Procurements and Contracts (ACPC) for all contracts exceeding ECU 35 000, the particular problems of managing buildings outside the Community - both in terms of sheer number and the speed of reaction needed in certain places where the property market is especially tight - have prompted the DAD to apply the Commission's Decision of 26 October 1988 (Written procedure E/1295/88 - SEC(88)1526) when renting residential accommodation and offices.

(b (c (f) The rules on building management (internal circular N° 7) are now being revised to reflect the particular features of management outside the Community.

Proposals to rent buildings of the kind referred to by the Court always have to be submitted to the DAD for prior approval and will also require approval by the Financial Controller from now on.

(d) The DAD will in future produce the six-monthly reports required under the Commission's Decision of 1988.

(e) The practice of staff renting accommodation directly is now being dealt with.

As staff move under the rotation system, contracts concluded directly by them are terminated and new contracts are concluded by the DAD when the new officials arrive.

Real-estate policy

17.20 17.21. It is true that there is no document setting out a general view on property policy.

However, there are two items of note here:

- the DAD has pursued a consistent policy on the purchase of property outside the Community and benefits from the experience of its predecessors in terms of managing the delegations;

- the shortage of funds in recent years has prompted specific analysis, by a standing technical working party, of individual cases where financing was possible.

At present the DAD is examining various financing systems and should eventually be able to spell out its views in a more detailed document.

Transfer of property from the former EAC to the Commission - Furniture and inventory

17.22 17.23. Data on the property entered in the delegations' inventories was sent on diskettes to the headquarters department responsible for keeping the Commission's general inventory.

This data will therefore be included in the inventory for 1991.

Vehicle fleet and transport allowances

17.24 17.25. The Commission endeavours constantly to ensure that each delegation has the most suitable vehicle fleet for its particular circumstances and operational needs.

The very poor state of the roads in some countries, especially in Africa, and the number of projects being monitored warrant the purchase of a larger number of vehicles there, all the more so since officials cannot be expected to use their own vehicles for delegation business in view of the very tough conditions.

The opposite phenomenon is found in the 'industrialized` countries.

Expenditure on data processing

ACQUISITION OF EQUIPMENT

17.31. Orders for the acquisition of data-processing equipment are placed with suppliers under general contracts concluded after consulting the ACPC, following a tendering procedure. They take the shape of 'specific agreements`, which in fact amount to detailed orders. These specific agreements in no way affect the overall framework set by the general contract, which specifies the contractor, the equipment that may be ordered and the unit price. The only departure from the general contract that may occur is that a lower price may be negotiated, depending on the quantity ordered.

In terms of sound financial management there is, then, no reason to refer these transactions to the ACPC, as they are conducted under contracts on which it has been consulted in advance. Purchases of this kind cannot be regarded as being made by direct negotiation, since they are directly subject to the general contracts. They are, indeed, submitted individually for approval by Financial Control, which is thus able to check that they fall under the general contract.

The situation is, of course, different where an order placed with a supplier falls outside the scope of the general contract concluded with him. For example, the purchase of software from a supplier with whom the Commission has signed a general contract for services would have to be referred to the ACPC, even in the event of a directly negotiated contract, as soon as the threshold value was exceeded.

PROVISION OF SERVICES

17.35. (a) The Commission recognizes the value of uniform methods for supervising and checking the presence of outside staff and a clear definition of the hours to be worked. Contracts and procedures will be altered accordingly.

(b) The Commission will ensure that contracts specify unambiguously either a specific number of days of service or an overall fixed amount.

(c) The Commission is currently drawing up new general contracts for the provision of data-processing services. The contracts will relate to specific fields, which will make it possible to select a smaller number of firms. This should make it possible, in any given field, to find the firm offering the best terms among those selected.

MANAGEMENT OF EQUIPMENT

Systems of managing equipment

17.36 17.37. While not contesting the Court's figures, the Commission would point out that some equipment is mobile by its very nature (portable computers, for instance) and that some is located close to the recorded place of installation (neighbouring offices). If these factors are taken into account, 84 % of the equipment installed in the first Directorate-General and 87 % in the second was at the correct location. After the inspection, all the equipment was located.

Nevertheless, to improve equipment management and in view of the decision to decentralize its data-processing management, the Commission intends to rethink the equipment management system, in particular the link between equipment management applications in the Directorates-General and the central systems (Sysbien and the 'base déquipements`).

Inventory of data-processing equipment

17.38. The Commission will bring in procedures to review regularly the criteria for entries in the inventory. Some equipment, however, is impossible to include in an inventory (electronic cards, for instance). Nevertheless the Commission will take steps to ensure that the value of such items is included in its assets.

Software

17.39. The different language and technical versions of each item of software are recorded in 'base déquipements`.

In view of the growing scale of software purchases, the Commission recognizes the need to lay down specific rules for handling software from the administrative point of view and in terms of its assets.

CHAPTER 18 (\*) European Schools

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INTRODUCTION

18.1. At the start of the 1990 autumn term, the nine European Schools were attended by 14 598 pupils (including 1 187 at infant-school level, 5 477 at primary-school level and 7 934 at secondary-school level). The staff totalled 1 030 teachers seconded by national governments, 365 part-time teachers recruited by the headmasters, 196 part-time teachers of religious instruction and 204 administrative and service staff.

For the financial year 1990, the total expenditure of the nine Schools and the Office of the Representative of the Board of Governors amounted to 98,6 Mio ECU, 65,3 of which was covered by the Community budget.

APPLICATION OF THE FINANCIAL REGULATION

18.2. The Financial Regulation of the European Schools

entered into force on 1 January 1989. The main provisions of the Regulation concern:

(a)the establishment of a single budget;

(b)the creation of a uniform accounting plan;

(c)the separation of the duties of authorizing officer, accounting officer and Financial Controller;

(d)the obligation to carry out a check prior to transfers, commitments and payment orders.

18.3. These provisions were supplemented by the implementing procedures of 2 February 1989 and the internal rules of 24 July 1989, 9 October 1989 and 1 February 1991 decided upon by the Representative of the Board of Governors.

18.4. The application of these provisions, however, is still not satisfactory. Certainly some progress has been noted as regards the presentation of the budget for the financial year 1990 in accordance with the Financial Regulation, the appointments of authorizing officers, accounting officers and the Financial Controller and the introduction of new financial management procedures. However, the creation of a uniform accounting plan in accordance with the Regulation still runs up against the different systems of accounting within the Schools, pending the forthcoming introduction of a computerized accounting system.

18.5. With regard to the prior check, the requirements of the Regulation have been only partially fulfilled. For the check prior to commitment proposals, the Schools apply a procedure which runs counter to the Financial Regulation. By regarding almost all expenditure as current expenditure and by proposing provisional commitments, the Schools are in fact circumventing the specific, prior check for most of the commitments entered into. Except for certain items of expenditure (installation allowances, severance grants, replacement of equipment), the payment orders are not approved.

18.6. Moreover, at its meeting of 24 and 25 April 1990 the Board of Governors deemed fit to extend until 1 May 1992 the dual mandate of Financial Controller and internal controller given to the official responsible for carrying out prior checks on expenditure. The Board of Governors has thereby maintained the existing situation of dependence which in fact reduces the effectiveness of the Financial Controller's work in the area of prior checks.

18.7. The Board of Governors should consider whether the absence of approval in respect of payments could not be partially corrected by the appointment of an assistant Financial Controller (Article 20 of the Financial Regulation).

APPLICATION OF THE FINANCIAL REGULATION

18.4. The Office of the Representative of the Board of Governors has prepared consolidated accounts for 1990 covering all the European Schools and the Representative's Office in accordance with the Financial Regulation applicable to the general budget of the European Schools. There is a uniform accounting plan; it applies to those parts of the budget which have been computerized (Brussels I and II and the Office). By the end of 1991 the Mol, Bergen and Luxembourg Schools will be computerized, and the system will be complete by the end of 1992.

18.5. Article 90(2) of the Financial Regulation allows the application of Articles 20, 24, 31 and 41 (prior approval by the Financial Controller) to be deferred. While the computer system was being put into operation the Representative of the Board of Governors authorized deferral in cases specified in his internal instructions, notably in areas not yet computerized.

The Commission will ask the Representative to instruct authorizing officers to confine provisional commitments to routine expenditure.

18.6. The Commission has always opposed the dual mandate of Financial Controller and internal controller, but the establishment of a post of full-time Financial Controller was delayed both for budgetary reasons and because decisions of the Board of Governors have to be unanimous.

The Commission will ask the next meeting of the Board of Governors (29 and 30 October 1991) to issue an immediate call for applications so that the post of Financial Controller can be filled by 1 May 1992, when the current appointment expires.

18.7. The Commission will also ask for an assistant Financial Controller to be appointed.

Commission Regulation (ECSC, EEC, Euratom) N° 610/86 of 11.12.1986 laying down detailed rules for the implementation of certain provisions of the Financial Regulation of 21.12.1977 (OJ L 360, 19.12.1986, p. 1), referred to in this Chapter as 'the implementing measures`.

Internal rules for the implementation of the European Parliament's budget, adopted by the Bureau on 17.12.1986.

Internal rules for the implementation of the European Parliament's budget, adopted by the Bureau on 17.12.1986.

Staff Regulations: Annex VII, Article 13, paragraphs 1 and 9.

Bureau decision of 13.5.1986, which established a system of annual indexing of the rates.

'Règlement concernant la tenue de linventaire` (Regulation on the keeping of inventories), made by the Secretary-General on 19.4.1989.

Annual report concerning the financial year 1989, paragraphs 16.13 to 16.16.

OJ L 286. 9.10.1987, pp. 3 to 7.

Sysbien: Computer application for the management of movable property listed in an inventory at the Commission.

Financial Regulation of 18.10.1988 applicable to the general budget of the European Schools.

ANNEX I

Reports and opinions adopted by the Court of Auditors during the last five years

The Court of Auditors is required by the terms of the Treaties to produce an annual report. It is also required, by the Treaties and other regulations, to produce annual reports on certain Community bodies and activities. The Treaties further give the Court the power to submit observations on specific questions and to deliver opinions at the request of one of the institutions. The reports and opinions adopted by the Court during the last five years are listed below.

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ANNEX II

Financial information relating to the general budget of the European Communities and to the European Development Funds (1990)Preliminary remarks

1. Source of financial data

The financial data in this Annex have been drawn from the revenue and expenditure accounts and the balance sheets of assets and liabilities of the European Communities (1) and of the European Development Funds and from other financial records provided by the Commission.

2. Monetary unit

All the financial data are presented in millions of ECU (Mio ECU), rounded to one decimal place. They always represent the rounding-off of each exact value and not the sum of the rounded-off figures.

3. Nomenclature

For each financial year the Court uses the budgetary nomenclature corresponding to that financial year for the presentation of the historic data. In 1988 there was a significant change in the nomenclature compared with previous financial years: as from that financial year costs incurred in the collection of own resources are no longer shown as expenditure but as negative revenue. This should be taken into account when comparing the various financial years.

4. Abbreviations and symbols

ECEuropean Community(ies)

ECSCEuropean Coal and Steel Community

EECEuropean Economic Community

EAEC or EuratomEuropean Atomic Energy Community

EAGGFEuropean Agricultural Guidance and Guarantee Fund

GNPGross national product

VATValue-added tax

(1)For the financial year 1990: revenue and expenditure account and balance sheet of assets and liabilities relating to operations under the 1990 budget [doc. SEC(91) 508 512].

BFRBelgian franc

DKRDanish crown

DMGerman mark

DRGreek drachma

ESCPortuguese escudo

FFFrench franc

HFLDutch guilder

IRLIrish pound

LFRLuxembourg franc

LITItalian lira

PTASpanish peseta

UKLPound sterling

u.a.Unit of account (until 1977)

EUAEuropean unit of account (from 1978 to 1980)

ECUEuropean currency unit (as from 1 January 1981)

Mio ECUMillions of European currency units

DADifferentiated appropriations

NDANon-differentiated appropriations

CACommitment appropriations

PAPayment appropriations

AFCAppropriations for commitment

AFPAppropriations for payment

BBelgium

DKDenmark

DFederal Republic of Germany

GRGreece

ESpain

FFrance

IRLIreland

IItaly

LLuxembourg

NLNetherlands

PPortugal

UKUnited Kingdom

EUR 10/12Total of the 10 or 12 Member States of the European Communities

BGBulgaria

CSCzechoslovakia

HHungary

PLPoland

ex. GDRthe former German Democratic Republic

RURomania

YUYugoslavia

EDFEuropean Development Fund

ACPAfrican, Caribbean and Pacific States

OCTOverseas countries and territories

FODFrench overseas departments

RRPRehabilitation and Revival Plan

StabexStabilization of export earnings

SysminSystem of stabilization of export earnings from mining products

FRFinancial Regulation of 21 December 1977 (see also the foreword on the inside front cover)

OJOfficial Journal of the European Communities

SBudgetary section

TBudgetary title

ChBudgetary chapter

-Nil

0,0Data between zero and 0,05

%Percentage

§Sections referring within this annex to texts, diagrams and tables

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Part I: General budget of the European Communities

1. Background information on the general budget

1.1. Origin of the general budget

The general budget was created by the Merger Treaty (1) (Article 20). It replaced, on 1 January 1968, the three separate EC budgets which existed before then: the ECSC administrative budget, the EEC budget and the Euratom operating budget. The Euratom research and investment budget was incorporated in the general budget as from 1971 by the Treaty of Luxembourg (2) (Article 10).

1.2. Legal basis

The general budget is governed by the financial provisions of the Treaties of Paris (3) (Article 78 ECSC) and Rome (4) (5) (Articles 199 to 209 EEC and Articles 171 to 183 Euratom). The Financial Regulation (6) governs the procedure for establishing and implementing the budget and for presenting and auditing the accounts. It is supplemented by further specific enactments governing the details of budgetary implementation.

1.3. Main budgetary principles prescribed by the Treaties and the Financial Regulation

The budget is authorized for one financial year (annuality). The budget presented must be in balance. Budgetary revenue is to be used without distinction to finance all expenditure entered in the budget (non-assignment). All items of Community revenue and expenditure are to be included in the budget (unity). The appropriations are specialized according to their nature or intended use (speciality). All items of revenue and expenditure are to be entered in full in the budget and in the accounts without any adjustment against each other (universality). There are some exceptions to these general principles.

1.4. Content and structure of the general budget

The general budget comprises the estimates of the ECSC's administrative expenditure and corresponding revenue, the EEC's revenue and expenditure and Euratom's revenue and expenditure.

The budget consists of five separate sections subdivided into statements of (estimated) revenue and expenditure: (I) Parliament; (II) Council (annexed: Economic and Social Committee); (III) Commission; (IV) Court of Justice; (V) Court of Auditors.

Within each section (7), revenue and expenditure are classified under budget headings (titles, chapters, articles and items) according to their type or the use to which they are to be applied.

1.5. Monetary unit of the general budget

The budget is established and implemented in ECU. The ECU is a unit based on a basket of national currencies. Following the revision of September 1989, 1 ECU = 0,6242 DM + 0,08784 UKL + 1,332 FF + 151,8 LIT + 0,2198 HFL + 3,301 BFR + 0,130 LFR + 0,1976 DKR + 0,008552 IRL + 1,440 DR + 1,393 ESC + 6,885 PTA.

The rates of conversion at 31 December 1990 between the ECU and the national currencies were as follows: 1 ECU = 42,1839 BFR = 7,88260 DKR = 2,04195 DM = 214,065 DR= 182,818 ESC = 6,95010 FF = 2,30384 HFL = 0,767840 IRL = 42,1839 LFR = 1 540,26 LIT = 130,604 PTA = 0,707840 UKL.

1.6. Financing of the general budget (budgetary revenue)

The general budget is mainly financed from the Communities' own resources: agricultural levies, sugar and isoglucose levies; customs duties; VAT-based own resources and GNP-based own resources; for more detailed information see the legislation in force (8).

Besides own resources, there are also other smaller sources of revenue (see § 5).

(1) Merger Treaty (8 April 1965): Treaty establishing a Single Council and Single Commission of the European Communities.

(2) Treaty of Luxembourg (22 April 1970): Treaty amending certain budgetary provisions of the Treaties establishing the European Communities and of the Merger Treaty.

(3) Treaty of Paris (18 April 1951): Treaty establishing the European Coal and Steel Community (ECSC).

(4) Treaty of Rome (25 March 1957): Treaty establishing the European Economic Community (EEC).

(5) Treaty of Rome (25 March 1957): Treaty establishing the European Atomic Energy Community (Euratom).

(6) Financial Regulation of 21 December 1977 (OJ L 356, 31.12.1977). See in this respect the foreword on page 2.

(7) Section III (Commission) is subdivided into Part A 'Staff and administrative appropriations` and Part B 'Operating appropriations`.

(8) Principal legal acts relating to own resources:

-Sixth Council Directive of 17 May 1977, common system of VAT: uniform assessment basis (OJ L 145, 13.6.1977).

-Council Decision 88/376/EEC, Euratom, of 24 June 1988 (OJ L 185, 15.7.1988).

-Council Regulation (EEC, Euratom) N° 1552/89 of 29 May 1989 (OJ L 155, 7.6.1989).

-Council Regulation (EEC, Euratom) N° 1553/89 of 29 May 1989 (OJ L 155, 7.6.1989).

-Council Directive 89/130/EEC, Euratom, of 13 February 1989 on the harmonization of the compilation of GNP (OJ L 49, 21.2.1989).

1.7. Types of budget appropriations

To cover estimated expenditure, the following types of budget appropriations are distinguished in the general budget:

(a)Differentiated appropriations (DA) are used to finance multiannual activities in certain sectors. They comprise commitment appropriations and payment appropriations:

-commitment appropriations (CA) cover, for the current financial year, the legal obligations entered into for activities whose implementation extends over several financial years;

-payment appropriations (PA) cover expenditure arising from commitments entered into in the financial year and/or preceding financial years.

(b)Non-differentiated appropriations (NDA) cover, for annual activities, both commitments and payments for the same financial year.

It is thus important to establish the following two totals for the same financial year:

-the total of appropriations for commitment (AFC) (1) = +non-differentiated appropriations (NDA)

+commitment appropriations (CA) (1);

-the total of appropriations for payment (AFP) (1)= +non-differentiated appropriations (NDA)

+payment appropriations (PA) (1).

Revenue raised in the budget is to cover the total appropriations for payment. Commitment appropriations are not financed until the corresponding payment appropriations have been entered in the budget.

The following simplified scheme (with illustrative amounts) shows the impact of these types of appropriations in each budget year:

(1)It is important to note the differences between appropriations for commitment and commitment appropriations and between appropriations for payment and payment appropriations. The two terms commitment appropriations and payment appropriations are used exclusively in the context of differentiated appropriations.

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1.8. Establishment of the general budget

Before 1 July of each year each institution draws up estimates of its expenditure for the following financial year (running from 1 January to 31 December). The Commission enters these estimates in a preliminary draft budget, and, not later than 1 September, places this before the Council, which with Parliament constitutes the budgetary authority. The Council establishes the draft budget and forwards it to Parliament not later than 5 October of the same year. Parliament can propose modifications to the draft budget for compulsory expenditure (1) and make amendments for non-compulsory expenditure; these modifications and amendments are submitted to the Council. For compulsory expenditure the Council takes the final decision. For non-compulsory expenditure Parliament may, within the limits of a statistical maximum rate of increase, make amendments before taking the final decision. The President of Parliament declares that the budget has been finally adopted. However, Parliament may reject the draft budget and ask for a new draft to be submitted (2).

If at the beginning of a financial year the budget has not been voted, particular provisions of the Treaties and the Financial Regulation relating to the authorization of expenditure are to be applied (3).

Amending budgets (which do not alter the total amount of the annual budget) or supplementary budgets (which alter the total amount) may be adopted by the budgetary authority.

The budgetary allocation to a specific budget heading can be modified by transfers (4) from other budget headings.

1.9. Implementation of the general budget

1.9.1. Responsibility for implementation

The Commission implements the budget on its own responsibility in accordance with the Financial Regulation and within the limits of the appropriations allotted; it also confers upon the other institutions the requisite powers for the implementation of the sections of the budget relating to them (5). The Financial Regulation lays down the implementation procedures and, in particular, the responsibilities of the authorizing officers, accounting officers, administrators of advance funds and financial controllers of the institutions (6).

1.9.2. Implementation of revenue

The estimated revenue is entered in the budget subject to change by amending and supplementary budgets.

The budgetary implementation of revenue consists in establishing the entitlements and recovering the revenue due to the Communities (own resources and other revenue); it is governed by special provisions (7).

The actual revenue of a financial year is defined as the sum of recoveries upon entitlements established during the current financial year and recoveries upon entitlements still to be recovered from previous financial years.

1.9.3. Implementation of expenditure

The estimated expenditure is entered in the budget. According to the nature of the legal obligation involved, it is covered by appropriations for commitment or appropriations for payment. The budgetary implementation of expenditure, i.e. the evolution and utilization of appropriations, may be summarized as follows:

(a)Appropriations for commitment

-Evolution of appropriations: The appropriations for commitment allocated in the initial budget can undergo certain modifications until the final appropriations for commitment are obtained: final appropriations for commitment = initial budget (NDA and CA) + amending and supplementary budgets + supplementary receipts (8) + transfers (5) + commitment appropriations carried over from the preceding financial year (9) + non-automatic carry-overs (10) from the preceding financial year (uncommitted NDA) + released commitment appropriations from preceding financial years which have been made available again (11).

-Utilization of appropriations: The final appropriations for commitment are available in the financial year for use in the form of commitments entered into (appropriations for commitment utilized = amount of commitments entered into).

-Appropriations remaining available for the next financial year: Non-differentiated appropriations which have not been committed may be carried over non-automatically to the next financial year after approval by the budgetary authority (10). Non-utilized commitment appropriations may be carried over by the Commission to the following financial year (9).

-Cancellation of appropriations: The balance is cancelled.

(b)Appropriations for payment of the financial year

-Evolution of appropriations: Appropriations for payment may also undergo modifications leading to the final appropriations for payment: final appropriations for payment = initial budget (NDA and PA) + amending and supplementary budgets + supplementary receipts (9) + transfers (5).

-Utilization of appropriations: The final appropriations for payment are available in the financial year for use as payments (utilized appropriations for payment of the financial year = amount of payments made from the appropriations of the financial year).

-Carry-overs of appropriations to the next financial year: Appropriations not paid may be carried over to the next financial year in the form of automatic (12) or non-automatic (13) carry-overs.

-Cancellation of appropriations: The balance is cancelled.

(c)Appropriations for payment carried over from the preceding financial year (automatic and non-automatic carry-overs)

In each financial year these appropriations are also available for use as payments. Carry-overs which remain unused during the year are cancelled, except in the case of expenditure on behalf of third parties where carry-overs can be repeated. Amounts cancelled in this way are added to the result of the financial year in the consolidated revenue and expenditure account (see 1.9.4.).

With regard to actual expenditure, a distinction is made between:

-actual expenditure during a financial year = total payments during the financial year = payments against appropriations for payment of the financial year plus payments against appropriations for payment carried over from the preceding financial year.

-actual expenditure charged to a financial year = expenditure charged to the consolidated revenue and expenditure account (see 1.9.4.) = payments against appropriations for payment of the financial year plus appropriations for payment of the financial year carried over to the following financial year.

1.9.4. The consolidated revenue and expenditure account and the balance of the financial year

After the closure of each financial year the consolidated revenue and expenditure account is drawn up. The balance of the year, which is to be entered in the budget of the next financial year on the occasion of an amending budget, is determined therein (14) (see § 10).

1.10. Presenting the accounts

Not later than 1 May of the year following the closure of the financial year, the Commission forwards to Parliament, the Council and the Court of Auditors the accounts of that year: the accounts comprise a revenue and expenditure account and a balance sheet, together with an analysis of the financial management (15).

1.11. External audit

As from 1977 the external audit of the general budget has been carried out by the Court of Auditors of the European Communities (16). The Court of Auditors examines the accounts of all revenue and expenditure of the general budget, whether revenue has been received and expenditure incurred in a lawful and regular manner, and whether the financial management has been sound. The audits may be carried out before the closure of the financial year in question. The audits are performed on the basis of records and, where necessary, on the spot in the institutions of the Communities and in the Member States. The Court of Auditors draws up an annual report for each financial year and may also, at any time, submit observations on specific questions and deliver opinions at the request of one of the institutions of the Communities.

1.12. Discharge and follow-up

As from 1977 the following provisions are applicable (17): Parliament, on the recommendation of the Council, gives, before 30 April of the second year following the financial year in question, discharge to the Commission on the implementation of the budget. To this end the Council and Parliament in turn examine the accounts presented by the Commission and the annual report of the Court of Auditors. The institutions must take appropriate action on the comments appearing in the decisions giving discharge and report on the measures taken (18).

(1) Compulsory expenditure is that resulting necessarily from the Treaties or from acts adopted in accordance with them.

(2) For details concerning the budgetary procedure see Articles 78 ECSC, 203 EEC and 177 Euratom.

(3) Article 9 of the Financial Regulation.

(4) Article 26 of the Financial Regulation.

(5) Articles 78d ECSC, 205 EEC, 179 Euratom and 22(2) of the Financial Regulation.

(6) Articles 21 to 55 and 73 to 77 of the Financial Regulation.

(7) Articles 28 to 35 of the Financial Regulation and Council Regulations (EEC, Euratom) Nos 1552/89 and 1553/89 of 29 May 1989 (OJ L 155, 7.6.1989).

(8) Article 96(2) of the Financial Regulation.

(9) Article 7(2) (a) of the Financial Regulation.

(10)Article 7(1) (a) and 7(3) of the Financial Regulation.

(11)Article 7(6) of the Financial Regulation.

(12)Article 7(1) (b) of the Financial Regulation.

(13)Articles 7(1) (a) and 7(2) (b) of the Financial Regulation.

(14)Article 32 of the Financial Regulation and Articles 15 and 16 of Council Regulation (EEC, Euratom) N° 1552/89 (OJ L 155, 7.6.1989).

(15)Articles 78 to 82 of the Financial Regulation.

(16)Articles 78e, 78f ECSC, 206 and 206a EEC, 180 and 180a Euratom and Articles 83 to 90 of the Financial Regulation.

(17)Articles 78g ECSC, 206b EEC, 180b Euratom.

(18)Article 89 of the Financial Regulation.

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Part II: The European Development Funds (EDFs) (position at 31 December 1990)

21. General information on the EDFs

THE FIRST FOUR EDFs

21.1 General information and detailed financial information on the first three EDFs, has most recently been given in the annual report of the Court of Auditors on the financial year 1980. Information concerning the 4th EDF has been given in the annual report on the financial year 1986. Only a few small amounts still remain to be paid under the 4th EDF. A summary of the payments made under the first four EDFs is given in § 28.

THE 5th AND 6th EDFs

21.2. Legal provisions

a)Legal basis in respect of ACP States:

-5th EDF: second ACP-EEC Convention signed in Lomé on 31 October 1979 (Lomé II),

-6th EDF: third ACP-EEC Convention signed in Lomé on 8 December 1984 (Lomé III).

b)Legal basis in respect of the OCT:

-5th EDF: Council Decision 80/1186/EEC of 16 December 1980,

-6th EDF: Council Decision 86/283/EEC of 30 June 1986.

c)Establishment of the EDFs:

-5th EDF: internal agreement of 20 November 1979,

-6th EDF: internal agreement of 19 February 1985.

d)Financial Regulations:

-5th EDF: Financial Regulation 81/215/EEC of 17 March 1981,

-6th EDF: Financial Regulation 86/548/EEC of 11 November 1986.

21.3. Allocations, financing, distribution and type of aid

The EDF allocations after changes (1) by the Council are as follows:

-5th EDF: 4 775,5 Mio ECU,

-6th EDF: 8 064,1 Mio ECU.

The EDFs are financed by the EC Member States in proportions laid down in the internal agreements (see also § 22).

The abovementioned internal agreements provide for distribution of the allocations of the EDFs between the ACP States and the OCT and between grants, special loans, risk capital, Stabex (2) and Sysmin (3).

Part of the allocation in the form of grants is reserved for exceptional aid and for interest subsidies on loans granted by the European Investment Bank. The rest of the allocation in the form of grants and the allocation in the form of special loans are distributed among the recipient countries, with the exception of funds for the regional projects, administrative costs and a contingency reserve. The amounts thus allocated to the recipient countries, called indicative programmes in the case of the ACP States, are used to finance the projects adopted.

21.4. Monetary unit

EDF allocations are denominated in ECU; for the purpose of converting the monetary units previously applied into ECU, it has been agreed that 1 u.a. = 1 EUA = 1 ECU.

21.5. Date of entry into force

- 5th EDF: 1 January 1981,

- 6th EDF: 1 May 1986.

21.6. Financial implementation

The Commission draws up a timetable of requests for contributions, which in principle are to be paid quarterly by the Member States of the European Communities. The use of the EDF resources is shown in the accounts in three stages: (I) financing decision, (II) signing of contracts against funds allocated to national authorizing officers, (III) authorization of payments to contractors.

21.7. External audit

The Court of Auditors is responsible for the audit of the EDFs (in accordance with the Treaty).

21.8. Authority giving discharge

The European Parliament gives discharge for the financial management of the EDFs, on the recommendation of the Council (in accordance with internal agreements).

(1)The initial allocations were altered by Council Decisions, and are increased by various receipts such as reconstitution of Stabex transfers and bank interest.

(2)System designed to guarantee the stabilization of earnings from exports by the ACP States to the Community (Lomé I, Article 16; Lomé II, Article 23; Lomé III, Article 147).

(3)System designed to aid ACP States whose economies are largely dependent on the mining sectors and in particular towards helping them cope with a decline in their capacity to export mining products to the Community (Lomé II, Article 49; Lomé III, Article 176).

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